Financial collateral arrangements excluded from scope WHOA procedures

On 1 January 2023, the Dutch Bankruptcy Act was amended to implement the EU Restructuring and Insolvency Directive (Directive 2019/1023). In particular, this amendment is of relevance for creditors under financial collateral arrangements with Dutch firms that are subject to pre-insolvency debt restructuring procedures under the WHOA.

What is it about?

The amendment to the Bankruptcy Act clarifies what many already hoped for, namely that financial collateral arrangements and netting provisions within the meaning of the Financial Collateral Directive (Directive 2002/47/EC) are excluded from the scope of WHOA Procedures. As a result, such rights under financial collateral arrangements against a Dutch counterparty remain unaffected should it become subject to WHOA Procedures.

Which firms should care?

This development is relevant for all firms that enter into financial collateral arrangements with Dutch firms that can become subject to WHOA Procedures, for instance to secure payment obligations under derivatives or other financial transactions. So essentially all sell-side firms.

What should they know?

Background

Under the WHOA Procedures, it is possible for a debtor, its creditors, its shareholders or its works council to (a) initiate a debt restructuring plan outside standard insolvency proceedings and (b) request the competent court to appoint a restructuring expert to assist in preparing such a debt restructuring plan.

The initiation of WHOA Procedures can affect the contractual rights of a counterparty of a Dutch firm subject to such procedures (the debtor) as follows.

• First, a ban on ipso facto clauses applies, as result of which the initiation of WHOA Procedures will not constitute a ground to (i) amend any agreements and obligations towards the debtor thereunder, (ii) suspend performance of obligations under an agreement and (iii) terminate an agreement with the debtor. This means that an event of default related to these circumstances cannot be invoked.

• Second, a stay of four months (with a possible extension of up to another four months) can be imposed which would result in an extension of the abovementioned restrictions. A creditor would, during the stay period, not be able to amend or suspend his obligations to the debtor or terminate a mutual agreement on the ground of a default by the debtor that occurred before the stay, provided however that the debtor provides security for any new obligations.

• Third, the debtor may propose an amendment or early termination of an agreement to its counterparty as it deems fit. If the counterparty rejects the proposal, the debtor may still terminate the agreement after receiving approval from the court, taking into account a notice period effective as per the debt restructuring plan.

Consequences of the amendment to the Bankruptcy Act

Prior to the amendment that excludes financial collateral arrangements and netting provisions thereunder from the scope of WHOA Procedures, there was less certainty as to how these were affected by the WHOA Procedures.

The Bankruptcy Act did already provide that assets provided under a financial collateral arrangement were not affected in the event a stay is imposed. However, set-off rights under netting provisions were not explicitly excluded. Nonetheless, the general view was that these should also remain unaffected by the stay, also on the basis of parliamentary documents that addressed questions about the impact of WHOA Procedures on financial master agreements such as the ISDA Master Agreement and Global Master Repurchase Agreement and the safeguarding of rights thereunder.

The amendment gives additional certainty in this respect as it provides for a general exemption from the application of WHOA Procedures to financial collateral arrangements and netting provisions thereunder. This certainty benefits all counterparties to financial collateral arrangements with Dutch firms that can become subject to WHOA Procedures as it ensures the enforceability of collateral and netting provisions during such WHOA Procedures.

When will this apply?

The relevant amendment to the Bankruptcy Act became effective on 1 January 2023.

Any further thoughts?

Firms that enter into financial collateral arrangements (eg under financial master agreements) with Dutch firms that can become subject to WHOA Procedures (eg corporates or pension funds) and that rely on legal opinions regarding the enforceability of collateral and netting provisions, could consider reviewing these and updating them where necessary to ensure they appropriately take account of this recent development.