Preventing financial difficulties from leading to bankruptcy

The three lawyers are part of the Finance & Restructuring team and specialise in insolvency law, which deals, among other things, with businesses that can no longer meet their financial obligations. They also act as court-appointed bankruptcy trustees, giving them first-hand insight into what happens when a company goes bankrupt and the consequences for business owners, employees and creditors.

This experience enables them to reach effective agreements at an earlier stage and intervene when necessary. “We know what happens when a business becomes insolvent,” Michiel explains. “We use that knowledge to advise business owners at an earlier stage and explore how we can prevent them from ending up in that situation. This is also known as the rescue culture: helping businesses while there are still sufficient options available to turn things around.”

Keeping viable businesses afloat

This shift reflects a broader development. Legislators are increasingly focused on preserving viable businesses. This is important not only for business owners and their employees, but also for creditors and the wider economy.

“Keeping viable businesses operating benefits the Dutch economy,” Jeroen explains. “When a business can be saved, jobs are preserved and creditors can often recover at least part of what they are owed. But this requires exploring the available options before it is too late.”

WHOA facilitates restructuring agreements between parties

Financial difficulties are increasingly being resolved through agreements between businesses and their creditors, rather than through formal court proceedings. This has given the parties involved significantly greater autonomy. The Dutch Court Approval of a Private Composition (Prevention of Insolvency) Act (WHOA), which came into force in 2021, has played an important role in enabling this shift.

“The WHOA allows a fundamentally viable business to restructure its debts by proposing an arrangement to its creditors,” Michiel explains. “If the statutory requirements are met, the court can approve the restructuring plan. Under certain circumstances, the plan can then also become binding on creditors who have not agreed to it.” Previously, a single dissenting creditor could block an entire restructuring process. Now that this is no longer necessarily the case, parties are more willing to make concessions and reach a compromise.

Ralph sees clear benefits in this approach. “Ultimately, creditors want to recover their money. In bankruptcy proceedings, it is often uncertain how much they will receive. By entering into discussions at an earlier stage, parties can explore whether part of the debt can be repaid while allowing the business to continue operating under revised arrangements.”

However, the interests of all parties involved must be carefully considered. Not every creditor has the same level of knowledge or bargaining power. The WHOA therefore includes safeguards to protect creditors.

“You need to consider who is involved in the negotiations and whether the interests of all parties are sufficiently taken into account,” Jeroen explains. “Negotiations provide room to find a solution, but that does not mean anything goes.”

Reaching an agreement with creditors without court involvement

The potential benefits of this approach are illustrated by a restructuring in which Boels Zanders advised a company facing substantial debt. The financial difficulties had arisen during the COVID-19 pandemic, and the company eventually became unable to meet its principal repayments and interest obligations. Alongside the financial restructuring, the company also underwent operational and workforce reorganisations.

“It was a complex process, partly because several legal entities were involved,” Ralph explains. “In total, there were more than 250 stakeholders. Ultimately, all creditors voluntarily agreed to the proposed arrangement. They had to waive part of their claims, but the remaining amounts were repaid, allowing the business to continue operating. We did not need to seek court approval for this debt restructuring agreement, as everyone recognised its necessity and agreed to the terms.”

The company is still operating today, and jobs have been preserved. “Without these agreements, the company would probably no longer exist.”

This outcome was more favourable for both the business owner and the creditors than bankruptcy would have been.

Evolving European regulations

Attention is also shifting at the European level. The European Union aims to harmonise certain aspects of insolvency law across its Member States. The new directive must be transposed into Dutch law by 22 January 2029. One of its objectives is to provide investors with greater clarity about what happens when a business within the European Union encounters financial difficulties.

“Currently, each Member State has its own rules, making it difficult to assess the risks involved,” Jeroen explains. “Greater alignment between these rules would make the risks more predictable, encouraging cross-border investment.”

One of the measures included in the directive is the pre-pack: a bankruptcy procedure prepared confidentially in advance, allowing a business to resume operations immediately and preserve its value.

“This approach was previously developed through case law in the Netherlands but has never been formally incorporated into legislation,” Ralph explains. The legislative proposal has been pending before the Dutch Senate since 2016. “The new directive now requires Member States to introduce such a procedure.”

After all, while a company as a legal entity may no longer be viable, its business operations may still be worth preserving.

“In conventional bankruptcy proceedings, assets can quickly lose value, to the detriment of creditors. A pre-pack allows a business restart to be prepared discreetly in advance. This can help preserve both the value of the business and employment. It is particularly important for businesses where continuity is essential, such as organisations providing vital services to society, businesses with sensitive operational processes or companies with strong brands.”

‘You need to fix the roof while the sun is shining, rather than waiting until the water starts leaking in.’

Recognising the warning signs

Business owners should avoid waiting until their financial difficulties become too severe. In fact, once a company is facing an acute liquidity crisis, it may already be too late to initiate a WHOA procedure.

“A WHOA procedure takes time and therefore costs money,” Michiel warns. “Throughout the process, you must be able to continue meeting your ongoing financial obligations. Sometimes we encounter businesses where restructuring could have been possible, but action was taken too late.”

This is understandable, as entrepreneurs tend to be optimistic by nature, he explains. “They may hope that a major contract will come in next week or that the situation will improve on its own. Shame can also play a role: admitting that your business is struggling financially is difficult.”

Trust is essential in these situations. “If you have repeatedly made promises you have failed to keep, having a constructive conversation with creditors becomes much more difficult.”

Ralph identifies several warning signs that business owners should take seriously. “These include a sustained decline in revenue, mounting payment arrears or the need to repeatedly inject additional funds into the business. Don’t wait until things go seriously wrong. If you notice changes in the market or a decline in incoming orders, work with your accountant to prepare financial forecasts and explore different scenarios. What will you do if things take a turn for the worse? What options will still be available to you? You need to fix the roof while the sun is shining, rather than waiting until the water starts leaking in.”

According to Michiel, planning ahead should begin long before the first bills go unpaid. Even when starting a business, it is wise to consider potential setbacks.

“You can think ahead about what might happen if market conditions change, for example due to developments such as AI, or if your business starts to underperform. By making the right arrangements in advance, you will be in a much stronger position if difficulties arise later.”

‘When a business can be saved, jobs are preserved and creditors can often recover at least part of what they are owed.’

This does not mean that business owners need to embark on a major restructuring process straight away. An initial conversation with an accountant or financial adviser can already help identify potential risks. Michiel emphasises that restructuring is rarely a task for a single adviser.

“You need legal expertise, but also a good financial adviser, an accountant and sometimes a tax specialist. Together, you assess the situation and explore the available options.”

According to the three lawyers from the Finance & Restructuring team, this is the essence of the rescue culture. Rather than waiting until bankruptcy becomes an increasingly likely prospect, businesses should discuss what is needed to remain financially healthy at an earlier stage.

“We can also provide advice at an early stage to help prevent problems or enable businesses to respond to them sooner,” Jeroen explains. “The more options you still have available, the greater the chances of keeping your business on track.”