Creditors' agreement

Creditors' agreement

On January 1, 2021, the Private Agreement Homologation Act (WHOA) entered into force. This act supports companies that are at risk of bankruptcy due to high debt levels, but still have viable business activities. Bankruptcy can be prevented when an organization reorganizes its debts. Before the WHOA came into effect, all creditors and shareholders had to agree to a creditors' agreement. If even one creditor did not agree to the amicable settlement, bankruptcy could still be filed. With the WHOA, creditors are divided into different classes. If the majority within a class agrees to the proposal, the court can confirm the agreement. Those who voted against are then also bound by the agreement. Our lawyers and legal experts offer legal advice to creditors and debtors regarding creditors' agreements.

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The creditors' agreement within restructuring and insolvency

A creditors' agreement is an arrangement in which a company reaches a settlement with its creditors regarding the (partial) repayment of outstanding debts. Within our Restructuring and Insolvency , the creditors' agreement is a central instrument for averting impending bankruptcy. Unlike a bankruptcy application, the entrepreneur remains in control under an agreement: the board retains control over the company and no trustee is appointed. This also distinguishes the agreement from the classic suspension of payments and debt restructuring. Whether you are an international group or the baker around the corner, our mixed teams of lawyers and in-house counsel assist both debtors wishing to propose an agreement and creditors to whom an agreement is presented.

Closed or public WHOA procedure

The WHOA offers the debtor the choice between a closed and a public agreement procedure. The procedure starts with a declaration of commencement filed with the registry of the court (Article 370, paragraph 3 of the Bankruptcy Act). In a closed agreement procedure, the restructuring remains outside the public eye, which limits reputational damage and unrest among customers and suppliers; in practice, this route is attractive for smaller entrepreneurs. The public agreement procedure is recorded in a public register and can be recognized under the European Insolvency Regulation, which is important for cross-border restructurings of larger companies. We advise on the most suitable route, taking into account your creditors, financing, and international interconnectedness.

Class division and voting

Under the WHOA, creditors and shareholders are classified into classes of parties with a comparable position, for example, preferred and unsecured creditors, or financiers versus other creditors (Article 374 of the Bankruptcy Act). The agreement must contain all information that voting parties need to form an opinion, such as the classification, the financial consequences per class, and the expected proceeds in the event of bankruptcy. A class votes in favour if at least two-thirds of the amount represented in that class agrees. To mitigate risks, the debtor or restructuring expert may ask the court to review the classification in advance (Article 378 of the Bankruptcy Act). A careful classification is decisive for the chances of success of the agreement; we draw this up together with you.

Cooling-off period and restructuring expert

During the process, the court may declare a cooling-off period of up to four months, with an extension to a maximum of eight months (Article 376 of the Bankruptcy Act). During this period, creditors cannot recover their claims from the company's assets without permission, and bankruptcy applications are suspended to allow for a period of calm for negotiations. Upon request, the court may appoint a restructuring expert (Article 371 of the Bankruptcy Act), who can prepare an agreement and submit it for homologation. If not all classes agree and there is no restructuring expert, the court appoints an observer to safeguard the interests of the collective creditors. Our lawyers act as advisors in these processes, and where appropriate, as restructuring experts or counsel for an involved creditor.

Homologation by the court and grounds for rejection

For homologation, it is required that at least one class that would still receive a distribution in the event of bankruptcy has voted in favour of the agreement. Depending on the urgency, the court usually handles the request for homologation within eight to fourteen days. The judge assesses ex officio against general grounds for rejection, such as: the debtor is not in a state where it is reasonably likely that he will become insolvent; creditors have not been properly informed; the agreement was concluded through fraud or favoritism; or performance is insufficiently guaranteed (Article 384, paragraph 2 of the Bankruptcy Act). In addition, supplementary grounds for rejection apply that can only be invoked by dissenting voters, including the so-called “best interest of creditors” test: a creditor may not be worse off under the agreement than in a bankruptcy (Article 384, paragraph 3 of the Bankruptcy Act). Furthermore, for small SME creditors, it applies that they are in principle entitled to at least 20% of their claim, unless there is a compelling ground for deviation.

Consequences of a homologated agreement

In principle, a homologated agreement is binding on all creditors and shareholders involved in the agreement, including those who voted against it and even on a class that voted against it as a whole (the so-called cross-class cram-down). The homologation judgment constitutes an enforceable title, and there is no right of appeal against the homologation. A homologated agreement can only be dissolved in the event of structural default in performance. For the company, this means that the debt burden is sustainably restructured and viable activities can be continued; for creditors, it means that their position is definitively established. It is therefore of great importance for both debtors and creditors that the agreement and its substantiation are legally and financially watertight.

Creditors' agreement, restart, or bankruptcy?

A creditors' agreement is not always the appropriate route. Sometimes a restart or a controlled bankruptcy offers a better outcome for the interests involved. We objectively compare the scenarios with you: what does the agreement yield compared to liquidation in bankruptcy, what financing is required, and which creditors must be included? For the small business owner, we seek a pragmatic and affordable solution; for the group, we construct an agreement that holds up internationally and with financiers. In this way, our lawyers and in-house counsel connect the creditors' agreement to the broader strategy within restructuring and insolvency.