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.
In our campaign series on do's and don'ts when bankruptcy is (approaching) this week, we focus on: the out-of-court settlement
Since Jan. 1, 2021, many accountants and legal experts have been mouthing off only about the WHOA(Homologation Private Agreement Act). This law makes it possible to force creditors to agree to a reduction of their rights, usually a settlement that involves paying a percentage of the claim against final discharge of the excess. The "old-fashioned" out-of-court settlement, is often forgotten or no longer mentioned. But this is unjustified.
The WHOA is primarily intended as a stick to get obstructionist creditors to go along with a restructuring after all. And the WHOA also has disadvantages for the company to be restructured, substantial costs and restrictions. Moreover, one prefers to reach a settlement with creditors on a voluntary, commercial basis rather than enforce it through the courts. Therefore, it is also good to explore the option of an out-of-court settlement if it is to be restructured.
A debt reduction agreement
A debtor who anticipates that he cannot pay his debts in full and wishes to avoid bankruptcy may ask his creditors to agree to an out-of-court settlement. There are conceivable situations (also outside the WHOA) in which a creditor who refuses to do so can be forced to agree to an extrajudicial settlement. This will then proceed through summary proceedings. When such a situation arises is explained in this article.
Unlike cases regulated by law (such as WHOA, bankruptcy, suspension of payments or statutory debt rescheduling for natural persons), an out-of-court settlement does not involve judicial review. It is in fact an agreement in which it is agreed that the (imminently) insolvent debtor will pay only part of his debts in final discharge.
In principle, a creditor can recover his claim from all of his debtor's assets (Article 3:276 of the Civil Code) and is not at all obliged to agree to participate in an agreement. A creditor will therefore have to expressly agree to the debtor's proposal.
What should an out-of-court settlement meet at least?
The lower courts have developed a number of criteria that an agreement must meet if it is to qualify for injunctive relief (via summary judgment):. The agreement must:
- be well-founded and provide a full understanding of the debtor's debt and asset position;
- contain current data;
- offer insight into the maximum achievable outcome, the utmost must have been offered;
- preferably be prepared and supervised by an independent expert;
- make a plausible case that failure to achieve it will result in bankruptcy and that the consequence will be that creditors will receive (much) less;
- reflect the fact that the debtor has made or will have to make significant sacrifices in order to best satisfy his creditors;
- treat comparable creditors equally , or the agreement must justify why certain creditors are favored over others. The starting point is equal treatment of creditors; and
- during the execution of the arrangement, creditors should be kept constantly informed of relevant developments regarding their claims.
The grounds for coercive participation
Compulsory participation in a private agreement can only take place by strict exception, if the concrete circumstances in the individual case provide sufficient indications for this. There are various bases on which a creditor can be forced to cooperate in a composition.
Misuse of powers
The most common basis is that refusal to cooperate in the arrangement constitutes an abuse of powers (Article 3:13(2) BW). In assessing whether a creditor can be forced to participate in a settlement, the court (in summary proceedings) first tests whether the offered settlement meets the criteria as discussed above.
Balance of interests
Next, the court will test whether in the specific case the interests of the debtor, who claims coercive participation in the agreement, should outweigh the interests of the creditor summoned (in summary proceedings), who is in principle entitled to payment of his entire claim. Only if the creditor could not reasonably have refused, is there an abuse of rights.
Although a trend is emerging in the lower court jurisprudence whereby debtors are increasingly being assisted with out-of-court debt restructuring, the Supreme Court has set clear frameworks.
The Supreme Court considered:
" (...) restraint should be exercised when granting an order to cooperate in an extrajudicial composition. Only under very special circumstances can there be room for an order to a creditor to cooperate in the performance of an agreement offered to him."
Under what circumstances can participation be enforced?
In the past, lower courts have considered the following circumstances in deciding whether a creditor can be forced to cooperate in an out-of-court settlement:
- Are there other (social) interests such as job preservation?
- Is there good faith on the part of the debtor? There must have been no attempts on the part of the debtor to prejudice the creditors.
- Is there a legitimate fear that the debtor will be unable and unwilling to honor the agreement?
- How large is the claim of the reluctant creditor relative to the total debt? The interest of a relatively small creditor carries less weight than that of a relatively large creditor.
- How large is the number of reluctant creditors relative to the total number of creditors? If the number of creditors who do not voluntarily agree is relatively small, this may be reason to assume the unreasonableness of their position.
- Is there a legitimate fear that coercive participation is anti-competitive ?
- Is there a legitimate fear that the agreement will set an (undesirable) precedent ?
Whether a creditor can be forced to cooperate with an agreement depends on the answers to the above questions. The more questions are answered in a positive sense for the debtor, the more likely it is that a creditor will abuse his power to (continue to) demand full performance of his claim.
Conclusion
The extrajudicial forced composition is an agreement between a debtor and his creditors. The starting point in whether or not an individual creditor accepts an out-of-court settlement is therefore freedom of contract. He is entitled to payment of his entire claim and, in principle, he does not have to settle for less. When a debtor's situation is in line with the above requirements, a debtor can force a refusing creditor to agree to a settlement by means of summary proceedings.
