CERP Act: Consequences for contracting parties

The Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) describes a procedure for companies to restructure their excessive debt by agreeing on a composition with their creditors and shareholders. Where previously a composition required the approval of all the creditors, and a single creditor could block the restructuring efforts, this changes with the CERP Act.

The purpose of a composition is to modify the rights of creditors and/or shareholders with a view to a successful restructuring. The debtor, or (if appointed) the restructuring expert (in Dutch: ‘herstructureringsdeskundige’), has a great deal of latitude in how to give shape to the composition. However, for the composition to be confirmed, it must satisfy the criteria defined in section 384(2) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet). A composition must correspond closely to the contemplated restructuring. The purpose of the CERP Act is to give companies additional possibilities to restructure without becoming insolvent or applying for suspension of payments One requirement, however, is that the parties at which the composition is aimed may not find themselves in a worse position than they would if the debtor became insolvent.

Besides the possibilities for a composition under which outstanding debts are waived in part or in their entirety or a repayment deferral is agreed, section 373 Insolvency Act also provides for the possibility of restructuring current contracts. Section 373 also offers protection against “ipso facto” clauses, i.e. clauses that allow a contracting party to enforce or terminate its contract with a debtor if a composition is being prepared or has been offered. Under section 373(3) Insolvency Act, these clauses do not have effect, in order to prevent the debtor from losing valuable contracts and rendering the restructuring less likely to succeed.

Possibilities for restructuring current contracts

A company’s viability can be diminished by its contracts, and in particular its continuing performance contracts – for example leases for the premises of unprofitable branches of the company, that “weigh it down like an anchor”, other lease contracts, franchise agreements, supply contracts, purchase agreements and other fixed-term contracts. However, section 369(4) Insolvency Act explicitly rules out the possibility of restructuring employment contracts: to protect employees, any attempt to amend or cancel an employment contract remains subject to regular employment-law rules. 

Under section 373(1) Insolvency Act, the debtor or restructuring expert may offer a contracting party a proposal for amending or terminating the contract. While this possibility previously already existed under general contract law, a new rule that the CERP Act introduces is that the debtor may terminate the contract unilaterally if the other party does not accept the proposed amendment or termination. However, this termination then only has effect if the court approves it and confirms the composition.

Implications for contracting parties: left with nothing at all?

Under section 373(3) Insolvency Act, the debtor’s contracting party may not terminate the contract or bring forward the consequences of breach under section 80, Book 6 Dutch Civil Code merely by reason that the debtor is preparing or has offered a composition. The debtor, however, may amend its contracts, or even unilaterally terminate them before the contractual end date if the contracting party does not agree to the proposed amendments. So are the contracting party’s interests sufficiently protected then?

A debtor’s contracting parties are not left with nothing at all. The CERP Act contains sufficient safeguards to protect their interests:

• a creditor’s position may not be worse, if a composition is agreed, than it would be in the event of the debtor’s insolvency;
• unilateral termination by the debtor of a contract before its end date is subject to review in court: the court must authorise the termination, and the cancellation only takes effect if the composition is confirmed;
• the date of cancellation is the date on which the court renders the confirmation judgment, with a notice period specified by the debtor, unless the court considers that notice period to be unreasonable and establishes another period. Under section 373(1) Insolvency Act, a 3-month notice period will always be considered sufficient;
• if the contracting party is entitled to compensation for loss or damage if the contract is cancelled before its end date, the debtor may bring that compensation under the composition, pursuant to section 373(2) Insolvency Act – the debtor will then receive the same treatment as all other creditors in the same class and will be entitled, among other rights, to vote on the composition;
• if the debtor does not include the creditor’s compensation in the composition, it will need to be paid in full after the contract is cancelled;
• if the court has imposed a cooling-off period under section 376 Insolvency Act, section 373(4) Insolvency Act then dictates that any failure by the debtor to fulfil its obligations before the cooling-off period began does not offer grounds for amending obligations or for rescinding the contract or suspending its performance in respect of the debtor while the cooling-off period lasts, in so far as security has been provided for fulfilment of new obligations that arise during that period;
• lastly, the Explanatory Memorandum accompanying the CERP Act states that the board of directors of a debtor (if that debtor is a legal entity) is liable for any new obligations that are formed if and when the board knows, or should know, that the legal entity will be unable to fulfil them (known as the Beklamel standard).

Conclusion

Part of the Dutch government’s legislative programme for Recalibration of Insolvency Law (Herijking Faillissementsrecht), the CERP Act is aimed at companies with excessive debt that are at risk of insolvency but are essentially still viable, or have viable operations, by increasing their ability to reorganise. As a restructuring instrument, it will prove very valuable. Despite its technical complexity, the CERP Act also offers a great deal of latitude for preparing a composition, and gives added protection to creditors that might be affected by the composition.

By adding possibilities for offering a composition and amending contracts or terminating them before their end date as elements in the restructuring process, the CERP Act increases the ability of struggling companies to reorganise. In section 373 Insolvency Act, the CERP Act gives the debtor or restructuring expert a multitude of options, without losing sight of the other parties’ interests.