Your partner for restructuring, bankruptcy and restart


Your company or Dutch subsidiary is in financial difficulties. At first you thought that the situation would be short-lived, but your customers are also struggling to survive and cashflow is low. You can still see opportunities in the marketplace, but with your current costs you cannot make a successful transition back to profitability.

The above example unfortunately encapsulates the situation for many companies since the beginning of the economic crisis. Fixed costs, such as rent and personnel continue at the same pace, but are no longer aligned with the shrunken income of the company.

Remediation/ Extrajudicial composition

In some cases, voluntary remediation is still possible. For example, a reorganisation plan can be drawn up including a collective redundancy plan for personnel. A reorganisation has the advantage that it is often invisible to the outside world. The company’s reputation is not damaged and the company preserves valuable assets and customers. In addition, contact can be established with the largest creditors: bank, lessor, leasing company, suppliers, etc.

Experience shows that suppliers are often willing to participate in a debt remediation scheme, but other creditors may be less flexible. If there are tax arrears, then remediation is often difficult because of the priority of the tax authorities, which should also be reflected in an reorganisation plan. This means that less remains for the other creditors.

Reorganisation may entail individual agreements with certain creditors, but can also take the form of a settlement with all creditors. An extrajudicial agreement offers different classes of creditors a certain percentage of the outstanding receivables against final discharge, in line with their legal priority as creditors. Banks or stakeholders are sometimes willing to fund the agreement with or without new financing for the downsized company.

At this moment it is not (yet) possible to force creditors to contribute to voluntary remediation. For an out of court settlement, participation of all creditors is required. Once one creditor refuses to cooperate, the agreement crumbles like a house of cards. The legislator considers this situation unsatisfactory and has therefore drafted a bill (WCO II) enabling compulsory composition outside of bankruptcy in the future. When certain conditions are met, then a creditor will have to accept the offered composition.

Bankruptcy/ Receivership

By definition bankruptcy means a destruction of assets. Bad publicity is often inevitable, customers will seek out other suppliers and valuable allies and personnel are lost. If, however, remediation is no longer a possibility, a bankruptcy or a moratorium of payments may be the only remaining options.

A moratorium should overcome the many problems involved voluntary reorganisation, as the moratorium creates a temporary suspension of commitments with the intention of creating space to conclude a judicial (compulsory) agreement with creditors. However, it is standard practice in The Netherlands that the majority of moratoriums convert into full bankruptcy after a short time, without creditors ever having been able to vote for a composition. The reason for this is that the moratorium does not apply to secured or preferential creditors. Preference according to the law is attributed to wages and taxes. If there is no extra finance in place during the suspension of payments to pay these creditors, then soon the bankruptcy receiver will conclude that bankruptcy must be applied for.

Pre-pack

Another possibility is a pre-pack procedure. The court appoints an ‘intended’ receiver before bankruptcy who oversees the best possible transfer and restart of operations. The intended receiver is there to ensure that the process is honest and the best deal possible is on the table before bankruptcy. If the pre-pack is successful, the new company is already operational hours or days after bankruptcy is actually declared with minimal noise and maximum yield for the old creditors. Usual destruction of value has been prevented thanks to the preparation during the pre-pack phase.

The pre-pack is currently still controversial in The Netherlands because it is said to be a covert reorganisation whereby legal protections for personnel are circumvented. In addition, parties are critical of pre-packs involving  old management and / or shareholders in the restart. The legislator, however, is convinced of the benefits of the pre-pack. A bill for anchoring the pre-pack in law has been adopted in the summer of 2016 and will come into law in 2017. Currently, several courts already operate an unofficial pre-pack procedure.

The pre-pack process is not expected to be applicable to small and medium sized businesses. Most courts now require that the company must represent a certain social importance before a pre-pack is possible. That interest will often be apparent from the business, turnover and the size of the workforce.

For a successful pre-pack,  the cooperation of major stakeholders is nearly always necessary. Timely consultation with stakeholders is essential.

Restart after bankruptcy

When a pre-pack is not possible or desirable, the possibility remains for a restart or relaunch of operations after bankruptcy. Again, thorough preparation is necessary. There should be a business plan and you need to reflect on a new structure and decide which employees and assets you would like to take over. Certain debts may have to be taken over to ensure continuity. Is certain equipment, for example, leased and necessary to continue production? Is it or is not desirable to take over the rent on the current premises etc. etc...

Contrary to what many may think, it is better to speak openly with the receiver about restart plans and not to start with the transfer of assets before bankruptcy. This is usually a red flag for the receiver that could complicate negotiations. This does not mean that you cannot talk to parties that you think you will need for a possible restart and ask for their cooperation.

Another common mistake is that people assume that the receiver has no choice but to sell to the original owner / shareholder. In many cases, just after bankruptcy other parties appear interested in acquiring assets at a relatively affordable price. It sometimes happens that someone else runs off with the loot. You should calculate a realistic price for the assets to avoid unexpected surprises or bidding wars.
 

Also assume that the receiver wants to see valuations and forecasts to determine the value of the assets and goodwill. For yourself, these things also very important because you need to know what the financial picture will be after the restart. A successful restart can be achieved in one or two weeks, but the speed depends mainly on good preparation and a convincing bid.

How can Bowmer & Nuiten help you?

Bowmer & Nuiten has an experienced team of corporate lawyers and receivers who know the bankruptcy process by heart. We work closely with you and your advisors on restart or rehabilitation plans. If you want to reorganise staff, then we can draw up a redundancy plan. If you decide that bankruptcy is the way forward, we will prepare the request and liaise and negotiate with the receiver after bankruptcy has been declared.

If you are considering a pre-pack, we can establish to what chance of success the request will have and take the necessary measures if a pre-pack is viable.

For more information or questions, please contact Maria Bowmer.

Contact us