Vol 12 (2015) - Issue 3

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Introduction of a Cram Down Mechanism in the Netherlands: ‘Money couldn’t buy friends, but you got a better class of enemy’

1. Introduction
The current Dutch Bankruptcy Act ('DBA') dates back to 1893. Although the DBA has undergone some changes, it essentially retained its historic focus on liquidation, with effectively no corporate rescue mechanisms and very limited options to maximise value for all stakeholders. In general, the current regime can be characterised as creditor oriented with an emphasis on creditors’ existing legal positions – including hold-out positions without any economic justification. Mechanisms for readjustment of these positions to the economic reality of the company are largely absent, which results in disproportionately strong positions for out of the money creditors, effectively leading to unnecessary bankruptcies of economically viable companies.
Since the worldwide financial crisis, the European Union has been taking action to promote a more restructuring oriented approach towards insolvency. Although the EU Regulation on insolvency proceedings attempts to deal with some aspects of cross-border insolvency, it never aimed at harmonising domestic insolvency laws in the different member states of the European Union.
In the past years several proposals have been adopted in order to harmonise domestic insolvency regimes, both to disincentive insolvency tourism and to improve restructuring conditions throughout Europe. At the same time, as several countries in continental Europe introduced up to date rescue mechanisms in their domestic bankruptcy codes, like the Gesetz zur weiteren Erleichterung der Sanierung von Unternehmen – or ESUG – in Germany and the procédure de sauvegarde in France, the contrast with the Netherlands became even more palpable and a number of Dutch companies entered into a UK Scheme of Arrangement.
In response, the Dutch legislator has recently initiated a program to modernise the Dutch insolvency framework, consisting of three pillars: prevention of fraud, enhancement of the reorganisational abilities of businesses and modernisation of the insolvency proceedings.
As part of this program, legislative proposals for a pre-packed asset deal were made public in 2014. Until December last year, the legislator was requesting consultation on the new legal framework for reorganisation plans out of insolvency proceedings (Act on Continuity of Businesses II, in Dutch: 'Wet Continuïteit Ondernemingen II', or 'WCO II') comparable to the UK scheme of arrangement.
The proposed WCO II creates the possibility of a compulsory composition (dwangakoord) allowing companies to readjust their capital structure outside a formal bankruptcy or suspension of payment. The proposal aims to create a flexible framework for solvent restructuring plans and limits the possibilities for out of the money creditors and shareholders to block extra-judicial reorganisation proposals that reflect the economic reality of the company.
As such, WCO II will have a substantial impact on the restructuring possibilities for companies in financial distress in the Netherlands, introducing extrajudicial, universally binding, debt restructuring schemes to the Netherlands. Although it is not an insolvency proceeding, the COMI-test as set out in the EU Insolvency Regulation will be applied as the gateway to the WCO II proceedings.