Steinhoff restructuring: The Dutch suspension of payments as an excellent tool for the restructuring of mass litigation claims

Introduction

The Netherlands played a key role in the global restructuring of the Steinhoff group, which was one of the largest restructurings in 2021. Steinhoff International Holdings N.V. (Steinhoff NV) entered into a Dutch suspension of payments to restructure its debt. In essence, it restructured €14 billion in debt from approximately 66,000 creditors, including mass litigation claimants. This sets a ground-breaking precedent for successful international restructurings of mass litigation claims, which can also be useful for other forms of restructurings involving a significant amount of creditors (e.g., bond debt restructurings).

Background

Steinhoff NV is the Dutch holding company of the Steinhoff group. The Steinhoff group is a retail giant with approximately 90,000 employees in more than 30 countries. Steinhoff NV is incorporated in the Netherlands with its primary listing at the Frankfurt Stock Exchange and its secondary listing at the Johannesburg Stock Exchange. On 5 December 2017, Steinhoff NV announced that the Steinhoff group had been involved in financial irregularities, i.e., serious misstatements in the group's financial statements. As a result, 90% of its share price dropped in value which marked the beginning of a restructuring that would take over four years (and counting) to complete. Shareholders, investors and other stakeholders commenced legal proceedings against the Steinhoff group and its managing and supervisory directors in the Netherlands, Germany and South Africa. Various class-actions were commenced against the group as well. It was estimated that over 66,000 litigation creditors filed claims against the Steinhoff group, setting the scene for a large mass litigation claim.

Initially, the Steinhoff group went through a financial restructuring of €9 billion in debt with its financial creditors. The financial irregularities that were disclosed in December 2017 and the events that ensued therefrom (e.g. massive drop in share price and litigation claims against the group) resulted in various events of defaults under the company's finance documents. The Steinhoff group completed the financial restructuring in 2018 and 2019, using two English law company voluntary arrangements (CVAs) as well as a South African law scheme of arrangement. The CVAs and scheme of arrangement provided the Steinhoff group breathing space to restore value and resolve the mass litigation claims against it. As part of the financial arrangements, the Steinhoff group agreed to an extension of certain finance documents to 31 December 2021 and a runway and bandwidth within which it could attempt to settle the claims of the litigation creditors under a global settlement agreement. Subsequently, Steinhoff negotiated with various groups of litigation creditors, D&O insurers and Deloitte (its auditor during the time the financial irregularities took place) to reach a global settlement agreement. However, the extended timeline was not sufficient to complete the global settlement, nor was the bandwidth for settling the claims. Therefore, the Steinhoff group went through another restructuring, which was largely implemented in 2021 and is discussed below.¹

Restructuring proceedings in multiple jurisdictions

In July 2020, the Steinhoff group announced a global settlement setting forth its initial parameters. In order to effect certain amendments to its finance documents (e.g. extension of maturity date, a larger bandwidth for settling the litigation claims, and lowering the thresholds for future waivers and consents under the finance documents), Steinhoff promoted a series of consent requests under its finance documents. Certain documents, however, required unanimous consent which was not obtained. In order to, nonetheless, implement the required amendments under the finance documents which were governed by English law, Steinhoff NV commenced an English law scheme of arrangement. Conservatorium Holdings LLC, an investor affiliated to Centerbridge Partners and registered in Delaware with its headquarters in London (Conservatorium), opposed the sanctioning of the scheme of arrangement. However, the English court rejected its objection and sanctioned the scheme of arrangement on 5 February 2021.²

In the meanwhile, Conservatorium had also commenced a 'Dutch scheme', i.e. a restructuring proceeding under the newly enacted law Wet homologatie onderhands akkoord (the WHOA, please refer to the Q1 2020, Q4 2020 and Q2 2021 issues of our International Restructuring Newswire for articles on the new Dutch scheme). The new law entered into force on 1 January 2021 and Conservatorium was the first party to file a petition on the first business day of the year, i.e. 4 January 2021, under the WHOA to commence a Dutch scheme. Conservatorium requested the appointment of a restructuring expert because, inter alia, the formal launch of an insolvency proceeding was taking too long in its view, while at the same time it had doubts about the independence of the managing board of Steinhoff NV given possible ties with and/or undue pressure from the former chairman and shareholder. The Dutch scheme petition has proven to be a trailblazing move of immense strategic significance for circumstances where creditors would like to take action to accelerate a restructuring proceeding. In the restructuring of Steinhoff NV, Conservatorium reached an agreement and settled, resulting in the withdrawal of the Dutch scheme.

Steinhoff NV, in turn, immediately filed for a suspension of payments (surseance van betaling) on 15 February 2021, which was provisionally granted on the same date. This marked the beginning of the formal implementation of the global settlement through an insolvency proceeding in the Netherlands. One of the key considerations for the preference of Steinhoff NV for a suspension of payments over a Dutch scheme was that the former would be recognised in Germany, because it was already on Annex A of the European Insolvency Regulation while the latter was not yet.³ In addition to the Netherlands and Germany, legal actions were pending in South Africa. The recognition of a Dutch insolvency proceeding in South Africa was (in short:) not possible. However, given that part of the legal proceedings were commenced against Steinhoff International Holdings Proprietary Limited (Steinhoff Ltd), a South African entity and the previous holding company of the group, the restructuring also needed to be implemented in South Africa. Hence, a scheme of arrangement under section 155 of the South African Companies Act was commenced to implement the restructuring in South Africa. The Dutch suspension of payments and South African scheme of arrangement were inter-conditional upon each of them entering into force. The South African scheme of arrangement is still ongoing and expected to be completed early 2022. The Dutch suspension of payments, however, was completed in 2021. In the remainder of this article, we will focus on the Dutch suspension of payments.⁴

The Dutch suspension of payments

The Dutch suspension of payments is an insolvency proceeding aimed at the restructuring of a company. In essence, the proceeding is meant to provide the debtor breathing space to prepare a composition plan which it can offer to creditors. A debtor that foresees that it cannot continue paying its debts when due, may request a suspension of payments. The suspension of payments will be granted promptly on a provisional basis, which in practice means that the Dutch court will grant the provisional suspension of payments on the same day or within a couple of days. Further, the court will appoint an administrator whose consent, cooperation or authorisation is required for certain legal acts of the debtor. While it is not mandatory under the Dutch Bankruptcy Act, the court almost always appoints a supervisory judge who supervises the suspension of payments and the conduct of the administrator.

The definitive (i.e., final) suspension of payments is granted at a hearing before the court, unless voted against by (i) creditors representing 1/4^th of the value of the debt represented at such hearing, or (ii) creditors representing 1/3^rd of all creditors present or represented at such hearing. However, such hearing on the definitive suspension of payments is not required if a composition plan is filed together with the petition for a provisional suspension of payments. In such case, the court will immediately set a date for a creditors' meeting where creditors can vote on the composition plan directly (instead of voting on the definitive suspension of payments first, followed by a separate vote on the composition plan). In practice, debtors often file a composition plan with the day-one petition for a provisional suspension of payments and request the court to set a date for a vote on the composition plan since this provides a debtor a strategic advantage. The composition plan is adopted if voted in favour by (i) a simple majority of all admitted creditors who are present or represented at the meeting, (ii) who together hold at least half in value of all admitted claims. This means that dissenting creditors have a stronger blocking power in a vote on the definitive suspension of payments compared to a vote on the composition plan, which explains why debtors prefer a vote directly on the composition plan.

Once the composition plan is adopted by the creditors, a hearing will be scheduled where the court will confirm the composition plan, unless certain grounds have occurred. The confirmation of the composition plan results in the composition plan being binding an all creditors affected by the suspension of payments (including dissenting, absent and non-voting creditors). However, a suspension of payments—and, as a result, also a composition plan offered in a suspension of payments—only affects unsecured, non-preferred creditors. Under Dutch law, secured creditors and preferred creditors are not bound by the suspension of payments, can take recourse against the debtor's assets during the suspension of payments and cannot be impaired or crammed down under the composition plan. This has been one of the main drawbacks of a suspension of payments in practice and the main reason why it has not been a successful restructuring tool in the Netherlands.⁵ In most restructurings, the secured creditors are key stakeholders with a decisive role in making the restructuring successful. The only financial restructurings in the Netherlands where such composition plans have been used successfully were bond debt restructurings.⁶ The restructuring of Steinhoff, however, illustrates that a composition plan offered to creditors in a suspension of payments can also be a successful tool for the restructuring of mass litigation claims.

The suspension of payments of Steinhoff NV and the committee of representation

Steinhoff NV petitioned for a suspension of payments on 15 February 2021—which was provisionally granted on the same day—and filed a composition plan with the request to the court to schedule a vote on the composition plan immediately (instead of a vote on the definitive suspension of payments first), which was granted. One of the complex elements of the Steinhoff restructuring was its creditor base: there were approximately 66,000 litigation creditors based in various countries with claims governed by different legal systems and court proceedings pending in different jurisdictions. Setting up a procedure that would allow all these creditors to participate directly at creditors' meetings, dispute claims of other creditors and vote on the composition plan would have been challenging and complicated.

The Dutch suspension of payments provides a special scheme for restructurings with a large number of creditors called the 'Brandaris-scheme'. NV Assurantie Maatschappij Brandaris (Brandaris) was an insurance company with more than 200,000 creditors that suffered distress in the 1960s. The Dutch government introduced a legislative amendment to facilitate its restructuring and introduced the Brandaris-scheme. The Brandaris-scheme provides certain specific rules—which deviate from the standard provisions—for a suspension of payments with more than 5,000 or (for certain provisions to apply) 10,000 creditors, which allow for relief from the court. The most important tool is the ability to appoint a committee of representation (commissie van vertegenwoordiging) with at least nine members.⁷ A committee of representation should not be confused with a creditors' committee in a suspension of payments or in international insolvency proceedings like US Chapter 11 cases, as the function and role of such committee differs. The appointment of a committee of representation results in creditors losing their individual voting rights; the members of the committee of representation have the exclusive right to vote on the definitive suspension of payments and/or the composition plan. In consideration for creditors losing their individual voting rights, the Dutch legislature introduced a higher threshold for adopting a composition plan: 3/4^th of the members of the committee who are present or represented at the voting meeting need to vote in favour of the composition plan, provided that the quorum requirements for holding such meeting are met (i.e. for the first meeting it is required that 2/3^rd of all members are present and, if such quorum is not met, for a subsequent meeting no quorum requirement applies).⁸ The Brandaris-scheme was only used once in history: for the suspension of payments of Brandaris only. This changed with the restructuring of Steinhoff NV.

The administrators of Steinhoff NV requested the Dutch court to apply the Brandaris-scheme in the suspension of payments. They proposed a committee with 14 members: members of each (large) creditor group plus four independent members. There is no requirement that all members must be creditors or from a creditor group and, hence, independent members deemed to represent and act in the interest of the creditors may also be appointed. The appointment of a committee of representation was heavily debated and strongly disputed by two creditors. Nonetheless, the court rejected their opposition and granted the request for a committee of representation.⁹ As a result, the more than 66,000 creditors did not vote directly, but rather the 14 members of the committee of representation—after various meetings of the committee of representation with elaborate deliberations on the composition plan—voted on the composition plan.

Once the composition plan was adopted, a confirmation hearing was held on 16 September 2021. The court ruled that none of the grounds for rejection applied and confirmed the composition plan.¹⁰ From a Dutch perspective, this marks the end of the suspension of payments, but the plan itself contains a condition precedent that it will become effective once the South African scheme of arrangement has also been sanctioned.

The committee of representation has been an important novelty, albeit based on existing legislation, which was only tested once in practice, as the appointment of the committee of representation streamlined the process and allowed for a resolution mechanism to restructure and settle litigation claims of over 66,000 creditors. The Dutch suspension of payments proved to be of immense significance for settling all claims. The possibility of appointing a committee of representation to streamline the voting process was a material advantage compared to the new Dutch scheme as the WHOA does not provide a legal basis in the new Act to appoint a committee of representation—although the WHOA does allow for bespoke relief from the court which could open the way for the appointment of a committee of representation in future restructurings. Further, one of the main advantages of the Dutch suspension of payments over more traditional tools for resolving mass litigation claims, e.g., like the Act on the Settlement of Mass Damages Claims in Collective Actions (Wet afwikkeling massaschade in collectieve actie, WAMCA) is that it provides for final resolution without an opt-out feature like the WAMCA. In order to reach final resolution, the composition plan of Steinhoff NV also stipulated a contractual bar date for submitting claims (i.e., of three months after the plan becoming effective), which was another important novelty as the Dutch suspension of payments does not have a statutory bar date for submitting claims.

The Steinhoff Dutch suspension of payments provides a ground-breaking precedent for settling mass litigation claims and class-actions through insolvency proceedings, making the Netherlands an excellent forum of choice. Needless to say, not all mass litigation claims and class-actions are suitable for resolution through insolvency proceedings and the Steinhoff restructuring has been a peculiar case. However, in situations where mass litigation claims put a debtor on the brink of a bankruptcy, the Dutch suspension of payments provides an excellent tool with the committee of representation being an appealing resolution mechanism to facilitate the process. More importantly, the latter makes the Dutch suspension of payments attractive for global restructurings with a large number of creditors.

The application of the Brandaris-scheme in the Steinhoff restructuring also provides an excellent precedent for bond debt restructuring that involve numerous unsecured bondholders. For example, if different tranches of bonds have been issued, a committee member for each of the tranches may be appointed to represent the bondholders in the committee of representation. The members may also be bond trustees. Bond debt restructurings may be streamlined by a voting procedure where the committee of representation votes instead of individual bondholders. However, existing practice in the Netherlands is to invite the bondholders as beneficial owners to vote directly on the composition plan. It remains to be seen whether the Steinhoff restructuring will change that practice.

Conclusion

The global restructuring of the Steinhoff group has been a fascinating restructuring thus far with multiple proceedings in different jurisdictions. The Dutch suspension of payments of Steinhoff NV has ensured that the implementation of the restructuring has been completed in the Netherlands, allowing for a global settlement with approximately 66,000 creditors consisting of different creditor groups, such as financial creditors and litigation creditors. The application of the Brandaris-scheme was an important tool: by appointing a committee of representation and allowing the members of the committee to vote, the voting procedure was streamlined setting an excellent precedent for large restructurings with large groups of international creditors. This also sets a blueprint for other forms of restructurings like bond debt restructurings with large groups of international bondholders. The Steinhoff restructuring illustrates the importance of the Dutch suspension of payments not only as a restructuring tool, but also as a tool to settle and resolve mass litigation claims and class-actions.