The Dutch Scheme and the role and influence of works councils

The new Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act” or “Dutch Scheme”; in Dutch: Wet homologatie onderhands akkoord, or WHOA), which will enter into force on 1 January 2021, is a key instrument for companies that are intrinsically profitable, but are on the verge of insolvency as a result of excessive debt. The Dutch Scheme allows companies to reinforce their capabilities for reorganising and so avert insolvency. Although the new legislation explicitly excludes employment contracts from its scope, that does not mean of course that the company’s workforce does not play a meaningful part in the process: it is important not to understate the role of the works council or employee representatives.

The Dutch Scheme: what does it involve?

In the present situation, it is almost impossible for distressed companies to form an extrajudicial composition with their creditors unless all the company’s creditors consent. With a single creditor being able to block the composition, this creates problems for the debtor, and generally leads to insolvency.

To help prevent these situations, the CERP Act provides for legal proceedings where the court is asked to confirm an extrajudicial composition on the restructuring between the company and its creditors and shareholders. Once the court gives its approval (homologatie in Dutch), the composition will have binding effect in respect of all creditors and shareholders affected – including the creditors and shareholders that voted against the composition – provided that its substance and the decision-making process satisfy a number of criteria. As mentioned above, the company’s workforce is excluded from the scope of the enforceable composition: in so far as any employees have claims on the company (for example for their wages), they retain those claims for the full amount.

On the one hand the new legislation is aimed at companies that, though struggling with excessive debt, still possess viable operations, while on the other it is designed to ensure a controlled process for liquidating the assets of companies that have no further possibility for survival. In the latter situation, the Dutch Scheme should offer creditors a more favourable financial outcome if the company’s assets are liquidated without an insolvency.

Works councils and employee representation committees

Under the Dutch Works Councils Act (Wet op de Ondernemingsraden), any company running a business with a workforce of generally at least 50 people is obliged to set up a works council.

If the workforce consists of at least 10 people, but fewer than 50, the company is obliged to arrange for a committee of employee representatives if more than half the workforce so request.  

The works council and employee representatives sometimes play a part in the formation of an extrajudicial composition.

Works council and employee representatives: role and influence

The company is not the only party that can initiate the extrajudicial composition process: the company’s creditors and shareholders also have this power, but the works council or employee representation committee as well. They might wish to do so, for example, if the board of directors is unwilling or seems unable to offer an extrajudicial composition to restructure the company, and insolvency looms. In these situations, the works council or employee representatives could request the court to appoint a restructuring expert to prepare a composition in the board’s place, and present it to the company’s creditors and shareholders. As a rule, the actions of the works council or employee representation committee will be motivated by a desire to save jobs. To read more about the particular role and responsibilities of the restructuring expert, see also this blog.

The right to initiate the appointment of a restructuring expert gives the works council or employee representatives an important role under the new legislation. A key factor here is that the works council (and the employee representation committee too, to a lesser degree) have a right under the Works Councils Act to demand consultation and information from the company. Those rights can be exercised to request information or clarification, for example about the company’s survival as a going concern. The works council or employee representatives can then decide whether or not to ask the court to appoint a restructuring expert.

Another factor is that an enforceable composition is generally part of a larger parcel of reorganisation measures: besides restructuring its debts, the company will need to update its operations to cut costs, which might involve forced redundancies (individual or collective) or modifying or cutting back the company’s activities. If the company is contemplating these measures, the works council (and the employee representation committee too, again to a lesser degree) will have a right to express its advice before any decision is made. The company is obliged to seek that advice at an early enough stage to allow the works council or employee representatives to materially affect the decision. Here, too, the works council and employee representatives play an important role, meaning that they can play an active, or even proactive, part in the restructuring.

Essentially, this means that the introduction of the CERP Act on 1 January 2021 will give works councils and employee representation committees greater influence – and companies can already prepare for the Dutch Scheme to be invoked as soon as the new calendar year begins. It is important, therefore, that they familiarise themselves with the new legislation, to recognise any necessity to restructure and reorganise on time.