As the Covid-19 pandemic forces many businesses to consider options to restructure its capital and funding, the Dutch lawmakers missed an important opportunity to pass a new restructuring law that would greatly benefit affected stakeholders. The next opportunity to pass the law now seems to be in October, too late for some.
Dutch companies facing financial distress thus far had two options: either to file for bankruptcy (liquidation) or to come to a voluntary restructuring with all their creditors. In practise, companies, shareholders and creditors have a strong aversion to the Dutch bankruptcy procedure. The law is outdated and amounts to a near certain liquidation, with commensurately low recovery expectations. The near certain liquidation is because there are no provisions for a restructuring of the capital structure of a firm. While bankruptcy/liquidation is acceptable for businesses in economic and financial distress, it is highly undesirable if it happens to businesses in financial distress but with certifiable economic prospects. In such cases the difference between the expected liquidation value and reorganisation value can be substantially in favour of an orderly restructuring.
In most cases, creditors expect higher recovery values in reorganisation than in liquidation. From a stake-holder point of view, bankruptcy has far-reaching social and economic consequences, as the firm may halt operations. It leads to unnecessary job losses, credit losses, loss of technology and know-how. The Dutch bankruptcy law was due for an overhaul.
WHOA
Now, lawmakers have prepared a corporate restructuring law, the WHOA (Wet Homologatie Onderhands Akkoord). WHOA is described by some as a faster, more flexible and cost-efficient version of the famous US Chapter 11 and the UK’s Scheme of Arrangements.
The WHOA procedure can be started by the company management, shareholders or any creditor when the company is expected to be insolvent in the future. If prepared properly, the entire procedure can be finished in 3-5 weeks and the board remains in control. Essential to the WHOA is the restructuring expert, who is appointed by the court and eventually decides on the new capital structure. Creditor classes vote by majority to approve a restructuring plan. Other key elements are that:
RECOVERY
In a much cited paper, Bris, Welch and Zhu (2006) show exactly how important a procedure like the WHOA is. When analysing recovery rates in U.S. Chapter 11, they find that secured creditors have a recovery rate between 32%-51% in liquidation and a much higher 72% on average in a restructuring procedure. For unsecured creditors this difference is even larger: 5% versus 52% respectively. Other research shows similar results.
Differences between the US and The Netherlands can be substantial. But we will venture to estimate the expected effect of WHOA on Dutch creditor recovery rates anyway. Couwenberg and de Jong (2007) have performed a study on the effects of the Dutch insolvency law. They find that both secured and unsecured creditors have a higher recovery rate (80% and 22% respectively) in the Netherlands. While this does show that the Dutch insolvency law works rather well, we expect the WHOA to improve recovery rates especially for unsecured creditors, as shown in the graphs below. By definition, secured creditors need to improve recoveries under the WHOA regime. But the real beneficiaries will be other stakeholders: employees, customers, supplier and unsecured creditors. We believe the latter could improve recovery rates to numbers similar to under U.S. Chapter 11 (or around 50%).
COVID-19
The government has financially supported businesses throughout the first months of the COVID-19 pandemic. This support would benefit enormously from the new WHOA. Unfortunately, lawmakers could not finalise its approval process in parliament prior to the summer recess. The law is now expected to come into force no earlier than October 2020. That may be too late for many Covid-19 stricken businesses. Insolvency lawyers have shown their frustration in a unique open letter to lawmakers (in Dutch) and pointed to the billions of Euros of business value and thousands of jobs at stake, particularly now. The bill for this delay now falls to shareholders, entrepreneurs, small business owners, creditors and ultimately, the tax payer who will foot the COVID-19 related business support bills. What a shame.