Legislative overhaul of Dutch insolvency law
In 2012 the Dutch legislator announced a legislative overhaul of Dutch insolvency law under the name Herijking Faillissementsrecht (the ‘Re-assessment of Bankruptcy law’). This legislative programme aims to amend and modernise Dutch insolvency law. Legislative proposals that focus on the prevention of bankruptcy fraud, the negative social and economic effects caused by it, and the strengthening of the of position of the bankruptcy trustee have entered into force in 2016 and 2017 and have resulted in, among others, a broader civil and criminal liability of (supervisory) directors and in statutory duties for the insolvent company (including its directors and officers) or third parties in control or possession of the insolvent company’s administration to provide information or cooperation to the bankruptcy trustee.
The legislative proposals regarding the enhancement of companies’ ability to reorganise are still pending: the Continuity of Companies Act I regarding the pre-pack, the ‘Act on Court Approval of Schemes to Avoid Bankruptcy’ (formerly the Continuity of Companies Act II) and the Continuity of Companies Act III regarding the continuation of business in bankruptcy. The legislative proposal aiming at the modernisation of bankruptcy proceedings has been adopted and will enter into force in early 2019.
The Continuity of Companies Act I
The legislative proposal that introduces a legal basis for the pre-pack sale (the Continuity of Companies Act I) has been adopted by the Lower House in 2016 and is currently pending before the Dutch Senate. The ECJ’s decision in the Smallsteps case (C-126 16) on 22 June 2017 made it clear that the pre-pack procedure in that particular case could not be viewed as a procedure upon which the exceptions to the rules concerning the transfer of undertakings applied. In a formal response to questions from the Dutch Senate regarding the possible implications of the Smallsteps case for the current pre-pack legislative proposal, the Minister of Security and Justice stated in September 2017 that the Smallsteps case did not necessitate an amendment of the existing legislative proposal.
According to the Minister of Security and Justice, if a post-bankruptcy relaunch of the debtor’s business is preceded by and prepared in a pre-pack procedure, the application of the employee protection rules concerning the transfer of undertakings should be determined on a case-by-case basis by either the bankruptcy trustee designate or a court (as the case may be) in accordance with the ECJ’s decision in the Smallsteps case. Since the publication of the ECJ decision, two decisions have been rendered by two different Dutch courts of appeal that have shed further light on the implications of the Smallsteps case on the Dutch restructuring landscape.
In mid-2018, a Dutch court of appeal held that the Smallsteps decision did not mean that all post-bankruptcy restarts of insolvent companies (which have been prepared prior to the formal bankruptcy - whether or not in the form of a pre-pack) are automatically excluded from application of the exception to rules concerning the transfer of undertakings. According to this court of appeal, the assessment of whether the conditions set out in Smallsteps decision are satisfied, should occur on a case-by-case basis, taking into account all relevant facts and circumstances. In this case, the relevant circumstances led to the conclusion that the bankruptcy proceedings were initiated with the view to liquidate the company’s assets. In addition, there was supervision by an authorised government authority from the moment of the liquidation order. Therefore, the union’s claims - which were based on the assertion that the conditions regarding the exception to the rules concerning the transfer of undertakings were not met - were ultimately rejected by the court.
Around the same period in a different case, another court of appeal also held that whether the ruling in the Smallsteps case can be applied, should depend on all facts and circumstances of each particular case. In that specific case, there were no facts indicating that the bankruptcy was aimed at continuation of the business. Therefore, the court held that that the rules concerning the transfer of undertakings did not apply.
This means that the use of a pre-pack is still possible and confirms that the application of the employee protection rules concerning the transfer of undertakings is to be determined on a case-by-case basis, taking into account all the relevant circumstances of the individual case.
Earlier in 2018, the Minister for Legal Protection - after discussions with various stakeholder groups - already stated that in practice there is still a need for the Continuity of Companies Act I and has requested the Senate to continue the treatment of the legislative proposal. It was also announced that new legislation under employment law regarding the position of employees and employee rights in a relaunch following bankruptcy is being investigated. At the same time, the current protection scheme for employees when a suspension of payments has been granted to the company or employer is being reconsidered in light of the precarious financial situation of the company. Finally, employees’ participation rights in insolvency are a topic of debate, focusing on strengthening the position of the works council in insolvency situations.
The ‘Act on Court Approval of Schemes to Avoid Bankruptcy’
The original legislative proposal, which was announced in 2014 as the Continuity of Companies Act II, has been significantly amended and substantively a new proposal was launched in September 2017: the ‘Act on Court Approval of Schemes to Avoid Bankruptcy’. The act will introduce a fast and efficient procedure to restructure the company’s business through a scheme between the company and all or certain of its (secured) creditors or shareholders. Through the scheme a release of liability of a surety, co-debtor or guarantor (including a parent company that is jointly and severally liable for debts of its subsidiary) can also be effected.
A scheme can be initiated by a debtor who foresees that he or she will no longer be able to pay his or her debts. If the debtor does not initiate a composition but it is clear that this would be the only way to avoid an imminent liquidation, or if the initiated composition cannot be seen as a serious attempt or if it has been rejected, a creditor can also initiate a composition. According to the new proposal, proposing a scheme is considered to be a last-resort restructuring tool; the debtor is expected to seek other out-of-court settlement solutions first, before initiating a compulsory composition. After initiating a scheme, the debtor has the opportunity to request the court to order a stay. During this period, any third-party rights to seek recovery against assets of the debtor or to repossess assets under the debtor’s control cannot be exercised without court-permission. Creditors may seek the appointment of an independent expert to draw up a scheme.
The new proposal provides for the possibility for the debtor to propose to its counterparty in an executory contract a modification of such contract. If the counterparty does not agree, the debtor can terminate the contract, in which case the counterparty obtains a claim for damages against the debtor. The proposed composition can also entail a modification of the rights of shareholders, including a ‘debt for equity swap’. Provisions in agreements that result in an automatic termination or permit termination because of a bankruptcy or similar procedure, will remain ineffective, according to the new proposal.
Creditors or shareholders will be divided into different classes if their rights or interests are so different that they cannot be deemed to be in a comparable position. In any event this includes creditors or shareholders that have a different rank in bankruptcy. Only the creditors or shareholders whose rights or claims are affected by the proposed composition are allowed to vote. A class has accepted the composition if the group of creditors who vote in favour of it, represents at least two-thirds in value of the total value of claims in that class, or, in case of shareholders, if that group represents at least two-thirds of total votes within that class. The new proposal no longer requires an absolute majority of the creditors or shareholders within a class.
If at least one class accepts the composition, the debtor is able to request that the court confirms the composition, which means the composition is binding on all creditors or shareholders affected by the scheme, also including those who voted against it. The court will among other refuse if (i) the debtor did not fulfil the statutory requirements regarding the voting process and notification, or (ii) at the request of one or more creditors, on the basis of one or more grounds for refusal (eg, the ‘creditor’s best interest-test’). If not all classes have voted in favour of the proposed composition, the court will refuse the confirmation of the composition if, under the proposal the creditors would receive less than upon liquidation (‘best interest of creditors test’) and the going concern value of the company would not be distributed among the classes of creditors and shareholders in accordance with their statutory ranking (thereby introducing the ‘absolute priority rule’). Under the new legislative proposal, it is not possible to appeal against the decision of the court.
In 2018, the draft proposal again underwent several amendments and is currently being finalised. A final proposal is expected to be submitted to Parliament at the end of 2018 and if approved by Parliament it will enter into force in 2019/2020.
The Continuity of Companies Act III
The legislative proposal for the Continuity of Companies Act III will provide means to facilitate the continuation of businesses in bankruptcy, such as a duty for suppliers to continue to supply in bankruptcy. It is aimed at improving the ability of the bankruptcy trustee to efficiently settle the bankruptcy and limit the damage for all parties involved as much as possible. It also considers amendments to the suspension of payments procedure. This proposal is still in the preparatory phase.
Modernisation of bankruptcy proceedings
This legislative proposal focuses on achieving a more efficient and transparent insolvency procedure in which the bankruptcy trustee can exercise his or her duties as administrator and liquidator more easily and effectively. In addition, the proposal aims to better inform creditors and other parties involved of the progress of the procedure, thereby improving these parties’ ability to protect their interests. Proposals include the abolition of provisions that prevent the use of electronic communication. The proposal has been approved by the Senate in June 2018 and is expected to enter into force in early 2019.
The Recast Insolvency Regulation
The Dutch Implementation Act EU Insolvency Regulation amends the Dutch Bankruptcy Act in order to align with the Recast Regulation, which came into effect for insolvencies commencing on or after 26 June 2017, and mostly concerns technical amendments. The Implementation Act entered into force in December 2017.
Insolvency Regulation v Brussels I Regulation
Recently, the Dutch Supreme Court has asked the ECJ for a preliminary ruling regarding the qualification of anti-avoidance/fraudulent conveyance actions. The bankruptcy trustee in this case had filed a tort claim that he in his capacity as bankruptcy trustee brought on behalf of the joint creditors of an insolvent estate for compensation against a third party who acted unlawfully against the joint creditors, a ‘Peeters/Gatzen vordering’.
The Dutch Supreme Court referred the matter to the ECJ with respect to the question of whether a claim, brought on the basis of tort, for the benefit of the joint creditors arises directly from rules regarding insolvency proceedings, in which case the Insolvency Regulation (recast) applies, or is based on general civil law rules, governing claims generally, in which case the Brussels I Regulation applies. Because of the cross-border element, it is particularly relevant in this case to determine what the nature of the claim is, because that will decide which court has international jurisdiction and which law is applicable. It will be interesting to see how the ECJ will decide on this matter of international conflict of law rules regarding insolvency.
Other developments regarding Dutch restructuring and insolvency law
Proposal to prohibit contractual limitation on pledging receivables
In response to pressure from the business sector in the Netherlands, in July 2018 the Dutch Ministry of Justice and Security has published a draft legislative proposal that will make ineffective any contractual provisions that limit parties’ ability to transfer or pledge receivables. The proposal has been prepared in consultation with several organisations from the business sector in the Netherlands, including the Confederation of Netherlands Industry and Employers, the Factoring & Asset Based Financing Association Netherlands and the Dutch Banking Association.
The aim of the proposal is to stimulate credit lending to small and medium-sized companies. Currently, a limitation on pledging receivables is often included in standard contract terms and prevents companies from transferring and pledging their claims on third parties to banks or other lenders. By removing this obstruction, the Dutch government hopes to stimulate investments, innovation and growth as it should result in an increase of receivables that can serve as collateral for financing. In addition, the intended ban should enhance the competitive position of the Dutch business sector in comparison to several other European countries. The consultation on the legislative proposal runs until August 2018.
Recovery and resolution of insurers
The legislative proposal for the Act Recovery and Resolution of Insurers reinforces and expands the current framework for the recovery and resolution of insurers. The proposal amends the Dutch Financial Supervision Act and the Dutch Bankruptcy Act and provides the Dutch Central Bank with more resolution tools and a wider authority in order to be able to take action on an individual basis regarding failing insurers. The guiding principle is that no creditor of a failing insurer should be worse off than in insolvency.
The resolution tools are based on the framework of resolution tools for banks and investment firms. An important element of the proposal is, for example, the bail-in tool. Contrary to the bail-in tool for banks however, bail-in under the proposal is aimed at the protection of the interests of policyholders and beneficiaries (not at saving the insurer). The legislative proposal was adopted by the Dutch Lower House mid-2018 and will need to be approved by the Senate, before entering into force.
Modification of Bank Creditor Hierarchy
The legislative proposal for the Act of the Modification of Bank Creditor Hierarchy implements Directive (EU) 2017/2399, which amends the Bank Recovery and Resolution Directive as regards the ranking of debt instruments in insolvency. The legislative proposal introduces a new rank in insolvency for unsecured debt instruments in insolvency in accordance with the requirements of Directive (EU) 2017/2399. The legislative proposal is currently pending before the Dutch Lower House.
Legislative proposal to amend the ‘settlement finality’ provisions in the Dutch Bankruptcy Act
Since the implementation of Directive 98/26/EC on settlement finality in payment and securities settlement systems (the Settlement Finality Directive) in 1999, the Dutch Bankruptcy Act contains specific provisions that ensure that insolvency proceedings against a participant in a settlement system do not retroactively affect the rights and obligations of other participants, nor their reliance on the normal financial guarantees inherent to a transaction in the system. For instance, the Dutch Bankruptcy Act specifically provides that the bankruptcy of a participant (eg, a bank) in a payment or securities settlement system (eg, TARGET2) will not have retroactive effect with respect to certain settlement transactions (eg, payments, set-off, netting, and other transfer orders) involving the bankrupt participant, nor will the granting of a cooling-off period affect the ability of a participant to seek recourse against assets of the bankrupt participant.
Currently, this protection only applies in relation to settlement systems that are (i) specifically identified as such by the Minister of Finance, (ii) governed by the laws of an EU member state, or (iii) specifically acknowledged as such by an EU member state and registered with the European Commission. This effectively means that a Dutch bank participating in a settlement system that does not meet these criteria would not be able to guarantee to its counterpart that settlement transactions would not be retroactively affected if the Dutch bank were to become the subject of insolvency proceedings. With an aim to lift this disparity and to improve the competitiveness of Dutch financial institutions operating in the international market, the Dutch legislator has proposed to amend the Dutch Bankruptcy Act by expanding the definition of settlement system (now also including systems in other non-EU countries with adequate supervision) and by having the exemption on the retroactive effect of a Dutch bankruptcy judgment apply to all settlement transactions (whether or not those transactions occurred within a settlement system).
This legislative proposal is still in the preparatory phase.
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