Restructuring, the CERP Act and the supervisory board

The COVID-19 coronavirus is not only causing a sad loss of life, its impact will inevitably carry over to the economy, affecting numerous companies. Faced with the resulting crisis, boards of directors and supervisory boards everywhere will be forced to consider the future of their companies, and in some cases will need to carry out significant restructuring efforts to survive the financial difficulties.

Act on Confirmation of Extrajudicial Restructuring Plans

To help struggling companies, the Dutch House of Representatives recently agreed to the introduction of a new restructuring instrument: the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet Homologatie Onderhands Akkoord or WHOA). The present contribution provides a brief discussion of the role of the supervisory board in connection with this restructuring instrument. Although the legislative proposal does not assign the supervisory board any specific duties, it will nevertheless play a key role in the process. At a minimum, the supervisory board will have an important part to play both in the runup to the composition proceedings and while they are underway.

Duties of the supervisory board: general

A company’s supervisory board has a twofold task: to advise the board of directors, and to oversee the company. When carrying out these duties, the supervisory board must at all times consider the interests of the company and its operations. Although the supervisory board may in principle rely on the information shared by the board of directors, some situations demand closer supervision. As case law shows, this includes cases where the supervisory board receives indications from which it can, or should, infer that extraordinary circumstances have arisen that demand a higher level of supervision. For example, increased supervision may be necessary when the company makes major investments or changes its strategy. It will certainly be needed if the company is struggling financially and is forced to restructure: in times of crisis, a company’s decisions will generally have a major impact on its operations and its ability to continue as a going concern.

Composition

So essentially, if a composition is a possibility, the company’s supervisory board will generally already be in a higher state of alertness, and should already be discussing with the board of directors what measures need to be taken. The supervisory board will also need to consider whether the incumbent directors will be capable of steering the company through the crisis, including whether the relevant stakeholders have faith in them. If not, the supervisory board must intervene.

One possible way of securing the company’s future as a going concern might be to initiate a composition; in fact, the board of directors has an obligation to take prompt action to protect the interests of all the stakeholders in the company and investigate what possibilities exist to secure its future as a going concern and minimise the potential harm to its stakeholders. The supervisory board has the responsibility of ensuring that the directors carry out this duty and, if they do not, taking action.

Role of the supervisory board under the CERP Act

The procedure under the CERP Act may be initiated by the company itself, or by a third party such as a creditor, a shareholder or the company’s works council. For the company to initiate the procedure itself, the board of directors will need to pass a resolution to that effect. In the future, the company’s articles of association might also dictate that initiating a CERP Act procedure requires the approval of the supervisory board. The procedure can be initiated if and when the company finds itself in a situation where “it is reasonable to assume that it will be unable to continue to pay its debts”. The board of directors and the supervisory board will need to work together to determine whether the company’s financial struggles have brought it to that point.

Important role for the supervisory board

Once the procedure has begun, the supervisory board will again have an important role. The supervisory board must carry out its duties in the best interests of the company and its operations. The question is how this should be given shape in the event of a composition. At a minimum, the supervisory board may not act in the interests of separate groups, and must give consideration to all the company’s stakeholders: both shareholders and creditors. In the event of a composition, of course, it is quite conceivable that the interests of those two groups will be diametrically opposed – which might already happen before the procedure is initiated. For example, the legislative proposal states that if the composition requires the company’s agreement shareholders may not interfere to any unreasonable extent to prevent the board of directors from agreeing to CERP Act proceedings. As such, it is possible that the supervisory board will find itself inadvertently caught between the company’s directors and its shareholders. According to established case law, the supervisory board has no obligation to mediate in those situations; however, if the conflict escalates the supervisory board may voluntarily assume an important role and oversee the directors as they consider the interests at stake.

CERP Act proceedings

Even during proceedings under the CERP Act, the company’s normal business will continue, and the supervisory board must still carry out its regular advisory and supervisory duties. If a restructuring expert is appointed, the supervisory board will also need to provide all information and cooperation, both on request and at its own initiative, that the restructuring expert needs to properly fulfil his or her duties.

At a minimum, the supervisory board must never try to remain uninvolved or collectively resign when a composition procedure begins, for example out of a belief that the supervisory board’s duties are no longer necessary under the circumstances. Something similar happened in KPNQwest: the company was struggling financially, and its supervisory board adopted the position that the banks would inevitably enforce their security interests and proceed to liquidate the company’s assets. In the Enterprise Court’s opinion, however, the supervisory board’s members were wrong to abandon ship: they in fact had a particular responsibility, the Court held, to assist the directors during times of financial difficulty and should not have simply accepted that the company had become completely reliant on the banks. They should instead have been more proactive, for example by seeking advice from external experts, and should have assisted the board of directors during meetings with potential buyers and investors. This same principle will also apply to negotiations to achieve a composition: both when determining the necessity of initiating the composition and during the actual proceedings, the supervisory board will need to provide “an extra set of eyes”.

Restructuring the company

In short, therefore, the supervisory board will need to carry out its duties with added intensity if the company is facing financial difficulties. One of its responsibilities will be to map out the possibilities for restructuring the operations. The legislative proposal on compositions could offer an effective solution for securing the company’s future as a going concern and limiting the harm caused to its stakeholders.