On 1 January 2021, the Homologation Private Agreement Act ("WHOA") entered into force. This new regulation in the Bankruptcy Act allows companies with liquidity problems to restructure debts by concluding a private agreement with their creditors. Under conditions, creditors who have not agreed to the arrangement can also be bound by the arrangement through approval (homologation) of the arrangement by a judge. A WHOA route thus offers interesting opportunities for companies in dire straits. What is this law and how is case law developing so far?
Today part 2 in the WHOA blog series with additional information on the cooling-off period and the possible appointment of an observer.
We previously wrote in general about the cooling-off period under the WHOA. In brief, what this means: under normal circumstances, creditors may at some point proceed to seize or file for bankruptcy to put pressure on a debtor. Holders of security interests (such as pledge or mortgage) can also enforce their collateral if payment is not made. A WHOA process can give a debtor leeway to relieve (some) pressure. In principle, the cooling-off period lasts four months and 'freezes' creditors' ability to seek recourse against funds/goods of the debtor. This creates space to reach an agreement.
On 26 May 2021, the Amsterdam District Court declared a cooling-off period and appointed an observer:
A debtor rents out holiday cottages and therefore has seasonal income. The cottages are fully booked for the rest of the year. With this turnover in prospect, a settlement can be presented to unsecured creditors. The debtor argues that the proceeds of this agreement will be higher than if the debtor were to be declared bankrupt now. However, a petition for bankruptcy has already been filed by a creditor. The WHOA is being used in this case to reach an agreement with unsecured creditors. A cooling-off period would suspend the impending bankruptcy petition.
Two creditors object to the application for a cooling-off period. They have been left unpaid for five months. They have also tried to reach an amicable settlement with the debtor, but to no avail. The creditors therefore argue that the cooling-off period was only requested to delay the declaration of bankruptcy. The creditors feel that there has been an abuse of the opportunity to start a WHOA process.
The court rules that, because of the debtor's earning model and favourable prospects, declaring bankruptcy thwarts the debtor's efforts to reach an agreement. It is also important that an arrangement is likely to yield higher proceeds for the creditors than declaring bankruptcy.The court therefore finds a cooling-off period necessary and considers that the creditors are not disproportionately disadvantaged. This satisfies the legal requirements for granting an application to declare a cooling-off period. The court grants a four-month cooling-off period.
However, the creditors' objection was not futile; given the objections raised by the creditors, the court appoints an observer. This observer supervises the formation of the arrangement with a specific eye on the interests of the joint creditors.
When applying for the declaration of a cooling-off period, it is important for both creditors and debtors to argue well why a cooling-off period would or would not be necessary. After all, that is a requirement for granting, as is the requirement that creditors' interests are not unreasonably harmed. This ruling also endorses this standard. Moreover, the ruling provides insight into the court's decision-making process and the considerations for appointing an observer.
The WHOA is on the move! From now on, we will regularly discuss a different topic in conjunction with recent developments in this blog series.