The Absolute Priority Rule (abbreviated as APR) is one of the key touchstones when homologating a WHOA agreement. This rule particularly comes into play when an agreement is imposed on one or more dissenting classes ('cross class cram down').
The APR means that no lower-ranking class or shareholder may share in the reorganisation value:
The rule thus protects the ranking of creditors and shareholders as it also applies in bankruptcy.
While the WHOA leaves room to deviate from the APR, this room is limited. A deviation is allowed only if:
Whether and to what extent there is compliance with this rule, or a (justified) exception, depends, inter alia, on:
The APR may force strategic choices to be made in the design of the agreement. For the company, this entails that any deviation must be carefully justified. For creditors, on the other hand, the APR can be an important defence in the event of homologation or, even earlier, a reason to vote against the proposed arrangement.
At Marxman, we also advise on the application of the APR within the WHOA, as well as on 'cross class cram down' situations, valuation discussions and the request for homologation.
Want to know whether a proposed WHOA agreement complies with the rules or how to defend yourself as a creditor against a deviation from them?
In a WHOA process, time is often the scarcest factor. Creditors seizing, claiming assets or threatening to file for bankruptcy can undermine the agreement even before it has been finalised and proposed. In that case, a cooling-off period may be the appropriate tool. It provides the company going through the WHOA with temporary protection against recourse actions by creditors.
A cooling-off period is not granted automatically. The debtor (or restructuring expert) can request it, after filing the necessary starting statement, and will also have to indicate whether this cooling-off period should apply to all creditors (general cooling-off period), or against one or more specific creditors (selective cooling-off period).
The application will be heard at a hearing. Interested parties should be invited by the debtor. It is up to the creditor to decide whether to appear at the hearing and/or to submit (in advance) an opinion regarding the application to the court.
Because during a cooling-off period no recourse can be taken against the debtor's assets, it should be handled with restraint: proportionate and effective. This is also reflected in the limited duration and the possibility of extension (once, total cooling-off period maximum 8 months), as well as in the fact that the debtor will have to prove, upon request, that recovery or another recovery action is imminent.
A request for a cooling-off period therefore requires careful decision-making and thorough preparation within the process. The right demarcation increases the chance of granting it and thus of a successful settlement.
Assuming a situation where not all creditors involved have agreed to the arrangement, the homologation is the decisive moment within a WHOA process. Even when the required majorities have agreed to the arrangement, the court can refuse homologation based on the statutory grounds for rejection.
The WHOA makes an important distinction between two categories in this regard.
These grounds are reviewed by the court on its own motion. An appeal by a creditor is not required for this purpose. They are fundamental safeguards of the WHOA process, such as:
If one or more grounds arise, the court should refuse homologation.
At the request of one or more creditors or shareholders with voting rights who have not themselves consented to the arrangement or who have been wrongfully denied voting rights, the court may reject the request for homologation if it appears that, on the basis of the arrangement, these creditors or shareholders are only better off than if the debtor's company were to go bankrupt.
Also at the request of one or more creditors or shareholders with voting rights who have not themselves consented to the arrangement and have been classified in a class that has not consented to the arrangement or who have been wrongly denied voting and should have been classified in a class that has not consented to the arrangement, the court rejects homologation of the arrangement in certain specific cases.
Examples include:
These grounds presuppose an active litigation attitude on the part of creditors and shareholders. Those who do not object may lose their (special) position.
The distinction between ex officio and rejection grounds makes the WHOA procedure strategically complex. For the debtor, this means that the arrangement must be structured in such a way that it passes the ex officio test as well as withstand possible objections by certain creditors. For creditors, timely and well-founded defence is crucial.
Team H&I consists of lawyers with specialist knowledge and extensive practical experience in preparing a sound settlement, with particular attention to the grounds for rejection and their strategic commitment.
The WHOA procedure offers several tools to prepare a private agreement carefully and efficiently. One of these is the aspects request: a possibility to have the court rule on specific parts of the agreement even before the homologation phase.
With a aspects request, the debtor, but also a creditor or shareholder, can ask the court to rule on, for example:
The main advantage of an aspects petition is that it creates (more) legal certainty. Discussions that otherwise might only arise at homologation - and might lead to rejection of the settlement - are brought forward and settled. An additional advantage is that, from that moment on, there is also presumably no need to spend any more time on the relevant parts and, moreover, the agreement can - if desired or necessary - be amended or supplemented in line with the outcomes.
At the same time, an aspects request requires thorough preparation. The request must be sufficiently concrete and the aspects must be carefully formulated. The timing of an aspects request can also be critical: a (too) early submission may mean that not all aspects that are unclear or uncertain have been identified yet and/or that the aspects are insufficiently clear or formulated. With late deployment, the benefit of interim assessment remains limited and, moreover, the handling of the request or the outcomes may no longer be awaited and thus the outcomes may no longer have any effect on the substance of the agreement and its feasibility and/or homologation.
Want to know whether an aspect request in your WHOA process could be of strategic benefit? Contact team H&I or read more on our website.
In closed composition proceedings, no publication in the Central Insolvency Register, the Trade Register of the Chamber of Commerce and the Official Gazette takes place. This way, the agreement can be prepared and concluded in relative peace and quiet. Naturally, creditors and shareholders involved will be informed.
By the court, requests are additionally heard behind closed doors. Finally, publication of the judgment takes place 'anonymously'. This means that company names and names of directors are removed.
The closed agreement procedure is not recognised as an international insolvency procedure. Thus, a homologated WHOA agreement is not recognised in other member states. The situation is different in public composition proceedings.
As soon as the court becomes involved as part of the attempt to reach an agreement, the choice for one of the two procedures should be made in any case. Moreover, on the opening statement, it can be ticked whether the debtor chooses a public arrangement procedure or a closed arrangement procedure, so this is often already the moment when a choice is made.
The WHOA allows for a restructuring expert to be appointed by the court. This officer plays a central role in the preparation and conclusion of a private (WHOA) agreement.
A restructuring expert may be appointed:
The appointment particularly comes into play when:
The court will grant the request for designation if it is reasonably plausible that the debtor will not be able to proceed with the payment of the debts and this request is made by the debtor himself and this request is furthermore supported by a majority of the creditors. In contrast, a request will be rejected if the interests of the joint creditors are not served by the designation.
The restructuring expert is in charge of:
Although the debtor formally remains in control ('debtor in possession'), the restructuring expert takes control of the process.
The restructuring expert acts independently and impartially. This enhances trust in the process and increases the likelihood that the agreement will be adopted and stand up to homologation. At the same time, it means that the debtor partly relinquishes influence - an important strategic consideration within the process.
The restructuring expert can:
On the other hand, the appointment involves costs and substantially changes the dynamics of the process.
At Marxman, we specialise in restructuring and insolvency. Our advice may be to have a restructuring expert appointed, if we assess that this has added value within the process, and think along with you about the delineation of the role.
The WHOA has no possibilities of appeal. Moreover, a debtor who has offered a settlement himself and whose homologation request has been rejected may not have a new settlement homologated by the court for three years.
Afterwards, it is only possible to request the court to appoint a restructuring expert. Only this restructuring expert may then still offer a settlement and request its ratification.
WHOA stands for Private Arrangement Homologation Act. This means that debtors can present their creditors with a private agreement to restructure part of the debt.
When not all creditors can agree to the debtor's composition, the court can be asked to homologate the composition. If the court homologates the agreement, this means, as it were, that the agreement is approved/enforced. Thus, creditors who did not vote or voted against the settlement can still be bound by the settlement.
An agreement can be homologated by the court when no grounds for rejection arise.
The WHOA imposes strict requirements on the provision of information to creditors and shareholders. This information obligation is essential for careful decision-making and is an important touchstone for the approval of the arrangement.
The debtor must provide information such that voters can form an informed opinion about the arrangement and its consequences.
Specifically, the debtor must provide insight into, among other things:
Information does not have to be in one document, but it should be consistent, accessible and verifiable. In practice, the information package often consists of:
The court looks not only at the presence of information, but also at its quality and completeness as well as its accessibility to affected creditors. Moreover, this may include how much effort the company has put into reaching the creditor to obtain a response.
A lack of information is an independent also ex officio ground of rejection for homologation. In addition, lack of clarity increases the likelihood of creditors' defence and delay of the process or even a dissenting vote.
So by providing timely and complete information, you immediately increase the feasibility of your agreement. Even in case of a request for homologation, this will contribute to the court's assessment.
The WHOA allows a company to restructure its debts through a (forced) composition, hopefully avoiding bankruptcy while preserving enterprise value. Access to the WHOA is limited by the so-called entry criterion.
This criterion implies that the company may be in a situation where it can be reasonably expected that it will become insolvent if no settlement is reached, but at the same time it must still be able to meet its current obligations. If the latter is not the case, a suspension of payments or ultimately bankruptcy is still appropriate. Unlike bankruptcy or suspension of payments, the WHOA is not a test of current insolvency, but is based on a prognosis and thus future prospects (continuity of the company).
The entry criterion requires foresight and a substantiated estimate. Obviously, it is not a certainty, but various documents and information can be used to substantiate and convey this estimate to creditors:
Such substantiation plays a role not only at the start of the WHOA process, but also in other (interim) applications to the WHOA judge, such as:
The entry criterion requires careful determination. If you start too early, there may not yet be a reasonably foreseeable bankruptcy. If you start later, there is a risk that there are still insufficient funds to keep up with ongoing obligations. In a way, a balance needs to be struck, which can be explained and used to convince the creditors involved of the need to reorganise and accept the composition proposal. In practice, this often works into (lack of) creditor confidence and/or doubts about securing an arrangement, with all its possible consequences.
Therefore, the entry criterion is not merely a formal threshold, but at the same time a benchmark and sometimes a hinge between a private agreement and a WHOA agreement.
The WHOA prescribes that information be provided to voting creditors on the value expected to be realised in the liquidation of the debtor's assets in bankruptcy. This is a theoretical account of what is most likely to happen in bankruptcy. This varies from company to company.
To begin with, it is necessary to have the assets valued. In addition, we look at what creditors there are, whether they have security rights and whether the tax authorities have a preferential claim, for example.
There is also a focus on whether there could be a legitimacy claim in bankruptcy. The issue then is whether the company has been properly managed. The bar for arriving at a legitimacy claim against a director is high.
Against the question of what revenues there would be in bankruptcy, there are of course costs. These include costs to monetise assets and the salary of the receiver.
A creditor qualifies as an SME creditor under the WHOA when:
If a creditor qualifies as an SME creditor, he will in principle have to be offered 20% on the claim in a WHOA settlement. The 20% offer can only be deviated from if there are compelling reasons. The court does not readily assume that there are compelling reasons.
However, it is still important to note that the rule that 20% must be offered to SME creditors does not apply to:
The 'no creditor worse off principle' dictates that creditors should not be offered a worse offer than they would receive in a theoretical bankruptcy. This constitutes an additional ground for rejection. This means that if a creditor invokes the no creditor worse off principle, the court can reject the homologation request.
One of the principles of the WHOA is that the debtor himself prepares the arrangement. The task of the observer is to supervise the preparation of the arrangement. In doing so, the observer has an eye for the interests of the joint creditors. The observer will monitor and assess the establishment of the composition and inform the court.
The observer may be appointed at various times during the formation of an agreement:
For the observer to perform his task properly, he will have to obtain cooperation and information from the debtor. The observer must be given access to all information necessary to reach an opinion on the draft agreement.
Moreover, another important task is that the observer informs the court about certain decisions/requests submitted to the court. These include, for example, the request for extension of the cooling-off period and granting of the homologation request.
In case a debtor opts for public settlement proceedings, a publication takes place in the Central Insolvency Register, the Trade Register of the Chamber of Commerce and the Official Gazette. That publication takes place after the court's first decision. In some cases, that first decision is only the judgment on the homologation request.
An important advantage of opting for public settlement proceedings is the reason why these proceedings and the possible positive homologation judgement are recognised in other member states of the European Union (with the exception of Denmark). The debtor with foreign debts can therefore benefit from a public settlement procedure. Consider not only suppliers, but also foreign (One Stop Shop, 'OSS') VAT debts.
Moreover, in the case of the public agreement procedure, the Dutch court may also have jurisdiction over foreign companies. Thus, the Dutch court has jurisdiction when the European debtor has the centre of its main interests in the Netherlands.
As soon as the court becomes involved as part of the attempt to reach an agreement, the choice for one of the two procedures should be made in any case. Moreover, on the opening statement, it can be ticked whether the debtor chooses a public arrangement procedure or a closed arrangement procedure, so this is often already the moment when a choice is made.
Preventing recourse requires more than filing a commencement notice. If a debtor wants to prevent a creditor from seeking redress during the preparation of a WHOA settlement, it will have to apply to the court to order a cooling-off period.
When a creditor requests the court to declare the debtor's bankruptcy, the filing of a starting declaration or applying for a cooling-off period does not affect the pending bankruptcy petition. For the bankruptcy petition, it is still subject to defence.
When the court grants the application to appoint a restructuring expert and the court declares a cooling-off period, it does apply that a pending bankruptcy petition is suspended. The suspension lasts for as long as the cooling-off period lasts.
The reference date (also called: 'fixing date') is a specific date on which the value and extent of assets and liabilities are determined. Debts outstanding at that time are in principle included in the WHOA settlement. The situation is fixed, as it were, for the starting points that the debtor includes in the WHOA agreement.
Debts arising after this date fall outside the settlement and are settled as current liabilities. When choosing the reference date, a reference date should be chosen based on objective grounds. In addition, an accurate insight must be provided as to which creditors or shareholders are not covered by the settlement.
The court will require a clear explanation as to why certain creditors are not affected by the arrangement. This is important because it will allow creditors to determine whether there is a justifiable reason for unequal treatment of creditors of equal rank.
A WHOA procedure starts by filing a declaration of commencement with the registry of the relevant court. On the basis of a prescribed form, on which the debtor additionally indicates whether it chooses a closed or public procedure, the debtor thereby formally indicates that a private agreement is being prepared.
Although at first glance the letter of commencement seems a formality, it has important legal and strategic implications.
With the starting statement:
The starting declaration is registered by the court (not substantively reviewed). In case of public WHOA proceedings, the declaration is additionally published in the Central Insolvency Register.
Generally, the date of filing of the statement is presumed to be the reference date (to be used).
The statement is concise, but should, of course, be legally correct and complete.
The moment of the start declaration is strategically important. Firstly, because this moment is also presumed to be the reference date, which should be taken into account in the arrangement, and secondly, because the filing of a commencement statement (and thus a formal commencement of the WHOA) may have an effect on involved creditors.
At Marxman, we specialise in restructuring. We advise entrepreneurs and guide them through the process. In this process, filing a start-up statement is an important step, both in progress and in content.
A creditor (or shareholder) is entitled to vote when the agreement changes its rights. This usually means that creditors are only offered a percentage of the claim anymore, the term of a loan is extended and/or the interest rate changed, etc.
For creditors whose claims are not affected, they do not vote.
No later than seven days after the creditors vote, a voting record must be prepared. This is a mandatory part within the WHOA procedure and plays a central role in the homologation of an agreement.
After all, it follows from this how the agreement was voted on and thus whether the legal requirements have been met. Without a voting record, the court cannot check this and therefore cannot proceed to homologation.
The voting record must be concrete and verifiable and contain:
The debtor should then ensure that voting creditors can take cognisance of the voting record so that they can verify the outcome. In practice, creditors will often use this moment to decide for themselves whether and to what extent it makes sense to oppose homologation.
In case an application for homologation is indeed made, the voting report should be filed at the registry of the relevant court. There, the voting report is available for inspection by persons entitled to vote free of charge.
Term
The homologation hearing will take place within eight to 14 days of the filing of the voting report.
An incorrect or incomplete voting record may lead to:
Since (non-)compliance, including the preparation of the voting record in accordance with the rules, is an ex officio ground for rejection that the court tests on its own motion when applying for homologation, this is a crucial moment and document for the outcome of the offered agreement.
At Marxman, we know better than anyone how closely things listen and ensure that all formalities and deadlines are met every time.
Valuation is a core part of any restructuring and so is a WHOA process. The liquidation value, reorganisation value and enterprise value play a role in the assessment of a deal to be offered and hence the possible outcome.
The valuation report plays a particularly crucial role in the comparison with a bankruptcy scenario. After all, creditors should not be worse off with a settlement than in case of bankruptcy ('best interest test'). Moreover, creditors will generally be more willing to agree to a composition if they know the alternative is less attractive.
It is not only the content of the valuation report that is crucial, but also the time at which it is drawn up AND shared with creditors.
First of all, the report will have to approach the moment of the reference date as much as possible, so that it gives a most accurate picture of the factual and legal situation at that moment, so that the position of creditors can also be portrayed at that moment. This avoids - as much as possible - proverbial comparing apples with oranges when assessing and weighing up the settlement and an alternative scenario.
Secondly, a valuation report:
If the valuation is only presented later in the process - or even only at homologation - it increases the chances of discussion, delay and rejection. Not only the creditors, but also the court will look critically at timeliness, content and the (timely) sharing of the report. After all, failure to present a relevant valuation (in a timely manner) may also stand in the way of a homologation of the arrangement due to lack of information and/or transparency.
The importance of timeliness may incidentally also imply that a valuation carried out towards homologation needs to be updated in order to be sufficiently current at the time of judicial review.
A valuation report is not a formality but a strategic document. The chosen valuation method, starting assumptions and reference date must be in line with the purpose of the agreement and the stage of the process. This requires coordination between legal and financial advice, but also requires the entrepreneur himself to provide up-to-date and complete information at an early stage. In our experience, cooperation between the entrepreneur, her advisers and the appraiser allows the latter to get to work quickly and produce a sound report. Once this is available in its full extent, preferably with probability scenarios, these results can also be used to support the settlement and towards creditors to provide insight and understanding.
Team H&I has short lines of communication with appraisers. As a result, we can quickly establish contact and, in consultation and coordination, arrive at a timely valuation report suitable for use during the process. From practical experience, we know the significance of this document and can therefore time it together with the entrepreneur and multidisciplinary partner(s).
Want to know which valuation is required in a WHOA process and when it is best to bring it in? Please contact Marxman with no obligation.