On 6 April 2023, Steinhoff International Holdings NV (SIHNV) announced that the Amsterdam District Court had appointed both Frédéric Verhoeven, a partner at Houthoff, and Willem Meijer, founder of Mediation Kamer Amsterdam, as observers (“observator”) in connection with its draft restructuring plan. Steinhoff’s plan is covered by the Dutch Wet homologatie onderhands akkoord or Act on the confirmation of a private restructuring plan (WHOA). This act entered into force on 1 January 2021 and now is a part of the Dutch Bankruptcy Act, at articles 369 to 387.
WHOA. The WHOA, as it is still called, introduced a flexible framework for proposing a restructuring or liquidating plan (“akkoord”) to a number of the debtors’ creditors and shareholders, which upon court confirmation (“homologatie”) will be binding on the absent or dissenting creditors and shareholders included in the plan. The result is a compulsory plan (“dwangakkoord”), a multi-party contract that is binding against naysayers (see the references below this article for background).
WHOA scheme. As GRR has reported, SIHNV’s draft plan was published on 29 March. In an accompanying press release, SIHNV said: “The task of the observer is to assess the establishment of a restructuring plan (akkoord)”.
What does this task specifically entail? The “observer” is one of the many new terms and expressions the WHOA introduced into the Dutch Bankruptcy Act. The debtor in a WHOA is a debtor in possession (DIP). The debtor has primacy in the private composition or restructuring plan (“akkoord”) procedure.
In terms of property rights, the debtor is not replaced by someone else (like a “curator” in the event of bankruptcy liquidation or “faillissement”), or assisted by someone else (like a “bewindvoerder” in the event of suspension of payments proceedings): it remains fully and exclusively authorised to dispose of its property during the application of the WHOA scheme.
Restructuring expert. In addition, the WHOA has a restructuring expert (“herstructureringsdeskundige”). If there is reason to do so, the debtor’s creditors, shareholders or other interested parties may deprive the debtor of the ability to design and present a plan. Instead, they can ask the court to appoint a restructuring expert who can prepare a plan and put it to a vote. A restructuring expert must act effectively, impartially and independently, having regard to the interests of the collective creditors and shareholders, to try to reach a settlement.
If the entrepreneur-debtor itself, as DIP, asks for a stay of enforcement measures against some or all of its creditors (a cooling-off period) as it tries to reach an agreement, its creditors or shareholders can keep control of the process by asking the court to appoint an observer who will supervise the process in the interest of the joint creditors.
Observer. In the Steinhoff case, however, the debtor itself applied for the appointment of an observer.
An observer can be appointed during the preparation of a plan or agreement. At that time, there need not yet be a “critical situation of imminent insolvency” – the general requirement for the assignment of a restructuring expert.
The background to the introduction of the figure of the observer lies mainly in a modest role that was originally reserved for creditors in the draft-legislation for the WHOA scheme, which it was feared at the time might be abused by debtors.
One of the alternatives to increase participation of creditors in a restructuring and prevent the debtor from using the WHOA process improperly is to appoint an observer, “… who monitors a plan process initiated by the debtor and, in that context, the interests of the joint creditors of the debtor”, as the Explanatory Note says.
According to the second sentence of Article 380(1) of the Dutch Bankruptcy Act, the observer has the statutory task of supervising the formation of the plan (composition), while having an eye for (“oog … hebben voor”) the interests of the joint creditors. This job description is not precisely defined in the law, however. Article 380(2) only provides: “As soon as it becomes apparent (“wanneer het duidelijk wordt”) that the debtor will not be able (“dat het de schuldenaar niet zal lukken”) to reach an arrangement under this Section or that the interests of the joint creditors will be prejudiced, the Observer shall inform the court accordingly”.
In that case, the court will give the observer and the debtor the opportunity to express an opinion in a manner to be determined by it, and within a period to be determined by it, and will attach any consequences that it deems appropriate. The terminology (“becomes apparent” and “will not be able to reach” an arrangement) is certainly vague. If both have been established, at the discretion of the observer, he is under an obligation to “inform the court”.
What’s an observer doing? It’s a bit of guesswork as to the specific meaning of the nature, scope and depth of the observer’s supervision. The legislator provides just a few clues as to what the observer should aim for. He is to “supervise the formation of the plan, while taking into account the interests of the joint creditors”.
Various verbs can be used to describe the activity of the observer.
The first is: to observe. His legal job designation suggests that it is about observing. This is the deliberate observation of the process of establishing the plan and of the persons involved in the realisation of that plan (as a multi-party agreement). Observation is a method of finding out and registering actual behaviour without direct contact with those involved. The purpose of observing is to find out how the presentation of a proposal and the reactions to it and a subsequent negotiation process took place. During the observation, an objective account on its own merits is made of what has occurred. In this activity, the observer is a person who functions as a “fly on the wall”.
A second term is: to monitor. The Explanatory Note provides the court has the option of appointing an observer “… who monitors a plan process initiated by the debtor and, in that context, represents the interests of the debtor’s collective creditors”. It also mentions that when a cooling-off period is announced, the court can choose “… to appoint an observer who will monitor the preparation process.” In general, monitoring means checking progress in a certain process through a monitor. The observer is then someone who exercises progress control during a process that is being developed towards an agreement.
A final term is one which is also in the act: to supervise (“toezicht houden”). Surveillance has the meaning of keeping an eye on, paying attention to, monitoring an activity, process or object in order to assess whether everything is or is going as it should be. In Dutch corporate law, the figure of supervisor (e.g. a supervisory board) is well-known. In general, a supervisor fulfils its role from the perspective of the objectives of the company in question. A supervisory body assesses whether the management board has made a careful and balanced assessment of the company’s commercial interests, including the interests of internal and external stakeholders, in the performance of its duties.
Bounderies of its work? Supervision in the context of Article 380(1) relates to supervision of the formation of the plan (composition), or the formation of an agreement, based on necessary information obtained. The “narrow” goal of the conclusion or formation of the agreement will relate to the tactics or strategy to reach the plan and the continuity in the progress of talks and compliance with laws and regulations. In his task (supervising the formation of the plan), the observer must “keep an eye on” the interests of the joint creditors.
“Keeping an eye on” is a new term in the vocabulary of Dutch insolvency law. The collective interests of the creditors precludes taking into account the individual interests of these stakeholders – it is about the interests of the joint creditors. The Explanatory Note provides: “The observer will use these spectacles (“bril”) to assess the composition before it and inform the court” about the fact that the debtor will not be able to reach a plan (composition) or that the interests of the joint creditors will be harmed. With the same “spectacles”, the observer will give the court his view on an agreement in the context of a homologation request (Article 384(7)). Neither the text of Article 380(1) nor the Explanatory Note mentions to “keep an eye” on the interests of shareholders. One may expect a court to assist the sloppy legislator with a reasonable interpretation implying that the observer is also concerned about (“keeps an eye on”) the interests of the shareholders whose rights may be affected by the plan.
The WHOA legislation also does not specify the scope, depth and intensity of the supervision. The question arises as to how far supervision of the formation of a plan extends: I understand it as extending to the debtor (DIP) as it gathers the essentials for a promising restructuring plan – preparing a draft proposal and preparing and conducting negotiations over the plan, as well as essential information concerning the position of creditors and shareholders in that process.
The Dutch observers in Steinhoff, this international, rather complex case, will not only be the supervisors of the formation process, but also trackers who will closely follow the debtor’s own activity within the not-yet-sophisticated WHOA system.
The question has arisen in Dutch literature whether the intended supervision also includes guarding against improper conduct or detrimental transactions. Must the observer report to the court that the preparatory period was affected by the favouring of one or more creditors or shareholders with voting rights or by other unfair means, regardless of whether the debtor or another person cooperated in that unfairness? Must it report that assets have been concealed? Or that in the preparatory period for the plan, selective payments were made or detrimental transactions carried out? If so, how far back? Were these transactions or payments most certainly made? Most probably? Seemingly likely?
It has been proposed that, once a WHOA procedure formally starts, the court should ex officio explicitly order that the observer’s supervision also extends to the period prior to the filing of the statement of initiation for the proceedings (e.g. for six months).
These are all open questions.
In a narrow interpretation of the law, the observer has the task of supervising the formation of the plan, while taking into account (during that supervision) the interests of the joint creditors. His job is quite vaguely defined and it seems difficult to also include investigation of irregularities under the wording. Would this then fit under how extensive the observer’s research should be, let alone its costs?
Well, I’ll be following the case with interest.
References
Gert-Jan Boon, Reinout Vriesendorp and Harold Koster, SPECIAL ISSUE PREVENTIVE RESTRUCTURING 8. The WHOA: the Breakthrough for a Dutch Business Rescue Culture, HERO 2022 / W-008, (15 December 2022)
WHOA Explanatory Memorandum, Parliamentary Documents II 2018/19, 35 249, nr. 3, p. 15, 21 and 24.
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR mid-April 2023. See globalrestructuringreview.com