An extract from The Insolvency Review, 7th Edition
Plenary insolvency proceedingsi Pre-packs – silent administrators
Possibly the most significant development in the past few years in Dutch insolvency proceedings has been the increasing use of pre-packs (i.e., pre-packaged insolvency restructurings) and the use of silent administrators (and recognition of the added value thereof across the Dutch legal profession).
Although it currently has no formal basis in Dutch statute (though a draft bill has been submitted to Parliament), the courts have been willing to hear a debtor's request for (and in rare cases, even upon a formal application by a creditor) and to appoint (informally) a silent insolvency administrator prior to the opening of formal procedures. This allows for the debtor and the silent administrator to try to restructure the entity outside formal proceedings. If this is not feasible, it allows for a sale or restructuring of the debtor's business to be pre-arranged with the assistance of the informal administrator and under the supervision of an (informal) supervisory judge. This increases the chances of a successful restructuring in formal insolvency proceedings.
In the past, all types of businesses – retail, fashion and flower exports, healthcare and hospitals, media and entertainment – have made use of the involvement of (silent) administrators prior to bankruptcy to restructure the business. Furthermore, a diversity of courts and administrators have been involved, meaning that the use of silent administrators and pre-packs has developed throughout the Netherlands.
Most cases that have made use of this tool concerned operational businesses (many of which had suffered as a result of the economic crisis) that were in need of (considerable) debt reduction but, in principle, were viable businesses. The successful restructurings were mostly done in cooperation with the secured creditors (mostly senior bank debt) and the debtor.
After a rather positive start, with a lot of success stories, Dutch pre-pack practice has faced growing criticism during the past five years. Critics mainly claim that the bidding process lacks transparency and that pre-packs are misused to shed jobs (owing to non-applicability of the rules on transfer of undertaking). This has led to a judgment of the European Court of Justice (ECJ) dated 22 June 2017 in the Estro case described in Section III.ii. The negative publicity regarding the case and the ECJ Estro ruling has resulted in the reluctance of courts to facilitate pre-packs and silent administrations, and in a draft bill concerning the rights of employees in the event of the transfer of a company into bankruptcy (see Section V.ii).ii Estro Groep BV
Estro Groep BV et al (Estro), the largest Dutch childcare provider, was declared bankrupt on 5 July 2014. Of Estro's 380 locations, 130 were closed, and the employment contracts of about 1,000 employees (of a total of roughly 3,600) were terminated. By means of a pre-packed bankruptcy sale, and immediately upon the opening of the formal bankruptcy proceedings, the viable parts of the underlying business of Estro were transferred as a going concern to Smallsteps BV, so as to continue the business in a smaller form. The owner of Smallsteps BV is HIG Capital, which also owns Estro.
This pre-packed bankruptcy sale is one of many transactions and restructurings that have taken place by means of a pre-pack. Nonetheless, and possibly since the bankruptcy of Estro caused a lot of employees to lose their jobs, the case has received a lot of press attention and criticism.
In February 2015, the trade union AbvaKabo FNV initiated legal proceedings against Estro/Smallsteps for abuse of bankruptcy proceedings (merely) for the termination of the employment of roughly 1,000 employees. The trade union based its claim on the fact that the European rules of transfer of undertakings should apply in this case, despite those rules not being applicable, in principle, in a Dutch bankruptcy. Council Directive 2001/23/EC relating to the safeguarding of employees' rights in the event of transfers of (or parts of) undertakings provides that the requirement to assume all employment contracts does not apply when the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor. Based on that Directive, Dutch law stipulates that the rules of transfer of undertakings do not apply in the case of a transfer of undertaking by a transferor in bankruptcy.
AbvaKabo FNV has asserted that the Estro case was not a bankruptcy instituted with a view to the liquidation of the assets of the company and a subsequent sale of a viable part of an otherwise bankrupt enterprise, but a bankruptcy and subsequent sale with the aim of restarting the business. Therefore, the actions of Estro should be considered a proper transfer of an undertaking to which the regular rules of the transfer of undertakings should apply, which were circumvented through an abuse of Dutch bankruptcy law. On 24 February 2016, the court of first instance asked for a preliminary ruling from the ECJ on whether a pre-pack sale has to be considered a transfer of undertaking. The ECJ delivered its judgment on 22 June 2017. It ruled that the protection of workers guaranteed by Directive 2001/23/EC does apply in a situation, such as in the main proceedings, in which the transfer of an undertaking in the context of a pre-pack prepared before the declaration of insolvency and put into effect immediately after the declaration of insolvency.
The exact consequences and legal implications of this ruling for future pre-packs and pre-packs that have been carried out in the past remain unclear. As a result of this ruling, Dutch courts have become more reluctant to facilitate pre-packs without a clear legal basis (for which a draft bill is still pending). The ruling also resulted in a separate draft bill concerning the rights of employees in the event of the transfer of a company into bankruptcy. This bill is described in Section V.ii.
The bankruptcy of Estro Group BV is interesting since it is the first Dutch bankruptcy in which the receiver has requested the Enterprise Chamber, on the basis of a new statutory provision, to investigate the policy of the company. In the Netherlands, a receiver is obliged to investigate the causes of the bankruptcy and the DBA provides him or her with the tools to do so. However, an investigator appointed by the Enterprise Chamber has more investigative powers than a Dutch receiver. The request is still pending before the Enterprise Chamber and a decision on the opening of the investigation is expected in 2019.iii Oi Group
The Oi Group is one of the world's largest integrated telecommunications service providers, with its operations primarily located in Brazil. Oi's shares are listed on the São Paulo and New York stock exchanges. Oi Group has two main financing companies incorporated in the Netherlands.
Owing to a combination of factors, the financial situation of the Oi Group has been declining in recent years.
The largest debts of the Oi Group stem from loans and bonds (the total debt was reported to be approximately 65 billion reais). Around April 2016, Oi Group entered into negotiations with its creditors (including the note holders of the Dutch special purpose vehicles) to reach an agreement on an out-of-court restructuring.
As the Oi Group was unable to reach such an agreement, it filed for in-court restructuring proceedings in Brazil (recuperação judicial (RJ)) for certain entities within the Group, including the two Dutch companies, being the first Dutch entities to be subjected to Brazilian insolvency proceedings. This filing is considered the largest reorganisation petition in Brazil's history. In June 2016, the Brazilian court opened the RJ proceedings for certain entities in the Oi Group, including the two Dutch companies. Since Brazilian insolvency proceedings are not automatically recognised in the Netherlands, the Dutch companies were subjected to Dutch suspension of payment proceedings, and both the composition plan offered and the creditors' meeting due to vote on the plan have been aligned with the Brazilian RJ, meaning that the aim is for the Brazilian and Dutch insolvency proceedings to run concurrently and in cooperation. Further, the suspension of payments proceedings was preceded by a silent administration period, to allow the administrator and the court to be informed of the contemplated alignment of the Brazilian and Dutch proceedings, which was a new purpose for using silent administration in Dutch insolvency practice (rather than for a pre-packed sale). On 19 April 2017, the suspension of payments granted to the two Dutch companies were converted into bankruptcy proceedings by the Amsterdam Court of Appeal at the request of a group of bondholders. The two Dutch companies also remained in the Brazilian RJ within which the Oi Group still strived to come a restructuring of the Oi Group. On 19 and 20 December 2017, Oi Group creditors voted in favour of a restructuring plan (the RJ Plan) in the Brazilian RJ proceedings.
As mentioned in Section I.vii, Dutch private international law applies the principle of territoriality, meaning that foreign insolvency proceedings (i.e., outside the European Union) will not be recognised automatically, in principle. Therefore, to ensure that all material aspects of the RJ Plan are given binding effect in the Netherlands, as part of the Dutch bankruptcy proceedings the Dutch entities offered a composition plan to their creditors that mirrors the RJ Plan. The creditors of the Dutch companies voted in favour of the Dutch composition plan on 1 June 2018 and the court approved the plan on 11 June 2018. As the Dutch composition plan has now become final and binding, the Dutch bankruptcy of the Dutch companies has ended successfully, with the companies emerging from bankruptcy.iv Steinhoff Group
Steinhoff is a South African international retail holding company that has dual listing in Germany. Steinhoff deals mainly in furniture and household goods, and operates in Europe, Africa, Asia, the United States, Australia and New Zealand. Two Dutch companies are part of the Steinhoff Group (International Holdings NV, the head of the group, and Hemisphere International Properties BV).
In December 2017, Steinhoff's chief executive officer (CEO) resigned after the company announced possible accounting irregularities. The share price dropped by 66 per cent and later by more than 90 per cent as it became public knowledge that the company had overstated profits and assets by nearly US$12 billion. From an investigation by PwC, it followed that eight people, including former Steinhoff executives, were involved in a scheme whereby potential intercompany transactions worth €6.5 billion were fraudulently recorded as external income to prop up profits and hide costs in money-losing subsidiaries. In March 2019, the company share price was still 96 per cent down on its value before the scandal erupted.
Steinhoff is now under new management and is working to clean up its balance sheet following the fraud, with a view to implementing a financial restructuring of the group to restructure almost US$12 billion of debt. Steinhoff itself initiated legal proceedings against its former CEO.
Steinhoff is subject to several investigations and is facing a string of law suits. The Dutch court assumed jurisdiction to review class actions against the group. The case concerns a group of investors who claim to have suffered losses as a result of the accounting fraud. From this decision, it follows that the Netherlands can play a part in cross-border class actions when Dutch group companies are included as defendants (or co-defendants). As many multinationals use Dutch companies as holding or finance companies within their group, this is noteworthy. The judgment further illustrates how Dutch courts are willing to take on cases even when similar proceedings are pending in other jurisdictions (in this case Germany and South Africa).v Agrokor Group
Agrokor was a conglomerate, largely centred in agribusiness and with headquarters in Croatia. The company was founded in 1976 and expanded its operations significantly by acquiring a number of large companies in Croatia and south-east Europe. The Agrokor Group had an annual sales revenue of €6.465 billion in 2015, making it the second largest retailer and the eleventh largest of all companies in south-east Europe. As at 31 December 2017, Agrokor employed around 50,900 people.
Early in 2017, it became clear that Agrokor was suffering financial difficulties. To avoid a collapse that would have badly affected Croatia's economic stability, the government, in March 2017, hastily drafted and passed the Law on Extraordinary Administration Procedure in Enterprises of Systematic Importance for the Republic of Croatia, introducing a court-supervised restructuring procedure on the basis of a going concern. Eventually, a successful settlement plan was constructed and the group revived after a major and complex restructuring in respect of its €5.8 billion of debt.
Although the company is mainly centred in south-east Europe, the restructuring also had a Dutch law angle. The group's companies were transferred to the Fortenova Group on 1 April 2019. The holding structure of the Fortenova Group comprises three legal entities based in the Netherlands. Under the settlement plan, claims by Agrokor's creditors have been assigned to the Fortenova Group, in consideration of new equity in the form of depositary receipts issued by a Dutch foundation (stichting administratiekantoor) and convertible bonds issued by the top Dutch holding company within the Fortenova Group. The purpose of the 'foundation' structure is to separate legal and beneficial ownership of the shares. The sole legal shareholder exercises the voting rights and other meeting rights corresponding with such shares and will be obliged to pass on all the financial benefits it derives from the shares to the holders of the depository receipts.vi Bankruptcies in the non-food retail industry
The past few years have been tough for companies within the non-food retail sector and many well-known companies have gone bankrupt. Examples include retail chains selling bike and car accessories (Halfords, 102 locations and more than 530 employees), women's clothes (Etam Groep, 200 locations and around 2,000 employees), shoes (Schoenenreus, 206 locations and 1,500 employees; Fred de la Bretoniere), jewellery (Siebel, 36 locations and 170 employees), sports goods (Unlimited Sports Group, which owned Perry Sport and Aktie Sport with a total of 2,300 employees), toys (Intertoys, 286 locations and 3,200 employees), fashion and homeland (Sissy-Boy, 45 locations and 600 employees), as well as fashion houses (Mexx, 315 locations throughout Europe and 1,500 employees in 50 countries; McGregor; Coolcat; Men At Work; Supertrash) and budget pharmacies (Op=Op Voordeelshop, 130 locations and 1,164 employees).
There have been three main causes for this trend. The first is the fierce competition from online shopping. Many of the above-mentioned companies followed a traditional model with a main focus on sales from physical shops rather than via the internet. The second reason is that these companies were still suffering the effects of relatively low consumer trust. The third reason is the high cost of premises. Most of these companies have been renting premises at high market prices that date from before the economic crisis. These high running costs (combined with the low sales) often pose a threat to the continuity of the business. Whereas Dutch law does not yet provide for a mechanism to cram down creditors outside insolvency proceedings, these companies had to go through formal bankruptcy proceedings to try to restructure their businesses. Most notably, V&D, one of the largest Dutch department store groups (63 locations in the Netherlands and more than 10,000 employees) was unable even to be restructured or partially sold during its bankruptcy (with the exception of the La Place food and restaurant division), resulting in the piecemeal liquidation of assets and loss of all jobs.vii Hospitals
In June 2013, the Ruwaard van Putten Ziekenhuis was the first hospital to be declared bankrupt in the Netherlands for more than 20 years. It was suffering financial problems during 2011 and 2012, partly as a result of changes in the national arrangements for financing healthcare, whereby, since 2011, hospitals have to negotiate with insurers themselves about the reimbursements for the care provided. In addition, the financial burden for hospitals had become heavier because the government was no longer contributing to premises costs. At this time, liquidity problems arose at the Ruwaard, which were alleviated with advances from insurers. Further, there was tension between the hospital's management and the partnerships of specialists. The reputation of the Ruwaard suffered at a time when public perception was not positive anyway. This reputational damage became irreversible following the immediate closure of the cardiology department following an order issued by the Healthcare Inspectorate in November 2012.
Two other hospitals in the Netherlands were declared bankrupt in 2018 – the MC Slotervaart and the IJsselmeerziekenhuizen. The financial situation at both hospitals had been deteriorating rapidly in recent years. According to the institutions, this was mainly due to the fact that it became more expensive to hire staff, because of the tight labour market. The receivers are still in the process of investigating the causes of the bankruptcies of these two hospitals.
Ancillary insolvency proceedings
As the Netherlands has not adopted the Model Law, the concept of ancillary proceedings does not apply. However, there have been a number of cases in which insolvency proceedings were opened in the Netherlands as the main proceedings over a Dutch finances company.
To a certain extent, these types of proceedings are ancillary to foreign insolvency proceedings. Several foreign groups use Dutch corporates as finance vehicles to extract funds from the market by means of issuing bonds, the proceeds of which are subsequently on-lent to the group. In the past, several of these groups have faced financial difficulties and sought to restructure outside or through formal insolvency proceedings. If, and to the extent, an out-of-court restructuring failed for the group, this inevitably led to the insolvency of the Dutch finance company. High-profile cases include Oi Group, Petroplus International BV, Pfleiderer Finance BV and Global PVQ Netherlands BV, the finance vehicle of the German company Q Cells. These finance companies hold major claims in the insolvency of their group companies, and their major creditors often include bondholders or other financial creditors.
Since the only asset of the Dutch company is usually the inter-company claim against the insolvent group members, it is in the immediate interests of the creditors of the Dutch insolvent companies that the insolvencies of the foreign group companies are successfully conducted. Furthermore, as major creditors, the Dutch companies may have a large influence on the conduct of such foreign proceedings. Thus, these Dutch insolvency proceedings can play an important part in these pending foreign insolvency proceedings.
In the case of the Oi Group, the Dutch companies were subject to both Brazilian and Dutch proceedings. It is currently not clear whether the Dutch proceedings were ancillary or main proceedings compared to the Brazilian proceedings, since both courts have assumed jurisdiction to open main proceedings, and as there is no treaty in place and since the Netherlands has not adopted the Model Law, there is no formal necessity to establish which proceedings are the main proceedings. However, the petition that the Dutch companies filed to open suspension of payments proceedings indicated that the companies aimed to have the Dutch proceedings assist the successful restructuring of Oi Group in the Brazilian proceedings.