Prohibition of ipso facto-clause under the WHOA (the Dutch Scheme)
On 1 January 2021, the Court Approval of a Private Composition (Prevention of Insolvency) Act (Wet Homologatie Onderhands Akkoord or WHOA) entered into force (see also this news item). By introducing a “Dutch Scheme”, the WHOA makes it easier for a company in financial distress to get its creditors and shareholders to the negotiation table in order to agree upon a reduction of its debt burden. To that end, the WHOA provides several tools to facilitate the process and protect the interests of various stakeholders.
One of these tools is the prohibition of so-called ipso facto clauses, as set forth in Section 373(3) Bankruptcy Act. An ipso facto clause is a contractual provision pursuant to which the debtor's counterparty obtains certain powers upon the occurrence of certain events. Such an event could be, for example, the debtor applying for suspension of payments (surseance van betaling) or being declared bankrupt (faillietverklaring). An ipso facto clause is often included in agreements such as general terms and conditions, rental agreements and financial agreements.
In order not to jeopardize the continuity of the company due to the elimination of important agreements during a Dutch Scheme, Section 373(3) Bankruptcy Act stipulates that provisions that attach an (automatic) contractual legal consequence to the opening of a Dutch Scheme or to events or actions related to such a scheme will have no effect. Therefore, provisions giving a contracting party the power to amend the agreement, suspend its own performance or terminate the agreement as soon as the debtor starts a Dutch Scheme, a cooling-off period is declared or a restructuring expert is appointed are ineffective.
The continuity of the company during the preparation and negotiation of the arrangement is important for a successful restructuring of the company. Overriding the contractual freedom of the parties and counterparty’s the interest in withdrawing from an agreement with a debtor in financial distress is considered justified by the legislator, as the counterparty have a financially healthy debtor once the arrangement has been ratified.
It remains to be seen, however, whether a counterparty will actually end up having a financially healthy debtor after having started a Dutch Scheme. The report issued by the standing committee of the Ministry of Justice and Security on 7 November 2022 (for the report, click here) shows that 260 so-called declarations of commencement (startverklaringen) have been filed with the court registries until early October 2022 and just under 8% of these commenced schemes (20 in total) resulted in ratified arrangements.