The WHOA allows you to offer an arrangement to your creditors and shareholders, as well as proposals to amend and terminate agreements. The aim of the WHOA is to give companies that are in dire straits the opportunity to restructure their debts or terminate the company without bankruptcy. This can be done with a closed or public procedure. During the proceedings, a cooling-off period can be requested which suspends bankruptcy petitions and allows attachments to be lifted. Creditors cannot seek recourse against the debtor's assets and/or claim goods during this period. Pledgees and mortgagees are also not allowed to exercise recourse unless authorisation is obtained from the court.
The ruling we discuss in this post deals with the operation of a cooling-off period against a pledgee, the importance of transparent disclosure and a sound plan of action.
The ruling we cover in this article was published on 26 January 2021. The applicant is a construction company which fears that a creditor will execute a judgment and that a lienholder will enforce its lien. It wants to prevent this and has filed a commencement notice with the court and applied for closed proceedings. The issues that make this ruling interesting are:
The cooling-off period also applies in relation to a pledgee. The pledgee cannot exercise their rights without authorisation from the court. In particular, a pledgee with a claim in its own name is not authorised to give notice to the debtor, to accept payments or to set these off against its claim.
The court considers that, once an agreement has been reached – as they are also able to do in a bankruptcy situation – a pledgee may seek recourse on the basis of the deed of pledge. On that basis, the court states that it is expressly not the intention that the pledgee’s rights should be restricted by the cooling-off period. This seems to us to be an incorrect premise.
The court goes further and states that the pledgee may therefore recover, collect the claims and offset the proceeds. On the contrary, the premise is that creditors including the pledgee are restricted and may only exercise their rights with authorisation. To protect the interests of a pledgee with a lien on a registered claim, substitute security must be provided pursuant to Section 376(7) Bankruptcy Act.
At first glance, what the court did here does not appear to be in accordance with the law. Authorisation was apparently not sought by the pledgee to exercise its rights despite the cooling-off period. The court can grant this authorisation only after hearing all concerned including the pledgee. However, the court is not talking about an authorisation but a limitation of the scope of the cooling-off period. Since the debtor was no longer authorised to collect the claim, this cannot be a case of a lifting of the authority to do so pursuant to article 377, paragraph 1 Bankruptcy Act. In addition, ex officio lifting is not possible in that case either. This restriction should therefore be based on Article 379, paragraph 1 Bankruptcy Act. This article empowers the court to make ex officio provisions or make determinations to protect the interests of creditors.
Incidentally, the outcome would probably have been different if the pledgee had not requested security in the form of a lien beforehand. In this case, the pledge gave the creditor a strong position without having asked for it. It is unfortunate that the court does not give further reasons for its considerations to spare the pledgee in this way.
In paragraphs 4.8 and 4.9, the court hints that it is not impressed by the submitted plan of action and the progress of the intended reorganisation. It gives the applicant one month to:
In addition, the court has some very specific questions about the reorganisation value, investments in the property and the possible existence of a tax debt.
This ruling shows that the threshold for granting an application for a cooling-off period is low. The court does not seem adequately informed and doubts the accuracy of the information provided. The applicant is then given one month to make progress and still inform the court adequately. It is uncertain whether the court will always be so accommodating. The importance of proper preparation and an adequate plan of action seems obvious. The idea behind the WHOA is that, in principle, a reorganisation plan and its financing should be ready at the outset, and an agreement without a WHOA process has proved impossible. In this case, the letter of commencement was filed to avoid bankruptcy and enforcement of a lien.
Restructuring experts can help you create an adequate plan of action and prepare an agreement. The appointment of an independent restructuring expert is not always necessary, especially in less complex situations. If the agreement is prepared and discussed with creditors in a timely manner, the threat of WHOA proceedings, can often be enough to achieve an agreement that only needs to be approved ("homologated") by the court.
Then contact one of our WHOA specialists.