Job van Hooff and Sophie Beerepoot, Stibbe

This is an extract from the 2020 edition of GRR’s the Europe, Middle East and Africa Restructuring Review. The whole publication is available here.

In summary

Dutch insolvency law is constantly evolving. In recent years, restructuring has been a key theme: the highly anticipated Dutch Scheme – which allows for court confirmation of private restructuring plans – will soon become law, possibilities for ‘pre-packaged’ insolvency proceedings are being explored, and there have been numerous successful reorganisations through composition plans in formal insolvency proceedings. In this article, we will address each of these topics and discuss their relevance for national and foreign debtors.

Discussion points

• Introduction of the Dutch Scheme into Dutch insolvency law
• Possibilities for pre-packaged insolvency proceedings and the appointment of prospective insolvency law practitioners
• Composition plans in suspension of payments and bankruptcy proceedings
• Commencing Dutch insolvency proceedings as a foreign debtor
• Recognition of foreign insolvency proceedings in the Netherlands

Referenced in this article

• Act on Confirmation of Private Restructuring Plans
• Continuity of Enterprises Act I
• Transfer of Undertakings Directive
• Smallsteps
• Heiploeg
• Lehman Brothers
• Oi Brasil
• Yukos

Introduction

The current Dutch Bankruptcy Act (DBA) dates back to 1893, which means that it entered into force even before the first private car was introduced in the Netherlands. However, the statute’s respectable age by no means warrants the conclusion that the law itself is antiquated. Rather, it shows that the DBA has been – and still is – a carefully considered and stable foundation for Dutch insolvency law to adapt and develop.  

Over the past decade, insolvency laws worldwide have been focusing more and more on business rescue and restructuring instead of liquidation. The covid-19 pandemic has once again shown the need for a restructuring toolkit that is available to businesses. In this article, we will provide an overview of the current and future restructuring tools under Dutch law and highlight relevant developments in Dutch insolvency law.

Pre-insolvency proceedings

Dutch law does not provide for a mechanism to impose a restructuring plan on dissenting creditors outside formal insolvency proceedings. As a result, composition plans outside bankruptcy or suspensions of payments require the cooperation and consent of all creditors. Only in exceptional cases (abuse of power) can a creditor be forced to agree to an informal workout.

The Dutch Scheme

On 6 October 2020, the senate of the Dutch parliament passed the Act on Confirmation of Private Restructuring Plans, which introduced a framework that enables debtors to restructure their debts outside formal insolvency proceedings. This highly anticipated Act incorporates features of the US Chapter 11 regime and the English scheme of arrangement and is, as such, often referred to as the ‘Dutch Scheme’. The Dutch Scheme provides businesses with the opportunity to arrange financial restructuring outside formal insolvency proceedings by means of a court-approved restructuring plan.

The Dutch Scheme is a result of several years of intensive deliberation; the Act was first proposed in 2014 and was amended repeatedly to incorporate the extensive suggestions and commentaries from a diverse group of stakeholders (including bankruptcy trustees, banks, trade unions, lawyers and representatives of small and medium-sized enterprises). Discussions revolved around, among other things, the introduction of an absolute priority rule and the required amount of court supervision.

The Dutch Scheme has the following key characteristics:

• initiation by debtors (shareholder consent not required), creditors or shareholders;
• no requirement to appoint an insolvency practitioner in a debtor-in-possession proceeding (although in some cases, a restructuring expert or observer will be appointed);
• a wide range of ways to restructure debt, including debt-for-equity swaps, haircuts, payment extensions, and amendments or terminations of existing agreements (employee rights are exempted);
• accommodation of both individual businesses and (cross-border) group restructurings;
• possibility to petition the court for preliminary decisions regarding plan-related matters;
• possibility for the court to order a stay of individual enforcement actions and bankruptcy requests for up to eight months;
• exemption of financing, including debtor-in-possession financing, pending the Dutch Scheme from fraudulent conveyance provisions and set-off bans;
• entitlement to vote of every creditor or shareholder whose rights are affected by the plan: parties eligible to vote are divided into classes on the basis of (the similarity of) their rights or interests, or the rights they will receive under the plan;
• voting in classes: a class accepts a plan if a two-thirds majority of the total amount of claims or issued share capital in that class has voted in favour (no head count);
• possibility of cross-class cramdown through court confirmation of the plan, provided at least one class of creditors (which would receive cash payment in the event of bankruptcy) has accepted the plan;
• refusal by the court to confirm the plan:
  • of its own motion if (among other reasons) procedural requirements have not been met, the performance of the plan is not sufficiently guaranteed, or the plan is a result of fraud (general grounds);
  • at the request of an opposing creditor or shareholder if they would be significantly worse off under the plan compared to a liquidation scenario (‘best interest of creditors’ test); or
  • at the request of an opposing creditor or shareholder who belongs to a class that rejected the plan if (among other reasons) the order of priority is disregarded in relation to the opposing class (‘absolute priority’ rule), or the relevant creditors are not offered a cash amount equivalent to the amount that they would have received in the event of a liquidation; and
• binding force of the plan, after court confirmation, on the debtor and all creditors and shareholders who were entitled to vote.

Public or non-public restructuring

There are two types of Dutch scheme: public proceedings and non-public proceedings. Contrary to non-public schemes, public schemes will be registered in the insolvency register, which is publicly accessible, and court hearings and decisions are public. It is expected that non-public schemes will mostly be used if the plan concerns only part of the (major) creditors or shareholders, or if it is paramount to avoid (negative) publicity.

Another important distinction is that only the public scheme will be included in Annex A of the EU Regulation on Insolvency Proceedings (EIR)  and, as such, is eligible for automatic recognition throughout the European Union.  Non-public Dutch Scheme proceedings fall outside the scope of the EIR but can still be recognised within and outside the European Union based on treaties or private international law. It is expected that the Dutch Scheme will be recognised in jurisdictions that have implemented the UNCITRAL Model Law unless the relevant jurisdiction requires reciprocity. Subject to certain conditions, access to both the public and the non-public Dutch Scheme is open to foreign debtors.

Recent amendments regarding secured creditors and the protection of small enterprises

When the House of Representatives passed the Act on the Dutch Scheme on 26 May 2020, it also adopted three amendments. These amendments address the concerns expressed by certain parties that the Dutch Scheme would, in practice, be primarily to the benefit of secured creditors and shareholders.

To protect small enterprises with unsecured ordinary claims, they must receive a minimum cash or non-cash distribution with a value of 20 per cent of the amount of their claims under the plan, unless there are compelling grounds for a lower distribution.

Furthermore, the Act now explicitly provides for bifurcation of secured creditors’ claims, meaning that creditors holding security rights will be placed in a preferred class only in relation to the part of their claim that is secured; the remainder of their claim is placed in a class of ordinary creditors. The determination of which part of the claim is secured will be based on the expected value of the security rights in a bankruptcy scenario.

Finally, under the Dutch Scheme, creditors from a class that opposes the plan are entitled to receive a distribution in cash of the amount they would have received in the event of bankruptcy. As a result of the amendments, secured creditors are exempt from this rule and, as such, cannot demand a cash distribution for the part of their claim that is secured.

Conclusion

The Dutch Scheme is a balanced restructuring tool that combines the best features of the US Chapter 11 and the English scheme of arrangement. It is expected that the Dutch Scheme will boost Dutch business rescue culture and is highly anticipated as such. Partly owing to the covid-19 pandemic, the Act has become a priority. The general hope is that it can enter into force by 1 January 2021.

Pre-packs and employees

While Dutch law does not currently provide a statutory basis for pre-packaged administrations, most courts  have allowed the appointment of a silent trustee in advance of formal insolvency proceedings. It is generally agreed that it is in the interest of the business and its creditors that the future insolvency practitioner become involved before the actual insolvency proceedings commence. This increases the chances of a successful continuation or restart of (all or part of) the business, as well as the likelihood of a controlled liquidation.

As such, the Dutch legislature has developed an Act to facilitate the use of, and provide a statutory basis for, what are termed ‘pre-packs’: the Continuity of Enterprises Act I. The Act was unanimously passed by the House of Representatives in 2016 but has been halted following the European Court of Justice (ECJ) judgment in the Smallsteps case in 2017. 

In this judgment, the ECJ contends that the insolvency exemption in the Transfer of Undertakings Directive (TUPE)  does not apply if a business is sold in bankruptcy if this is prepared and executed as a pre-pack. That would mean that employees of the seller would automatically transfer to the buyer in a transfer of undertaking, regardless of bankruptcy – a major disadvantage of pre-packaged insolvency proceedings compared with non-prepared insolvency proceedings. While the judgment is understandable in respect of protection of employees against abuse of bankruptcy law, many feel that this does not warrant the discarding of the pre-pack (and its considerable advantages) entirely.

On 29 May 2020, the Supreme Court (the Supreme Court) decided in a preliminary judgment that the TUPE rules on transfer of undertaking did not apply to the bankruptcy of Dutch company Heiploeg.  As there may be reasonable doubt on the validity of this judgment (considering the ECJ’s Smallsteps judgment), the Supreme Court referred questions to the ECJ for a preliminary ruling on the interpretation of TUPE and the ECJ’s earlier judgment. The Supreme Court argues that the ECJ did not seem to be fully informed on Dutch bankruptcy law when it issued the Smallsteps judgment and points out a number of assumptions made by the ECJ in that judgment that it feels should be nuanced. For example, the Supreme Court notes that a pre-pack can be a means to a successful liquidation and that there is sufficient independent oversight by the (prospective or silent) trustee and supervisory judge. In addition, the Supreme Court states that there are notable differences between the Heiploeg and Smallsteps cases (eg, the fact that the Heiploeg business was not sold to an affiliated party) and effectively asks the ECJ to reconsider whether TUPE should apply in such a situation.

This preliminary judgment is generally considered to be an attempt to revive the pre-pack in the Netherlands. The ECJ’s response to the Supreme Court’s questions will likely determine the fate of the pre-pack in the Netherlands; it is considered a ‘make it or break it’ situation.

The discussions around whether it is necessary to safeguard employee rights in a threatened or actual event of bankruptcy led the Dutch parliament to launch a proposed Act on the Transfer of Undertakings in Bankruptcy in early 2019. The Act aims to increase protection of employees in the event of a restart or continuation of the business in bankruptcy, which is currently limited. Public consultation on the Act closed on 31 August 2019, and it is expected that the Act will be introduced in the House of Representatives in the near future. The senate has indicated that it will defer consultations on the act concerning pre-pack so that the two acts can be considered jointly.

Pending the ECJ’s response in the Heiploeg case and the pre-pack and employee rights acts, most courts remain willing to appoint prospective insolvency practitioners and supervisory judges to facilitate orderly insolvency proceedings. However, pre-packaged sales immediately after commencing bankruptcy are currently off the table.

Restructuring through formal insolvency proceedings

Dutch law provides for two formal corporate insolvency proceedings: suspension of payments and bankruptcy. Suspension of payments proceedings are more focused on restructuring, while bankruptcy is generally liquidation-focused. In practice, most suspension of payments proceedings are followed by bankruptcy.

The main difference from a restructuring perspective is that suspension of payments proceedings are partial debtor-in-possession proceedings; the debtor requires the consent of a court-appointed insolvency administrator to perform acts of administration and disposition with regard to the estate. In bankruptcy, solely the court-appointed insolvency administrator is authorised to administer the estate.

Both suspension of payments and bankruptcy proceedings provide the debtor with the opportunity to offer a composition plan to its joint ordinary creditors. The debtor generally has freedom to structure the composition plan; the plan can, for example, provide for full or partial payment on claims or a debt-for-equity swap.

The plan is flexible: it can be aimed at reorganisation of the business or a (controlled) liquidation of the estate, with both concepts being broadly interpreted. The composition plan in the Dutch bankruptcy of Lehman Brothers Treasury Co BV,  for example, provided that the estate would be liquidated outside bankruptcy and in accordance with the rules and guidelines agreed in the plan. In the plan, the debtor and its creditors, for example, agreed on a mechanism to determine the value of various financial instruments for distribution purposes.

The plan procedure comprises two phases: first, the plan must be accepted by the creditors. Then, the court will decide on confirmation of the plan. The plan is accepted by the creditors if the majority of the creditors that were admitted to and appeared in the creditor meeting (head count criterion), which together represent at least half of the amount of total admitted claims (amount criterion) vote in favour of the plan. The plan may still proceed to the confirmation phase even though it has not been accepted by the creditors if it is adopted by the supervisory judge. The supervisory judge can adopt a composition plan if 75 per cent of the creditors that were admitted to and appeared in the creditor meeting voted in favour of the plan, and the rejection is the result of one or more creditors unreasonably casting a vote against the plan.

While these are the statutory criteria for acceptance of a plan, the Supreme Court has sanctioned a flexible approach regarding the rules on the composition plan. In 2003, when the UPC group was restructured by way of a composition plan in suspension of payments proceedings, the Supreme Court allowed the supervisory judge to set a ‘voting record date’ to determine which parties were to be considered creditors of UPC. In addition, the Supreme Court permitted beneficial owners of claims to be treated as creditors in the sense of the DBA. 

A more recent example of the willingness of Dutch courts and insolvency practitioners to adapt the statutory provisions on the composition plan to the circumstances of a specific case is the 2018 worldwide reorganisation of Brazilian telecommunications group Oi. While its activities were mostly located in Brazil, the Oi group had raised a major part of its capital through note issuances by two Dutch financing companies. After the Oi group went into reorganisation, the two Dutch companies were, eventually, declared bankrupt in the Netherlands.

When Oi offered a plan to its creditors in the Dutch bankruptcy proceedings, the parties involved were confronted with several challenges. For example, the notes that the two companies issued were governed by UK and US law, which raised questions on who were to be considered the creditors of the company: the note trustees or the beneficial owners? Under Dutch law, only the ‘legal owner’ of the claim is considered a creditor, and only a creditor can file a claim, vote on the plan and receive distributions.

Another issue that arose concerned the anticipated (lack of) noteholder participation in the meeting to vote on the plan as to satisfy the amount criterion, the creditors voting in favour of the plan had to represent at least half of the amount of total admitted claims (not just those present or represented at the creditor meeting). Generally speaking, it is not unusual – or harmful – for noteholders to refrain from active participation in creditor meetings, but in this specific case, that could have jeopardised the entire reorganisation plan.

To address these and other issues, the companies and the bankruptcy trustees jointly requested the supervisory judge to create provisions deviating from the DBA to better suit the specific circumstances of the financing companies and their creditors. The supervisory judge obliged and provided, for example, with regard to the US notes that the note trustee be exclusively authorised to file the total claim under the notes, but that only the beneficial owners (who were beneficial owners on the voting record date, which was also set by the supervisory judge) were allowed to vote on the plan. The supervisory judge also held that the amount criterion of the DBA would be satisfied if the creditors voting in favour represented at least half of the total amount of admitted claims of creditors participating in the creditor meeting (instead of the total admitted claims of all creditors). At least in part owing to the Dutch courts’ flexible approach and willingness to take into account the specific facts and circumstances in these bankruptcies, the composition plans of the Dutch Oi companies were accepted by the creditors, and the reorganisation was successful.

After a plan is accepted by the creditors or adopted by the supervisory judge, it is put to the court for confirmation. The court may refuse confirmation of the plan on several grounds, for example, if the plan is achieved by fraudulent means or if the value of the bankrupt estate considerably exceeds the sum offered under the plan. If the court confirms the plan, it will be binding on all affected creditors. The insolvency proceedings will be terminated, and the debtor regains full control over the estate.

Although restructuring by way of a composition plan in formal insolvency proceedings is not an everyday occurrence, there are numerous examples of successful (national and international) plan-based reorganisations in both bankruptcy and suspension of payments proceedings, including UPC, Plaza Centers, Lehman Brothers, Isolux Corsán, Oi Brasil and Floresteca.

Foreign debtors

The Dutch financial newspaper Het Financieele Dagblad recently reported that foreign companies are increasingly turning to the Netherlands for their legal domicile to settle their legal affairs in accordance with Dutch law. The flexibility of Dutch corporate law seems to provide majority shareholders and management with more control over the company than is afforded under their local jurisdictions.  Recent examples of foreign companies moving their legal domicile to the Netherlands are Campari-Milano, Fiat Chrysler and the construction company Cementir.

However, it is not only Dutch corporate law that is of interest to foreign companies; Dutch insolvency law, especially the Dutch Scheme, also provides ample interesting restructuring opportunities for companies that can show a connection (not necessarily domicile in) to the Netherlands.

A Dutch court may find that it has jurisdiction to commence a Dutch Scheme, suspension of payments proceedings or bankruptcy proceedings under either of two regimes:

• the body of rules on jurisdiction as laid down in the European Insolvency Regulation (EIR); or
• the body of rules on jurisdiction as laid down in the DBA or the Dutch Code of Civil Procedure (DCCP).

If the debtor’s centre of main interests (COMI) is within one of the EU member states (except Denmark), the EIR regime will generally apply and – depending on whether the COMI is located in the Netherlands or in another member state – the Dutch court can open main or territorial insolvency proceedings in the Netherlands. The most important benefit of having insolvency proceedings opened under the EIR is that there is no issue of enforcement; the insolvency proceedings are automatically recognised throughout the European Union (except Denmark). Even so, all insolvency proceedings opened under Dutch law have universal effect, although this may, in practice, be limited by the lack of coercive power to ensure compliance.

If the EIR does not apply (generally when a debtor’s COMI is located outside the European Union), the Dutch court will assess whether it has jurisdiction to commence insolvency proceedings based on the DBA or the DCCP, which provide several grounds to assume jurisdiction:

1. the debtor has statutory seat and thus domicile in the Netherlands;
2. the debtor maintains an office in the Netherlands, which is a place where business is conducted with third parties; or
3. solely with regard to the Dutch Scheme, if the case is sufficiently connected to the Dutch jurisdiction.

In the explanatory memorandum to the Act on the Dutch Scheme, the Dutch Minister for Justice stated that point (iii) could, for example, be the case if the debtor has (substantial) assets in the Netherlands or if a (substantial) part of the claims to be restructured is governed by Dutch law. 

The Dutch Minister for Justice confirmed that, although not a goal in itself, foreign companies can make use of the Dutch Scheme. 

Recognition of foreign insolvency proceedings in the Netherlands

If insolvency proceedings are opened neither in the Netherlands nor in another EU member state (with the exception of Denmark), the question is whether the foreign insolvency proceedings will be recognised in the Netherlands. The Netherlands has not adopted the UNCITRAL Model Law and, as such, there has long been uncertainty on the conditions under which foreign insolvency proceedings would be afforded recognition in the Netherlands (unless a treaty was in place to govern recognition).

In January 2019, the Supreme Court provided clarification on this issue in its landmark judgment on recognition of the Russian bankruptcy of oil company Yukos.  The Yukos case illustrates why recognition of foreign bankruptcies can be so important. In 2006, the Russian company OAO Yukos Oil Company was declared bankrupt by a Russian court, and a Russian liquidator was appointed. A year later, the Russian liquidator auctioned off the shares in Dutch subsidiary Yukos Finance BV to the Russian company OOO Promneftstroy. The central issue in the proceedings before the Dutch courts was whether the Russian bankruptcy judgment (and the subsequent appointment of the Russian liquidator) would be recognised in the Netherlands. If not, the Russian liquidator could not have validly sold the shares in the Dutch subsidiary under Dutch law.

In its Yukos judgment, the Supreme Court stated that, in the absence of a treaty, recognition of foreign bankruptcies in the Netherlands is governed by the general rules of private international law. This means that, in principle, foreign judgments are afforded recognition  if four conditions are fulfilled:

• the jurisdiction of the court that issued the judgment is based on internationally acceptable grounds;
• the foreign judgment is the result of legal proceedings that meet the requirements of due process and the proper administration of justice;
• recognition of the foreign judgment is not contrary to Dutch public policy; and
• the foreign judgment is not irreconcilable with a judgment of a Dutch court between the same parties, or with an earlier judgment by a foreign court between the same parties involving the same subject and cause, if the earlier foreign judgment is enforceable in the Netherlands.

The Supreme Court emphasised that it is not, in principle, relevant whether the foreign judgment is correct; when deciding on recognition, there is no room for revision of the merits. However, it held that recognition cannot be granted in cases where recognition of the foreign judgment – because of its content or its formation – would lead to a violation of fundamental principles and values of Dutch law.

In Yukos, that was exactly the case. Already in 2017, the Amsterdam Court of Appeal had held that the Russian authorities had purposely engineered the bankruptcy by imposing extremely high, non-legitimate value-added tax charges and by repeatedly violating the company’s rights in the ensuing proceedings. This led the Amsterdam Court of Appeal to conclude that recognition of the Russian judgment adjudicating bankruptcy was contrary to Dutch public policy. The Supreme Court – in addition to setting out the criteria for recognition of foreign insolvency proceedings – confirmed the Court of Appeal’s judgment and, as a result, the Russian judgment declaring Yukos bankrupt has no legal effect within the Dutch legal order. This means that under Dutch law, the Russian liquidator was not authorised to sell the shares in the Dutch company Yukos Finance BV, and Promneftstroy did not become its new owner.

In a way, this judgment is typical of Dutch insolvency law and the way it is applied in practice: it is flexible, practical and accommodating, but its principles and underlying values must be respected.

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