Governance in the Dutch Scheme: the role of the restructuring expert (magazine article)

Introduction

It is commonly accepted that, in times of financial distress, the sooner a company takes action and begins to restructure, the more likely it will be to avert loss of capital, jobs and knowhow. This goes a long way to explaining the culture of “business rescue” that has emerged in Europe and elsewhere – or in the words of the Dutch legislature: a culture that revolves around increasing companies’ capabilities for reorganising.

One of the restructuring instruments that the legislature wishes to provide to distressed companies is that of an enforceable composition, as laid down in the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act” or “Dutch Scheme”; in Dutch: Wet Homologatie Onderhands Akkoord, or WHOA), which will be incorporated into the Dutch Bankruptcy and Insolvency Act (Faillissementswet). According to the Minister, this restructuring instrument fills a widely recognised need to incentivise boards of directors to swiftly identify and resolve financial difficulties jeopardising their company’s future as a going concern.

The new legislation provides a scheme for court approval of extrajudicial compositions between companies and their creditors and shareholders. Once the court has approved the composition (and assuming that certain criteria have been satisfied), it will have binding effect in respect of all creditors and shareholders that it affects, even if they voted against the composition. In other words, where the existing Dutch legal system does not make any provision for enforceable compositions that do not involve insolvency proceedings or suspension of payments, and each individual creditor has the ability to block the efforts to restructure the company, the Dutch Scheme will in fact allow for this possibility.

The restructuring instrument under the new legislation is aimed (at least primarily) at companies that in essence are viable and profitable but, burdened by excessive debt or excessive structural costs, need to reschedule their debts and obligations to avert a suspension of payments or insolvency. The basic premise is that the new legislation will add new possibilities to the existing restructuring practice. First, a company that is in financial distress will need to reach a consensual agreement with its creditors and shareholders about debt rescheduling. The option of an enforceable composition under the Dutch Scheme should be seen as a last resort. However, according to the legislature, the Dutch Scheme can also be used for companies that have no possibility for survival, where a controlled liquidation of the company’s assets through a composition under the Dutch Scheme offers creditors more than liquidating them in insolvency proceedings.

The legislature’s inspiration for the CERP Act lies in the Scheme of Arrangement and Chapter 11 proceedings. A key premise under the new legislation is that the company’s board of directors remains in control, meaning that the scheme leaves the “debtor in possession”, as it is called. In other words, the company (represented by its board of directors) does not lose control of its own assets, nor the power to dispose of them, and the board retains full and exclusive authority to represent the company in its normal operations – and in fact may not abdicate that responsibility, given that managing a company is its obligation.

However, the CERP Act also introduces a new phenomenon, whose role in restructuring attempts forms the topic of this contribution: the restructuring expert.

Criterion for appointing a restructuring expert

Section 371(3) Insolvency Act states that the court will appoint a restructuring expert on request if it is plausible to assume that the company will be unable to continue to pay its debts: in that situation, the court must grant a request from the company’s board of directors to appoint a restructuring expert. A restructuring expert must also be appointed if the request “is backed by the majority of the creditors”. Presumably, this refers to the creditors that will have the right to vote on the composition if and when it is offered.

The court will refuse to appoint a restructuring expert if “it can be made plausible that this does not serve the interests of the body of creditors”. A key factor in whether or not the request should be granted is whether appointing a restructuring expert will directly or indirectly add value for the body of creditors, based in part on the potential delays and added cost of appointing a restructuring expert.

In my view, whether or not appointing a restructuring expert serves the interests of the body of creditors will depend on the concrete facts and circumstances of the case that the court needs to consider when weighing the various parties’ interests. The Explanatory Memorandum on the new legislation illustrates this using a scenario where a creditor asks for a restructuring expert to be appointed “for no other purpose than to block or delay a viable restructuring process that has reached an advanced stage, and so improve its negotiating position, whereas such strategic behaviour and the resulting delay will harm the body of creditors”.

When a restructuring expert will be brought in

Given that the basic premise for the legislature is that the company must first attempt to agree on a composition with its affected creditors before drawing on the Dutch Scheme, it is safe to assume that a restructuring expert will only be brought in when this offers added value. As such, I believe that a request to appoint a restructuring expert will generally only be granted if:

• the board of directors itself is not doing enough, or anything at all, to avert insolvency;
• a small group of creditors or shareholders are blocking the rescue attempt, despite a preference among relevant stakeholders for the company to continue;
• the board finds itself caught in a conflict of interests between shareholders and creditors, or the board requests the appointment to prevent any appearance of conflicting interests or to improve the confidence in the composition process and so the likelihood of success;
• the board has already initiated a restructuring process, but some stakeholders have little or no remaining confidence in the board and the success of the process as conceived by the board, or concerns have been raised that the board is using the Dutch Scheme for improper purposes. In these situations, a restructuring expert can be brought in as an “independent external third party” to restore the confidence of the creditors involved and the confidence in the process, and so improve the chances of the composition process succeeding.

These scenarios therefore do not involve a consensual composition process, but a conflict of interests with the potential to prevent the restructuring from succeeding.

What the restructuring expert does

The restructuring expert’s primary job is to prepare a composition and initiate the process towards its confirmation by the court. Only the restructuring expert may offer the composition. However, the board of directors may present the restructuring expert with its own composition and ask for it to be offered to the voting creditors and shareholders. According to the Minister, this allows the company to “present its own composition to the voting creditors and shareholders via the restructuring expert.”

The restructuring expert is responsible for ensuring that the actual composition and the process towards its confirmation in court both satisfy the criteria imposed by the CERP Act.

The actual composition

The restructuring expert is responsible for making sure that the substance of the composition, including the information that is required under section 375 Insolvency Act, is complete and truthful: not only, therefore, information about the actual composition (e.g. the classification of creditors and the criteria used, the financial implications of the composition for each class and what values can be realised under the composition and in the event of insolvency), but also information about the company itself: a statement of income and expense, a list of voting creditors and shareholders and similar details.

That final category also includes – in short – the actual restructuring plan. The restructuring expert will need to provide information about the company’s finances, as well as describing:

• the nature, extent and cause of the financial distress;
• what the company has already attempted to overcome its difficulties;
• what restructuring measures the composition covers;
• how those measures will contribute towards solving the difficulties; and
• how long it is expected to take to carry out those measures.

As a rule, if any of this information is missing, the court will refuse to confirm the composition, although not necessarily: the court may nevertheless confirm the composition if the shortcomings in the information provided could not, within reason, have led to a different voting outcome.

The process

Presenting the composition

The restructuring expert is also responsible for making sure that the composition is presented to the voting creditors and shareholders, or else that they are told how to access the composition, with a reasonable notice period (at least eight days before the vote).

The restructuring expert has discretion in how to present the composition; what matters is that the creditors and shareholders must be able to form a considered opinion on the composition, in digital or electronic format. Another possibility is to publish the composition online. The creditors and shareholders must have sufficient opportunity to study the composition, including any changes made before or during the voting procedure; exactly how much time this is will depend on the actual circumstances and may therefore in fact be longer than eight days. It is also important to note that, if the contemplated notice period raises any concerns or queries, the restructuring expert may ask the court to rule on whether the notice period is “reasonable”.

If this notification obligation is not satisfied, the court will refuse to confirm the composition, unless the creditors or shareholders that were not duly notified declare themselves in favour of the composition.

Conducting the vote

The restructuring expert’s next task is to establish when to hold the vote on the composition, and how. Votes can be conducted in writing, though the restructuring expert might prefer to convene a meeting, either in person or using electronic communication tools. Whatever procedure is chosen, the voting creditors and shareholders should be able to actually vote according to their various classes. The restructuring expert’s choices must be disclosed in the composition. To regulate the vote, the restructuring expert may prepare rules of procedure for voting and meeting.

After the vote, the restructuring expert must prepare a report of the vote as soon as possible (within seven days at most), and make it available for the voting creditors and shareholders “without delay”. The report must disclose who voted, and how, and whether the restructuring expert intends to refer the composition to the court for confirmation. It must also describe anything else that occurred in connection with the vote or the meeting, in so far as it is relevant for the purposes of the request for confirmation. This will allow the creditors and shareholders to verify the outcome of the vote and, based on the report, to consider whether or not to object to the confirmation. 

Requesting confirmation

If the criterion has been met that at least one class has voted in favour of the proposed composition, the restructuring expert may ask the court to confirm it. In some situations, however, the board of directors must first give its consent: i) if the restructuring expert was appointed at the request of a party that was not the board, ii) if not all classes voted in favour of the composition, and iii) if the company, or its corporate group, has a workforce of fewer than 250 and an annual revenue for the previous financial year of no more than €50 million, or the balance sheet total at the end of the previous financial year was no more than €43 million. This means that the request for confirmation will frequently require the board’s consent. If the restructuring expert so requests, however, the court may rule that the board has no valid reason, and that ruling may then serve instead of the board’s consent.

If and when the court has made such a ruling, the restructuring expert must share the details of the hearing where the court will handle the confirmation with the voters in writing and without delay. This requirement is therefore stricter than for convening the vote: if the voters are not notified in writing and without delay, this constitutes grounds for the court to refuse the confirmation, unless the voters concerned declare that they accept the composition.

Impartial, independent and effective

Restructuring experts are expected to perform their duties “effectively, impartially and independently”.

The CERP Act provides some guidance to help them carry out their duties effectively, including the following:

• the debtor and all persons directly involved in the business that the debtor runs – meaning the members of the company’s board of directors and supervisory board, its shareholders and its employees – must share all necessary information and give all necessary cooperation for the proper fulfilment of the restructuring expert’s duties, both on request and on their own initiative;
• the restructuring expert has the authority to examine all accounts, records and other relevant company information “that the restructuring expert believes necessary for the proper performance of the restructuring expert’s duties”.

The restructuring expert may in fact enforce this by requesting the information in court, subject to cumulative penalties to enforce compliance.

High expectations

I believe that the restructuring expert’s duties should not be interpreted as only preparing the composition and overseeing the process leading up to its confirmation. Given that the company, or its board of directors, retains the exclusive authority to manage and dispose of the company’s assets, the restructuring expert probably does not have any responsibilities in that area. However, to be effective, the restructuring expert must not be blind to what is happening within the company during the composition process.

To my mind, the restructuring expert cannot passively wait to be handed the desired information, but will need to actively seek out the information that is essential for carrying out the expert’s duties: by asking for it, and by interviewing the board/management and key figures on the work floor, for example, in pursuit of that information. A proper understanding will be needed of numerous aspects of the company. The restructuring expert needs to know about the company’s operations, its clients/customers and suppliers/vendors, its strategy, key individuals at the company, the operations that yield the best margins, and so on, but also what caused the financial distress and how to eliminate those causes. Often, the composition with the creditors will be only one part of a larger, more general restructuring plan that might also involve divestments, transformations or changes/additions to management/the board.

Restructuring experts are expected to work well with the board of directors and the supervisory board, which will potentially put them in a position where they need to convince the board of directors that successfully restructuring the company based on a composition will require particular measures and in some cases even bringing in the necessary expertise from outside. This could include a financial expert to prepare or validate a liquidity forecast, a lawyer specialising in restructuring to advise the board as it moves forward with the restructuring process, or an expert to scrutinise the company’s strategy and suggest adjustments where necessary.

The restructuring expert will need to know what is happening within the company and must study it in every aspect. The expert will need to understand the company’s financial situation – not only on the day of the restructuring expert’s appointment, but continually, as it were, throughout the entire composition process. For virtually every single distressed company, its liquidity (or more precisely: its lack of liquidity) is a key factor, or even the deciding factor. Restructuring experts can only properly carry out their duties by reviewing existing liquidity forecasts; if none are available, the restructuring expert will need to insist that they are prepared. The expert should know what contractual and other rights and obligations the company has that are reflected in the liquidity forecast.

At the same time, managing and carefully handling the diverse interests of the equally diverse stakeholders (from the board of directors and shareholders to creditors and employees) is also key. This demands open and transparent communication, the ability to build bridges, a lack of preconceptions, a focus on the road ahead and a shrewd intelligence. Above all, restructuring experts need to properly understand their role in the process as a whole.

The restructuring expert’s authority

Besides assigning the restructuring expert the job of initiating a composition process (if possible) and hopefully completing it, the CERP Act also defines a number of specific powers for the restructuring expert to exercise: the authority to unilaterally cancel active contracts, to request a cooling-off period, to ask the court to rule on issues and to ask the court to impose relief necessary to secure the creditors’ and shareholders’ interests.

While these powers increase the likelihood that the composition process will succeed, they might also lead to tensions with the board of directors and/or the supervisory board, if only because they are not exclusively reserved for the restructuring expert: the board of directors has the same powers.

Whose interests does the restructuring expert serve?

The legislative background to the CERP Act seems to imply that the restructuring expert’s duties are presumed to serve the interests of the body of creditors. However, I believe that while the creditors’ interests should carry significant weight with the restructuring expert – as they should with the distressed company’s board of directors – it is also important to consider the interests of the company itself, and its other stakeholders.

The purpose of an extrajudicial composition, after all, is ultimately to secure the survival of viable companies as a going concern. The purpose of an extrajudicial composition is to enable companies to continue their viable operations. The principal purpose of the CERP Act, according to the legislative background, is to protect the interests of both the creditors and the other stakeholders.

When carrying out their duties, restructuring experts must manifestly consider the interests of the body of creditors – but also those of other economic stakeholders, including the company’s workforce, since it is in their interests to secure the company’s survival as a going concern after the composition has been confirmed. Nevertheless, I also believe (and this is borne out by the premise underlying the legislation: to use compositions as a means to rescue viable companies) that restructuring experts should consistently consider the company’s own interests when carrying out their duties and exercising their powers under the CERP Act.

I should qualify this, however, by adding that the creditors’ interests will carry greater weight under Dutch Scheme proceedings aimed at liquidating the company’s assets.

In conclusion

The task that the board of a company in financial distress faces is a difficult one. However, the Dutch Scheme offers them help: a new statutory instrument intended to make it possible for distressed companies to restructure. It is important to bear in mind though that the new legislation is intended primarily for situations where consensual debt rescheduling is impossible, or at least seems to be. In those situations, it is safe to assume that the restructuring expert will play an important part, including by influencing the company’s internal governance. To my mind, a restructuring expert is not an “expert” as such, but a court-appointed officer with the duty to work with the board of directors and the supervisory board to ensure, wherever possible, the company’s survival as a going concern through a composition. Restructuring experts should be aware that they must carry out their duties and exercise their powers under the CERP Act not only in the interests of the creditors, but in the interests of every capital provider with an economic stake, and must in particular bear in mind the interests of the company itself, and as such a plurality of interests.