Written by Sandra Frommelt, Tim Carapiet-Petit and Tessa Visser.
Speakers at the spring meeting of the Corporate Litigation Association last Monday 17 June 2024 gave an update on the Court Approval of a Private Composition (Prevention of Insolvency) Act (Wet Homologatie Onderhands Akkoord in Dutch, in short the WHOA). The WHOA was introduced three years ago within a short time frame as a reorganisation tool and is proving to be a valuable alternative to bankruptcy and suspension of payments.
Despite the fact that many WHOA cases do not reach homologation because parties still manage to reach a mutual agreement, the WHOA procedure appears to work quickly and efficiently. In doing so, an application for homologation can be used broadly; an application is not easily rejected because it would be too early or too late. Even if a company is already de facto insolvent, WHOA proceedings can still offer a solution in some cases.
A major difference and advantage of WHOA compared to bankruptcy is that the entrepreneur retains control during proceedings. There is no trustee in bankruptcy and the company is not shut down. WHOA is characterised by the fact that the 'debtor in possession' can initiate WHOA himself and continue to do business himself.debtor in possession’ zelf de WHOA kan initiëren en zelf kan blijven ondernemen.
At the same time, the WHOA provides several safeguards for stakeholders as well as the company. For instance, within a cooling-off period, a private composition can be explored without creditors being able to file for bankruptcy.
The position of shareholders is a special one in a WHOA – no control, but nevertheless not without a future. WHOA proceedings can be initiated without shareholders' consent – even if otherwise agreed in agreements, regulations or articles of association. Nevertheless, in most cases shareholders are better off in WHOA proceedings than in bankruptcy. In bankruptcy, shareholders are at the back of the line, leaving them empty-handed in almost all cases. WHOA proceedings aim to allow the company to continue without stifling debt, giving shareholders a chance to see some return on their investment in the future.
A well-supported and consistent valuation is crucial for successful WHOA proceedings. Two valuations show the difference between reorganisation value (the value after WHOA) and liquidation value (expected proceeds in bankruptcy). Creditors must be better off with a reorganisation in favour of bankruptcy in order for a court to approve the homologation request.
Often, the threat of a WHOA with eventual homologation and possible cram down is enough to induce creditors and shareholders to reach an agreement – a big stick that was lacking before the introduction of the WHOA, as a result of which many private agreements often failed to materialise. Does this make the WHOA the holy grail in reorganisation land? It appears to be a powerful tool, but it is not the only one. Also consider a restructuring through enforcement of a share pledge. Shares can be sold privately or through the courts if a pledge is enforced. That moment can be used to bring about a restructuring. This of course requires that a pledge on shares has been established. Furthermore, this procedure does not always offer the safeguards that the WHOA does, as this sale/restructuring can also take place privately without court supervision. In addition, no cooling-off period can be ordered and thus the pledged shares may still prove worthless if interim bankruptcy is declared.
All in all, after more than 3 years of WHOA, we can conclude that it is a valuable addition to the insolvency practice. However, it is still important to act carefully, and to collaborate with experts in different fields to achieve optimal results.
Questions about this procedure, or about possible options in case of financial difficulties? Please feel free to contact us, we will be happy to advise you.
