When leniency turns to conflict: Tackling the corona crisis with out-of-court debt restructuring

In these special and difficult times, you see that the government and major agencies are taking various measures to help business owners in their liquidity. There are opportunities to defer tax and pension contributions and interest and redemption payments with banks. There are also expanded credit possibilities and extended state guarantees for banks, for non-bank financiers and for credit insurers. For previous blogs on this subject, see our site www.corona-recht.nl and in particular the blog by my office colleague Reinier Pijls.

business owners also grant each other (partial) extensions and hold each other less to purchase commitments. There is a lot of corona-related leniency in the market.

But what if the leniency turns to conflict?

Then you need to be sharp as business owner ! A business owner who foresees that he cannot pay his debts in full and wants to avoid bankruptcy, can ask his creditors to agree to an out-of-court settlement. There are conceivable situations in which a creditor who refuses to do so can be forced through the courts to agree to an out-of-court settlement. In this article, I explain how to maximize the chances that an agreement will be accepted by the creditors or that the court will force the agreement on a reluctant creditor.

Introduction

If a company threatens to become insolvent, the debtor can - to avert bankruptcy - offer an agreement to its joint creditors. Unlike the cases regulated by law (in bankruptcy, suspension of payments or statutory debt rescheduling for natural persons), an out-of-court settlement does not involve any judicial review. It is in fact an agreement in which it is agreed that the (threatened) insolvent debtor will pay only part of his debts in final discharge. In principle, a creditor can recover his claim from all the assets of his debtor (Article 3:276 of the Civil Code) and is not at all obliged to agree to participate in an agreement. A creditor will therefore have to expressly agree to the debtor's proposal. There is a law in the making (the WHOA), which should make an extrajudicial agreement easier to reach, but that law is not yet in force. So until then, we have to make do with the system below.

What an out-of-court settlement must meet at least

Lower courts have developed a number of criteria that an agreement must meet if it is to qualify for coercive participation:

• the agreement must be properly substantiated and provide full insight into the debtor's debt and asset position; the information must be current;
• the agreement must offer insight into the maximum achievable outcome, the utmost must have been offered;
• the agreement must be prepared and supervised by an independent expert;
• agreement must make it plausible that failure to reach it will result in bankruptcy and that the consequence will be that creditors will receive (much) less;
• the arrangement should reflect the fact that the debtor has made or will have to make significant sacrifices in order to satisfy his creditors in the best possible way;
• the arrangement must treat comparable creditors equally, or the arrangement must justify why certain creditors are favored over others. the starting point is equal treatment of creditors;
• during the execution of the arrangement, creditors should be kept constantly informed of relevant developments regarding their claims;

The grounds for coercive participation

Compulsory participation in a private agreement can only take place by strict exception, if the concrete circumstances of the individual case provide sufficient indications for this. There are various bases on which a creditor can be forced to cooperate in a composition.

The most common basis is that refusal to cooperate in the arrangement constitutes an abuse of powers (Article 3:13(2) BW). When assessing whether a creditor can be forced to participate in a settlement, the court will first assess whether the offered settlement meets the criteria as discussed above. Next, the court will test whether in the specific case the interests of the creditor claiming forced participation in the agreement should weigh more heavily than the interests of the creditor summoned (in summary proceedings), who is in principle entitled to payment of his entire claim.

Although a trend is emerging in the lower case law whereby debtors are increasingly being assisted in an out-of-court debt settlement, the Supreme Court in its ruling of August 12, 2005 set out clear frameworks. The Supreme Court considers: " (...) restraint is required when granting a claim for cooperation in an extrajudicial settlement. Only under very special circumstances can there be room for an order to a creditor to cooperate in the performance of an agreement offered to him."

Under what circumstances can participation be enforced

In the past, lower courts have considered the following circumstances in deciding whether a creditor can be forced to cooperate in an out-of-court settlement.

• Are there other (social) interests such as job preservation?
• Is there good faith on the part of the debtor? There must have been no attempts on the part of the debtor to prejudice the creditors.
• Is there a legitimate fear that the debtor will be unable and unwilling to honor the agreement?
• How large is the claim of the reluctant creditor relative to the total debt? The interest of a relatively small creditor carries less weight than that of a relatively large creditor.
• How large is the number of reluctant creditors relative to the total number of creditors? If the number of creditors who do not voluntarily agree is relatively small, this may be reason to assume the unreasonableness of their position.
• Is there a legitimate fear that coercive participation is anti-competitive?
• Is there a legitimate fear that the agreement will set an (undesirable) precedent?

Whether a creditor can be forced to cooperate with an agreement depends on the answers to the above questions. The more questions are answered in a positive sense for the debtor, the more likely it is that a creditor will abuse his power to demand full satisfaction of his claim. Thus, the legal skill and creativity of the business owner and its attorney also play a decisive role in this!

Conclusion

The extrajudicial forced composition is an agreement between a debtor and his creditors. The starting point in whether or not an individual creditor accepts an out-of-court settlement is therefore freedom of contract. A creditor is entitled to payment of his entire claim and, in principle, he does not have to settle for less. Not even in this corona crisis.

When a creditor's situation matches the requirements outlined above, a creditor can force a reluctant debtor to agree to a settlement. However, the fact that such an order is the exception rather than the rule is demonstrated once again by the Supreme Court's ruling last August 12.

It is therefore important that you seek proper advice if you intend to offer an out-of-court settlement to your creditors to avert the threat of insolvency of your company. Fortunately, we have a good track record in this respect, in which we regularly manage to bring about an out-of-court settlement, with or without the assistance of the courts!