An Introduction to the Dutch Scheme and an Overview of the First Rulings Since Its Enactment

On Jan. 1, 2021, the Dutch Act on the Confirmation of Private Plans (hereafter referred to by its Dutch acronym, “WHOA,” or the “Dutch Scheme”) entered into force. It represents a robust and flexible restructuring framework. This brief article provides a summary of the Dutch Scheme and an update about the first published cases involving the scheme.

Dutch Scheme Inspired by U.S. Chapter 11 Reorganization Plan

The Dutch Scheme provides an instrument to facilitate court confirmation of a private plan to restructure a business’s capital structure, so that creditors and/or shareholders who did not accept the plan can nevertheless be bound by it (with the exemption of rights of employees).[1]

A debtor is eligible for this procedure if it can reasonably be assumed that he will not be able to proceed paying his debts as they fall due.[2] The Dutch Scheme procedure can be initiated by both the debtor and a court-appointed restructuring expert.[3] The capital providers whose rights will be amended are the only ones with voting rights.[4] For purposes of voting, the respective different types of creditors and shareholders are divided into classes based on their rank and interests.[5] Based on this voting procedure, a two-thirds majority of a class can impose its will on the minority.[6]

Under the Dutch Scheme, the debtor or restructuring expert can opt to offer the plan in a private or public procedure. If the debtor starts the preparation of a plan, he deposits a notification thereof with the court registry.[7] From this moment onward, the debtor can call in a number of flanking measures. No preceding creditors’ meeting or court entry test is required. After preparing the plan, the debtor presents it to its respective capital providers for a vote. Voting on the plan commences eight days afterward at the earliest.[8] Within seven days after voting, the debtor draws up a report and submits this at the court registry for inspection.[9] Between eight and 14 days after (1) submission of this report and (2) the debtor submitting a request for court approval of the composition plan, the court hearing for approval of the composition plan is held.[10] Until the day of the hearing, creditors can file a motion to reject approval of the plan.[11]The court renders its judgments as quickly as possible,[12] and no appeal is allowed. The entire procedure can expectedly be finalized within four to five weeks at the earliest after submitting the plan. For an overview of the procedure, see the timeline below.

Dissenting capital providers are protected. At the request of one or more capital providers — in a class that has voted in favor of the plan — the court will refuse the request to confirm the plan if the shareholder or creditor in question were to acquire rights that are significantly lower in value than the payment they are expected to receive upon liquidation of the debtor’s assets (liquidation value), i.e., inspired by the U.S.’s best-interest-of-creditors test.[13]

The plan can be submitted to the court for confirmation if at least one (on the basis of liquidation value “in the money”) class of capital providers has accepted it.[14] The plan can be imposed upon any dissenting classes; this cramdown possibility is also inspired by the U.S. system. This confirmation is subject to conditions that may be invoked at the (explicit) request of one or more dissenting capital providers from a dissenting class.[15] The key principle is that the value of the reorganized debtor (reorganization value) must be distributed across the different classes under the plan in accordance with their statutory or contractual order of priority — i.e., inspired by the U.S.’s absolute priority rule.[16]

This is different compared to, e.g., the new U.K. Part 26A Restructuring Plan, where the court, for the purpose of the cramdown, must be satisfied that, (condition a) if the plan is sanctioned, none of the members of the dissenting class would be any worse off than they would be in the “relevant alternative”; and (condition b) the plan has been approved by at least one class who would receive a payment or have a genuine economic interest in the company in the event of the “relevant alternative,” which is “whatever the court considers would be most likely to occur in relation to the company if the compromise of arrangement were not sanctioned….”

Whereas under the new U.K. Part 26A Restructuring Plan one has to analyze — on the day of reckoning — the value available if the compromise of arrangement were not sanctioned, under the Dutch Scheme (like chapter 11) the value of the reorganized debtor — i.e., the value of the company if the restructuring plan will come about — is the relevant parameter for the purpose of the cramdown analysis.[17]

First Cases

If one analyzes the first published cases on the Dutch Scheme, a number of interesting conclusions can be drawn. It appears from case law that the vast majority of the cases concern small SMEs, even including sole traders, while the legislator (and also the academic literature) expected that mostly large companies would (be able) to use the Dutch Scheme as a restructuring tool. In most of those cases it is the debtor itself that initiated the procedure, and not an external party such as a large financial creditor. Applying the Dutch Scheme is thus less of a financial burden and practically more feasible than was anticipated.

From case law, it further follows that debtors are not very reluctant to ask courts to appoint an restructuring expert, while at first it seemed more likely that mainly external parties (creditors, working councils) would make such request. Courts have emphasized that the restructuring expert should act completely independently from all parties involved, even though the applicant may, as part of its request, indicate which persons he/she thinks would be suited for the role of restructuring expert. Courts have shown that they check very carefully whether the persons proposed are indeed independent and seem to attach considerable weight to circumstances that may threaten that independence.[18] For instance, courts have decided that the risk is too high that the person proposed would not act independently because this person had already assisted the applicant in an earlier stage of the restructuring procedure; because the request for a particular person was made on the office paper of the firm for which that same person was working; and because the person proposed had already invoiced costs for work done for the applicant.[19] The courts have expressed that an applicant should basically only make contact with the person he seeks to propose to the extent to which this is strictly necessary for composing a fee quote (as this should be part of the request to the court).[20]

Another recurring element in case law is the completeness and the comprehensibility of the information provided as part of the plan.[21] During hearings, judges have asked standard questions such as what the liquidation value of the debtor is, but also specific questions about items on the balance sheet and who the owner of a certain building is.[22] In one case, the insufficiency of the information led the court to deny a request to confirm a plan. Among other things, the debtor in that case had not informed the creditors about the (possible) existence of a debt it had, and the financial reports it had submitted contained incorrect figures.[23] The test underlying this assessment is whether creditors and shareholders are able to make an informed decision on the plan proposed.[24]

Most cases that have been published so far relate to the stay that can be ordered to facilitate preparing and proposing the restructuring plan. An important condition to grant a request for a stay (and to which the courts also pay the most attention in their decisions) is that the stay should be in the interest of the joint creditors. To that end, the courts, in each of their decisions, assess whether the joint creditors would be better off with a (Dutch Scheme) plan than with the alternative scenario, in most cases the bankruptcy of the debtor. If the plan scenario likely leads to a better result for the creditors (provides a “clear plus,” to put in the practical words of one court[25]), then ordering a stay, which facilitates the realization of a plan scenario, meets the interests of the joint creditors.[26]

A last interesting point that follows from the current case law is the manner and the situations in which the courts make use of the observer, which has happened in a number of cases now.[27] In short, the observer monitors the preparations for the plan with an eye to the interests of the joint creditors.[28] For that purpose, the courts have appointed an observer in a case in which there was a conflict within the board of the debtor that initiated the plan proceedings, and, in another case, because it thought that the provision of information (until then) was insufficient. In one case, the term for the stay was relatively long, and some persons involved were both creditor and member of the board of the debtor, which could lead to a conflict of interest.[29]

International Aspects of the Dutch Scheme

As mentioned above, under the Dutch Scheme the debtor or restructuring expert can opt to offer the plan in a private or public procedure. This choice affects when the plan procedure falls within the scope of the European Insolvency Regulation (EIR) or not, as the EIR only applies to public proceedings.

Public Procedure: EIR

For the public procedure, the Dutch courts have jurisdiction if the centre of main interests of the debtor is located in the Netherlands.[30] The opening of the plan procedure and its consequences, including a possible stay, are automatically recognized in all countries of the European Union with the exception of Denmark.[31]

There are also disadvantages to the application of the EIR. Under the EIR, the Dutch court has fewer options to assume jurisdiction than under Dutch private international law (see below). Also, article 8 EIR restricts the effects of the plan and a stay versus creditors that have a security right over assets of the debtor that are located outside the Netherlands. Under the EIR the Dutch plan procedure does not affect such security rights over foreign assets.

Private Procedure: Domestic Private International Law

For a private proceeding, the Dutch court must establish its jurisdiction according to the Dutch Civil Code (DCC), which gives the general rules for jurisdiction for petitions and leaves the courts with a lot of freedom to determine jurisdiction. The Dutch court has jurisdiction if the petitioner or one of the interested parties has its place of residence, place of business, or usual residence in the Netherlands. The court can also assume jurisdiction if there otherwise is sufficient connection with the Dutch jurisdiction. The Dutch legislator listed several circumstances that — each individually — lead to sufficient connection:[32]

• the debtor has his centre of main interests or an establishment in the Netherlands;
• the debtor has substantial assets in the Netherlands;
• a (substantial) part of the debts that would be part of the plan follow from obligations that are governed by Dutch law or for which a choice of forum is made for the Dutch courts;
• a (substantial) part of the group that the debtor is part of consists of companies located in the Netherlands; or
• the debtor is liable for debts of another debtor for which the Dutch courts have jurisdiction.

A private plan is not eligible for automatic recognition within the EU. Recognition of the plan therefore depends on the private international law of the country in which recognition is requested.

Concluding Remarks

We make the following concluding remarks about the Dutch Scheme:

• It provides for a fast, efficient and highly flexible instrument with all the powers required to reconfigure the capital structure as appropriate, whilst preserving the business throughout;
• The fact that others besides the debtor (controlled by out-of-the-money equity) can initiate the procedure enhances early intervention;
• The instrument enables creditors to preserve and realize the value of the business on a nondistressed basis;
• The instrument enables existing equity to inject new money into the business and thus to protect its investment by facilitating the elimination of unsupported debt; and
• The availability of a variant that falls within the EIR and a variant that falls outside the EIR, with very broad jurisdiction, makes the instrument particularly useful for dealing with cross-border groups. The variant that falls within the EIR offers the benefit of automatic recognition. The variant that falls outside of the EIR can be used where the EIR is problematic because of the existence of security rights on foreign assets (rights in rem exception) or because of the COMI of guarantors or other group members being located in different jurisdictions. This enables a cross-border group to be restructured through proceedings in a single jurisdiction.