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Blog 2016

2016-01-doc3 Some queries on post-commencement financing

To operate its business during any pre-insolvency or insolvency proceeding and to finance its reorganisation efforts a debtor-company needs liquidity. Some insolvency office holders (court appointed administrators; debtors in possession) may be able to use available cash collateral, although that may not be very realistic given the circumstances. Another financial lifeline could be the debtor’s ongoing revenue streams. But also here the weakness is that it may have run close to dry, which could have been the cause of the problems. Therefore, many times such debtor-companies will need ‘new’ or ‘fresh’ money by way of a new post-commencement (or: post-petition) financing facility to achieve their reorganisation objectives. In the USA, section 364 of the U.S. Bankruptcy Code governs a debtor’s requests to obtain post-petition financing. It intends to incentivise lenders to extend credit to the debtor company (that is in a Chapter 11 proceeding) which then has to be provided on an unsecured basis. After notice and a hearing it could however also be provided in exchange for an administrative priority for which the debtor in possession may be authorised e.g. to incur a post-petition debt as a superpriority administrative claim or to establish a secured claim in not yet encumbered property. These post-petition facilities may also include cross-collateralization (or: cross-securitisation) with the result that a lender links two or more properties together for lending purposes, which is the outcome of a loan by the same lender, often to purchase another property. This is (just the beginning of the story in) the USA. In a book: Gregor Bear and Karen O’Flynn (eds.), Financing Company Group Restructurings, Oxford University Press, 2015. ISBN 987 0 19 873846 6, xli + 580 pp, some twenty-five country overviews are included on the theme of out-of-court restructuring and post-commencement insolvency financing in the corporate group setting, domestically and internationally. Specifically, the latter part carries the book’s innovation, it is to my knowledge the first comprehensive treatment of financing in the corporate group setting, domestically and internationally. In bringing together a collection of distinguished contributors (academics and practitioners) at the forefront of insolvency practice and law reform efforts, the book results in a display of the latest in practice and work-arounds for financing out-of-court restructurings as well as judicial reorganisations, going-concern liquidations and administration proceedings of financially distressed global business groups. What I would have appreciated is mentioning the final date at which the laws of these countries is stated. The Chapter on the USA for instance does not refer to proposals to reform Chapter 11, published in December 2014. Another point to note is that the editors – surely very capable to do so – do not present a comparative overview of the most pressing principles and practices seen in these countries, as to enable law makers (e.g. working on harmonisation of topics of restructuring and insolvency in Europe) to work from there in considering best approaches. As a clarification: Recommendations 27 and 28 of the March 2014 EU Recommendation on a new approach to business failure and insolvency encourages new financing, as part of a restructuring plan, which then should be exempted from civil and criminal liability. In most EU Member States the general rules for transaction avoidance (actio pauliana) will apply. Only a few of them specifically protect new finance provision from such claw back actions. The Recommendation does, however, not touch on the form of protection to be given to new financing. Which rules should govern the conditions of post-commencement financing. Who would provide it, e.g. in certain pressing circumstances an additional duty for a shareholder to provide additional capital or any thrird party? Which rules would provide (sufficient? adequate? full?) protection to post-commencement creditors. What about the protection of other parties whose interests may be jeopardised by the provisions for such funding. Should other (secured?) creditors be informed? Is it transparent that the existing secured creditor (with an information lead) provides ‘new’ money or should it be a 'neutral' third party, to have an objective benchmark to ensure the debtor’s chances. Should the courts approval only be necessary when the priority of post-commencement financing or the guarantees connected to it affect the interests of secured creditors (as UNCITRAL recommends)? And approval at what time? Most likely at the time the borrowing decision is made. What will be the ‘new’ secured position towards pre-commencement secured and privileged claims (supersede?; equal?; subordinate?). In this regard a very valuable chapter is the last chapter of the book (written by the first editor) on the topic of domestic law harmonisation and international procedural reform, based on the work products of UNCITRAL and the World Bank. In all, the book is a valuable resource for practitioners who must structure (and courts that must approve) financing for global enterprise groups in reorganisation, to find out the legal rules in other countries, as these chapters offer insightful reviews. It is highly commended to experts in company, financial and insolvency law, as it contributes substantially to available know how in this area, both in domestic as well as in cross-border cases.

2016-01-doc2 Gift cards and insolvent retailers

V&D gift cards, will its holders be left in the cold? On the last day of 2015 the District court of Amsterdam opened bankruptcy proceedings (‘faillissement’) against the Dutch retailer Vroom & Dreesmann (V&D). V&D is the largest and most historic Dutch department store chain, which entered the Dutch market in 1887 with a store in Amsterdam. It now has 67 stores all over Holland with a platoon of 10,000 employees. It is evident that the appointed insolvency office holders (‘curatoren’) are working around the clock to try to save the business, preferably via an acquisition of all its assets and liabilities in one go (a ‘restart’). In the newspapers mention is made of interest from Canadian, German and Chinese third parties. In the light of these developments it is just a minor issue: what is V&D (so Vroom&Dreesmann, V&D does not mean venereal disease!) doing with its gift cards. It has been announced that V&D gift cards (as well as air miles) are not being accepted as payment anymore. We’re not talking peanuts here. These gifcards represent around 9.5 million euros. If the average value is € 40, that would mean over 2.3 million cards! The Dutch newspaper Het Financieele Dagblad reports a total of € 53 million debts owed to around 1800 creditors. It is clear that gift card creditors are not included in these numbers. The decision not to accept gift cards was already made by the board of V&D during the moratorium proceeding (‘surseance van betaling’) that preceded the bankruptcy proceeding. The reason behind this strategy escapes me. Was V&D afraid of a ‘retail run’ (as in a ‘bank run’)? What is the justification of what seems an unjust enrichment? Here we are entering an other issue: ‘where is the money’? Is it just mingled with V&D’s other liquidity or are the amounts paid for the cards kept separately (in what way?) or held by a separate company? This is just one of the questions that lawyers are confronted with when talking about gift cards. Unrelated to the V&D case, as far as I can see the legal qualification of a ‘gift card’ has not been addressed in Dutch legal literature. More generally, the alignment or tension between principles of insolvency and principles of consumer law has only scarcely been studied. A first matter is which contractual conditions apply, as in the Netherlands there are some strict rules for consumer protection in general sales law and for applicable general conditions to such contracts. Other queries related to the topic of consumers’ prepayments and insolvency are for instance what happens with (i) payments – partially or in full – for goods or services, to be collected on delivered later, or with (ii) returned products and to possibility of issuing a credit note (I understand V&D does not accept returned products, which seem to violate mandatory consumer sales law). The more principle matter would be whether, and to what extend, these types of transactions are excluded from the general principles underpinning most insolvency laws, i.e. the principle of paritas creditorum. There are other questions, e.g. what is the specific position of a consumer when the company, being its counterparty, during its insolvency is still trading. Here it would fit to discuss the consequences of insolvency on guarantees or warranties on goods purchased or services rendered. Back to gift cards or vouchers bought, but not accepted for use. Its legal nature is unsecure. Could a gift card be seen as a security (‘effect’) in the sense of a ‘negotiable financial instrument’ (‘waardebewijs’) in the meaning of the Act of financial supervision? Probably not, as the criterion here seems to be participation in a company’s capital. Or should the card (or a certain amount of its nominal value) receive a specific priority treatment instead of leaving the cardholder just being an unsecured creditor? Any third party buying the whole V&D business would at one stroke gain a tremendous goodwill from its future customer base if it would decide to accept gift cards (for instance to a certain percentage). V&D’s administrators could also decide to honour gift cards (to a certain amount; under certain conditions), but they are bound by their legal task that any action taken by them should pass the test of being for the benefit of the body of creditors. However, an example of such an action can be found in the USA, where some six years ago as a part of an overall settlement (proposed by the RadioShack stores), all gift cards also would be honoured at these stores, good for half of the purchase price of merchandise being bought. A holder of a $30 card could use it to cover an $8 of a $15 purchase, but could redeem the full amount of the card for a purchase of $60 or more. V&D gift cards represent some value, as on websites such as ‘marktplaats’ (‘Marketplace’) there seems to be a lively trade. Buyers provide around 10% or 20% of the value. Is this ‘claim trading’ a sign of a leg up to a collective action? See my blog on such an action for the unsecured creditors of DSB Bank, at One advice in the troublesome Dutch retail market seems appropriate: if you have gift cards, go to the shop now and don’t save it for a rainy day.

2016-01-doc1 My jobs on the side and my activities over 2015

Listing my jobs on the side ('nevenfucties') and my activities over 2015. As per tradition in the first week of January I am submitting my additional functions (‘nevenfuncties’) in addition to being a judge in the Court of Appeal in The Hague. Since some 10 years a statement of additional functions is mandatory for judges. As a deputy judge in the Court of Appeal The Hague I have submitted my list this week. See 2016 nevenfuncties. Listing 'academic' activities is common practice in Dutch universities. As an emeritus of the University of Leiden (Leiden Law School) I am, however, not certain whether my publications do count for the Law School's 'academic output' or whether with having that status you're out of the picture. Anyway, as I have my own blog, I am listing what has been achieved in 2015: PhD's supervised, appointments, publications (books; books edited; other publications) and lectures. Activities 2015 Wessels