REALWorld Law

Real estate finance

Non-insolvency procedures

Are there any schemes or arrangements which can be implemented in relation to a debtor company or business which is in financial difficulties (other than insolvency proceedings)? How do they affect the rights of a lender with security?

Netherlands

Netherlands

The WHOA (Wet homologatie onderhands akkoord), which came into effect on 1 January 2021, is a Dutch pre-insolvency proceeding inspired by the English Scheme of Arrangement and Chapter 11 of the US Bankruptcy Code. The WHOA provides businesses with a structured and flexible process to negotiate debt agreements and restructure their financial obligations. The end goal of the WHOA is to create a new viable capital structure  (debt and equity) that allows financially distressed companies to continue to operate, preventing a bankruptcy (faillissement).

The proceeding allows the debtor to impose a restructuring plan on dissenting (classes of) creditors and shareholders. The procedure is designed such that court involvement is in principle minimal and can be completed in a relatively short timeframe.

The WHOA grants companies significant freedom in determining the content of the WHOA plan. In addition to allowing creditors to be compelled to waive part of their claims, the WHOA, through Article 373 of the Bankruptcy Act (Faillissementswet), also provides the possibility to restructure burdensome contracts (such as rental or lease agreements). The relevant company can propose to modify (or terminate) such a burdensome agreement. If the contractual counterparty does not agree, the debtor has the right to unilaterally terminate the agreement, provided the Dutch court grants permission. A counterparty’s claim for damages resulting from such termination can be included in the WHOA restructuring plan as concurrent debt.

On 25 October 2024, the Dutch Supreme Court issued a landmark ruling regarding the WHOA. The Dutch Supreme Court determined that a WHOA plan cannot force financiers to provide entirely new funding or funding under previously committed credit facilities against amended terms. The Dutch Supreme Court further clarified that a WHOA plan can change the order of priority among creditors, provided the WHOA sanctioning criteria are observed.  

Furthermore, with respect to mortgage rights in particular, if a  debtor is having financial difficulties, a mortgagee, who is also the pledgee with respect to the rental income arising from the mortgaged property, can make its right of pledge public, as a result of which the tenants must pay the rent directly to the mortgagee/pledgee (and not to the pledgor).

The mortgagee is also entitled to:

  • take over the management of the property if the mortgagor seriously defaults in the performance of its obligations towards the mortgagee and the Dutch court grants the mortgagee authorization to do so. This can only be the case when this is agreed upon beforehand in the mortgage deed. In such an event, the mortgagee must be aware that it could be deemed to be the manager of the relevant property under Dutch environmental law, in which case the authorities could require the mortgagee to comply with the applicable environmental rules. Therefore, this should only be done when the implications of potential environmental liability have been considered; and take the property under its control if this is required for purposes of foreclosure.