In this blog, I will explore the role of restructuring experts in the Netherlands in preventing abuse. First, I will discuss the obligation for EU Member States to have preventive restructuring frameworks. Next, I will explain why preventing abuse is important. Then I will discuss the role of restructuring experts in preventing abuse based on the interview study I conducted. I will conclude this blog with my findings and the next steps I will take in my research.
Preventive Restructuring Frameworks in the EU
Under the Preventive Restructuring Directive (2019/1023), Member States of the European Union are obliged to implement preventive restructuring frameworks or changes to their existing frameworks to ensure that these comply with the requirements of the Directive. All of these frameworks should enable debtors experiencing financial difficulties to prevent the liquidation of their business by allowing them to restructure their capital structure. A debtor wishing to utilise a restructuring framework must set out a plan for restructuring their capital. The plan “should help to (…) maximise the total value to creditors — in comparison to what they would receive in the event of the liquidation of the enterprise’s assets or in the event of the next-best-alternative scenario in the absence of a plan — as well as to owners and the economy as a whole” (Recital 2 Preventive Restructuring Directive 2019/2023).
In these restructuring plans, debtors have considerable freedom to propose what they believe is necessary to restructure their capital structure. In most cases, debtors propose paying a percentage of the debt while imposing the forgiveness of the remaining amount, but they can also suggest other types of changes to existing agreements, such as extending the maturity date of an obligation.
PIFORs
During the restructuring process, the debtor remains in possession of the business, but a restructuring practitioner (PIFOR) may be appointed. Article 2(12) of the Preventive Restructuring Directive provides the definition of a PIFOR:
“‘practitioner in the field of restructuring’ means any person or body appointed by a judicial or administrative authority to carry out, in particular, one or more of the following tasks:
(a) assisting the debtor or the creditors in drafting or negotiating a restructuring plan;
(b) supervising the activity of the debtor during the negotiations on a restructuring plan, and reporting to a judicial or administrative authority;
(c) taking partial control over the assets or affairs of the debtor during negotiations.”
Combating abuse in the Dutch Restructuring Framework
In the Netherlands, the Preventive Restructuring Directive has been implemented within the Wet Homologatie Onderhands Akkoord (WHOA). The WHOA was drafted as part of the legislative programme ‘Recalibration of Insolvency Law’. This programme specifically addresses combating fraud, strengthening the reorganization capacity of companies, and modernising insolvency law. Due to the legislative programme, changes are for example made for bankruptcy proceedings in the Netherlands to combat fraud more effectively. However, the WHOA does not pay much attention to combating fraud, even though it is part of the legislative programme that is specifically designed to (among others) combat it. This is also striking because the goal of the restructuring framework is to maximise total value for creditors, owners, and the economy as a whole, as stated in Recital 2 of the Preventive Restructuring Directive. When fraud is not combated, value for creditors and the economy as a whole is lost. Additionally, Article 1 of Protocol No. 1 of the ECHR obliges Member States to have sufficient safeguards to ensure that deprivation of one’s possessions is only permitted under the conditions provided for by law and by the general principles of international law.
The role of restructuring experts in combating abuse
In my PhD research, I examine whether the WHOA contains sufficient safeguards to prevent abuse. For this blog entry, I will focus on the role of restructuring experts in this regard.
Within the WHOA, a distinction is made between two types of restructuring experts: the restructuring expert and the observer. The restructuring expert mainly focuses on drafting or negotiating a restructuring plan under the WHOA and can therefore also take partial control over the debtor’s assets or affairs during negotiations. The observer’s role is primarily to supervise the debtor’s activities and report to the court. Through a qualitative interview study, I was able to compare the law in theory with the law in practice in relation to these two different experts. The law codified in the WHOA contains no specific legal obligation for the restructuring expert or observer to prevent abuse. The interview study I conducted shows that restructuring experts and observers are uncertain about their role in preventing abuse. For example, should they conduct a legality research of the debtor’s actions, and if so, how in-depth should it be?
Using the grounded theory (Straussian approach), I developed an explanatory theory of how restructuring experts deal with potential abuse in practice. Their behaviour with regard to preventing abuse can be explained by three main factors: the actors and their beliefs, the available resources (such as time, money and hiring other experts), and the court’s directions. For the full details of the study and its limitations, please refer to my dissertation, which will probably be available to read within the next year.
Conclusion and next steps
In this blog I pointed out that attention is paid to preventing fraud in the Netherlands, but it is striking that this seems to be lacking in the WHOA. This is despite it being an important part of the legislation’s goal and relevance to comply with Article 1 of Protocol No. 1 of the ECHR. One factor in determining whether the WHOA has sufficient safeguards to prevent abuse is the role of restructuring experts and observers during a WHOA process. Based on the interview study I conducted, I can conclude that there is a discrepancy between the law on paper and the law in action with regard to combating abuse. To further test my explanatory theory on how restructuring experts deal with possible abuse, I will conduct a survey to determine how many experts address potential abuse in a certain way.
*This research blog was written by J.C.M. (Anne) Verboom LLM, PhD-candidate at Leiden University.
About BWILC and the PhD Workshop
This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.
Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised alternately in Leiden and another city, prizes are awarded for the best presentations.