The Private Arrangement Homologation Act

The Private Arrangement Homologation Act is now six months old. Time to take stock, because even though only 30 judgments were published, we know more and more about this wonderful restructuring instrument. I discuss the most important and the most striking rulings.

Own experience

In early 2021, I assisted a client facing a Whoa settlement. The debtor had sought (and been granted, see here) a cooling-off period in the first place. Client was therefore unable to take any action to collect her claim.

Through another creditor, we found out that the debtor was paying some creditors through another limited liability company, but among other clients, he was not. That looked like selective default. Client therefore - rightly - found the agreement unacceptable. We pointed this out to the debtor and informed the court accordingly.

An observer was appointed by the court and eventually the client's complaints were taken seriously; the debtor was declared bankrupt and a receiver was appointed.

Viability

In one of the rulings, the request for homologation (establishing the agreement) was rejected because the debtor had not made it sufficiently clear that the company would be sufficiently viable after reorganization. After all, this is a requirement. Thus, although the (majority of) creditors favored the arrangement, the court refused to homologate the arrangement. This was not the case in pre-WAO restructurings, or to a lesser extent. The comparison between the offered settlement and the bankruptcy scenario was then assumed. So now it must also be stated and demonstrated that the company is viable.

That's in line with the law, but an extra bump to take.

Costs (court fees)

Think before you leap, as the saying goes. The same goes for the Whoa. I have already written an article on the cost of restructuring.

This ruling makes it painfully clear that even as a creditor you need to be on your guard. The creditor acted against the homologation. Under the law, court fees are due for this. Salient detail: the creditor's payout from the settlement was less than the court fee owed.       

Restructuring expert appointment

As I wrote in my earlier article, it is not mandatory to offer an agreement with the help of a Restructuring Expert. The debtor may request the appointment of a Restructuring Expert. This is done as follows: the debtor requests at least three offers from appointable Restructuring Experts. The court then appoints one Restructuring Expert based on those quotes.

It is also possible for a creditor to request that a Restructuring Expert be appointed. The debtor may then respond to that as well.

The request to appoint a Restructuring Expert has been rejected several times. This was often due to the fact that the Restructuring Expert was not independent enough (= too involved with the debtor or a creditor) or for lack of interest because the debtor already seemed technically bankrupt. See also here.

A request for appointment of a Restructuring Expert was also denied because there was no longer a corporation and the Whoa does not lend itself to indebtedness of private individuals without recourse to business.

Requests are fortunately sometimes granted: see here and here for that.

Rejection Homologation

Once all the bumps have been taken and the majorities have been achieved, the court can be asked to homologate the agreement.

The court then reviews the agreement against the legal requirements and grounds for rejection.

In the past 6 months, several homologation requests have been rejected by the courts. All the more reason to emphasize once again that good expert guidance is essential.

Accords were also homologated. The first homologation dates from February: see here.

Forgotten creditor

What if a creditor challenges the homologation of an agreement to he was "forgotten"? In principle, the homologation could be refused. In this ruling, the court in Zutphen had to consider the homologation request. It was eventually possible to homologate because the forgotten creditor still agreed to the agreement.

This provides a ground for rejection within the meaning of 384 subsection 2 under c Fw. On the one hand because one unsecured creditor had been forgotten, but also because the other creditors were presented with an incomplete picture about the settlement; the liabilities were greater.

The court ultimately concluded that homologation was simply allowed: the debtor could show that even with a correct representation of the agreement, the agreement would have been accepted.

So it is essential to prepare the agreement well, but also to involve experts in the process. Especially when restructuring without a Restructuring Expert.

The observer

In any case, the observer is appointed if a cross class cram down will take place; one class then binds all classes and as a safeguard, there will then be additional monitoring of interests by the observer. An officer who represents the interests of the creditors. So does a trustee.

Bankruptcy vs. Whoa

The bankruptcy cannot be set aside on the grounds that one wants to offer a Whoa settlement, see here. The Court does not go along with that.

Under the Whoa, a cooling-off period can be requested. However, this cooling off period does not affect a bankruptcy filing. 

The law does provide that the request for appointment of a Restructuring Expert suspends the bankruptcy petition. If the debtor gets there in time, this is a powerful tool to parry a bankruptcy petition.

Pauliana

Under the Whoa, it is possible to have certain legal acts approved by the court, which might otherwise still be annulled under pauliana in the event of bankruptcy.

This ruling involved the creation of a mortgage right to raise financing to fund the agreement. This gives the lender a security interest stronger than the rights of "ordinary" creditors, whereas in the event of bankruptcy, the value of the collateral would accrue to all creditors. This can be paulian unless approved by the court. That happened.

In this ruling, new credit was provided to continue operating the business. Otherwise, the company would not be able to harvest. Although the court basically did not see how this would harm the creditors' interests, it nevertheless granted an authorization to accept the new credit.     

Conclusion

The Whoa remains a complicated law. When properly applied, a business can be restructured in a wonderful way and the future of the business and employment is assured.

In the past 6 months, more than 30 Whoa rulings have been published. This is - given the upcoming crisis - few. As of October, support measures will be withdrawn. Therefore, the time for restructuring has come.

Would you like a no-obligation sparring session on whether restructuring your company is possible? If so, please contact me. My colleagues and I are also available for appointments as Restructuring Experts.