The birth of a new Titan? - 2019 How does the new Dutch scheme compare with the English scheme?
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The birth of
a new Titan?
How does the new Dutch scheme
compare with the English scheme?
2019
allenovery.com
2 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
Speed read
As the Netherlands takes steps to legislate for the introduction of a
new restructuring tool, with similarities to the English scheme of
arrangement and company voluntary arrangements and the U.S.
Chapter 11 procedures, we consider the impact this might have on
the global restructuring market and the ability to deliver restructuring
solutions for clients.
Although untried and untested, the Dutch scheme looks like it could
provide a credible alternative to the UK and U.S. procedures and,
with Brexit looming, it might just steal a march on the English law
CVA proceeding with its possible automatic recognition under the
European Insolvency Regulation. That said, the absence of automatic
recognition for English schemes of arrangement has not, hither to,
hindered their popularity. Also, although Brexit has many downsides,
it might (perversely) have a positive impact on the popularity of
English restructuring tools in circumstances where debtors are trying to
restructure English law governed debts, thanks to the rule in Gibbs.
© Allen & Overy LLP 2019
3
How do the options measure up?
Schemes of arrangement under Many will already be familiar with The UK government, keen for the
the English Companies Act 2006 the process of English Schemes, UK not to be left behind as European
(English Schemes), company CVAs and Chapter 11 but will likely jurisdictions introduce preventative
voluntary arrangements under the be less conversant with the new restructuring procedures, has indicated
English Insolvency Act 1986 (CVAs) Dutch Scheme. For a detailed analysis, that it will be seeking reforms to the
and Chapter 11 proceedings under the produced by Allen & Overy in UK insolvency framework, for more
U.S. Bankruptcy Reform Act of 1978 the Netherlands, click here. information on these proposals
(Chapter 11) have, for many years, click here. The comparative table also
The comparative table at Annex I of
offered reliable and tested ways for shows how the UK would measure up
this document shows how the English
companies to restructure their debts. if the reform proposals are
Scheme, CVA, Dutch Scheme and
implemented in line with the
There’s now a new kid on the block Chapter 11 measure up against each
latest government indications.
in the form of the Dutch Act on other on a number of key metrics.
Court Confirmation of Extrajudicial Here we take a look in a little more
Restructuring Plans (Dutch Scheme), depth at the key differences between
but how does it measure up when the various procedures.
compared to English Schemes,
CVAs and Chapter 11 and is it really
a viable contender?
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4 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
Court Involvement
Under an English Scheme and a but will only happen where requested (for example Debenhams, Steinhoff,
Dutch Scheme, the court will have a by an interested party. This is to be Giraffe and Regis) the implementation
role in overseeing the process and will contrasted with the significant court of a restructuring by way of CVA can
ultimately be required to confirm or involvement as part of Chapter 11 and be significantly delayed while the court
sanction the restructuring plan. the very minimal court involvement deals with challenges to the CVA on
Creditors, debtors and shareholders with CVAs. the basis of unfair prejudice, English
have the opportunity to come before Schemes have not been plagued with
A benefit of the court involvement in
the court seeking judgment on a the same issue. On the flip side, where
both English Schemes and the Dutch
number of preliminary questions there is a large degree of court
Scheme is that there is a forum for
before voting and the implementation involvement, as with Chapter 11,
disgruntled creditors to bring forward
of the arrangement, in an English although there is little risk of
their complaints. At first glance this
Scheme the forum for these arguments subsequent challenge or hold up,
looks to be a downside, however, it
is the convening hearing, at which the the constant involvement of the court
allows issues to be dealt with upfront,
court will order the holding of the leads to extra time, cost and formality.
leading to less ability to challenge the
relevant scheme meetings; under the Arguably the English Scheme and
restructuring later and this delivers
Dutch Scheme, court involvement will the Dutch Scheme strike just the
execution certainty. As we have seen
not always be necessary at the outset right balance.
with a number of CVAs recently
© Allen & Overy LLP 2019
5
Cross-class cram down
One shortcoming of the English restructurings done in the UK but provided that the restructuring plan
Scheme is that the scheme must be it is an extra and perhaps unwelcome is approved by one or more senior
approved by each class of affected step. One alternative might be to use a impaired class, then the Dutch Scheme
creditors before it can be implemented. CVA, where creditors vote in a single and Chapter 11 allow for the rights
This means, for example, that the class, however, the rights of secured of more junior classes to be
English Scheme cannot be used to or preferential creditors cannot be “crammed down” and thus the
affect rights of junior creditors or altered by a CVA without their restructuring plan can be forced upon
shareholders without their consent as a consent and shareholder rights them (subject to the Absolute or
class. So, where an English Scheme is cannot be compromised, so this has Relative Priority Rule – as discussed
to be utilised to effect a debt-to-equity its limitations. further below). The UK Reform
swap without shareholder consent, the proposals would also look to fix this
The Dutch Scheme offers a solution to
restructuring usually also needs to “problem” as a matter of English law
this issue. As with Chapter 11, junior
include an enforcement sale whereby by allowing the inclusion of
creditors and shareholders can be
the shareholders are left behind in the shareholders and introducing a
included in the restructuring plan and
old holding company structure and the cross-class cram down mechanism.
their rights can be compromised.
assets and creditors move to a newco
Even if as a class the junior creditors
structure. This hasn’t proved an
or shareholders do not consent to
insurmountable struggle for
the compromise of their rights,
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6 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
The Absolute Priority Rule
Chapter 11 adopts the Absolute regardless of the form in which this restructurings which completely wipe
Priority Rule. In simple terms, distribution is made); and (iii) if the out the more junior tranches of debt.
this means that a junior class of rejecting class would have been in the They may, therefore, demand that
creditors or shareholders cannot retain money in a liquidation, they have been some value is retained in respect of
any value as part of a restructuring offered a cash out option: a distribution junior tranches of debt (even if it’s only
unless all more senior classes are paid equal to what it would have received in an equity stake) even where the senior
in full. This is in contrast to the English a liquidation in cash. tranches are taking a hair-cut on their
Scheme and CVAs, where the English debt. Equally, in cases where there are
Under the UK reform proposals,
court will consider (either as part of the retail bonds, for example, it may be
as with the Dutch Scheme, where using
sanction hearing for an English commercially desirable for such
the cross-class cram down, the starting
Scheme or when hearing challenges to creditors (usually unsecured) to be
point would be the Absolute Priority
CVAs on the grounds of unfair impaired to a lesser degree than more
Rule but the court could still confirm a
prejudice) whether the restructuring senior secured institutionally held debt
plan not meeting this test provided that
proposals are broadly “fair” when (as was the case in the Co-op Bank
any departure is necessary and just and
compared to the most likely alternative restructuring). Under Chapter 11 there
equitable and, as with the Dutch
(ie a liquidation) and this allows much is a work-around where a certain
Scheme, no creditor or shareholder
greater flexibility when structuring the amount of “gifting” to junior classes
can be worse off under the plan than
terms of a restructuring. is permitted. Although the Dutch
they would have been in the next
Scheme does allow for a departure
Although the starting point under the best alternative, which will often
from the Absolute Priority Rule,
Dutch Scheme where cross-class cram be liquidation.
it is unclear how the requirement to
down is to be used, is the Absolute
But what does this actually mean provide a cash-out option will operate
Priority Rule, a scheme that is rejected
in practice? in practice and whether other
by one or more classes and that
In previous restructurings we have interested parties will be prepared to
departs from this principle may still
seen that, where there are multiple provide the cash. The UK reform
be confirmed by the court provided
tranches of debt, there are often proposals appear a little more flexible,
that: (i) at least one in the money class
significant numbers of creditors with but, again, they are new and untested.
must have accepted the plan; (ii) there
cross-holdings across the various All in all, so far as the Dutch Scheme
are reasonable grounds for the
tranches. These creditors often and the UK reform proposals go,
deviation from the Absolute Priority
consider their debt as a package and it might be a case of watch this space...
Rule and the plan is fair and reasonable
and not detrimental to the rejecting if their more significant holdings are in
class (which is the case if the rejecting more junior tranches of debt with a
class has been offered a fair share in the smaller holding in the senior classes
distribution of the reorganisation value then they may not be supportive of
© Allen & Overy LLP 2019
7
Holding everything together
while the restructuring completes
One of the features of Chapter 11 having entered administration or Furthermore, ipso facto clauses will
that makes it, in certain circumstances, proposed an English Scheme or CVA be temporarily unenforceable in order
more attractive than pursuing an where the contract permits termination to prevent interference with the
English Scheme is that as soon as the on those grounds (which many do). preparation of the restructuring plan.
Chapter 11 filing is made, there is a Futhermore, in the Metinvest
This might just give the Dutch Scheme
worldwide stay on enforcement action restructuring, Allen & Overy used what
and Chapter 11 the edge over the
by creditors and there is a ban on became referred to as a “scheme lite”
English Scheme where a debtor has
the operation of ipso facto clauses simply to introduce a moratorium.
key contracts and is worried about
(ie counterparties are not permitted
The Dutch Scheme has elected counterparties using the proposed
to terminate a contract on the sole
to follow the U.S. in this respect. restructuring as a way of extricating
ground that the debtor has entered
The proposal of a restructuring plan themselves from those contracts.
Chapter 11). Neither of these features
will permit the debtor to request a However, such advantage may be
is available with an English Scheme or
stay on insolvency petitions against short-lived as the UK reform proposals
a CVA. That said, if a stay is thought to
the debtor for up to four months include a prohibition on the operation
be necessary then an English Scheme
and a further four month stay on of ipso facto clauses and the provision of
or CVA could be coupled with an
enforcement action can be requested a general stay (though much more
administration to give a stay on
by the debtor if there is a real prospect limited in time to 28 days with the
enforcement action and legal
of a restructuring plan being option of a further 28 day extension).
proceedings, though at present nothing
brought about.
would stop counterparties terminating
contracts on the basis of the company
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8 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
What if the money is running out?
Where a debtor is desperately in need This might appear to be a major will agree to a third party provider
of cash and the existing creditors are disadvantage of the UK and Dutch sharing their security and ranking either
not minded to either provide it or to procedures but as a matter of practice, ahead of them or at the very least
permit any third party provider to if any restructuring is to be successful alongside them. The UK reform
share in their security, Chapter 11 then a high degree of existing creditor proposals considered adopting a more
might offer a unique solution for support is required and this generally U.S.-style approach to rescue financing
debtors. It is the only one of leads creditors to a pragmatic but ultimately decided that they were
these proceedings that provides for approach to new financing. They will not necessary and held more potential
super-senior interim financing to be usually either provide it themselves problems than they heralded solutions.
approved by the court. (albeit sometimes grudgingly) or they
© Allen & Overy LLP 2019
9
Recognition of the procedure
One of the key things that influences a right in rem in respect of an asset in available to the public route of Dutch
a debtor in deciding which proceeding another member state, the opening Scheme might seem like an important
to pursue is whether, if approved, or conclusion of the Dutch Scheme advantage that it has over the English
the arrangement would be recognised does not affect the rights in rem of Scheme and Chapter 11 and might be
and given effect to in the jurisdictions the secured creditors to enforce particularly so if and when the CVA
that really matter to the debtor, their security, and it’s probable such loses its status as being automatically
which are those where the debtor a creditor can enforce the security recognised across the EU Member
has assets. For those proceedings that for its original claim of 100. States post-Brexit. However, thanks
can be brought within the European to a long standing common law rule
The Dutch Scheme also has a private
Insolvency Regulation, the procedure (often referred to as the rule in Gibbs),
version, which will be outside the
and its effects will be given automatic in a post-Brexit world (where the
scope of the European Insolvency
recognition across all EU Member United Kingdom is no longer obliged
Regulation and, as with the
States. For the moment, of the to automatically recognise EU
English Scheme, it is possible that
proceedings considered here, only a insolvency proceedings) and where
where a Dutch Scheme seeks to
CVA falls within the European a debtor is trying to compromise or
compromise Dutch law governed
Insolvency Regulation, however, restructure English law governed debt,
debt, other jurisdictions will recognise
once available, the public route of the English common law says that this can
such a compromise under principles
Dutch Scheme will also benefit from only be done in accordance with the
of private international law and,
automatic recognition. So far so good, governing law of the debt (ie English
importantly, such recognition would
however, there is one important law), and thus the starting point is that
likely not be subject to the right in
exception under the European you would need to have an English
rem exception under the European
Insolvency Regulation which means process to compromise such debt and,
Insolvency Regulation as
that, for example, notwithstanding that here again the English Scheme has a
described above.
a Dutch Scheme has been proposed trump card that it can continue to play
and has approved a reduction in Notwithstanding the downside of for so long as parties wish to enter
secured debt from 100 to 80 and there the rights in rem exception under into arrangements that are English
is a stay on enforcement, where a the European Insolvency Regulation, law governed.
creditor is a secured creditor who has the automatic recognition that will be
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10 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
Where does that leave us?
All in all, the introduction of the Dutch Scheme is a welcome
addition to the global restructuring landscape. It offers another tool
that can be utilised for restructurings, and that must be a good thing.
The differences, sometimes subtle and sometimes significant,
between the various procedures mean that there might be compelling
reasons in a particular case and on a particular fact pattern why,
for example, the Dutch Scheme might work when Chapter 11 or
an English Scheme won’t be suitable or vice versa. This might only
become apparent once a restructuring starts to take shape and so it
will be important for debtors and creditors alike to consider whether
their chosen legal advisers have the necessary expertise in each of
these jurisdictions.
The Dutch Scheme certainly looks promising but it will need to get
off the ground. It will need willing debtors and for the Dutch judiciary
to be bold and assertive. But, if it can be used successfully in just a few
cases then it might just be the next big thing and take its place among
the English Scheme and Chapter 11.
© Allen & Overy LLP 201911
Annex I
allenovery.com12 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019 13
Restructuring proceedings –
EU, UK, NL and U.S.
UK Corporate Proposed Netherlands
Directive UK Scheme U.S. Chapter 11
Insolvency Reforms Scheme
Out-of-court process No No No No No
Debtor in possession Yes Yes Yes Yes Yes
Stay on Yes
Yes No Yes Yes
enforcement action (standalone moratorium)
Ban on ipso facto Yes No Yes Yes Yes
Separate classes Yes Yes Yes Yes Yes
Cram down Yes Yes Yes Yes Yes
Cross-class cram down Yes No Yes Yes Yes
Not higher than 75% in 2/3 in value or majority in
75% by value and 50% 75% by value and more than
Support required amount or number of 2/3 in value number of allowed claims
by number 50% of unconnected creditors
affected parties in each class
Basis for founding Public (CoMI); Private
n/a Sufficient connection Sufficient connection Asset in the U.S.
jurisdiction (sufficient connection)
Super-priority
Yes No No No Yes
DIP finance
© Allen & Overy LLP 2019 allenovery.com14 The birth of a new Titan? | How does the new Dutch scheme compare with the English scheme? | 2019
Key contacts
NETHERLANDS
Sigrid Jansen Aroen Kuitenbrouwer Brechje van der Velden
Partner – Amsterdam Partner – Amsterdam Partner – Amsterdam
Tel +31 20 674 1168 Tel +31 20 674 1142 Tel +31 20 674 1580
sigrid.jansen@allenovery.com aroen.kuitenbrouwer@allenovery.com brechje.vandervelden@allenovery.com
UK
Jennifer Marshall Nicola Ferguson
Partner – London Senior PSL – London
Tel +44 20 3088 4743 Tel +44 20 3088 4073
jennifer.marshall@allenovery.com nicola.ferguson@allenovery.com
U.S.
Ken Coleman Daniel Guyder Laura Hall
Partner – New York Partner – New York Partner – New York
Tel +1 212 610 6434 Tel +1 212 756 1132 Tel +1 212 756 1171
ken.coleman@allenovery.com daniel.guyder@allenovery.com laura.hall@allenovery.com
© Allen & Overy LLP 201915
OTHER CONTACTS
Katrina Buckley David Campbell Tim Crocker Joel Ferguson
Partner – London Partner – London Partner – London Partner – London
Tel +44 20 3088 2704 Tel +44 20 3088 4758 Tel +44 20 3088 3208 Tel +44 203 088 2414
katrina.buckley@allenovery.com david.campbell@allenovery.com tim.crocker@allenovery.com joel.ferguson@allenovery.com
Ian Field Earl Griffith David Lines Nick Lister
Partner – London Partner – London Partner – London Partner – London
Tel +44 20 3088 2671 Tel +44 20 3088 2635 Tel +44 20 3088 2680 Tel +44 203 088 2469
ian.field@allenovery.com earl.griffith@allenovery.com david.lines@allenovery.com nick.lister@allenovery.com
Melissa Samuel Hannah Valintine
Partner – London Partner – London
Tel +44 20 3088 4361 Tel +44 203 088 2238
melissa.samuel@allenovery.com hannah.valintine@allenovery.com
Tim Watson Randal Weeks
Partner – London Partner – London
Tel +44 20 3088 3984 Tel +44 20 3088 2661
tim.watson@allenovery.com randal.weeks@allenovery.com
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