On 5 September 2017, the Dutch legislator published an amended bill on pre-insolvency proceedings in the Netherlands1 for consultation purposes.2 The Bill contains a proposal for an amendment to the Dutch Bankruptcy Act (Faillissementswet) which enables a company in financial difficulties to propose a composition outside insolvency proceedings to its creditors and shareholders, to restructure problematic debts. This legislative proposal is one of the measures proposed in the context of a more comprehensive legislative programme with the objective, amongst others, to strengthen the restructuring possibilities for companies.3 Relevant in this respect is also the proposal for a directive of the European Commission of 22 November 2016 which entails the introduction of pre-insolvency procedures, such as the composition outside insolvency proceedings.4 The most important aspects of the Bill, which is influenced by primarily English schemes of arrangement and also by US Chapter 11 proceedings, are briefly explained below.

Current practice

In order to prevent a bankruptcy, companies can informally offer a 'composition' to their unsecured creditors, which usually entails a postponement of payment or (part) debt forgiveness. Starting point is that creditors are free to decide whether they cooperate to such a composition or refuse to do so. As a result thereof one creditor can frustrate a restructuring of debts outside insolvency. Only in very exceptional circumstances will a court order a creditor to cooperate with an 'informal' composition. Another issue identified with the current practice is that, both in an informal composition outside insolvency and a composition inside insolvency, secured creditors cannot be bound by it. In practice there has been a demand for legislation that would make it possible to have a cram down of dissenting (secured) creditors outside insolvency.

Offering a composition: by whom?

The draft legislation provides that the company itself can offer a composition to restructure its debts outside an insolvency proceeding. Creditors can also initiate the launch of a composition by requesting the court to appoint an expert. Such an expert could subsequently offer a composition to co-creditors and shareholders of the company. A creditor may, however, only request the court to appoint an expert if (i) the company is heading for bankruptcy and the creditor has requested the company in writing to offer a composition itself but the company omits to do so, (ii) if the company has offered a composition and none of the classes of creditors and shareholders has voted in favor of the composition, or (iii) if the court has denied the sanctioning of the composition.

Offering a composition: to whom?

The composition can be offered to (a number of) creditors and shareholders. The draft legislation provides the possibility to divide the creditors/shareholders in different classes. It is left up to the offeror of the composition to introduce tailor made classes depending on the circumstances of the case. The only criteria are that if creditors/shareholders have, or obtain as a result of the composition, claims and/or right that reasonably can be considered different in the sense that they have incomparable positions, those creditors/shareholders have to be placed in different classes. Creditors/shareholders that will have a different ranking in bankruptcy will in any case have to be placed in different classes.

The proposal explicitly does not apply to the rights of employees. Therefore, the rights of employees cannot be amended through a composition.

Content of the composition

Starting point is that the offeror can design the composition as he deems fit. An interesting element in the proposal is that also claims of surety’s, joint and severally liable debtors and guarantee providers can be amended by the composition. Currently the Dutch Bankruptcy Act does not provide a possibility thereto. In practice this will lead to not only the company being subject thereto, but also group companies.

Furthermore, the proposal will introduce the possibility for the company to make a proposal to amend contractual arrangements going forward. If the counterparty does not consent to the proposal, the company has the possibility to terminate the contract, whereby a term of three months will be sufficient for termination. If the contract contains a clause that will terminate the contract automatically or gives the other contract party the right to terminate or amend the contract if the company offers a composition (“ipso facto” clauses), that provision will be not applicable. The offering of a composition is also not a ground for the suspension of performance of obligations against the company.

Voting

The voting on the composition takes place per class. The voting can take place physically, in writing or electronically. A class of creditors has approved the composition, if a group of creditors that represent at least 2/3 of the amount of claims participating creditors in that class have voted in favor of the composition. A class of shareholders has approved the composition, if at least 2/3 of the shareholders have voted in favor of the composition. Only shareholders and creditors whose rights are altered by the composition are entitled to vote.

Cram down

If at least one class has voted in favor of the composition, the company can request the court to approve the composition and declare it generally binding (i.e. also on dissenting creditors and shareholders). The draft legislation therefore introduces a possibility for the court to declare a composition generally binding even though not all classes have voted in favor of the composition. On request of a creditor or shareholder that has voted against the composition, the court will refuse to declare the composition generally binding if, amongst others, the composition is unreasonable because the creditors/shareholders will receive less than they most likely will receive when the company is declared bankrupt or if the compliance with the composition by the company is not sufficiently ensured.

Conclusion

The draft legislation that purports to implement a composition outside insolvency fulfills a need in the Dutch legal practice. Inspired by mainly the English scheme of arrangement and the US Chapter 11 a safeguarded procedure is expected to be introduced that should enable companies and creditors to make sure minority obstructive creditors are no longer in a position to ‘force’ a company into offering a composition in bankruptcy or suspension of payments. The reorganization possibilities of the Dutch legal framework will be materially improved and this can form a useful contribution to (further) economic recovery.