Where is the WHOA?
By Tom Reijnen, Kruger Interim Management
After years of preparation and multiple consultation rounds, the Act on the Confirmation of an Extrajudicial Restructuring Scheme (the Dutch Scheme (‘WHOA’)) has entered into force on 1 January 2021, as an expansion of the Dutch Insolvency Law. The Dutch WHOA is based on the U.S. Chapter 11 and English Scheme of Arrangement.
The WHOA provides guidelines for a cross-class cram down for all creditors of the company including its shareholders and its preventive restructuring methods are in conformity with the European guidelines EU 2019/1023.
There was some urgency to activate the WHOA by January 1, 2021, because many companies were expected to need the procedure due to the COVID-19 pandemic, and its negative effect on company performance.
The WHOA is developed for companies that are on the verge of bankruptcy due to a heavy debt burden, but from which the activities in essence are viable. With the WHOA procedure these companies can secure its future via a legally binding cross-class cram down agreement.
Due to COVID-19 lockdown rules, and negative sentiments about economic growth a peak in WHOA-procedures was expected. Some law firms formed special WHOA teams, and advisory firms educated themselves on the WHOA to support their clients.
Contrary to all expectation, it remained relatively quiet. Only a few news articles appeared. One on a small festival organizing company that successfully completed a WHOA procedure and one on a professional soccer club from the Hague that started a WHOA procedure. Next to that some WHOA procedures for mainly small organizations have started.
Why didn't any midsize or large corporations complete a WHOA procedure? Without extensive research, some of the following points seem to provide an explanation.
- For a large group of companies, liquidity problems have been (temporarily) avoided due to government ample liquidity-support measurements and postponed payment of taxes. Companies are allowed to pay off their tax debt, caused by the pandemic, over a period of five years.
- The company’s creditors are also able to start a WHOA procedure. The risk, however, is that a creditor loses its client while only receiving a proportion of the amount owed.
- It is still unclear how trade credit insurers react after a WHOA procedure. Existing limits may cease to exist, and suppliers are likely to stop their deliveries.
- Knowing that of the company's shares will be diluted – at best to a small minority share - as a result of a WHOA procedure, a company's shareholders, for midsize companies often the director-major shareholder, are unlikely to initiate such a procedure.
- Banks are used to dealing with their debtors directly. In a WHOA procedure the bank's securities are valued arbitrarily, often on liquidation value (i.e., the value realized in case of bankruptcy), and other receivables are grouped with competing creditor classes. Dealing with a company directly may increase a bank's chances to redeem the owed amount.
- Many distressed companies have too many employees. The WHOA does not offer a solution for high reorganization costs as it remains bound by the inflexible Dutch Labor Law.
- The Dutch Insolvency industry currently solves problems for heavily distressed companies and their stakeholders at a very late stage. Per that moment the WHOA procedure is unable to compete with that existing pragmatic approach.
- The preparation and implementation costs of a WHOA procedure can run extremely high for midsize companies and large corporations. Costs associated with a WHOA procedure are for example legal support, fiscal support, taxations, objective valuations, due diligence, and accountancy costs.
In case an investor is willing to invest "fresh money" into an organization, after reaching a minority agreement with the director-major shareholder, starting a WHOA procedure may be attractive.
The number of bankruptcies is down by one-third compared to the same period before the pandemic and down by two-thirds compared to the time of Lehman Brothers' bankruptcy in 2008. The government has clearly been able to avoid many problems. Once the government's support ceases to exist, the number of bankruptcies is likely to temporally spike before normalizing to regular levels.
The WHOA procedure, will plausibly further develop into an important tool for potentially insolvent companies. All parties, however, need to accept that the WHOA procedure is not a costless quick fix that can be implemented last minute.
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