Who is bound by the composition?

The Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) sets out a procedure for companies to restructure their excessive debt by reaching a composition with their creditors and shareholders. Where previously a composition required the approval of all the creditors, and a single creditor could block the restructuring efforts, this changes with the CERP Act.

The debtor or (if one has been appointed) the restructuring expert decides who will be offered a composition: one or more specific categories (“classes”) of creditors, for example, or all creditors and capital providers. A court-confirmed composition within the meaning of section 383 of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet) is binding for the debtor and for all creditors and shareholders that were allowed to vote on the composition (section 385 Insolvency Act). This means that it also binds the creditors and shareholders that voted to turn down the composition, and anyone who was entitled to vote but did not. If the composition is offered (only or also) to stakeholders with beneficial interests, such as holders of bond loans (section 381(4) Insolvency Act) or depositary receipts (section 381(5) Insolvency Act), the holders of the legal title to the interests are also bound by the court-confirmed composition. The judgment confirming the composition grants an enforceable title to voting creditors with claims that the debtor has not contested (section 386 Insolvency Act).

The creditors and shareholders that have been offered the composition are evidenced by the list of creditors and shareholders that must accompany the composition in accordance with section 375(2)(b) Insolvency Act. As a rule, it will be clear who they are. In some situations, for example if the debtor has issued bond loans, the composition may apply to holders of specific bond loans, without their identities actually being established. The manner of communicating with those parties will generally be established in the loan/trust terms. Mostly, those communications will be centralised.

If the voting creditors or shareholders were not all properly invited to vote

The debtor and (if one has been appointed) the restructuring expert are obliged to adequately notify all creditors and shareholders affected of the composition, the vote and the confirmation hearing. The court will turn down a request for confirmation if this requirement has not been met, unless the creditors and shareholders involved declare that they nevertheless agree to the composition (section 384(2)(b) Insolvency Act).

So does this mean that confirmation of a composition will not bind creditors or shareholders that were not invited to vote, and that have not otherwise indicated their acceptance of the composition? The fact is that the court will generally be unable to verify whether particular information has not been disclosed. As such, it is possible that the composition will be confirmed without all the creditors and shareholders having had the opportunity to learn about it and vote. At present, it is unclear whether the composition will then be binding for them. In legal literature, some authors have argued that the binding effect nevertheless applies, pursuant to section 385 Insolvency Act. Other writers however argue that a composition can only bind parties that were given adequate notice, and accordingly had the opportunity to vote.

Under section 387(2) Insolvency Act, section 165 also applies, modified accordingly, if the composition does not exclude the possibility to rescind the composition. Section 165 Insolvency Act gives every creditor that is bound by the composition the right to seek the composition’s rescission. Like any other creditor, a creditor that was not properly notified of the composition, the vote and the confirmation hearing may seek rescission of the composition under section 165 Insolvency Act only in so far as the debtor fails to fulfil the financial obligations under the composition: this clause does not give the creditor the right to rescind the composition for failure to fulfil the obligation under section 384(2)(b) Insolvency Act.

Does this mean then that creditors or shareholders that were not adequately notified of the composition, the vote and the confirmation hearing have no possibilities to take action against the composition? If a creditor or shareholder was deliberately and intentionally not notified of the composition, the vote and the confirmation hearing, it would seem logical that the court may refuse to confirm the composition by analogy with section 153(2)(3) Insolvency Act or on grounds of deceit (section 384(2)(g) Insolvency Act) or other circumstances (section 384(2)(i) Insolvency Act). If the composition has already been confirmed, any creditors and shareholders that believe they have been harmed as a result could seek damages on grounds of a tort.

Scope of the composition: does it extend to a creditor’s entitlement in respect of a third party?

It is also possible for creditors to have entitlements in respect of third parties in connection with the debtor’s debt, for example if a third party has given a creditor suretyship or has guaranteed fulfilment of the debtor’s obligations. The question is whether a composition will then cover those claims as well, or whether the entitlements in respect of those third parties will remain unaffected. Opinions in legal literature are divided, although it seems to be largely agreed that creditors’ claims on third parties cannot be modified without their consent. Unless other arrangements have been agreed, a composition only covers the relationship between debtor and creditor, except if the third party is also in a state of pre-insolvency.

To prevent such third parties from taking legal recourse against the debtor and so reversing the outcome of the restructuring, section 370(2) Insolvency Act prevents third parties from seeking redress against the debtor for any sums that they pay to creditors after the court has confirmed the composition. If a third party pays some or all of a creditor’s claim before the composition is confirmed, the resulting claim to recover that payment may be included in the rescheduling under the composition.

Conclusion

A court-confirmed composition has binding effect on the debtor and on all voting creditors and shareholders, even if they did not all vote to accept the composition or even vote at all. The confirmation judgment grants an enforceable title to all voting creditors with claims that the debtor has not contested.

It is unclear whether the composition will also be binding for creditors and shareholders that were not notified of the composition, the vote or the confirmation hearing, and have not otherwise expressed their agreement. Opinions on this question in legal literature are divided. However, it is primarily in the best interests of the debtor and the collective creditors and shareholders to successfully complete the restructuring process that the composition serves. To achieve this, and to prevent discussion, the composition must be prepared with great care, and all parties affected should be involved and informed adequately and promptly. Any disputes and disagreements that cannot be resolved may be referred to the court as part of the CERP Act process for a ruling under dispute resolution mechanism (section 378 Insolvency Act).