30 Mar WHOA agreement offers business owners relief, but also has disadvantages
The WHOA, as a new part of the Bankruptcy Act, entered into force on 1 January 2021. The WHOA offers companies that can no longer pay their debts the opportunity to restructure those debts, in order to avoid a suspension of payment or bankruptcy. On the initiative of the company in question (or of other parties), a private composition (WHOA composition) may be offered to creditors and shareholders. Those creditors and shareholders vote on the composition offered. The court must then ratify (approve) the composition offered. It is remarkable that an approved WHOA composition can be binding on creditors that have not agreed to it. For that reason it is also known as a “compulsory composition”.
This article addresses the impact that the WHOA has on current agreements and the effect that a bankruptcy has on contracts.
Contracts and WHOA composition
Debtors’ possibilities of amending or terminating contracts
A company that relies on the WHOA may make its contracting parties the offer to amend or (prematurely) terminate a current contract. If the contracting party does not give its consent, the company may request the court to unilaterally terminate the contract under the WHOA. If the court agrees, the contract is unilaterally terminated and the other party is entitled to damages under the law. The damages may be limited in the WHOA composition.
In principle, the above rules apply to all types of contracts other than employment contracts. The WHOA does not apply to employment contracts.
Protection of debtor against loss of rights under agreements
A debtor who prepares or offers a WHOA composition is faced with financial problems. That may be a reason for creditors themselves to want to get out of an agreement. The WHOA protects debtors against unwanted amendment or termination of agreements by providing that the preparation or offer of a WHOA composition cannot be grounds for amending or terminating a contract or for the suspension of obligations for the contracting parties of the debtor. Even contractual clauses that grant a right of termination or amendment in a WHOA situation (ipso facto clauses) are rendered ineffective. The debtor may furthermore ask the court for a cooling-off period. During that cooling-off period, the other party may not amend, suspend or dissolve (ontbinden) the contract with the debtor on the grounds of default that occurred before the cooling-off period.
Contracts and bankruptcy
Although the WHOA gives parties an extra tool to restructure debts, bankruptcy cannot always be avoided.
The basic principle in bankruptcy is that contracts remain in full force. After a bankruptcy, various special rules apply, the most important of which are:
- the trustee or the counterparty may prematurely terminate certain contracts, such as hire-purchase, lease and employment contracts;
- a counterparty may set the trustee a reasonable deadline in writing within which he or she must confirm whether a contract will be performed, subject to the provision of security, failing which the trustee loses the right to demand performance; and
- many contracts contain a clause that gives the contracting parties the right to terminate the contract if the counterparty is declared bankrupt. These clauses (contrary to similar clauses in the case of a WHOA composition) are legally valid.
It is essential for the reorganisation capacity of companies under the WHOA on the one hand that it is possible to amend or terminate contracts and on the other hand that protection is offered against undesired amendment or termination by counterparties. In the eyes of the legislature, the resulting infringement on the parties’ freedom of contract is justified by the public interest in avoiding bankruptcy.
There are significant differences between the rules that apply to contracts in a WHOA composition and after bankruptcy. It seems that parties to a WHOA composition generally have less control over their position because of the unilateral termination option and the “compulsory composition”.
For information or advice on this topic please contact Sander Pieroelie (+31-6-22287865) or Sabine Chan (+31-6-57891113).
This article was published in the Newsletter Vestius of March 2021