Background: Royal IHC restructuring
In March of 2023, the Rotterdam District Court sanctioned the WHOA plan offered by the Dutch shipbuilder Royal IHC. Pursuant to the WHOA plan and as a result of its sanctioning, a dissenting financier was forced to continue providing funding under an existing, not yet fully drawn credit facility. This aspect of the WHOA plan and the District Court’s reasoning supporting its decision was met with criticism in Dutch legal literature. In addition, the Rotterdam District Court ruled that although it is not possible to amend the statutory ranking of security rights (in rem) by means of a WHOA plan, it is possible to amend the contractual ranking of claims in an intercreditor agreement on the basis of a WHOA plan.
The Dutch Supreme Court’s involvement
With a view to achieve the finality desired in restructuring scenario’s, the WHOA does not allow for appeals. However, with a view to safeguard proper development of the law, the Procurator General of the Dutch Supreme Court has the right submit an appeal in a so-called cassation proceeding ‘in the interest of law’ (without any subsequent ruling having effect on the specific case brought before it). The Procurator General concluded that the Dutch Supreme Court should set aside the Rotterdam District Court’s ruling on the grounds that the WHOA does not allow to impose changes to existing contractual obligations of plan stakeholders towards the debtor. Rather, the law only allows to amend plan stakeholders’ rights against the debtor. Further, the Procurator General concluded that it should also be possible to amend the statutory ranking of security rights (in rem) by means of a WHOA plan.
Key takeaways from the ruling
The Dutch Supreme Court followed the conclusion of the Procurator General and set aside the Rotterdam District Court’s ruling, concluding that:
- No forced increase of exposure: financiers cannot be compelled through a WHOA plan to provide either (i) entirely new funding or (ii) (undrawn) funding under previously committed credit facilities against amended terms. Any changes to existing contractual obligations of plan stakeholders can only be effected consensually, with the possibility for the debtor to terminate agreements in case of refusal (subject to sanctioning).
- Order of priority can be amended: a restructuring plan can change the statutory ranking of security rights (in rem) among creditors (as this constitutes an existing right that can be amended in a WHOA plan), but the Dutch ‘absolute’ priority rule applies. If the change in priority causes violation of this rule and it is invoked by a dissenting creditor that forms part of dissenting class, a reasonable ground for deviation must exist and it must not prejudice the interests of the dissenting creditor.
Implications for future restructurings
The Dutch Supreme Court’s decision provides crucial guidance for the Dutch (and international) restructuring space. Importantly, the confirmation that the existing statutory ranking of security rights (in rem) can be amended through a WHOA plan ensures that a debtor can use its existing asset base to provide (senior ranking) credit support for new financing required to implement a WHOA plan.