WHOA! The Dutch coercive agreement

For many retailers, the Corona months were a bad time; people slammed into jobs en masse, everyone worked from home, and vacation money was invested en masse in home offices. The market continued to shift from offline to online in flux.

Yet not everything was rosy; retailers were also declared bankrupt. There were battles over rent reductions for store properties and the "share the pain" principle became a reality. Just recently, the court ruled that Scotch and Soda's request for rent reduction must also take into account (online) sales from elsewhere in a group.

While there is much to comment on that ruling, it could potentially still be detrimental to franchisees in the future. At least if the ruling stands up on appeal.

The number of bankruptcies is expected to increase in almost all sectors following the cessation of government support. To somewhat stem the predicted bankruptcy wave, the Private Arrangement Homologation Act ("Whoa") entered into force on January 1 of this year. A new restructuring instrument whereby - essentially viable - companies can be rescued and creditors can be forced to settle for a lower payout on their claims.

The agreement is conditionally declared generally binding ("homologated") by the court, and all creditors who have been offered the agreement are then bound by it.

Whether your business is thriving or is currently experiencing (or will experience) liquidity crunches due to deferred expenses, chances are you will encounter the Whoa in the near future.

Time, therefore, for an explanation.

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Whoa as legal basis for out-of-court settlement

In restructuring practice, the reorganization of (parts of) a company has been around for quite some time. This could be done by cold restructuring (restart from suspension of payments/bankruptcy) or by warm restructuring (going concern and outside insolvency proceedings) through a creditors' agreement.

The disadvantage of a composition with creditors before the introduction of the Whoa was that all creditors had to agree to the arrangement and that, in principle, the tax authorities had to be offered double the percentage of the creditors. If a creditor refused, the arrangement did not go through and the company went bankrupt.

The introduction of Whoa will change that. The Whoa has a number of principles: the debitor in control, the majority binds the minority and the whoa provides for the possibility of reorganizing current obligations.

The central issue is always: is the business viable and does the settlement yield the best feasible outcome for the creditors.

Debitor in control

The Whoa allows creditors to take the initiative to open Whoa proceedings. Can a creditor then offer a settlement on behalf of the debtor? No. They may not. The initiative then sees the request to appoint a Restructuring Expert. A Restructuring Expert then works side by side with the debtor to investigate whether offering a settlement is possible. In principle, the debtor has the leading role.

The debtor who decides to open Whoa proceedings himself can prepare and offer an agreement to his creditors by himself (i.e. without a Restructuring Expert). It is advisable, however, to involve a lawyer.

The majority binds the minority

In agreements before the Whoa, you had two groups of creditors: unsecured and preferred. 

The Whoa allows creditors to be divided into different groups, called classes. The agreement is offered for each class and each class is voted on.

Thereby, for each class, the majority of the debt represented binds the minority. Within a class, even one creditor can bind the rest, as long as his claim comprises the majority in that class.

If one class has agreed to the agreement, the class may bind the other classes as well. We call that a cross class cramn down.

This makes it easier to push through an agreement.

Restructuring of current liabilities

Under the Whoa, it is possible to restructure ongoing contracts. This was not possible before. An example: your webshop is running so well that the physical store is no longer needed. However, a lease has been signed for the store that continues for several years.

A proposal can be made to the landlord to terminate the lease. This is already possible, of course, but once the landlord rejected the proposal, you were still stuck with the lease.

Under the Whoa, you can now get out of the lease. You can ask the court for permission to terminate the lease. You can then include any fines or, for example, the remaining rent payments in the Whoa Agreement. You then buy that off against payment of a percentage on that claim.

Partial restructuring

The Whoa thus provides tools to restructure both debts and contracts. It also makes it possible to offer a partial settlement, for example, to a group of creditors instead of all of them.

This also makes it possible to terminate unprofitable parts within a company or within a group without bankruptcy. 

Now what if you are facing a whoa trail

Suppose you supply many construction companies and one construction company decides to do a restructuring under the Whoa.

My first tip would be to find out if you can recover the delivered goods under retention of title or right of claim. However, this is often not possible, so you should probably consider accepting or rejecting the agreement.

If you wish your client to be able to move forward, you will naturally agree to the settlement. Depending on the size of your organization, you may receive a percentage payout where small creditors should be offered a percentage of at least 20% unless they all agree to a lower percentage.

You can then reclaim VAT on the 80% to be written off.

If you disagree with the proposal, you can vote against it. If the majority of creditors in your class vote in favor, you may still be forced to settle for the offered settlement.

However, if in your opinion there is something wrong with the offered settlement, or if you feel that I have been placed in the wrong class, then the way to go to court remains. Indeed, creditors can turn to the court with complaints about the offered settlement or to the debtor.

In addition, you can also ask the court for additional supervision of the agreement. This can be done by having a Restructuring Expert appointed, or by having an observer appointed. The latter only tests whether the composition is in the interests of the creditors, but has no active role in the preparation of the composition.

Please note that you are required to pay court fees and that you must first complain to the debtor (or the restructuring expert). It is advisable to get good advice from a restructuring expert: recently, a creditor contested the ratification of a settlement agreement and this cost him more than he was eventually reimbursed.

Still, complaining makes sense. Just recently, a Whoa trajectory was turned into bankruptcy because the debtor did not treat creditors fairly. Some did get paid in full through a sister company and some did not.

Conclusion

The Whoa offers many opportunities to more successfully restructure or liquidate unprofitable business units. The Whoa also makes it easier. This has advantages for the debtor and can be disadvantageous for the creditor.

Chances are that you will have to deal with the Whoa in the future. Therefore, get proper advice.