One of the premises of the Dutch Scheme is that, while the composition is being prepared, the debtor still has the authority to manage and dispose of its assets. This “debtor-in-possession” principle means that the debtor stays in control of the company and continues to conduct its business while preparing a composition with its creditors. Nevertheless, in some situations it might be necessary for an independent party to oversee those preparations. In the Dutch Scheme, that role is assigned to a new actor: the observer. The observer’s job is to monitor how the composition comes about, bearing in mind the creditors’ interests (section 380(1) of the Dutch Bankruptcy and Insolvency Act (Faillissementswet)). The present blog describes the observer’s preferred profile, in what circumstances an observer might be appointed and what the observer’s duties and responsibilities are.
The observer’s personal qualities – profile
Although observers are court-appointed, the legislature has not provided any guidance on who might be appointed to that role. This gives the courts a considerable degree of latitude. The role is reminiscent of that of a “silent trustee” (stille bewindvoerder) – a court-appointed fly on the wall who observes the preparations to restart the business from insolvency – and traditional insolvency trustees are therefore frequently put forward as observers. Like restructuring experts, observers should be well-versed in financial matters, with an understanding of insolvency law as well. They should also have experience with corporate debt restructuring. Most insolvency lawyers will be capable of doing the job, but others might also possess the necessary knowledge and experience to be appointed as observers.
According to the legislature, in principle it is impossible to have a restructuring expert and an observer at the same time. If a restructuring expert is appointed as an independent expert to represent the interests of the body of creditors, it is unnecessary to also appoint an observer. It follows, then, that an observer should only be appointed if the debtor is seeking to bring about a composition by itself: if a restructuring expert has been appointed, the responsibility for preparing and offering the composition is the expert’s.
When an observer might be appointed
Sometimes an observer will be appointed at the debtor’s request, by way of relief under section 379 Insolvency Act. In some situations, however, the court will be obliged to appoint an observer on its own motion, or at least consider the possibility of appointing one. First, if concerns exist that the debtor might embezzle or misappropriate assets, an observer will be needed to oversee matters. Second, according to the Explanatory Memorandum accompanying the new legislation, the court should in particular consider appointing an observer during a general cooling-off period, to safeguard the creditors’ interests during that time. A third situation is the “cross-class cram-down”, where the court is asked to confirm a composition that has been rejected by some classes of creditors. If the process does not already include a restructuring expert or observer, the court must as yet appoint an observer then.
The observer’s role
The general assumption in the Dutch Scheme is that debtors wanting to offer their creditors a composition should do the preparatory work themselves. An observer, if one has been appointed, plays a key role during these preparations. As an independent outsider in the process, the observer should keep an eye on the interests of the body of creditors; the legislature describes this role as monitoring and reviewing the composition from that perspective and informing the court accordingly. The interests of the body of creditors include averting an insolvency, which would force them to accept smaller proceeds. Another purpose of having an observer oversee the preparations is to prevent embezzlement and misappropriation.
It is the observer’s duty to inform the court if it emerges that the debtor’s attempt to bring about the composition will fail, or if the interests of the body of creditors are being harmed; the court will then determine how to proceed from there. If the possibility of a successful composition has not vanished entirely, the court may decide to appoint a restructuring expert to prepare the composition instead of the debtor. If a composition has become entirely impossible, the process under the Dutch Scheme ends then and there.
In order to properly carry out these duties, the observer will require cooperation and information from the debtor. This is similar to the debtor’s relationship with a restructuring expert: the debtor must give the expert unrestricted access to the company’s accounts, records and other information, and must share information on request and on its own initiative. That same cooperation is also required from all employees, shareholders and members of the board of directors and supervisory board. Although the legislature has not been entirely clear here, it is safe to assume that these obligations do not go quite as far in the case of an observer, whose duties lean more towards supervision. At a minimum, however, the observer must be given access to the information necessary to form an opinion on the prospects of a composition.
If an observer has been appointed, the court has a duty under the law to hear the observer before ruling on specific issues in the Dutch Scheme. For example, the court will ask for the observer’s views before deciding whether to appoint a restructuring expert, extend a cooling-off period or confirm the composition. In the first instance, the court has the authority to appoint the same observer to the role of restructuring expert. Unlike the observer’s role, the role of the restructuring expert does in fact carry the authority to offer a composition. In other situations, too, the court must ask for the observer’s opinion, for example before granting a specific power of attorney or before ruling on requests that have bearing on the formation of the composition.
The court may appoint an observer if it considers it necessary to oversee a debtor that is preparing a composition. No hard and fast rules exist that dictate who may be appointed as an observer. At a minimum, however, the observer must be well-versed in financial matters, coupled with knowledge of and experience with corporate restructuring. The observer’s role is to monitor and review the composition that is being prepared and inform the court accordingly, acting in the best interests of the body of creditors throughout.