A revision of Dutch insolvency law is being considered to introduce a new scheme of arrangement process. The process, based on English law schemes of arrangement, is likely to have far-reaching consequences for both Dutch insolvency and finance law.
FROM CREDITOR-CENTRIC TOWARDS DEBTORFOCUSSED INSOLVENCY LAW
Dutch insolvency law originates from the Dutch Bankruptcy Code implemented in 1893. The Code is a reflection of nineteenth century sentiments: it is predominately concerned with securing creditors’ rights as opposed to the rescue of a debtor’s business. Present-day consensus is that insolvency law should be geared towards the protection and restructuring of a debtor’s business, even if this might be at the expense of individual creditors. The aim when restructuring a business is to preserve value, thereby enabling a higher return for the group of creditors as a whole.
The proposed Dutch scheme is a debtor-friendly extension of the Dutch insolvency code. It is aimed at preserving the value of a debtor’s business through a court-imposed restructuring, at the expense of individual creditors’ and shareholders’ (“stakeholders”) rights. The draft legislation aims to strike a balance between the efficient restructuring of a business whilst ensuring that stakeholders’ rights are not infringed upon unnecessarily.
The procedure’s goal is to achieve an agreement or composition between the debtor and its stakeholders whereby the stakeholders’ rights are amended (e.g. by reducing creditors’ claims or amending the terms of a loan facility or multi-year lease agreement). The scheme can involve a composition offered to all stakeholders or just to certain interested parties (e.g. secured lenders). The scheme can be proposed by the debtor or, if certain conditions are met, it will also be possible for stakeholders to initiate the process.
The process for the adoption of a scheme consists of two phases: voting by the stakeholders on a proposed scheme, and adoption of the scheme by the court.
First phase, voting on the proposed scheme
This first phase does not involve the courts. A debtor (or a stakeholder) prepares a proposal in which is set out:
- the amounts offered to stakeholders,
- the amount which would be realized if the company were to be declared bankrupt, and
- a division of the stakeholders into classes. The proposal must be sent to all stakeholders whose rights are to be amended.
Classes must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. As the manner in which creditors are divided into classes can have a defining impact on the outcome of a scheme, the procedure allows for stakeholders (or the debtor) to request the appointment of a supervisory judge.
Provided there has been no request for a such a judge to review the division into classes, creditors vote on the proposal eight days after it has been sent to them. The proposal is accepted if all classes agree to it. A class is considered to have agreed to the proposal if a majority in number of the members of a class vote in favour of it, and if this majority represents at least two thirds of the amount of the outstanding claims included in the class.
The Dutch scheme deals with stakeholder classes which are ‘out of the money’ in a different way than the United States chapter 11 procedure. In chapter 11 such a class is not required to vote but is considered to have (automatically) voted against the proposed scheme. In a Dutch scheme, a class of out-of-themoney stakeholders would be allowed to vote, but as described in the next paragraph, their rejection of the scheme can be discounted by the court.
Second phase, presenting the scheme to the court
Both debtors and stakeholders can petition the court to adopt the approved scheme - and even to adopt a rejected scheme. However the court will only adopt a rejected scheme if all classes of stakeholders receive at least the amount they would receive if the company were to be declared bankrupt. Consequently we expect that there will be extensive discussion about the valuation of a company. This will require close collaboration between attorneys and accountants.
The court can refuse to adopt a scheme if:
- it serves no purpose other than to shift risk from the majority to the (outvoted) minority,
- there were ulterior motives for (a class of) stakeholders agreeing to the scheme,
- the procedure for voting was unfair, or
- other material reasons give grounds for refusing to adopt it.
Once a court adopts the scheme it is binding on all stakeholders that fall within its scope, regardless of their participation in the voting process. However, stakeholders with a continuing obligation (e.g. lessors, suppliers) can choose to terminate their agreements from the date of adoption of the scheme thereby ensuring that no new obligations arise.
COMPARISON WITH UK SCHEMES OF ARRANGEMENT
The proposal is inspired by the UK’s scheme of arrangement procedure which is increasingly being used by non-UK companies as a flexible and relatively fast way to restructure debts. A significant difference between the current UK scheme and the proposed Dutch scheme is that the UK procedure is used not only for financially distressed or insolvent companies but also extensively as a tool for acquisitions and demergers of solvent companies. It is not considered to be an insolvency process and as such, falls outside the scope of the EC Regulation on Insolvency Proceedings. This provides what appears to be viewed as attractive scope for companies registered outside the UK to initiate a scheme there, despite not being able to show that the company’s centre of main interests is in the UK. The debtor merely has to show that it has a sufficient connection with the jurisdiction and the English courts have accepted that security documents governed by English law with English jurisdiction clauses provide such a “sufficient connection”. However, the fact that the UK scheme is not an insolvency process also means that there is considerable doubt about the extent to which any scheme sanctioned in the UK, which purports to affect the rights of creditors outside the UK, will be recognised and enforced in other jurisdictions.
In stark comparison to this, the Dutch proposal prescribes that only entities whose COMI is located in the Netherlands can be the subject of a Dutch scheme. As it is only in draft form, The Dutch scheme has not yet been included in the annexes to the EC Insolvency Regulation. Whilst it is likely to be included in the future, if the proposals are finalised and used before then, the consequences and enforceability of such a scheme outside of the Netherlands may be debateable. This fact that the Dutch scheme will almost certainly fall within the scope of the EC Insolvency Regulation could have particular significance for secured creditors as some of the provisions of the EC Insolvency Regulation which attract most interest and criticism but which remain largely untested by the courts, concern the extent to which insolvency proceedings can alter or affect secured creditors’ rights. The introduction of the Dutch scheme is likely to bring this issue swiftly into the spotlight.
There are two other areas in which the proposed Dutch scheme process will provide greater flexibility than UK schemes: (i) in the UK only the debtor can propose a scheme; and (ii) the courts are involved at an earlier stage in the proceedings in the UK than is envisaged will be the case in the Netherlands.
This new proposed scheme provides a welcome addition to Dutch insolvency law. It will facilitate the restructuring of debtors, amendments to facility agreements and even an alternative method to effect a hostile takeover.
Once in force, we expect to see the new process enthusiastically adopted. If, as anticipated, it will be included in the EC Insolvency Regulation, it will provide a valuable tool for crossborder restructuring specialists seeking to effect a compromise of claims which will be recognised throughout Europe.