Group companies and the CERP Act

The Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) contains alternative rules for group companies. The reason for this separate treatment is that it is relatively common for companies that are part of the same group to guarantee performance of each other’s obligations. Under the CERP Act, guarantors remain liable towards creditors for the difference between the original debt and the amount that the debtor pays based on a composition. As a consequence, in group situations, issuing guarantees will then cause the same liquidity difficulties to carry over to multiple companies. In practice, if one company plans to offer a composition under the CERP Act, the other companies in its group will wish to join in order to avoid these problems for guarantors. To prevent each company from needing to offer a separate composition, the legislature has introduced a new mechanism in section 372(1) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet).

This mechanism makes it possible to alter the guaranteed rights of creditors in respect of companies that are part of the same group as the debtor in the debtor’s composition. To qualify for this arrangement, the companies must form a group as defined in section 24b, Book 2 Dutch Civil Code, i.e. an organisational and economic unit. The company submitting the petition on the group’s behalf is referred as the “principal debtor”. To prevent situations where each company is forced to petition the local court in its district separately, the group may choose a single court, based on its territorial jurisdiction. That court will then have exclusive jurisdiction for the group as a whole.[1] Not only does this improve the procedural efficiency, it also prevents fragmentation.

How this works under the CERP Act

Corporate groups are often made up of large numbers of companies, including companies established in other countries. The CERP Act does not allow healthy companies to take part in the composition: the composition may only cover companies that are in a situation as described in the CERP Act, i.e. where it is reasonable to assume that the company will be unable to continue to pay its debts, but still has viable operations. The court will review this before confirming the composition. One factor that will significantly facilitate the CERP Act in these situations is that non-Dutch companies may also participate if the Dutch court has jurisdiction under the revised Recast Insolvency Regulation. Proceedings under the CERP Act are available to all companies whose centre of main interest (or “COMI”) is situated within Europe.

Another requirement is that the composition may only cover creditors’ rights to payment of or security for fulfilment of the principal debtor’s obligations, or for obligations for which the other companies are jointly liable. This means that it may not include separate obligations of the other companies that are not linked to the principal debtor or obligations for which they are not jointly liable.

If a restructuring expert (in Dutch: ‘herstructureringsdeskundige’) is appointed, it is also important that the companies involved must consent to the modified rights. The last factor that needs to be reviewed is whether the court handling the proceedings would also have jurisdiction if the companies involved offered separate compositions or petitioned separately for confirmation of a composition. This will often be the case, as the only issue here is territorial jurisdiction. When confirming the composition, the court will review each company separately to determine whether the requirements for confirmation are satisfied, and whether confirmation is not prevented by statutory grounds.

If the principal debtor decides to involve the other companies, and those companies also satisfy the requirements under section 372(1) Insolvency Act, the principal debtor must submit the same information for those companies as it was required to provide about itself under section 375 Insolvency Act: enterprise value, reorganisation value, etc. The group may decide for itself which company to designate as the principal debtor. Conceivably, this will be the company with the greatest amount of debt, since the principal debtor may include every one of its debts in the composition.

For reasons of procedural efficiency, the legislature has chosen to only allow the principal debtor to petition the court on the group’s behalf. This includes requests to impose a cooling-off period (section 376(1) Insolvency Act), to pronounce an interim ruling on important aspects of the contemplated composition (section 378(1) Insolvency Act), to order preliminary relief (section 379(1) Insolvency Act) or to proceed with confirmation of the composition (section 383(1) Insolvency Act).

Separate mechanism for group companies

In summary, the mechanism for group companies is a useful one, and serves to prevent situations where a single company initiates CERP Act proceedings and burdens the other companies with large debts as a result of their guarantees. At the same time, the mechanism would seem less advantageous for creditors, as group guarantees will have less value if they can also be included in the composition.

[1] Section 369(8) Insolvency Act.