The restart in bankruptcy: the Dutch scheme of arrangement, the share transaction and the asset transaction

After six years of hard work, he had to close his coffee shop. The pandemic, high rent and a few wrong decisions had taken their toll. A week after closing, he walked past the building and saw that everything was still there: the coffee machine, the chairs, and even the chalkboard with “Thursday: Apple Pie!”. With the help of a loyal customer who missed his cappuccino, the coffee bar made a restart. Same beans, same barista, but now with an accountant in the mix. That is how things can go.[1]

Private limited companies facing financial problems that threaten the survival of the company, but whose business activities are viable, may be suitable for a restart in bankruptcy. In this blog series, a “restart in bankruptcy” means a continuation of (part of) the company after bankruptcy, possibly within the same legal entity. In this blog, three forms of restart in bankruptcy are discussed: the Dutch scheme of arrangement, the share transaction in bankruptcy and the asset transaction in bankruptcy.

The Dutch scheme of arrangement

The company can enter into a form-free agreement with its creditors, often agreeing that the company will repay part of the debt to creditors and waive the rest. This is called offering a ” private bankruptcy arrangement” (onderhands akkoord). If creditors agree, the company’s bankruptcy is lifted. If creditors do not agree, the board or the trustee in bankruptcy can ask the court to adopt the bankruptcy arrangement. We call this homologatie (court approval). The agreement is then called a “compulsory composition” (dwangakkoord), because the creditors are “forced” to agree.

The Dutch scheme of arrangement has the advantage that it allows the company’s name recognition to be maintained, as do many favourable commercial contracts. In addition, creditors usually receive more money than in a liquidation, because the Dutch scheme of arrangement allows the bankruptcy to be settled relatively quickly. Of course, a bankruptcy arrangement does have to be financially viable. Creditors excluded from the compulsory settlement can also challenge it.

A restart in bankruptcy could also take place when (at least) one shareholder (e.g. the holding company) transfers its shares in the insolvent company to a new shareholder. A share transfer has the advantage that the company’s name recognition and favourable commercial contracts can usually be retained. In doing so, be aware of so-called “change of control” provisions: these can cause an agreement to terminate.

It may be difficult to find a new shareholder willing to acquire the shares because, after all, he is taking over a company with known (and possibly unknown) debts. Moreover, to continue the company, he will have to make a capital injection, whether or not accompanied by a bankruptcy arrangement to restructure the company’s debts, or he will have to deposit the capital injection in the bankruptcy account of the trustee, who will then distribute.

The asset transaction in bankruptcy

Another way to restart in bankruptcy is by the trustee transferring the company’s assets to another entity that wants to continue the business. Due to the private company’s private nature, a transfer often takes place to sitting stakeholders. To transfer the assets, the trustee needs approval from the supervisory judge (rechter-commissaris). Once the asset transfer is completed, the bankruptcy of the selling company ends through dissolution or distribution.

The asset transaction is relatively attractive to potential buyers, as all unacknowledged liabilities basically remain with the bankrupt company. The downside is that the commercial loss for the company left behind is great as it ceases to exist, and with it its trade name.

Are you involved in an insolvent or bankrupt company and do you want to explore your options? Feel free to contact us. We are happy to explore the best solutions together.

[1] This story is fictitious.