The Dutch Pre-pack and Scheme

Introduction

In response to the recent economic crisis and developments in certain other countries, the Dutch legislator has (already in December 2012) announced a number of measures to improve restructuring possibilities for companies: one proposal dealing with the “Dutch prepack” and a second proposal dealing with the “Dutch Scheme”.[1] Although the proposals have, against initial expectations and statements made by the Dutch ministry, still not been implemented, the proposals continue to shape the Dutch restructuring market.

In this article a brief overview is provided of the Dutch pre-pack (§ 2) and the Dutch scheme (§ 3).

Dutch pre-pack

Current practice

In the last couple of years a number of Dutch restructurings have been effected by way of a (Dutch) pre-pack. A high profile example where a “pre-pack” was used to restructure a business and which has led to extensive press coverage (in the Netherlands) is Estro. In the case of Estro and more generally in case of pre-packs in the Netherlands, the term “pre-pack” is used in relation to a practice whereby the company approaches the court with the request to assign a “silent administrator” to it, i.e. a person which the court intends to appoint as bankruptcy trustee should the company enter into a formal bankruptcy proceedings. This allows the company  to prepare and negotiate a transaction prior to bankruptcy, i.e. “precook” matters as much as possible in a structured way. In particular, in cases where it is essential that the transaction is implemented immediately or in the short term after the bankruptcy (e.g. to prevent closing down of the business for any period of time in bankruptcy or to limit negative publicity), the pre-pack can provide a solution.

There is no statutory basis (yet) in the Bankruptcy Act for the appointment of a silent administrator, which has led certain district courts in the Netherlands to refuse to cooperate with such an appointment. Furthermore, it is not clear how a silent administrator, if appointed, should conduct himself. Should he be a “fly-on-the-wall” or be actively involved in the restructuring of the business? The legislative proposal aims to provide a legislative framework for the current practice dealing with such issues, but it is left to practitioners (such as the courts) to develop further practice guidelines.

Key features

The Dutch pre-pack seeks to facilitate a structural and effective winding up of bankruptcies and/or aid the restart of commercially viable parts of the debtor’s business after bankruptcy. The main purpose is to maximise proceeds from the sale of assets for the benefit of the joint creditors and/or, in the case of a restart of business, maintaining employment.

Only the company can request the court to assign an intended trustee (beoogd curator; this term is used in the proposal instead of the term silent administrator that has developed in practice). Creditors are not allowed to apply to the court with a similar request. The company will have to make it plausible that the appointment of an intended trustee serves either the interest of the joint creditors, or the public interest (e.g. maintaining employment). The company should, amongst others, provide a plan to the court, which explains what steps the company considers taking in the period directly following the assignment of the intended trustee and what role in its view the intended trustee should play. If the aim is to sell assets in bankruptcy, the court would for example need to be informed about the envisaged transaction and the (potential) purchasers.

Similar to a trustee in bankruptcy, the intended trustee should act in the interest of the joint creditors. This entails that prior to bankruptcy he should take such actions that would lead to creditors’ claims in bankruptcy to be satisfied as much as possible. He, however, does not have the same powers as a bankruptcy trustee. As an example, the intended trustee has no power to administer and dispose of assets of the debtor, which control the bankruptcy trustee would have. His task is (solely) to observe and to inform (or be informed) about (or on) the debtor’s business and the restructuring possibilities to facilitate the smooth implementation of a transaction in bankruptcy.

Current status of proposal

Following criticism of market parties, a revised proposal was published wherein a number of provisions were added. Importantly, the following revisions were made:

• At the time the request is served, the debtor must show that during the ‘silent preparation phase’ he will still be in a position to meet his current and new payment obligations (including the proposed liquidator’s salary).
• The request can only be approved if the debtor demonstrates that a ‘silent preparation phase’ has added value in his specific situation. Added value will be deemed to exist if it can be shown that the preparation may reduce the losses for the parties involved in the event of an insolvency to such an extent, or increase the chances of a sale of profitable parts of the business carried on by the debtor following a possible declaration of insolvency for the highest possible sale price while maintaining the highest possible sale price and the greatest possible employment to such an extent, that this outweighs the fact that the preparation is occurring in silence.
• In view of the interests of the creditors and other parties involved, the court can now also impose further conditions on the nomination of a proposed liquidator. For example, the Works Council can (on a confidential basis) be involved in the ‘silent preparation phase’.
• If it turns out that on a request for the nomination of a proposed trustee a director has provided incorrect information about the added value for the preparation of the bankruptcy with a view to making use of the preparation process for improper purposes, it will be assumed that the director has performed his duties improperly and that the improper performance of his duties is a material cause of the insolvency. Consequently, the director will be at risk of being held liable by the liquidator for any shortfall in the estate on a bankruptcy. In addition, if the director has not complied with the duty to provide information as mentioned above, a civil law prohibition of management may be imposed on him.

Some of the provisions have not been retained in the revised proposal. For example, the earlier proposal contained a provision to the effect that (briefly) the proposed trustee could declare that it could reasonably be expected that in the event of an insolvency a trustee would not set aside a particular legal act on the grounds of fraudulent preference. Following criticism in the consultation process, this provision has not been retained.

At the moment, due to delays in the legislative process with the Dutch ministry, it is not clear when the proposal on the Dutch pre-pack will be implemented in Dutch legislation. The expectation is currently that implementation will take place in 2017.

Dutch scheme

Current practice

Companies that seek to cram down creditors in the Netherlands can only do so in an insolvency proceeding. Outside of insolvency, companies can informally offer a ‘composition’ to their unsecured creditors, but creditors are free to decide whether they cooperate or not. This could lead to a situation where one creditor can frustrate a restructuring of debts outside insolvency. Another issue identified with the current practice is that secured creditors are not bound by a composition in insolvency. As a result of these limitations, a select number of Dutch companies have recently been restructured via for example an English scheme of arrangement.

Key features

The company itself can offer a composition to restructure its debts outside an insolvency proceeding. Creditors can also offer a composition to co-creditors and shareholders of its debtor. A creditor may, however, only offer a composition if he (i) has ascertained that the company is heading for a bankruptcy and (ii) has provided the company with the opportunity to offer a composition itself. Required in any event is that the company has its centre of main interest in the Netherlands.

The composition can be offered to (a number of) creditors and shareholders, who can be divided in different classes. It is left up to the offeror of the composition to introduce tailor made classes depending on the circumstances of the case. The only criterium is that creditors/shareholders claims and/or rights that can reasonably be considered equal should be made part of the same class. Relevant is that the claims and/or or rights of the creditors or shareholders should be equivalent to such an extent that it can reasonably be expected that they will come to a joint point of view on the composition.

Starting point is that the offeror can design the composition as he deems fit. An interesting element in the proposal is that also claims of surety’s, joint and severally liable debtors and guarantee providers can be amended by the composition. Furthermore, it is possible to amend contracts via the composition, such as a rent reduction for lease agreements (subject to a statutory opt-out for the counterparty). Currently the Dutch Bankruptcy Code does not provide a possibility for these aspects.

In order to create further flexibility the draft legislation provides that voting on the composition shall take place according to the procedure that is provided for in the composition by the offeror. A class has approved the composition, if (i) an ordinary majority of creditors/shareholders that form such class and have participated in the voting, has voted in favor and (ii) such majority represents at least 2/3 of the amount of claims of the participating creditors or 2/3 of the issued share capital of the participating shareholders. Only shareholders and creditors whose rights are altered by the composition are entitled to vote.

If a composition has been approved by the required majorities of shareholders/creditors, the court will declare it generally binding (i.e. also on dissenting creditors and shareholders) at the request of the offeror, unless the interests of one or more creditors or shareholders will be damaged disproportionally. Whether interests are damages disproportionally is for the court to decide on a case by case basis. The court can also declare a rejected composition generally binding. Required is that the court is of the view that the rejecting creditors or shareholders could reasonably not have voted in the manner that they did. Rationale behind this feature is that creditors or shareholders whose claim would not be paid in a bankruptcy of the company (or would receive a substantially lower distribution in such case) should not have the power to block a restructuring as they have no interest to do so.

Current status of proposal

The expectation is that the proposal on the Dutch scheme will be implemented in the course of 2017, although a delay in implementation seems increasingly likely.