Which of the in WCOII and Chapter 11 described cram down procedure should have preference for Dutch law in the perspective of European Insolvency Law?

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Which of the in WCOII and Chapter 11 described cram down

procedure should have preference for Dutch law in the

perspective of European Insolvency Law?

Natasja Wagenaar June 24th 2015

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Master thesis

Title: Which of the in WCOII and Chapter 11 described cram down procedure should have preference for Dutch law in the perspective of European Insolvency Law?

University of Amsterdam Faculty of Law

Master European Private Law By: Natasja Wagenaar

Studentnumber: 6035809

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Table of Contents

Table of Contents ... 3

1. Introduction ... 4

2. Commission Recommendation on a new approach to business failure and insolvency ... 6

2.1 Background and goals of the Recommendation ... 6

2.2 Specific recommendations on the cram down procedure ... 9

3. US Law; Chapter 11 US Bankruptcy Code ... 12

3.1 Cram down procedure ... 12

3.2 Protection of classes in the cram down procedure ... 16

Unfair discrimination ... 16

Fair and equitable ... 17

4. Dutch Law; WCOII ... 22

4.1 Cram down procedure ... 23

4.2 Protection of creditors ... 24

Confirmation of the plan ... 25

Cram down of dissenting classes ... 26

5. Preferable system under European Insolvency Law ... 28

5.1 Comparison of the systems in the light of the Recommendation ... 28

5.2 Recommended adaptions to the WCOII cram down procedure ... 31

Recommended adoptions to the WCOII ... 31

Should the APR be introduced in the WCOII? ... 34

6. Conclusion ... 37

7. Sources ... 39

Literature ... 39

Case studies ... 42

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1. Introduction

As a consequence of the worldwide financial crisis many businesses faced financial

difficulties, some even resulting in bankruptcy. To stabilize the economic market and prevent businesses from going bankrupt, insolvency proceedings have changed focus over the last years. Old insolvency law proceedings were generally aimed at liquidation, whereas now this seems to be an outdated principle. In addition, the European Commission is moving towards a new approach to business failure and insolvency. In their recommendation of 12.3.2014(the ‘Recommendation’) the Commission states that ‘the objective of this Recommendation is to

ensure that viable enterprises in financial difficulties, wherever they are located in the Union, have access to national insolvency frameworks which enables them to restructure at an early stage with a view to preventing their insolvency, and therefore maximise the total value to creditors, employees, owners and the economy as a whole. The Recommendation also aims at giving honest bankrupt entrepreneurs a second chance across the Union.’1 Many European countries have already published a law proposal on pre-insolvency proceedings or schemes. Many of these proposals are based on the US Chapter 11 Bankruptcy Code and the scheme of arrangement in the UK.

Recently, the Dutch legislator has also proposed a pre-insolvency scheme (gerechtelijke

dwangakkoord buiten faillissement); the WCOII.2 The Dutch proposed WCOII could be a big improvement for Dutch practice in Insolvency Law.3 The proposed scheme under the WCOII is very similar to the US Chapter 11 procedure in the US Bankruptcy Code, nevertheless the system differs from Chapter 11 when it comes to the cram down procedure. The cram down procedure can be described as a way in which a majority can bind a minority. Specifically, the US Chapter 11 procedure cram down could be described as ‘the sanctioning of a plan

approved by some classes but not by others, with the result that it would be possible for the majority of classes to bind dissenting classes.’4 The Dutch legislator chose a different angle of incidence, which will be explained in chapter 4, but did not give a very clear explanation for this choice. 5 The question is whether this different approach to the cram down procedure is desirable for Dutch Law or whether the Chapter 11 cram down procedure should be preferred.

1 _{Recommendation 2014, recital 1} 2 _WCOII 3 _{INSOLAD 2014} 4 _{Wessels 2014, page 17} 5 _{Vriesendorp 2014, page 109}

5 In my thesis I will focus on a comparison between the cram down procedure in the

Chapter 11 procedure and the Dutch WCOII proposal, which for most of its content was largely derived from the Chapter 11 procedure. I will first give an overview of the background and content of the Recommendation and the ratio behind it. Next I will look at the Chapter 11 procedure and at the WCOII procedure. Subsequently I will compare the two systems and argue, in light of European Insolvency Law, which adaptions to the proposed procedure in the WCOII could be recommended to improve the procedure and bring it more in line with the aims of European Insolvency Law.

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2. Commission Recommendation on a new approach to business failure

and insolvency

Over the last few years European Insolvency Law has shown a significant shift towards a focus on pre-insolvency procedures and restructuring plans6. Several Member States have already adopted procedures based on the US Chapter 11 and the UK scheme of arrangements. In order to harmonise the national laws and reflect the legal practice in the Member States, the European Union devised several resolutions, acts and action plans.7 ‘This interest by

European policy makers is not new and the development of a ‘rescue culture’ has been well documented. However the global financial crisis and the subsequent rise in insolvencies as a result has re-focussed the policy makers.’8 The developments resulted in a Recommendation on a new approach to business failure and insolvency.9 This chapter will discuss the

Recommendation and focus in particular on the specific recommendations therein concerning the cram down procedure.

2.1 Background and goals of the Recommendation

European Insolvency Law has seen several changes in different fields over recent years.10 The Recommendation primarily focusses on the restructuring of companies and the adoption of effective legislation to ensure a pre-insolvency procedure in the national laws. According to the Commission ‘it is necessary to encourage greater coherence between the national

insolvency frameworks in order to reduce divergences and inefficiencies which hamper the early restructuring of viable companies in financial difficulties and the possibility of a second chance for honest entrepreneurs, and thereby to lower the cost of restructuring for both debtors and creditors. Greater coherence and increased efficiency in those national insolvency rules would maximise the returns to all types of creditors and investors and encourage cross-border investment.’11 In order to achieve this, the Member States should draft a national law that ensures an efficient procedure to reorganize companies.

6 _{Wessels 2014, page 2}

7 _{European Parliament Resolutions of 15 November 2011 with recommendations to the Commission on}

insolvency proceedings in the context of the EU company law, P7_TA(2011)0484, COM(2012)573 final, COM(2012) 742 final, COM(2012) 795 final.

8 _{van Zwieten 2015, page 3} 9 _{Recommendation 2014}

10 _{Recommendation 2014, recital 6-10} 11 _{Recommendation 2014, recital 11}

7 As mentioned previously, many Member States have already adopted national laws based on the US Chapter 11 procedure and the UK scheme of arrangements. The Recommendation is also closely related to these procedures. The Recommendation aim is to harmonise and regulate pre-insolvency procedures throughout the European Union. In order to do so the Commission came up with a set of “minimum standards” on “preventive restructuring frameworks” that should be implemented by the Member States.12

The Commission further states that: ‘To promote efficiency and reduce delays and costs, national preventive

restructuring frameworks should include flexible procedures limiting court formalities to where they are necessary and proportionate in order to safeguard the interests of creditors and other interested parties likely to be affected.’13 Kristen van Zwieten, an Oxford associate professor, analysed the Recommendation and structured it into six core principles14; these same principles are also followed by professor Bob Wessels.15 To provide a clear overview of the Recommendation I will now explain these 6 core principles, as structured by van Zwieten, by referring to the relevant clauses in the Recommendation:

- Early recourse: It is important for the restructuring plan that the debtor has the possibility to present a plan before the business actually becomes insolvent. Some Member States already provide for a restructuring plan in insolvency proceeding, however the regulation should be adapted to provide for a restructuring plan before insolvency proceedings take place. As the Recommendation states ‘the debtor should

be able to restructure at an early stage, as soon as it is apparent that there is a likelihood of insolvency.’16

- Minimised court involvement: In order to ensure a short and inexpensive procedure the Commission recommends very limited court involvement. ‘The involvement of the

court should be limited to where it is necessary and proportionate with a view to safeguarding the rights of creditors and other interested parties effected by the restructuring plan’.17 The Recommendation states that the debtor should be able to open restructuring proceedings without any court involvement, as this will improve the flexibility of the procedure since a court procedure is usually very lengthy and expensive.

12 _{Recommendation 2014, article 3 and 3(a)} 13 _{Recommendation 2014, recital 17} 14 _{van Zwieten 2015}

15 _{Wessels 2014, page 23}

16 _{Recommendation 2014, clause 6a} 17 _{Recommendation 2014, clause 7}

8 - Debtor-in-possession: In order to keep the business running the Recommendation

wants the debtor to keep control over the “-to-day operation of its business”,18 which should improve the effectiveness of the restructuring plan. In normal insolvency proceedings the debtor will not stay in control of its business, as the company would usually be liquidated resulting in the debtor losing its company. Since the aim of the restructuring plan is to give the debtor a second chance, it seems logical that the debtor will stay in control. However, it is also important to safeguard the rights of creditors. The Recommendation foresees in the option of a supervisor, ‘in order to oversee the

activity of the debtor and creditors and take the necessary measures to safeguard the legitimate interest of one or more creditors or another interested party.’19

- Court-ordered stay: The Recommendation foresees in a court-ordered stay which would ‘grant a temporary stay of individual enforcement actions lodged by creditors,

including secured and preferential creditors, who may otherwise hamper the prospects of a restructuring plan.’20 The stay should provide the debtor with extra time to come up with a restructuring plan. When important creditors are willing to accept the plan, it is vital that other creditors cannot block it by enforcing their claim. As such a stay largely interferes with creditors’ rights with respect to their claim, it is important to note that the Recommendation also safeguards their rights. There should be ‘a fair balance between the interest of the debtor and of the creditor, especially the secured creditor.’21

The stay should not last unduly long and should be lifted when no longer necessary.22

- Ability to bind dissenting creditors to a restructuring plan: To overcome the problem of creditors blocking a restructuring plan, the Recommendation foresees in the option for the court to bind dissenting creditors. ‘A restructuring plan should be adopted by

the majority in the amount of creditors' claims in each class, as prescribed by national law. Where there are more than two classes of creditors, Member States should be able to maintain or introduce provisions, that empower courts to confirm

restructuring plans that are supported by a majority of those classes of creditors, taking into account in particular the weight of the claims of the respective classes of

18 _{Recommendation 2014, clause 6b} 19 _{Recommendation 2014, clause 9b} 20 _{Recommendation 2014, clause 10} 21 _{Recommendation 2014, clause 13} 22 _{Recommendation 2014, clause 14}

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creditors.’23As mentioned before, this is also known as the cram down procedure, which I will discuss in more detail below.

- Protection for new finance: In order for a restructuring plan to succeed, new finance can be very helpful. Therefore the Recommendation recommends that new national legislation should include rules on new finance. When new finance is declared void because of existing insolvency laws, this could block the restructuring plan. In Dutch Law for example this could be voided through transaction avoidance, known as “Actio Pauliana”, which rule could block a restructuring plan when an investor is willing to invest new finance but wants more certainty for this finance.24 To overcome certain problems the Recommendation states that ‘providers of new financing as part of a

restructuring plan which is confirmed by a court should be exempted from civil and criminal liability relating to the restructuring process’25. Naturally fraud is excluded from this regulation.

2.2 Specific recommendations on the cram down procedure

An important part of the Recommendation is the power that is given to the court, as described in clause 18, to bind dissenting creditors to the restructuring plan; the so-called cram down. In order for the restructuring plan to be effective, the Member States should ensure there will be an efficient framework in the national law. Businesses should have the opportunity to present a restructuring plan and courts may, where necessary, bind creditors to this plan. First of all lengthy and costly procedures should be avoided so businesses can actually realize the restructuring plan. Another important factor is creditors that try to block the restructuring plan. Creditors may block a plan to realize their “nuisance value”; this value arises when a creditor has the position to block or slow the restructuring plan because they know the debtor is dependent on them.26 The legal procedure should overcome this problem by providing the option to bind such creditors to the plan, i.e. the cram down of dissenting creditors. In this following section I will look closely at the Commission’s specific recommendations on this cram down procedure.

23 _{Recommendation 2014, clause 18}

24 _{Actio Pauliana is expressed in art. 42-45 and 47 of the Dutch Bankruptcy Code, in the Dutch case ABN}

AMRO / Van Dooren q.q.( HR 8 juli 2005, NJ 2005, 457) the court declares transaction avoidance could also occur in case a bank provides extra finance to a company in return of extra security rights.

25 _{Recommendation 2014, clause 28} 26 _{van den Berg 2014, page 239}

10 Under the Recommendation a restructuring plan can be adopted in two ways. Firstly, the adoption of a restructuring plan by creditors without any court involvement and secondly, the court confirmation of a restructuring plan despite the fact that not all creditors agreed to the plan. For the first option the Recommendation ensures that Member States give the possibility to adopt a restructuring plan ‘by certain creditors or certain types or classes of creditors only,

provided that other creditors are not affected.’27 In case a company proposes a restructuring plan that only affects a certain group of creditors, meaning the other creditors will still get paid and retain their rights as before the restructuring plan, the company does not have to involve those unaffected creditors in the proposal of their plan. The Commission provides this option without any court involvement, however since the other creditors are not affected this is not an actual cram down of (dissenting) creditors. The cram down of dissenting creditors is given in the second option, the court confirmation of the restructuring plan. Since dissenting creditors are bound to a restructuring plan against their will it is important to safeguard their interests, as the Commission states; ‘to ensure that the rights of creditors are not unduly

affected by a restructuring plan and in the interest of legal certainty, restructuring plans which affect the interests of dissenting creditors or make provision for new financing should be confirmed by a court in order to become binding.’28 The Recommendation provides a list of conditions that the Member States should include in their national laws and the courts should bear in mind when confirming a restructuring plan:

a) ‘the restructuring plan has been adopted in conditions which ensure the protection of the legitimate interests of creditors;

b) the restructuring plan has been notified to all creditors likely to be affected by it; c) the restructuring plan does not reduce the rights of dissenting creditors below what

they would reasonably be expected to receive in the absence of the restructuring, if the debtor's business was liquidated or sold as a going concern, as the case may be;

d) any new financing foreseen in the restructuring plan is necessary to implement the

plan and does not unfairly prejudice the interests of dissenting creditors.’29

In addition to these conditions, the Recommendation protects creditors by giving the court an option to reject a restructuring plan in case it has clearly no prospect of preventing

insolvency.30 Furthermore the Recommendation provides that Member States must ensure that all affected creditors are notified of the restructuring plan. In the case that the creditors are not

27 _{Recommendation 2014, clause 20} 28 _{Recommendation 2014, clause 21} 29 _{Recommendation 2014, clause 22} 30 _{Recommendation 2014, clause 23}

11 notified of the content of the plan they have the right to appeal against the plan.31 However, the appeal should not suspend the restructuring plan.32 By stating that the appeal should not suspend the plan the Recommendation stresses the importance of a fast implementation of the restructuring plan. There is a requirement that creditors are to be protected, however a fast and efficient procedure seems to be more important. Additionally the Recommendation

acknowledges the effect of the court confirmation and states that the plan ‘should be binding

upon each creditor affected by and identified in the plan’33. This cram down of dissenting creditors should help debtors by giving them the opportunity to effectively propose a restructuring plan and prevent their business from going bankrupt.

As the Commission states in their recital the prevention of insolvency should maximise the total value to creditors, employees, owners and the economy as a whole.34 The cram down procedure is an important component in the Recommendation for the restructuring plans. However, there should be a fair balance between this cram down and safeguarding the rights of the creditors. The Commission invited Member States to implement the Recommendation in their national laws before April 2015 and will assess the implementations by October 2015.35 Consequently it is interesting to check how the national laws, which in my thesis is limited to Dutch law, have implemented or are going to implement the Recommendation. In the following chapters I will analyse both the cram down procedure itself and the protection of creditors in this procedure in the proposed amendment of Dutch Insolvency law. Firstly however, I will analyse the US Chapter 11 procedure from which many European procedures are derived. 31 _{Recommendation 2014, clause 24} 32 _{Recommendation 2014, clause 23, 24} 33 _{Recommendation 2014, clause 26} 34 _{Recommendation 2014, recital 1} 35 _{Recommendation 2014, clause 34, 36}

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3. US Law; Chapter 11 US Bankruptcy Code

The US Chapter 11 Procedure (“Chapter 11”) can be seen as the most prominent insolvency proceeding worldwide. Chapter 11, which can be found in the U.S. Bankruptcy Act, has served in the US for over 35 years and should provide the debtor with a cost-effective and efficient procedure to resolve its financial distress.36 As the Supreme Court stated, Chapter 11 ‘gives to the honest but unfortunate debtor […] a new opportunity in life and a clear field for

future effort, unhampered by the pressure and discouragement of pre-existing debt.’37

European companies have also used Chapter 11 for reorganisation for example the company Almatis, incorporated under the laws of a member state of the European Union, proposed a restructuring plan under Chapter 11 in 2010.38 According to the board of Almatis ‘the

insolvency laws of The Netherlands and Germany are not suited to assist in the implementation of a global restructuring with the Debtor’s diverse capital structure. Moreover, the Debtors believe that multi-jurisdictional insolvency proceedings will undermine, rather than facilitate the desired restructuring.’39 Apparently the laws of the Netherlands and Germany, as well as European law, did not foresee in an effective procedure to reorganize the company of Almatis. In 2012 the Commission published a Recommendation which is largely derived from Chapter 11, which was discussed in the previous chapter. The Dutch legislator has acknowledged Chapter 11 was an important inspiration for drafting the WCOII and evidently Chapter 11 is very important when studying this Dutch proposal.40 This chapter will explain the cram down procedure and the protection of creditors as it is laid down in the Chapter 11 procedure.

3.1 Cram down procedure

Chapter 11 provides a legal framework for reorganization and enables companies to have a fresh start. ‘The fundamental concept of a chapter 11 plan is simple. The plan gives (or

promises to give) the creditors more than they would receive in a liquidation of the debtor. In

36 _{ABI Commission to study the reform of chapter 11, 2012-2014, page 6} 37 _{Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)}

38 _{Solicitation Package for Joint Prepackaged Plan of Reorganization for the Debtors Under Chapter 11 of}

the Bankruptcy Code, April 23th 2010. To be found:

http://bankrupt.com/misc/ALMATIS_DisclosureStatement.pdf

39 _{Solicitation Package Almatis 2010, p. 50} 40 _{MvT WCO II, page 12}

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exchange for the payment or promise to pay, the debtor retains its assets and business.’41 The plan could be seen as a contract negotiated between the creditor and the debtor and finally confirmed by the court. In this paragraph I will provide an overview on the procedure in which a Chapter 11 plan is formulated and confirmed.

Chapter 11 begins with the filing of a petition with the court.42 A distinguishing mark of the Chapter 11 is that no case trustee is appointed and the debtor keeps control and

possession of its assets during the reorganization, defined as the “debtor in possession”.43 Before reorganization the debtor must file a reorganization plan with the court, including a classification of claims and specification on how they will be treated under the plan and a disclosure statement, containing information on assets, liabilities and business affairs of the debtor. The latter information is important to inform the creditors and give them the

opportunity to evaluate the plan.44 After the plan is filed with the court the creditors must vote on the plan. In order to do so they will be divided into classes. ‘Classification of claims is

central to the scheme in Chapter 11 for allocating the value, including going concern surplus, among creditors and equity security holders of a financial distresses firm.’45 According to the US Code, a plan may only place claims of creditors in the same class if they are substantially similar.46 In order to determine what similar means, basic rules of classification must be analysed. Claims of a different nature, referring to the legal priority of a claim, must be classified separately and claims of a similar nature should be classified together unless the plan proposes a different treatment of these similar claims. The interest a creditor may have on his claim or the procedure is not relevant to the classification of the claims.47

Once the creditors are subdivided into classes, the classes may vote on the plan. In order to vote on the plan, a distinction is made between impaired classes and unimpaired classes. In general, as section 1124 U.S.C. defines, a class of creditors is impaired in case its legal, equitable and contractual rights are altered and a class of creditors which rights are left unaltered are known as unimpaired classes.48 Holders of unimpaired claims are deemed to

41 _{Hayes 2000, page 5}

42 _{Chapter 11 Bankrupty Basics: US law provides for several forms that the petition could adhere to,}

additionally the debtor must file schedules assets and liabilities, current income and expenditures, executory contract and unexpired leases an a statement of financial affairs. Federal Bankruptcy Procedure 1007(b). To be found: http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics 43 _{11 U.S.C. § 1101} 44 _{11 U.S.C. § 1121, 1123 and 1125} 45 _{Norberg 1995, page 119} 46 _{11 U.S.C. 1122} 47 _{Norberg 1995, page 119-120} 48 _{Resnick and Sommer 2010}

14 have accepted the plan.49 The idea behind this rule is that an unimpaired class does not have any interest in the plan since its rights are left unaltered, consequently they do not have any reason to vote against the plan and should not be able to block a plan.50 On the other hand, impaired classes that do not receive anything under the plan are deemed to have voted against the plan and are seen as ‘out of the money’ creditors.51The impaired classes have to vote on the plan by ballot;52 a class of claims accepts the plan if it is accepted by a group of creditors that hold at least two-third in amount and more than 50% in number of the allowed claims of such class hold by creditors.’53

A claim is allowed in case it is filed with proof of the claim and not objected by the party of interest.54 If these thresholds are met, the class will vote in favour of the plan. The dissenting creditors in an accepting class are also bound to the plan, as this intra-cram down is different than the cross-class cram down, which implies the cram down of dissenting classes (hereinafter referred to as cram down).

After the court approves the disclosure statement and the creditors have voted on the plan, the court will conduct a confirmation hearing to confirm the plan.55 In order for the reorganization plan to work the plan must be confirmed by the court. The confirmation of a restructuring plan is regulated under section 1126 – 1129 of the Bankruptcy Code. In case a reorganization plan is successful in the sense that all the classes of creditors voted in favour the plan, the court may only confirm a restructuring plan if the requirements of section 1129(a) US Bankruptcy Code are met. The most relevant requirements of this section are; ‘(1) The plan complies with the applicable provisions of this title.

(2) The proponent of the plan complies with the applicable provisions of this title. (3) The plan has been proposed in good faith and not by any means forbidden by law. (4) …

(5)… (6) …

(7) With respect to each impaired class of claims or interests— (A) each holder of a claim or interest of such class—

(i) has accepted the plan; or

49 _{11 U.S.C. § 1126(f)} 50 _{Vriesendorp 2014, page 38} 51 _{11 U.S.C. § 1126(g)} 52 _{11 U.S.C. § 1126} 53 _{11 U.S.C. §1126(c)} 54 _{Klee page 151} 55 _{11 U.S.C. § 1128}

15 (ii) will receive or retain under the plan on account of such claim or interest property of a

value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date; …

(8) With respect to each class of claims or interests— (A) such class has accepted the plan; or

(B) such class is not impaired under the plan. (9) …

(10) If a class of claims is impaired under the plan, at least one class of claims that is

impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.

(11) Confirmation of the plan is not likely to be followed by the liquidation, or the need for

further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.

(12) … (13) …’

In case the foregoing requirements are met the court will confirm the plan. However, if not all classes voted for the plan, as paragraph 8 of section 1129(a) prescribes, the court shall on request of the proponent of the plan, confirm the plan notwithstanding paragraph 8, if the plan does not discriminate unfairly and is fair and equitable. The confirmation of a plan, notwithstanding the objection of dissenting creditors, is known as the cram down.56 It is important to notice that the conditions of discrimination and fair and equitable only apply ‘with respect to each class of claims or interests that is impaired under, and has not accepted

the plan.’57 Consequently, creditors who rejected the plan but were classified in a class that voted for the plan (intra-cram down) will not be protected by the conditions in section

1129(b). ‘Among the remaining provisions of Section 1129(a) which must be satisfied in order

to effect a cram down is the requirement that at least one impaired class of claims, excluding claims of insiders58, have accepted the plan.’59 This rule implies that in case the plan is seen

56 _{For the purpose of this thesis the term ‘cram down’ will be used as meaning the cram down of}

dissenting classes under 11 U.S.C. § 1129(b), which is different from the intra-cram down of creditors that rejected the plan but are in a class that voted for the plan under 11 U.S.C. § 1126(c).

57 _{11 U.S.C. § 1129(b)(1)}

58 _{In the case In re Deluca 194 B.R. at 804 the court held that: "The primary objective of Section 1}

129(a)(10)'s insider component is to forestall the voting of a creditor who is so beholden to or controlled by the debtor as to in effect be an alter ego of the debtor." For a more detailed explanation of the term insider see Lichtenstein 2001

16 as fair by one impaired class of claims, the plan could be fair to all the impaired classes, otherwise this accepting class would never have voted in favour of the plan. Following from the provisions, in case at least one impaired class accepts the plan, the plan meets all the other requirements of 1129(a) and the plan does not unfairly discriminate and is fair and equitable in respect to the dissenting classes, the court shall confirm the plan. The question remains in what case a plan does discriminate unfairly or is not fair and equitable, so the court cannot use its cram down power in order to protect the dissenting classes.

3.2 Protection of classes in the cram down procedure

According to the cram down provision in Chapter 11 a dissenting class can be crammed down in case the plan does not discriminate unfairly and is fair and equitable to the dissenting classes. This paragraph determines when these requirements are met. In relation to the fairness and equitableness it will focus on the Absolute Priority Rule (APR) in Chapter 11 since this could be an interesting subject for the Dutch Proposal.

Unfair discrimination

The first condition described in section 1129(b)(1) of Chapter 11 is that a plan may not

discriminate unfairly. However, the Code itself does not give any further explanation on when a plan will be unfairly discriminatory. This condition is a frequently debated topic amongst American scholars and usually the best way to determine the meaning of this unfair

discrimination is to look at the courts’ explanation in a case-by-case basis. 60 An important case on this topic is the Aztec case whereby the court referred to Chapter 13 US Bankruptcy Code in determining whether a plan was unfairly discriminatory.61 The court acknowledged that in order to judge a case it is important to judge the circumstances and facts of each case separately. To judge whether a plan is unfair the court came up with a four-part test which requires: ‘(1) a reasonable basis for the discrimination exists; (2) the debtor cannot

consummate its plan without discrimination; (3) the discrimination is proposed in good faith; and (4) the degree of discrimination is directly proportional to its rational.’ In short, the plan

60 _{Polivy 1998, page 196}

61 _{In re Aztec Co. 107 B.R. 585 (Bankr. M.D. Tenn. 1989); Unfair Discrimination in Chapter 11: A}

Comprehensive Compilation of Current Case Law, Denise R. Polivy, American Bankruptcy Law Journal, Vol. 72, Issue 2 (Spring 1998), page. 191-226

17 may only discriminate and cram down creditors if, under the circumstances of the case, there is a valid reason for this discrimination.

In order to understand the condition of unfair discrimination it could be usable to look the relation between unfair discrimination and the condition of fair and equitable. A rather outdated viewpoint is that the condition of unfair discrimination is included in the cram down to clarify and is therefore complementary to the condition of a plan being fair and equitable. 62 Seeing as the fact that Chapter 11 itself does not give a clear explanation of unfair

discrimination and also case law differs when it comes to this topic,63 it does not clarify the condition of fair and equitable at all. Even though the court formulated a four-part test, the judgements of the court are still highly dependent on the different circumstances of the case.

Another approach is that ‘a plan satisfies the unfair discrimination test by treating

similar claims or equity interest in a like manner.’64 In relation to the fair and equitable test this means the condition of unfair discrimination refers to a horizontal fairness, which would be the case if similar classes are treated equally. As explained before, claims of a different nature, referring to the legal priority of a claim, must be classified separately and claims of a the same nature should be classified together. This would raise the question how the

horizontal test works since the cram down in art. 1129(b) only looks at a whole dissenting class. However, similar classes must be classified together unless the plan proposes a different treatment of these similar claims. This would mean similar claims could be placed in different classes, in order to determine if a plan unfairly discriminates the different classes of similar claims should be compared. The condition of fair and equitable on the other hand, would look the vertical fairness between classes of different claims, as discussed in the following

paragraph.

Fair and equitable

In contrast to the lack of explanation in the US Bankruptcy Code on unfair discrimination, section 1129(b) provides for an extensive explanation on the conditions of fairness and

equitableness. A fair and equitable plan refers to the vertical protection of classes of creditors,

62 _{Klee 1979, page 141; Even though Klee’s paper dates from 1979 his explanation of Chapter 11 is still}

relevant for a comprehensive understanding of the procedure in Chapter 11.

63 _{Most courts apply the ‘four-part Aztec test’, however, the right approach to the condition of unfair}

discrimination is still a debatable topic. For a more detailed explanation on the approaches by the courts and relevant case law; see Polivy 1998 page 199-203

18 which regulates the priority among classes of creditors having higher and lower priorities with respect to pre-bankruptcy priorities.65 This vertical protection makes sure that classes with a lower priority will not receive anything under the plan before higher priority classes are satisfied, as this would be unfair with respect to pre-bankruptcy priorities. The latter is reflected in the APR. Before this rule is discussed, an explanation of the details of fairness and equitableness in section 1129(b)(2) of the Code will be given.

In order to determine whether a plan is fair and equitable, and therefore rank classes according to their priority, this subsection distinguishes three groups of claims; the secured claims, the unsecured claims and ownership interests. In order for a dissenting class of secured claims to be crammed down, Chapter 11 states three requirements of which at least one should be met;

‘(1) that the holders of such claims retain the liens securing such claims, whether the property

subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and that each holder of a claim of such class receive on account of such claim deferred cash payments totalling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;

(2) for the sale, subject to section 363 (k) of this title, of any property that is subject to the

liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or

(3) for the realization by such holders of the indubitable equivalent of such claims.’66

In order to cram down a dissenting class of secured claims, one of the above-mentioned provisions should be fulfilled. This can be achieved by selling the property of the secured claim free of lien, which gives the secured creditor the option to bid its claim, and transfer the proceeds of the lien to the secured creditor(2). Another way is to give the secured creditor a “indubitable equivalent” of its claim(3). The last possibility is to give the secured creditor a new secured claim, payable over a period of time(1). This option differs from the first two since it is the only option in which the creditor holds an interest in the company. ‘The

Bankruptcy plan must provide for the creditor to receive interest, as well as cash equivalent to the value of the collateral securing the creditor’s interest, as part of the future stream of

65 _{Bruce A. Markell, New Perspective on Unfair Discrimination in Chapter 11, American Bankruptcy Law}

Journal, Vol. 72, Issue 2 (Spring 1998), page 227-228

19

payments.’67 In the United Savings Ass’n v. Timbers of Inwood Forest Associates, Ltd. (1988) the Supreme Court noted that valuation, as stated in this cram down provision, requires a present value analysis, which ensures creditors receive an amount equal to or greater than the present value of the collateral at the conformation date.68 This valuation involve a risk for both the secured creditor, when the value will be too low, as the plan debtor, in case the value is too high, since it will be rather difficult determine what the value should be. Therefor both secured creditor and the debtor would rather avoid this valuation and make sure the secured creditor accept the plan so the cram down under this section is not necessary.69 Nevertheless, according to the three provisions in this article, the court can only confirm a plan in case the secured claims get paid to the full amount with reasonable interest and in a reasonable amount of time.70

For the protection of a class of unsecured creditors the plan should contain at least one of the following provisions;

‘(1) the plan provides that each holder of a claim of such class receive or retain on account of

such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(2) the holder of any claim or interest that is junior to the claims of such class will not receive

or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.’71

With respect to a class of unsecured creditors, they can be crammed down in two ways. First they should receive an amount equal to the value of the full amount of their claim. This amount could be received or retained, so the unsecured creditors could also be paid over time as long as they receive the full amount of their claim. In case the unsecured creditors do not receive or retain a claim on the full amount of their claim, the plan may still be confirmed as

67 _{Wong 2012, page 1933}

68 _{See Wong 2012, page 1934; Under a present value analysis, the bankruptcy court must ensure that the}

total stream of payments—or “deferred cash payments,” in the words of the statute—is set at a level sufficient to ensure the creditor receives the present value of its secured claim, even though it will receive that value over time. The deferred cash payments are discounted back to the present value of the claim at confirmation to ensure that the creditor receives disbursements of which the total present value equals or exceeds the amount of the secured claim. To accomplish this, the deferred cash payments must include an interest rate, or “discount rate,” which appropriately compensates the secured creditor for the fact that the value of its claim will be received over time rather than immediately.

69 _{Broude 1984, page 451} 70 _{Hayes 2000, page 17} 71 _{11 U.S.C. § 1129(b)(2)(B)}

20 long as junior creditors do not receive or retain anything under the plan. The latter is often referred to as the Absolute Priority Rule which will be discussed below.

Finally, with respect to a class of interests the Code states the two requirements are;

‘(1) the plan provides that each holder of an interest of such class receive or retain on account of such interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or

(2) the holder of any interest that is junior to the interests of such class will not receive or

retain under the plan on account of such junior interest any property.’72

A class of interest can be crammed down provided they are receiving property under the plan of a value as of the effective date of the plan equal to the greatest of the in (1) mentioned valuations. In case the class of interest receives less, no junior claim of interest can receive anything under the plan. Also in this case the APR applies, however, in case of common stock there will be no such rule since there is no junior class of interest.

For both the class of interest as the class of unsecured creditors, the company should be valued in order to determine the value of the allowed amount of their claims. According to Chapter 11 this should be the “value, as of the date of the plan,” this value will be based on the going-concern value at that point.73 In case a dissenting class of interest or unsecured claims is not paid the full value of their claim, no junior class can receive anything under the plan, known as the APR. The APR also implies a higher ranked class cannot receive more than entitled to without the plan if that leads to a junior creditor receiving less than he would have received without the plan.74

The APR is seen as the cornerstone of US reorganization practice and often levelled with the condition of a fair and equitable plan. The company needs to be valued in order to see if a plan violates the APR, this is usually a very long and complex procedure. Therefore the APR is a good incentive for debtors to propose a fair reorganisation plan to their creditors to make sure the creditors vote in favour of the plan and there is no need to comply with the APR. ‘It

protects creditors by guaranteeing that a court will not confirm a plan that subordinates their claims to the benefit of the debtor’s equity holders without the creditors’ consent.(…)The absolute priority rule thereby prevents equity holders from taking advantage of any insider

72 _{11 U.S.C. § 1129(b)(2)(C)}

73 _{11 U.S.C. § 1129(b)(2)(B and C); also see Foohey 2012, page 49-50} 74 _{Klee 1990, page 231}

21

status or colluding with senior creditors to get rid of intermediate claimants.’75 A

reorganisation plan is usually proposed by the debtor and its major shareholders, while the APR avoids shareholders remaining interest in the company at the expense of the creditors. The APR aims at accomplishing that secured creditors, unsecured creditors and holders of interest share in the value of the company according to their priority. However, it is a rather complex and inaccurate rule to accomplish this aim. In many cases the APR will be effective but there are several issues Chapter 11 suffers from due to this rule, especially in case a company needs new additional finance.76 Additionally, it will be difficult to keep good shareholders on the board of the company since they can only get paid after all the other are paid in full. I will discuss these problems and the application of the APR for the WCOII in the last chapter.

75 _{Foohey 2012, page 50}

22

4. Dutch Law; WCOII

In august 2014 the Dutch legislator published a document proposing changes in Dutch insolvency law, entailing a proposal for a pre insolvency reorganisation plan in Dutch Law (the “WCOII”).77 The WCOII foresees in a regulation that gives the court the possibility to confirm a plan and make it generally binding on creditors (‘algemeen verbindend verklaren’). The WCOII aims at preventing insolvency by stimulating businesses to prepare a

reorganization plan at an early stage.78

By proposing the WCOII, the Dutch legislator largely meets the needs of Dutch legal practice, as these needs were already stressed in a symposium in 2013 by INSOLAD, a cooperation of Dutch insolvency lawyers.79 It was clear that the Dutch legal practice required a system that would disable a single creditor to frustrate the reorganisation plan of a company, which was seen as a serious problem in current Dutch Insolvency law.80 The proposal was also to meet requirements of “economic reality”, meaning that “out of the money” creditors who will not receive any money in liquidation should not be able to frustrate the procedure. Creditors that do receive money or other compensation should only be able to impede the procedure in case they are worse off under the reorganisation plan than without the plan.81 The basic idea is that the company will be liquidated in case the plan is not accepted, since in this alternative scenario the creditors will receive the liquidation value. In case a creditor does not receive less than this liquidation value under the plan there is no ‘economic’ interest this creditor has to frustrate the plan, therefor the court should be able to force a plan upon such dissenting creditor.

The WCOII is a response to the Recommendation of the Commission in 2012, which forced Member States to adopt effective legislation to ensure a pre-insolvency procedure in the national laws. The Dutch legislator emphasises the fact that both the scheme of

arrangement and the Chapter 11 procedure were an important inspiration while drafting the WCOII. However, the Dutch legislator also stresses that the WCOII departs deliberately from these procedures in several aspects since the legal systems of the UK and US differ from the

77 _WCOII

78 _{MvT WCOII, page 1} 79 _{INSOLAD 2014, page 1} 80 _{MvT WCOII, page 4} 81 _{MvT WCO II, page 16}

23 Dutch legal system.82 In this chapter the WCOII, in particular the cram down and the

protection of creditors, will be discussed.

4.1 Cram down procedure

The Dutch cram down procedure can be divided into two stages. The first stage focusses on proposing a restructuring plan, classifying the creditors and voting of creditors on the plan.83 The second stage regulates the option of the court to confirm the plan and thereby calling it generally binding on all creditors.84 At first a plan will be proposed to creditors and

shareholders of whom the rights will be affected under the plan.85 Both the debtor and a creditor can propose a plan, however, a creditor should first give the debtor the opportunity to do so.86 The WCOII contains a list of conditions a plan should comply with,87 amongst others the plan should clearly state the content of the plan and its financial consequences for the involved creditors, the classification of classes of creditors and the criteria for this

classification, the valuation of the company as far as relevant, the procedure for voting on the plan and other information creditors should receive in order to judge the plan.

The plan may foresee in a classification of creditors and shareholders, classification must be done in such a way that creditors with similar rights will be in the same class.88 The creditors and shareholders may object to the classification in case they do not agree with the classification.89 The legislator mentions that he chose to give this objection opportunity in an early stage to improve deal certainty on the plan. In case the creditors can only object the classification in a later stage the plan will be undermined which causes delays and higher costs.90 Only creditors and shareholders whose rights will be affected under the plan are able to vote.91 By doing this, the legislator connects with the legal reality rather than the economic reality since it considers the rights and not the economic position of a creditor. The

advantages and disadvantages of this choice will be discussed in the last chapters.

82 _{MvT WCO II, 14.08.2014, page 12} 83 _{Art. 368-372 WCOII}

84 _{Art. 373-383 WCOII} 85 _{Art. 368 WCOII} 86 _{Art. 368 sub. 2 WCOII} 87 _{Art. 370 WCOII}

88 _{Art. 369 sub. 1 and 2 WCOII} 89 _{Art. 371 WCOII}

90 _{MvT WCOII page 60} 91 _{Art.369 subs. 3 WCOII}

24 After the classification the classes will vote on the plan; a class will accept the plan in case over 50% of the class voted for the plan and this group represents more than 2/3rd of the amount of the claims in the class.92 The second stage of the WCOII procedure is the

confirmation of the reorganization plan by the court. The plan will be accepted in case all voting classes voted in favour of the plan. According to the legislator this absolute majority is justifiable since the procedure is an out of insolvency proceedings and there is no trustee involved.93

In case the plan is accepted in compliance with the first stage the court will confirm the plan.94 This will bind all creditors, also those who did not vote or voted against the plan but were in a class that accepted the plan.95 However, even if the plan is accepted according to the first stage the court must still reject the plan in case; (a) the interest of one or more

creditors will be disproportionately affected, (b) compliance with the plan is not adequately guaranteed, (c) the plan is formed due to deception, unfair means or is based on evidently false representation of the circumstances and (d) other substantial reasons based on which the plan should be rejected according to the court.96 If the plan is not accepted according to the previous stage the court may nevertheless accept the plan over dissenting classes, provided that the classes who voted against the plan could not reasonably have come to their dissenting vote. The latter can be equated to the “cram down” of dissenting creditors as we have seen in the Chapter 11. In the next paragraph the circumstances under which the court must confirm or reject a plan, and under what circumstances the court may cram down dissenting creditors, will be discussed.

4.2 Protection of creditors

As mentioned above the WCOII confirmation of a plan contains two provisions that should protect creditors. First of all the plan has to comply with art. 373 sub 3 WCOII; these conditions also apply to creditors who were not allowed to vote for the plan since their right did not change under the plan. In case these conditions are satisfied and all classes of creditors voted for the plan, the court must confirm the plan. Secondly, in case not all the classes accepted the plan the court may cram down those dissenting classes in case those classes

92 _{Art. 372 subs. 3 WCOII} 93 _{Mvt WCOII, page 22} 94 _{Art. 373 subs. 1 WCOII} 95 _{MvT WCOII page 22} 96 _{Art. 373 subs. 3 WCOII}

25 could not reasonably have come to their dissenting vote, as states in art. 373 sub 2 WCOII. Below I will discuss both of these provisions in the WCOII.

Confirmation of the plan

Notwithstanding a plan is accepted by all the classes, the court can still reject the plan in case it violates any of the conditions in art. 373 subs. 3. In principle the court will confirm the plan in case all the classes voted in favour of the plan, as since there are no dissenting classes there is a solid foundation for the plan. However, according to article 373 subs. 3 WCOII, the court must reject the plan in case one of the given circumstances;97 (a) the interest of one or more creditors will be disproportionately affected, (b) compliance with the plan is not adequately guaranteed, (c) the plan is formed due to deception, unfair means or is based on evidently false representation of the circumstances and (d) other substantial reasons based on which the plan should be rejected according to the court.98 To determine whether such material reasons not to confirm exist, the court will not only look at the interests of the voting creditors but also at the interests of the classes that could not vote on the plan since their rights were not

affected by the plan.99

This clause is used as a safety net to prevent a reorganization plan that harms minority shareholders. In case one of the circumstances in this clause applies the court must reject the plan, the legislator states that they chose this term to express the court does not have any discretionary authority.100 The latter statement seems to highlight the fact that the court must reject a plan and not at the discretionary authority of this entre provision since circumstance (d) contains a very open norm in which the court may look for substantial reasons to reject a plan. The circumstances listed under b and c of this clause use the same grounds as art. 153 of the Duct Insolvency Law (Faillissementswet); this article aims at preventing a situation in which a plan is only presented in order to stop or delay Insolvency proceedings.101

Circumstance (a) aims at preventing unfair voting which results in a plan that harms minority creditors. According to the legislator this circumstance is largely derived from the English and American procedure, it is comparable to the US Chapter 11 criteria which states “the plan must not discriminate unfairly and is fair and equitable with respect to each class.” The Dutch

97 _{MvT WCOII, page 69-70} 98 _{Art. 373 subs. 3 WCOII} 99 _{MvT WCOII page 23} 100 _{MvT WCOII page 70} 101 _{MvT WCOII page 70}

26 legislator translates the US and English criteria and states that clause (a) would in any event apply in case; (i) the plan aims at shifting the risk of reorganization to the minority of voters, (ii) no reasonably thinking creditor or shareholder would vote in favour of the plan or (iii) the voting on the plan was unfair.102 The latter is a rather strange comparison of the Dutch

legislator since, in Chapter 11, the circumstance of unfair discrimination and fair and

equitable only applies in case dissenting creditors will be crammed down, which the WCOII regulates in the provision discussed below. I will elaborate on this in the next chapter.

Cram down of dissenting classes

In order to confirm a plan where not all classes approved, and therefore cram down one or more classes, the court should determine whether the dissenting classes could not reasonably have voted against the reorganization plan. Article 373 subs. 2 WCOII gives a set of

exceptions in which case a class that voted against the plan did not vote unreasonably; (a)a class with the right of mortgage or pledge that, under the plan, receives an amount which is less than the private market value of the property their mortgage of pledge applies to, (b) a class with retention of title that, under the plan, receives an amount which is less than the price for which the property was delivered, (c) a class with preferred or concurring creditors that, under the plan, receives an amount which is less than what they would receive in liquidation, and (d) a class of shareholders that, under the plan, receives an amount which is less than what they would receive in liquidation.103

In the Explanatory Memorandum of WCOII, the Dutch legislator already stresses that

creditors who would not receive anything without the plan, so called “under-water” creditors, may not stop a plan. On the other hand, creditors that did receive something without the plan and are (partly) “above water” may not stop the plan in case they are not worse off by the plan. This starting point is laid down in this clause and the court may still confirm the plan in case the creditors could not reasonable vote against the plan. This term is in line with the Chapter 11 rule stating “if the plan is equitable with respect to all classes”. Whether this is the case needs to be determined in light of all the circumstances of the case.104

The Dutch legislator does give the court a little more guidance by referring to art. 146 of the Dutch Insolvency Law. Art. 146 FW also contains the provision that a creditor could not

102 _{MvT WCOII page 70} 103 _{Art. 373 subs. 2 WCO II} 104 _{MvT WCOII page 68}

27 reasonably come to its vote, which explicitly refers top the percentage a creditor would

suspect to get on their claim in case the company would be liquidated.105 Nevertheless, the provision remains vague since the court needs to determine, taking all circumstances into account, whether the dissenting class unreasonably voted against the plan.

As mentioned previously, the circumstances and terms used show similarities with Chapter 11. However, in deviation of Chapter 11 this Dutch provision to cram down dissenting creditors does, amongst other differences, not explicitly contain the APR rule as used in the Chapter 11 procedure. In the next chapter I will closely compare the differences between the cram down procedures and argue, in the light of the Recommendation, what adaptions should be recommended for the WCOII.

28

5. Preferable system under European Insolvency Law

5.1 Comparison of the systems in the light of the Recommendation

The Dutch WCOII and the US Chapter 11 show some decisive differences in their regulation of the cram down procedure. In order to compare these I will highlight three main differences in the procedures. The first difference follows from the right of creditors to vote on the plan. Under Chapter 11 creditors are divided into groups of impaired and unimpaired classes. Unimpaired classes are those whose legal, equitable and contractual rights are left unaltered under the plan, unimpaired classes are deemed to have accepted the plan.106 Impaired classes are those whose legal, equitable and contractual rights change under the plan, impaired classes that receive nothing under the plan are deemed to vote against the plan. In the end, all classes of creditors (are deemed to have) voted on the plan, whether their rights change or not. Under the Dutch WCOII proposal only the classes whose rights change under the plan can vote on the plan. Creditors whose rights will not change under the plan are excluded from the procedure.107 The actual difference between these procedures is smaller than it may seem at first instance. Even though Chapter 11 states all creditors vote on the plan, the unimpaired classes are deemed to have voted for the plan and the impaired classes that do not receive anything under the plan are deemed to have voted against the plan so they do not actually vote. Likewise, it could also be argued Dutch creditors are deemed to have voted for the plan by not allowing them to on for the plan, since they are left out of the voting procedure they may after all not reject the plan. The main difference is that under Chapter 11, impaired classes that would not receive any proceeds under the plan are deemed to have voted against the plan.108 Under WCOII all creditors whose rights will change under the plan are able to vote, also those who will not receive any proceeds under the plan.

The Dutch legislator notes that it considered not to allow voting rights to creditors who would not receive any proceeds in case the company would be liquidated. However,

according to the Dutch legislator this procedure, which is more similar to Chapter 11, would cause the procedure to become more complex. The court would already need to evaluate the company in the beginning of the procedure to determine which creditor is out of the money; this might lead to disputes and delays in the procedure. According to the legislator the WCOII

106 _{11 U.S.C. § 1126(f)} 107 _{Art. 369 subs. 3 WCOII} 108 _{11 U.S.C. § 1126(g)}

29 overcomes this problem by allowing all creditors with changing rights to vote.109

Furthermore, the legislator notes that creditors who would not receive anything when the company is liquidated might have other incentives to vote in favour of the plan.110 In light of the Recommendation, the Dutch legislator wanted to connect with recital 20 which states a restructuring plan which does not involve all creditors does not need to give the uninvolved creditors the right to vote.

The second difference is that under Chapter 11 a plan is accepted if, besides the conditions of 1129(a) being fulfilled, one class of impaired claims voted for the plan provided that the plan does not unfairly discriminate and is fair and equitable in respect to the

dissenting classes. 111 Whereas under the WCOII a plan is rejected if not all voting classes accepted the plan unless the dissenting class could not reasonably have voted against the plan.112 Both systems contain a general provision with which the plan should comply113 and specific provisions for the cram down of dissenting creditors.114 In case not all classes voted in favour of the plan, the WCOII reserves the option for the court to cram down dissenting creditors in case they could not reasonably have voted against the plan.

The idea behind this clause is broadly the same as the Chapter 11 procedure, being that creditors should not be able to frustrate the plan in case they do not receive less under the plan than they would receive in bankruptcy. The difference with Chapter 11 is basically that the reasonableness is codified and the doctrine is reversed. According to the Dutch legislator this absolute majority is justifiable since the procedure is an out of insolvency proceedings and there is no trustee involved.115 Looking at the Recommendation, the Commission also provides for the option to cram down dissenting classes of creditors. The Recommendation states that ‘Member States should be able to maintain or introduce provisions which empower courts to confirm restructuring plans which are supported by a majority of those classes of creditors.’116

The Recommendation requires at least a majority of classes to have accepted the plan, this could be more efficient than the current WCOII, I will discuss this in the next paragraph.

109 _{MvT WCOII page 54}

110 _{MvT WCOII page 63} 111 _{11 U.S.C. § 1129(b)}

112 _{Art. 373 subs. 2 WCOII; also see Vriesendorp paragraph 50 and 109} 113 _{11 U.S.C. § 1129(a) and art. 373 subs. 3 WCOII}

114 _{11 U.S.C. § 1129(b) and art. 373 subs. 2 WCOII} 115 _{Mvt WCOII, page 22}

30 The last difference is the fact that the Dutch legislator did not adopt the APR rule in the WCOII. In order for the court to use their cram down power, a plan should not unfairly discriminate and be fair and equitable under Chapter 11. This provision could be compared to the Dutch provision of unreasonable voting as laid down in art. 373 subs. 2 WCOII, since both provisions regulate the cram down of dissenting creditors. The US fair and equitable test mainly focusses on the fact that the restructuring plan should respect pre-bankruptcy

priorities. The APR is seen as the cornerstone of US law and states that a dissenting class must ‘receive or retain on account of its claim property or value, as of the effective date of the

plan, equal to the allowed amount of such claim’, before a junior class receives anything

under the plan. Besides respecting pre-bankruptcy priorities the APR is seen as a mechanism that protects creditors against overruling classes and cram down.

The WCOII does not contain an APR in art. 373 subs. 2, even though the WCOII is largely derived from Chapter 11 the Dutch legislator does not mention the APR in the WCOII or in its Explanatory Memorandum. To illustrate that the current WCOII procedure might violate the APR, I will give an example. Presume there are 3 types of creditors; senior creditors, junior creditors and shareholders. They have an interest of 60, 30 and 10 (100 in total) and the company is worth 50 in liquidation and 70 in going concern value. Since the senior creditor has an interest of 60 and the company is only worth 50 in liquidation, the junior creditors would not receive anything in liquidation. The restructuring plan will pay the senior creditors 95% of their claim and the shareholders 5% since they want the shareholder to remain in the company due to his knowledge. The junior creditor receives nothing under the plan and will likely vote against the plan. However, under the WCOII art. 373 subs. 2 states the plan will be rejected in case a party could not reasonably vote against the plan, which is explained by art. 146 FW referring to the percentage of its claim a creditor would receive in liquidation.

In the previous example the creditor is not worse off than he would be in liquidation so, seeing the fact the Dutch legislator does not mention anything about the APR, the creditor could not reasonably vote against this plan. The junior creditor will be crammed down by the court. It could be argued that the shareholder will receive money at the expense of the junior creditor. This is a violation of the APR which apparently does not apply to the Dutch WCOII. Below I will discuss whether this APR rule should apply under the Dutch law and if there are other recommended adaptions to the WCOII.

31

5.2 Recommended adaptions to the WCOII cram down procedure

The Dutch legislator partly deviated from Chapter 11 in the cram down procedure and did not implement the APR. Several scholars criticized the WCOII on these adjustments and argue that the Dutch legislator should connect to the Chapter 11 cram down and introduce an APR. Below several viewpoints are discussed and argued whether these should be recommended adaptions to the WCOII.

Recommended adoptions to the WCOII

Under the WCOII only creditors whose rights change are able to vote on the plan. The Dutch legislator states, by proposing the WCOII, that it aims at connecting the legal reality to the economic reality. 117 The economic reality would prevent creditors that, considering the liquidation value of the company, do not have any economic interest in the company, (‘out of the money’ creditors) have the power to block a plan. However, by looking at the rights of the creditors rather than their economic position to judge whether they can vote seems to deviate from this principle. Creditors that are ‘out of the money’ in liquidation could still vote under the WCOII in case their rights change under the plan.

As an advantage of the Dutch procedure, in which only classes whose rights will change will be involved, INSOLAD notices it is easier and more efficient in case the reorganisation will only focus on a small group. In this case only the small group will be involved and the debtor does not need to involve all creditors in the voting on the plan.118 Vriesendorp on the other hand argues that the WCOII should connect to the economic position of the creditors and adapt the proposal in order to prevent ‘out of the money’ creditors can vote on the plan.119 The downside of this proposal is that the valuation of the company has to take place in the beginning of the reorganisation procedure. The valuation of the company can be a rather difficult and time-consuming operation. Especially in case this valuation is replaced to the beginning of the procedure this might cause discussion and disputes in the procedure. On top of that the value of the company might change over time and ‘out of the money’ creditors could be ‘in the money’ when the actual voting will take place, causing the whole voting procedure to be frustrated. Also art. 371 WCOII, which gives

117 _{Mvt WCOII, page 16} 118 _{INSOLAD, paragraph 7} 119 _{Vriesendorp 2014, 115}