Offering a composition under the CERP Act: closed and open proceedings

Closed and open proceedings

Under section 369(6) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet), the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) provides for two forms of proceeding towards a composition: closed proceedings and open proceedings. A debtor may offer a composition under section 370(1) Insolvency Act if “it finds itself in a situation where it is reasonable to assume that it will be unable to continue to pay its debts”. Under that section 371(1), the debtor, any creditor or shareholder, or the debtor’s works council or employee representatives may also petition the court to appoint a restructuring expert (in Dutch: ‘herstructureringsdeskundige’), who can then offer a composition.

If the court receives a petition under the CERP Act, it must first establish whether it has jurisdiction. Next, it must determine whether a composition should be reached in closed or open proceedings.

In closed proceedings, jurisdiction is determined in accordance with section 3 Dutch Code of Civil Procedure. For open proceedings, the key factor is whether the centre of the debtor’s main interests (known as the debtor’s “COMI”) is situated an EU Member State (except Denmark). If the COMI is situated outside the EU, or in Denmark, the court’s jurisdiction is determined under section 3 Dutch Code of Civil Procedure. If the Dutch courts have jurisdiction, the specific court district must then be determined in accordance with sections 262 and 269 Dutch Code of Civil Procedure (section 369(7) and (8) Insolvency Act). 

The petitioning party must indicate a preference for closed or open proceedings. The petition must provide arguments substantiating that preference. If the petitioning party is not the debtor, the court will allow the debtor the opportunity to express its views on the petition before the court makes its ruling.

Differences between closed and open proceedings

In closed proceedings, no public announcement is made that the debtor or restructuring expert intends to offer a composition. All petitions to the court under the CERP Act are heard in camera. In open proceedings, conversely, the process is publicly disclosed, when the intention to offer a composition is published in the Insolvency Register, the Netherlands Government Gazette and the Commercial Register of the Chamber of Commerce (section 370(4) Insolvency Act). Additionally, petitions in connection with the proceedings are heard in open court (section 369(9) Insolvency Act).

Open proceedings: what information to disclose

If publication is required under section 370(4) Insolvency Act, that information will include the date on which the proceedings began, the competent court, the basis for the court’s jurisdiction (including in an international context) and the debtor’s details. Additionally, petitions in connection with the proceedings are heard in open court to ensure that all information about the composition becomes publicly available.

Motives for choosing closed or open proceedings

The court will consider the arguments presented by the petitioning party to determine which form of proceedings to declare applicable to the composition. Once the court has decided on closed or open proceedings, the entire process must then follow the appropriate rules of procedure; this means that switching to the other form is impossible once the proceedings are underway. It is very important, therefore, to carefully consider this choice, and the petition must be properly argued. So what might motivate the petitioner to prefer one form over the other?

As a rule, it is not in the debtor’s interests to publicise its difficulties, and the debtor will prefer closed proceedings in order to work in relative peace and quiet before offering a composition. Publicity may cause the debtor to lose revenue, and might harm the debtor’s reputation. It could also benefit competitors, and so diminish the likelihood of the restructuring having a successful outcome.

So what reasons might exist to prefer open proceedings? If the debtor, or divisions of the debtor’s group for which the composition is offered, are established in the EU (except Denmark), open proceedings offer some benefits: open proceedings are governed by the Recast Insolvency Regulation, and accordingly the confirmation judgment will automatically be recognised in all EU Member States (except, again, Denmark). This can make it easier to complete an international restructuring (particularly for a corporate group) in which a composition is offered, and will make it more effective and relatively faster.

Open proceedings: the logical form if international aspects are involved?

Unfortunately, this is not automatically true. First, a key issue is that the international recognition of a confirmation judgment applies to open proceedings in the EU (except Denmark). A confirmation judgment may also be recognised abroad in closed proceedings, if this is possible under the general international private law regime of the country where recognition is sought; this will need to be established beforehand. Another factor is who is offered the composition: is it intended only for shareholders, or is it also intended for all Dutch and non-Dutch creditors of international divisions, for example? In the latter situation, open proceedings might be the logical choice. However, it is also important to realise that the rights of financiers with security interests abroad, and the rights of some creditors, are protected under Articles 8ff. of the Recast Insolvency Regulation, despite the automatic recognition of a confirmation judgment in open proceedings. As a result, a composition cannot be used as an argument against a financier with security interests abroad, for example. Similar rules apply to other situations, for example a cooling-off period. Parties’ rights to goods situated abroad cannot be restricted if a cooling-off period is announced. The statutory provisions of section 373(4) Insolvency Act cannot be used as arguments against them then, based on the Recast Insolvency Regulation.

Closed and open proceedings: conclusion

If a court receives a petition for proceedings under the CERP Act, the court must first establish whether it has jurisdiction, and then determine what form of proceedings to apply: closed or open. This is a very important choice, with significant implications. When the proceedings begin, this choice must be weighed carefully, and the request for a particular form must be clearly argued. It is impossible to switch between the different forms once the proceedings are underway, and the form that is chosen plays a key role in whether or not the restructuring will have a successful outcome.