No suspension of pending proceedings in WHOA proceedings

When a company is in financial dire straits, but the business is still viable, a composition may be offered to creditors in order to avoid bankruptcy. The Homologation Private Arrangement Act ("WHOA") provides a regulation for a forced composition outside suspension of payments and bankruptcy.

How does a WHOA agreement work?

The special feature of the forced composition is that not every creditor whose rights are reduced has to accept the agreement. A majority can bind a dissenting minority, albeit the agreement must then be homologated (read: approved) by the court.

Custom

Section 379 Fw allows the court to make such provisions and make such provisions as it deems necessary to protect the interests of creditors or shareholders during the formation of a WHOA agreement at the request of the debtor. The open wording of this provision allows the court to make tailored provisions. These provisions are therefore also referred to as "customized provisions."

Restructuring

The court may also grant relief on its own motion or at the request of the restructuring expert. A restructuring expert is an officer who can be appointed during a WHOA process to bring about an agreement between the debtor and its creditors. Read more about that in this article.

Target

The legislator's focus in these tailor-made provisions has been on provisions that primarily serve to safeguard the interests of the creditors or shareholders involved. This could include, for example, setting the condition that the agreement must be voted on within a certain period of time. It is also conceivable for the court to stipulate that the debtor must regularly inform the creditors and the court about how the process is progressing.

Debtor asks court to suspend pending proceedings by way of tailored relief

Recently, the Gelderland District Court handed down an interesting judgment showing that the measure provision of Section 379 Fw has a limited scope.

In this case, the debtor applied to the court for customary relief under section 379 Fw. The applicant was a company whose activities included trading and distribution of bananas in the Russian (spot) market.

Spot market trade

In this so-called spot market trade, the distributor and the buyer do not agree the price in advance, as is common in regular trade, but rather after the bananas have been delivered to Russia. As a result, the debtor had suffered significant losses and subsequently ran into financial difficulties. As a result, it could no longer fulfill its payment obligation to several suppliers. Having failed to offer an out-of-court settlement to the suppliers concerned, the banana trader started preparing a judicial WHOA settlement.

Three suppliers had previously initiated subpoena proceedings against the debtor demanding - in short - payment of their invoices. In one of those proceedings, the debtor had since been ordered to pay nearly half a million dollars, but it had appealed.

Suspension

The debtor then requested the court to suspend the pending proceedings by way of a measure as referred to in Section 379 of the FW. In doing so, it took the position that, in view of the international nature and complexity of the disputes, the proceedings would involve substantial costs which it could not bear. Moreover, these costs would be incurred in vain, as the pending proceedings under the settlement would be terminated and struck out, the debtor argued.

The suppliers, as interested parties, had been given the opportunity to present their views and concluded by rejecting the request. Among other things, they pointed to the limitative grounds for suspension under Sections 225 and 226 of the Dutch Code of Civil Procedure (Rv) and the limited possibility of seeking injunctive relief under Section 225 of the Fw in subpoena proceedings.

The court's opinion

The court stated first that the customization provisions serve primarily to safeguard the interests of the creditors or shareholders involved. In this sense, a customized provision serves the same purpose as the other provisions that can be requested during the WHOA process. Consider the request to declare a cooling-off period (Section 376 FW) or the request to be allowed to perform legal acts(Section 42a FW). Like the tailor-made provisions, these provisions serve to enable the debtor to reach an agreement.

The limited scope of the size provision

In addition, the court considered that in creating Section 379 Fw, the legislator sought a connection to the existing measure provision for suspension of payments in Section 225 Fw. This provision has a limited scope and only authorizes the court to take an order measure during the moratorium for the benefit of all creditors. That measure aims to protect the interests of the joint creditors. Suspension of pending proceedings is thus too far-reaching a provision that does not fit within the framework of Section 379 of the FW.

The court thus concluded that pending litigation cannot be stayed under WHOA. Thus, despite a WHOA petition, litigation must "simply" continue.

Conclusion

All in all, it can be concluded that the measure provision of Section 379 Fw has a limited scope. When the WHOA was introduced, the legislator saw no reason to expand the statutory grounds for suspending pending proceedings. Therefore, the intention to offer a settlement and/or the impossibility of being able to bear the costs of the proceedings do not constitute grounds for suspending current proceedings against creditors.

The attorneys in our team can guide you during a WHOA trajectory. We can also advise you if you, as a creditor or other stakeholder, are facing a WHOA trajectory from your debtor or contracting party. Please feel free to contact us with any questions in this regard.