How does the cooling-off period work within the WHOA?
The Private Agreement Homologation Act (WHOA) offers companies in financial difficulties the opportunity to reach an agreement with their creditors without going into bankruptcy. In order to reach such an agreement, a cooling-off period has been created, during which creditors cannot collect their debts. This makes the cooling-off period a powerful tool that provides enough peace of mind to reach an agreement.
What is the cooling-off period?
The cooling-off period is in fact a “temporary shield” imposed by the court around the company. The aim is to create peace of mind so that an agreement can be worked out in relative tranquillity. Without this protection, creditors could, for example, seize assets, the bank could enforce securities and a landlord could proceed with eviction. The basic principle under the WHOA is that the company should continue to operate as normally as possible during the negotiations. Seizure or similar measures would immediately thwart the conclusion of such an agreement. The legislator has therefore decided that the court, upon request, can impose such a period of relative freeze.
How is a cooling-off period invoked?
The request for a cooling-off period can be made by the debtor itself, but also by a restructuring expert if one has been appointed. The court will then examine whether a number of conditions have been met. It is important that there must be a serious prospect of an agreement being offered to the creditors. The cooling-off period is therefore not an emergency brake for those who simply want to buy time; a realistic restructuring plan must be in the works. In addition, the cooling-off period must be necessary to keep the company running during the WHOA process, and the interests of creditors must not be materially harmed.
How long is the cooling-off period?
If the court grants the request, it will set a period of up to four months. This period may be extended upon request, but in principle the cooling-off period may not exceed eight months in total. The court may also focus the cooling-off period on certain creditors or certain assets. This means that a tailor-made approach is possible: sometimes protection against one critical party (e.g. the landlord or the bank) is sufficient, while in other cases broader protection against a group of, or all, creditors is necessary.
What specifically changes during the cooling-off period?
First of all, during that period, creditors and pledgees and mortgagees cannot, in principle, enforce their security rights if this would frustrate the continuity of the business. This means that the bank cannot simply proceed with the public sale of stocks or machinery, and a pledgee cannot simply cash in on its pledge. New seizures are also generally prohibited, and any planned enforcement sale procedures can be halted. In addition, creditors cannot, in principle, file for bankruptcy against the debtor while the cooling-off period is in effect.
Current agreements and existing debts are not affected by the cooling-off period
An important practical question is often what this means for current contracts, such as rental, lease or supply agreements. The cooling-off period does not automatically freeze all contracts or eliminate payment obligations. In principle, the company must continue to meet its current obligations. However, the WHOA does limit the ability of contracting parties to terminate crucial agreements or discontinue services solely on the basis of past payment arrears. The idea is that the company must continue to operate in order to retain value, enable an agreement to be reached and demonstrate that the company has an independent future and will not run into problems again in the short term.
It is also important to emphasise what the cooling-off period does not do. Debts are not waived during this phase and the ranking of creditors remains unchanged. The cooling-off period is not a mini-bankruptcy, but a temporary standstill in which everyone has to take a step back. Creditors retain their rights in a legal sense, but are temporarily unable to exercise them to the full extent. The court may lift the cooling-off period prematurely if it appears that there is no serious prospect of an agreement or if creditors are disproportionately disadvantaged.
For creditors, the cooling-off period can sometimes be difficult to accept, as it temporarily reduces their means of exerting pressure. At the same time, a successful WHOA agreement can often yield a better financial result than bankruptcy. The court explicitly weighs these interests: the cooling-off period is only granted if there is a realistic chance of a better outcome for the creditors as a whole. Furthermore, creditors can turn to the court if they feel that their position is being unacceptably affected.
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