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2020-04-doc1 Three stept to get out of the Insolvency Valley II

Inspired by joint reflection within the board of the Conference on European Restructuring and Insolvency Law (CERIL), www.ceril.eu, and based on similar considerations and recommendations made on Friday, 20 March 2020 (see http://www.ceril.eu / news / ceril-executive-statement-2020-1-on-covid-19-and-insolvency-legislation /), I posted on 25 March 2020 my blog, in Dutch (https://bobwessels.nl/blog/2020-03-doc4-drie-stappen-om-uit-het-insolventie-dal-te-komen/, in which I proposed a three-step solution for the Netherlands to get business get back on its feed again:

1 The legislator announces a general national debt moratorium

2 Introduction of a temporary scheme of self-administration for companies

3 Entry into force in the foreseeable future of the Dutch Act on Court Confirmation of Extrajudicial Restructuring Plans

Below is an English translation. At the end some additional observations as per 1 April 2020.

Business (and the economy) urgently need security, clarity and predictability. Large parts of the SMEs see little money coming in due to the economic slowdown, while the costs continue. These are fixed costs but also debts related to orders that are currently coming in, but of which the products can hardly be sold at the moment. Generating turnover is difficult due to a drop in demand and restrictions on exports. Contracts are based on existing relationships with suppliers and customers, which currently raise many questions: is there force majeure? Does the corona crisis justify an appeal to unforeseen circumstances (Article 6: 258 Dutch Civil Code)? Do the many tens of thousands of contracts and general terms and conditions have specific clauses that apply? There is a need for rest (I thought so, in self-quarantine in Dordrecht).

 1 National debt moratorium

Such an arrangement builds on what has been effective in Dutch legal history culture with regard to outstanding debts in an emergency (Payment Delay Act 1914; Zeeland Flood Emergency Regulation 1953). She anticipates what will become future, art. 6 and 7 Restructuring Directive (Stay and consequences of individual enforcement actions), albeit not ‘individually’ and not linked to restructuring plans, but generally and immediately, unconditionally.

A generally applicable national debt moratorium results in a standstill between uncertain, faultfining or combatting contracting parties and provides immediate relief with regard to outstanding or soon to be paid debts. It applies retroactively from 15 March 2020 to 1 May 2020. This six weeks enables all involved to prepare the governmental financial support program that has come into effect and to tailor the infrastructure of the executive to individual (small) companies and self-employed persons-businesses. It protects against legal measures for six weeks, so no collections, the freezing of executions, evictions, seizures, redress, etc., but also a prohibition on set-off. In short, a temporary, nationwide suspension of debt payment for small businesses. Key point: economic activity and employment are thus preserved.

2 Temporary scheme for self-administration (‘zelfbewind’) companies

Introduce a ‘spring-summer sleep’ period, temporary (for example, from 1 May to 1 July 2020), which protects individual smaller companies from insolvency measures. It has the following instruments: (i) the debtor can file a petition for self-administration, in combination with the request to suspend the commencement of any pending bankruptcy of one or more creditors for a period up to (for example) 1 July 2020, (ii) the request implies the suspension of all claims and the suspension of all executions for the remainder of the proceedings, including tax and social security obligations, (iii) it also covers a prohibition of all payments on all legal and contractual obligations, except those that are necessary for the continuation of the maintenance of the pure business functions, very essential goods, such as electricity, emergency services, servers, etc. The company must be able to continue as well and as badly as possible, whereby the entrepreneur reamins in control (‘debtor in possession’). In order to monitor this somewhat, instrument (iv) is the appointment of a ‘monitor’ (lawyer or accountant) who, during this period (of ‘self-government’ instituted at the request of the debtor), performs a limited consultation and control function as supervisor of the business process (if necessary consultation on which transactions or payments are within the normal course of a business) and with the debtor’s duty to provide information (and power giving permission or not by the monitor) if the debtor is considering / taking action regarding the sale of assets, ditto for voluntary payments to third parties, ditto when assuming financial obligations, for example by agreeing new credits or acting as a guarantee for others.

After expiry of the term, automatic revival of all rights will take place, unless the monitor advises the judge to extend the self-administration for a limited period of up to 2 months.

To ensure uniformity and effectiveness: query to appoint a central executor (three insolvency judges?), who will be advised by a small committee (from the Insolvency Law Committee?)

3 Entry into force of ‘Dutch Scheme’ / Whoa

With a letter of 18 March 2020 signed by some twenty prominent scholars and practitioners, the parliament has been asked for the immediate enactment of the Dutch Act on Court Confirmation of Extrajudicial Restructuring Plans (or Whoa, Wet Homologatie Onderhands Akkoord). In a letter of 20 March this call was supported by central organizations of employers and employees. It would like to ensure that amendments are considered and that interested parties can consider proposals.

My recommendation: organize the parliamentary process in such a way that the Whoa (whether or not amended after amendments) can take effect on 1 September 2020. It is a comprehensive law, with various business economic elements that are of value only under ‘normal’ market conditions.

I know: there are many (legal) details that are not discussed or that need more input. In addition, the three-stage scheme will yield opportunists who want to bum or abuse the system. Social corona profit makers will certainly be there. A robust ex post sanction system will have to act against this. However, the vast majority of entrepreneurial Netherlands seems to me to benefit from a clear and orderly structure: (1) the announcement of a general national debt moratorium (15 March – 1 May 2020), (2) the introduction of a temporary scheme of self-administration for companies ( 1 May 2020 – 1 July 2020, with the possibility to extend for two months), and (3) the entry into force in the foreseeable future of said Act (Whoa), which has been further amended in parliament, as of 1 September 2020, all from the fervent hope that market conditions will then have normalized.

4 Additions per 1 April 2020

Courts. Dutch courts have issued on 26 March 2020 additional guidance (non-binding, but in practice nearly always used), see https://www.rechtspraak.nl/SiteCollectionDocuments/Tijdelijke-regeling-Insolventies-rechtbanken-ivm-Corona.pdf., the so-called ‘Temporary derogation in insolvency cases in courts due to the special circumstances caused by the Corona crisis’.

In the guidance, in general in insolvency cases, it is business as usual, with arrangements to avoid physical meetings and electronic exchange of documents. One substantial element stands out: ‘When considering applications for bankruptcy (‘faillissement’), the court considers that legal protection and protection against abuse of the situation is of great importance. Judicial review is essential in this respect, because each situation must be assessed separately. The judge will look at all relevant circumstances, including the current pandemic and the related (economic) situation.’

The argument of ‘abuse of right’ is rather vague, but it has been used by courts in individual insolvency cases when the filing creditor exerts improper pressure. It is new to announce this ground in advance and to use it in a more generic way. As I am not aware of Dutch government’s legislative actions, the temporary rule acts as a useful line of defence in the given circumstances.

Convertibel subscription. People pay a subscription to use a local fitness center, cultural activities, transportservices etc. In cases when subscribers can afford it, the moneys could be payed, for instance every month in advance, for the coming six months. However being not able to use the facilities (due to lock down) their counterperties should consider to ask to indeed continue payment (and not withdraw the subscription) but swap the nature of it by converting the monnies into a loan. With such a convertible subscrition (debt) a business borrows money with the intent to repay say 50 percent of it from the moment the facilities reopen again (say on 1 July), in a repayment scheme according to an agreed timeframe and (moderate) interest rate. Another conversion is possible too (into shares), but seem to sophisticated for this group of businesses. In exchange for the cancellation of the subscription the swap aim to help the financially struggling especially local business to continue to operate.

Professional advisors. The CERIL Exective statement (see above) ends with a special remark to advisors. In order to promote the use of rules based on the CERIL statement’s recommendations, it is suggested that, for those who can afford it, advisers offer the deferral of (preferably mitigated or moderated) fees with special discounts and introduce or extend a pro bono services programme (for instance until 31 August 2020). The gap could also be partly closed by a government. All countries strive to control the spread of the virus. They also strive to their utmost to protect the continuation of their economies. As the existing professional infrastucture will be capable to assist in achieving this policy goal, any government should consider to fund partly the work of professionals during the wave of insolvencies that is to be expected. An orderly and effective handling of cases, be it luiqidation when conditions so dictate or rescue measures or proceedings when appropriate, any country should aim to protect. When indeed lawyers or accountants drop their fees to, say, 50 percent, a government cound fund 20 or 30 percent. Also the continuation of an organised insolvency market is a goal as such. It should promote to prevent pressure on the judiciary, to avoid unnecessary quarrels between stakeholders and thus enable to continue business which are financially healthy, for the benefit of the general economy.