Dutch restructuring and insolvency developments

January 2014 | PROFESSIONAL INSIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

The Dutch legislator is working on various pieces of legislation that should increase restructuring options and decrease the number of bankruptcies in the Netherlands. The first piece of legislation provides for a legal framework for the appointment of a so-called silent administrator. This piece of legislation was published for consultation last October. The second piece of legislation shall introduce a legislative framework for a forced judicial composition outside a bankruptcy situation. By doing so, creditors may be forced to accept a certain composition offered outside of a bankruptcy situation. This legislation is expected to be published for consultation in early 2014. The third piece of legislation shall introduce measures that ensure that business operations can be continued during a bankruptcy, including an obligation for certain essential suppliers to continue providing their supplies in a bankruptcy situation. In addition to these pieces of legislation, the Dutch government has announced measures to fight fraud that involves bankruptcies. All these developments will be discussed in this article.

Silent administrator / pre-pack

The legislation on the appointment of a so-called silent administrator involves the appointment by the court of an independent silent administrator prior to bankruptcy. This silent administrator is the person who will be appointed as formal trustee if a bankruptcy cannot be prevented and the company is declared bankrupt. The new legislation intends to serve three purposes. First, the silent administrator may be asked to declare that a certain transaction prior to bankruptcy shall not be considered detrimental to the rights of creditors and that this transaction shall not be annulled on the basis of fraudulent preference. This decreases the risks and will make it easier to sell a certain part of the business in a situation where it is unsure if a bankruptcy can be avoided. Secondly the silent administrator can be asked under which conditions he is willing to sell the assets and the business of a company once a company is declared bankrupt. This makes it possible that the assets and the business of a company are sold immediately after the bankruptcy is announced. This so-called pre-pack ensures a continuation of the business without interruption, making a purchaser more willing to pay a price on the basis of a going concern rather than liquidation value of the assets. The third purpose of the appointment of a silent administrator is to make any necessary preparations that ensure a proper winding up in bankruptcy.

Even without the new legislation being in force, the Dutch courts do cooperate with the appointment of a silent administrator at this time. During 2012 and 2013, pre-packs have been executed more frequently and the number is increasing. There are possibilities for Dutch pre-packs even without an explicit legal framework for such pre-packs under Dutch law.

One of the challenges with a pre-pack is to ensure that due process is followed to maximise earnings. Ensuring continuation of the business while creating maximum appetite in the market for the assets to be sold are among the challenges that the troubled company and the silent administrator face. Financial difficulties and any forthcoming bankruptcy should be kept quiet to ensure continuation of the business, while on the other hand a maximum number of potential interested parties should be contacted to ensure a fair price. Lack of transparency and the possible distortion of competition are often cited as disadvantages of a pre-pack.

In the Netherlands it is the court that appoints a silent administrator and a request for this appointment should be made by the distressed company at the court. The request should explain why it is desirable to appoint a silent administrator before being put into formal administration. Whether or not the Dutch court grants the distressed company a silent administrator is currently – due to the absence of formal legislation being in force – dependent on the willingness of the relevant court. Overall, most courts have been willing to appoint a silent administrator when a distressed company has made such a request.

In most cases, where a silent administrator has been recently appointed, a pre-pack may be executed. In the public reports of some of these bankruptcies, the trustees did clearly explain why the pre-pack was executed and the benefits it offered above any alternatives. As may be expected, the reasons included the fact that the business could be sold for a higher price, jobs were preserved, lease agreements could be maintained and the damage to certain creditors was reduced due to the continuation of the business. It is clear that in a pre-pack creditors do suffer, but less than they would in a situation without a pre-pack.

Forced judicial composition

Early in 2014, a draft bill is expected to be published for consultation, which will introduce the possibility for a forced judicial composition outside a bankruptcy situation. Through this legislation, a minority of creditors may be forced to accept a certain composition offered outside of a bankruptcy situation if a certain qualified majority of the creditors approve the composition offered. It is intended that separate groups of creditors may be introduced and that only the groups of creditors that would receive a distribution in a bankruptcy situation would be entitled to vote. Currently, such forced composition is only possible in the Netherlands within a formal insolvency proceeding. Further details on this legislation are not yet known.

Measures to ensure continuance of the business operations in bankruptcy

It has also been announced that measures shall be introduced to ensure that business operations can be continued during a bankruptcy. This would include an obligation for certain essential suppliers to continue providing supplies in a bankruptcy situation. Payment for these supplies as of the date of bankruptcy should be ensured, but due payments from the period up to the date of bankruptcy will not be a valid reason to terminate supplies.

Anti fraud measures

The Dutch legislator has prepared legislation that makes it possible to prohibit a managing director who has been found guilty of improper management to exercise a managerial function for a maximum period of five years. In addition, imprisonment of directors is possible if they refuse to provide a bankruptcy trustee with the necessary requested information, if accounts were not properly kept, and in the case of excessive spending, embezzlement or if a certain creditor was intentionally preferred above others. All these measures should make it easier for a trustee and the public prosecutor to fight fraud.

In conclusion

Dutch legal practice shows a need for more restructuring options. This preserves value and saves jobs. More flexible restructuring options also lead to a better climate for establishing a business and prevent COMI shopping. This understanding has led many European countries, such as Germany, France and Belgium, to amend their legislation to provide more restructuring options. The Netherlands now follows this trend with new legislation.

Further, the European legislator is discussing amendments to the European Insolvency regulation in order to prevent unnecessary bankruptcies and enhance options for successfully restructuring a group of companies in distress, including cross-border situations.

All this should be welcomed as it increases the chances of restructuring the business and reduces losses for creditors.

Robin de Wit is an attorney-at-law at Holland Van Gijzen advocaten en notarissen LLP. He can be contacted on +31 (0) 88 4070 449 or by email: robin.de.wit@hollandlaw.nl.

Robin de Wit

Holland Van Gijzen advocaten en notarissen LLP