Trade Alert: The Netherlands

THE NETHERLANDS

The property market in the Netherlands is booming, with real house prices in Amsterdam rising 64 per cent in the five years up to September 2018. 

The Netherlands Foreign Investment Agency ("NFIA") reported in August 2019 that over 100 companies have already relocated to the Netherlands from the UK with another 325 thought to be considering following suit due to concerns accessing the Eurozone market following Brexit. Companies that have moved their headquarters to Amsterdam include Sony and Dechra Pharmaceuticals Plc, a veterinary drugs producer that changed the ownership of all of its UK marketing authorisations to a new unit located in the Netherlands in September 2019 due to concerns of a hard Brexit. Commissioner of the NFIA, Jeroen Nijland, noted that "the ongoing uncertainty in the United Kingdom and the increasingly clearer possibility of a no deal, is causing major economic unrest for these companies…that is why more and more companies are orienting themselves in the Netherlands as a potential new base in the European market".

In addition to businesses moving to the Netherlands, investment in the Netherlands has also grown exponentially. British investment has increased to more than EUR 80bn since the Brexit vote in 2016, and up from EUR 14bn in 2014. Britain is now the largest foreign investor in the Netherlands. This is in contrast to Dutch investment in Britain which dropped from EUR 50bn to minus EUR 11bn last year.

Economic growth in the Netherlands, the Eurozone's fifth largest economy, has "unexpectedly held steady" in the second quarter of 2019, growing 0.5 per cent. The Dutch national statistics office (CBS) suggests that this is due to strong investments, consumer spending and exports, with the Dutch economy outperforming its peers in the past two years with increased spending by consumers and unemployment at record low levels. Reuters notes that economic growth in the Netherlands is expected to slow down in 2020 as exports are impacted by weakening growth in Germany, Brexit and US trade policies.

SPECIAL THANKS

We appreciate the assistance of David Viëtor and Marc Orval of NautaDutilh NV with the following discussion of Dutch law, regulation and practice.

DUTCH LEGAL SYSTEM

The Dutch legal landscape is characterised by stability and the rule of law. The Dutch legal system is based on civil law. Under Dutch contract law, 'freedom of contract' and 'pacta sunt servanda' (agreements must be kept) are leading principles. Various Dutch Supreme Court decisions have made it clear that, although a court must consider all relevant circumstances, courts must exercise great restraint in refusing to enforce otherwise binding rules on the basis of standards of reasonableness and fairness. Moreover, the Supreme Court has ruled that in dealings between professional parties, the courts must exercise even greater restraint. Accordingly, the exercise of a contractual right between professional parties will only be unacceptable in exceptional circumstances. Secured creditors traditionally have a very strong position under Dutch insolvency law, with the Netherlands considered to be among the most secured creditor-friendly jurisdictions in Europe.

KEY POINTS FOR TRADERS

• Generally, no banking licence is required for lending to bona fide Dutch professional parties. The method(s) available for transfer are provided for in the loan documentation. Additional transfer formalities may apply depending on the chosen method but typically these are satisfied by default in the loan documentation.
• Security agents / trustees commonly used in the Netherlands. The security agent generally holds Dutch security interests on the basis of a 'parallel debt' structure.  No security is created in the name of individual lenders.
• Generally no withholding tax on payments of interest.

BANKING LICENCE REQUIREMENTS

No banking licence is generally required for lending to bona fide Dutch professional parties. However, under the Dutch Financial Supervision Act, it is prohibited to conduct the business of a 'credit institution' without a licence from the Dutch Central Bank. 

In addition, it is prohibited for entities other than licensed credit institutions to accept repayable funds from the public. Pursuant to these prohibitions, a borrower may require a licence as a credit institution if it borrows money from lenders that are deemed to form part of the public. 

Although the key terms ‘credit institution’, ‘repayable funds’ and ‘public’ are European law (Capital Requirements Regulation) concepts, there is limited official European guidance as to their meaning. According to the explanatory memorandum to the legislation implementing the Capital Requirements Directive IV ("CRD IV") in the Netherlands, the Dutch law interpretation of these concepts will continue to be taken into account until such European-level guidance is available. This means, inter alia, that the pre-CRD IV Dutch law safe harbour regime allowing parties to accept repayable funds of at least EUR 100,000 (or its equivalent in another currency) will remain relevant until further European guidance has been provided. Consequently, providing the initial loan of any lender to a Dutch borrower is at least EUR 100,000 or the equivalent thereof, the Dutch borrower will fall within the old safe harbour, and the requirement that the borrower obtain a banking licence will not be triggered. Other safe harbours are also available under the old Dutch law interpretation, which likewise allow a borrower to avoid triggering the banking licence requirement. In this context, loan documentation sometimes provides that lenders can only be 'professional market parties' or contains a warning that an incoming lender should 'seek Dutch legal advice' on whether it is part of the public.

METHOD OF TRANSFER

If the loan documentation is governed by Dutch law, a lender can transfer its position by way of a transfer of contract (contractsoverneming) or an assignment (cessie) combined with a debt assumption (schuldoverneming). The loan documentation typically provides which method or methods are available.

Transfer of contract:

• all or a part of the lender's rights and obligations in connection with the loan documents (i.e., the complete or partial contractual position of the existing lender) will be transferred to the new lender; and
• consent (medewerking) to the transfer from the borrower is required to effect the transfer. Usually such consent is already provided for in advance in the loan documentation.

Assignment combined with a debt assumption:

• this method is rarely used to transfer loans;
• lender assigns rights and claims (vorderingen op naam) to the new lender;
• the borrower must in principle be notified (mededeling) of the assignment to effect the assignment. Usually such notification is already provided for in advance in the loan documentation; and
• consent (medewerking) from the borrower is required to effect the debt assumption. Usually such consent is already provided for in advance in the loan documentation.

As long as the security agent remains in place and the 'parallel debts' (see below) are embedded in the loan documentation, the Dutch law security will not be discharged by a transfer of commitments or loans by individual lenders.

SECURITY AND TRUSTS / AGENCY

It is customary to use a ‘parallel debt’ structure (sometimes called a ‘covenant to pay’ structure) in financing transactions where security interests governed by Dutch law will be held by a security agent for the benefit of multiple lenders. Under such a structure, each obligor (borrowers and guarantors) undertakes to pay to the security agent in its individual capacity (i.e., acting in its own name and not as the lenders’ agent or representative) amounts equal to the amounts owed by that obligor to all lenders under the finance documents (a "parallel debt"). The Dutch security interests are created in the name of the security agent (and not in the name of all lenders) and secure payment of the parallel debts. Each lender only has a contractual claim against the security agent for payment of an amount to be determined under an intercreditor arrangement from the proceeds of the enforcement of the security interests. The main reason for this structure is that Dutch law does not provide for the concept of a trust. A foreign trust may be recognised in the Netherlands, but that does not circumvent the issue that Dutch security interests can only be created in favour of creditors whose claims the security interests are intended to secure. A parallel debt structure has two additional benefits. The first is that it facilitates loan transfers and the second is that, if properly drafted, security interests created in favour of the security agent on the basis of a parallel debt will also secure a facility increase by existing or future lenders, or both.

TAX AND STAMP DUTY CONSIDERATIONS

Withholding tax is not applicable on payments under a regular loan if the terms of the loan documentation are commercial, except in exceptional circumstances (e.g., where the debt is treated as equity for tax purposes or for subordinated loans with no maturity or a maturity in excess of 50 years and profit-linked interest).

THOMAS COOK ENTERS COMPULSORY LIQUIDATION

Thomas Cook Group Plc ("Thomas Cook"), the world's oldest travel company, and its associated UK entities entered compulsory liquidation on 23 September 2019, with the UK business ceasing trading with immediate effect. The court appointed the Official Receiver (a civil servant of The Insolvency Service and an officer of the court) to oversee the liquidation, and Special Managers were appointed by the court to assist the Official Receiver: (i) Simon Appell, Alastair Beveridge, Dan Imison and Ben Browne of AlixPartners were appointed as Special Managers over the airline and tour operator companies; and (ii) Blair Nimmo, Jim Tucker, David Pike, Mike Pink and Ben Leith of KPMG were appointed as Special Managers to the retail division and aircraft maintenance companies. 

Thomas Cook creditors include:

(i) Bondholders under the EUR 750,000,000.00 6.25% Senior Notes due 2022 (the "2022 Notes");

(ii) Bondholders under the EUR 400,000,000.00  3.875% Senior Notes due 2023 (the "2023 Notes"); and

(iii) Lenders under the GBP 875,000,000.00 Revolving Credit Facility with maturity date 2022 (the “RCF”).

It was announced on 27 September 2019 that the 2022 Notes and the 2023 Notes have been delisted.

AlixPartners provided a Liquidation Recovery Analysis in August 2019 (as detailed in the Explanatory Statement for the proposed Scheme of Arrangement) estimating that creditors could recover:

(i) 2.2% to 6.2% for the 2022 Notes; 

(ii) 3.4% to 5.4% for the 2023 Notes; and

(iii) 13.2% to 16.7% for the RCF.

Fitch estimates recoveries at 8% for the Notes, and S&P Global Ratings suggests 0% - 10%.

There are several reasons suggested for the demise of Thomas Cook:

(i) It had a debt pile of around GBP 1.7bn and had to sell around 3 million holidays per year to cover its interest payments. 

(ii) Thomas Cook found it hard to compete with its competitors (especially in the online space).

(iii) It was affected by geopolitical uncertainty (such as the attempted coup in Turkey in 2016, one of its most popular destinations, and the heatwave in Europe in 2018 deterring customers from booking holidays abroad).

The demise of Thomas Cook is having a knock on effect on its European businesses:

●Neckermann Polska, which employs around 140 people, announced on 24 September 2019, that it was insolvent despite its stable financial condition as it cannot operate independently without its parent company. 

● Thomas Cook’s Scandinavian arm announced that it would  continue to operate as a separate legal entity from its parent company and that it was looking for  new owners. It suffered some disruption following Thomas Cook's compulsory liquidation, with three airplanes unable to take off due to its parent company holding the leasing contracts. The Scandinavian arm consists of two legal entities -  Thomas Cook Northern Europe and  Thomas Cook Scandinavian Airlines (also known as Ving Group).

● On  25 September 2019, Thomas Cook's German subsidiaries,  Thomas Cook GmbH, Thomas Cook Touristik GmbH and  Bucher Reisen & Öger Tours GmbH,  filed  for insolvency.

● The German government and federal state of Hesse agreed to provide a six month EUR 380m bridging loan to Thomas Cook’s Condor due to liquidity being used up by its insolvent parent company. Condor is reportedly operationally healthy and profitable and is expected to make a profit in the current year. If the European Commission grants approval, the bridging loan will be paid out. The German economy ministry confirmed that constructive talks with Brussels were already underway. A  Frankfurt court has also begun  investor protection proceedings to allow Condor to be restructured.

Michael Neises and Christian Staps at  Heuking Kühn Lüer Wojtek are available to provide further information on developments in Germany.

What is UK Compulsory Liquidation?

Compulsory Liquidation is commenced by an application to court. It is a procedure whereby a liquidator is appointed to realise the assets of the company and distribute them to creditors. Following the realisation and distribution of assets, the company is dissolved. The order of payments (pursuant to the Insolvency Act 1986 ("IA 1986")) is as follows:

(1) administrator's / liquidator's costs and expenses realising fixed charge assets;

(2) fixed charge holders;

(3) administrator's / liquidator's general costs and expenses of administration / liquidation;

(4) payment of the prescribed part to unsecured creditors;

(5) floating charge holders;

(6) unsecured creditors;

(7) interests of debts; and

(8) shareholders (preference and then ordinary).

The Official Receiver is initially appointed as liquidator under section 136 IA 1986, but can be replaced by an insolvency practitioner appointed by the companies' creditors and contributories pursuant to section 139 IA 1986. Once a winding-up order has been granted, any disposition of the company's property, any transfer of the company's shares or any altering of the status of the company's members will be void unless the court rules otherwise pursuant to section 127 IA 1986.

Following the occurrence of a compulsory liquidation, creditors will be invited by the liquidator to provide details of their claims by submitting a proof of debt indicating the amount owed and providing supporting evidence. Once all claims have been received, the liquidator will assess them and may accept a claim in whole or part, or reject it. The Official Receiver or Special Manager may send out a notice within 12 weeks of the commencement of the winding-up proceedings to hold the first meetings in liquidation whereby an insolvency practitioner may be appointed as liquidator. In this notice, the Official Receiver or Special Manager will also provide deadlines for the filings of any claims. If neither the Official Receiver nor the Special Manager call such a meeting, a notice will be provided stating the filing deadline for claims.

As at the date of publication, no date has been announced for the submission of claim forms in the Thomas Cook liquidation proceedings. Please contact Louisa Watt, Ben Klinger, Iden Asl or Hannah Geddes for further information on Thomas Cook's compulsory liquidation and any trading queries.

NOTABLE TRANSACTIONS

STEINHOFF INTERNATIONAL HOLDINGS N.V. ("STEINHOFF")

Further to August’s Trade Alert report on Steinhoff, Steinhoff reported that it had appointed Mazars LLP (Netherlands) as its new group auditor at its Annual General Meeting following recommendation by its audit committee. Steinhoff suffered when Deloitte refused to sign off on the company’s financials for the year through September 2017. Steinhoff announced that it was fined by South Africa's Financial Sector Conduct Authority (“FSCA”) for contravention of the Financial Markets Act 2012 (“FMA”) due to significant accounting irregularities in December 2017. The FSCA imposed an administrative penalty of ZAR 1.5bn under section 81 of the FMA. The FSCA reduced the fine (i) noting Steinhoff’s current financial position; (ii) recognising the fraud committed by the group and senior officers and employees; (iii) acknowledging the cooperation of current management; and (iv) with the objective of avoiding penalising innocent shareholders further. The reduced fine totalled ZAR 53m (around USD 3.6m), a record fine by the FSCA.

Following Steinhoff’s announcement that the company had implemented a CVA on 13 August 2019, it reported that the key management focus will now be on managing litigation risk. The company reported that there are several legal proceedings which have been initiated against Steinhoff including: (i) various shareholder class action groupings in the Netherlands, Germany and South Africa; (ii) the Amsterdam Enterprise Chamber; and (iii) various vendors, predominantly in South Africa. Once the company has explored possible strategic litigation solutions it plans to restructure the group with a view to reducing debt and financing costs.

AABAR INVESTMENTS ("AABAR")

It was announced in September 2019 that Aabar’s bonds lost around a quarter of their EUR 2bn value. This followed an adverse opinion by its auditor, Ernst & Young, on its 2018 financial statements. Aabar noted on 30 August 2019 in a regulatory disclosure that an adverse opinion was provided “due to losses incurred during the financial year, accumulated losses and a deficiency of assets”. 

Aabar’s convertible Eurobonds which are due in 2020 and 2022 lost around 25 cents on the dollar. The company, which has about USD 6.4bn of debt, is said to be exploring the options available to it in order to allow it to continue operations as usual and to meet its financial obligations as they fall due. 

VIVARTE SAS ("VIVARTE")

In July 2019, Vivarte ended the disposal process for Minelli, a premium footwear brand, which would have enabled it to pay EUR 100m due on its EUR 300m notes which mature in October 2019. This prompted a downgrade of the notes from Caa3 to Ca by Moody's. 

Creditors of Vivarte have agreed to activate the fiducie contract resulting in the creditors becoming the new shareholders of the company and leaving zero debt on the balance sheet.  

Patrick Puy announced that while the company's previous shareholders "lost everything", Vivarte, with its new shareholders, is ready to invest EUR 70–75m into the business and an announcement to unveil a new board is expected in November.     

CONTACT

Please contact Iden Asl, Hannah Geddes or Lucy Hartland with any queries regarding this month's Trade Alert.