In previous articles, we looked at several key aspects of the Dutch restructuring scheme (known as the "WHOA"), including: how the scheme operates; the ban on appealing lower court decisions; combining WHOA and US plans; and how the scheme works in practice. In other jurisdictions, insolvency proceedings similar to the WHOA are increasingly used to settle mass damages claims. A recent noteworthy example concerns Purdue Pharma, which initiated Chapter 11 proceedings to restructure its debts, consisting for a large part of mass damages claims arising from its role in the opioid crises. The WHOA may also have this potential to be used as an instrument to settle mass damages claims.

The Netherlands has separate statutory frameworks for the resolution of mass damages claims outside of insolvency proceedings. One year before the WHOA entered into force, on 1 January 2020, the Resolution of Mass Damage in Collective Action Act (known as the “WAMCA”) entered into force. The WAMCA transformed the Dutch collective action regime by allowing claims for monetary damages, introducing stricter admissibility requirements for claim organisations and amending collective action procedure. In addition to the WAMCA, the Collective Settlement of Mass Claims Act (known as the “WCAM”) provides a framework for court approved opt-out settlements.

The possibility of employing the WHOA to settle mass claims raises the question of how the WHOA relates to the WCAM and WAMCA frameworks.

WCAM

The WCAM is a scheme allowing mass claims collective settlements to be declared binding by the courts. If a court declares a settlement agreement binding, this will bind all beneficiaries, unless they opt out in writing within a certain period after the binding declaration. Since 2013, WCAM settlements can also be entered into by a bankruptcy trustee after a liable party has been declared bankrupt.

The opt-out possibility limits the finality that can be achieved through a WCAM settlement. Furthermore, WCAM settlements might not enjoy recognition in all foreign jurisdictions, potentially limiting the finality which can be achieved through WCAM settlements for international mass damages claims.

WAMCA

The WAMCA allows representative claim organisations to bring collective claims for damages. Unlike the WCAM, the WAMCA does not require an agreement between the liable party and claim organisation. If the parties reach a settlement during the proceedings, they may jointly petition the court to declare their settlement agreement binding on the class of persons represented by the claim organisation, subject to opt-outs for individual persons. If the parties do not reach a settlement, the court can eventually award damages by imposing a collective compensation scheme.

Similar to the WCAM, finality for mass damages claims through the WAMCA is limited due to opt-out possibilities for individual claimants and the limited jurisdiction of Dutch courts over foreign claimants.

For further background regarding the WCAM and WAMCA, see here.

WHOA

The WHOA differs from the WCAM and WAMCA in that it was not designed as an instrument to settle mass damages claims. The relevant parties in WHOA proceedings are therefore not liable parties and claimants, but rather debtors and their creditors. Such creditors may include mass damages claimants. It goes without saying that an adversely decided class action can put the continuity of a debtor at risk.

The WHOA seeks to prevent the negative consequences of bankruptcy by allowing for the cramdown of creditors unwilling to enter into a restructuring plan. Under the WHOA, the court can approve a restructuring agreement between the debtor and a qualified majority of creditors, making that agreement binding on all creditors.

The key advantage of the WHOA scheme for settling mass damages claims (compared to the WCAM and WAMCA) lies in its ability to achieve finality for all existing claims. Mass damages claimants can be bound by a restructuring plan supported by a qualified majority of creditors. There is no opt-out available to creditors under the WHOA. Besides, restructuring plans under the WHOA are likely to benefit from broad international recognition.

If a debtor faces financial distress due to mass damages claims relating to legacy issues, the WHOA could offer an effective way for the debtor to "draw a line in the sand", assuming that the debtor's business is viable despite the mass damages claims. There are, however, several limiting factors for employing the WHOA to settle mass damages claims.

First, in order to initiate WHOA proceedings, the debtor concerned must meet a "light insolvency" test: it must be reasonably plausible that the debtor will be unable to pay its future debts as they fall due. The WHOA is only available for debtors in distress, whether or not that distress is caused by mass damages claims. In the US, courts have been reluctant to accept the debtor's statement that it is in financial distress due to mass damages claims in Chapter 11 proceedings, if the debtor's liability for those claims has not yet been sufficiently established. Dutch courts may show similar reluctance should a debtor claim that it meets the light insolvency test because of its exposure from mass damages claims, before such claims have been sufficiently proven to exist.

Second, in order for a restructuring plan to be confirmed by the courts, it must meet the "best interest of creditors" test: the plan must be more beneficial to creditors than ordinary bankruptcy proceedings. Mass damages claimants are likely to form an unsecured class of creditors, with a weak position in the case of bankruptcy as bankruptcy estates tend not to allow for a distribution on unsecured claims. Nevertheless, any restructuring plan must ensure that mass damages claimants are not worse off under the restructuring plan than they would be in an ordinary bankruptcy, taking into account the full size of their claims.

Third, the settlement of mass damages claims which can be achieved through the WHOA is generally limited to existing claims: the WHOA does not accommodate for a way to settle future or unknown claims.

Last, considering the WHOA does not provide for a mechanism to estimate damages claims, like the WAMCA does, applying the WHOA to mass damages whose amount is challenged by the debtor (or other creditors) may be an issue.

Can all types of mass damages claims be crammed down through a WHOA?

Because mass damages claimants are likely to be an unsecured class of creditors, their voting power on a restructuring plan is limited. Depending on the nature of the mass damages claims, the court may be reluctant to allow a cramdown of mass damages claimants in the context of a restructuring plan. Especially in personal injury cases, it seems undesirable for unsecured mass damages creditors to be subject to a restructuring plan by virtue of the support of such a plan by secured professional creditors (such as bank lenders). This may result in the court refusing to confirm a plan based on either the argument that the weight attributed to all or some mass damages claimant's vote should have been based on a different claim amount, or on the catch-all refusal ground provided for in the WHOA.

When mass damages claims lead to large exposures, debtors may very well turn to the WHOA to ensure the continuity of their business. It remains to be seen whether the WHOA will prove to be an effective tool to settle mass damages claims in a way that is similar to foreign jurisdictions, and whether Dutch courts are willing to apply the WHOA in all types of cases.