Quoted October 2015 - Edition 105 Current issues relating to accounting law, article 403 liability and insolvency law 2 In this edition • Introducion • Financial reporting • Article 403 liability • Facilitating reorganisations of businesses: Dutch pre-packs and schemes 3 Fourth Directive (78/660/EEC) and the Seventh Directive (83/349/EEC) in relation to individual and consolidated accounts, and Directive 2013/50/EU, which amends a number of the provisions of the Prospectus Directive (2003/71/EC) and the Transparency Directive (2004/109/ EC). 1. Amending legislation relating to financial markets The Dutch domestic rules in the area of financial markets have undergone an annual cycle of change since 2010. Part of this cycle is the rules in the area of financial reporting, and the supervision of such reporting, by companies whose securities are traded on a regulated market of a Member State (known as issuing institutions) where the Netherlands is regarded as the Member State of origin. This includes, inter alia, all Dutch companies whose shares have been admitted to trading on a regulated market of a Member State. 1.1 Disavowal statements For companies which are not issuing institutions, Title 9 of Book 2 CC (Title 9) provides that their accounts have to be adopted with due observance of facts and circumstances occurring between the preparation and the adoption of the accounts, to the extent that those facts and circumstances are essential to provide the insight required by statute. If it subsequently turns out that the accounts are seriously deficient in giving this insight, then the board must inform its shareholders without delay and file a notification with the Trade Registry.1 According to the legislator, a similar rule for issuing institutions was lacking.2 Provision has been made for this in the Amendment Act 2014. The new provisions, which came into force on 1 January 2014, can be summarised as follows. Introduction This issue of Quoted begins with an overview of recent and pending changes in the area of financial reporting. For listed companies in particular, the relevant rules have been and are being amended. There then follows a summary of the current case law in the area of what is known as ‘article 403 liability’. Article 403 liability arises if a consolidating holding company wants the other companies in the group whose figures are included in its annual accounts not to have to carry on publishing separate accounts. One of the conditions imposed by article 2:403 of the Dutch Civil Code (‘CC’) is that the consolidating holding company assumes joint and several liability for any debts arising from legal acts of the consolidated group companies. The last part of this Quoted sets out the proposed insolvency law rules relating to the facilitation or reorganisations of businesses. This is intended, inter alia, to provide a statutory basis for the appointment, before a business goes bankrupt, of a ‘silent administrator’ to prepare a start-up (the ‘prepack’) and enable a compulsory settlement to be reached outside an insolvency. A. Financial reporting This section first of all contains a discussion of the changes in the area of financial reporting which entered into force on 1 January 2014 and 1 January 2015 under the Financial Markets (Amendment) Act 2014 (the Amendment Act 2014) and the Financial Markets (Amendment) Act 2015 (the Amendment Act 2015 amending (inter alia) the Financial Supervision Act (the FSA)). It then considers the changes expected later this year pursuant to the implementation of Directive 2013/34/ EU (the Accounting Directive), which replaces the 1 See article 2:362 CC. 2 Article 2:362 para. 8 CC is not mentioned in the list of provisions from Title 9 which continue to apply if the legal entity prepares its accounts in accordance with the international accounting standards approved by the European Commission. NB: application of the international accounting standards by issuing institutions is only mandatory for consolidated accounts. Bond-issuing institutions without subsidiaries (such as a finance BV which forms part of a group) only publish individual accounts. For individual accounts, it is possible to choose (briefly) between IFRS, Title 9 and Title 9 with the application of IFRS valuation principles that have been applied in the consolidated accounts. 4 would be required to consolidate has been included in the consolidated accounts of a parent company and a number of other conditions mentioned in article 2:408 CC have been met. With effect from 1 January 2015, issuing institutions are no longer allowed to make use of this exemption. This has brought Title 9 into line with the earlier amendment in the Seventh EEC Directive in 2003 in the context of the introduction of IFRS.5 The amendment to Title 9 goes further than the Directive, because the exemption has also been withdrawn for companies whose securities are traded on regulated markets outside the EU.6 In practice this is relevant to intermediate holding companies which have issued listed bonds, since their shares are held by the parent company. This means that these companies have to establish consolidated accounts as at 31 December 2014, with comparative figures for 2013, in accordance with IFRS. In addition to the exemption under article 2:408 CC, a number of these intermediate holding companies also make use of the exemption from publishing their full individual accounts under article 2:403 CC.7 As long as the Accounting Directive has not yet been implemented, these companies can dispense with publishing their individual accounts or just publish greatly simplified individual accounts. After the implementation of the Accounting Directive, these companies will also have to publish their full individual accounts (see paragraph 2 below). An issuing institution is required to make a notice generally available (by publishing a press release which must be simultaneously sent to the Authority for the Financial Markets (the AFM)) if: - between the making available of the annual financial report and its adoption facts or circumstances emerge which are essential to the insight which the report is required by law to provide (article 5:25c para. 7 FSA); or - the annual financial report adopted differs from the annual financial report originally prepared (article 5:25c para. 8 FSA); or - the financial report adopted falls seriously short in providing the insight which the report is required by law to provide (article 5:25c para. FSA in conjunction with article 2:362 para. 6 CC).3 1.2 Language and reporting standards In addition, it has now been expressly provided that companies which apply the international financial reporting standards (IFRS) must prepare their accounts in Dutch, unless the general meeting of shareholders has resolved to use a different language, and that the standards applied must be mentioned in the notes to the accounts.4 1.3 Withdrawal of consolidation exemption for intermediate holding companies with listed securities Under Title 9 intermediate holding companies are exempt from the requirement to prepare consolidated accounts if the financial information which these companies 3 Article 2:362 para. 8 CC requires that this notice must be accompanied by an audit report and that the entity must send the notice and the audit report to the Trade Registry. If the entity is an issuing institution which has made the notice generally available and sent it to the FMA, as required, the FMA will deal with sending the notice to the Trade Registry (article 5:25m para. 11 FSA). 4 By means of the addition of article 2:362 para. 6, last sentence and para. 10 to the enumeration of provisions from Title 9 which continue to apply if the legal entity draws up its accounts in accordance with IFRS (see note 2). 5 Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/ EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings. 6 The term ‘regulated market’ is used in the FSA to denote regulated markets situated in the EU. Regulated markets outside the EU are termed ´a system similar to a regulated market’. 7 This follows from article 40 of the Accounting Directive, which states that the Member States must not make the simplifications and exemptions under the Directive available to public-interest entities unless the Directive expressly provides otherwise. For the term ´public-interest entities’, see paragraph 2.2. 5 1.5 Deadline for publishing accounts The Amendment Act 2014 has added a new provision in article 2:210 CC which in essence provides that BVs with listed securities (which will in practice be bonds) have to prepare their accounts within four months after the end of their financial year and that this period cannot be extended.8 Since the implementation of the Transparency Directive, a similar provision for NVs with listed securities has been included in article 2:101 para. 1 CC. This is intended to correspond with article 5:25c FSA, which provides that issuing institutions must make their accounts generally available within four months after the end of their financial year. After the introduction of this provision for BVs on 1 January 2014, it emerged that it did not take into account the fact that under the FSA certain issuing institutions are exempt from article 5:25c FSA. This relates to the category of institutions which only issue bonds or other securities without the character of shares with a nominal value per security of at least EUR 100,000 (or the equivalent in another currency). This point did not come up when the provisions for NVs were amended, because the exempt category of institutions are generally BVs. This has been rectified in the Amendment Act 2015. A provision has been added to article 2:101 CC and article 2:210 para. 1 CC to the effect that companies to which article 5:25g para. 2 or 3 FSA applies can apply the preparation period for ‘normal’ NVs or BVs. NVs and BVs which are not issuing institutions are required to prepare their annual accounts within five months after the end of each financial year and can extend this period by a resolution of the general meeting of shareholders on the basis of extraordinary circumstances. This amendment came into force with effect from 1 January 2015 and therefore applies to accounts for financial years ending on or after 30 September 2014. 1.4 Improved supervision by the AFM The Amendment Act 2014 also contains a number of changes to improve the AFM’s supervision of financial reporting by issuing institutions for which the Netherlands is the Member State of origin and issuing institutions with a listing on a regulated market outside the EU. The new measures which have been available to the AFM since 1 January 2014 are as follows. (i) Order for further clarification The AFM can request the Enterprise Chamber of the Amsterdam Court of Appeal (the EC) to order a Dutch issuing institution to provide further clarification concerning the application of the regulations in its financial report. The Amendment Act 2014 has extended this measure to the half-yearly reports of Dutch issuing institutions and the annual and half-yearly reports of foreign issuing institutions with a listing in the Netherlands. Also, the period for the request to be served by the AFM has been extended from 6 to 9 months after the documents are sent to the AFM. (ii) Order to publish press release The AFM can request the EC to order a foreign issuing institution with a listing in the Netherlands to issue a public announcement explaining that its financial report does not comply with the regulations or how the regulations will be applied in the future. This measure was originally introduced because the AFM cannot require foreign companies to revise their accounts. The Amendment Act 2014 has extended this measure to the half-yearly accounts of foreign issuing institutions with a listing in the Netherlands and to the annual and half-yearly accounts of Dutch issuing institutions. Again, the period for the request to be served by the AFM has been extended from 6 to 9 months after the documents are sent to the AFM. The press release must also be made generally available as a free-standing document. 8 It also provides that the Minister of Economic Affairs cannot release these companies from this requirement. 6 2.2 Public-interest entities Issuing institutions and licensed credit institutions and insurance companies (which are together referred to in the Accounting Directive as public-interest entities, or PIEs) cannot use the light-touch regimes discussed in the previous paragraph. That is already the case now, except that in Title 9 this group has been extended to include companies which have outstanding securities listed on unregulated markets and markets outside the EU. This extension is not replicated in the Bill (article 2:398 para. 7 CC). This means that following the introduction of this Act these companies will be able to use a light-touch regime if the group remains below the relevant thresholds on a consolidated basis. This does not affect the fact that the relevant non-European stock exchange may prohibit the use of the exemptions under Title 9 for the consolidated accounts. Also, PIEs can no longer use the exemption relating to the form, auditing and publication of individual accounts under article 2:403 CC (article 2:403 para. 4 CC). Until now this has been controversial for issuing institutions because of the additional publishing requirements under the FSA which apply to this group. PIEs can also no longer use the facility to include simplified profit and loss calculations in their individual accounts if the legal entity publishes consolidated accounts (article 2:402 para. 2 CC). The exemption from consolidation for small groups currently does not apply to licensed credit institutions (article 2:426 para. 3 CC) and insurance companies (article 2:445 para. 4 CC) or to issuing institutions and companies which have outstanding securities listed on unregulated markets and markets outside the EU 2. The Accounting Directive and the proposed Implementation Act On 19 July 2013 the Accounting Directive entered into force. The Accounting Directive replaces the Fourth Directive and the Seventh Directive. One of the objectives of the Accounting Directive is to reduce administrative costs for small and medium-sized companies, facilitate the comparison of annual accounts and increase the transparency of payments to public bodies by companies in the extraction industry and primary forest logging. The Member States were required to have implemented the Accounting Directive into their domestic legislation by 20 July 2015 at the latest. On 11 March 2015 the Bill was published under the name Accounting Directive (Implementation) Act.9 This Bill applies the amended provisions to financial supervision of financial years commencing on or after 1 January 2016. It is permitted to apply them earlier. The most important changes under the Accounting Directive, as formulated in the Bill, are briefly discussed below. 2.1 Light-touch regimes Title 9 provides for light-touch regimes for so-called small and medium-sized companies. The threshold amounts for determining whether a company is small, mediumsized or large (two of the three criteria must be met) are being increased (articles 2:396 para. 1 and 397 para. 1 CC). Also, an optional category is being introduced for very small companies (so-called micro-entities), to which the most exemptions apply (article 2:395a CC). The new thresholds are as follows: micro small medium-sized large balance sheet total ≤ € 350,000 ≤ € 6 mio ≤ € 20 mio > € 20 mio net turnover ≤ € 700,000 ≤ € 12 mio ≤ € 40 mio > € 40 mio average staff during financial year < 10 < 50 < 250 ≥ 250 9 Parliamentary Documents II 2014/15, 34 176, nrs 1-4. 7 management report contains material inaccuracies, ´in the light of the knowledge and understanding acquired during the examination of the entity and its environment’ (article 2:393 para. 3 CC). This element must also be reflected in the audit opinion (article 2:393 para. 5 CC). 2.5 Publication deadline The accounts and the management report must be published within a reasonable period of not more than 12 months. At present the final publication deadline for unlisted companies is 13 months.11 Under the Bill, the extension of the deadline for preparing the accounts in articles 2:49 CC (for commercial associations), 2:59 CC (for cooperative associations and mutual insurance associations) and articles 2:101 and 2:210 CC for NVs and BVs respectively is being reduced by one month and the final publication deadline mentioned in article 2:394 para. 3 CC is being changed from 13 months to 12 months. 2.6 Country by country reporting The Accounting Directive contains a requirement for large companies and PIEs which are active in the extraction industry and logging of primary forests to make an annual report of payments which have been made during the financial year by the issuing institution and the companies consolidated by it to public bodies in the countries where the group is active for: (i) production rights: (ii) taxes on income, production or profits; (iii) royalties; (iv) dividends; (v) signature, tracing and production bonuses; (vi) licensing rights, rentals, joining fees and other payments for licences and/or concessions; and (vii) payments for infrastructure improvements. The report does not form part of the accounts. Payments of less than EUR 100,000 do not have to be mentioned. Reporting must be carried out per project as well as per country. Under the Bill this will be included in an Order in Council. (article 2:407 para. 2(b) CC). The exclusion under article 2:407 para. 2(b) CC is being replaced by a reference to PIEs. This means that a small group which includes a company with outstanding bonds that are traded on an unregulated market will in future be able to make use of this exemption. 2.3 Goodwill and R&D expenses The Accounting Directive requires goodwill to be capitalised. At present Title 9 still allows goodwill which has arisen on the acquisition of an associated participation10 to be written off against equity or the profit and loss account. These methods are being deleted (article 2:389 para. 7 CC). The Accounting Directive also no longer allows research expenses to be capitalised. This facility is therefore being removed by the Bill (article 2:365 para. 1(b) CC). However, development expenses for which a statutory reserve is formed up to the amount capitalised can still be capitalised. In exceptional cases where the useful life of development costs and goodwill cannot be reliably estimated, these assets must be written off over a maximum period of 10 years (article 2:386 para. 3 CC). At present Title 9 does not impose any maximum on the useful life of goodwill. The Dutch Accounting Guidelines (Richtlijnen voor de jaarverslaggeving) apply a maximum period of 20 years, which can only be deviated from in exceptional cases. 2.4 The management report The term ‘annual report’ is being replaced by the term ‘management report’, which also corresponds better to the description used in practice. The accountant’s audit of the management report is being extended. In addition to auditing whether the annual accounts meet the requirements imposed on them and whether the management report has been prepared in accordance with Title 9 and is compatible with the accounts, the accountant will be required to check whether the 10 An entity is an associated participation or joint venture of a member of a group to which the reporting entity belongs (in the consolidated accounts). 11 See article 2:394 para. 3 CC. 8 of the reporting period (article 5:25d para. 1 FSA). This deadline is being extended to three months. 3.3 Extension of retention period The retention period for annual and half-yearly reports of issuing institutions is being extended from five years to ten years (article 5:25c para. 1 and 5:25d para. 1 FSA). 3.4 Country by country reporting Issuing institutions which are active in the extraction industry or logging of primary forests are required to make a separate report within six months after the end of their financial year of the payments made to public bodies in the countries where the group is active, in accordance with the requirements set out in the Accounting Directive (see paragraph 2.6 above). Again, there is a retention period of ten years. This requirement is being incorporated into article 5:25c FSA. B. ARTICLE 403 LIABILITY 4.1 Preferential treatment of wage claims Wage claims of employees have priority over all assets of the employer.14 If another entity has assumed joint and several liability for the same wage payments via a 403 statement, then the employees can also demand payment of the wages from the other entity. The question whether this claim also has priority has been answered inconsistently in the lower courts. On 11 April 2014 the Supreme Court finally answered the question in the negative in the context of the liquidation of Econcern.15 Priority can only be based on the law16 and although the law gives priority to wage claims on the employer, it does not give priority to claims under a 403 statement. That claim derives solely from the 403 statement itself.17 An employee’s claim against the company or entity which has issued the 403 statement therefore does not have priority, even if it is actually a claim for payment of wages. 2.7 Amendment to Accounting Directive The Accounting Directive was amended on 22 October 2014.12 The amended Directive requires large PIEs with an average of more than 500 employees to include in their management report a financial declaration and a description of their diversity policy in relation to the composition of the board and statutory board. This change has to be implemented in domestic legislation by 6 December 2015 at the latest. 3. The Transparency Directive and the proposed Implementation Act Directive 2013/50/EU came into force on 26 November 2013. This Directive has amended a number of the provisions of the Prospectus Directive and the Transparency Directive. The Member States are required to implement the Directive in their domestic legislation before 26 November 2015. The Transparency Directive Amendment (Implementation) Bill was published on 18 June 2015.13 The most important changes in the area of financial reporting by issuing institutions are as follows. 3.1 Abolition of interim statements The requirement for issuing institutions with listed shares to publish an interim statement - in addition to their annual and half-yearly financial reporting - in the first and second half of the financial year is being abolished. This amendment is intended to reduce burdens on companies. According to the legislator it should also reduce the short term pressure on issuing institutions and encourage investors to take a longer term view. 3.2 Extension of publication deadline for half-yearly financial reporting At present issuing institutions have to make their halfyearly financial report generally available as quickly as possible, but at the latest within two months after the end 12 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups. 13 Parliamentary Documents II 2014/15 34 232, nrs 1-4. 14 Article 3:288 opening lines and part e CC. 15 HR 11 April 2014, ECLI:NL:PHR:2014:898 (UWV/Econcern). 16 Article 3:278 para. 2 CC. 17 HR 28 June 2002, ECLI:NL:PHR:2002:AE4663 (Akzo Nobel/ING). 9 not sufficient for an assumption to be made that the creditors had sufficient security to meet their claims, and thus illustrated that such an argument must always be concrete and substantiated. 4.3 Article 403 liability and the principle of reasonableness and fairness21 Two separate judgements in 2014 have illustrated that an attempt to invoke the derogatory effect of the principle of reasonableness and fairness, or at least abuse of rights, in the context of article 403 liability will normally only succeed if a party deliberately tries to disadvantage another party. An attempt by an employee to invoke a 403 statement which had no longer been relevant for many years, and which she previously did not even know existed, was upheld by the Enterprise Chamber.22 An attempt to invoke the derogatory effect of the principle of reasonableness and fairness by the joint and several article 403 debtor was not upheld. An objection raised after the end of the statutory objection period against the termination of the remaining liability23 was nevertheless regarded by the Rotterdam District Court as having been raised on time, because in the District Court’s view the joint and several article 403 debtor had deliberately engineered the expiry of the objection period before the creditor (as the sole creditor) would be informed of the intended termination of the remaining liability.24 4.2 Article 403 liability in the context of the nationalisation of SNS Subordinated claims played a central role in the context of the nationalisation of SNS. SNS Reaal had assumed joint and several liability for certain debts of SNS Bank by having filed a 403-statement. On appeal to the Supreme Court, the question was put to the Supreme Court whether subordinated claims against SNS Bank would also be subordinated if they were recovered from SNS under the 403 statement issued by it.18 The Supreme Court held that the nature of a subordination provision was such that it only related to the priority order on a recourse to the assets of the relevant debtor (SNS Bank). A subordination provision agreed by a creditor with SNS Bank did not affect the creditor’s recourse to the assets of a third party, such as SNS Reaal, which was jointly and severally liable by virtue of a 403 statement for the relevant obligation and was not a party to the subordination provision. Again in the context of the nationalisation of SNS, the question was put to the Central Netherlands District Court whether a claim for damages for breach of a bank’s duty of care fell within the scope of a 403 statement in which liability had been accepted for debts arising from legal acts.19 The Court interpreted the term “arising from legal acts” broadly and held that a breach of a bank’s duty of care also arose from a legal act, because a contractual relationship must have existed before the existence - and thus before the breach - of that duty of care.20 The District Court also held that the mere fact that SNS had been nationalised by the Dutch National Bank was 18 HR 20 March 2015, ECLI:NL:HR:2015:661, continuation of Amsterdam Court of Appeal (EC) 11 July 2013, ECLI:NL:GHAMS:2013:1966 (SNS). 19 Central Netherlands District Court 7 May 2014, ECLI:NL:RBMNE:2014:1642 (Propertize). 20 The judgment has received a critical response from various authors. As far as we are aware, this case has not yet been ruled on in any higher court. 21 See also: ‘Case law and tax aspects of article 403 certificates’. Genoteerd nr 82 (November 2011). 22 Amsterdam Court of Appeal (EC) 11 September 2014, ECLI:NL:GHAMS:20142887 (Koks/Van Lieshout). 23 Within the meaning of article 2:404 para. 2 CC. 24 Rotterdam District Court 30 September 2014, ECLI:NL:RBROT:2014:8032 (Pergen/Eneco). 25 HR 3 April 2015, ECLI:NL:HR:2015:837 (Bia Beheer). 10 the same date, they do not have to become time-barred on the same date, for example because the limitation period for one of the two claims has been stayed in the meantime. C. FACILITATING REORGANISATIONS OF BUSINESSES: DUTCH PREPACKS AND SCHEMES 5.1 Introduction At the end of 2012 the Minister of Security and Justice announced the Reassessment of Insolvency Law legislative programme.29 This programme has three cornerstones, i.e. (i) combating fraud (ii) facilitating reorganisations of businesses, and (iii) modernisation. In this connection a summary of the draft bills published until then appeared in January 2014 in Loyens & Loeff’s Genoteerd newsletter.30 The preliminary proposal for the Companies Continuity Act I31 had by then already been published for consultation as part of cornerstone (ii) and it provides for rules to be included in the Bankruptcy Act to nominate a proposed liquidator to facilitate the handling of insolvencies and speed up a start-up of viable parts of a business following a liquidation, so that value and employment can be maintained. After that, also as part of cornerstone (ii), on 14 August 2014 the preliminary proposal for the Companies Continuity Act II was published for consultation. This proposal is intended to make the process of restructuring problematic debts of companies outside a liquidation more flexible and quicker and to allow it to happen with a minimum of formalities, costs and uncertainties.32 4.4 Effect of a settlement on a claim under a 403 statement On 3 April 2015 the Supreme Court held25 that if a creditor of a legal entity grants a final discharge to the entity via a compromise agreement (settlement agreement) in exchange for payment of a specified sum, that does not necessarily mean that the parent company of that entity (which was jointly and severally liable by virtue of a 403 statement issued by it) would also be released from its obligations under the 403 statement. The compromise only has the consequence that the parent company’s debt to the creditor is reduced by the amount paid to the creditor by the legal entity. 4.5 Limitation period for article 403 liability On 19 June 201526 the Supreme Court upheld a judgement of The Hague Court of Appeal27 in which the Court of Appeal held that at the date on which a claim arose under a legal act carried out by the exempt legal entity, a claim also arose at the same time against the legal entity which had issued a 403 statement in favour of the exempt entity. For this reason the limitation period for both claims started at the same time. According to the Court of Appeal, both the claims in the case before it became time-barred (for this reason) on the same date. Although the Court of Appeal’s judgment can be interpreted in various ways, the Advocate General explained it to the Supreme Court in such a way that the Court of Appeal did not assume that the mere fact that the claims against the exempt entity were time-barred necessarily also meant that the claims under the 403 statement were time-barred.28 It therefore appears that although both claims will in practice normally arise on 26 HR 19 June 2015, ECLI:NL:HR:2015:1691 (X/Eneco). 27 The Hague Court of Appeal 18 March 2014, ECLI:NL:GHDHA:2014:892. 28 Conclusion of A-G Timmerman of 17 April 2015, ECLI:NL:PHR:2015:523. 29 Parliamentary Documents II 2012/13, 29 911, nr 74. 30 January 2014, nr 96. 31 See http://www.internetconsultatie.nl/wet_continuiteit_ondernemingen_i. 32 See: http://www.internetconsultatie:/nl/wco2. 33 Parliamentary Documents II 2014/15, 34 218, nrs 1-4. 11 rules do not apply to individuals who do not carry on an independent profession or trade. Following the consultation process, a number of provisions were added to the recently published Bill for the Companies Continuity Act I as compared with the draft of the Bill. The following is a non-exhaustive summary of these additions: • At the time the request is served, the debtor must show that during the ‘silent preparation phase’ he will still be in a position to meet his current and new payment obligations (including the proposed liquidator’s salary). • The request can only be approved if the debtor demonstrates that a ‘silent preparation phase’ has added value in his specific situation. Added value will be deemed to exist if it can be shown that the preparation may reduce the losses for the parties involved in the event of an insolvency to such an extent, or increase the chances of a sale of profitable parts of the business carried on by the debtor following a possible declaration of insolvency for the highest possible sale price while maintaining the highest possible sale price and the greatest possible employment to such an extent, that this outweighs the fact that the preparation is occurring in silence. • In view of the interests of the creditors and other parties involved, the court can now also impose further conditions on the nomination of a proposed liquidator. For example, the Works Council can (on a confidential basis) be involved in the ‘silent preparation phase’. • If it turns out that on a request for the nomination of a proposed trustee a director has provided incorrect information about the added value for the preparation of the bankruptcy with a view to making use of the preparation process for improper purposes, it will be assumed that the director has performed his duties improperly and that the improper performance of his duties is a material cause of the insolvency. For a description of the content of the draft bill for the Companies Continuity Act I, we refer to the newsletter mentioned earlier. In the meantime, the Bill for the Companies Continuity Act I was published on 4 June 2015.33 A brief explanation of this Bill will be given below, focussing primarily on the most important changes to the draft bill and the draft bill for the Companies Continuity Act II. 5.2 The Companies Continuity Act I In practice it has already been possible for some time for a debtor in serious difficulty to make a request to the District Court to nominate a person in advance (a ‘silent administrator’) whom the District Court intends to appoint if a bankruptcy were to be ordered. Most District Courts join in with this practice, which is sometimes also described as a ´pre-pack’. This has led, for example, to the restructurings of Schoenenreus34and the mushroom grower Prime Champ, which have also received a lot of attention in the press. The Bill is intended to codify existing practice in a set of guidelines which will offer scope for further interpretation. The proposal introduces a facility into the Bankruptcy Act to allow the court to nominate a proposed trustee or intended administrator before an insolvency or suspension of payments is ordered. The object of this is to facilitate a structured and effective insolvency procedure and/or accelerate a start-up for viable parts of a business. The involvement of the proposed trustee, and the calm and space that would go hand in hand with this, should result in a higher yield being realised for the assets for the benefit of the creditors as a whole and/or employment being preserved as much as possible on a start-up. The rules contained in the Bill apply to companies, regardless of what activities they carry on or the legal form in which they are conducted, and can therefore also apply to companies in the semi-public sector. The 34 However, Schoenenreus was not able to benefit from the restructuring for long. Earlier this year the liquidation of Schoenenreus was ordered. 12 it. The court will only order a creditor to cooperate in the implementation of a settlement in very exceptional circumstances. Creditors with a security right, such as banks in most cases, will also (both in and outside an insolvency) not be compelled to cooperate in a settlement. However, in practice there has already been a need for some time for creditors who have no reasonable interest in refusing their cooperation to be able to be compelled to cooperate in a settlement outside an insolvency. The draft Bill provides that a company can offer a settlement to restructure its debts outside an bankruptcy or suspension of payments. A creditor can also offer a settlement to co-creditors of his debtor. The background to this is that it is possible that creditors will be prepared to save a company via a settlement, but that the board of the company, under pressure from the shareholders, will not wish to cooperate in a settlement. However, the creditor is only allowed to offer a settlement if he has established that the company is heading for an insolvency and if he has first given the company the chance to offer a settlement itself. This last requirement is intended to prevent a creditor from spontaneously offering a settlement and thus creating unnecessary unrest and frustrating the normal conduct of the business. The settlement can be offered to creditors and shareholders. It can also be offered to a limited group of them. In this respect the draft Bill provides for the ability to allocate creditors/shareholders into different classes. The legislator has deliberately chosen not to include a defined allocation into classes in the Bill. The allocation has been left to the party offering the settlement, so that it can be aligned to the specific circumstances of the case. However, a criterion has been introduced which to some extent limits this freedom. Creditors with claims (and shareholders with rights) which must reasonably be regarded as equivalent must be placed in the same Consequently, the director will be at risk of being held liable by the liquidator for any shortfall in the estate on a bankruptcy. In addition, if the director has not complied with the duty to provide information as mentioned above, a civil law prohibition of management may be imposed on him. Some of the provisions included in the draft Bill have not been retained in the final Bill. For example, the draft Bill contained a provision to the effect that (briefly) the proposed trustee could declare that it could reasonably be expected that in the event of an insolvency a trustee would not set aside a particular legal act on the grounds of fraudulent preference. Following criticism in the consultation process, this provision has not been retained in the final Bill. 5.3 The Companies Continuity Act II The draft Bill for the Companies Continuity Act II is intended to introduce compulsory settlements outside an insolvency in the Netherlands. Following the example of the English scheme of arrangement, this Dutch compulsory settlement will also be referred to as a scheme. The aim is that businesses will be able to restructure their debts outside insolvency proceedings. This draft Bill is in line with the recommendation made by the European Commission on 12 March 2014, which provides (inter alia) that Member States must include a facility in their domestic legislation for companies to offer compulsory settlements outside an insolvency.35 The expectation is that the Bill will enter into force early in 2016 at the earliest. Companies will be able to informally offer a “settlement” to their creditors in order to avoid an insolvency. The settlement will often include a deferral of payment and a release/partial release of the claim. Creditors will in principle be free to cooperate in a settlement or reject 35 European Commission, 12 March 2014, C (2014) 1500. 13 The draft Bill also includes a facility for making a settlement that has been rejected generally applicable if the court considers that the creditors/shareholders who voted against it could not reasonably have exercised their votes in this way. The idea behind this provision is that creditors whose claims would not be met if the bankruptcy of the company were to be applied for (or who would receive a smaller payment on an bankruptcy) should not be able to have the power to prevent a restructuring. After all, they have no interest in it. The draft Bill to introduce compulsory settlements outside an insolvency meets a practical need. It creates a procedure, backed with safeguards, intended to ensure that a few obstructive creditors can no longer lead to a company having to offer a settlement out of necessity in an bankruptcy or suspension of payments. This will (or may) materially improve the scope for reorganisations under Dutch legislation and should (or may) offer a useful contribution to further economic recovery. class. In interpreting this criterion, the claims or rights of the creditors/shareholders in a particular class must correspond with each other to such an extent that it can reasonably be expected that they will be able to reach a common position. The company or creditor can in principle structure the settlement as it wishes. A particular feature of this draft Bill is that claims against sureties, co-debtors and guarantors can also be changed by the settlement. This has not been possible under insolvency law until now. To create as much flexibility as possible, the draft Bill provides that the vote on the settlement has to be made in accordance with the procedure laid down by the party offering the settlement in its proposal. A class has approved the settlement if a simple majority of the creditors/shareholders belonging to the class and participating in the vote has voted for the settlement, which majority represents at least two thirds of the amount of the claims of the creditors participating in the vote (or two thirds of the issued capital represented by the voting shareholders in those classes). Only creditors/ shareholders whose rights are changed by the settlement are entitled to vote. If a settlement has been accepted (in the manner described above), then the court will declare the settlement generally applicable on request by the company or creditor who offered the settlement, unless this would disproportionately harm the interests of one or more of the creditors/shareholders. The disproportionate harming of interests is an open standard which has to be interpreted by the court. An example of this might be a situation where the vote on the settlement has been carried out unfairly. Also, if the settlement serves no other purpose than to pass on the risk of the restructuring to the minority voting against it, the court would be able to conclude that interests are being disproportionately harmed. 14 Quoted Quoted is a periodical newsletter for contacts of Loyens & Loeff N.V. Quoted has been published since October 2001. The authors of this issue are A.N. Krol ([email protected]), Y.M. van Beek ([email protected]) and M.R.C. van Zoest ([email protected]). This newsletter is also available in electronic form, in both Dutch and English. Orders/additional orders can be obtained via [email protected] Editors E.H.J. Hendrix A.N. Krol W.J. Oostwouder A.J.A. Stevens A.C.J. Viersen D.F.M.M. Zaman A.G. 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