The WHOA in brief
The WHOA is a law introduced in 2021. This law regulates that an essentially healthy company can restructure its assets in order to avoid bankruptcy. The business owner does this by offering an agreement to its creditors, whereby they receive, for example, a partial distribution and must waive the remainder of their claim. The creditors can then vote on the accord. The agreement can ultimately - once the majority of creditors have agreed to the agreement and the court has reviewed and approved the agreement - be forcibly imposed on creditors who had not agreed to the agreement. Therefore, the WHOA agreement is also called a forced composition.
The WHOA provides a wide range of tools to ensure that the aforementioned restructuring proceeds smoothly and increases the chances of success. One of the most important tools is the cooling-off period, established in Sections 376 and 377 of the Bankruptcy Code (FW).
What is a cooling off period?
The cooling-off period ensures that the/your creditors are not allowed to exercise their rights over their or your property for a period of several months. Some examples are as follows:
- Suppliers under retention of title may not claim their goods delivered under retention of title;
- Ongoing bankruptcy petitions are suspended. That is, they will not be processed while the cooling-off period is in progress;
- Pledgees cannot give notice of their pledge rights to creditors during the cooling-off period in order to draw collection authority to themselves. This means that the claims you have pledged cannot suddenly be collected by the pledgee. A condition for this is that alternative security is provided to that pledgee, for example by providing a bank guarantee;
- Seizures made may be lifted. Here the court weighs the interest of the distraining party in maintaining the attachment against the interest of the debtor in lifting it. The focus is on whether the attachment prevents the continuation of the business.
During the cooling-off period, you remain authorized to use, consume and dispose of all your goods. This includes, for example, goods delivered to you under retention of title. You also retain the authority to collect your claims. However, this right of use is framed: you may exercise the aforementioned right of use to the extent:
- This is necessary for the normal conduct of business, and
- the interests of third parties entitled to claim the goods are adequately safeguarded.
You can shape safeguarding the interests of third parties, for example, by offering substitute security.
The purpose of the instrument is to enable you to offer an arrangement. It also aims to prevent creditors who are unwilling to cooperate in the restructuring you have initiated from immediately taking recourse actions to hinder the composition process.
Authority to apply for cooling-off period and review it
You are authorized to request a cooling-off period yourself. It may also be that the WHOA proceedings appoint a restructuring expert, in which case he/she (too) is authorized to do so. The court will consider the request only if:
1. you have already filed a so-called starting statement with the court under the WHOA, and
2. you have offered a settlement to your creditors, or you have committed to do so within two months.
The above means that the cooling off period must be related to the agreement and that some preparations of the agreement must have already been made. These are cumulative requirements, meaning that you must meet both. Only then will the court proceed to review the substance of your request. An alternative to the above requirements is that a restructuring expert is appointed. In that case, he can request the cooling-off period and the court will proceed directly to substantive review.
In its substantive review , the court applies the following conditions:
- The cooling-off period must be necessary to allow you to continue to operate the business you are running during the preparation and negotiation of an arrangement or to wind down the business you are running through an arrangement in a controlled manner;
- At the time the cooling-off period is declared, it is reasonable to assume that the interests of the joint creditors are served by it; and
- The creditors whose rights are affected by the cooling-off period are not materially affected.
For the first requirement, you can think of the following circumstances: fear of bankruptcy petitions and other recourse actions, the knowledge among creditors that you want to offer a settlement, and liquidity problems as a result of (a threat of) termination of credit or blocking of a bank account. There must be a concrete prospect of recourse actions.
The second requirement ensures that creditors are no worse off with the declaration of a cooling-off period than in the situation where a settlement is not reached. To this end, you must be able to make it plausible that a concrete plan has been or will be drawn up that will lead to a better result for the creditors than in bankruptcy. The mere assertion that the proposed settlement prevents bankruptcy costs is insufficient for this purpose. Commitments by creditors not to take measures do not automatically preclude necessity.
The third requirement is that the individual creditors whose rights are blocked by the cooling-off period should not have their interests substantially impaired. This means, for example, that the value of the attached property must not be greatly diminished by the cooling-off period or that the creditors must be provided with adequate coverage for claims that have been pledged to it but are collected during the cooling-off period. You must also be able to meet your ongoing obligations during a cooling-off period. This means, for example, that if new debts arise during the cooling-off period, you must be able to pay them. In other words, the liabilities must not increase while the assets remain the same.
Some courts apply an additional requirement, namely that you are in the WHOA state. This means that the creditor is in a state in which it is reasonably likely that he will not be able to proceed with the payment of his debts. The law does not require judges to assess this during the cooling-off period, but practice shows that this does happen.
If all of these requirements are met, the judge will grant the request for up to 4 months. This period can be extended to a maximum of 8 months.
In practice, it frequently happens that the court grants a request provisionally, followed shortly thereafter by a hearing for final granting. This is due to the urgency of the request in that case. In the period between the provisional granting and the final assessment, those involved can be heard in order to safeguard the interests of the creditors. The circumstances may justify that the debtor cannot wait for this and the court therefore orders a provisional cooling-off period as a temporary provision.
An alternative by designation
It may happen that the judge rejects a request for a cooling off period. In principle, there is then no point in submitting another request; after all, the judge will come to the same conclusion with reference to the earlier rejection. This is of course different if there are changed circumstances.
Another option is that you request the appointment of a restructuring expert or have a creditor friend do so. A restructuring expert is an officer who can be appointed either at your request or at the request of the creditor(s). Unlike the bankruptcy trustee, the restructuring expert does not take over your power of disposition of your assets, the restructuring expert is only authorized to take certain legal actions. You can think about requesting a cooling-off period or provision.
If you yourself request the appointment of a restructuring expert, as referred to in Section 371 of the FW, this request is always granted pursuant to the third paragraph. If a creditor submits the request, the court first tests whether the creditor's interests prevent the appointment. Section 3d, subsections 1 and 2, Fw also regulate that if a request for the appointment of a restructuring expert runs concurrently with a bankruptcy petition, the request for a restructuring expert is heard first and the bankruptcy petition is suspended. In addition, this article regulates that the appointment of the restructuring expert in the above case is always accompanied by a cooling-off period.
Although this construction has been criticized in the literature, case law has confirmed that this is how the law works and that this route can be taken.
The cooling-off period: a panacea?
A lot can be achieved with the cooling-off period. It brings calm and overview, allowing more time to elaborate and offer a settlement. This is in the interest of all creditors if it leads to value preservation.
With a cooling-off period, pending bankruptcy petitions can be suspended, attachments levied and creditors can be prohibited from exercising their rights such as claiming goods delivered under retention of title or disclosing a lien.
A request for a cooling-off period can only be made as part of a WHOA proceeding. Thus, the filing of a WHOA commencement statement is necessary to have the ability to make such a request at all.
The court will test whether the cooling off period is necessary to be able to continue to run your business during the preparation and negotiation of an arrangement or to wind up your business in a controlled manner by means of an arrangement, whether the request is in the interest of the joint creditors, and whether the cooling off period does not harm the interests of individual creditors. If the court rules in favor, it will grant a cooling-off period for a maximum of four months, which may be extended once for another four months.
