Restructuring contracts under WHOA

The Private Arrangement Approval Act is a powerful tool in corporate restructurings. In the past, such a restructuring often went wrong for two reasons: one creditor did not want to agree to the settlement, or the current (long-term) agreements were too heavy a burden on liquidity.

The WHOA provides a solution to both problems: the majority of creditors bind the minority, and in some cases one group of creditors can bind all creditors, see this article. It is also possible to modify or even terminate perpetual agreements (think leases or rental agreements of, for example, retail premises, but also heavy manufacturing applications) under the WHOA.

In this blog, we explain how that works.

Being in a state

First, it must be determined whether there is a condition in which it is likely that the company will not be able to continue paying its debts.

In fact, this is the starting point of every WHOA procedure, whether it is a rescue operation or a liquidation process.

Qualifying the agreement

Under the WHOA, a the debtor may propose to an opposing party with whom the debtor has entered into an agreement to modify or terminate that agreement (Section 373 Fw).

In principle, therefore, almost all current contracts fall under this provision, with one very important exception: employment contracts (369 subsection 4 Fw). For these, "normal" labor law applies. For more information see here. Thus, lease agreements, assignment agreements, contracting work, money loan agreements and rental agreements can be amended or terminated.

Change or terminate?

The business owner will have to ask itself whether it wants to terminate or (temporarily) modify the agreement. For a retailer, terminating the lease may be less interesting than (temporarily) reducing the rent. For example, the manufacturing industry may benefit from amending agreements with raw material suppliers. By contrast, for a business owner that will also be parting with staff as part of a reorganization, terminating the lease agreement for the vehicle fleet may be of interest.

Thus, for each contract, it is necessary to see what value it still has for the company.

The Restructuring Expert may also use the ability to modify or terminate agreements.

Proposal

The proposal to modify or terminate is then presented to the other party. It is conceivable (and wise) that prior to this some discussions have already taken place or a draft proposal has been shared back and forth.

It is then up to the other party to accept or reject the proposal.

If the other party rejects the proposal, business owner may terminate the agreement unilaterally, if the agreement has been offered and is homologated AND the court gives permission.

Objection

Just as it applies to other creditors, an opposing party who disagrees with the course of events must raise its own objection.

Until the day of the homologation hearing, the other party to the contract may submit to the court a reasoned written request for rejection of the request for authorization to terminate the contract.

An opposing party may not invoke a ground for rejection if he has not protested to the debtor or the restructuring expert, if appointed, on the matter within a reasonable time after he has discovered or reasonably should have discovered the possible existence of that ground for rejection.

A successful objection requires that the creditor be able to show that the debtor is not in a condition where it is reasonably likely that the debtor will be unable to continue to pay its creditors.  

Since the court will only grant the request for permission to terminate the agreement if the (entire) agreement is homologated, the other party can also attempt to oppose the homologation of the agreement itself. The other party can then invoke the legal grounds for rejection.

If the objection succeeds, the agreement will not proceed, at least not be amended or terminated. This may result in the debtor subsequently being declared bankrupt.

As an opposing party, it is therefore prudent to consider the impact of bankruptcy on the contract.

Damage

When the debtor is allowed to terminate a contract, the other party is often entitled to damages. Under the WHOA, the debtor is allowed to also directly propose an agreement for that compensation. Therefore, the counterparty may also vote on the agreement.

Termination and modification of leases.

The legislator cites lease agreements as an example of ongoing agreements that may "hang like a millstone around the company's neck. Reason, therefore, for a debtor to want to proceed to modify or terminate a lease agreement. Modification of a lease may involve: negotiating a lower rent or removing an operating obligation. The latter is of course of great interest to hospitality businesses!  

In case of bankruptcy, the landlord is (also) faced with a termination by the trustee (art. 39 Fw). In that case (in principle) only the first three months' rent are an estate debt and the other claim(s), such as rent arrears, are 'only' unsecured claims. If the agreement contains a request for termination of the lease, a connection is sought with the system of article 39 Fw. In that case, the landlord must be offered at least an amount equal to 3 months' rent, so that the landlord is not put in a worse position than he would be in the event of the tenant's bankruptcy.

Therefore, it is unlikely to be easy for a landlord to avoid a request to terminate a lease under the WHOA.

For vacant possession damages, one should expect the debtor to anticipate this by including the landlord's vacant possession claim in the settlement. Since one of the things that is important in the court's assessment of the agreement is that the landlord's perspective in the agreement is not (significantly) worse than in the case of the tenant's bankruptcy, the tenant will have to offer at least the portion of the landlord's vacant possession claim that the landlord is expected to be able to obtain also in the case of bankruptcy.

Insolvency and change of control clauses

Many contracts today contain so-called ipso facto clauses. These clauses regulate the rights of the other party in case of insolvency, liquidation or business termination. Under WHOA, the other party is not given the right to modify or terminate the contract. This means that ipso facto clauses lose their effect.

Many agreements also contain change-of-control clauses. These clauses mean that if the debtor changes the management or shareholders, the other party may terminate the agreement.An agreement involving a debt-for-equity swap cannot be crossed by such a change-of-control provision. Under a debt-for-equity swap, a portion of a creditor's claim is converted into an equity interest and thus control in the company, while diluting the equity interest and related control of the existing shareholders.

The legislator believes that within the frameworks of the arrangement, the opposing party has no legally respectable interest in withdrawing from the agreement: on the contrary, after the homologation of the arrangement, it obtains a debtor who is once again financially sound.

Instead of using this arrangement, the debtor may also choose to create a class in the agreement that includes certain agreements, which entails that then, for those counterparties, their rights are changed at once in an equal manner.