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?
The purpose of a WHOA route is to allow restructuring to take place that avoids bankruptcy of the debtor's company. A WHOA arrangement also allows a controlled winding-up of the company to take place. Companies are then liquidated outside a bankruptcy, with the proceeds generally being higher than in regular bankruptcy proceedings.
The WHOA is aimed at companies that are burdened by high levels of debt but still have a profitable business. The requirement is that ‘it is reasonably plausible that the company cannot continue to pay its debts’. In other words: bankruptcy is, in the long run, effectively inevitable without debt restructuring. At the same time, there must be potential for the company to become viable again following debt restructuring.
A WHOA procedure is initiated at the company’s request, either through a request by the company for the appointment of a restructuring expert or through a similar request from a stakeholder. Once a WHOA process has begun, attempts are made to reach an informal agreement. In the WHOA agreement, various creditors and shareholders are categorised into voting classes. Creditors of equal rank are placed in the same class. Once the agreement has been presented to the creditors and shareholders by the company or the restructuring expert, the latter may vote on it on a class-by-class basis. If at least one class votes in favour of the arrangement by a two-thirds majority, but there are also those who vote against it, the arrangement may be submitted to the court for confirmation. If the court confirms (approves) the arrangement, any creditors who voted against it are also bound by the arrangement. An important requirement for the approval of the arrangement is that, under the terms of the arrangement, creditors must not end up in a substantially worse position than they would have been in had the company gone into liquidation.
During the WHOA process, the company may apply to the court to declare a cooling-off period. This means that, during this period, creditors cannot seize the debtor’s assets. For example, a creditor may not invoke its retention of title. A request for a cooling-off period will be granted if the court deems this necessary to enable the company to continue operating during the (preparation for) negotiations on the arrangement. The cooling-off period may last for a maximum of eight months.
Private or public proceedings
A debtor or restructuring expert may choose between private or public proceedings. In the former case, the court deals with applications and decisions behind closed doors. The advantage of this is that the company can prepare the arrangement in peace and without publicity. In public proceedings, by contrast, the agreement is published in the Insolvency Register and entered in the Companies Register. Please note: it is not possible to switch from closed to public proceedings, or vice versa, partway through the process.
Developments
The WHOA has now been in force for several months. The first court rulings on various WHOA-related matters have now also been issued.
On 19, 26 and 29 January 2021 respectively, the District Court of the Northern Netherlands handed down judgements that are relevant to the appointment of a restructuring expert. The following points can be distilled from this case law.
When a request is made for the appointment of a restructuring expert, the ‘state’ of the company is first assessed. The court considers the issues outlined, the various types of stakeholders and the proposed course of action. On this basis, the court assesses which restructuring expert is most suitable. A key consideration is that the restructuring expert must be independent.
Where a request is made for a restructuring expert, the court must appoint one. However, the applicant must submit several quotations. If only one restructuring expert is nominated, and that person is not independent or is found not to be independent, the court will reject the request.
A cooling-off period may only be granted if it is necessary to enable the business to continue operating whilst an arrangement is being prepared. This also applies during the coronavirus pandemic. In addition to this necessity, the requirements for granting a cooling-off period are that: (i) a composition proposal has already been tabled, or (ii) a commitment has been made to table a composition proposal within two months, or (iii) a restructuring expert has been appointed. If none of these conditions are met, the application will not be considered on its merits.
The cooling-off period must not substantially prejudice the creditors’ interests. The court briefly compares the outcome of a composition with that of bankruptcy and weighs this against the impact of a cooling-off period.
For example, a cooling-off period is necessary where the risk that creditors will seek to recover their claims from the company disrupts or renders a restructuring process impossible. Where creditors stand to receive more under a composition than they would in the event of bankruptcy, their interests are not substantially prejudiced. This also applies to secured creditors, such as a bank, and other parties holding attachments.
The WHOA is in flux! In this blog, we have outlined the WHOA process and named the first developments in case law. From now on, we will regularly cover a different topic in conjunction with recent developments.