A company can run into financial difficulties for a variety of reasons. Consider the bankruptcy of a major customer or debtor, but also an incidental setback on a project or temporarily disappointing business.
If a company is in dire straits, the director has an obligation to investigate whether the company can be successfully restructured. Only if that is not possible, then the option of bankruptcy with possible relaunch comes into the picture.
One of the ways a company can be successfully restructured is through debt restructuring. This can be done in various ways such as through individual arrangements with creditors, a creditors' agreement, a WHOA (Homologation Private Agreement Act) or employee reorganization.
Table of contents
What is the WHOA?
With the WHOA, a business owner has the ability to enter into a private agreement with its creditors outside of bankruptcy. A feature of the WHOA is that it can also bind creditors who have not agreed to the proposed composition.
Although even before the WHOA it was also possible to conclude a private agreement - the extrajudicial composition - the basic principle here is that all creditors must explicitly agree to the debtor's proposal. Only in exceptional cases can creditors be forced to participate in an out-of-court settlement. Reinier Pijls wrote an article about this as part of our campaign series of do's and don'ts with (approaching) bankruptcy.
WHOA as a tool for restructuring
The WHOA, on the other hand, provides business owner with tools to get obstructing creditors to go along with a restructuring. An agreement based on the WHOA therefore makes it possible to restructure the debts of a fundamentally healthy company so that bankruptcy can be averted.
The WHOA may be a very appropriate restructuring tool to restructure this debt. First, because the Tax Administration is committed to settle at the same rate as the unsecured creditors in a WHOA agreement until April 1, 2024. In addition, because even a dissenting Tax Administration can be bound by a WHOA agreement under circumstances and thus the tax claim can be remediated. How does that work?
How does the WHOA process work?
The offering of a private agreement based on the WHOA does not require prior court approval. The debtor who can no longer meet his payment obligations can begin the WHOA process by filing a so-called starting statement at the registry of the court.
Once the debtor has filed the opening statement, he will have access to various facilities. These aim to facilitate the completion of the agreement. Among other things, a cooling-off period can be ordered and the court can make stipulations or provisions. These aim to safeguard the interests of the asset providers (read: the creditors a shareholders).
Initiative by creditors
In addition to the debtor, creditors, shareholders, the works council or the staff meeting can also take the initiative to reach an agreement using the WHOA. However, these "stakeholders" cannot independently offer an agreement. They will in that case have to request the court to appoint a restructuring expert. This restructuring expert acts as a "bridge builder. He or she then tries to bring about an agreement between the debtor and his or her creditors. We will discuss this in more detail later in this article.
Cooling off period during WHOA proceedings
Offering a private settlement may take some time. Simultaneously with the filing of the opening statement, the debtor can ask the court to order a cooling-off period. During this cooling-off period, individual creditors cannot recover from the debtor's assets unless they obtain court authorization to do so. For example, no assets of the debtor can be attached and no retention of title or lien can be invoked.
Going concern
In addition, the processing of any application for suspension of payments or bankruptcy may be suspended during the cooling-off period. This gives the debtor breathing room to effectuate the settlement and keeps the debtor's assets together, ensuring the preservation of the going concern value of the business.
The cooling-off period lasts up to four months and may be extended for another four months. Before the creditor makes this request, the:
- aforementioned commencement statement have been filed; and
- he must offer or promise to offer an agreement.
Thus, a cooling-off period is possible even if a concrete agreement does not yet exist.
The court will grant the request if it appears summarily that the cooling-off period is necessary in order to continue business during the preparation of the arrangement. In addition, the debtor must make it plausible that the interests of the joint creditors are served by this and that those interests have not been substantially harmed.
The restructuring expert and/or observer
Any creditor, shareholder, works council or employee representation can ask the court to appoint a restructuring expert. The task of the restructuring expert is to offer an agreement in an effective, impartial and independent manner.
Trust
The debtor himself can also request the court to appoint a restructuring expert. In that case, the debtor can no longer offer an agreement independently. This will usually be done in practice to avoid any appearance of a conflict of interest and to gain the confidence of creditors that a viable settlement is being offered on good grounds.
Observer
In addition to a restructuring expert, the court may appoint an observer if requested. The task of the observer is to supervise the formation of the arrangement, keeping in mind the interests of the joint creditors and shareholders.
When, in the opinion of the observer, it is clear that the debtor will not succeed in reaching an agreement or that the interests of the joint creditors and shareholders will be harmed, the observer notifies the court. The court may attach whatever consequences it deems advisable, such as appointing a restructuring expert.
Shaping the WHOA procedure
The debtor is free to determine the content of the agreement. Because a private agreement legally qualifies as an agreement, freedom of contract is the starting point. This provides room for adequate intervention in the company's financial situation. For example, the content of the agreement will often include a change in the rights of creditors and/or shareholders. Here you can think of a postponement of a payment obligation or a full or partial waiver of a claim against final discharge. It is also possible to convert creditors' claims into shares in the company, a so-calleddebt for equity swap.
Standing agreements
In addition to payment obligations, continuing agreements can also hang around the company' s neck like a millstone. In that case, too, the WHOA offers a solution. Indeed, as part of the agreement, long-running (term) contracts, such as a lease or distribution agreement, can be amended or terminated.
The debtor can ask the court for permission to do this, regardless of what the parties have agreed to in the agreement. Furthermore, any claim for compensation due to the other party as a result of the termination of the agreement can be included in the agreement and thus remediated.
The class division and vote on the agreement
Creditors and shareholders to whom a composition is offered are assigned to different classes. Creditors who are entitled to a higher rank in the liquidation of assets in the event of bankruptcy, such as the tax authorities and the UWV, for example, must be assigned to a different class than creditors with a lower rank, such as trade creditors. This is necessary for the homologation (read: approval) of the agreement by the court.
Each class then considers whether the agreement has been assented to. A class has agreed if of the votes cast, at least 2/3rds of the total amount of claims are represented.
Cross-class cram down
In order to submit the accord to the court for homologation, it is not required that all classes have agreed to the accord. The accord can be homologated and declared binding on all creditors and shareholders if at least one class has consented. This phenomenon is also known ascross-class cram down.
However, this is subject to the condition that the consenting class must be "in the money. This means that the consenting class must consist of creditors who, in the event of liquidation of the debtor's assets in bankruptcy, would be satisfied in whole or in part. It is thus crucial for the success of the arrangement that the creditors are better off with the arrangement than in the case of the debtor's bankruptcy.
In particular, the aforementioned cross-class cram down makes it possible for the Tax Administration, even if it votes against it, to still be bound by the agreement. Thus, this allows the tax authority's claim to be remediated even if the tax authority votes against the agreement.
Homologation as a starting point in WHOA
As soon as the court receives the homologation petition, it sets a date for a hearing. Creditors and shareholders with voting rights can submit a written request to reject the homologation request up to the day of the hearing. The basic principle here is that the homologation request will in principle be granted, unless there are general and/or additional grounds for rejection.
General grounds for rejection refer to the procedural aspects of reaching the agreement. The judge will test whether the decision-making process was pure. Even when a general ground for rejection has not been invoked, the court may apply it ex officio.
General grounds for rejection
The general grounds for rejection regulated by the law are:
- There is no imminent insolvency of the debtor;
- One or more creditors or shareholders entitled to vote were not properly informed of the arrangement, given the opportunity to vote and/or not informed of the date of the hearing at which the homologation petition will be considered;
- The debtor has not fulfilled his duty to provide information;
- The fulfillment of the agreement is not sufficiently guaranteed;
- A creditor was allowed to vote on the settlement in an incorrect amount;
- The debtor wants to enter into new financing in the context of the execution of the arrangement, which would substantially harm the interests of the joint creditors
- The agreement was reached by fraud, by favoring one or more voting creditors or shareholders, or by other unfair means;
- The wages and disbursements of the court-appointed restructuring expert, expert or observer have not been deposited or security has not been provided for them;
- There are other reasons that oppose homologation.
Additional grounds for rejection
The additional grounds for rejection refer to the content of the agreement. The court can reject the homologation request on an additional ground for rejection only if a voting creditor or shareholder invokes it. If all classes have agreed to the accord, the homologation petition can be rejected if it appears that a dissenting creditor or shareholder is worse off with the accord than with the debtor's bankruptcy.
When not all classes have agreed to the agreement, the following additional grounds for rejection may be appealed:
- The SME creditors receive a payment of less than 20% of the amount of their claim under the agreement, in the absence of a weighty ground;
- The distribution of the reorganization value realized from the settlement will deviate from the legal ranking order. However, this will not lead to rejection if there are reasonable grounds for doing so and the creditors and shareholders involved are not harmed in their interests;
- Unsecured creditors cannot opt for a cash distribution;
- Pledge and mortgage holders who have provided corporate financing are offered shares or certificates and do not have the right to opt for a distribution in any other form.
Impact of WHOA
General binding
Once the agreement is approved by the court, it becomes binding on the debtor and all voting creditors and shareholders. Individual creditors and shareholders who voted against are thus still bound by the agreement and will often have to settle for a reduction in their original claim.
Third Party
It should be noted that the agreement is only binding on the debtor and all creditors and shareholders with voting rights. In principle, the accord does not affect any rights that creditors may exercise against third parties. This means that despite a homologated agreement, a creditor can still recover from, for example, a director, who may be liable for the debt in addition to the company.
Profession
In order to be able to execute the accord quickly after ratification in order to ensure the continuity of the company, there is no possibility of appeal against the ratification. Moreover, any suspended requests for suspension of payments or bankruptcy lapse by operation of law.
Conclusion
The WHOA provides an essentially viable company struggling with excessive debts an additional restructuring opportunity to restructure those debts by offering a WHOA settlement. The special feature of the WHOA is that dissenting creditors can be bound by the WHOA agreement and thus forced to agree to a write-off of their claim.
The opportunities and risks of an out-of-court settlement versus a WHOA, a moratorium or bankruptcy are different. It is therefore important that you seek proper advice, as to which restructuring mechanism will work best for your company. For this you can contact our specialists.
