The international restructuring of Steinhoff under the Dutch WHOA
On 21 June 2023, the District Court of Amsterdam (the WHOA Court) granted its judgment in one of the largest public proceedings under the WHOA (also known as the ‘Dutch Scheme’) in the restructuring of Steinhoff International Holdings N.V. (Steinhoff), a multinational company active in the sale of housekeeping goods and other related goods. Steinhoff got into financial distress due to accounting errors revealed on 5 December 2017. The subsequent rescue efforts lasted more than six years and consisted of three restructuring procedures, namely (i) the financial restructuring with the financial creditors of Steinhoff implemented by two English company voluntary arrangements and an English scheme of arrangement in 2018, (ii) the parallel English scheme of arrangement, South-African scheme of arrangement and Dutch suspension of payments for the implementation of a global settlement of litigation claims and amendments under its finance documents in 2021, and (iii) a further restructuring that effectively constitutes the de-listing and solvent liquidation of Steinhoff under the WHOA in 2023. One the authors of this blog discussed the second restructuring earlier in International Restructuring Newswire (see Steinhoff restructuring: The Dutch suspension of payments as an excellent tool for the restructuring of mass litigation claims | Netherlands | Global law firm | Norton Rose Fulbright). This blog focuses on the third restructuring under the Dutch WHOA. We discuss two judgments of the WHOA Court in which: (i) the court rejected a petition for the appointment of a restructuring expert on 7 June 2023, and (ii) the court sanctioned the restructuring plan on 21 June 2023.
Petition for a restructuring expert under the WHOA
Steinhoff offered a restructuring plan to its creditors and shareholders on 11 May 2023, after its petition for the appointment of two observers was granted by the WHOA Court on 6 April 2023. At the end of the voting period, one of the shareholders of Steinhoff SDK Schutzgemeinschaft der Kapitalanleger EV (SDK) filed a petition for the appointment of a restructuring expert. The WHOA Court rejected the petition for the appointment of a restructuring expert because the appointment of the restructuring expert was not in the interests of the creditors of Steinhoff.
The WHOA is a debtor-in-possession proceeding. The debtor stays in control of its business and will also take the lead in preparing and offering the restructuring plan, but creditors and shareholders have the possibility to petition for the appointment of a restructuring expert who will – if appointed by the court – prepare and offer the restructuring plan (whilst the debtor still remains in control of the business itself). Unlike a restructuring expert, an observer has a more passive role and is not tasked with preparing and offering the restructuring plan, but rather will observe and monitor the process and reports to the court on the process throughout the WHOA proceeding. Under the WHOA, it is not possible to have a restructuring expert and observer appointed at the same time. In the restructuring of Steinhoff, two observers were already appointed, but SDK attempted to revoke their appointment and have a restructuring expert appointed instead.
The court will assess two requirements for the appointment of a restructuring expert. The first requirement is that the debtor needs to be in financial distress, i.e. the court will assess whether it is reasonably likely that the debtor will cease to pay its debts. The second requirement is whether the appointment of a restructuring expert is in the interests of its creditors. In this judgment, the WHOA Court ruled that the second requirement was not met. The WHOA Court ruled that Steinhoff’s restructuring plan had already been submitted for voting and none of its creditors voted against it. The WHOA Court added to this reasoning that the appointment of a restructuring expert cannot be primarily requested in order to obtain further information from the debtor or re-assess the valuation reports that have been produced by expert. At the end of the day, assessing whether the appointment of a restructuring expert serves the interests of the creditors requires a balancing act between increasing the chances of a successful restructuring and the inevitable delay caused by the appointment of a restructuring expert to the restructuring process as a whole. In this case, where the restructuring plan was already adopted by all creditors, such delay was not justified.
This judgement shows, amongst other things, that the timing for a petition for the appointment of a restructuring is essential: whilst it may be useful to petition for a restructuring expert when the debtor has not initiated the preparations for a restructuring plan yet, the chances of success for such petition decrease significantly when the restructuring plan has already been offered and adopted by its creditors.
Sanctioning the restructuring plan of Steinhoff
Under the restructuring plan, Steinhoff will be de-listed and its shares will be transferred to a new holding company (the New TopCo) owned by five independent foundations. The shareholders and creditors will receive contingent value rights (CVRs) from the New TopCo entitling them to a distribution of any (future) residual value of the group after repayment of all external debt. However, the expectation is that not all external debt will be repaid, which means that the holders of the CVRs are not expected to receive a distribution. Furthermore, the restructuring plan proposes an extension of the maturity date of the finance documents in order to facilitate a controlled wind-down as well as a write-off of any residual outstanding debt after all assets of Steinhoff have been liquidated and proceeds have been used to repay outstanding debt.
The restructuring plan was offered to three classes of creditors and one class of shareholders. The plan was adopted by 100% in each class of creditors and rejected by the class of shareholders with 89.62% of shareholders voting against the plan. This means that a cross-class cram down was required.
Steinhoff requested the WHOA Court to sanction the restructuring plan. During the sanctioning hearing, various valuation matters were debated. The WHOA Court ruled that the shareholders were out of-the-money based on the reorganisation value as well as the liquidation value. This means that they were not worse off under the restructuring plan compared to a bankruptcy proceeding (the ‘best-interest-of-creditors test’). Furthermore, the restructuring plan also complied with the absolute priority rule (APR) given that the shareholders were out of the money. Based on the APR, no party may receive more than 100% of the value to which it is entitled based on the reorganisation value of the debtor. The shareholders debated that the financial creditors were receiving more than 100% due to the CVR allocation, given that the CVRs were partially allocated to the shareholders, but partially also to the financial creditors. According to the WHOA Court, the CVRs did not represent any value at the time of the sanctioning of the restructuring plan and any potential future residual value was not a value realised by the restructuring plan. Therefore, the allocation of the CVRs was not deemed relevant by the court.
This judgment illustrates the importance of valuations in WHOA proceedings, in particular with respect to the reorganisation value in light of the APR.
International jurisdiction under the Dutch WHOA
The WHOA has two types of proceedings: confidential WHOA proceedings and public WHOA proceedings. Confidential WHOA proceedings are handled behind closed chambers, and the Dutch courts have jurisdiction in these proceedings if there is a sufficient connection with the Netherlands (e.g. if the debtor has assets in the Netherlands or it has Dutch law governed debt). Public WHOA proceedings have public hearings, and the Dutch courts have jurisdiction in these proceedings if the debtor has its centre of main interest (COMI) in the Netherlands. The WHOA Court accepted jurisdiction in the restructuring of Steinhoff for the public WHOA proceedings. The public version of the WHOA proceeding is listed in Annex A of the EU Insolvency Regulation (Recast) and benefits from automatic recognition throughout the EU. However, it requires that Steinhoff as the debtor has its COMI in the Netherlands. The Steinhoff group is a multinational company with asses and activities predominantly in South Africa and Germany. The listed top holding of the group was a Dutch legal entity. The WHOA Court deemed the latter sufficient to rule that Steinhoff had its COMI in the Netherlands and accepted jurisdiction.
This judgment illustrates that the WHOA is accessible for international restructurings whereby foreign multinationals use the public version of the WHOA proceeding and benefit from automatic recognition throughout the EU. It may set a precedent for the use of the WHOA by foreign debtors with only holding companies (as a top holding of an international group) or financing companies (as a borrower of bank debt or an issuer of bond debt in international capital markets) in the Netherlands.
The restructuring of Steinhoff is an excellent example of the use of the Dutch WHOA in an international setting. It provides guidance on the involvement of a restructuring expert, the timing for doing so as well as the role of a restructuring expert. More importantly, it showcases the strength of the WHOA as an advanced modern restructuring tool where rights of creditors and shareholders are required to be affected to ensure the survival of the business. This is particularly true in situations where a cross-class cram down is required and complex valuation discussions are expected balancing the rights of the debtor and its supporting creditors and shareholders versus the dissenting minority whose rights will be protected by the APR and best-interest-of-creditors test. Lastly, this WHOA proceeding also highlights the importance of the WHOA as an international restructuring tool for large foreign debtors.
* This article was originally published by Norton Rose Fulbright.