No amendment to the ranking of security rights under the Dutch Scheme (WHOA) procedure

The Rotterdam District Court, the Netherlands, has ruled that an amendment to the ranking of security rights is not possible under the Dutch Scheme procedure (WHOA), without the consent of the relevant secured creditors. While there is still ambiguity about the (im)possibilities of amending creditors’ rights under the WHOA, the ruling is a welcome clarification in the context of distressed finance and debt restructuring in the Netherlands.

Background

Two debtors were preparing a reorganisation plan under the WHOA, whereby they proposed to demote the security rights of two of their senior lenders in favour of a new lender. The senior lenders seemed unwilling to provide much needed additional funding and possessed a security right over, amongst other things, all of the future trade receivables of the debtors. The new lender was willing to provide the required new funding, but only with a super senior right of pledge over the specific future trade receivables against which he would be lending. The debtors therefor sought to amend the ranking of certain security rights as part of the proposed restructuring plan, by granting the new lender super senior security over the specific future trade receivables against which he would be lending. The debtors utilised the possibility for interim relief under the WHOA procedure to petition the court for directions as to whether the amendment was possible under the WHOA procedure.

Judgement

The court ruled that amending the ranking of security rights is not possible under the WHOA procedure. It substantiated its decision by referring to the Restructuring Directive, which provides EU-member states with the discretion to codify the option for super priority for rescue financiers which would legally favour them relative to the other creditors in a subsequent insolvency procedure. This is exactly what the debtors and the new financier sought to accomplish by amending the ranking of security rights and the European legislator opened the door for such arrangements. The court, however, pointed towards the Dutch legislator, who had specifically indicated that the discretion provided in the Restructuring Directive was not used when implementing the Restructuring Directive through the enactment of the WHOA procedure.

Impact of the decision

Following the decision of the court, debtors cannot demote the ranking of the security rights of their existing lenders under the WHOA. This raises the question whether contractual arrangements in respect of the ranking of creditors can be amended under the WHOA. This question is relevant for the syndicated finance practice, in which contractual arrangements regarding the ranking of creditors (e.g. a distribution waterfall in an intercreditor agreement) have become commonplace. Whether amendments to such contractual arrangements are possible under the WHOA is still unclear and will need to be answered by future case law.

Take Away

The court has provided the Dutch distressed finance and restructuring market some much needed clarity by ruling that an amendment to the ranking of security rights falls outside the scope of the WHOA procedure. This decision is in line with the approach the Dutch legislator has taken in respect of implementing the Restructuring Directive. Whether contractual arrangements in respect of the ranking of creditors do fall under the scope of the WHOA is to be decided in court.