Flattening the insolvency curve
The role of insolvency law in preventing unnecessary corona-related bankruptcies. Can the Dutch legislature offer debtors more respite possibilities?
The COVID-19 pandemic has caused a global economic crisis. The Dutch government - like many governments worldwide – has drawn up an unprecedented package of economic support measures in order to avoid unnecessary corona-related bankruptcies. It is striking, however, that in contrast to many other jurisdictions, no adjustments to insolvency legislation have been announced yet.
The role of insolvency law
The role of insolvency law in this crisis is twofold. First and foremost, in the current lockdown phase in which companies are forced to close their doors, quick solutions for liquidity shortages and providing respite are key in preventing unnecessary bankruptcies. As soon as there is any prospect of normalisation, insolvency law should accommodate effective restructuring of viable companies and efficient liquidation of non-viable companies. During both the lockdown phase and the phase of normalisation, the role of directors of companies should receive more attention. In the current uncertain circumstances, directors should be encouraged and facilitated to take the necessary measures to avoid insolvency.
Tour d’horizon: insolvency related COVID-19 measures
Numerous measures have been taken worldwide to avert the financial consequences of the COVID-19 pandemic. In several jurisdictions, creditors are limited in their ability to file for bankruptcy. In Spain and the Czech Republic, for example, bankruptcy petitions by creditors are simply not processed for a certain period of time. In other countries - such as Germany and France - creditors are limited in their options by adjusting the requirements for bankruptcy.
Other countries have granted debtors more general respite possibilities, for example by giving the debtor a legal basis for not fulfilling certain obligations or by limiting the possibilities of recovery of creditors. A moratorium can be established automatically (as in Belgium), after judicial intervention (as in Switzerland), or with the approval of (a qualified majority of) creditors (as is the case in New Zealand and the Czech Republic).
In a number of countries, measures have been taken to encourage and facilitate directors to take the necessary steps to avoid insolvency and provide directors with the necessary elbow room. Directors’ duties that regulate directors’ behaviour in relation to insolvency have been relaxed in order to prevent directors from filing for bankruptcy too early. In Spain, Belgium and Germany, for example, the obligation to file for bankruptcy has been temporarily suspended. In Australia and New Zealand, a special safe harbour has been introduced. Transaction avoidance provisions have been temporarily inactivated or adjusted in order to facilitate new financing with the additional effect that directors do not have to fear liability if they cooperate with such transactions.
Although the measures vary widely, some important similarities can be identified. Almost every measure requires a causal relationship between COVID-19 and the financial difficulties. In addition, some measures require a viability check and a prospect of improvement of the financial prospects of the company. Legislatures strive for simple and easy solutions to keep both the costs and the pressure on the judiciaries manageable.
The status quo in the Netherlands
The Dutch government has also taken measures to prevent unnecessary corona-related insolvencies. On the one hand, these measures provide for quick solutions for liquidity problems and on the other hand they facilitate funding options. The changes to Dutch private law are mainly related to the possibility of digital decision-making and extend the deadlines for publication of the financial statements. In contrast to many other jurisdictions, no adjustments to insolvency legislation have been announced.
The absence of a wave of bankruptcies could be explained by the open standards and the pragmatic ‘polder culture’ of cooperation that characterise the Dutch legal framework. For example, several banks have announced that they will grant a six-month extension of repayments to companies and a historic COVID-19 arrangement has been set up in the retail sector in the form of the "Support Agreement for and by the Dutch retail sector". The Dutch courts have also announced that they will take into account the corona crisis in the handling of bankruptcy petitions ("TARIC").
Additional measures to flatten the insolvency curve
The lack of additional measures is striking, especially given the fact that no effective restructuring possibilities exist in the Netherlands. Dutch insolvency law practice has been complaining for decades about the ineffectiveness of the Dutch suspension of payments (‘surseance van betaling’) as a reorganization instrument, mainly due to the fact that the suspension only works for unsecured creditors. A first additional measure could be to extend the scope of the suspension of payments to secured creditors.
The second role of insolvency law in this crisis lies in proposed Dutch restructuring legislation referred to as the Dutch Scheme (Wet Homologatie Onderhands Akkoord, WHOA), which could play an important role in COVID-19 related restructurings once the bill is adopted. The Dutch WHOA could be a valuable addition to the Dutch reorganization practice. Not only does the WHOA introduce efficient restructuring proceedings, the content of a WHOA plan may also be a standstill.
The Dutch legal framework on directors’ liability and transaction avoidance seems to offer directors sufficient room to take restructuring measures. While the ex post assessment of liability may take into account the COVID-19 pandemic - which should reduce the risk of liability - the perception of that risk may not be reduced without additional measures. The legislature could take this perception into consideration by offering directors some ex ante comfort to avoid risk-averse behaviour. It is worth considering introducing a safe harbour in the Netherlands, inspired by the regulations in Australia and New Zealand.
Not even the beginning of the end
The measures taken by the Dutch government seem to be able to mitigate some of the liquidity problems faced due to the COVID-19 pandemic. Time will tell whether these measures are sufficient to prevent unnecessary corona-related bankruptcies. The Dutch legislature could offer Dutch debtors more respite possibilities. Compared to other jurisdictions, the debtor seems to have very few options other than opening insolvency proceedings. In addition, effective mechanisms should be introduced that accommodate effective restructuring of viable companies and efficient liquidation of non-viable companies. The adoption of the WHOA is an important first step.
This blog is a shortened version of a scholarly article published in the Dutch Journal of Insolvency Law. The full article is available here: A.M. Mennens en J.M.W. Pool, ‘Flattening the Insolvency Curve. Het voorkomen van onnodige coronafaillissementen door wijziging van insolventierecht? TvI 2020/22.