The Netherlands finally has its own state of the art restructuring law, the Dutch Scheme. What does that bring GCs? A great tool if handled with care and otherwise trouble. We will sketch the outlines and illustrate how it works on a group company, an acquisition, and a customer in financial distress.
Dutch financial restructurers have long been yearning for a tool like the U.S. Chapter 11 or U.K. Scheme of Arrangement. Since 1 January 2021 we have it. Some say it’s even better than its U.S. and U.K. counterparts: the Act on the Confirmation of an Extrajudicial Restructuring Plan, a.k.a. the Dutch Scheme (Wet homologatie onderhands akkoord or WHOA). Click here for the Act, in Dutch.
The Dutch Scheme solves the hold-out problem which arguably caused many essentially viable but over-indebted businesses to go bankrupt. Where they would otherwise have been able to re-emerge deleveraged in line with their earning capacity, shareholders or creditors could until recently basically veto a restructuring plan that would do just that. And they could do so even if in bankruptcy they would not receive anything (out of the money). This afforded them a disproportionate power over others that did have something to lose in bankruptcy.
Now that changed. If the debtor proposes a Dutch Scheme, classes of shareholders and creditors may vote on it. If at least two thirds of the amount voted in a class votes to accept, the plan is accepted by that class. And if at least one qualifying class of creditors accepts the plan the Court may confirm the plan. Once confirmed, it binds all shareholders and creditors subject to it. Also the ones that voted against or did not show up.
The plan may for example give creditors a haircut, extend the tenor of their debt or force a debt for equity swap. This enables a thorough restructuring of the balance sheet liabilities. In addition, the Dutch Scheme may help to improve EBITDA. It provides debtors the right to terminate onerous contracts (bleeders) and restructure the damages claim.
This sounds too good to be true. And of course it is not that simple. Strict conditions and limitations apply. For example, employment contracts are off limits (so no forced layoffs), there should be a likelihood of insolvency, due process is required and the plan should be reasonable (e.g. creditors must be better off than in bankruptcy). The conditions based on these principles are quite detailed and complex.
So how does this help GCs? In the board room they can say there is a new tool to realise the value of an over-indebted but viable subsidiary. If the sub is strategic, it can be financially restructured with relevant creditors taking a haircut. If the sub is non-core, a Dutch Scheme can make it ready for sale. Conversely, if the GC’s company is looking to acquire an over-indebted but strategically attractive company, it may consider to stipulate the target is first restructured so its creditors do not free ride into a recapitalised company without sharing in the losses. Finally, GCs may raise awareness that customers at the other end of an agreement which is profitable to the GC’s company but a bleeder to them, have a new stick because they can ultimately seek to terminate and discount the damages.
So where is the trouble? Even though the Dutch Scheme does not affect employment agreements, it does compare well to acting on redundancy. The process needs to be build up carefully and all relevant stakeholders need to have their say and be convinced there is no other reasonable option and that this works best for the collective. Otherwise, it’s trouble. It’s also trouble if the tool is not taken seriously in the hands of a customer trying to solve a bleeder.
So tool or trouble? It depends on how you use it and on your ability to anticipate others using it on you.
