It did so after the Dutch Government submitted to the Dutch Senate’s justice committee its memorandum of reply (Memorie van Antwoord) regarding the Dutch Scheme, or to use the full title: the Act on confirmation of private restructuring plans (commonly referred to as the WHOA, after its Dutch acronym). This blog highlights the various topics covered in the memorandum of reply.
1. “Distribution in another form” for commercial lenders
The WHOA provides that creditors from an opposing class should be offered the option of receiving a distribution in cash of the amount they would receive in a bankruptcy proceeding. Following amendments made and adopted by Dutch Parliament (as discussed in our previous blog), secured creditors that have commercially provided the debtor with financing (hereinafter: “commercial lenders“) are exempt from this rule, and therefore they cannot demand cash distribution. Nevertheless, they are still entitled to a “distribution in another form” of the amount they would receive in a bankruptcy proceeding. The Senate raised the question of what such a “distribution in another form” would be. The memorandum of reply explains that the distribution in another form may involve, for example, a cash payment based on adjusted conditions (such as a deferred payment) but not shares or depositary receipts for shares. As such, the WHOA seeks to ensure that an opposing commercial lender from an opposing class cannot be forced to participate in a debt for equity swap. At the same time, the WHOA provides the possibility for a debtor to extend the period of repayment of a loan granted by commercial lenders by means of the restructuring plan.
The memorandum of reply describes a number of safeguards already provided for in the WHOA to protect the interests of the capital providers involved – including the commercial lenders:
- The court verifies of its own motion whether it is sufficiently plausible that the debtor will be able to repay the loan within the proposed new repayment term.
- The court must reject the restructuring plan at the request of opposing creditors if they would be in a significantly worse position under the plan compared to their position in a hypothetical scenario of a bankruptcy proceeding (the ‘no creditor worse off’ principle).
- A delayed or dispersed payment of an existing loan has disadvantages for the commercial lender compared to a direct payment in cash which would have been received in a bankruptcy proceeding. Partly in view of this, the explanatory memorandum to the amendment – which introduced the “distribution in another form” for commercial financiers – states that the terms of the deferred or dispersed payment of the debt must be on “market terms” and that “as a rule, this will mean that interest will be paid and the claim will continue to be covered by collateral“. According to the explanatory memorandum, this should compensate the commercial lender for the disadvantages.
- The court must reject the restructuring plan at the request of opposing creditors if the statutory or contractual order of priority is disregarded in relation to the opposing class, unless a ground for reasonable justification exists and the deviation is not detrimental to the relevant creditors (absolute priority rule).
- It is possible that, under the restructuring plan, the commercial lender may be granted a deferred or dispersed payment of the loan, while unsecured creditors receive a partial payment on their claim. In principle, this is in conflict with the absolute priority rule. However, in the memorandum of reply it is mentioned that a reasonable justification for the deviation may be found in the fact that a good relationship with, for example, the suppliers is essential for the continuation of the company and the success of the restructuring. Therefore, it may be argued that such creditors, but not the commercial lender, must receive a payment in cash.
2. Financial master agreements under the Dutch Scheme
The memorandum of reply states that the Dutch Scheme does not affect the enforceability of financial master agreements (e.g. the ISDA Master Agreement or the Global Master Repurchase Agreement). As such, under the Dutch Scheme the rights arising from financial master agreements remain safeguarded. The memorandum of reply explicitly discusses two provisions commonly agreed upon in financial master agreements; both provisions relate to early termination and settlement of transactions in the event one of the parties involved fails to fulfil its obligations, or becomes insolvent and will therefore no longer be able to fulfil its obligations.
- Close-out netting. The financial master agreements provide for a system of close-out netting in the event of early termination due to a default under the agreement – whether or not due to insolvency – to settle all transactions concluded between the parties under the master agreement at one time, and in accordance with a pre-agreed system.
- Financial collateral. When financial master agreements are concluded, financial collateral is usually also provided in order to limit the damage occurring in that case. These financial securities relate, for example, to a balance on a bank account or a portfolio of tradable securities.
The WHOA provides for the possibility of unilateral, interim termination of agreements with the approval of the court. The memorandum of reply states that in case a financial master agreement is unilaterally terminated under the Dutch Scheme, the settlement of the master agreement – and therefore the claim for damages under the agreement – takes place on the basis of the agreed close-out netting system and, if applicable, the provided financial collateral.
The memorandum of reply also explains that if the court grants a cooling-off period to the debtor under the Dutch Scheme, the rights arising from the close-out netting system and the financial collateral remain secured, because in the event of a cooling-off period the court must authorize the relevant counterparty to exercise its set-off and security rights.
3. The role of the court under the Dutch Scheme
The Senate requested clarification on the limited role of the courts under the WHOA. In reply, the Minister elaborated on certain aspects, including that:
- the WHOA provides that the court tests the restructuring plan at its own motion against the general grounds for refusal, and rejects the plan if any of those grounds applies, e.g. procedural requirements have not been met or the performance of the plan is not sufficiently guaranteed.
- if the court needs to render a decision, it will give the interested parties the possibility to be heard.
- court decisions under the WHOA cannot be appealed, as swift proceedings are necessary and deal certainty is required.
4. Business climate for international companies
If there exists sufficient connection with the Dutch legal sphere and the Dutch courts have jurisdiction, foreign companies may also make use of the Dutch Scheme pursuant to Article 3 of the Dutch Code of Civil Procedure. This is the case, for example, if a subsidiary of a foreign group of companies is established in the Netherlands.
Further info on the Dutch Scheme can be found in our earlier blog posts.