My debtor offers a settlement

In insolvency land, it is the introduction of the Homologation Private Agreement Act ("WHOA") that is ringing the bell. Due to the corona crisis, this law has been introduced at lightning speed. Below I elaborate on what you can do if you, as a creditor, are faced with such a WHOA agreement.

WHOA

Since Jan. 1, 2021, it has been possible, under circumstances, to offer a forced composition to creditors and have it approved by the court. The forced composition will then be binding on all creditors. This is special, because until now this was only possible within insolvency proceedings (suspension of payments, bankruptcy or wsnp).

A WHOA proceeding is designed to provide a quick solution to an impending bankruptcy in which the company and jobs can be saved. It is therefore a relatively short process. A WHOA agreement can be declared binding within just a few weeks.

There is no right of appeal against the homologation: so you have to be careful, before you know it you are bound by the agreement.

Complain

The legislature is clear: you snooze, you lose. Creditors are subject to a duty to complain throughout the WHOA process. This is far-reaching because during the proceedings the court may make interim decisions that are relevant to your position as a creditor. Think about class certification, but also about determining that the settlement is reasonable.

Should you have any objections to the settlement, make sure you make your objections known to the debtor (and/or the Restructuring Expert) in time. If you fail to do so, the court may ignore your objections at a later stage.

Ability to rescue businesses with viable businesses

On the one hand, this is a wonderful tool to save companies with potential, but it also results in a drastic reduction of a creditor's rights. After all, the starting point was that a creditor need not settle for less than 100% payment of his claim. That will now change.

There will also be no legitimacy investigation. Directors who may have mismanaged a debtor will in principle not be addressed by a trustee in WHOA proceedings. You must therefore do that yourself.

In this blog, I briefly outline what you, as a creditor, can still take action against a WHOA settlement if you do not wish to agree to it.

Higher yield

The premise of the WHOA (and other out-of-court agreements) is that creditors are presented with a better recourse than in bankruptcy. In other words, if you do not agree, you will be paid a lower (or no) amount.

In that context, it is essential that you have a clear picture of what recourse you have with your debtor. For example, are there any assets abroad? Is there perhaps recourse with the director privately? Have any assets been sold recently and for how much?

Classification

Before a WHOA settlement will be offered, the debtor (or the restructuring expert assisting the debtor) may (may) divide its creditors into classes.

This class division provides a first opportunity for creditors to complain about the settlement. After all, creditors in different classes, may be offered different settlements.

A creditor can appeal to the court against class certification under the WHOA. As a creditor, take advantage of this because: after the classes are assigned, there will be a vote for each class.

In principle, if one class agrees to the arrangement, the arrangement can be homologated. This implies that a tactical classification of creditors may allow a minority of creditors to overrule the refusing majority.

Vote

The easiest remedy against a WHOA agreement is to vote against it. Make sure you get a picture of who else has a claim against the debtor.

Once agreed to (by the majority within one or more classes), the debtor or the restructuring expert will submit the agreement to the court for homologation.

The creditor can then still ask the court not to homologate the agreement.

The court refuses homologation in only three cases:

1. The procedural rules on the offer, content and design of the agreement and the voting procedure were not correctly applied;
2. The arrangement is unreasonable because there are creditors or shareholders who would be put in a substantially worse position by the arrangement than in bankruptcy, or
3. It involves one of the grounds for refusal that also apply to the moratorium and bankruptcy settlement.

This is not likely to happen, but it is not unthinkable.

Applying for WHOA yourself

The law is set up so that creditors can also open WHOA proceedings. If you see that one of your major customers is poorly paid and the debts are only increasing, it may make sense to consider filing a request to open WHOA proceedings yourself. That way, an investigation will be conducted (well before bankruptcy) to see if your losses can be minimized.

Prevention is better than cure

The larger your claim, the more annoying it is if you have to write it off. This is true in the case of a WHOA settlement and certainly in the case of bankruptcy.

I therefore conclude with the following tips:

• Implement a tight accounts receivable policy and cash flow monitoring: the sooner you intervene, the sooner you get paid. A WHOA settlement will be through in no time. See in more detail this blog by my colleague Reinier Pijls.
• Demand security: get a surety bond or pledge, then the settlement will only affect you to a limited extent.
• Make sure - especially if you are owed a lot of money - that you have a proper recovery investigation done by your attorney prior to the WHOA process. You need that to judge whether you really have been presented with the best deal.
• Investigate whether you can still sue the directors privately for your claim (see here and here).
• Ask questions of the restructuring expert: have claims against directors also been examined?
• Consult with your lawyer: is it still possible to sue the directors of the WHOA debtor under directors' liability?   
• By the way, you can also request a WHOA trajectory yourself if you suspect that your creditor can no longer continue to fulfill his obligations, but does nothing else about it.

WHOA promises a lot of changes in the coming year. Be keen that you get what you are entitled to.

In my next blog, I will elaborate on the possibility of amending a contract and on what rights the creditor has in that case.