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ICLGThe International Comparative Legal Guide to:
A practical cross-border insight into corporate recovery and insolvency work
Published by Global Legal Group, in partnership with INSOL International and the International Insolvency Institute, with contributions from:
13th Edition
Corporate Recovery & Insolvency 2019
Ali Budiardjo, Nugroho, Reksodiputro Allen & Gledhill LLP AZB & Partners Barun Law LLC Benoit Chambers Cleary Gottlieb Steen & Hamilton LLP De Pardieu Brocas Maffei Aarpi Dirican | Gozutok ENGARDE Attorneys at law Gall Gilbert + Tobin Hannes Snellman Attorneys INSOL International International Insolvency Institute (III) Kennedys Law Office Waly & Koskinen Ltd. Lenz & Staehelin Loyens & Loeff Luxembourg
Macfarlanes LLP McCann FitzGerald Miyetti Law Mori Hamada & Matsumoto Noerr LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Pirola Pennuto Zei & Associati SCA LEGAL, SLP Schindler Rechtsanwälte GmbH SOLCARGO Stibbe Synum ADV Thornton Grout Finnigan LLP Zepos & Yannopoulos
WWW.ICLG.COM
The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2019
Editorial Chapters:
Country Question and Answer Chapters:
1 INSOL’s Role Shaping the Future of Insolvency – Adam Harris, INSOL International 1
2 International Insolvency Institute – An Overview – Alan Bloom, International Insolvency Institute (III) 4
5 Australia Gilbert + Tobin: Dominic Emmett & Alexandra Whitby 18
6 Austria Schindler Rechtsanwälte GmbH: Martin Abram & Florian Cvak 26
7 Belgium Stibbe: Pieter Wouters & Paul Van der Putten 32
8 Bermuda Kennedys: Alex Potts QC & Mark Chudleigh 38
9 Canada Thornton Grout Finnigan LLP: Leanne M. Williams & Alexander Soutter 48
10 England Macfarlanes LLP: Paul Keddie & Timothy White 55
11 Finland Law Office Waly & Koskinen Ltd.: Tuomas Koskinen & Sami Waly 62
12 France De Pardieu Brocas Maffei Aarpi: Joanna Gumpelson & Philippe Dubois 68
13 Germany Noerr LLP: Dr. Thomas Hoffmann & Isabel Giancristofano 75
14 Greece Zepos & Yannopoulos: Emmanuel Mastromanolis & Giorgos Vavatsioulas 81
15 Hong Kong Gall: Nick Gall & Ashima Sood 90
16 India AZB & Partners: Bahram N. Vakil & Gausia Shaikh 96
17 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Theodoor Bakker & Herry N. Kurniawan 101
18 Ireland McCann FitzGerald: Michael Murphy & Grace Armstrong 106
19 Italy Pirola Pennuto Zei & Associati: Massimo Di Terlizzi 112
20 Japan Mori Hamada & Matsumoto: Daisuke Asai & Dai Katagiri 120
21 Korea Barun Law LLC: Thomas Pinansky & Joo Hyoung Jang 125
22 Luxembourg Loyens & Loeff Luxembourg: Anne-Marie Nicolas & Véronique Hoffeld 132
23 Mauritius Benoit Chambers: Anjeev Hurry 137
24 Mexico SOLCARGO: Fernando Pérez Correa Camarena &
Abimael Hernández Hernández 141
25 Netherlands Stibbe: Job van Hooff & Daisy Nijkamp 147
26 Nigeria Miyetti Law: Dr. Jennifer Douglas-Abubakar & Jude Odi 153
27 Russia Synum ADV: Alexander Zadorozhny & Artem Kazantsev 159
28 Singapore Allen & Gledhill LLP: Kenneth Lim & Edward Tiong 166
29 Spain SCA LEGAL, SLP: Pedro Moreira & Isabel Álvarez 172
30 Sweden Hannes Snellman Attorneys: Carolina Wahlby & Fredrik Olsson 179
31 Switzerland Lenz & Staehelin: Tanja Luginbühl & Dr. Roland Fischer 185
32 Turkey Dirican | Gozutok: Gökben Erdem Dirican & Ali Gozutok 194
33 Ukraine ENGARDE Attorneys at law: Dmytro Donenko & Artem Parnenko 201
34 USA Paul, Weiss, Rifkind, Wharton & Garrison LLP: Alan W. Kornberg &
Elizabeth R. McColm 208
Contributing Editor
Jat Bains, Macfarlanes LLP
Publisher
Rory Smith
Sales Director
Florjan Osmani
Account Director
Oliver Smith
Senior Editors
Caroline Collingwood Rachel Williams
Sub Editor
Jane Simmons Group Consulting Editor
Alan Falach
Published by
Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 Email: [email protected] URL: www.glgroup.co.uk
GLG Cover Design
F&F Studio Design
GLG Cover Image Source
iStockphoto
Printed by
Ashford Colour Press Ltd May 2019 Copyright © 2019 Global Legal Group Ltd. All rights reserved No photocopying ISBN 978-1-912509-72-0 ISSN 1754-0097
Strategic Partners
Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720
Disclaimer
This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
General Chapters: 3 Directors and Insolvency: Dangers and Duties – Jat Bains & Paul Keddie, Macfarlanes LLP 7
4 “Cross”-Border Wall? Not for U.S. Recognition of Foreign Insolvency Proceedings –
Cleary Gottlieb Steen & Hamilton LLP 12
1
chapter 1
insol international adam Harris
insol’s role shaping the Future of insolvency
As I near the end of my tenure as President of INSOL International (a
role that has brought immense satisfaction over the last two years), it
is a privilege to once again be asked to contribute to this publication.
It has been another busy year for INSOL International as we
continue to implement the recommendations of our Task Force 2021
strategic review, hold conferences and seminars, develop new
offerings for our members, and publish regular papers.
INSOL’s Task Force 2021, to which I referred in the previous
contributions to this publication, was launched at our Quadrennial
Conference held in Sydney in 2017. The paper itself was the
culmination of over two years’ development. The finished
product showed where INSOL wished to be and how it sought to
position itself in 2021; as a result, a number of working groups
were established to deliver on these key areas.
I am proud to say that two years into the process many of the key
achievements which we identified have actually been delivered or are in
the process of being finalised, and I am excited at the prospect of what will
be achieved over the next couple of years as we make our way to 2021.
I would like to take this opportunity to run through some of the key
developments over the last year.
Communications
When I wrote for this publication last year, there was a great deal of
excitement and anticipation not only for the annual conference due to
be held in New York but also for the launch of the new INSOL website,
the launch of which would coincide with the conference.
Communication via the internet is now such an important part of
business that it was vital that INSOL got this right and with the new
website a platform now exists that provides an enhanced user
experience for members. Not only that, but it is seamlessly integrated
with INSOL’s CRM system which provides members the opportunity
to update their details and list preferences and in so doing provides a
far more bespoke user experience. With this platform in place,
opportunities for further development are unlimited with one such
project being the INSOL app. Linked to both the website and CRM it
provides INSOL with further means of communicating with its
members, thereby enhancing their membership experience. Whether
used during a conference, seminar or other INSOL event, this product
allows INSOL to provide information and help establish contact
between members. In time its functionality will be enhanced and will
provide ever more ways to communicate and disseminate information.
I am also very pleased that over the last 12 months INSOL has
established itself in the world of social media. Whether through
Twitter, LinkedIn or other platforms, our members are “active” and
embracing this medium of communication has become a priority.
Whether used to promote publications and events, or to stimulate
debate, INSOL has embraced this form of communication and work
continues as we look for new ways to utilise it and add to our ever-
growing number of followers.
Legislative Colloquium
INSOL has over many years established excellent relationships with
the Judiciary in many parts of the world. Our Judicial Colloquium has
proven a great success. Similarly, we have touchpoints with many
regulators and legislators and, resulting from our strategic review, a
Legislative Colloquium has been formed. The first gathering took
place at our conference in New York last year and a larger meeting
will be held next month at our forthcoming conference in Singapore.
Initiatives such as this understandably gain momentum over time but
the support for this at this early stage as been immense and I am proud
of what has been achieved in such a short time.
Judicial Training College
INSOL is fortunate that its members are so generous with their time.
It would be almost impossible to deliver our technical products and
services without them. One group that is particularly generous with
their time is the Judiciary, who have been firm supporters of the
organisation and the work that we do. Another significant
achievement that has been contemplated in the taskforce
deliberations has been the launch of INSOL’s Judicial Training
College. This initiative has seen Judges assist in the training of the
Judiciary in other jurisdictions. With training taking place in
Vietnam and Zambia in 2018 and more scheduled for 2019, this is
an initiative that we are already extremely pleased with and
confident that this is a sustainable long-term project for INSOL.
Foundation Certificate in International Insolvency Law
INSOL’s Global Insolvency Practice Course (also known as the
Fellowship) is now in its 10th year and has proven to be a great success.
Fellows have been instrumental in the forward strategy of INSOL, and
while this course is aimed at more experienced practitioners it has long
been thought that a more “entry level” course was required. The
Foundation Certificate in International Insolvency Law is intended to
provide a first-class but affordable and accessible educational offering
to those who do not have access to similar offerings in their own
iclg to: corporate recovery & insolvency 2019 www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London
jurisdictions. The course focuses on providing a sound theoretical
understanding of the basic principles of international insolvency law
for persons who have had limited exposure to this field (or no exposure
at all). The course has also been designed to provide candidates with a
basic understanding of practical issues in international insolvency.
A fundamental distinguishing factor of the course is that it is
presented entirely online and can be completed over a period of one
or two years. While appropriate support and guidance will be
provided to registered candidates, this is mainly a self-study course
to be completed at a pace suitable to each individual. While the
course is mainly aimed at candidates from the emerging market and
developing economies, less experienced candidates from developed
countries will also benefit from the course.
In terms of content, emphasis is placed on corporate insolvency law
and introduces candidates not only to the insolvency laws of various
jurisdictions, but also to the various available mechanisms for
dealing with transnational insolvencies in those jurisdictions.
To provide a little more detail, the course focuses on: i) an
understanding of the various principles and theories that apply in
international insolvency law; ii) an overview of the UNCITRAL
Model Law on Cross-Border Insolvency or the European Insolvency
Regulation; iii) an overview of the insolvency system that applies in
the United Kingdom or that which applies in the United States (as
two leading global insolvency systems), including the approach to
cross-border insolvency in these two jurisdictions; and iv) an
overview of the insolvency systems (and approach to international
insolvency) in various jurisdictions across the globe (candidates can
select from 25 jurisdictions in five regions across the globe).
The course begins on 1 September 2019 but registrations have already
commenced and I am happy to say that the level of interest has been
overwhelming with some candidates registering within hours of this
opening. We are confident that this product will prove very successful
and sit comfortably alongside the INSOL Fellowship.
INSOL International Technical Publications
One of the most valuable benefits INSOL International provides to its
members, is its technical library containing a vast array of technical
publications. With over 10,000 members worldwide, INSOL is able
to tap into the incredible depth of experience and knowledge of its
members in producing regular technical publications dealing with
cutting-edge issues in the world of restructuring and insolvency.
These publications come in the form of books, Special Reports, a
Technical Paper Series and a Small Practice Technical Paper Series.
Recent publications include topics as diverse as Insolvency and
Trusts, and Employee Entitlements (books), UNCITRAL’s Model Law on Recognition and Enforcement of Insolvency-Related Judgments – a universalist approach to cross-border insolvency (Special Report)
and Liability of controlling persons in corporate insolvency: Evolving trends in Russian law and practice (Technical Paper Series).
The Global Insolvency Practice Course (GIPC or Fellowship)
I have already briefly mentioned the GIPC when referring to the
Foundation Certificate above, but I would like to take this
opportunity to congratulate the class of 2018, whilst also wishing
this year’s class (busy preparing for Module B as I write) the best of
luck. I am sure they will excel on this course and I do hope they are
enjoying the experience. The Fellowship really has been a jewel in
the INSOL crown and the impact that the Fellows make across so
many aspects of INSOL’s work and initiatives, is hugely significant.
Events
Throughout my tenure as President and long before I even joined the
Board, INSOL has been running tremendously successful seminars
and events that seem to get bigger and more successful each year. Last
year our New York conference was more successful than I could ever
have imagined. Just under 900 delegates attended and the feedback we
received was overwhelmingly positive. It is always difficult to
continue to improve on numbers – particularly when the bar is set so
high – but our 2019 conference, which will take place in Singapore in
April, has already attracted numbers that exceed 900. The topics and
speakers selected under the theme “looking to the future”, really seem
to have caught the imagination. Personally, I am really looking
forward to hearing the thoughts and insights of our Keynote Speaker,
Professor Richard Susskind. That will set the scene for the forward-
looking theme of the conference. Significant parts of the 2019
Singapore conference are devoted to areas such as artificial
intelligence and cryptocurrency, all very much in keeping with the
underlying theme of the future and the issues, challenges and
opportunities it may bring. In addition, various ancillary meetings and
events have been planned around the main plenary session, including
the Offshore Meeting, Small Practice Meeting, Judicial Colloquium,
Academics’ Colloquium, Legislative Colloquium and the Ian Fletcher
International Insolvency Law Moot presented in conjunction with the
International Insolvency Institute (III).
While the INSOL conference is the largest and most high-profile
INSOL event, our one-day seminars over the last 12 months have also
been very successful and have taken place all over the globe. INSOL
returned to Buenos Aries for our established Latin American seminar
in March 2018 and then returned to Europe in June to host its first one-
day seminar in the Nordic region. This seminar took place in Helsinki,
Finland and was jointly hosted by INSOL International and INSOL
Europe, attracting over 100 delegates. Events were also held in the
Channel Islands (Jersey), Dubai, Jakarta and Hong Kong. We also
staged a very successful Africa Round Table (ART) in Maputo,
Mozambique, in partnership with the World Bank Group. As a South
African it has been particularly rewarding and meaningful to me to
have been involved with this initiative, especially to have seen it grow
over the last nine years, and to have delegates from diverse
jurisdictions enthusing about the project having been a real catalyst for
change in a particular insolvency system. I look forward to celebrating
the 10th year of this project, which will be held in Swakopmund,
Namibia, and I am confident that it will be a resounding success.
The Future
And what of the future? Though I am soon stepping down from my
role as President, I am proud to have contributed. I see a very bright
and exciting future for INSOL. I have already made mention of the
many Task Force 2021 initiatives that have been delivered over the
last year, however, there are many more to come in the next two
years, one of which is the establishment of the Asia Hub, a project
that has required some significant research.
insol international insol’s role shaping the Future of insolvency
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Adam Harris INSOL International / Bowmans 22 Bree Street Cape Town, 8000 South Africa Tel: +27 21 480 7837
Email: [email protected]
URL: www.bowmanslaw.com
www.insol.org
Adam Harris is a Director of Bowmans, South Africa, and specialises in business restructuring, insolvency and related fields. He is the current President of INSOL International.
Adam represents lenders and creditors, such as a number of major banks, and other institutions such as professional indemnity insurers, as well as business rescue and insolvency practitioners in various aspects relating to the restructuring or winding up of companies and the administration of insolvent estates.
He has represented international practitioners and creditors in various cross-border matters, to obtain recognition, and in relation to asset tracing, the valuation of such assets, and the ultimate disposal thereof and the repatriation of the proceeds.
In the course of representation of creditors and business rescue practitioners, Adam has dealt with various aspects such as the rights of creditors given the moratorium established on commencement of the formal proceedings, post-commencement (DIP) finance, the ranking of claims, and the formulation and implementation of rescue plans.
Adam has attended to some of the leading cases on different aspects of winding-up, insolvency and business restructuring such as the constitutionality of interrogations, impeachable transactions (claw-backs), procedural aspects of winding up applications, the interpretation of the Business Rescue legislation and insolvency practitioners’ remuneration.
He is one of the co-authors of Mars: The Law of Insolvency (9th and 10th Ed.), a leading insolvency text in South Africa.
INSOL International is a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. There are currently over 40 Member Associations world-wide with over 10,000 professionals participating as Members of INSOL International.
Copyright © No part of this document may be reproduced or transmitted in any form or by any means without prior permission of INSOL International. The author accepts no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any view expressed herein.
©2019 Copyright INSOL INTERNATIONAL. All Rights Reserved. Registered in England and Wales, No. 0307353.
INSOL, INSOL INTERNATIONAL, INSOL Globe are trademarks of INSOL INTERNATIONAL.
insol international insol’s role shaping the Future of insolvency
iclg to: corporate recovery & insolvency 2019 3www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London
With such a large membership in the Asia-Pacific region and such
scope for growth, INSOL is delighted to announce that it will be
opening a satellite office in this region in 2019. This is obviously a
momentous decision for an organisation such as INSOL, which has
operated from one office in London for over two decades.
These are without question exciting times and I know that the
organisation is in good hands going forward. It has the roadmap,
and knows where it is headed.
Note
Please note that this chapter was written in March 2019.
chapter 2
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international insolvency institute (iii) alan Bloom
international insolvency institute – an overview
Most commentators seem to think that we are heading towards some
form of downturn/correction in a number of global markets either
towards the end of 2019 or in the early part of 2020.
With the ever more globalised nature of business and the more
nationalistic politics of the early 21st century, it is incumbent on
organisations like the International Insolvency Institute (“III”) and
others to ensure that in the case of both in-court and out-of-court
restructurings and insolvency, there is maximum cooperation
between those representing enterprises in different jurisdictions and
the judges who preside over estates that are subject to
multijurisdictional proceedings.
The III is dedicated to this and through our activities, our
sponsorship of projects, conferences, academic and judicial
meetings and regional activities, we seek to develop thinking in the
area of cross-border insolvency and to support international
organisations and in some cases individual countries or their
judiciary that are looking to develop and/or implement legislation
which furthers cross-border insolvency.
The III is now 19 years old and has recently undertaken quite a
considerable revamp in terms of its governance, the way in which it
operates and the breadth of its activities.
The organisation has approximately 360 members with a cap on
membership of 500. Membership is currently: 40% North
American; 35% European; 16% Asian; and 9% Latin American and
Caribbean. We have a stated objective to increase representation
from jurisdictions with less mature insolvency regimes and
therefore less well-developed insolvency professions and judiciary.
Our membership is currently 83% male and 17% female with a clear
and stated intention of increasing the percentage of female
members.
Finally, on membership, we have: 16% judges; 16% academics;
61% legal practitioners; and 7% financial advisory practitioners.
We have a keen interest in increasing the number of financial
advisory members across the full range of financial advisory
activities.
As membership is by invitation through full member sponsorship,
we have a network of individuals, as part of our membership
committee, who liaise with the existing membership to establish a
pipeline of candidates who are to be considered for membership.
In terms of governance, the organisation is accountable to its
members, through a Board, an Executive Committee and a series of
operating committees.
The board consists of members with a good cross-section of
geographic, gender and professional backgrounds. It meets
monthly, and all major decisions have to be approved by the board.
The Executive Committee consists of the President, the immediate
past-President and four Vice-Presidents. At the time of writing, the
immediate past-President role is represented by both Don Bernstein
of Davis Polk & Wardwell and former judge James Peck, now of
Morrison and Foerster. The Vice-Presidents are Debra Grassgreen
of Pachulski Stang Ziehl and Jones of San Francisco; John Martin of
Norton Rose Fulbright, Sydney, Australia; Professor Charles
(“Chuck”) Mooney of the University of Pennsylvania Law School;
and Professor Ignacio Tirado of UNIDROIT.
The Executive Committee and other committees are supported by a
small, experienced team of senior administrators.
III’s operational committees consist of three types:
■ Four regional committees representing: North America;
EMEA; Asia; and Latin America/the Caribbean.
■ Four core committees: Partnerships; Programs and Meetings;
Projects; and Law and Practice Reform.
■ Various specialist committees such as: the Academic
committee; the Judicial committee; and the NextGen
committee.
Each of the regional committees has co-chairs and between five to
ten members. The role of the regional committees is principally to:
■ identify suitable new members;
■ identify new candidates for the NextGen programme;
■ organise regional activities including meetings, webinars
etc.; and
■ consider projects for submission to the Projects Committee.
The Partnerships Committee ensures that the III is working closely
with other like-minded organisations in a positive and proactive way
and collaborating on projects and joint-ventures where appropriate.
The Programs and Meetings committee oversees the work of our
annual conference committees, ensures that we present the best
possible conferences and learn from the lessons of previous events
to ensure quality, consistency and continuity. It is also responsible
for looking at future destinations for the annual conference and
ensuring that each of the regional meetings are dovetailed with other
activities within the Institute.
The Projects Committee is responsible, in liaison with the Academic
Committee, for helping to generate ideas for new projects and
approving any proposed projects before they are sanctioned by the
Executive Committee and the Board.
The Law and Practice Reform Committee is looking at
opportunities to use the skill base of the III membership to support
initiatives either cross-border or within countries, to develop
insolvency/bankruptcy regimes and to support the development of a
suitably skilled judiciary.
iclg to: corporate recovery & insolvency 2019 5www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London
The Academics forum meets on the day before each annual conference
and part of the meeting is open for any of our members to attend. It
provides a forum for the discussion and debate on key topics and its
work often results in the generation of new project ideas, as well as
input to our regional and annual events.
The judicial forum also meets the day before our annual conference.
Unlike the Academic forum, the Judicial forum is not open to non-
judges and it serves to stimulate debate and influences the subject
matter for projects, wider forums and future conferences, for
example on court-to-court communication.
At the New York annual conference last September, for the first time
we not only had a Judicial forum but in a separate meeting, there
was an opportunity for the academics and judges to get together and
discuss issues of mutual interest.
The NextGen membership consists of approximately 125 current
members and approximately 40 alumni. The NextGen group
organise their own conference, with a completely separate tailor-
made programme which they develop, which takes place the day
before each annual conference. There is an open invitation for full
members to participate. NextGen also organise their own social
programme. Increasingly, NextGen members support and
participate in the work of the full member committees.
Finally, we have subcommittees looking at issues such as intellectual
property rights in insolvency, sovereign debt restructuring and
UNCITRAL liaison.
The creation of these committees and the increased level of
governance has meant that there is far more activity at III than ever
before with many more opportunities for members to participate. A
few highlights from the past year and from the programme for the
next few months represent a major change in the scale of
opportunities for our members to get involved and significantly
greater platforms for the Institute and its members.
Annual Conference
Our next conference is in Barcelona between 16–17 June 2019, and
in 2020 we will have our second conference in Asia, when Hong
Kong will host following the great success of Tokyo 2016. We are
currently assessing venues for our 2021 conference with an
announcement to be made in Barcelona.
Regional Meetings
During the course of the last 12 months, we have held regional
meetings in Vancouver, Paris, Mexico City, Miami and Singapore,
with further meetings planned for San Diego, Amsterdam, China,
São Paulo and Singapore.
These meetings, usually followed by lunch or dinner, tend to involve
no more than 50 to 60 members and sometimes as few as 10 to 20.
They represent an opportunity to deal with significant issues of the
day and, with relatively few involved, there is the opportunity to
dive deeper and engage more fully in the topics presented.
Webinar
Last autumn we ran our first ever webinar on issues arising from
insolvency and restructuring in Africa. The event was a great
success and allowed access to a much wider group of participants
without the cost and time commitment of travelling. I fully expect
that III will do more of these in the future.
Ian Fletcher Moot Competition
In a strong collaboration with INSOL, we have created a branded
moot competition in honour of Professor Ian Fletcher, who sadly
passed away last year.
First run in Sydney in 2017, the second running took place in
Vancouver in February 2018 and the third will take place in
Singapore, coinciding with the Judicial colloquium that forms part
of the Insol regional conference in April 2019.
The quality of submissions and the prominence of the judges make
this a very impressive, now annual, event. III and INSOL are
committed to this for the foreseeable future and we are currently
planning the location for 2020, which will be the announced in the
next few months.
Academic Events/Panels
In February 2018, an event was held in honour of Professor Jay
Westbrook from the University of Austin in Texas. The gathering,
of many of the leading lights from academia and professional
practice, has been recorded in a series of papers produced in
Professor Westbrook’s honour, soon to be published on the III
website.
In September 2018, the University of Michigan hosted another
academic forum primarily concerned with issues around soft law.
The conference was designed to attract members who would be in
New York for the annual conference and it was attended by a
number of leading academics in the field.
III also ran panels at other organisations’ events: at the ABI
International symposiums in Dublin and Milan; at the NCBJ
conferences; and in conjunction with the International Committee of
the ACB.
Support for Law and Practice Reform
III has provided considerable support in terms of members’ time, to
the Asian Business Law Institute’s initiative, looking at the
insolvency regimes in a dozen or so Asian jurisdictions, and ways in
which the various domestic codes can be made more consistent.
iii international insolvency institute – an overview
www.iclg.com6 iclg to: corporate recovery & insolvency 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London
Alan Bloom Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom
Tel: +44 207 951 9898
Email: [email protected]
URL: www.ey.com
Alan Bloom is a senior restructuring Partner at EY and President of the International Insolvency Institute from 2017–2019.
The International Insolvency Institute Is:
A non-profit, limited membership organisation. ■
An invitation-only membership of the most senior, experienced and respected practitioners, academics, judges and financial industry ■professionals in the world.
Dedicated to improving international cooperation in the insolvency field. ■
Focused on promoting greater international cooperation and coordination through improvements in the law and in legal procedures. ■
Continually studying, analysing and providing solutions to problems in cross-border insolvencies and reorganisations. ■
Awarded special consultative status to United Nations Agencies.■
iii international insolvency institute – an overview
7
chapter 3
iclg to: corporate recovery & insolvency 2019 www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London
macfarlanes llp
Jat Bains
paul Keddie
Directors and insolvency: Dangers and Duties
Nobody envies directors caught up in a restructuring. Tough
decisions need to be made and not everyone will get what they want
or expect, and those decisions will be subject to intense scrutiny
from disaffected stakeholders. Moreover, directors risk the
unpleasant prospect of personal liability for their actions and
pressure upon them is not easing up.
In the aftermath of the financial crisis, a common view was held that
whilst institutions may have been punished, the senior executives
responsible for misbehaviour have largely escaped punishment. A
number of governments have reacted to this sentiment, along with
recent high-profile failures of businesses where at least partial
blame was attributed to the actions of the directors of those
businesses, and have pushed an agenda of personal accountability.
This makes it more incumbent than ever on directors to ensure that
they can satisfy the myriad of legal obligations placed on them, as
they confront the financial difficulties of their companies.
Controls on Directors
There are certainly good reasons for the law to regulate directors’
actions, particularly relating to insolvency. In a balance sheet
insolvency, the economic value of the company breaks in the
creditors’ debt and not the shareholders’ equity. However, in the
absence of regulations the directors may take actions in the interests
of themselves or the shareholders and not the creditors who hold the
remaining economic interest in the company. Such actions include
shifting assets out of the company (and so out of the reach of
creditors) or engaging in highly speculative investments or loss-
making activities. The losses caused by those actions will be borne
by the creditors. The shareholders will usually be protected by
limited liability and will be no worse off as the value of their equity
has already been reduced or completely depleted.
To mitigate the potential harm to creditors, the law may impose
controls on directors including:
■ an obligation on directors to file for insolvency;
■ making directors personally liable for increased liabilities of
the company;
■ shifting directors’ duties from being owed to the shareholders
to being owed to the creditors of the company; or
■ challenges to transactions prior to an insolvency process that
are detrimental to the general body of creditors.
Versions of the fourth type of control are common across most
jurisdictions, whilst there is more variation in which of the other
controls various jurisdictions adopt.
Obligation on Directors to File for Insolvency
English law does not impose a strict obligation on directors to file
for an insolvency process when they become, or should have
become, aware of the company’s insolvency. However, many other
European jurisdictions do. For example, in Germany directors have
21 days to file for insolvency, in France they have 45 days, and in
Spain, they have two months.
Personal Liability for Directors for Increased Liabilities of the Company
In England and Wales, where directors are not explicitly obliged to
file for insolvency, “wrongful trading” is the main impetus for
directors to put an insolvent company into administration or
liquidation.
The criteria for wrongful trading are set out in sections 214 and
246ZB of the Insolvency Act 1986. Directors face being personally
liable for an increase in the net deficiency of a company’s assets
between the time the directors knew, or ought to have concluded,
that there was no reasonable prospect of a company avoiding an
insolvent liquidation or administration and the commencement of
the subsequent insolvent liquidation or administration. Directors
found liable for wrongful trading may also be disqualified from
acting as directors or have restrictions placed upon their capacity to
act as directors in the future.
There is a defence against wrongful trading if the director concerned
took every step that they should have taken with a view to minimising
the potential loss to the company’s creditors. A higher standard will
be required of a more skilled or experienced director, for example, a
professionally qualified director such as an accountant. It is crucial
that the board minutes or other written evidence records what steps
are being taken to protect creditors, as the burden of proof in
establishing the defence will be on the directors. Engaging
professionals to advise on wrongful trading can be helpful to
directors, both for the advice received and in demonstrating that steps
are being taken to minimise losses to creditors.
It is tempting for directors who are worried about personal liability
for wrongful trading to get themselves out of the situation by either
resigning or putting the company immediately into an insolvency
process. Neither of these may be advisable. Resigning as a director
will not absolve the liability for wrongful trading. Indeed, by
resigning, the now former director can be said to have failed to take
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every step to minimise creditors’ losses. This is particularly the case
where the director’s resignation has left a skills or knowledge gap in
the company’s board. Immediately putting the company into an
insolvency process which is destructive of value may contravene the
directors’ duty to the company’s creditors.
Duties Owed to Creditors
The Companies Act 2006 partially codified directors’ duties in
England and Wales. Section 172(1) provides that directors have a
duty to promote the success of the company for the benefit of its
members as a whole. However, this is subject to a requirement in
“certain circumstances” to act in the interests of the creditors of the
company. The English Court of Appeal has recently confirmed that
these circumstances include not only insolvency but a period prior
to insolvency if the directors knew, or ought to have known, that
insolvency was probable (BTI 2014 LLC v Sequana SA [2019]
EWCA Civ 112).
This shift in directors’ duties, from being owed to shareholders to
owed to creditors upon or near insolvency is more prevalent in
common law jurisdictions than in civil jurisdictions. Many of the
notable cases originate from Australia and New Zealand. However,
this is not a universal rule and certain jurisdictions retain the
primacy of duties owed to shareholders even where a company is
insolvent. Conversely, the EU’s proposed directive on preventative
restructuring frameworks will require its member states to lay down
rules requiring directors to have due regard for creditors’ and other
stakeholders’ interests where there is a likelihood of insolvency.
Directors of distressed companies should consider carefully, and
take professional advice if necessary, if a duty to act primarily in the
interests of creditors has been triggered. It is advisable for the
directors to record in board minutes how the creditors’ interests have
been duly considered and the reasons why the board’s decisions are
in the interests of creditors. This will mean a different way of
operating from when shareholders’ interests were being primarily
considered. However, this does not necessarily mean that a
company cannot continue its business, as in many cases, it will also
be in the creditors’ interests for the company to carry on trading.
The shift in directors’ duties towards creditors can be problematic in
a group restructuring. Directors of an insolvent subsidiary can be
caught between the competing demands of its creditors and its
parent company. This can be complicated when the same
individuals are directors of different companies within the same
group. English law and many other jurisdictions do not allow
directors to consider their duties on a group-wide basis, as they must
consider the interests of the particular company of which they are a
director. Prudent directors will appoint their own lawyers who are
independent to those advising the company or the wider group to
help them navigate these issues and avoid any potential conflict.
Challenges to Pre-Insolvency Transactions
England and Wales, like most jurisdictions, allows for certain
transactions which had a detrimental effect on a company’s creditors
to be challenged during an insolvency process. The main types of
challenge are transactions at an undervalue, transactions defrauding
creditors, preferences and avoiding a floating charge. The risks of
these transactions being subsequently challenged should be
considered by directors, as where it is not feasible to reverse the
transaction, directors may be required to compensate the company
for the loss suffered.
Transactions at an Undervalue and Defrauding Creditors
Transactions at an undervalue involve a company transferring an
asset to another party for no consideration or for significantly less
than its market value. A transaction at an undervalue can be
challenged by a liquidator or administrator if:
■ the company was insolvent or became insolvent as a result of
the transaction (insolvency is presumed if the transaction is
with a connected person such as a director);
■ the transaction occurred within the two-year period prior to
the onset of insolvency; and
■ the transaction was not made in good faith, for the purpose of
carrying on the business and there are no reasonable grounds
for believing that the transaction was for the benefit of the
company.
A transaction at an undervalue can also be challenged under section
423 of the Insolvency Act 1986 if its purpose was to put assets
beyond the reach of a creditor. These are so-called “transactions
defrauding creditors”. Despite the name, there is no need to show
fraud or any dishonesty on the part of the company or its directors,
just that the transaction was carried out with a purpose of removing
assets from creditors. There is also no requirement that the
company was insolvent or became insolvent due to the transaction.
Unlike the other types of challenges which are brought by an
administrator or liquidator, a claim for a transaction defrauding
creditors can be brought directly by creditors or any other party
prejudiced by the transaction.
Preferences
Preferences are transactions that the company carries out or permits
to happen which, upon a company going into administration or
liquidation, puts a creditor in a better position than it would
otherwise have been. This can include a company paying off a
director’s loan account ahead of paying other creditors, or the
granting of security to an unsecured creditor. For a transaction to be
successfully challenged as a preference:
■ the company must have been insolvent at the time of the
preference or become insolvent as a result of the preference;
■ the transaction must have occurred no more than six months
prior to the onset of insolvency (if to an unconnected person)
or no more than two years prior (if to a connected person);
and
■ the granting of the preference must have been motivated by
the desire to prefer the particular creditor (i.e. to put it in a
better position than it would have otherwise been). This is
presumed when the recipient of the preference is connected to
the company.
Avoiding Floating Charges
Floating charges are a form of security that allows the security
provider to freely deal with the class of assets charged until the
floating charge is crystallised, e.g. upon an event of default in a loan
agreement or insolvency. If granted within one year (to an
unconnected person) or two years (to a connected person) prior to
the onset of insolvency, a floating charge may be avoided to the
extent it secures “old money”. These are funds already advanced to
the company prior to the floating charge being granted.
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Public Companies
Directors of public and listed companies have to bear an even
heavier burden. A particular concern of regulators will be the flow
of information and need to make sure investors are not misled by
directors.
The directors will need to comply with disclosure rules such as
those in the Market Abuse Regulations or the AIM Rules. There is
a limited ability to delay disclosure where immediate disclosure
may prejudice the company’s legitimate interest, the market is not
likely to be misled and the company is able to ensure the
confidentiality of the information. For example, if there are
negotiations in progress.
A further risk in withholding information from the public is that a
director can commit a crime if they mislead the market. A director
does so if they knowingly or recklessly make a statement that is
false or misleading in a material respect or they dishonestly conceal
any material fact. Directors may also be held personally liable if
they made a false or misleading statement in any prospectus issued
as part of a public fundraising.
Until “cleansed” by publication the facts of a company’s financial
difficulties or planned restructuring may constitute inside
information. Directors should avoid any dealing in shares, options
and other securities of the company, or they run the risk of civil and
criminal liabilities for insider dealing or market abuse.
Cross-border Difficulties
Directors of companies operating across jurisdictions should take
steps to clarify what obligations apply or may apply to them upon an
insolvency. A striking example of what can go wrong is the case of
Kornhaas v Thomas Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd (C-594/14), where the
European Court of Justice (“ECJ”) found that the director of an
English incorporated company was personally liable under German
law for payments the company had made after becoming insolvent.
Despite being registered in England, the company’s “centre of main
interest” was in Germany. On this basis, the company’s insolvency
was subject to German law as per the EC Insolvency Regulation
2000 (since recast). The ECJ held that the personal liability for
payments by the company was linked to the failure to file for
insolvency within 21 days (which, as referenced above, is a
requirement of German, but not English law). Accordingly, this
requirement to file applied to the director even if as a director of an
English company she was otherwise subject to English law
directors’ duties.
The interaction of obligations of directors in different jurisdictions
also needs to be considered when planning a restructuring. For
example, the plan for a group-wide out-of-court restructuring may
be derailed if the directors of one group company are required by
law to file for insolvency before the restructuring can be
implemented.
Protection for Directors
Given the risks that directors assume, companies often have to
provide some level of protection to directors. Otherwise it can be
difficult to persuade individuals to serve as directors and to continue
serving during difficult times. The two most common protections
offered are indemnification by the company and directors’ and
officers’ (“D&O”) insurance.
An indemnity from the company cannot be all encompassing.
England and Wales section 232 of the Companies Act 2006 restricts
a company’s ability to indemnify a director in respect of negligence
or a breach of trust or duty in relation to the company. Section 234
prevents a company from indemnifying a director for criminal fines,
regulatory penalties and defence costs for criminal or regulatory
proceedings where the director was found guilty.
A more critical limitation of indemnities is that, if called upon, an
indemnity would only make a director an unsecured creditor of the
company. Therefore, an insolvency scenario, the time when the
indemnity is most likely to be needed is also when the indemnity is
least likely to have any value. Accordingly, directors may seek
indemnification from elsewhere in the group, or from a controlling
fund or sponsor, which is more likely to meet any indemnity claim.
The advantage of D&O insurance over an indemnity from the
company is that the payer would be a (hopefully) solvent insurer rather
than a financially distressed company. However, care and specialist
advice will need to be taken to ensure the cover is as expected.
It is common for insurance policies to not pay out in respect of a risk
that is against public policy. Directors may find they are not
covered for criminal liabilities and, in some jurisdictions, civil fines.
Therefore, criminal liabilities are one area where directors are
unlikely to benefit from either an indemnity or a D&O policy. At
one level, this is sensible as generally insulating individuals from
the legal consequences of criminal behaviour can lead to perverse
consequences. However, there may be technical criminal offences
which do not require any dishonesty or malevolent intent on the
directors’ part. With more and more obligations imposed on
directors, the uncovered risks they run are increasing.
Even where cover is not prohibited by the law, the drafting of the
policy may still leave directors exposed. For example, a D&O
policy will typically provide cover for a damages claim which is
made against a director. However, some jurisdictions do not
consider a claim against directors under insolvency laws to be a
damages claim and, consequently, that claim may not be covered by
the D&O policy. Directors, therefore, would be wise to seek both
insurance and local law advice if there are concerns about the extent
of a policy’s coverage.
A common area of concern in relation to coverage is the extent of
the “insured versus insured” exclusion. Insurers will typically
exclude claims made by one insured party against another. A D&O
policy will usually insure both the company and its directors, so an
insured versus insured exclusion may apply when a company brings
a claim against its own director, as would be the case in England for
a breach of directors’ duties. Some comfort for directors can be
found if, in an insolvency process, actions brought in the name of
the company by insolvency practitioners controlling the company
are carved out of the insured versus insured exclusion.
There is a risk that a D&O policy may encourage claims against a
director if claimants believe the deep pockets of an insurer will meet
their claim. However, in general a good D&O policy is likely to be of
benefit to directors and almost certainly of more benefit than an
indemnity from an insolvent company. Indeed, it is often worth shadow
directors, who may run many of the same risks as directors, being
formally appointed as directors so that they can benefit from the policy.
Directors and former directors should also bear in mind that usually
the D&O insurance policy will be taken out by the company, but in
an insolvency process the directors cede control of the company to
an insolvency practitioner. Therefore, as a practical matter,
directors should ensure they keep their own copy of the D&O policy
documents.
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Future of Directors’ Liability in the UK
In the UK, attitudes towards directors of insolvent companies have
hardened after a string of high-profile failures including BHS and
Carillion. In the former case, the previous owner of BHS, Sir Philip
Green, was heavily criticised in the press and in Parliament for
selling to a consortium of inexperienced investors, headed by a
twice bankrupted businessman. Shortly after the sale, BHS went
into administration with its pension fund among its most heavily
affected creditors. After enormous political pressure, Sir Philip
agreed to contribute £363m to the BHS pension fund.
The BHS case has inspired a raft of new proposals by the UK
Government. A pension-specific measure is a proposed new
criminal offence of wilful or reckless behaviour in relation to a
defined benefit scheme. Another proposal with wider application is
to make directors of a holding company liable in relation to the
disposal of an insolvent subsidiary. According to the proposal,
liability would attach to a holding company’s directors if:
■ the subsidiary was insolvent at the time it was sold;
■ within 12 months of completion of the sale the disposed of
subsidiary enters administration or liquidation;
■ the interests of creditors are adversely affected during the
period between the sale and administration or liquidation; and
■ the holding company’s directors could not have reasonably
believed that the sale would lead to a better outcome for creditors
than the administration or liquidation of the subsidiary.
The UK Government has rowed back on an earlier proposal to make
any holding company directors found guilty of this offence to pay
compensation to the sold subsidiary’s administrators or liquidators.
However, guilty directors would still risk being disqualified to act as
a company director and the associated financial penalties.
Detailed draft legislation is still awaited, but the UK Government is
keen to implement the new liabilities for directors. This is despite
strong scepticism from the professional restructuring community.
In part, this relates to concerns about how directors of holding
companies (and potentially entities further up the group structure)
will manage the conflicts with their duties to their own company and
shareholders. There are also concerns that holding company
directors, fearing for their own personal liability, may place a
subsidiary into an immediate value-destructive insolvency process
rather than risk a distressed sale (which may ultimately produce a
better outcome for creditors despite the risks).
It will be interesting to see whether any changes in the UK inspire
other jurisdictions to follow suit.
Brexit means the EU proposed directive of preventative restructuring
frameworks is unlikely to be directly relevant to UK directors. From
an English law perspective, this would have broadened the category
of parties’ whose interests’ directors would need to have due regard
for when there is a likelihood of insolvency to “other stakeholders”.
The directive will have a larger impact on the remaining EU
members where, for the first time in many jurisdictions, directors
will owe duties to creditors when the company is in the vicinity of
insolvency.
Conclusion
Undoubtedly, the law should take a firm stance where there has been
clear and genuine wrongdoing by directors. However, financial
distress and insolvency will be an unfamiliar and bewildering
situation to most directors. Governments should as a result be wary
of imposing too onerous a burden on directors, and too high a risk of
personal liability. Companies need individuals to be willing to
accept directorships and to remain in office when the company is in
distress. Nonetheless, the trend continues to be to expect more of
directors not less. The particular course of action directors will need
to adopt will vary with the situation, but good practice would be to:
■ hold regular board meetings focused on the company’s
financial difficulties. These may have to be held more
frequently than the practice during better times. Minutes
should be carefully kept to record decisions made, the
reasons for them and that due consideration was given to the
directors’ duties including, where relevant, those owed to
creditors of the company;
■ take professional advice, ideally from insolvency and
corporate recovery specialists. Directors should also
consider whether it would be appropriate to appoint their own
legal advisors independent of the company’s or the group’s
advisors;
■ ensure they have up-to-date and accurate information on the
company’s affairs, assets and liabilities. This should include
a list of all known current and prospective creditors and other
crucial stakeholders. The liquidity of cash is crucial and
directors should have a cash flow projection for the
immediate future;
■ avoid committing the company to large new liabilities or new
creditors. If this is necessary to continue trading directors
should consider how new creditors can be protected and how
the liabilities to the new creditors will be met; and
■ review (with the assistance of professional advisors if
necessary) the company’s D&O insurance coverage.
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Jat Bains Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2234
Email: [email protected]
URL: www.macfarlanes.com
Paul Keddie Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2894
Email: [email protected]
URL: www.macfarlanes.com
Jat specialises in a range of debt finance transactions, acting for a diverse range of stakeholders including credit and special situations funds, corporate clients, sponsors, bondholders and senior and mezzanine lenders in relation to, amongst other things, workouts and restructurings.
He has been involved in restructurings in a wide range of sectors including retail, healthcare, hotels, consumer lending, technology and media, construction, manufacturing, professional services and infrastructure.
Jat is a member of the Institute for Turnaround.
Paul advises on a broad range of corporate restructuring and recovery issues.
His clients include companies in financial difficulties, their directors and shareholders, insolvency practitioners appointed over such companies, lenders to and other major creditors of troubled entities, investors interested in a “loan-to-own” strategy and buyers of businesses where there is an insolvency aspect.
Paul is a qualified insolvency practitioner, having passed the Joint Insolvency Examination Board examinations and is the co-author of the “Insolvency and Restructuring Manual, 3rd Edition”, which was published by Bloomsbury in 2018.
macfarlanes llp Directors and insolvency: Dangers and Duties
From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high-net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters.
Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals.
Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation.
We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.
chapter 4
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cleary gottlieb steen & Hamilton llp
“cross”-Border wall? not for U.s. recognition of Foreign insolvency proceedings
Introduction
Though political headlines in the U.S. and other major developed
economies may be focused on trends of nationalism and insularity, a
study of the recent U.S. decisions on recognition and enforcement of
foreign insolvency proceedings suggests a decidedly contrary trend.
Rather than any hint of “America First”, or insistence on United
States-centric views of creditor rights, U.S. courts are trending
towards openness to recognition and enforcement of foreign
insolvency proceedings. Courts in the U.S. have moved away from
technical or formalistic requirements that could arguably present
barriers to cross-border restructurings, and now prioritise
effectuating the mandate of the UNCITRAL Model Law on Cross-
Border Insolvency (“UNCITRAL Model Law”).
Approximately 15 years ago, the United States enacted legislation to
implement the UNCITRAL Model Law, styled as Chapter 15 of the
United States Bankruptcy Code. The stated purpose of Chapter 15
is to “provide effective mechanisms for dealing with cases of cross-
border insolvency” and to facilitate cooperation between U.S. and
foreign courts. See 11 U.S.C. § 1501. Since that time, foreign
debtors have enjoyed this comprehensive legislative framework that
provides straightforward and consistent rules for treatment and
recognition of foreign insolvency proceedings. A representative of
a foreign debtor may commence a proceeding under Chapter 15 for
recognition of a foreign judicial or administrative insolvency
proceeding, which provides foreign debtors access to U.S. courts to
efficiently administer assets, resolve claims, and take certain other
actions (e.g., file discovery requests) within the United States.
A number of earlier bankruptcy court decisions, such as the Second
Circuit’s decision in In re Barnet, 737 F.3d 238 (2d Cir. 2013)
(imposing Section 109 debtor eligibility requirements for
possessing property in the United States to Chapter 15 foreign
debtors), were viewed to limit the scope of Chapter 15. In contrast,
recent cases have taken a more permissive approach, with increased
emphasis on ensuring that the legislative objective of Chapter 15 to
facilitate efficient cross-border corporate reorganisations is achieved.
This chapter discusses several major decisions in the last two years
consistent with this trend and provides guidance on some of the key
legal issues and tools available to foreign debtors seeking U.S.
recognition of foreign proceedings. Consistent with these decisions,
foreign debtors and creditors should expect Chapter 15 proceedings
to continue to emphasise prioritising a single foreign main
proceeding, granting comity to foreign insolvency courts, and
providing broad relief without procedural delays to ensure proper
enforcement.
No Gaming the System: Determining a Debtor’s Centre of Main Interests
The decisions on the touchstone for recognition – where a debtor’s
“centre of main interests” (“COMI”) lie – perhaps best highlight
where the developments on foreign insolvency recognition point.
To begin, consistent with the UNCITRAL Model Law, Chapter 15
authorises different relief depending on whether the recognised
foreign proceeding is a “main proceeding” – a case pending in the
country where the debtor’s COMI is located – or a “nonmain
proceeding” – a case pending in the country where the debtor has
only an “establishment”. See 11 U.S.C. § 1502. This is a key
determination because recognition of a foreign main proceeding
entitles the foreign debtor to broader automatic relief, including an
imposition of the automatic stay in the United States, than is
available upon recognition of a foreign non-main proceeding.
Although COMI is not defined in the statute, Section 1516(c)
provides a statutory presumption that the debtor’s registered office
is its COMI. Nevertheless, creditors in a proposed Chapter 15 case
may challenge the location of a debtor’s COMI (and thus whether
the proceeding is a main proceeding) in an effort to disrupt or
otherwise limit the reach of the Chapter 15 case. The stakes are
especially high because courts have interpreted Chapter 15 to be the
exclusive avenue for providing ancillary assistance to foreign
proceedings. See, e.g., In re Millennium Global Emerging Credit Master Fund Ltd., 458 B.R 63, n. 42 (Bankr. S.D.N.Y. 2011).
Foreign debtors and representatives, as well as their creditors who are
keenly aware of the stakes, have provided fodder and guidance for
how the COMI determination can be leveraged. Specifically, in 2017,
two opinions from the U.S. Bankruptcy Court for the Southern
District of New York (“SDNY Bankruptcy Court”) (one of the most
sophisticated and active jurisdictions for both Chapter 11 and Chapter
15 cases) demonstrate how the fundamental principles of fairness and
efficiency under Chapter 15 can drive outcomes (at least in part).
Determining COMI with competing foreign proceedings: Don’t play games
In In re Oi S.A., 578 B.R. 169 (Bankr. S.D.N.Y. 2017), Judge Lane
addressed COMI issues in the context of two competing foreign
restructuring proceedings of a Dutch subsidiary of a Brazilian
conglomerate, one in Brazil (the “Brazilian Proceeding”) and one
subsequently commenced in the Netherlands (the “Dutch
Proceeding”). Judge Lane maintained his finding that the debtor’s
COMI was in Brazil, in part because of an objecting creditor’s role
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in initiating the Dutch Proceeding. The decision emphasises that
Chapter 15 will be interpreted with a focus on promoting fair and
efficient administration of foreign insolvencies.
Oi Brasil Holdings Coöperatief U.A. (“Coop”) was the Dutch
subsidiary of a Brazilian telecommunications conglomerate, Oi S.A.
(“Oi”). In July 2016, Judge Lane recognised Oi’s Brazilian
Proceeding as a “foreign main proceeding” in part because Coop
operated as a tax-advantaged financial vehicle for Oi, a Brazilian
corporation. Around the same time as Judge Lane’s decision,
Coop’s creditors commenced legal proceedings against Coop in the
Netherlands, which culminated in the competing Dutch Proceeding.
The Dutch insolvency trustee then asked Judge Lane to modify or
terminate the prior recognition order and instead recognise the
Dutch Proceeding as Coop’s foreign main proceeding.
In a lengthy opinion, Judge Lane denied the petition, finding no
basis for the relief sought under Section 1517(d) because the Court
had been fully aware of Coop’s connections to the Netherlands at
the time of recognition of the Brazilian Proceeding and that the
intervening commencement of the Dutch Proceeding did not
provide a basis for recognising it as the main proceeding. Of
particular note, Judge Lane expressly considered an objecting
creditor’s role in commencing the Dutch Proceeding as part of its
strategy to block recognition of any Brazilian restructuring plan in
order to increase its leverage. Judge Lane found that the objecting
creditor’s actions were “at odds with many of the goals of Chapter
15”, including fair and efficient administration of international
insolvencies, and admonished the objecting creditor for
“weaponiz[ing] Chapter 15 to collaterally attack” the Brazilian
Proceeding. Id. at 242.
While Judge Lane did not impute the objecting creditor’s conduct to
the Dutch insolvency trustee, the opinion paves new ground in
making clear that bankruptcy courts will consider a broad range of
facts and circumstances in resolving Chapter 15 disputes (including
determination of a foreign debtor’s COMI) in an effort to protect
against the use of Chapter 15 in contravention of its fundamental
purposes. Interested readers should keep an eye on further opinions
in this case – although the Second Circuit recently denied the
objecting creditor’s petition for appeal as moot, the objecting
creditor continues its efforts to challenge Judge Lane’s decision.
See Aurelius Capital Mgmt., LP v. Oi Brasil Holdings Coöperatief, U.A., No. 18-1450 (2d Cir. Jan. 24, 2019); Aurelius Capital
Management, LP’s Response to Motion to Dismiss Appeals and
Cross-Request for Vacatur, In re Oi Brasil Holdings Coöperatief U.A., No. 18-cv-03147 (S.D.N.Y. Feb. 15, 2019).
Pre-Filing COMI shifting: Move it to file it
Another important decision issued by the SDNY Bankruptcy Court
came out of the In re Ocean Rig UDW Inc. case, 570 B.R. 687
(Bankr. S.D.N.Y. 2017). The Second Circuit had previously held
that the relevant time for assessing COMI is the date on which the
Chapter 15 proceeding is commenced, but that a court “may look at
the period between the commencement of the foreign proceeding
and the filing of the Chapter 15 petition to ensure that a debtor has
not manipulated its COMI in bad faith”. See In re Fairfield Sentry,
714 F.3d 127, 138 (2d Cir. 2013). In Ocean Rig, Judge Glenn
considered whether the pre-filing actions of a foreign debtor to shift
its COMI to a country with more favourable insolvency laws
constituted legitimate “COMI migration” or bad faith “COMI
manipulation”. Focusing on the intent of the debtors in trying to
shift their COMI prior to their Chapter 15 filing, Judge Glenn found
that the UDW debtors had legitimately migrated, rather than
artificially manipulated, their COMI.
Ocean Rig UDW (“Ocean Rig”) was the corporate parent of three
holding companies owning deep-water oil drilling rigs. Each of the
Ocean Rig subsidiaries were nonresident corporations in the
Republic of Marshall Islands. Although the Marshall Islands were
the debtors’ statutory presumptive COMI, it lacked an established
restructuring regime. As a result, the debtors moved a substantial
portion of their business operations to the Caymans less than a year
before commencing insolvency proceedings.
Judge Glenn held that the debtors had legitimately moved their
COMI. Specifically, the debtors had taken concrete steps for the
“proper purpose” of facilitating a “value maximizing restructuring”.
570 B.R. at 703. The Court found no evidence of “insider
exploitation, untoward manipulation, [or] overt thwarting of third
party expectations” indicating bad faith. Id. at 707.
Lessons learned: Don’t weaponise Chapter 15
Both the Oi and Ocean Rig opinions show bankruptcy courts’
increasing attention to whether conduct of a foreign debtor (or, in
some instances, its creditors) comport with the underlying policies
of Chapter 15, a pragmatic approach that emphasises substance over
form. That approach is most clearly seen in Judge Lane’s findings
in the Oi decision that the recognition process must be “sufficiently
flexible to achieve the goals of Chapter 15”. 578 B.R. at 204.
Ultimately, Judge Lane appeared unwilling to create unnecessary
complexities by recognising a separate foreign main proceeding for
a Dutch finance subsidiary, since doing so would likely delay (and
even potentially threaten) the restructuring and jeopardise
uniformity across jurisdictions. Practitioners can likely expect to
see bankruptcy courts facing COMI disputes to take a similar
approach.
Tune Out the Noise: Enforcement in the Shadow of Pending Proceedings
Cross-border insolvencies often require navigating competing
foreign proceedings. Later opinions in Oi and Ocean Rig, as well as
the Argokor decision, suggest that U.S. courts are increasingly
willing to facilitate consummation of a foreign restructuring plan
notwithstanding pending foreign and domestic appeals or foreign
proceedings, in order to maximise the likelihood of a successful
restructuring. If nothing else, this puts increasing pressure on
creditors to avail themselves of remedies in the foreign
restructuring, rather than rely on potential hold-up-value in the
subsequent U.S. recognition and enforcement proceeding.
Enforcement in the U.S. pending appeal abroad: Don’t hold it up
The Oi restructuring saga did not stop at Judge Lane’s decision not
to recognise the Dutch insolvency proceeding. In re Oi S.A., 587
B.R. 253 (Bankr. S.D.N.Y. 2018). After the restructuring plan was
overwhelmingly confirmed by the Brazilian court, a group of Oi
shareholders appealed the plan confirmation in Brazil without
successfully obtaining a stay pending appeal. Instead, the appeal
was still pending when Judge Lane was asked to enforce and give
effect to the Brazilian confirmation order in the U.S.
In deciding whether to enforce the Brazilian plan despite the
pending appeal, Judge Lane focused on the court’s broad
discretionary authority, including the authority to grant relief
consistent with principles of comity, one of the most fundamental
principles of Chapter 15. The bankruptcy court concluded that
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unstayed foreign appeals should not prevent enforcement of a
confirmed restructuring plan. Judge Lane noted that the objecting
parties “provide[d] no timeline for how long this Court should wait”
and that waiting to enforce the restructuring plan in the U.S. would
“provide the very same stay pending appeal that...[was] denied by
the Brazilian courts”. Id. at 270. Judge Lane’s decision is consistent
with the general practice of the U.S. courts in recent cases of
providing the Chapter 15 debtor with the opportunity to
consummate a restructuring that has been approved by the foreign
court overseeing its primary insolvency proceeding.
Applying equitable mootness to appeals in the U.S.: The ship has sailed
After Judge Glenn recognised and enforced the terms of the Cayman
restructuring in Ocean Rig, certain shareholders appealed to the
SDNY District Court. See In re Ocean Rig UDW Inc., 585 B.R. 31
(S.D.N.Y. 2018). Judge Koeltl held that the appeal was equitably
moot, relying on Chapter 11 case law holding that there is a
presumption in favour of equitable mootness where a plan had been
substantially consummated. Further, where an appellant fails to
seek or obtain a stay pending appeal, overcoming the presumption
in favour of equitable mootness is particularly daunting. Judge
Koeltl further emphasised principles of “finality and fairness” in
dismissing appeals of substantially consummated reorganisations.
This appears to be the first published decision applying equitable
mootness in the Chapter 15 context.
Enforcement in the U.S. pending foreign recognition: Not my jurisdiction, not my problem
One decision further suggests that issues that could arise for
recognition in other jurisdictions outside of where the foreign main
proceeding is pending will not thwart U.S. recognition, even if the
governing law of the debt instruments would point there. In In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2019), Judge Glenn
ruled on a request to enforce the restructuring agreement approved
by a Croatian insolvency court under Chapter 15 despite a pending
dispute in the U.K. with respect to the enforcement of the agreement
as to English law-governed debt. Like Judge Lane in Oi, Judge
Glenn found that the purposes of Chapter 15 required prioritising
the debtor’s ability to effectuate its restructuring plan in a fair and
efficient way over other secondary considerations. It bears
particular note that this fulsome opinion was issued by Judge Glenn
in an apparent effort to clarify the law, even in the absence of formal
opposition by any creditors to the recognition of the restructuring
agreement.
The lead foreign debtor in this case, Agrokor d.d. (“Agrokor”), was
the holding company of a number of food-related companies, with
approximately half of its subsidiaries operating in Croatia. Because
Agrokor accounts for almost 15 per cent of Croatia’s GDP, the
Croatian government passed a special law (the “Extraordinary
Administration Law”), which it applied to Argokor’s restructuring.
In July 2018, the Agrokor entities in the Croatian Proceeding
entered into a settlement agreement with creditors holding
approximately 78 per cent of claims (the “Settlement Agreement”),
which was approved by the Croatian court. Shortly thereafter,
Agrokor and eight of its affiliates filed Chapter 15 cases in SDNY.
Enforcement in the U.S. of the Settlement Agreement was
straightforward on its face, but had one issue. Although the English
court had recognised the Croatian Proceeding, creditors there had
argued that the English court should decline to enforce the
Settlement Agreement under an English common law rule (known
as the “Gibbs Rule”), which provides that rights under English-law
governed indentures can only be determined by English laws and
cannot be discharged in a foreign proceeding. The concern is not
theoretical, given that the English High Court had applied the Gibbs
Rule when determining recognition of an Azerbaijan proceeding in
2018.
Judge Glenn dismissed the concern and held that a “broader analysis
of comity with respect to every nation involved” is not required
“because the Court’s decision to recognize and enforce the
Settlement Agreement is effective within the territorial jurisdiction
of the United States”. 591 B.R. at 186-87. Further, a creditor with
an English-law governed claim could always challenge enforcement
of the claim in English courts, which had also adopted the
UNCITRAL Model Law. Judge Glenn further offered a critique of
the Gibbs Rule and its territorialism as incongruent with the
UNCITRAL Model Law’s goal for bankruptcy proceedings that are
“unitary and universal, recognized internationally and effective in
respect of all the bankrupt’s assets”. Id. at 192.
Lessons learned: Get on board, the train is coming through
The Oi, Ocean Rig, and Agrokor decisions demonstrate that U.S.
bankruptcy courts will focus an enforcement inquiry on whether the
Chapter 15 debtors’ restructuring plan has been approved by the
foreign insolvency court, and will not permit proceedings before
foreign courts or appeals to U.S. courts to derail the restructuring
effort. Practitioners should be aware that U.S. bankruptcy courts
may be generally hesitant to delay enforcement of a plan already
approved in the foreign main proceeding, especially if delayed
enforcement may affect creditors’ rights and the success of the
restructuring. This places additional pressure on creditors to focus
their efforts to obtain all available remedies within the foreign
proceeding, as the U.S. courts are unlikely to impose procedural
protections denied abroad.
No “Pax Americana”: Comity Over Consistency with Chapter 11
Chapter 15 makes available certain relief that a domestic U.S.
debtor could not obtain under Chapter 11. After recognition of a
foreign proceeding, a U.S. bankruptcy court has discretion to grant
“appropriate relief ” under Section 1521 or provide “additional
assistance” pursuant to Section 1507. In Avanti and Energy Coal, two bankruptcy courts granted relief on principles of comity to
foreign courts even though such relief may not have been authorised
in a Chapter 11 proceeding.
Enforcement of third-party releases approved by foreign courts: Let me go!
Although U.S. bankruptcy courts are often hesitant to grant non-
consensual third-party releases, one recent opinion cements the
trend that such releases are more freely granted in Chapter 15. In In re Avanti Communications Group PLC, 582 B.R. 603 (Bankr.
S.D.N.Y. 2018), Judge Glenn approved a U.K. scheme of
arrangement that included non-consensual third-party releases, on
the grounds that a Chapter 15 proceeding should be driven by
principles of comity.
Avanti Communications Group (“Avanti”) was engaged in a U.K.
scheme of arrangement that restructured its debt. The U.K. scheme
was overwhelmingly approved by 98% of the impaired creditors.
The scheme contained releases of guarantees by affiliates who were
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not parties to the scheme. Avanti petitioned for recognition and
enforcement of the scheme under Chapter 15.
While recognising that third-party releases can be “problematic” in
Chapter 11 cases, Judge Glenn largely disregarded those issues and
held that the proper analysis is “whether to recognize and enforce
the foreign court order based on comity”. Id. at 606. Citing In re Metcalfe & Mansfield Alt. Inv., 421 B.R. 685, 696 (Bankr. S.D.N.Y.
2010), Judge Glenn noted that principles of comity counsels
approval of third-party releases granted in a foreign proceeding
“even if those provisions could not be entered in a plenary Chapter
11 case”. Id. at 607. Still, Judge Glenn evaluated whether the U.K.
scheme provided sufficient process and notice and received enough
support from creditors to justify binding non-voting creditors, and
whether the releases were required for a successful reorganisation,
factors often considered by bankruptcy courts Chapter 11 cases.
Judge Glenn further distinguished Avanti from the Fifth Circuit’s
decision in In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1042 (5th Cir.
2012). In Vitro, the Fifth Circuit declined to grant comity and
refused to enforce a Mexican court order granting releases of
guarantees of U.S.-based non-debtor affiliates. While Judge Glenn
focused on factual differences, such as the fact that Avanti had near
unanimous creditor support and did not count insider votes, the
Avanti opinion also generally took a more permissive view of the
relief available by granting comity. It also bears noting that the
Second Circuit (in which the SDNY Bankruptcy Court sits) has
more permissive standards governing Chapter 11 third-party
releases than the Fifth Circuit. Avanti is likely to further solidify
SDNY as foreign debtors’ preferred forum, given that debtors have
already started to avoid jurisdictions like the Fifth Circuit that are
hostile to granting third-party releases in Chapter 15.
Limited enforcement of choice of law clause: When in Rome, do as the Romans do
Even when a choice of law or forum selection clause points to the
United States, a bankruptcy court may compel a creditor to resolve
claims through the foreign proceeding. In In re Energy Coal S.P.A.,
582 B.R. 619 (Bankr. D. Del. 2018), the Bankruptcy Court for the
District of Delaware considered whether a dispute with respect to the
priority and distribution of claims must be resolved through the foreign
insolvency proceeding. Judge Silverstein held that creditors must
contest priority and distribution issues in the foreign proceeding.
Energy Coal S.P.A (“Energy Coal”) was an Italian-based company that
markets fuels, coal, and petroleum products for steel manufacturing.
Energy Coal entered into a contract with certain U.S. contractors (the
“Contractors”), which contained a Florida choice of law provision for
any dispute. In April 2015, Energy Coal commenced a restructuring in
Italy (the “Italian Proceeding”), which was later recognised in the
United States as a foreign main proceeding.
The Contractors objected to enforcement of the Italian-court
approved plan in the U.S., arguing that the plan improperly resolved
the priority status of their claims because their contracts required
adjudication of all disputes by a Florida court. The foreign
representative acknowledged that the validity and amount of the
claims could be determined by a Florida court, but insisted that any
dispute over priority and distribution must be resolved in Italy.
The U.S. bankruptcy court agreed with the foreign representative.
Judge Silverstein explained that enforcement of the restructuring is
guided by considerations of comity and the Contractors had
provided no basis for the choice of law provisions to “override the
comity afforded foreign main proceedings”. Id. at 628–29.
Lessons learned: If good enough abroad, good enough here
Both the Avanti and Energy Coal opinions reinforced the importance
given by U.S. bankruptcy courts to comity to foreign courts in
enforcing restructuring plans despite inconsistencies with Chapter 11
practices. Avanti continued a trend in the Southern District of New
York of approving non-consensual third-party releases in a Chapter
15 proceeding despite increasing scrutiny given to such releases in
Chapter 11. See In re Mood Media Corporation, 569 B.R. 556
(Bankr. S.D.N.Y. 2017) and In re Boart Longyear Limited, No. 17-
11156 (Bankr. S.D.N.Y. Aug. 30, 2017). Both the Avanti and Energy Coal decisions are consistent with the modern, uniform view of
cross-border insolvencies, ceding power of U.S. courts to foreign
courts to ensure uniform treatment across jurisdictions.
Do You Belong?: Practical Solutions for Section 109 Eligibility Requirements
Not all foreign debtors can access the protections of Chapter 15, and
U.S. courts may be making it easier by reducing or at least
mitigating the demands of eligibility requirements. As discussed
earlier, the Second Circuit’s Barnet opinion in 2013 required a
foreign representative under Chapter 15 to satisfy the eligibility
requirements for having a domicile, place of business, or property in
the United States pursuant to Section 109(a). Recent cases, such as
the SDNY Bankruptcy Court’s opinion in In re B.C.I. Finances Pty. Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018), suggest a practical
approach to satisfying Barnet’s requirements, furthering the
growing consensus that the bar for satisfying Section 109(a) is low.
B.C.I. Finances Pty. Limited (“B.C.I.”) and its affiliates were placed
into Australian liquidation proceedings (the “Australian Proceeding”)
in August 2014. As a part of the liquidation, the Australian
liquidators sued B.C.I.’s directors, alleging a breach of their
fiduciary duties. Two of the directors who were sued moved to New
York. The Australian liquidators then sought Chapter 15
recognition so that they can conduct discovery against the former
directors. One of the directors opposed the recognition, arguing that
B.C.I. did not have sufficient U.S. property under Section 109(a).
Judge Lane held that a $1,250 retainer placed in the trust account of
the liquidator’s U.S. counsel satisfied the Section 109(a) eligibility
requirement, by relying on prior Chapter 11 decisions holding that
the “property” requirement is satisfied by “even a minimal amount
of property located in the United States”. Id. at 293–94. Judge Lane
dismissed the objection that the retainer was deposited to
“manufacture eligibility”, explaining that prior Chapter 15 cases
have held that it is not improper to create eligibility by establishing
a bank account to pay bankruptcy counsel.
Separately, Judge Lane also held that the breach of fiduciary duty
claims against former directors that now reside in the United States
independently satisfied Section 109(a). Following a multi-step
conflict of laws analysis, the U.S. court determined that the claims
are situated where they are properly recoverable. This suggests that
even those with no concrete property in the United States can seek
the protection of Chapter 15, paving the way for debtors whose
primary assets are litigation claims to access U.S. courts.
Lessons learned: Don’t worry, a little is enough
The B.C.I. decision affirms the broad availability of Chapter 15 by
allowing foreign debtors to satisfy the “property” requirement of
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Section 109 with an immaterial amount of property deposited just
prior to filing or U.S. litigation claims. Notably, the decision was
echoed by the U.S. District Court for the Northern District of
California in In re Forge Group Power Pty., Ltd., 17-30008-DM,
2018 WL 827913 (N. D. Cal. 2018), which overturned the
bankruptcy court’s decision that an attorney retainer was not
property for purposes of Section 109. Forge is also notable as the
first case outside the Second Circuit to apply Barnet. In light of
these decisions, it is clear that foreign debtors do not face a
significant hurdle to satisfying the eligibility requirements of
Section 109. As a result, even if Barnet gains traction outside the
Second Circuit (and now courts within the Ninth Circuit), the
requirements under Section 109(a) can be easily satisfied and
should not be a material bar to seeking Chapter 15 protection.
Show Me the Money: Securities Law Exemptions in Chapter 15
While U.S. securities registration requirements are demanding and
expensive, foreign debtors are increasingly able to access
exemptions. Section 1145(a) of the Bankruptcy Code provides an
exemption from U.S. securities registration requirements for
securities issued by a debtor on account of pre-petition claims. Prior
to 2016, no court had explicitly authorised the use of Section 1145
in a Chapter 15 case. In a series of recent decisions, the SDNY
Bankruptcy Court has expressly applied Section 1145 in the Chapter
15 context, allowing foreign debtors to take advantage of
exemptions from the cumbersome securities registration process.
■ First, on December 21, 2017, in connection with the
enforcement of CGG S.A.’s French-confirmed plan, Judge
Glenn explicitly approved the use of Section 1145 in a Chapter
15 proceeding. Judge Glenn presented the use of Section 1145
as uncontroversial and resolved any policy-based concerns by
finding that securities disclosures provided in the French
insolvency proceeding were sufficient to protect investors. See In re CGG SA, 579 B.R. 716 (Bankr. S.D.N.Y. 2017).
■ Next, on June 15, 2018, in connection with the Chapter 15
proceedings for Oi S.A., the bankruptcy court approved the use
of Section 1145 for securities issued pursuant to the Brazilian
Reorganization Plan. See Order (I) Granting Full Force and
Effect in the United States to the Brazilian Reorganization Plan,
and (II) Granting Related Relief, In re Oi SA, et al., Case No.
16-11791 (Bankr. S.D.N.Y. June 15, 2018), ECF No. 277.
■ Finally, on October 5, 2018, Judge Bernstein issued an order
enforcing the Brazilian reorganization plan in OAS, S.A.,
which applied Section 1145 and exempted from securities
registration requirements the offer and sale of certain OAS
“conversion stock” issued under the Brazilian plan. See Order Granting Relief, In re OAS S.A. et al., Case No. 15-
10937 (Bankr. S.D.N.Y. Oct. 5, 2018), ECF No. 170 at 13.
Judge Bernstein previously noted in a hearing that Section
1145 should be available to a foreign debtor as a part of the
“additional assistance” provided under Section 1507.
These cases establish a trend in approving the use of Section 1145
for securities issued pursuant to a foreign reorganisation and is
consistent with the larger trend favouring the grant of broad relief in
Chapter 15. Foreign debtors who seek relief previously reserved for
domestic bankruptcy cases should consider arguing for the
extension of broad relief under Sections 1507 and 1521.
Conclusion
Despite early decisions limiting access to and the scope of Chapter
15 proceedings for foreign debtors, recent decisions (especially from
the Southern District of New York) suggest the opposite trend,
prioritising the underlying policies of Chapter 15 to facilitate
efficient and uniform treatment of cross-border insolvencies. These
recent opinions have interpreted Chapter 15 as a flexible tool to
resolve potential conflicts between competing jurisdictions by
prioritising the foreign main proceeding, granting deference to
decisions by foreign insolvency courts in an effort to maximise the
likelihood of restructuring success, and providing access to broad
relief previously reserved for domestic bankruptcy cases. As a result
of these developments, Chapter 15 will become an increasingly
attractive option to foreign debtors seeking protection for their U.S.
assets and resolution of potential claims in the United States.
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Cleary Gottlieb is a pioneer in globalising the legal profession. Since 1946 our lawyers and staff have worked across practices, industries, jurisdictions and continents to provide clients with simple, actionable approaches to their most complex legal and business challenges, whether domestic or international. We support every client relationship with intellectual agility, commercial acumen and a human touch.
We have a proven track record for serving with innovation. We are fluent in the many languages of local and global business. And we have achieved consistent success in multiple jurisdictions. Global corporations, financial institutions, sovereign governments, local businesses, and individuals come to us for consistently practical and forward-looking advice.
Our bankruptcy and restructuring practice advises clients worldwide on matters that cross legal and geographical borders. The deep ties that we form in all of the regions comprising our practice allow our lawyers to understand both the legal and cultural landscapes of highly complex, multijurisdictional restructurings. Clients appreciate the rigor of our approach, with our lawyers employing tough, analytical and outside-the-box thinking to structure creative solutions.
Luke A. Barefoot
Luke A. Barefoot’s practice focuses on bankruptcy litigation,
insolvency, corporate restructuring and related litigation matters, with a
particular focus on cross-border and international bankruptcy disputes.
Among others, Luke’s notable representations include representing the
Steering Committee of bondholders in the Oi Brasil Holdings
Coöperatief (Coop) Chapter 15 cases, including successful trial victory
maintaining recognition of Brazilian proceeding by the U.S. Bankruptcy
Court, and entry of order by Chapter 15 court enforcing terms of
Brazilian plan; Goldman Sachs Mortgage Company in exit financing
facilities in the John Hammonds Trust Chapter 11 proceedings; and
Overseas Shipholding Group Inc., in its Chapter 11 bankruptcy
proceedings and successful restructuring, including successful defense
and resolution of challenges to its plan of reorganisation.
Luke has been recognised as a leading lawyer by The Legal 500 for
his corporate restructuring work. He was named a “Rising Star”, by
Law360 and an “Outstanding Young Restructuring Lawyer”, by
Turnarounds & Workouts.
Lisa M. Schweitzer
Lisa M. Schweitzer’s practice focuses on financial restructuring,
bankruptcy, insolvency and commercial litigation. She has extensive
experience advising corporate debtors, individual creditors and
strategic investors in both U.S. Chapter 11 proceedings and
restructurings in other jurisdictions in North America, Europe and Asia.
Lisa has represented many companies and creditors in major U.S.
bankruptcy proceedings, including Nortel Networks Inc., Grupo
Inbursa, Inversiones Alsacia and Express de Santiago Uno, and has
advised various financial institutions in resolution planning.
Lisa has advised clients in some of the most high-profile bankruptcy
matters in North America, and her work repeatedly has been
recognised by the business and legal press, including being
honoured as a “Dealmaker of the Year” and as a “Dealmaker in the
Spotlight” by The American Lawyer.
Sean A. O’Neal
Sean A. O’Neal’s practice focuses on corporate restructuring,
insolvency, bankruptcy, and related litigation matters.
He regularly assists corporate debtors, creditors, investors, financial
counterparties, and other interested parties in bankruptcy-related
transactions, out-of-court workouts, and liability management
transactions. Sean also works with investors in purchasing assets from,
or making investments in, distressed companies. He frequently advises
clients on creditors’ rights, debt instruments, prepackaged bankruptcies,
loan-to-own strategies, debtor-in-possession financing, exit financing,
Chapter 11 rights offerings, forbearance arrangements, and other matters.
Sean recently represented ESL Investments Inc., as largest creditor
and shareholder of Sears Holdings Corp. with over $2.6 billion in
claims, in its Chapter 11 proceedings, as well as advising on
prepetition transactions and related matters.
Sean has been recognised as an “Outstanding Restructuring
Lawyer” by Turnarounds and Workouts. Additionally, he has been
recognised by Chambers USA, The Legal 500 U.S. and IFLR 1000
for his restructuring work.
Jane VanLare
Jane VanLare’s practice focuses on restructuring, insolvency and
bankruptcy litigation.
Jane has advised on significant transactions in the bankruptcy and
restructuring space, including acting as counsel to ModSpace, the largest
U.S. provider of temporary and modular office space, in the restructuring
of nearly $1 billion in secured debt through a pre-packaged Chapter 11
plan; Overseas Shipholding Group’s successful restructuring and exit
from Chapter 11 bankruptcy protection, which IFLR named as
“Restructuring Deal of the Year”; Goldman Sachs in the Lehman
Brothers Chapter 11 proceedings, which IFLR named as a “Restructuring
Deal of the Year”; and to Truvo Group in its Chapter 11 proceedings,
which IFLR named as an “EMEA Restructuring Deal of the Year”.
Jane has been recognised by the American Bankruptcy Institute as a
“40 Under 40” honouree and by Benchmark Litigation on the
“Under 40 Hot List”.
Benjamin S. Beller
Benjamin S. Beller’s practice focuses on bankruptcy, restructuring
and litigation.
Benjamin’s notable representations include Nortel Networks Inc., The
Puerto Rico Electric Power Authority (PREPA), and Tempur Sealy
International Inc. as debtor-in-possession lender and purchaser in the
Chapter 11 cases of Innovative Mattress Solutions LLC.
Benjamin has served clerkships with the Honorable Robert E.
Gerber of the U.S. Bankruptcy Court, Southern District of New York
and the Honourable Shelley C. Chapman of the U.S. Bankruptcy Court, Southern District of New York. He joined the firm in 2013.
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chapter 5
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gilbert + tobin
Dominic emmett
alexandra whitby
australia
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Australia is widely considered to emphasise the rights of creditors
over debtors and as such is recognised as a creditor-friendly
jurisdiction. Whilst there are some limitations on the options that
might otherwise be available to distressed companies and some
inflexibility in certain tools available to insolvency practitioners,
Australia’s insolvency regime is, for the most part, primarily
focused towards protecting the rights and interests of creditors over
the interests of debtors. For example, Australia’s voluntary
administration regime is controlled by creditors to the exclusion of
management and members and its purpose is designed to maximise
creditor returns. Further, unlike the United Kingdom for instance,
receivership is alive and well in Australia.
Creditors are active participants in all insolvency processes in
Australia. They can enforce their rights in each process and, whilst
there are some timing limitations placed on their enforcement rights
in a voluntary administration scenario, enforcement rights over
secured assets are otherwise unfettered.
Secured creditors and employees enjoy a statutory priority in a
distribution of assets and, in some circumstances, unsecured
creditors can also place themselves in a position of protection.
Unlike secured creditors, unsecured creditors are given no legal
right to priority, yet due to a particular relationship that may exist
with a debtor (for example, as a supplier of essential materials), they
can exercise that power to obtain payment and ensure future
payments as a practical necessity to maximise value and keep the
debtor business running.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Informal work-outs and reorganisations can be pursued in Australia
provided adequate attention is paid to the prohibitions on insolvent
trading. The Corporations Act 2001 (Cth) (the Act) bestows a
positive duty on directors to prevent a company from incurring a
debt whilst it is insolvent (or where they suspect it is likely to
become insolvent). A breach of this duty exposes the director(s) to
penalties such as personal liability for future debts incurred,
including during any informal workout period.
Following the recent introduction of a “safe harbour” protection into
Australia’s legislative regime (see question 9.1 below), Australia
may see an increase in the use of informal work-outs. The
protection is designed to provide financially distressed companies
time to develop an informal turnaround where a formal insolvency
might have otherwise been necessary. Given the real exposure
directors have to personal liability, which risk is only mitigated and
not eliminated by the safe harbour provisions, it is unclear at this
stage whether the reforms go far enough to significantly increase the
use of informal work-outs.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors owe a number of general and specific law duties to the
company, its shareholders and creditors. These include:
■ duties of good faith and due care and diligence;
■ to not improperly use the position, or information obtained by
virtue of the position, to gain personal advantage or cause
detriment to the company;
■ to keep adequate financial records;
■ to take into account the interests of creditors; and
■ to prevent insolvent trading.
Compliance with these duties means that directors should place a
company into external administration at such time that the company
is cash flow insolvent or there exists a less than reasonable prospect
that the company will remain cash flow solvent.
Australia’s new safe harbour provisions could, in certain
circumstances, enable a company to delay a formal insolvency
appointment where it seeks to pursue a turnaround plan with a
“better outcome” for the company (see question 9.1 below). If such
a plan is being developed, the company must ensure it meets the
criteria to enliven the protection, because as a matter of practice, if
the turnaround plan is unsuccessful and a formal insolvency
follows, the safe harbour protection will only be a defence to an
insolvent trading claim rather than a positive exception to liability.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Stakeholders who have the power to influence a company’s
situation include:
■ Secured creditors, who may seek to enforce their security and
appoint a receiver to realise the assets of the company.
■ Unsecured creditors, where they may have a particular
relationship with a debtor (e.g. as a supplier of essential
materials), may exercise that power to obtain future payment
of its debts as a practical necessity to keep the debtor business
running.
■ Shareholders.
An automatic moratorium applies in respect of each of the formal
procedures, other than receivership, to prevent unsecured creditors
(including shareholders and landlords) from enforcing their rights.
Whilst no such moratorium exists in receivership, to the extent an
unsecured creditor takes action to enforce their rights, they have no
recourse to the assets which are secured and in the control of the
receivers.
The Personal Properties and Securities Act (Cth) in 2009 (PPSA)
provides a regime for certain unsecured creditors and the protection
of a supplier’s title to goods relevantly supplied. A uniform concept
of “security interest” exists under the PPSA to cover all existing
forms of security interests under which an interest in personal
property is granted pursuant to a consensual transaction that, in
substance, secures the payment or performance of an obligation. It
also applies to certain deemed security interests such as certain
types of lease arrangements for certain terms, retention of title
arrangements and transfers of debt, regardless of whether the
relevant arrangement secures payment or performance of an
obligation. Personal property is defined broadly and essentially
includes all property other than land, fixtures and buildings attached
to land, water rights and certain statutory licences.
To perfect title under the PPSA, suppliers are required to register the
retention of title arrangements on the Personal Property and
Securities Register (PPSR). If a security interest is not perfected it
will, on liquidation of the grantor, vest in the grantor, despite the
agreement between the supplier and recipient that the supplier
retains title to those goods until payment is received.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Transactions are only vulnerable to challenge where a company is in
liquidation. Liquidators have the power to bring an application to
the court to declare the following types of transactions void:
■ insolvent transactions (which includes both unfair preferences
and uncommercial transactions) if entered into, in the case of
unfair preferences, during the six-month period ending on the
relation-back day (the relation-back day is generally the date
of the appointment of administrators prior to/the application
to wind-up the company) or in the case of uncommercial
transactions, during the two-year period ending on the
relation-back day;
■ unfair loans, which are voidable if entered into any time
before the winding up began;
■ unreasonable director-related transactions, which are
voidable if entered into during the four years ending on the
relation-back day; and
■ transactions entered into for the purpose of defeating,
delaying or interfering with creditors’ rights on a company’s
winding up, which are voidable if entered into during the 10
years ending on the relation-back day.
Uncommercial transactions and unfair preferences are voidable if
the company was insolvent at the time of the transaction or at a time
when an act was done to give effect to the transaction. Australian
Courts have held a transaction is “uncommercial” if a reasonable
person in the company’s circumstances would not have entered into
it. An unfair preference is one where a creditor receives more for an
unsecured debt than would have been received if the creditor had to
prove it in the winding up. The other party to the transaction or
preference may prevent it being held void if they can show they
became a party in good faith, they lacked reasonable grounds for
suspecting that the company was insolvent and they provided
valuable consideration or changed position in reliance on the
transaction.
Loans to a company have been held to be “unfair” and thus voidable
if the interest or charges in relation to the loan were, or are, not
commercially reasonable. This is distinct from the loan simply
being a bad bargain. Any “unreasonable” payments made to a
director or a close associate of a director are also voidable,
regardless of whether the payment occurred when the company was
insolvent.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
See question 1.2 above.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
There are two processes available to effect a restructure of a
company’s debts:
■ deed of company arrangement (DOCA); or
■ scheme of arrangement (Scheme).
DOCA
A DOCA takes place in the context of a voluntary administration
(i.e. a formal appointment).
Once a company is in voluntary administration, a DOCA can be
proposed by anyone with an interest in the company. A DOCA is
effectively a contract or compromise between the company and its
creditors. Whilst it is a feature of voluntary administration, it should
in fact be viewed as a distinct regime, where the rights and
obligations of the creditors and company differ to those under a
voluntary administration.
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Approval of a DOCA requires a simple majority (50% of creditors
voting in number and value). Where a DOCA is approved, it will
bind unsecured creditors, the company, directors and shareholders
and those secured creditors who vote in favour of it. Secured
creditors who do not vote to approve the DOCA retain their rights to
enforce their security at any time, including by appointing a
receiver. As such, secured creditors are the only form of stakeholder
who cannot be crammed down under a DOCA.
Shareholders have no entitlement to vote on a DOCA, but will be
bound by it.
A DOCA is a flexible restructuring tool in terms of outcomes that it
can deliver. These include debt-for-equity swaps, a transfer of
equity pursuant to section 444GA of the Act, moratorium of debt
repayments, a reduction in outstanding debt and the forgiveness of
all, or a portion of, outstanding debt.
Scheme of arrangement
A Scheme is a restructuring tool that sits outside of formal
insolvency. It is a court approved agreement which binds company’s
creditors and/or members to some form of rearrangement or
compromise of their pre-existing rights and obligations.
Schemes typically involve the deleveraging of a business or the
reduction of outstanding debt in exchange for the issuance of equity.
Schemes have also been used to facilitate a subsequent proposed (and
not mandatory) debt restructuring, rather than to actually implement it.
The approval threshold for Schemes is 50% by number and 75% by
value of the debt held by those creditors voting in each class such
that it is possible for dissenting creditors to be crammed down.
However, given the approval threshold must be met in each class,
dissenting creditors will have a power of veto if they can establish
they belong in a separate class. Classes are determined by reference
to commonality of legal rights and only those creditors whose rights
will be affected need be included.
The key element to the success of both restructuring procedures is
the willingness of (any) secured creditors to work with management
of the distressed company as well as other stakeholders. The
starting point for the negotiation will often involve an agreement or
undertaking on a standstill or forbearance period during which the
company will look to refinance its current debt structure (often
through the injection of new capital and/or equity).
Pre-packaged sales
The “pre-pack sale” in the traditional English and US tradition has
had limited application in the Australian restructuring environment
due to the stringent obligations placed on insolvency practitioners
and the protections afforded to creditors under both statute and
common law. However, the use of pre-packs may increase given the
recent introduction of the safe harbour protection.
Attempts to effect a “pre-pack” are also restricted by the specific
obligations on receivers vis-à-vis the disposal of assets. Section
420A of the Act requires a receiver to, upon the sale of an asset,
either achieve a price not less than market value (if a market exists
for the asset), or alternatively the best price reasonably obtainable.
Australian Courts have identified certain steps that a receiver should
take in order to comply with the second limb of the obligation,
which include a market or auction sale process and marketing
campaign, which has made “pre-pack” sales difficult for receivers to
achieve.
Due to the impediments described above, pre-packs tend only to be
used in circumstances where:
(a) there are limited alternative sale options available to the
insolvency practitioner appointed and there is evidence to
support the assumption that any delay in sale may be fatal to
the underlying business; or
(b) a market testing sale process has already been undertaken
prior to the appointment of the receiver or administrator.
Notwithstanding the above, the market may well evolve so that we
see more pre-packs if it can be demonstrated clearly that junior
creditors and shareholders are out of the money.
3.3 What are the criteria for entry into each restructuring procedure?
DOCA
Where a DOCA has been proposed by an interested party, it will be
accepted at the second creditor meeting if the majority of creditors
(50% in number and value) vote in favour of it.
Scheme of arrangement
A Scheme will be approved where at least 50% in number and 75%
in value of creditors in each class of creditor vote in favour of it.
Final court approval is required.
3.4 Who manages each process? Is there any court involvement?
DOCA
The management of the company under the DOCA will depend
entirely on its terms. A Deed Administrator may be appointed to
control the company and/or management may be reinstated.
Court supervision is not mandatory for a DOCA; however, should a
section 444GA share transfer be contemplated, it is likely leave of
the court will be required for implementation.
Dissatisfied creditors also have recourse to the court to have a
DOCA set aside.
Scheme of arrangement
The pre-existing management of the company generally continue in
that capacity during the Scheme process and approval phases (and,
depending on the terms of the Scheme itself, after implementation).
The Scheme process is heavily supervised by the court (as well as
regulatory bodies) and is subject to two hearings. The first court
hearing is to approve the convening of the meeting for the relevant
class(es) of creditors. At the second court hearing, the court must
approve the Scheme prior to implementation.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
There is no formal insolvency procedure that results in the
automatic termination of contracts between the debtor and third
parties.
Following appointment, administrators, receivers and liquidators
can choose not to continue to perform a contract. Any damages
flowing to the counterparty from the non-performance of a contract
will rank unsecured against the company. However, any contract
that an insolvency practitioner continues with may result in the
practitioner being held personally liable under the Act.
Contractual and mandatory set-off will apply in formal insolvency
processes, with certain exceptions. Section 553C of the Act
provides for a statutory set-off in a liquidation where there have
been mutual dealings between the distressed company and the
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relevant creditor. In such circumstances, an automatic account is
taken of the sum due from one party to the other in respect of those
mutual dealings, and the sum due from one is set-off against any
sum due from the other.
Until 1 July 2018, it was not uncommon for contracts to contain ipso facto clauses allowing a counterparty to terminate or renegotiate a
contract on the occurrence of any insolvency event (which can be
defined to include any form of restructure).
Following the introduction of Insolvency Law Reform Act 2016
(Cth) (ILRA) and its associated instruments, the ipso facto clause
regime underwent significant change, which came into effect from 1
July 2018. The effect of the regime amendments is to impose an
automatic stay on the enforcement of ipso facto termination rights in
certain contracts that are triggered simply because a company enters
into a formal or informal insolvency or restructuring process. The
stay operates during a “stay period”, the length of which is
determined by reference to the length of the relevant restructuring
process. There are also circumstances in which the stay period will
be indefinite. A court will also have the power to lift the automatic
stay where it considers it is in the interests of justice to do so.
Where the stay operates to prevent a counterparty from exercising
termination rights, a corresponding stay will also operate to prevent
a company from requiring a “new advance of money or credit” from
the relevant counterparty. This corresponding stay is designed to
protect counterparties from advancing further “money or credit” to
a company that has entered an insolvency process. However, the
concept of a “new advance of money or credit” is not defined such
that its scope is ambiguous and its application (for example, to
lenders within the terms of a facility or to suppliers of goods and
services under credit) is unclear.
The full effect of the new regime will take some time to be properly
understood as it does not operate retrospectively and only applies to
contracts entered into after 1 July 2018. All existing contracts as of
1 July 2018 that contain ipso facto termination clauses will confer
rights on the counterparty to enforce those rights in accordance with
the terms of the contact.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The costs of a DOCA will be the company’s costs in the
administration. Equally, Scheme costs will usually be the costs of
the company, unless otherwise negotiated.
A debtor can obtain financing and otherwise use its assets as
security in a scheme of arrangement and informal voluntary
reorganisations. This is solely a matter for agreement between the
company and its creditors. There are no special priorities given to
new debt as of right and such priorities have to be negotiated and
agreed with any existing creditors who already hold some form of
priority.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
A company may be wound up:
■ if solvent, voluntarily by its members; or
■ if insolvent, by its creditors or compulsorily by order of the
court.
4.2 On what grounds can a company be placed into each winding up procedure?
Members’ voluntary winding up
A members’ voluntary liquidation is a solvent winding up. It
requires the directors of the company to make a declaration of
solvency under section 494 of the Act that, in their opinion, after an
inquiry into the affairs of the company, the company will be able to
discharge its debts in full within 12 months of the commencement of
winding up. This is coupled with a special resolution of the
members to wind up the company (at least 75% of votes cast by
members entitled to vote).
Creditors’ voluntary winding up
A creditors’ winding up arises when the company is insolvent. It
can occur in a number of circumstances, including:
■ if the members of the company resolve that the company be
wound up and the directors cannot provide a solvency
declaration;
■ where a liquidator is appointed by members, the liquidator
forms the opinion that the company is in fact insolvent, they
will convert the process from a members’ voluntary winding
up into a creditors’ voluntary winding up; and
■ a company may also enter into a creditors’ voluntary winding
up at the end of an administration if the creditors resolve to do
so at the second creditors’ meeting.
Compulsory liquidation
A creditor can apply to the court for an entity to be wound up. The
most common ground for the application is insolvency, usually
indicated by a failure to comply with a statutory demand or
judgment debt. Other grounds not related to insolvency are also
available, including that it is “just and equitable” to do so or because
of a deadlock at a shareholder or director level affecting the ability
to manage the company.
Provisional liquidation
Upon application to the court to wind up a company, the court can
order the appointment of a provisional liquidator.
4.3 Who manages each winding up process? Is there any court involvement?
Liquidation
Following appointment, a liquidator will control the affairs of the
company and has the power to realise and distribute assets to the
exclusion of the directors and shareholders.
Court involvement is required in a compulsory winding up, where it
will appoint the liquidator.
Courts will also consider applications by the liquidator, pursuant to
section 480 of the Act, for an order that the liquidator be released
and that the company be deregistered after the liquidator has
realised all of the property out of the company or so much of that
property as can be realised (in his or her opinion) without needlessly
protracting the winding up, has distributed a final dividend (if any)
to the creditors, has adjusted the rights of the contributories among
themselves and made a final return (if any). The court must be
satisfied that no creditor will be adversely affected by the order.
Provisional liquidation
The provisional liquidator controls the affairs of the company
during the provisional liquidation to the exclusion of the directors
and shareholders.
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4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Generally, unsecured claims rank pari passu (with some exceptions),
with secured creditors afforded a level of priority by virtue of the
security arrangements in place. However, the court has the power (in
limited circumstances) to change the rank of a creditor’s claim.
Section 564 of the Act provides an incentive to creditors to give
financial assistance or indemnities to the liquidator to pursue asset
recovery proceedings or to protect or preserve property. If creditors
provide such assistance, the liquidator may apply to the court for an
order that the contributing creditors receive a higher dividend from
the company’s assets than they would otherwise be entitled to.
After the commencement of a winding up of a company, or after the
appointment of a provisional liquidator, leave of the court is
required to commence or continue legal proceedings against a
company. Secured creditors are generally exempted from this
process, assuming the validity of their security, as they remain
entitled to realise their security despite the liquidation.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
See question 3.5.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Generally, the statutory waterfall set out in the Act has secured
creditors paid in priority to unsecured creditors. Secured creditors
may contract priority arrangements between themselves if there are
different levels of secured debt within a company.
There is an exception to this for employee entitlement claims.
During a winding up, the entitlements of employees have priority
over all other unsecured debts and claims, as well as those assets
subject to a circulating security interest (formerly floating charges).
The numeration, costs and expenses of liquidators are afforded
priority over all creditors’ claims, including employees.
4.7 Is it possible for the company to be revived in the future?
A company cannot be revived in the future following a winding up.
Once the company’s assets have been sold, the company is deregistered
with the corporate regulator and ceases as a corporate identity.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Tax liabilities (including PAYG and capital gains tax) can continue
to be incurred during trade-ons in each of the insolvency and
restructuring processes. Whilst the tax office is not afforded
priority, certain tax liabilities are met regularly in distressed
situations as directors can be rendered personally liable of those
certain tax liabilities which are not paid.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Receivership
A receiver becomes personally liable for the services rendered by an
employee to the company. A receiver may choose to terminate
employment contracts, and is not personally liable for accrued
entitlements prior to appointment. The claims of the terminated
employees (in relation to unpaid entitlements) are given priority to
all other unsecured claims.
Voluntary administration
The position of an employee under any voluntary administration
will be at the discretion of the administrator.
DOCA
Employees are afforded a level of protection under a DOCA. The
statutory priority afforded to employees in liquidation must be the
equivalent in a DOCA (unless the employees vote otherwise).
Provisional liquidation
Provisional liquidation does not automatically terminate employees.
Liquidation
Employees are afforded a statutory priority ahead of other
unsecured creditors, and in some cases, secured creditors, for claims
in relation to unpaid employee entitlements. The position of
directors and management is different, and the priority afforded to
them is capped significantly. A liquidator that chooses to run the
business for a short period of time as part of the process will become
personally liable for services provided by individuals retained or
employed during that period.
Scheme of arrangement
A Scheme of itself generally does not affect employment.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Companies registered as foreign corporations in Australia could
have receivers, administrators or liquidators appointed to them, but
it is rare for this to occur. We are not aware of any foreign
corporations having initiated a scheme of arrangement in Australia.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Australian courts act cooperatively with foreign courts and
insolvency practitioners and will recognise the jurisdiction if the
relevant court where the “centre of main interest” is located. This
approach follows the UNCITRAL “Model Laws” on insolvency
which was codified into Australian law through the Cross-Border Insolvency Act 2008 (Cth).
There is also scope under different legislation (such as the Act) for
Australian Courts to recognise foreign judgments in Australia. Such
recognitions require compliance with the relevant court practice and
procedure rules.
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7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is becoming increasingly common for Australian companies
subject to a formal insolvency process to seek recognition of that
process in other jurisdictions (for example, Chapter 15 recognition
in the United States of America) but it is rare for Australian
companies to look to initiate a formal insolvency process or
restructure exclusively in a foreign jurisdiction.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
In insolvency proceedings involving corporate groups, a consolidated
group is not considered as a single legal entity. Where companies
operate as a consolidated group, the starting legal position is the
“separate personality” principle which prevents creditors of an
insolvent company from gaining access to the funds of other
companies for payment of their debts. Having said that, groups of
companies often enter into deeds of cross guarantee to afford
themselves the benefit of consolidated financial reporting. In a
liquidation scenario, that deed commits the companies a party to it
to pay the liabilities of all the other companies that are a party to it.
The Act, however, provides for a holding company to be liable for the
debts of their insolvent subsidiaries in certain circumstances. These
provisions enable the subsidiaries’ liquidator to recover amounts
equal to the loss or damage suffered by creditors from the parent
company if the parent failed to prevent the subsidiary from incurring
debts while the subsidiary was trading whilst cash flow insolvent.
Pooling of group funds may occur in limited circumstances, as
prescribed by Division 8 and Part 5.6 of the Act being sections 5.71
to 5.79L. Generally, those circumstances are where there is a
substantial joint business operation between members of the same
corporate group and external parties, such members of the group are
jointly liable to creditors. The liquidator of the corporate group
makes what is called a pooling determination, after which separate
meetings of the unsecured creditors of each company must be called
to approve or reject the determination. The court may vary or
terminate any approved pooling determination.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Australia’s corporate insolvency law has been the subject of recent
reform. Significant changes have been introduced via the ILRA,
with many of the reforms either in their infancy or still in the process
of being rolled out. To give full effect to the ILRA, a number of
additional instruments have been introduced, including the:
■ Insolvency Practice Rules (Corporations) 2016, which
provides a range of rules regarding the external
administration of companies and the registration and
discipline of external administrators;
■ Corporates and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016, which amends the
Corporations Regulations 2001 (Cth) and other relevant
regulations consequential on the Insolvency Practice Rules;
and
■ instruments to provide for the partial delay of certain ILRA
amendments.
Whilst the reforms do not make wholesale changes to Australia’s
current insolvency regime, they will affect the day-to-day operation
of both formal and informal restructuring processes and will bolster
creditor information rights.
Two of the biggest changes contemplated by the reforms include:
■ the introduction of a “safe harbour” concept to the insolvent
trading laws (see questions 1.2 and 2.1); and
■ the operation of the automatic stay on ipso facto termination
clauses (see question 3.5).
The safe harbour protection has been incorporated by introducing a
new section 588GA into the Act which provides that section
588G(2), being the provision which makes directors personally
liable for insolvent trading, will not apply if, after starting to suspect
the company is, or may become, insolvent, the director takes steps to
develop one or more courses of action that is “reasonably likely to
lead to a better outcome for the company” than the immediate
appointment of an insolvency practitioner. There are a number of
criteria that will be used to assess whether the test has been satisfied
so as to enliven the protection, including the engagement of
appropriately qualified advisors to provide advice on the restructuring
plan. The Explanatory Memorandum accompanying the legislation
states that “reasonably likely” requires that there is a chance of
achieving a better outcome that is not “fanciful or remote”, but is
“fair”, “sufficient” or “worth noting”.
The safe harbour rule does not provide protection in respect of all
debts and only covers debts that are incurred:
■ in connection with the relevant course of action being
pursued; and
■ during the period commencing at the time the course of
action is being developed ending at the earliest of a
“reasonable period” following the course of action not being
pursued, when the director ceases to take such course of
action, when the course of action ceases to be “reasonably
likely” to lead to a better outcome or the appointment of an
insolvency practitioner.
Care should be taken when relying on the safe harbour principle as
it will not operate to automatically exempt a director from exposure
to personal liability; rather it will be relevant to a director seeking to
defend an insolvent trading claim.
Additional reforms being proposed in Australia include:
■ Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth), pursuant to which:
■ civil and criminal penalties will apply to persons
(including directors and related entities) that enter into
transactions which are “reasonably likely” to prevent or
significantly reduce the recovery of employee entitlements;
and
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■ the Court will be able to make an “employee entitlements
contribution order” against a (solvent) parent company or
another entity which has benefited from the services of
the employees of a company in liquidation where it is
“just and equitable” for the order to be made (for example,
where the assets of group entities have been intermingled
and a subsidiary company has been intentionally left with
insufficient assets to discharge its liabilities).
■ Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth), pursuant to which:
■ it is proposed to introduce a new clawback provision into
the Corporations Act to enable a liquidator to recover a
“creditor-defeating disposition”, being a disposition of
company property:
■ where the consideration paid is less than the lesser of
the market value of the property and the best price
reasonably obtainable; and
■ which has the effect (irrespective of intention) of
preventing, hindering or significantly delaying the
property becoming available for creditors in the event
of a winding up,
only if the disposition was entered into (or an was act done
for the purpose of giving effect to the disposition):
■ when the company was insolvent or otherwise caused the
company to become insolvent; and:
■ during the 12 months before appointment of an
external administrator; or
■ less than 12 months after the disposition was entered
into or an was act done for the purpose of giving effect
to the disposition, the company enters into external
administration as a direct result of the disposition or
the act in respect of the disposition; and
■ was not entered into or done under a scheme of arrangement
or DOCA or by an administrator, liquidator or provisional
liquidator; and
■ a director will be exposed to personal liability where he or she
fails to prevent a company from entering into a creditor-defeating
disposition within the relevant time periods and the director:
■ is reckless as to the result of the disposition, in which case
the director will commit an offence and will also be liable
for a civil penalty and/or to pay compensation; or
■ knows or ought to know the disposition is a creditor-
defeating disposition, in which case a civil penalty and/or
compensation order may be imposed.
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Dominic Emmett Gilbert + Tobin Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue Barangaroo, NSW 2000 Australia Tel: +61 2 9263 4328
Email: [email protected]
URL: www.gtlaw.com.au
Alexandra Whitby Gilbert + Tobin Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue Barangaroo, NSW 2000 Australia Tel: +61 2 9263 4114
Email: [email protected]
URL: www.gtlaw.com.au
Dominic specialises in non-contentious restructuring and insolvency work for banks and financial institutions, as well as special situation groups and distressed debt funds. His expertise includes: preparing and negotiating standstill and forbearance arrangements; debt restructuring and schemes of arrangement; structured administration and receivership sales; and advice to directors, receivers, administrators and liquidators.
Recent and current roles in the resources sector include Bis Industries, Arrium, Emeco, Boart Longyear, Paladin and WICET.
Additionally, Dominic is involved in a significant if not lead role in Atlas Iron, Mirabela Nickel, Straits Resources, BrisConnections, RiverCity, Nine Entertainment, Westpoint, Ansett, Billabong, Alinta Energy, I-Med, Centro, Freight Link, Cross City Tunnel, Timbercorp, Walter Construction, MF Global, Top Ryde, Allco Finance, Raptis and FAI.
Gilbert + Tobin is Australia’s leading independent law firm. Established in 1988, the firm employs more than 500 lawyers and professionals nationally.
From our Sydney, Melbourne and Perth offices, we work on transactions and cases that define and direct the market. Our clients include major corporations and government clients, throughout Australia and the Asia-Pacific region, and around the world.
We are a diverse mix of talented, energetic and creative thinkers who bring different perspectives to find original solutions to unprecedented problems. With insight and rigour, we cut through complexity to get to the point.
Our core competency practice areas are: Restructuring + Insolvency; Corporate Advisory/M+A; Banking + Infrastructure; Capital Markets; Competition + Regulation; Intellectual Property; Disputes and Investigations; Technology; Media + Telecommunications; Employment; Energy + Resources; Real Estate; and Environment + Projects.
Alexandra practises in insolvency and restructuring disputes as well as non-contentious restructuring and insolvency transactions:
Anchorage Capital Partners, in its claim against certain former ■directors and officers of the Arrium Group in relation to the Arrium Group’s collapse.
A secured lender, in its objection to a proposed creditors’ scheme ■of arrangement in Re Boart Longyear Limited.
Bis Industries, in relation to a recapitalisation plan to restructure its ■A$1.17 billion debt.
The receivers and managers appointed to the Clem 7 (Airport Link) ■Tunnel in Brisbane, Queensland (BrisConnections).
The receivers and managers appointed to the North-South Bypass ■Tunnel in Brisbane, Queensland (RiverCity).
Nine Entertainment Group, in respect of its A$3.4 billion debt-for-■equity restructuring by way of scheme of arrangement.
The deed administrators of Mirabela Nickel Limited, in respect of a ■recapitalisation plan to restructure its A$500 million debt.
GrainCorp, in representative proceedings in the Supreme Court of ■New South Wales.
The majority group of term lenders in the Atlas Iron creditors’ ■scheme of arrangement.
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schindler rechtsanwälte gmbH
martin abram
Florian cvak
austria
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Austria is generally considered a creditor-friendly jurisdiction, as it
does not provide for UK or US styles of restructuring proceedings.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Austrian law allows for both informal work-outs as well as (within
the framework of the Austrian Insolvency Code) formal restructuring
and insolvency proceedings, all of which are used in practice. The
Austrian Insolvency Code provides for three types of insolvency
proceedings, namely:
■ restructuring proceedings with self-administration (where the
management of the debtor retains control over the day-to-day
business);
■ restructuring proceedings without self-administration (where
the court-appointed administrator takes control over the day-
to-day business); and
■ bankruptcy proceedings (where the court-appointed
administrator takes control over the debtor with the aim to
realise all assets to pay off the creditors).
The following chapter solely deals with work-outs, restructuring and
insolvency proceedings of corporate entities, and not individuals.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Managing directors are obliged to timely file for insolvency if the
debtor is considered “insolvent” according to the Austrian
Insolvency Act, i.e., if it is illiquid or over-indebted. A debtor is
illiquid if it cannot settle the liabilities due – known but not due
liabilities are not considered – and this is not just a temporary
occurrence. A debtor is over-indebted if its assets – based on their
liquidation value – are not sufficient to satisfy all of the creditors
and a business forecast shows that the debtor is likely to become
illiquid within a reasonably predictable period; usually at least the
current and the following financial year are considered for such a
test. If a debtor is illiquid or insolvent, the managing directors have
to file for the opening of insolvency proceedings without undue
delay; however, no later than within 60 days; failure to meet this
obligation exposes the managing directors to civil and criminal
liability, as follows:
In case of such delays, the managing directors will be liable to all
creditors for the damages caused by such delay. Existing creditors,
i.e. creditors who had a claim against the debtor before the opening
of the insolvency proceedings, are entitled to claim quota damages,
i.e. the difference between the quota they would have received in
case of a timely filing and the lower quota they received because of
the delayed filing. New creditors, i.e. creditors who became
creditors of the company after the point in time when management
would have been obliged to file, will be entitled to be reimbursed for
the negative interest, as they would have most likely not have
contracted with the debtor had its management already filed for
insolvency.
Criminal liability can occur under several circumstances, most
notably in cases of grossly negligent encroachment of creditors’
interests, preferential treatment of creditors, withholding of social
security payments and fraudulent intervention with creditors’ claims.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Shareholders or members of the supervisory board of the debtor (if
any) are not entitled to file for the opening of insolvency
proceedings. If they exert their influence to induce management not
to file for the opening of proceedings, this may expose a stakeholder
to claims for damages for contributing to a delay of the filing.
Creditors are entitled to (and frequently do) file for the opening of
insolvency proceedings; however, they can only apply for the
opening of bankruptcy proceedings, and not for the opening of in-
court restructuring proceedings. Creditors which have ongoing
contractual relationships with the debtor may be barred from
terminating such contracts in in-court restructuring proceedings, if
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such contracts are vital for the restructuring of the debtor (see
question 3.5). Otherwise, there are no special types of rules or
regimes applying to particular types of unsecured creditors.
Moratoria and stays on enforcement are only available for in-court
reorganisation proceedings (see question 3.5).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Court-appointed insolvency administrators can (and frequently do)
challenge before the insolvency court transactions undertaken by the
debtor prior to the opening of the proceedings during certain “suspect
periods” (not applicable for restructuring proceedings under self-
administration). For example, transactions in which the debtor
intentionally puts certain creditors at a disadvantage relative to one or
several other creditors who knew of such an intention can be
challenged when made within a suspect period of 10 years before the
opening of the proceedings. In other cases, suspect periods range
between six months and two years. Cases include the transfer of
assets without due consideration (two years), provision of security or
settlement of an obligation not due at the time (one year), and business
transactions with the insolvent debtor when the counterparty knew or
should have known of its insolvency (six months).
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Out-of-court restructurings can only be implemented pre-insolvency
or within the 60-day grace period (that is, management has an
obligation to file for the opening of insolvency proceedings without
undue delay but in any event within 60 days of insolvency; during
the 60-day grace period, management may make reasonable efforts
to restructure the debtor or prepare an application for restructuring
proceedings). The obvious advantage of an out-of-court
restructuring is that the proceedings are not registered in the
insolvency database (as would be the case with in-court
restructuring proceedings), and thus it is less likely to become
public. The other advantage is that out-of-court restructurings tend
to offer more flexibility and can be implemented quicker as long as
all relevant parties contribute. The downside is that out-of-court
restructurings only capture the contracting parties (and not all
insolvency creditors) and in certain situations there may be a risk of
voidance where an agreement is entered into at a time where the
debtor is already insolvent and the effect thereof is to potentially
reduce the value of the estate.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram down dissenting classes of stakeholder?
As mentioned under question 1.2 above, the Austrian Insolvency
Code provides for three types of formal insolvency proceedings.
The two types of restructuring proceedings (with or without self-
administration by the debtor) are aimed at ensuring the continuing
survival of the debtor by providing a restructuring of (some of his)
financial obligations. On the other hand, bankruptcy proceedings
(see question 1.2 above) are aimed at realising the assets of the
estate and distributing the proceeds to the debtor’s creditors. In case
restructuring proceedings are not successful, they are transformed
into bankruptcy proceedings.
Additionally, the Austrian Reorganisation Act also provides – at
least in theory – provisions for the restructuring of a company in
financial difficulty. However, these provisions have little practical
relevance, as the completion of such procedure requires the consent
of all creditors.
Austrian law does not contain any special rules on pre-packaged
sales or debt-for-equity swaps.
For in-court restructuring proceedings, creditors can influence the
process through threatening to withhold their consent to the
restructuring plan. The restructuring plan must be approved by
simple majority (by headcount) of the insolvency creditors present
at the restructuring plan hearing (Sanierungsplantagsatzung), who
must represent at least 50 per cent of the outstanding unsecured debt
represented at the hearing and be confirmed by a decision of the
court. Insolvency creditors who have acquired their claims after the
opening of the proceedings have no voting right (unless they
acquired the claim based on an agreement entered into prior to the
opening of the proceedings). In principle, the restructuring plan
must treat all insolvency creditors equally (Paritätsprinzip) unless
(where a group of insolvency creditors is concerned) unequal
treatment is approved by a simple majority (by headcount) of the
affected insolvency creditors present at the restructuring plan
hearing, who must represent at least 75 per cent of the affected
insolvency claims represented at the hearing or (where an individual
creditor is concerned) the individual creditor has granted his explicit
consent. The court decision confirming the restructuring plan
releases the debtor from his obligation to pay insolvency creditors in
excess of the agreed quota. If the debtor defaults and fails to come
current during the requisite cure period, the released claims are
reinstated and become immediately due.
Shareholders also have some (albeit less formalised) influence on
the process; typically, the debtor will require additional shareholder
funding to (a) satisfy the estate claims during the proceedings, and
(b) fulfil the payment obligations pursuant to the restructuring plan.
As opposed to creditors, the Austrian Insolvency Code does not
provide for a (creditor-initiated) cramdown of shareholders as a
whole or classes of shareholders.
3.3 What are the criteria for entry into each restructuring procedure?
An in-court restructuring process can only be opened by the
competent insolvency court based on an application by the debtor;
in case a creditor files for the opening of bankruptcy proceedings,
the debtor has the option to request that such proceedings are
opened as restructuring proceedings.
The debtor’s application for in-court restructuring proceedings must
include a restructuring plan (Sanierungsplan), which must provide
(i) that the rights of secured creditors (that is, rights of creditors
holding a property interest in an asset in the estate to request return
of the asset (Aussonderungsgläuber) and the rights of creditors
(Absonderungsgläubiger) holding a security interest in an asset to
the proceeds of enforcement into that asset) will not be affected, (ii)
full payment of all estate claims (Masseforderungen) (these are,
ranked in order of practical importance, claims for labour, services
and goods furnished to the estate post-filing, the costs of the
proceedings (including the remuneration and reimbursement
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awarded to the creditor’s committee and the Special Creditors’
Rights Protection Associations), any monies advanced by a third
party to cover the initial costs of the proceedings (to avoid a
dismissal of the filing in limine), and the fees of the administrator),
as well as (iii) an offer to pay at least 20 per cent (or 30 per cent if
self-administration is requested) of the claims filed by insolvency
creditors, i.e. other (unsecured) creditors that were not contested by
the administrator, within two years of the approval of the
restructuring plan. Furthermore, the debtor must provide evidence
in the application that he is able to fund the estate claims for a period
of 90 days following the application.
3.4 Who manages each process? Is there any court involvement?
Out-of-court restructurings are managed by the company itself
without any court involvement.
In restructuring proceedings with self-administration, the debtor
retains control over the estate. The administrator’s approval is
required only for matters outside the ordinary course of business.
However, the administrator may also veto matters which fall within
the ordinary course of business. In restructuring proceedings
without self-administration, control over the estate is transferred to
the administrator.
Following the receipt of an application for restructuring proceedings,
the court will issue a formal edict opening the proceedings. In such
edict, the court will determine the type of proceedings, appoint the
administrator and set dates/deadlines for (i) the report hearing (where
the administrator has to present his or her report of the status of the
debtor), (ii) the first creditors’ convention, (iii) the filing of
insolvency claims, (iv) the examination hearing (where the filed
insolvency claims are examined), and (v) the restructuring plan
hearing (where the creditors will take a vote on the proposed
restructuring plan). The report hearing and the first creditors’
convention typically take place within 14 days of the publication of
the edict and the examination hearing within 60 to 90 days.
Following the acceptance of the restructuring plan, the debtor will
(again) be vested with all rights in and to the estate. However, the
restructuring plan may also provide that a trustee is appointed to (i)
supervise the fulfilment of the restructuring plan by the debtor (in
which case supervision is similar to that during self-administration
proceedings), (ii) take over the estate (übernehmen) with the
mandate to fulfil the restructuring plan (Sanierungstreuhand), or
(iii) liquidate the estate (Liquidationstreuhand).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Out-of-court restructuring proceedings do not have any impact on
existing contracts. Thus, as the debtor will at this point most likely
be in default due to certain financing arrangements that it has, it is
customary for banks to agree on a standstill for the duration of such
out-of-court restructuring. It has to be borne in mind that the 60-day
filing obligation of the debtor’s management still applies in this case.
For in-court restructuring proceedings, the Insolvency Act provides
for a six-month moratorium for vital contracts, which limit a
contracting party’s ability to terminate for good cause. Default on
payments and deterioration of the financial or economic state of the
debtor is not considered good cause. The most notable exception to
that rule is funding commitments under credit facilities.
If contractual partners have to continue performing their contractual
obligations following the opening of in-court restructuring
proceedings, any claims for services provided after the opening of the
proceedings will be (preferred) estate claims (Masseforderungen).
Subject to this restriction, termination and set-off provisions will
still be upheld; however, set-off in an insolvency setting is modified
compared to the general rules of the Austrian Civil Code, as claims
of creditors are converted to monetary claims upon the opening of
the insolvency proceedings, and thus can be set off at an earlier
point. However, claims arising post-petition cannot be set off
against claims of the debtor.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
As mentioned above, the debtor needs to provide proof of funds to
cover its post-petition payment obligations for a period of 90 days
following the application. There are no restrictions on the sources
of funding, so funds can be provided by shareholders, through
operating cash flows, through existing unused financing lines or
through new debt financing.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are two types of proceedings to wind up a company, namely
(i) a voluntary liquidation, and (ii) bankruptcy proceedings pursuant
to the Austrian Insolvency Code.
4.2 On what grounds can a company be placed into each winding up procedure?
A voluntary liquidation can only be initiated by a resolution of the
shareholders of a company. In such resolution, a special suffix is
added to the company name to denote that the company is in wind-
down. Both the resolution and the change of the company name
have to be notified to the Companies Register.
For the preconditions of opening bankruptcy proceedings, see
question 2.1 above. As with in-court restructuring proceedings, the
proceedings are opened by an edict of the competent insolvency court.
Please note that the debtor has the option to apply for a conversion of
bankruptcy proceedings into restructuring proceedings, provided that
he can show that the preconditions are met.
4.3 Who manages each winding up process? Is there any court involvement?
A voluntary liquidation is managed either by (all or some of) the
managing directors of the company or by newly appointed
liquidators, as decided by the company’s shareholders. Court
involvement for a voluntary liquidation is limited; the liquidators
have to make certain filings with the Companies Register, which are
only subject to a limited review by the court. The liquidators will
have to terminate all existing contractual relationships of the
company, settle all outstanding claims and repay company debt
before the company can be finally wound down.
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For bankruptcy proceedings, the process is similar to the process for
in-court restructuring proceedings; the court will appoint an
administrator who will take care of the liquidation of the assets of
the debtors and the payment of the quota to the insolvency creditors.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
In a voluntary liquidation, the liquidators need to pay-off all existing
creditors of the company, so the creditors are in a strong position to
demand full repayment of their claims. Shareholders still retain
their influence (to the extent allowed by law), even after they
decided to put the company in liquidation.
In bankruptcy proceedings, the shareholders do not have any
noticeable degree of influence on the proceedings. They are,
however, entitled to bid for assets of the debtors in the same way as
other creditors. The influence of unsecured creditors is also limited
in bankruptcy proceedings; certain decisions by the administrator
require the prior consent of the creditors’ committee, where the
various creditors have voting rights depending on the amount of
their (accepted) claims against the debtor.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
In a voluntary liquidation, the shareholder decision to put the company
into liquidation does not by itself impact on the existing contracts of
the company. Typically, counterparties of the company will have a
contractual right to terminate their contract for cause if the company is
put into liquidation. Absent the company and its counterparty
exercising such termination right or reaching a different agreement, the
outstanding obligations under such contracts have to be fulfilled. Set-
off provisions (whether by contract or by statute) will typically not be
affected by a decision to put a company into voluntary liquidation.
In bankruptcy proceedings, the insolvency administrator may elect to
assume or withdraw from contracts which neither party has fully
performed at the time of the opening of the insolvency proceedings. If
the contract is assumed, further claims of the contracting party are
(preferred) estate claims (Masseforderungen), whereas in case of a
withdrawal, any resulting (damage) claims of the contracting party are
ordinary insolvency claims. Where the estate is the tenant, the
insolvency administrator (not the landlord) can terminate the lease, in
which case he must only observe the statutory notice period or a shorter
contractual notice period (but is not bound by a longer contractual
notice period). The six-month moratorium referred to under question
3.5 above may also apply in case of bankruptcy proceedings if the
administrator has sufficient funds to pay the estate claims and can show
that keeping such contracts in place will likely enhance the chances of
successfully selling the business enterprise of the debtor during the
bankruptcy proceedings for higher sales proceeds. Where the estate is
the landlord, no special termination rights exist. As regards set-off
provisions, please see question 3.5 above.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
All Austrian in-court restructuring and insolvency proceedings
differentiate between certain types of claims, which are ranked in
the following order:
■ Secured claims: claims of creditors holding a property
interest in an asset in the estate to request return of the asset
(Aussonderungsgläuber) and creditors holding a security
interest in an asset to the proceeds of enforcement into that
asset (Absonderungsgläubiger).
■ Estate claims: estate claims (Masseforderungen), which consist
of (i) costs of the proceedings, (ii) costs for the administration of
the estate, (iii) costs for post-petition salaries, (iv) costs for
terminating certain types of employment agreements, (v) claims
for the fulfilment of agreements not terminated by the
administrator, (vi) claims based on acts of the administrator,
(vii) unjust enrichment claims against the estate, and (viii)
compensation claims by the creditor protection organisations.
■ Insolvency claims: insolvency claims are claims by unsecured
creditors of the debtor relating to the pre-petition period. Such
claims need to be filed with the court (within a period of time set
forth in the opening edict of the proceedings) and can be
contested by the administrator.
■ Subordinated claims: claims of shareholders or claims based
on equity replacing services to the debtor can only be
satisfied if all other of the aforementioned claims have been
satisfied in full.
4.7 Is it possible for the company to be revived in the future?
Following the completion of the bankruptcy proceedings, the
(Austrian) debtor is deleted from the Companies Register. To the
extent additional assets of the debtor are discovered at a later point
in time, the company could be revived for as long as it takes to
distribute such additional assets to the creditors.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The opening of a restructuring or insolvency procedure itself does
not give rise to tax risks or liabilities. In an out-of-court
restructuring, any formal subordination or waiver of existing
shareholder debt may lead to the debtor recognising a taxable gain,
which – in most circumstances – can be offset against current losses
or loss carry-forwards.
For a voluntary liquidation to be finalised, the company will need to
obtain a tax clearance certificate before it can be deleted from the
companies register.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
The opening of in-court restructuring or insolvency proceedings by
itself does not affect the employees of the debtor.
The insolvency administrator has special rights to terminate
employment upon a partial or total shut down, only requiring the
administrator to comply with the (mandatory) notice periods under
statute and the applicable collective bargaining agreement (but not
longer contractual notice periods). A similar provision is available
to a debtor in a restructuring with self-administration if he decides to
close part of the business or unit, and continuing the employment of
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an employee engaged in that part of the business or unit would put
the restructuring or the business at risk. Such a measure, however,
requires the consent of the insolvency administrator.
Please note that mass lay-offs in connection with restructuring or
insolvency proceedings require a 30-day pre-notification of the
competent branch of the Austrian Labour Market Service. During
the aforementioned 30-day notice period, no termination can be
effectively announced – which means that the notice period is de facto prolonged by that period.
Post-petition salaries of employees as well as the costs for terminating
certain types of employment agreements are estate claims (see
question 4.6). Claims by employees for periods before the opening of
the proceedings (i.e., back pay, unpaid severance payments, etc.) are
normal insolvency claims. However, Austria maintains an Insolvency
Contingency Fund, where employees will receive compensation for
back pay and other claims from the employment relationship that arose
no earlier than six months before the opening of in-court insolvency
proceedings (up to a specified maximum amount), in exchange for
passing on their claims to the Insolvency Contingency Fund; as a result
of this scheme, the Insolvency Contingency Fund is typically one of
the bigger creditors in in-court restructuring proceedings.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Under the Austrian Insolvency Code, companies registered outside
of Austria (but in another EU Member State) can enter into
insolvency proceedings in Austria if their centre of main interest
(COMI) is in Austria and no insolvency proceedings have been
opened in respect of such debtor in another EU Member State as a
main proceeding according to Council Regulation (EC) No
848/2015. Companies registered outside the EU can in principle
also enter into insolvency proceedings in Austria, provided that their
COMI is in Austria; in this case, the Austrian Insolvency Code
provides for a rebuttable assumption that the COMI of a non-
Austrian debtor is located in its country of registration.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Insolvency proceedings that were opened as main proceedings in
another EU Member State have to be recognised in Austria pursuant
to Council Regulation (EC) No 848/2015.
For foreign insolvency proceedings opened outside of EU Member
States, the Austrian Insolvency Code provides for a recognition of
such proceedings provided that the COMI of the debtor is located in
the country where the insolvency proceedings were opened and the
foreign insolvency proceeding is comparable to an Austrian
insolvency proceeding. Please note that the Insolvency Code does
not provide for a formal recognition procedure, such as a Chapter 15
filing in the United States; thus, the question of the effects for such
foreign insolvency proceedings will be decided by Austrian courts
on a case-by-case basis, primarily when creditors try to initiate
enforcement actions against the debtor in Austria.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Generally, Austrian companies tend to restructure or enter into
insolvency proceedings in Austria. As opposed to Germany, where
several debtors have tried to open insolvency proceedings in the UK
in the recent past, we have not observed such attempts in Austria.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Since the 2017 amendment, the Austrian Insolvency Code
incorporates the provisions of Council Regulation (EC) No
848/2015 regarding insolvency proceedings for groups of
companies. These provisions basically provide for increased
coordination of the insolvency proceedings for the various group
entities.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
There are currently no proposals for reform.
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Martin Abram Schindler Rechtsanwälte GmbH Kohlmarkt 8-10 A-1010 Vienna Austria Tel: +43 1 512 2613 300
Email: [email protected]
URL: www.schindlerattorneys.com
Florian Cvak Schindler Rechtsanwälte GmbH Kohlmarkt 8-10 A-1010 Vienna Austria Tel: +43 1 512 2613 500
Email: [email protected]
URL: www.schindlerattorneys.com
Martin Abram is a founding partner of Schindler Rechtsanwälte. Prior to that, Martin was a partner at Wolf Theiss. His practice focuses on corporate law, corporate restructurings, mergers and acquisitions and project and real estate financing transactions. He regularly counsels financially troubled companies, their shareholders, management and supervisory boards as well as financing banks and other creditors in dealings with distressed debtors.
Schindler Rechtsanwälte is an Austrian law firm specialising in transactional work with extensive experience in the fields of M&A, private equity, finance, real estate, corporate, tax, securities law and restructurings. We regularly counsel leading national and international financial investors and their investments in corporate businesses, as well as financing banks.
Florian Cvak is a founding partner of Schindler Rechtsanwälte. Prior to that, he co-headed the private equity practice of Schönherr. His practice focuses on private equity, mergers and acquisitions, general corporate law and corporate finance transactions. He frequently assists financial sponsors and corporates on their investments in distressed debt and businesses in distress, and regularly advises shareholders, management and supervisory boards of financially troubled companies.
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stibbe
pieter wouters
paul van der putten
Belgium
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Belgian restructuring law can be considered to be debtor-friendly
for viable business, as well as at the same time being creditor-
friendly as it provides tools for creditors to counter any abuse of this
branch of law by debtors.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Belgian insolvency law allows for informal work-outs (i.e. reaching
an amicable settlement with two or more creditors), formal
restructuring (i.e., judicial reorganisation procedure under court
supervision), and insolvency proceedings (i.e., for bankruptcy and
liquidation). Formal restructuring and insolvency proceedings are
often used in practice. Informal work-outs are never publicly
disclosed. In our experience, informal work-outs have proven to be
useful for several matters.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors can be held liable on various grounds when they are
managing a company in financial difficulties. In summary, directors
should consider these specific issues when doing so:
■ Any current and former director and all other persons who
had de facto authority to manage and run the company’s
business can be held liable for all or part of the company’s
liabilities up to the amount of the shortfall if either is proven:
(i) that a manifest, serious mistake committed by one of them
contributed to the bankruptcy; or (ii) the directors knew or
should have known that there was obviously no reasonable
prospect in continuing the activities and in avoiding
bankruptcy and that they failed to act as a reasonable and
prudent director who is placed in the same circumstances.
■ Directors can, under certain circumstances, incur liability for
unpaid social security contributions, corporate tax, or VAT.
■ Directors will have to fulfil certain duties with regard to
informing the employees.
■ Directors must timely convene an extraordinary general meeting
of shareholders when the net asset value of the company
becomes less than the half of the share capital of the company.
■ Finally, directors have a statutory duty to file for bankruptcy
within one month after the company is in the state of
bankruptcy, i.e., when it has ceased to pay its debts and its
creditworthiness is undermined. A director who did not
timely file for bankruptcy can be held liable towards the
company and third parties for any losses incurred as a result
of his or her failure to file for bankruptcy. Directors can also
be punished under criminal law for certain acts and omissions
(e.g., not filing for bankruptcy on time or at all) if such acts
and omissions are found to have been committed intentionally
to delay the bankruptcy.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Shareholders can decide to put the company in liquidation when the
company’s net asset value becomes less than half of its share capital.
The public prosecutor or any party with standing can have the
company summoned before court and can seek its liquidation if the
company’s net asset value becomes less than the minimum share
capital required by law. However, the court can grant the company
time to correct its situation.
The public prosecutor, one or more creditors, the temporary
administrator who is appointed to oversee the debtor, or the
bankruptcy receiver in the main proceedings can petition for the
debtor’s bankruptcy.
If certain conditions are met, the public prosecutor, a creditor or any
party that is interested in acquiring the debtor’s business can seek
the opening of a judicial reorganisation procedure against the debtor
in order to have the debtor’s assets and business activities
transferred under court supervision.
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A debtor is protected from a petition for bankruptcy or liquidation
once it has filed an application for the opening of a judicial
reorganisation procedure. This filing also automatically suspends
any enforcement. However, any seizure of goods that is already in
an advanced stage cannot be stayed automatically because of the
filing, so the debtor, in such situation, will have to request the court
to order suspension of such seizure.
If the court affirms the opening of a judicial reorganisation
procedure, the court will grant the debtor a moratorium. During the
moratorium:
■ no bankruptcy or liquidation proceedings may be opened in
respect of or pursued against the debtor;
■ no means of enforcement (in relation to both moveable and
immoveable assets) against the debtor may be used or
pursued for claims predating the opening of the judicial
reorganisation procedure; and
■ no assets of the debtor may be seized for claims predating the
opening of the judicial reorganisation procedure unless the
seizure is in an advanced stage and the court did not suspend it.
The prohibition of enforcement during the moratorium prevents the
enforcement of recovering actual security interests (e.g., a pledge or
mortgage) or enforcement sought by creditors benefiting from a
statutory lien. However, it is allowed to enforce: (i) any specific
pledge over claims; and (ii) financial collateral created under the Act
of 15 December 2004 on financial collateral (on the condition that
the debtor is in default).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
In case of bankruptcy, certain transactions may be declared
ineffective against third parties if concluded or performed by the
debtor during the so-called “hardening period” (a period of a
maximum of six months before the date of the bankruptcy order,
except in the case where the bankruptcy order relates to a company
that was dissolved more than six months before the date of the
bankruptcy order in circumstances suggesting an intent to defraud
its creditors).
The transactions entered into or performed during the hardening
period which may be declared ineffective against third parties
include, among others, (i) gratuitous transactions entered into at an
undervalue or on extremely beneficial terms for the counterparty,
(ii) payments for debts which are not due, (iii) payments other than
in cash for debts due, and (iv) security provided for pre-existing
debts.
In addition, the court may, at the request of the trustee and in its
discretion, declare ineffective against third parties other transactions
entered into or performed during the hardening period provided that
the counterparty was aware of the debtor’s cessation of payments
and the court determines that this declaration would benefit the
bankruptcy estate.
The above provisions have been made inapplicable to a large extent
with regard to financial collateral and with regard to certain
transactions that have taken place within the framework of a judicial
reorganisation procedure.
So-called “fraudulent transactions”, i.e., abnormal transactions
entered into with the knowledge that the transaction would
prejudice the creditors of a company, are also ineffective in the
subsequent bankruptcy of that company. This is so even if the
transaction dates back from before the hardening period.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Belgian restructuring law gives the debtor the possibility to conclude
an amicable settlement with two or more of its creditors.
The reason for creditors to want to conclude such settlement with their
debtor lies in the fact that such type of agreement enjoys protection
from certain claw-back rules mentioned under question 2.3.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
A debtor can opt for a reorganisation procedure under court
supervision. The purpose of undergoing such judicial reorganisation
procedure is to preserve the continuity of all or part of the company or
of its viable business activities. A pre-packaged sale is not allowed.
A judicial reorganisation procedure can be initiated with an aim to:
(i) Conclude an amicable settlement with two or more creditors
(this is similar to the amicable settlement mentioned under
question 3.1, but it is concluded under court supervision).
The amicable settlement cannot affect third parties’ rights.
(ii) Implement a debt restructuring plan. The reorganisation plan
can contain the conversion of debt into equity. The
restructuring plan will be submitted for voting at a meeting
attended by the creditors and will only be adopted if (i) the
majority of the creditors attending the meeting, and (ii) the
majority share of the total value of the debt claims (the
principal sum) vote in favour of such plan. The creditors are
not divided into classes, but the plan can provide for a
differential treatment of creditors.
If the creditors meeting vote in favour of such plan, the court
will ratify it, and the plan will then bind all the debtor’s
creditors.
(iii) Selling all or part of its assets and activities to a third party.
Upon completion of the sale, the creditors are entitled to
exercise their rights on the sale proceeds. Any remaining part
of the company can then be submitted to either bankruptcy or
a voluntary liquidation.
Any party with standing can demand early termination of a judicial
reorganisation procedure if the debtor can no longer ensure the
continuity of its activities in accordance with the aim of the procedure.
3.3 What are the criteria for entry into each restructuring procedure?
An out-of-court amicable settlement can be concluded as soon as
this is necessary for reorganising the debtor’s business.
A debtor can request the opening of a judicial reorganisation
procedure if the debtor’s continuity is threatened in the short- or
long-term.
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3.4 Who manages each process? Is there any court involvement?
An out-of-court amicable settlement is managed by the directors
and without court involvement.
A judicial reorganisation procedure with a view to concluding an
amicable settlement or implementing a debt restructuring plan is
managed by the directors under court supervision.
A judicial reorganisation procedure with a view to selling all or part
of the debtor’s assets is managed by a judicial administrator acting
under court supervision. However, the directors remain on board to
manage the company.
Under certain circumstances, the court can appoint a judicial
administrator to assist or to replace the directors.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A judicial reorganisation procedure does not terminate any contract,
and contractual provisions that allow for early termination or
acceleration of the contract to be triggered by the initiation or
opening of a reorganisation procedure are null. A creditor may not
terminate a contract on the basis of a debtor’s default that occurred
prior to the reorganisation procedure if the debtor remedies such
default within 15 days from the date of the default notice. Subject
to certain conditions, close out netting provisions can be upheld.
As an exception to the general rule of continuity of contracts, the
debtor may cease performance of a contract during the reorganisation
proceedings if the debtor notifies the creditor about it and the
decision to cease performance is necessary for the reorganisation of
the business. The debtor’s exercise of this right to cease
performance does not preclude the creditor from suspending, on its
turn, the performance of its own obligations under that contract.
Claims arising during the judicial reorganisation procedure will be
treated preferentially over all other creditors’ claims in the event of
a subsequent bankruptcy or liquidation. Moreover, claims arising
after the opening of the judicial reorganisation procedure are not
subject to the moratorium and can thus be enforced. They can also
be set-off.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Belgian law explicitly allows the debtor to provide new security
interest for both existing and new debts (e.g., bank credits,
factoring, etc.) during the moratorium as long as doing so will
sustain the continuity of the business. Any new collateral granted
during the moratorium cannot be challenged in a subsequent
bankruptcy.
Claims arising after or relating to services rendered after the
opening of the restructuring proceedings are regarded as an estate’s
debts in the event of subsequent liquidation proceedings. Estates’
debts have the highest priority over all claims, and rank higher than
any other type of debt claim.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are two types of liquidation procedures under Belgian law:
bankruptcy; and voluntary or judicial liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
A company that has ceased to pay its debts persistently as they
become due and that is no longer in a position to obtain credit can be
declared bankrupt.
Voluntary liquidation of a company results from a decision made by
the general shareholders’ meeting.
A company can be placed in judicial liquidation on various grounds.
The most common ones are:
■ failure to file its annual accounts with the National Bank of
Belgium;
■ removal of the company from the Crossroads Bank for
Enterprises;
■ failure to appear when summoned before the chamber for
companies in difficulty; and
■ impairment of the company’s net equity capital as a
consequence of accumulated losses.
4.3 Who manages each winding up process? Is there any court involvement?
The bankruptcy procedure is managed by one or more court-
appointed bankruptcy receivers. The court also appoints a
bankruptcy judge who supervises the procedure.
Liquidation is managed by a liquidator who is appointed by the
shareholders (but such appointment must be approved by the court)
in case of a voluntary liquidation, and appointed by the court in case
of a judicial liquidation. The court will have to approve the payment
distribution plan that describes the distribution of funds.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
As a general rule, the enforcement rights of individual creditors are
suspended once the court declares the opening of bankruptcy
proceedings. And only after this declaration is the bankruptcy
receiver allowed to take any actions against the debtor and liquidate
its assets. However, such suspension does not apply to any pledge
of financial instruments or cash held on account, which falls under
the scope of the Act of 15 December 2004 on financial collateral.
For creditors whose debt claims are secured by certain movable
assets, such suspension would normally be limited to the period
required for the first verification of the debt claims.
For creditors whose debt claims are secured by immovable assets, the
intervention of the bankruptcy receiver is necessary to pursue the sale of
the assets. A first ranking mortgagee will generally be entitled to pursue
the enforcement of its mortgage after the first verification of the debt
claims if the enforcement procedure was already in an advanced stage.
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In case of liquidation, unsecured creditors and creditors with a
general privilege on all assets lose their enforcement rights, save to
the extent that the enforcement would not prejudice other creditors
or the proper course of the liquidation. Creditors whose debt claims
are secured by certain movable assets or immovable assets do not
lose their enforcement rights.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The declaration of bankruptcy or opening of a liquidation does not
in itself cause the termination of existing contracts. However, two
exceptions apply:
■ the parties to a contract may contractually agree that the
occurrence of a bankruptcy/liquidation constitutes an early
termination or acceleration event; and
■ intuitu personae contracts (i.e., contracts whereby the
identity of the other party constitutes an essential element of
the contract conclusion) are automatically terminated.
In case of a bankruptcy, the bankruptcy receiver may elect not to
perform the obligations of the bankrupt party that are still outstanding
after the bankruptcy if such decision is necessary for the management
and the liquidation of the bankrupt estate. The counterparty may not
seek injunctive relief or specific performance of the contract.
Subject to certain conditions, close out netting provisions can be upheld.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In case of bankruptcy (or deficit liquidation) the debts will generally
be priority-ranked according to a complex set of rules. Here is a
general overview of these rules:
Estate’s debt: All costs and debt incurred by the bankruptcy
receiver/liquidator during the bankruptcy/liquidation proceedings
are known as “estate’s debts”, and these have ultimate priority. In
addition, if the bankruptcy receiver/liquidator has contributed
financially towards the selling and enforcement of secured assets,
such contribution will be refunded to the receiver as priority, which
will be paid out from the proceeds from the assets sold before the
rest of the proceeds are distributed to the secured creditors.
Security interests: Creditors that hold a security interest have a
priority right over the secured asset (whether by means of
appropriation of the asset or from the proceeds generated from the
asset’s sale).
Privileges: Creditors may have a particular privilege right on
certain or all assets (e.g., tax claims, claims for social security
premiums, etc.). Privilege rights on specific assets rank higher than
privilege rights on all of the assets of the debtor.
Pari passu: Once all of the estate’s debts are settled and once the
creditors holding security interests and privilege rights are satisfied,
the sale proceeds from the remaining assets will be distributed
among the unsecured creditors who are ranked pari passu (unless a
creditor agrees to be subordinated).
4.7 Is it possible for the company to be revived in the future?
No, it is not possible to revive a company once the bankruptcy
procedure/liquidation has been closed.
There is a possibility, however, to appoint a bankruptcy receiver ad hoc if assets are discovered after the closing of the bankruptcy.
As from the closing of the liquidation, creditors have five years to
still initiate proceedings against the liquidated company. If the
liquidation was closed while fraudulently disregarding the interests
of a creditor, such creditor can seek to have the closing of the
liquidation declared null. If such claim is granted by the court, the
liquidation will be reopened.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
A creditor who has filed a debt claim in the bankruptcy is entitled to
record that claim immediately as loss and to request the refund of
VAT, insofar as it is applicable.
The opening of a judicial reorganisation procedure does not affect
the debtor’s tax obligations.
Debt reductions or waivers granted by creditors in the framework of
a collective restructuring plan approved by the court is not regarded
as a taxable gain for the debtor.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
An employment contract is considered an ongoing contract and does
not end when bankruptcy proceedings pertaining to the employer
are opened. The bankruptcy receiver is the one who must terminate
the employment contracts. However, the law sets out a simplified
procedure for the bankruptcy receiver to dismiss employees.
No specific rules apply to employee dismissals in the event of the
employer’s liquidation, so the liquidator needs to comply with
labour law provisions on the dismissal of employees.
Unpaid salaries and severance pay benefit from a privilege right on
all movable assets of the debtor-employer. It is important to note
that in certain circumstances, Belgian law gives dismissed
employees the right to a (capped) financial contribution from the
Indemnity Fund for the closing-down of firms.
In case of judicial reorganisation procedure, employment contracts
are not affected and remain in full force. Belgian law, just as the law
in most EU countries, allow the employer the possibility to dismiss
employees for economical or other specific reasons as part of a
social plan. In case of a judicial reorganisation procedure with a
view to selling all or part of the debtor’s assets and activities, the
parties involved will have to abide by a specific Collective
Bargaining Agreement (i.e., CBA no. 102) which, in short, entitles
the buyer to decide on how many employees should be transferred
and even to renegotiate to some extent the individual terms of
employment with the employees concerned. Please note that
Belgian courts have asked the CJEU the preliminary question of
whether the right to choose the number of employees is consistent
with Council Directive 2001/23/EC. Meanwhile, the Advocate
General has already issued his opinion in which he concludes that
Belgian law violates the Directive.
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7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
In situations to which Regulation (EU) 2015/848 of the European
Parliament and of the Council of 20 May 2015 on insolvency
proceedings (“European Insolvency Regulation”) does not apply,
Belgian private international law states that companies incorporated
elsewhere can use restructuring procedures or enter into insolvency
proceedings if its principal establishment is located in Belgium. In
most cases, the concept of “principal establishment” will be aligned
with the concept of “centre of main interests”, which is used in the
European Insolvency Regulation.
If the establishment is not the principal establishment, secondary
insolvency proceedings can be opened that will affect the Belgian
establishment only.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
In situations to which the European Insolvency Regulation does not
apply, Belgian private international law states that foreign
judgments with regard to restructuring or insolvency proceedings
can be recognised in Belgium if all conditions for recognition are
met (e.g., the judgment (i) does not contravene certain provisions
regarding applicable law, public order, the right of defence, (ii) does
not contravene another judgment, and (iii) does not attempt to
escape or deviate from mandatory law, etc.).
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Yes, this has been so for some Belgian companies because they are
members of an international group. But it is not common practice.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Belgian insolvency law does not contain regulatory provisions
regarding groups of companies. It is possible, however, for a group
of companies to have the same insolvency practitioner appointed.
In an international context, Belgian insolvency law contains
provisions that give effect to the group insolvency provisions under
the European Insolvency Regulation. It also contains provisions on
co-operation in case of an international insolvency that fall outside
the scope of the European Insolvency Regulation.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The new Belgian company code will enter into force on 1 May 2019
and will slightly amend the rules regarding the liquidation of a
company. The liquidation procedure will be simplified for solvent
liquidations, and it will be possible to liquidate a company in one
day if the creditors consent with such simplified dissolution.
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Pieter Wouters Stibbe Central Plaza – Loksumstraat 25 Brussels, 1000 Belgium Tel: +32 2 533 53 36
Email: [email protected]
URL: www.stibbe.com
Paul Van der Putten Stibbe Central Plaza – Loksumstraat 25 Brussels, 1000 Belgium Tel: +32 2 533 52 95
Email: [email protected]
URL: www.stibbe.com
Pieter Wouters mainly handles litigation cases in the area of contract law, sureties, banking law and the usual contracts. He focuses particularly on all aspects of insolvency law.
Pieter Wouters was a part-time assistant of Professor S. Stijns at the Instituut voor Verbintenissenrecht of the Katholieke Universiteit Leuven law faculty (from 2007 to 2010).
Stibbe is a Benelux law firm with main offices in Amsterdam, Brussels, and Luxembourg and branch offices in Dubai, London and New York. Stibbe offers a full legal service, both advisory work and litigation, in all areas of law, such as administrative law, banking & finance, corporate/M&A, employment & pensions, energy, EU, competition & regulated markets, insolvency & restructuring, intellectual property, litigation & arbitration, planning & environment, real estate & construction, tax, and TMT.
Stibbe consists of more than 390 lawyers. Stibbe’s Brussels office comprises close to 150 lawyers, of whom 30 are partners. As a full-service firm, our lawyers work in multidisciplinary teams with the aim to deliver pragmatic advice. We build close business relationships with our clients that range from local and multinational corporations to state organisations and public authorities. We realise that understanding their commercial objectives, their position in the market and their sector or industry, allows us to render suitable and effective advice.
Paul Van der Putten primarily handles litigation files in the field of contract law and obligations, banking law, security interest and enforcement. He also specialises in insolvency and restructuring (bankruptcy, composition and liquidation). Moreover, he acts as a liquidator of wound-up companies.
Paul Van der Putten is a regular guest speaker at seminars and conferences.
Paul Van der Putten has published various articles in professional reviews covering his areas of specialisation. He was a co-author of The European Restructuring and Insolvency Guide 2002–2003.
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Kennedys
alex potts Qc
mark chudleigh
Bermuda
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Bermuda is a self-governing British Overseas Territory. The
systems of law administered in Bermuda are local Bermudian
legislation, Bermudian common law (as developed from English
common law), and UK legislation expressly made applicable to
Bermuda.
Bermuda has its own Court system, including a designated
Commercial Court which is part of the Supreme Court of Bermuda,
with rights of appeal to the Court of Appeal for Bermuda, and then
the Privy Council in London.
The formal procedures available for companies in financial difficulties
are principally contained in the Companies Act 1981 (the winding
up provisions of which are substantially modelled on the UK’s
Companies Act 1948). Some provisions of the Bankruptcy Act
1989 are also applied to companies, by virtue of section 235 of the
Companies Act 1981, and there is some scope for debate as to the
applicability of certain provisions of the Bankruptcy Act 1989 to
corporate partnerships. There are also specific provisions relating to
insurance companies in the Insurance Act 1978 and relating to
segregated accounts companies and their general and segregated
accounts in the Segregated Accounts Companies Act 2000. There
are also specific provisions relating to banks in the Banking (Special
Resolution Regime) Act 2016, although only sections 1 and 10 of
that Act are currently in force.
The rules relating to compulsory winding up of companies are
contained in the Companies (Winding up) Rules 1982 and also, to a
lesser extent, in the Rules of the Supreme Court 1985.
As in other jurisdictions that follow English common law, there are
various ways by which a creditor can take security over assets in
Bermuda, by agreement between the creditor and the debtor,
including by way of: legal mortgage; equitable mortgage; fixed
charge; floating charge; pledge; contractual lien; and assignment.
The nature of the security interest, in any particular case, will be
determined by:
(a) the terms of the parties’ agreement, ordinarily set out in the
relevant security documents;
(b) the nature of the property being secured; and
(c) the nature of the debtor’s interest in the property being
secured.
There are various statutory provisions relevant to the taking of
security in Bermuda, including, for example, section 19(d) of the
Supreme Court Act 1905, section 1 of the Bonds and Promissory
Notes Act 1874, and section 2 of the Charge and Security (Special
Provisions) Act 1990.
With this legislative background in mind, Bermuda can be
described, for the most part, as a very creditor-friendly jurisdiction.
Secured creditors can generally enforce their security outside of the
insolvency process, and the insolvency legislation is highly pro-
creditor. It provides, in particular, for the right of an unsecured
creditor with an unpaid debt to apply for an order that the corporate
debtor be compulsorily wound up and its assets applied in
satisfaction of its debts, and there is no statutory corporate rescue
regime beyond the ‘Scheme of Arrangement’, discussed below.
Nevertheless, the Supreme Court has developed an insolvency
practice, through the appointment of ‘soft-touch’ provisional
liquidators, which is designed to support formal and informal
restructuring plans that have credible prospects of success, and the
support of the majority of creditors. In appropriate circumstances,
therefore, the Court does have the power to approach corporate
insolvencies in a ‘debtor-friendly’ manner, with a view to achieving
a corporate restructuring.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
There is no provision in Bermuda’s legislation for informal work-
outs. However, informal work-outs are common in Bermuda, and
the Supreme Court has developed certain practices to support and
assist them as discussed in our answer to question 3.1.
The only formal restructuring process in Bermuda is the Scheme of
Arrangement, discussed in our answer to question 3.2. The Scheme
of Arrangement is a highly versatile statutory procedure enabling
the restructuring of debt (and capital) by majority approval and
Court sanction. It is frequently used to restructure debt where the
consent of all creditors is unlikely to be forthcoming.
The only formal insolvency proceeding is compulsory winding up
by the Supreme Court. As we discuss in what follows, the Court’s
compulsory winding up jurisdiction can serve as a protective device
within which to restructure a company’s debt with a view to its
continued trading. Compulsory liquidations are common in Bermuda.
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2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors’ and officers’ duties are principally owed to the company
itself. To the extent that the company is solvent, such duties are
ordinarily owed to the company for the benefit of its present and
future shareholders.
When the company enters the zone of insolvency, directors must act
in the best interests of the company’s creditors. Directors that allow
a company to continue to trade while it is in financial difficulties
face a range of potential liabilities, depending on the precise
circumstances and the relevant director’s conduct and state of mind
(as discussed below).
Fraudulent trading: Section 246 of the Companies Act 1981
provides that any director that has knowingly caused or allowed a
company to carry on business with intent to defraud creditors of the
company or for any fraudulent purpose may be found personally
liable for all, or any, of the debts or other liability as the Court may
direct. This would include carrying on the business of the company
when it is known to be insolvent.
Personal liability for fraudulent conveyances/fraudulent
preferences: It is possible that directors might be held to be
personally liable, in certain circumstances, for fraudulent
conveyances or fraudulent preferences, as discussed in our
answer to question 2.3 below.
Breach of fiduciary duty and failure to exercise reasonable skill
and care: Directors owe duties to the company both pursuant to
section 97 of the Companies Act 1981, and as a matter of common
law, to act honestly and in good faith with a view to the best interests
of the company (which can include the interests of the company’s
creditors when the company is in the zone of insolvency), and to
exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. Failure to
comply with these obligations may result in personal liability on the
part of directors. Although not confirmed in statute, the power of
the directors of a Bermuda company to petition for the compulsory
winding up of an insolvent company has been recognised in Re First Virginia Reinsurance Ltd. [2003] Bda LR 47.
Misfeasance and breach of trust: Section 247 of the Companies
Act 1981 provides that a director may be personally liable if he has
misapplied, or retained, or become liable, or accountable for any
money or property of the company, or been guilty of any
misfeasance or breach of trust in relation to the company. The scope
and effect of section 247 was recently considered by the Supreme
Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ.
Unlawful return of capital: As a matter of common law and
pursuant to certain sections of the Companies Act 1981 dealing with
dividends, reduction of capital, share repurchases and share
redemptions, a Bermuda company that is not in liquidation cannot
lawfully return capital to its shareholders except by way of an
approved reduction of capital, or by way of authorised dividend,
redemption, or repurchase. Section 54 of the Companies Act 1981
provides that a company shall not declare or pay a dividend, or make
a distribution out of contributed surplus, if there are reasonable
grounds for believing that the company is, or would after the
payment be, unable to pay its liabilities as they become due or the
realisable value of the company’s assets would thereby be less than
its liabilities.
Miscellaneous offences and liabilities: Sections 243 to 248 of the
Companies Act 1981 set out a range of criminal offences that may
be committed by directors of companies, including, for example, by
fraudulently altering documents relating to company property or
affairs, falsifying books or accounts with the intention of defrauding
any person, or fraudulently inducing a person to give credit to the
company. There are also various legislative provisions that impose
personal liability on directors for any failure to pay certain taxes and
remit pension contributions.
Segregated accounts companies representatives: Section 10 of
the Segregated Accounts Companies Act 2000 requires a segregated
account representative to make a written report to the Registrar of
Companies within 30 days of reaching the view that there is a
reasonable likelihood of a segregated account or the general account
of a segregated accounts company for which he acts becoming
insolvent, and section 30 makes it a criminal offence to fail to do so.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Creditors with security over an insolvent company’s core assets
have the greatest influence over the company’s situation.
Unsecured creditors also exercise considerable influence as a result
of the rights which they enjoy, pursuant to Bermuda’s winding up
jurisdiction. The greater the value of an unsecured creditor’s debt
(and the greater the support that it can command from other
unsecured creditors), the greater the influence. Minority unsecured
creditors have relatively limited influence, above and beyond their
statutory and contractual rights.
In addition to the Supreme Court (and any foreign Courts with
jurisdiction over the company), certain regulatory authorities in
Bermuda may also influence the company’s situation, depending on
the circumstances. For example, the Registrar of Companies, the
Bermuda Monetary Authority and the Regulatory Authority of
Bermuda might, in appropriate circumstances, investigate the affairs
of an insolvent company and exercise such regulatory powers as
may be appropriate.
Section 165 of the Companies Act 1981 provides that, at any time
after the presentation of a winding up petition and before a winding
up order has been made, the company or any creditor or contributory
may apply to the Court for a stay of any proceedings pending against
the Company.
Section 167(4) of the Companies Act 1981 provides that, when a
winding up order has been made or a provisional liquidator has been
appointed, no action or proceeding shall be proceeded with or
commenced against the company except by leave of the Court and
subject to such terms as the Court may impose.
The Bermuda Court also has the separate power to order that
Bermuda Court proceedings be stayed in the exercise of its inherent
jurisdiction and as a matter of its case management powers under
the Rules of the Supreme Court; the Bermuda Court also has the
power, in appropriate cases, to issue an anti-suit injunction or an
anti-enforcement injunction with respect to claims being pursued in
foreign Court proceedings.
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2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Payments, transfers of assets, and security transactions can be
vulnerable to attack in the event of the company’s insolvency or
liquidation. Reviewable transactions include fraudulent conveyances,
fraudulent preferences, floating charges, onerous transactions, and
post-petition dispositions.
Fraudulent conveyances: Sections 36A to 36G of the Conveyancing
Act 1983 provide that a creditor of a company may be entitled to
apply to the Court to have a transaction set aside to the extent required
to satisfy its claim, provided that the dominant intention of the
transaction was to put the property beyond the reach of other creditors
and the transaction was entered into for no value or significantly less
than the value of the property transferred. For these purposes, a
creditor is one to whom an obligation is owed at the date of the
transfer, or to whom it is reasonably foreseeable an obligation will be
owed within two years of the date of the transfer, or to whom an
obligation is owed pursuant to a cause of action which accrued before,
or within, two years after the date of the transfer.
Fraudulent preferences: Section 237 of the Companies Act 1981
provides that any conveyance, mortgage, delivery of goods,
payment, execution or other act relating to property made or done by
or against a company within six months before the commencement
of its winding up shall be deemed a fraudulent preference of its
creditors and be invalid accordingly. Section 238 provides for the
liability and rights of fraudulently preferred persons. In order to fall
foul of the provision, the transfer or disposition must have been
made within the six months prior to the commencement of the
winding up. In the case of a compulsory winding up, this would be
the date of the presentation of the petition to the Supreme Court of
Bermuda. The transfer will be invalid if it was carried out with the
dominant intention of preferring one creditor over others at a time
when the company was unable to pay all of its creditors in full.
Floating charges: Section 239 of the Companies Act 1981 provides
that a floating charge on the undertaking or property of a company
created within 12 months of the commencement of the winding up
shall be invalid, unless it is proved that the company immediately
after the creation of the charge was solvent, except to the amount of
any cash paid to the company at the time of, or subsequently to, the
creation of the charge, together with interest at the statutory rate.
Onerous transactions: Section 240 of the Companies Act 1981
provides that the liquidator of a company can, with the Court’s
permission, disclaim any property belonging to the company or any
rights under any contracts which he considers to be onerous for the
company to hold, or is unprofitable or unsaleable.
Post-petition dispositions: Section 166 of the Companies Act 1981
provides that, in a compulsory winding up, any disposition of the
property of a company, including things in action, and any transfer of
shares or alteration in the status of the members of the company,
made after the commencement of the winding up (being the time of
presentation of the petition) shall be void, unless the Court otherwise
orders by way of a validation order. In the case of an insolvent
company, the Court should only make an order validating a post-
petition disposition where it can be shown that the disposition will
benefit (in a prospective case), or that it has benefitted (in a
retrospective case), the general body of unsecured creditors so as to
justify the disapplication of the pari passu principle. The focus of the
test is mainly directed to an objective assessment of the benefit to be
obtained by the general body of unsecured creditors, rather than the
necessity or expedience of the disposition from the company’s or
directors’ perspective. In the case of a solvent company, in contrast,
there are four elements which must be established before a validation
order may be made: first, the proposed disposition must appear to be
within the powers of the company’s directors; second, the evidence
must show that the directors believe the disposition is necessary or
expedient in the interests of the company; third, it must appear that
the directors in reaching that decision have acted in good faith; and
fourth, the reasons for the disposition must be shown to be ones
which an intelligent and honest director could reasonably hold.
Bulk sales in fraud of creditors: Under section 5 of the Bulk Sales
Act 1934, certain sales and purchases of stock in bulk are deemed to
be fraudulent, and absolutely void as against the vendor’s creditors,
unless the proceeds of sale are sufficient to pay the vendor’s
creditors in full, and are in fact so applied.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes, where the consent of all relevant creditors is forthcoming. It is
not possible to ‘cram down’ creditors in the absence of a formal
restructuring process.
Where there is a risk that negotiations towards an informal work-out
may be jeopardised by creditors instituting or continuing
proceedings against the company seeking enforcement of their
debts, the negotiations may be protected by a ‘soft touch’
provisional liquidation, a procedure developed as part of the
insolvency practice of the Supreme Court and now commonly used
to support work-outs. The procedure is described below.
Following presentation of a petition for the winding up of the
company (usually presented by the company itself, if the company
contemplates a restructuring), a provisional liquidator may be
appointed, who may then apply for a statutory stay of all proceedings
against the company while the work-out process continues, whether
informally or through the medium of a Scheme of Arrangement. The
board of directors retains control over the company, and endeavours
to effect a work-out under the supervision of the ‘soft-touch’
provisional liquidator and the Court. If the work-out negotiations are
successful, the winding up petition can be dismissed; if they are
unsuccessful, the winding up petition can be restored for final
hearing and the company can be wound up and placed into full
liquidation. While the work-out plan is negotiated, the hearing of the
winding up hearing petition is adjourned (although the company
enjoys the protection of the statutory moratorium).
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Liquidation procedures can generally be divided into compulsory
liquidations and voluntary liquidations. Voluntary liquidations can,
in turn, be divided into solvent liquidations (members’ voluntary
liquidations) or insolvent liquidations (creditors’ voluntary
liquidations).
As above, the general purpose of liquidation is to gather in, and
realise assets, to pay off creditors in accordance with their rights and
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priorities, and to distribute any remaining assets to the company’s
shareholders. The only formal rescue procedure is the Scheme of
Arrangement (although see further below in this section for an
exception to this rule). A Scheme of Arrangement (‘scheme’) is a
formal procedure which may be used to reorganise the business of
the debtor with a view to its continued trading.
A scheme may result in the adjustment or compromise of all or a
class of the debt of the company. It may include the transfer of
rights, property and liabilities of the company to another company.
Schemes of Arrangement may also reorganise the company’s
capital, and accordingly may be used (and have on several occasions
been used) to implement a debt-for-equity swap.
The Court has jurisdiction to make specific provision for this in the
order sanctioning the scheme.
A scheme is not an intrinsically insolvency-related procedure.
However, it may be employed after the appointment of a liquidator
or provisional liquidator, and there can be advantages in employing
a scheme in this way. Where illiquidity issues confront the
company, for example, its freedom to promulgate or pursue a
Scheme of Arrangement may be susceptible to litigation or
compulsory winding up petitions presented by dissentient creditors.
Where this is a concern, the powers of the Court pertaining to the
winding up of companies and appointment of liquidators may be
employed in the protection of a proposed scheme. This may include
the use of a ‘soft touch’ provisional liquidation, along the lines
described in our answer to question 3.1.
In the case of an insolvent insurance company, there is another
restructuring tool potentially available under section 37(5) and
section 39 of the Insurance Act 1978. These provisions enable the
Court, if it thinks fit, to reduce the amount of the insurance contracts
of the insurer, on such terms and subject to such conditions as the
Court thinks fit. Although the procedure and case law in this area is
not fully developed in Bermuda, it is likely that the Court would
require that a meeting of policyholders be convened, and their views
canvassed, and one relevant consideration for the Court would be
the effect of any reduction order on the company’s ability to make
recoveries against its reinsurers. Depending on the circumstances, a
formal Scheme of Arrangement may be required in any event.
A pre-packaged sale involves the pre-agreement of terms of a sale of
the business of the company to another party or a new company,
which sale is then effected directly after the appointment of an
office-holder. The sale and its terms are frequently negotiated by, or
with the approval of, major secured creditors of the company. The
prevailing regime in Bermuda does not lend itself to the use of pre-
packaged sales. Winding up proceedings anticipate the death of the
company and distribution of its assets. Conversely, the Scheme of
Arrangement process is too dependent upon the views of the general
creditor body. Neither allows the discretion necessary to pre-agree
and dictate a disposal of the business of the company, in the manner
required for a pre-packaged sale. Conceivably, a receiver and
manager appointed by a secured creditor pursuant to a charge over
substantially all the assets of a company may achieve something
akin to a pre-packaged sale. It is also conceivable that a Bermudian
exempt company whose centre of main interests is in the United
Kingdom, or whose assets and liabilities are situated in the United
Kingdom, might seek the assistance of both the Courts of Bermuda
and the Courts of England and Wales for the purposes of having a
pre-packaged sale effected under the supervision of a court-
appointed administrator. The procedure, however, is not as common
in Bermuda as it is in certain other jurisdictions, such as Jersey, and
there is some uncertainty in the case law as to the scope of the power
of Bermudian Courts and English Courts in this respect.
As is noted in our answer to question 3.3, a binding Scheme of
Arrangement requires the approval of a majority within each class
of creditors present and voting (including by proxy) at the meeting
of that class, representing 75 per cent by value of that class, votes in
favour of the scheme. Accordingly, the Scheme of Arrangement
must be on such terms as may be approved by the majority of
creditors in each class, and a Scheme of Arrangement is often the
result of promotion and direction by majority creditors.
Those voting at scheme meetings may in some circumstances
include persons beneficially interested in the company’s debt. In a
recent Scheme of Arrangement of debts of a company evidenced by
a global note held by a trustee, beneficial owners of the note, who
were each entitled to require issuance of an individual note
enforceable directly against the company, were allowed to vote in
the Scheme as contingent creditors of the company.
As may be seen from the above, a minority of dissenting creditors in
each class may be crammed down by a Scheme of Arrangement. In
the event that there is an enforceable debt subordination agreement
in place creating different classes of unsecured creditor (or in the
event that there are deferred creditors, for example, or shareholders
claiming payment of debts arising in their capacity as shareholders),
it may be possible to structure and secure the Court’s approval for a
Scheme of Arrangement in such a way as to cram-down a dissenting
(subordinate or deferred) class of stake-holder.
3.3 What are the criteria for entry into each restructuring procedure?
The Scheme of Arrangement procedure may be initiated by
application of a creditor, a member, the company itself, or (where
one has been appointed) the liquidator.
The applicant requests the Court to convene a meeting of the
creditors, or the relevant class of creditors, of the company. If the
Court so directs (which will almost always be the case, absent
exceptional circumstances), creditors must be summoned by notice.
Notification commonly includes advertisement of the meeting.
Where, because of differences in their respective rights, two or more
creditors are unable to consult together with a view to their common
interest, it will be necessary to separate creditors into classes for the
purposes of voting on the scheme proposal.
If a majority within each class of creditors present and voting
(including by proxy) at the meeting, representing 75 per cent by
value of that class, votes in favour of the scheme, and the Court
approves it, then the scheme will be binding on all creditors. Court
approval is a discretionary matter. The Court must be satisfied that
the statutory requirements have been met, including the holding of
requisite class meetings and approval of necessary majorities, and
that each class was fairly represented at each meeting. In addition,
the Court must be satisfied that the scheme is fair to creditors
generally – in other words, that the majority has not taken unfair
advantage of its position.
The scheme is not effective until a copy of the sanction order is
delivered to the Registrar of Companies. The scheme order must be
annexed to any copies of the company’s memorandum of
association issued subsequently to the order.
3.4 Who manages each process? Is there any court involvement?
If the Scheme of Arrangement is conducted outside a liquidation,
the company’s board of directors and any managers control the
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process, although a Scheme Administrator is normally appointed to
administer the scheme once it is implemented.
If the scheme is conducted within a liquidation, the liquidator
controls the process.
However, there is a hybrid option, under which the scheme is
conducted within a ‘soft touch’ provisional liquidation, used to
implement a restructuring within the protective environment of a
provisional liquidation but without the necessity of winding up the
company. The ‘soft touch’ provisional liquidation procedure has
been described in our answer to question 3.1. The board of directors
normally manages the scheme process under the supervision of the
provisional liquidator.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The commencement of a Scheme of Arrangement has no automatic
effect on contracts, save in the case where the relevant contract
contains contractual terms to that effect. If a Scheme of
Arrangement with creditors is approved, the scheme will govern any
issues relating to the termination of contracts with those creditors.
The protections available to parties that may be compelled to
perform outstanding obligations will depend on whether the
company is seeking to effect a solvent Scheme of Arrangement
(outside of a liquidation process) or an insolvent Scheme of
Arrangement (within a liquidation process). If the company
commences a liquidation process with a view to promoting an
insolvent Scheme of Arrangement, parties that are required to
continue performing outstanding obligations may be in a position to
require security or priority for payment, whether from the
company’s liquidators or the company’s other stakeholders.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The company generally uses its own assets to finance the procedures
of voluntary liquidation, compulsory liquidation, and any Scheme of
Arrangement. However, if the company does not have sufficient
assets or liquidity, it is possible for the company, or its liquidators, to
enter into funding arrangements with those interested in the outcome
of the procedures, typically creditors, if doing so is necessary for the
beneficial winding up of the company. In such a case, funding
liabilities would be expected to be re-paid by the company or by the
liquidator prior to the repayment of unsecured creditors, although
subject to the specific terms of any funding agreement and the Court’s
approval. In this context, it is possible as a matter of Bermuda law to
secure protection (or priority treatment) for rescue financing on an ad hoc basis, and by agreement in appropriate circumstances. In certain
cases, the liquidator appointed by the Court is the Official Receiver,
being a government official with a limited government budget.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
As set out above, the formal procedures available for companies in
financial difficulties are principally contained in the Companies Act
1981 (the winding up provisions of which are substantially modelled on
the UK’s Companies Act 1948). Some provisions of the Bankruptcy
Act 1989 are also applied to companies, by virtue of section 235 of the
Companies Act 1981, and there is some scope for debate as to the
applicability of certain provisions of the Bankruptcy Act 1989 to
corporate partnerships. There are also specific provisions relating to
insurance companies in the Insurance Act 1978 and relating to
segregated accounts companies and their general and segregated
accounts in the Segregated Accounts Companies Act 2000. There are
also specific provisions relating to banks in the Banking (Special
Resolution Regime) Act 2016, although this legislation has not yet been
brought into force. The rules relating to compulsory winding up of
companies are contained in the Companies (Winding up) Rules 1982
and also, to a lesser extent, in the Rules of the Supreme Court 1985.
Insolvent liquidation procedures can generally be divided into
compulsory liquidations and insolvent voluntary liquidations
(creditors’ voluntary liquidations).
The general purpose of the liquidation process is to gather in and
realise assets, to pay off creditors in accordance with their rights and
priorities, and then to distribute any remaining assets to the
company’s shareholders. However, liquidators in a winding up of a
company have the power to promote compromises and
arrangements whether by consensual means or using a Scheme of
Arrangement. Furthermore, where the company is not already in
liquidation, the winding up jurisdiction of the court and statutory
machinery may be invoked in order to protect the implementation of
a restructuring (as discussed above in connection with ‘soft-touch’
provisional liquidation).
Liquidators are generally given a degree of discretion as to the time
period within which to effect and complete the liquidation, which may
depend to some extent on the nature, location, and liquidity of the
company’s assets. After the liquidation process is complete, the
company can then be dissolved and it will cease to exist as a legal entity.
Voluntary liquidation
An insolvent voluntary liquidation is initiated by the company’s
shareholders through a resolution, based on the recommendation of
the board of directors. Although creditors participate in the
creditors’ voluntary liquidation procedure, they can only secure the
active supervision of the Court by petitioning for the compulsory
liquidation of the company.
Compulsory liquidation
The compulsory liquidation process is initiated by one of the
following making a petition to the Supreme Court of Bermuda: a
creditor, including any contingent or prospective creditor; a
contributory (that is, any person liable to contribute to the assets of
the company in the event of its liquidation, i.e. a shareholder or
member); the company itself (by a shareholders’ resolution if it is
solvent and/or by a directors’ resolution if it is insolvent); and, in
certain circumstances, the Registrar of Companies or the Supervisor
of Insurance (being the Bermuda Monetary Authority).
It is also possible, in exceptional circumstances, for receivers of
segregated accounts within a segregated accounts company to
petition for the winding up of the whole company, and also for the
Court to wind up a company of its own motion.
Section 170(2) of the Companies Act 1981 also allows the Court to
appoint a provisional liquidator between the presentation of a
winding up petition and its final hearing.
4.2 On what grounds can a company be placed into each winding up procedure?
A company may be compulsorily wound up by the Court in any of
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the following circumstances, under section 161 of the Companies
Act 1981:
(a) if the company has, by resolution, resolved that the company
be wound up by the Court;
(b) if there is default in holding the company’s statutory meeting;
(c) if the company does not commence its business within a year
of its incorporation or suspends its business for a whole year;
(d) if the company carries on any restricted business activity;
(e) if the company engages in a prohibited business activity;
(f) if the company is unable to pay its debts;
(g) if the company’s ministerial consents were obtained as a
result of a material misstatement in the application for
consent; or
(h) if the Court is of the opinion that it is just and equitable that
the company should be wound up.
The Supervisor of Insurance (being the Bermuda Monetary
Authority) can present a petition for the winding up of an insurance
company if it is in breach of the regulatory provisions of the
Insurance Act 1978, or if it is in the public interest that the insurance
company should be wound up on just and equitable grounds.
Section 34 of the Insurance Act 1978 also provides that the Court
may order the winding up of an insurance company subject to the
modification that the insurance company may be ordered to be
wound up on the petition of 10 or more policyholders owning
policies of an aggregate value of not less than $50,000, provided
that such a petition shall not be presented except by leave of the
Court, and leave shall not be granted until a prima facie case has
been established to the satisfaction of the Court and until security
for costs for such amount as the Court may think reasonable has
been given.
The Registrar of Companies can petition for the winding up of a
company if directed to do so by the Minister of Finance following
receipt of a report of an Inspector to investigate the company under
section 110 or section 132 of the Companies Act 1981.
A provisional liquidator can be appointed prior to the final hearing
of a compulsory winding up petition if there is a good prima facie
case that a winding up order will be made, and if the Court considers
that a provisional liquidator should be appointed in all the
circumstances of the case.
4.3 Who manages each winding up process? Is there any court involvement?
Compulsory liquidation: The liquidator or provisional liquidator
appointed by the Court controls the procedure of liquidation, and
displaces the company’s board of directors upon his appointment.
The exercise by the liquidator of his powers is subject to the
sanction, supervision and control of the Court, and, to a lesser
extent, the Committee of Inspection, if one is appointed. In the
same way as the board of directors is displaced, so too are the
powers of the shareholders displaced.
‘Soft touch’ provisional liquidation: Subject to the circumstances
of the case, the Court can order that a provisional liquidator be
appointed with limited powers (i.e. a ‘soft touch’), and that the
directors continue to retain all of their powers or certain limited
powers, subject only to the supervisory role to be played by the
provisional liquidator (subject, in turn, to the Court’s supervisory
role). This can be an important tool for the purposes of effecting a
restructuring, especially in the context of international insolvencies
which require parallel restructuring procedures both in Bermuda
and in other jurisdictions.
Voluntary liquidation: The liquidator appointed or approved by
the company’s creditors controls the procedure of voluntary
liquidation. The board of directors is displaced upon the
appointment of the liquidator, and their powers are terminated.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Subject to any orders dispensing with the need for approval, a
number of the powers of a liquidator appointed in an insolvent
winding up of a company may only be exercised with the approval
of a ‘Committee of Inspection’ comprising representative creditors
of the company. It is also possible for creditors to apply to the Court
with respect to the exercise or proposed exercise of the liquidator’s
powers, under sections 175 and 176 of the Companies Act 1981.
The making of a winding up order brings about a statutory moratorium
on proceedings against the company. This will not prevent secured
creditors enforcing their security where they can do so without
instituting proceedings before the court. Furthermore, even where
judicial assistance is needed, leave will usually be given to enforce
valid security interests notwithstanding the statutory moratorium. A
judgment creditor will not be permitted to continue with the execution
of its judgment against the company where notice of an order winding
up the company is received by the Provost Marshall prior to sale of
goods of the company taken in execution or prior to completion of
execution by receipt or recovery of the full amount of the levy.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Other than the statutory provisions governing contracts of employment
discussed in our answer to question 6.1, as a matter of law, there is no
automatic termination of contracts with the company upon the
commencement of a compulsory liquidation or a creditors’ voluntary
liquidation (save in the case of the liquidator disclaiming an onerous
contract or transaction, and save in the case where the relevant contract
contains contractual terms to that effect). However, a contracting
counterparty can only claim in the liquidation for debts which exist at
the date of commencement of the liquidation, and interest also ceases
to run from that date. In the circumstances, there is, as a matter of fact,
a termination or cancellation of contracts in the event of liquidation,
unless the liquidator elects to affirm the relevant contract. Contracting
counterparties can also seek to assert claims against the company for
damages sustained as a result of any breach of contract caused by the
commencement of the liquidation, subject to proof in the liquidation.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In a compulsory liquidation or a creditors’ voluntary liquidation,
creditors’ claims are ranked in the following order:
(1) secured creditors enforce their security outside the
liquidation, but essentially in priority to all other creditors;
(2) the costs and expenses of the liquidation, including all costs,
charges and expenses properly incurred in the company’s
winding up, including the liquidator’s remuneration if
sanctioned by the Court (pursuant to sections 194, 232, and
236(6) of the Companies Act 1981 and Rule 140 of the
Companies (Winding up) Rules 1982);
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(3) debts due to employees located in Bermuda under section 33(3)
of the Employment Act 2000;
(4) preferential debts owed to preferential creditors pursuant to
section 236(1) of the Companies Act 1981, including unpaid
taxes under the Taxes Management Act 1976, unpaid social
insurance/Government pension contributions under the
Contributory Pensions Act 1970, liability for compensation
under the Workmen’s Compensation Act 1965, and payments
of up to $2,500 due to employees of Bermudian companies but
resident outside of Bermuda;
(5) debts secured by a floating charge (although higher priority
debts must be paid out of any property secured by a floating
charge if the assets of the company are not otherwise sufficient
to meet them pursuant to section 236(5) of the Companies Act
1981);
(6) unsecured creditors’ debts, including the unsecured balance of
secured creditors’ claims (pursuant to sections 158(g), 225 and
235 of the Companies Act 1981);
(7) post-liquidation interest on unsecured creditors’ debt claims;
(8) debts due to shareholders in their capacity as such (pursuant to
section 158(g) of the Companies Act 1981); and
(9) shareholders’ equity in the event of a surplus balance, according
to their rights and interests under the company’s bye-laws.
Each category of debts must be paid in full before payment of
creditors in the subsequent category. Creditors in the same category
rank equally (or pari passu) among themselves.
However, in the case of the winding up of segregated accounts
companies, section 25 of the Segregated Accounts Companies Act
2000 provides that the liquidator shall deal with the assets and
liabilities which are linked to each segregated account only in
accordance with the segregation principles of the legislation and the
relevant governing instruments or contracts for each transaction.
Section 36 of the Insurance Act 1978 also provides that, in the case
of an insurer carrying on long-term business, the assets in the
insurer’s long-term business fund will only be available for meeting
the liabilities of the insurer attributable to its long-term business, and
its other assets shall only be available for meeting its other liabilities.
There is some scope for argument as to the order of priority for
payment of claims asserted by former shareholders in mutual fund
companies, whose shares have been redeemed but who are owed
payment of the redemption proceeds at the commencement of
liquidation. The general view is that these are debts due to
shareholders that rank behind outside trade creditors’ debts, but
ahead of shareholders’ equity, but the legislative provisions,
including section 158(g) of the Companies Act 1981, are not
entirely clear in this respect, notwithstanding a recent judgment of
the Supreme Court of Bermuda that has touched upon the issue.
There is also scope for argument as to the order of priority of
outstanding occupational pension payment liabilities under the
National Pension Scheme (Occupational Pensions) Act 1998 and
Regulation 56 of the National Pension Scheme (General) Regulations
1999, since the legislative provisions are not entirely clear.
4.7 Is it possible for the company to be revived in the future?
In the course of the liquidation, the liquidator will adjudicate the
claims of unsecured creditors and collect the assets of the company.
Assets will be distributed (to the extent available) according to the
statutory priorities in the form of dividends.
At the end of this process, the liquidator is generally released, and
the company is dissolved.
Under section 260 of the Companies Act 1981, the Court has the
power to declare a dissolution of a company void in certain
circumstances, up to a period of either two years (most liquidation
cases) or 10 years (members’ voluntary liquidation) after the date of
dissolution, and under section 261 of the Companies Act 1981 the
Court has power to restore a company that has been struck off the
Register for up to 20 years after strike-off.
Following Court approval of a Scheme of Arrangement (see below), the
scheme is implemented under the auspices of the company’s directors
and the Scheme Administrator (or the liquidator, if one has been
appointed). The company may continue in all respects (subject to the
scheme) as before. Alternatively, where the scheme was promoted in
the context of winding up proceedings, the liquidation of the company
may proceed on the basis of the balance of its assets and liabilities.
A Scheme of Arrangement of the debts of a company extinguishes
the debts and has no effect on the existence, powers or capacity of
the company. Accordingly, the company may go on to trade
unburdened by the debts that have been discharged as a result of the
Scheme of Arrangement.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
No particular tax liabilities are incurred in each procedure, as a
matter of local Bermuda law. Stamp duty is payable in the ordinary
way, save that section 253 of the Companies Act 1981 provides
various exemptions from stamp duty where a company is in
compulsory liquidation or creditors’ voluntary liquidation.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Section 33(1) and 33(2) of the Employment Act 2000 provide that
the winding up or insolvency of an employer’s business shall cause
the contract of employment of an employee to terminate one month
from the date of winding up or the appointment of a receiver, unless,
notwithstanding the winding up or insolvency, the business continues
to operate.
Upon termination of an employment contract under the Employment
Act 2000, employees working in Bermuda may be entitled to
recover accrued entitlements (such as salary and payment in lieu of
paid vacation entitlements), as well as severance pay.
As set out in our answer to question 4.6 above, the following claims
rank within the list of preferential claims that are to be settled before
payment of certain other unsecured debts: (a) debts due to employees
located in Bermuda under section 33(3) of the Employment Act 2000;
and (b) preferential debts owed to preferential creditors pursuant to
section 236(1) of the Companies Act 1981, including unpaid taxes
under the Taxes Management Act 1976, unpaid social
insurance/Government pension contributions under the Contributory
Pensions Act 1970, liability for compensation under the Workmen’s
Compensation Act 1965, and payments of up to $2,500 due to
employees of Bermudian companies but resident outside of Bermuda.
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7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Following the decision of the Privy Council in PricewaterhouseCoopers v Saad Investments Company Limited [2014] UKPC 35 (discussed in
more detail in our answer to question 7.2), it is clear that the Supreme
Court of Bermuda currently has no jurisdiction to wind up ‘overseas
companies’ that have not been granted a permit by the Minister of
Finance to carry on business in Bermuda. A previously used ‘loophole’
under the External Companies (Jurisdiction in Actions) Act 1885 was
closed by the Privy Council’s decision.
The Supreme Court currently lacks jurisdiction to order the
convening of meetings of creditors in relation to a proposed
compromise or arrangement of the debt of an overseas company,
unless that company has been registered by the Minister of Finance
as a Non-Resident Insurance Undertaking under the Non-Resident
Insurance Undertakings Act 1967.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Bermuda has no statutory equivalent of Chapter 15 of the US’s
Bankruptcy Code, section 426 of the UK’s Insolvency Act 1986, or the
UK’s Cross-Border Insolvency Regulations 2006, by which the UK
implemented the United Nations Commission on International Trade
Law’s Model Law on Cross-Border Insolvency. The Supreme Court of
Bermuda has nonetheless confirmed, following the Privy Council
decision in Cambridge Gas Transportation Corp v Navigator Holdings plc [2007] 1 AC 508 that, as a matter of common law, the Supreme
Court of Bermuda may (and usually does) recognise liquidators
appointed by the Court of the company’s domicile and the effects of a
winding up order made by that Court, and has a discretion pursuant to
such recognition to assist the primary liquidation Court by doing
whatever it could have done in the case of a domestic insolvency.
However, the precise scope of Bermudian Courts’ common law power
to assist foreign liquidations, and, in particular, to ‘provide assistance
by doing whatever it could have done in the case of a domestic
insolvency’ has been the subject of considerable debate in a number of
recent judgments, including in two recent judgments by the Privy
Council, on appeals from the Court of Appeal for Bermuda, in
Singularis Holdings Limited v PricewaterhouseCoopers [2014]
UKPC 36 and PricewaterhouseCoopers v Saad Investments Company Limited (referred to in our answer to question 7.1).
In summary, subject to the facts of any particular case, the Bermuda
Court is likely to recognise the winding up orders of foreign Courts,
and to assist foreign liquidators to the fullest extent possible, in
circumstances where:
(1) there is a ‘sufficient connection’ between the foreign Court’s
jurisdiction and the foreign company making it the most
appropriate, or the ‘most convenient’ jurisdiction to have
made an order for the winding up of the company and
appointment of foreign liquidators;
(2) there are documents, assets, or liabilities of the foreign
company within the jurisdiction of Bermuda; the foreign
company has conducted business or operations within, or
from, the jurisdiction of Bermuda, whether directly or by
agents or by branches; the foreign company has former
directors, officers, managers, agents or service providers
within the jurisdiction of Bermuda; and/or the foreign
company properly needs to be involved in litigation or
arbitration within the jurisdiction of Bermuda; and
(3) there is no public policy reason under Bermudian law to the
contrary (if, for example, there would be unfairness or
prejudice to local Bermudian creditors).
However, the Privy Council has stressed that the question of how far
it is appropriate to develop the common law so as to assist foreign
liquidations depends on the facts of each case, and the nature of the
power that the Bermuda court is being asked to exercise. In the
context of an application for an order for production of documents
by an entity within the jurisdiction of the Bermuda court, the Privy
Council has noted that such a power is available only where
necessary to assist the officers of a foreign court of insolvency
jurisdiction or equivalent public officers, but is not available to
assist a voluntary winding up, which is essentially a private
arrangement. It is not a power to assist foreign liquidators to do
something which they could not do under the law by which they
were appointed, and its exercise must be consistent with the
substantive law and public policy of the assisting court in Bermuda.
There is some uncertainty as to whether a foreign Scheme of
Arrangement or related procedure (such as an insurance business
transfer scheme under legislation implementing European single
market insurance directives) can be recognised and enforced in
Bermuda as a matter of common law. Although the Supreme Court
of Bermuda has shown some willingness to recognise foreign Court
orders approving foreign schemes (in the absence of opposition), it
is unclear what position it might take in a contentious situation.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Exempted companies incorporated in Bermuda carry on business
predominantly or exclusively in foreign jurisdictions, and
frequently have their shares and other securities listed on foreign
public exchanges. They are accordingly subject to the insolvency
regimes of the jurisdictions in which they do business, where these
extend to companies incorporated overseas. Proceedings in other
jurisdictions, for example: the United States; the United Kingdom;
the British Virgin Islands; the Cayman Islands; Hong Kong; and
Singapore, affecting insolvent Bermuda exempted companies are
common. Where necessary, these are commonly supported by
ancillary liquidation proceedings in Bermuda or by judicial
recognition and assistance (of the type discussed in our answer to
question 7.2) from the Supreme Court with the foreign proceedings,
in the absence of winding up proceedings in Bermuda.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There are no statutory provisions for the treatment of insolvent group
companies. The Supreme Court has, however, occasionally appointed
the same office-holders as liquidators to multiple companies in the
same group of companies, subject to suitable arrangements being
made with respect to any conflicts that might arise (including by way
of appointment of a ‘conflicts’ liquidator). In appropriate cases, the
Supreme Court has also supported and approved co-operation
agreements that have been entered into between separate office-
holders of companies within a group of companies.
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9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
One of the more significant recent legislative developments in
Bermuda is the Banking (Special Resolution Regime) Act 2016,
which has been enacted but not yet brought into force, save with
respect to sections 1 and 10 (as at the time of writing). This is a very
substantial piece of legislation which provides a new statutory
toolset for dealing with the failure or insolvency of a bank in
Bermuda.
The Companies and Limited Liability Company Amendment Act
2017 also introduced certain legislative changes regarding retention
of the books and papers of a company and its liquidators.
The Bermuda Monetary Authority has been actively engaged in a
consultation exercise regarding potential reform of the order in
which insurance policyholder creditors rank for payment in an
insolvent liquidation of an insurer. It is anticipated that this
consultation exercise will lead to certain legislative changes to the
1978 Insurance Act later in 2019.
The Chief Justice has recently published various consultation papers,
proposing certain procedural reforms to the Companies (Winding Up)
Rules 1982 and certain Rules of the Supreme Court of Bermuda 1985
which are of relevance to corporate litigation. Some of these rule
changes were implemented in July 2018, and it is anticipated that
certain other rule changes will be implemented later in 2019.
The Government of Bermuda is actively engaged in a consultation
exercise with respect to potential relaxation of the 60/40 Bermudian
ownership and control requirements for local Bermuda companies.
The Restructuring and Insolvency Specialists Association
(Bermuda) is also actively considering a variety of industry
proposals for potential law reform in the area of personal
bankruptcy, insolvency and corporate rescue, and this is also an area
of interest to the Government of Bermuda, the Official Receiver, the
Registrar of Companies, as well as the Chief Justice.
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Alex Potts QC Kennedys 20 Brunswick Street Hamilton HM10 Bermuda Tel: +1 441 296 9276
Email: [email protected]
URL: www.kennedyslaw.com/bermuda
Mark Chudleigh Kennedys 20 Brunswick Street Hamilton HM10 Bermuda Tel: +1 441 296 9276
Email: [email protected]
URL: www.kennedyslaw.com/bermuda
Alex Potts QC has a wide-ranging commercial litigation and arbitration practice, with a focus on disputes in the fields of contentious insolvency, banking, financial services, investment funds, insurance, reinsurance, professional negligence, aircraft finance, company law, and trusts.
Mr. Potts has conducted cases and appeared as counsel before a variety of courts and tribunals, in England and Wales, Bermuda and the Cayman Islands, representing creditors, directors, managers, liquidators, and debtors.
Mr. Potts has appeared in a number of reported insolvency cases in Bermuda, and he regularly advises, speaks and writes on issues of insolvency law in Bermuda. He is a committee member of The Restructuring and Insolvency Specialists Association (Bermuda) and a member of INSOL.
Alex Potts’ full professional profile is available at: http:// www.kennedyslaw.com/apotts/.
Kennedys provides expert counsel in relation to commercial and corporate matters in Bermuda.
The firm handles insolvency and restructuring matters, commercial litigation and arbitration, corporate and trust disputes, contract drafting, and general corporate advisory/regulatory work across all business sectors and with a particular focus on insurance.
The firm excels at prosecuting and defending complex matters involving significant exposure, sensitive public relations issues and industry-wide policies. Kennedys offers its clients not only local Bermuda expertise but also multinational legal expertise through its association with the international law firm Kennedys Law LLP.
In its insolvency and restructuring practice, Kennedys advises and represents clients in Bermuda and in other jurisdictions with connections to Bermuda. Recent matters handled by the team include: representing the liquidators of two British Virgin Islands-funded companies in compulsory winding up proceedings in Bermuda; advising on Schemes of Arrangement; representing the compulsory liquidators and segregated accounts receivers of two Bermuda mutual fund companies structured as segregated accounts companies; representing management, creditors and shareholders of various Bermuda companies, funds and private equity structures in a number of contested compulsory winding up petitions; representing the interests of unsecured creditors in various receiverships; and representing a Bermuda mutual fund company structured as a segregated accounts company in responding to various claims and applications for its various segregated accounts to be put into receivership.
The Kennedys insolvency and restructuring team in Bermuda includes Alex Potts QC, Mark Chudleigh, Nick Miles, Lewis Preston, and Nicolas Champ.
* * *
Kennedys and Kennedys Bermuda are the trading names in Bermuda of Kennedys Chudleigh Ltd., an independent Bermuda law firm. Kennedys Chudleigh Ltd. is a limited liability company incorporated in Bermuda under the Companies Act 1981, which is regulated under the provisions of the Bermuda Bar Act 1974, and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009.
Mark Chudleigh is the managing partner of Kennedys. Having practised in London for 20 years, he maintains an international practice for clients in Bermuda, London, the United States, Asia and elsewhere. His practice focuses on dispute resolution and commercial litigation involving the insurance and financial services sectors. Mr. Chudleigh’s practice includes commercial/corporate litigation, insurance and reinsurance claims and disputes, insolvency and restructuring and trust matters.
Mr. Chudleigh acts as an expert witness on Bermuda law and accepts appointments as an arbitrator. In addition to being admitted in England & Wales and Bermuda, he is admitted as an attorney in the State of California and he is frequently involved in matters with a US component.
Mr. Chudleigh is recognised as a leading lawyer in Bermuda by several directories, including Chambers Global and The Legal 500. He is a member of the Restructuring and Insolvency Specialists Association (Bermuda) and a member of INSOL.
Mark Chudleigh’s full professional profile is available at: https:// www.kennedyslaw.com/our-people/profiles/bermuda/mark-chudleigh.
Kennedys Bermuda
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leanne m. williams
alexander soutter
canada
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Canada is a relatively creditor-friendly jurisdiction. Canada’s
restructuring legislation is drafted to provide creditors with
sufficient remedies and latitude while balancing those remedies
with protections in favour of the debtor to ensure fairness.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Many restructurings never become public and are not formalised. In
order to avoid the costs of a formal restructuring process, parties
often attempt an informal restructuring prior to commencing a
public insolvency filing.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Under Canadian law, the directors of a company have a fiduciary
duty to the company and not to its creditors, shareholders or other
stakeholders. This is so even when the company is facing
insolvency. However, directors may consider the interests of
various stakeholders, including shareholders, creditors, employees
and suppliers, in fulfilling their fiduciary duty. The fiduciary duty is
a duty of loyalty – it requires directors to act honestly and in good
faith with a view to the best interests of the company. This means
that a director must prefer the interests of the company over, for
example, the interests of a shareholder who nominated the director
to the board or the director’s own interests in a business opportunity
that properly belongs to the company.
Directors also have a duty of care that requires them to exercise the
care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. In other words, directors
must take steps to ensure that they are making informed decisions,
including by considering all relevant information, identifying
reasonable alternatives and seeking input from appropriate advisors.
Directors face many potential liabilities as regards a financially
troubled company. A variety of stakeholders have standing to seek
an oppression remedy against a director where the director’s
conduct was oppressive, unfairly prejudicial or unfairly disregarded
the interests of a shareholder, creditor, director or officer of the
company. In such circumstances, the court can make any order it
deems fit, including holding the director personally liable for any
damages. In addition, various statutes impose personal liability on
directors for the company’s failure to meet its obligations.
Examples include a company’s failure to pay wages or vacation pay
to its employees and to remit source deductions for employee
income taxes and Employment Insurance and Canada Pension Plan
contributions.
While there is no statutory requirement to enter a restructuring or
insolvency process at a particular time, a company must be
“insolvent” in order to qualify for insolvency protection. For
proceedings under the Companies’ Creditors Arrangement Act (CCAA) (Canada’s primary restructuring statute for large
companies, which is discussed in greater detail below), courts have
interpreted the term “insolvent” broadly, finding that a company is
insolvent if it is reasonably expected to run out of liquidity within a
reasonable proximity of time as compared with the time reasonably
required to implement a restructuring.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
A variety of stakeholders may influence the company’s situation in the
pre-filing context. Various statutory regimes may govern certain aspects
of the relationship between the company and certain stakeholders.
Additionally, stakeholders may have certain rights against the company
under common law. For example, secured creditors may have the ability
to compel the company to file for insolvency protection or may have a
contractual right to appoint a receiver to take over the company’s
business and/or realise on its assets.
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The government is also a key player in the pre-filing context, as it is
able to impose financial sanctions on the company for a variety of
reasons, including environmental, pension and other wrongdoings.
Landlords may exercise various remedies as against a tenant-
company upon non-payment of rent including, in addition to their
express contractual rights, the right to distrain on the tenant’s goods
or to terminate the lease. A company’s employees may also affect a
company’s decision about whether to file for insolvency protection
and there are very limited circumstances under which a collective
agreement can be altered in both a bankruptcy and restructuring
situation.
In the post-filing context, there are restrictions on the actions certain
stakeholders can take against the company. If a company files for
protection under the CCAA, typically all creditors (secured and
unsecured) are stayed from exercising their rights against the
company. By contrast, if the company files an assignment in
bankruptcy under the Bankruptcy and Insolvency Act (BIA), only
unsecured creditors are restricted from pursuing their rights against
the company. Where a debtor company makes a proposal, or gives
notice that it intends to make a proposal, under the BIA, all creditors
are stayed except for secured creditors who have issued the
appropriate enforcement notice and such notice periods as are
prescribed have expired.
The stay of proceedings does not apply to obligations incurred after
a proceeding is commenced under the BIA or CCAA.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
There are generally two types of transactions entered into by a
financially troubled company that are at risk of challenge. The first
occurs where the company makes a transfer to (e.g., a gift,
conveyance, assignment, payment of dividends, premiums, etc.) or
for a creditor at the expense of other creditors. The second occurs
where the company makes a transfer and the consideration received
by the company (if any) is far less than the value of the
consideration given by the company.
It is possible to challenge such transactions under various provincial
and federal statutes. Where the company has filed for insolvency
protection under either the BIA or the CCAA, typically the party
challenging the transaction is the court officer overseeing the
insolvency proceedings, although it is possible for a creditor to do so
where the court officer refuses or neglects to act. A creditor can also
challenge the transaction under various provincial statutes,
regardless of whether the company has filed for insolvency
protection.
The requirements to prove that such a transaction has occurred vary
depending on the statute pursuant to which the transaction is
challenged. For example, in certain instances, it is necessary to
prove that the company intended to defraud, defeat or delay a
creditor, while in other cases it is not necessary to prove intent.
Where a creditor successfully challenges a transaction under a
provincial statute, the transaction is void against any person injured
by the transaction. Where the company has filed for insolvency
protection under either the BIA or the CCAA and the transaction is
successfully challenged by the court officer overseeing the
proceedings, typically the transaction is void as against the court
officer. In certain cases, it is also possible for the court officer to
order that a party or any other person who is privy to the transaction
make a payment to the company’s estate to make it whole.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Often an informal restructuring of a company’s balance sheet or sale
of assets is approved through an abridged court process. In
appropriate circumstances, the court will approve a consensual
restructuring that is in the best interests of the debtor company and
its creditors without a full-blown insolvency proceeding.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Formal restructuring proceedings are provided for under the BIA
and the CCAA to either liquidate or restructure a company’s
indebtedness. A formal restructuring may also be implemented by a
corporation’s governing statute. This chapter will focus on the
mechanisms by which a debtor may restructure its liabilities; as a
result, certain other liquidation and sale mechanisms will not be
fully explored.
A restructuring under the BIA typically takes the form of a
restructuring proposal to the company’s creditors. If a proposal
process is commenced, a licensed trustee in bankruptcy (trustee) is
appointed as proposal trustee who will work with the debtor
company to prepare a proposal to put to its creditors. The proposal
trustee is required to monitor the business of the debtor but
management of the corporation remains under the debtor’s control.
A debtor company is not restricted in what its proposal may include.
Typically, a proposal under the BIA will offer to pay a percentage of
the debt owing to compromised creditors or establish a pool of
money which is to be divided up among creditors and/or provide an
extension of the time required to pay the amounts afforded under the
proposal. The restructuring proposal must be put to a vote by the
creditors being compromised at a meeting established for that
purpose. During the creditors’ meeting, at least 51 per cent of
creditors holding at least 66⅔ per cent of the voting claims must
approve the proposal for it to be passed and approved. Even if
approved by the required majorities, the proposal must also be
approved by the court. In the event that the proposal is not approved
by the required majorities or the court, the proposal will fail and the
company will automatically be deemed bankrupt.
Debtor companies with liabilities of at least $5 million may
commence restructuring proceedings under the CCAA. The CCAA
is designed to be a flexible and discretionary statute by which larger
companies are able to restructure their indebtedness. A CCAA plan
of arrangement must be approved by at least 51 per cent of creditors
holding at least 66⅔ per cent of the voting claims and the court.
Unlike a vote under a BIA proposal, there is no deemed bankruptcy
if a CCAA plan is not approved by the creditors or the court.
However, in the event that the creditors of a debtor under the CCAA
fail to approve the debtor company’s plan of arrangement, it is likely
that the creditors will move to pursue a liquidation of the debtor’s
assets for the benefit of its creditors.
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A debtor company may also successfully restructure its obligations
under the provisions of its governing statute, whether such company
is provincially or federally incorporated. Certain restructurings do
not require the extensive relief afforded by the BIA or CCAA and, as
such, its governing statute may provide the flexibility to restructure
certain discrete aspects of a corporation’s capital structure. In
Canada, such restructurings are not common but have become more
prevalent in recent years.
The creditors must ultimately vote in favour of any restructuring
proposal or plan of arrangement. If the vote successfully achieves
the requisite majorities in number and amount, those creditors not in
favour will be subjected to the will of the majority and have the
proposal or plan of arrangement.
3.3 What are the criteria for entry into each restructuring procedure?
A bankruptcy proposal may be filed by an “insolvent person”. An
insolvent person is defined by the BIA as one whose liabilities
amount to $1,000 and (i) who is unable to meet his obligations as
they generally become due, (ii) who has ceased paying his current
obligations in the ordinary course of business as they generally
become due, or (iii) the aggregate of whose property is not, at a fair
valuation, sufficient to pay its obligations. A bankruptcy proposal is
commenced by either filing (i) a notice of intention to make a
proposal (NOI) together with a statement of creditors having claims
in excess of $250, or (ii) the filing of the actual proposal together
with a statement of the financial affairs of the debtor, with a
government office known as the official receiver. The NOI must
also appoint a trustee to act as proposal trustee.
In order to qualify to restructure under the CCAA, a debtor company
or affiliated debtor companies must have total obligations in excess
of $5 million. A CCAA restructuring is commenced by way of
application to the court in the province within which the head office
or chief place of business resides. In the event that the company has
no place of business in Canada, a company may file in any province
where the company’s assets are situated.
A restructuring under a corporation’s governing statute is dependent
on the particular framework of that statute. This type of
restructuring is typically reserved for a solvent corporation that is
attempting to make a fundamental change; however, the courts have
used a flexible approach to this interpretation.
3.4 Who manages each process? Is there any court involvement?
The proposal trustee manages the process of a BIA proposal. The
debtor company remains in possession and control and any proposal
approved by the debtor’s creditors must be approved by the court.
A CCAA restructuring is also a debtor-in-possession process. A
monitor is appointed by the court (Monitor) to oversee the process
on its behalf. The CCAA is a purely court-driven process. Any plan
of arrangement approved by the creditors of the debtor must be
approved by the court.
A restructuring under a corporation’s governing statute is managed
by the corporation. The court typically plays a central role in the
arrangement process. The court establishes the process by which
the arrangement will be presented to the company’s stakeholders
which must then be approved by the court prior to implementation.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Once the BIA proposal process has commenced, a debtor may
disclaim or resiliate any agreement to which the debtor is a party by
giving notice in a prescribed manner to the other parties to the
agreement and to the proposal trustee. A stay of proceedings is
granted which prohibits parties from terminating or failing to
honour their obligations under the proposal process unless such
agreement is disclaimed. Creditors are not permitted to set off for
goods and services delivered by them after the date of filing.
During a CCAA process, the court order will grant a stay of
proceedings prohibiting a party from exercising any rights or
remedies against the debtor, including the termination of contracts.
Parties are expressly prohibited from terminating a contract for
reason of the commencement of the proceedings. The purpose of
the CCAA is to preserve the status quo in order to allow the debtor
to restructure its affairs. The CCAA explicitly states that the law of
set-off applies in CCAA proceedings.
Creditors are not, however, prohibited from requiring immediate
payment, or pre-payment, for goods, services, use of leased or
licensed property or other consideration provided. If such payment
terms are not met, the creditor can refuse further supply/service and
can require immediate payment through court order.
The terms and structure of a restructuring under a corporation’s
governing statute is completely discretionary. Typically, the stay of
proceedings is very limited.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
In the event that sufficient funding is not available to sustain the
business through the process, Debtor-in-Possession (DIP) financing
may be obtained in either a BIA proposal process or a CCAA process.
Under both the BIA and the CCAA, the court may grant a super-
priority charge in favour of the DIP lender which ranks ahead of all
other creditors of the debtor. The ranking of charges is discussed in
more detail in question 4.7.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Depending on the nature of the company, it may be wound up
through bankruptcy or receivership proceedings under the BIA or
the Winding up and Restructuring Act (WURA). The WURA
governs the liquidation and restructuring of certain types of
financial institutions including incorporated banks or savings banks,
authorised foreign banks, trust companies, insurance companies,
loan companies having borrowing powers and building societies
having a capital stock. The WURA also applies, but is rarely used to
liquidate federally regulated corporations, including not-for-profit
corporations. The WURA has been used sparingly in recent years
and will not be discussed in detail in this chapter.
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While the CCAA is primarily a restructuring statute, it is possible to
liquidate or wind up a debtor company under the CCAA if attempts
to restructure the debtor company under the CCAA fail.
4.2 On what grounds can a company be placed into each winding up procedure?
Bankruptcy proceedings in Canada can be commenced on a
voluntary or involuntary basis. A voluntary bankruptcy proceeding
may be commenced by a company that meets the statutory
definition of “insolvent person” under the BIA. An insolvent person
is defined as a person who is not bankrupt and who resides, carries
on business or has property in Canada, whose liabilities to creditors
provable as claims under this Act amount to $1,000, and:
(a) who is for any reason unable to meet his obligations as they
generally become due;
(b) who has ceased paying his current obligations in the ordinary
course of business as they generally become due; or
(c) the aggregate of whose property is not, at a fair valuation,
sufficient, or, if disposed of at a fairly conducted sale under
legal process, would not be sufficient to enable payment of all
his obligations, due and accruing due.
By contrast, an involuntary application may be initiated by one or
more unsecured creditors where: (i) their debt owing to the applicant
creditor(s) is at least $1,000; and (ii) the debtor company has
committed a prescribed act of bankruptcy within six months
preceding the filing of the application. A secured creditor may also
commence an involuntary bankruptcy application provided that it
can establish that the debtor company has unsecured debts of at least
$1,000 owing and that an act of bankruptcy has occurred with six
months preceding the filing of the application.
With respect to receiverships, a creditor’s contractual right to
appoint a receiver is often triggered by a default under the terms of
the security document governing the credit relationship. A receiver
may be privately appointed by a creditor if the right to do so is
contained in the security documentation governing the credit
relationship.
Alternatively, a creditor may seek a court-appointed receiver where
such appointment is “just or convenient”. In determining whether
an appointment would be “just and convenient”, a court may look to
the following factors:
■ whether the company’s default justifies the appointment of a
receiver;
■ whether a right to appoint a private receiver exists;
■ whether it is in the interests of all parties to have a receiver
appointed by the court;
■ whether appointment by the court is necessary to enable the
receiver to carry out its work and duties;
■ whether the assets of the company are in jeopardy;
■ whether the appointment would cause prejudice to innocent
third parties; and
■ whether the appointment would maximise recoveries for all
creditors.
If a company qualifies for liquidation under the WURA, it may be
liquidated if it is: insolvent; in liquidation or in the process of being
wound up and asked to be brought under the WURA by petition of
any stakeholders, assignees or liquidators; or a financial institution
and it is (or its assets are) under the control of the Superintendent of
Financial Institutions and is subject to an application for a winding
up order.
4.3 Who manages each winding up process? Is there any court involvement?
Bankruptcy proceedings under the BIA are managed by a trustee. At
the time of the trustee’s appointment, all property of the debtor
company passes to the trustee, including property located outside
Canada and property of the company in the possession of third parties.
After taking possession of the debtor company’s property, the trustee
will sell the company’s property and distribute the proceeds to
creditors, subject to the rights and actions of secured creditors.
The trustee will compile certain statutory documents in accordance
with the BIA, notify creditors of the debtor company’s bankruptcy,
investigate the affairs of the debtor company and arrange for the first
meeting of creditors to provide creditors with information on the
bankruptcy. Following the distribution to creditors, the trustee is
discharged and the company is usually discharged from its debts.
As part of the bankruptcy process, the trustee will provide the court
with periodic reports and must seek court approval when taking
certain steps, such as selling the debtor company’s property and
finalising its discharge.
With respect to receiverships, the winding up process is managed by a
receiver. A receiver may take control of the debtor company’s business
(at which point the receiver becomes a receiver-manager) and dispose
of the company’s property. As noted above, a receiver may be privately
appointed or appointed pursuant to court order. Privately appointed
receivers will generally only act on behalf of the secured creditor that
appointed them and will realise on the property specifically covered by
the relevant security or loan agreement under which they were
appointed. Privately appointed receivers are not overseen by the court.
Court-appointed receivers are officers of the court and act on behalf of
all creditors of the debtor company. The powers and rights of court-
appointed receivers are included in the court order that appointed them.
Similar to trustees, court-appointed receivers will provide the court with
periodic reports and must seek court approval when taking certain steps.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Under liquidation proceedings under the BIA, a secured creditor
may proceed to enforce its security without obtaining the consent of
the trustee or leave of the court. The stay of proceedings that comes
into effect on the bankruptcy of a company does not apply to a
secured creditor in realising or otherwise dealing with its security
unless the court orders otherwise, which occurs infrequently.
Under CCAA proceedings, all creditors, including secured
creditors, are stayed from taking enforcement action against the
debtor company.
Shareholders typically have very little or no influence over the wind
up of a debtor company under each of Canada’s insolvency and
restructuring regimes.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The rules applicable to contracts in insolvency differ depending on
whether the company is being wound-up under the BIA or CCAA.
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In certain cases, existing contracts may be disclaimed by the debtor
company (i.e., rejected) or they may be assigned to purchasers
notwithstanding that the agreement contains a restriction on
assignment. However, post-filing contracts, eligible financial
contracts and collective agreements are not assignable.
Counterparties to a contract with the debtor company may also be
stayed from exercising what are commonly known as ipso facto
clauses, which purport to terminate, amend or accelerate payment in
the event that the counterparty to the contract becomes insolvent.
Termination or acceleration rights triggered by insolvency or
bankruptcy are stayed in CCAA proceedings but may not be stayed
in bankruptcy proceedings under the BIA where the company is
being wound-up.
The disclaimer of contracts by a company is statutorily authorised
under the CCAA with the consent of the Monitor, subject to the right
of any party to the contract to move before the court for an order that
the company should not be permitted to disclaim the contract. If the
Monitor does not consent to the contract rejection, the company
may move before the court on notice to all parties to the contract for
an order permitting the rejection of the contract. It is important to
note that certain types of categories of contracts may not be
disclaimed: an eligible financial contract; a collective agreement; a
financing agreement if the company is the borrower; and a lease of
real property if the company is the lessor.
While a trustee does not have the statutory right to disclaim a
contract made by the company, the common law has held that the
trustee has a right to do so. With respect to intellectual property,
while a licensor may reject a licence, the licensee continues to be
entitled to use the intellectual property during the term of the licence
agreement provided the licensee continues to perform its obligations
under the licence agreement. As noted above, the CCAA explicitly
states that the law of set-off applies in CCAA proceedings. While
the law of set-off in the bankruptcy context is different from that
under the CCAA, it continues to apply in BIA proceedings.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The BIA contains a statutory scheme that governs the ranking of
claims. The rights of secured creditors will rank ahead of
substantially all claims against the debtor company, except for
certain “super-priority” claims. These super-priority claims
include: (i) claims for unpaid payroll tax deductions (known as
source deductions); (ii) claims made by suppliers for the return of
goods supplied to the debtor company in the 30-day period prior to
bankruptcy; and (iii) claims for up to $2,000 for unpaid salary,
wages, commissions and benefits. Once super-priority claims and
secured claims are satisfied, preferred claims are paid. Preferred
claims include fees of the trustee and its legal counsel and claims for
up to three months of arrears of rent and three months of future rent
by landlords. Once preferred claims are paid, the claims of general
unsecured creditors are paid pari passu. If the debtor company has
funds remaining after all unsecured creditors are paid, equity
holders and other subordinated claims may receive a distribution.
The CCAA does not contain a statutory scheme for distribution.
However, the BIA scheme of liquidation and distribution supplies
the backdrop for distribution if a CCAA reorganisation is ultimately
unsuccessful and a company is liquidated under the CCAA. Under
the CCAA, the court typically grants super-priority charges which
rank ahead of secured creditors for certain claims. These super-
priority charges often include: (i) fees for professionals such as the
Monitor and its counsel, fees for counsel to the company and fees
for other restructuring professionals such as a chief restructuring
officer (administrative charge); (ii) DIP financing (DIP financing
charge); and (iii) amounts to pay post-filing suppliers to the
company that are deemed critical suppliers (critical supplier
charge).
4.7 Is it possible for the company to be revived in the future?
A dissolved company that is insolvent or bankrupt may be revived.
A revival, however, does not change the company’s status under the
BIA. When the company is revived, the rights, liabilities and
obligations arising before and after the dissolution are restored to
the revived company. The company is put in the same position as
though it was never dissolved. The company benefits from, is
bound to and is liable for, all acts taken while the corporation was
dissolved. Also, any changes to the internal affairs of the company
are deemed valid. Any legal actions dealing with the internal affairs
of a revived corporation taken between the time of its dissolution
and its revival are valid.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Certain steps in a restructuring or insolvency procedure may give
rise to certain tax risks. The primary tax consideration in a
restructuring or insolvency proceeding is the potential application of
the debt forgiveness rules contained in the Income Tax Act. In
general terms, the debt forgiveness rules apply where debt of a
company is forgiven or settled for payment of an amount that is less
than the principal amount owing. The forgiveness causes a
reduction in various tax accounts or tax attributes or, ultimately, an
income inclusion. In addition, the sale of a company’s assets may
give rise to tax liabilities if the debtor company does not have
sufficient tax losses to offset the gains made on the sale of the assets.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
None of the three procedures discussed in this chapter have an
automatic effect on the status of the employment of the debtor’s
employees. However, in the event that a BIA proposal is
unsuccessful and a debtor is deemed bankrupt, the act of
bankruptcy automatically terminates the employees of the debtor.
The BIA and CCAA both prohibit the termination of collective
bargaining agreements during a restructuring.
Notwithstanding that the employment relationship remains
unaltered, in each process, certain amounts owing to employees
may be compromised.
A proposal or CCAA plan of arrangement will not be approved if it
does not provide for at least the minimum amount that would be
provided to employees in a bankruptcy. Claims payable to
employees include claims for unpaid wages or other compensation
for the period commencing six months before the date the NOI was
filed in a BIA proposal, or the date of the proposal if no NOI was
filed, or the date that CCAA proceedings were commenced, to the
date that the proposal was accepted.
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In a bankruptcy, the employee can claim for unpaid wages or other
compensation for the period commencing six months before the
date of the initial bankruptcy event to the date of the bankruptcy
rank behind secured creditors and super-priority claimants, but
ahead of unsecured claims and most other preferred claims.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Companies incorporated in a foreign jurisdiction can restructure or
enter into insolvency proceedings in Canada. In order to restructure
or enter into insolvency proceedings under the CCAA, a debtor
company must be incorporated in Canada or have assets or conduct
business in Canada. Companies not incorporated in Canada, but
seeking to restructure in Canada, will often have to establish that
their centre of main interest (COMI) is situated within Canada.
Three factors generally determine where a debtor company’s COMI
is situated: (i) the location of the company’s headquarters or head
office; (ii) the location of the company’s management; and (iii) the
location which a significant number of creditors’ recognise as the
company’s COMI. Other secondary factors, which a Canadian
court may review in determining COMI, include:
■ the location where corporate decisions are made;
■ the location of human resource functions;
■ the existence of shared management within entities and in an
organisation;
■ the location where cash management and accounting
functions are administered;
■ the location of the debtor company’s marketing and
communication functions;
■ whether the debtor company is managed on a consolidated
basis;
■ the extent of integration of the debtor company’s
international operations;
■ the centre of the debtor company’s corporate, banking,
strategic and management functions;
■ the location where pricing decisions and new business
development initiatives are made; and
■ the location of the debtor company’s treasury management
functions, including management of accounts receivable and
accounts payable.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Foreign restructuring or insolvency proceedings may be recognised
by courts under the BIA (in the case of a bankruptcy) or the CCAA
(in the case of a restructuring). To commence the process, a foreign
representative must apply to the court for recognition of a foreign
insolvency proceeding. If the applicant is successful in convincing
the court that he or she is a “foreign representative” and that the
application relates to a “foreign proceeding” as those terms are
defined under the CCAA and the BIA, the court must make an order
recognising the foreign proceeding.
If the court is satisfied that the applicant is a foreign representative
and that the application relates to a foreign proceeding, the court
must determine whether the foreign proceeding is a “foreign main
proceeding” or a “foreign non-main proceeding”. If the proceeding
is characterised as a foreign main proceeding, the court will issue an
order staying all proceedings against the debtor, restraining further
proceedings in any action. By contrast, if the proceeding is
classified as a non-main proceeding, a stay is not automatic. Rather,
the court has the discretion to make any order necessary for the
protection of the debtor’s property or the interests of creditors.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Companies incorporated in Canada can enter into insolvency
proceedings in other jurisdictions. However, this is rare given that
Canada’s insolvency regimes are advanced and Canadian insolvency
practitioners and courts are recognised around the world.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There are a number of different approaches for seeking insolvency
protection for a corporate group in Canada. A company or group of
companies may file in a foreign jurisdiction and seek recognition of that
foreign proceeding in Canada. Alternatively, a company or group of
companies may file in the jurisdiction that is the group’s COMI, with
each debtor company filing in only one jurisdiction and then
coordinating each separate filing either through recognition proceedings
or some other mechanism. Finally, each member in a corporate group
may make separate full filings in Canada and the foreign jurisdiction(s).
Coordinated filings are often implemented in circumstances in
which there is a corporate group consisting of entities that are
related but not centrally managed or highly integrated.
Concurrent main filings involve full insolvency proceedings under
the CCAA or BIA as well as a full filing in the foreign jurisdiction(s)
by the same entity. This approach is administratively complex and
has rarely been used since the UNCITRAL Model Law on Cross-
Border Insolvency was adopted by Canada in 2009.
Courts and office holders (professionals administering the debtor
company’s insolvency) involved in multi-jurisdictional insolvency
proceedings typically enter into communication or cooperation
protocols to ensure that cross-border insolvency proceedings are
managed in a harmonious and efficient manner.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
There are not currently any fundamental proposals of reform that
have been tabled in respect of the restructuring regime in Canada.
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Leanne M. Williams Thornton Grout Finnigan LLP Suite 3200, 100 Wellington Street West Toronto Dominion Centre Toronto, ON, M5K 1K7 Canada Tel: +1 416 304 1616
Email: [email protected]
URL: www.tgf.ca
Alexander Soutter Thornton Grout Finnigan LLP Suite 3200, 100 Wellington Street West Toronto Dominion Centre Toronto, ON, M5K 1K7 Canada Tel: +1 416 304 0595
Email: [email protected]
URL: www.tgf.ca
Thornton Grout Finnigan LLP (TGF) is a Canadian boutique law firm with an office located in the financial district of Toronto, Ontario, practising exclusively in two areas: (i) insolvency and restructuring; and (ii) commercial litigation. As one of the first Canadian firms to recognise the value provided by a high-end boutique model, TGF was founded in a spirit of innovation with a view to providing a more focused and efficient vehicle for delivering legal services to sophisticated clients. TGF is a mix of senior restructuring and litigation lawyers with a full range of experience gained by years of practice, both inside and outside major full-service law firms, combined with talented and energetic younger lawyers who thrive in the entrepreneurial environment of a boutique firm.
Leanne M. Williams is a Partner at Thornton Grout Finnigan LLP practising exclusively in the area of restructuring and insolvency, including reorganisations, workouts, refinancings and secured transactions. Leanne has extensive experience in Canadian and cross-border restructurings on behalf of both debtors and creditors across a broad spectrum of industries. She also regularly acts for accounting firms during the insolvency process. Leanne represents all types of stakeholders in the restructuring process with the goal of achieving a successful workout both within and outside of formal court proceedings.
Alexander Soutter is an Associate at Thornton Grout Finnigan LLP and practices in the firm’s restructuring and insolvency group as well as its commercial litigation group. Alexander has significant experience representing creditors, both before and after a debtor’s insolvency.
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1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The UK is typically considered to be a creditor-friendly jurisdiction
and, in particular, friendly towards secured creditors. Enforcement
of security in the UK is regularly carried out without the need for
any court involvement other than the filing of certain prescribed
forms. Notarisation or similar requirements that can sometimes
delay enforcements in other jurisdictions are also not required.
Consequently, English law is often chosen as the governing law of
contracts and disputes are litigated in the English courts by both
local and overseas parties. A number of high-profile cross-border
restructurings have also been conducted using English law-
governed documents and the English courts have been flexible in
facilitating the use of English law to govern proceedings concerning
overseas companies. In the context of restructurings, this is perhaps
best demonstrated by the sanctioning of a number of schemes of
arrangement proposed by foreign companies in the English courts,
even where those companies have a limited connection to the UK
(such as English law-governed finance documents which are being
amended via the scheme).
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Informal work-outs without any court involvement or the use of
formal insolvency proceedings are common in the English market.
Such work-outs can take a variety of forms and range from (for
example) amendments to credit agreements to relax covenant
testing levels or extend maturity dates to debt-for-equity swaps.
There are also a number of formal insolvency processes available
under English law. The most commonly used insolvency process is
administration, pursuant to which a licensed professional is appointed
to manage a company’s affairs in place of its directors. The
administrator has extensive powers to trade the company and may
also dispose of the company’s assets, either after a period of trading or
immediately upon his appointment (known as a “pre-pack” sale).
The alternative to administration is liquidation, which is primarily used
in respect of companies which have insufficient remaining assets to be
traded or sold and whose affairs are therefore being wound down.
English law also provides for two types of court-approved
restructuring processes: company voluntary arrangements
(“CVAs”); and schemes of arrangement (“Schemes”). Whilst there
are a number of differences between the two processes, each
essentially allow a company to (provided that a specific amount of
its creditors vote in favour) compromise creditor claims and take
other steps to restructure its affairs, which binds all creditors
(regardless of whether they voted in favour or not).
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
English law does not prescribe a set point in time at which a
company’s directors must file for insolvency. It is the duty of the
directors to decide the appropriate time to file (although secured
creditors may, in practice, take the decision to enforce and put the
company into an insolvency process prior to the directors taking
action).
The main impetus for directors in this respect is that directors of
companies who knew, or should have known, that the company of
which they are a director had no reasonable prospect of avoiding
entering an insolvency process, but caused creditors to incur losses
after that point, can be personally liable to compensate creditors for
those losses. This is known as “wrongful trading”. Consequently,
directors are often eager to file for insolvency without too much
delay, although a premature filing which causes losses to creditors
also presents a risk to directors.
Further, from the point at which a company becomes insolvent
under English law (either on a “balance sheet basis” – the
company’s liabilities exceed the value of its assets – or on a “cash
flow basis” – the company owes a liability or liabilities that it is
unable to pay when due), the directors of the company must have
their primary regard to the interests of the company’s creditors.
Prior to that point, it is the company’s shareholders to whom the
directors should have their primary regard. Breaching this duty and
causing the company’s creditors to incur losses by doing so risks the
director being personally liable for the offence of “misfeasance” if
the company subsequently enters liquidation.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The “pari-passu” principle provides that a company’s ordinary,
unsecured creditors should be treated the same and without
preference between them within an English insolvency process.
However, certain types of unsecured creditors are granted certain
additional rights and given a different status notwithstanding the
application of that principle:
■ employees rank ahead of other unsecured creditors to the
extent of their “preferential claims” against the company –
these are claims for certain liabilities such as wages and
unpaid holiday pay owed to the employee up to certain
prescribed limits. Claims in excess of those limits rank
alongside all other unsecured claims against the company;
■ landlords of commercial property are granted certain rights to
seize a company’s assets, sell them and apply the proceeds
towards unpaid rent due by the company) and to forfeit (i.e.
terminate) a lease if it is breached. These rights do not
automatically terminate upon a company entering insolvency;
however, the moratorium against creditor action which
applies in administrations prevents a landlord from taking
any such action without the benefit of a court order or the
consent of the administrator; and
■ suppliers of goods to a company may include retention of title
clauses in the terms of their supply which provide that the
supplier retains title to the relevant goods until those goods
are, either by themselves or along with all other goods
supplied by that supplier, sold by the company. Such clauses
survive the company entering an insolvency process and
therefore mean that the administrator or liquidator either has
to set aside the proceeds of a sale of the relevant goods and
pay them to the supplier (rather than distribute them to all
creditors equally), or allow the relevant supplier to collect the
goods from the company’s premises if they are not necessary
to the conduct of the proceedings.
A moratorium on creditor action comes into effect upon a company
entering administration with a two-week interim, and a moratorium
is also available when a preceding notice of intention to enter
administration is filed at court. A moratorium prior to a CVA is
currently only available to companies with turnover, assets and
employees below certain (relatively low) thresholds, and is rarely
used. The courts have been willing to use their general case
management powers to stay creditor action where preparations for a
Scheme are at an advanced stage (although there is no statutory
moratorium available).
The government has proposed a new general restructuring
moratorium, but we await new legislation to bring this into effect.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Certain types of transactions entered into by a company prior to its
entry into administration or liquidation can be challenged by the
administrator or liquidator. If that challenge is successful, the
transaction can be unwound or, if that is not possible (for example,
because the counterparty to the transaction was dealing with the
company in good faith and it would therefore be unfairly
detrimental to that counterparty if the transaction was clawed back),
the directors can be ordered to make a compensatory payment to the
company’s creditors for the losses caused.
The main types of challenge are:
■ transactions at an undervalue where the company gifts or
disposes of assets for significantly less than their market
value. The transaction must have occurred within two years
of the commencement of the administration or liquidation
and the company must have been insolvent at the time of the
transaction or become insolvent as a result;
■ preferences where a company does something or causes
something to be done which has the effect of putting a
creditor in a better position upon the company entering
administration or liquidation than it would have otherwise
been. In order to be challenged the preference must have
occurred within two years (if to a person connected with the
company) or six months (if to an unconnected person) prior
to the commencement of the liquidation or administration.
The company must also have been motivated by the “desire”
to prefer the recipient of a preference for the challenge to be
successful; and
■ invalidation of floating charges (which are a type of security
which “floats” over a company’s non-fixed, movable assets,
such as stock) that are entered into by a company within two
years (for floating charges granted to connected persons) or
one year (for floating charges granted to unconnected
persons) prior to it entering administration or liquidation.
The invalidity is only to the extent that they secure “old”
consideration. This would apply if, for example, no new
money was advanced by the recipient of the floating charge
when it was granted by the company.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. There are a number of tools available to companies and
creditors which wish to restructure the Company’s obligations under
English law financing contracts. The Loan Market Association’s
(“LMA”) recommended forms of loan facility documentation
contain extensive amendment and waiver provisions which govern,
amongst other things, the percentage by face value of a company’s
lenders (usually a “majority” of lenders holding in aggregate more
than two thirds of the participations under the relevant loan, or for
certain exceptional changes, all of those lenders) required to vote in
favour of steps such as waivers of debt, conversions of debt into
equity, re-setting of financial covenants and disposals of assets.
Schemes are often used to push through restructurings where
finance documents require the approval of 100% of the company’s
lenders to amendments and waivers required in connection with the
restructuring. If the company cannot secure the consent of all of its
lenders, but has the approval of the requisite number of creditors to
approve a Scheme (see below), the company can use a Scheme to
effect the relevant amendments and waivers which, if approved,
binds all of the company’s creditors.
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3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Schemes and CVAs are commonly used for companies looking to
restructure their liabilities. Each process causes creditors who vote
against it (or, in the case of a Scheme, creditors who have no
economic interest in the Scheme and are not being affected by it) to
be crammed-down provided that a requisite number of creditors
vote in favour. In the case of a CVA, at the meeting convened to
vote on the CVA, 75% by value of the companies’ unsecured
creditors present or voting by proxy (provided that no more than
50% by value of any creditors who vote against the proposal are
creditors who are unconnected with the company) must vote in
favour of the CVA. If approved, the CVA binds all of the
companies’ unsecured creditors, although it cannot affect the rights
of a secured creditor without its consent.
A Scheme requires that creditors (both secured and unsecured) are
divided into classes, based on commonality of their rights against
the company, to vote on the Scheme. Each class must then vote on
the Scheme at a meeting held for that purpose and provided that
75% by value and a majority in number of each class of creditors
present (in person or by proxy) at such meetings vote in favour, and
provided the Scheme is sanctioned by the Court, the Scheme binds
all creditors of the company. If a company can demonstrate that a
particular class of creditors is not affected by the Scheme (usually
“out of the money” creditors who have no economic interest in the
company), such class will not be required to vote on the Scheme.
Creditors are able to challenge Schemes and CVAs on the basis of
being treated unfairly in comparison to other creditors, or that the
outcome of the CVA or Scheme realises a poorer result than an
alternative process. Furthermore, other than in the case of relatively
small companies proposing a CVA, there is no moratorium or stay
on creditors threatening enforcement prior to the Scheme or CVA
being approved, which can potentially disrupt the process (although
the courts are becoming increasingly willing to stay enforcement
action by creditors which would disrupt a Scheme which has
reached an advanced stage and would produce a more favourable
outcome for creditors than if that enforcement action was allowed to
proceed).
Pre-packaged sales are also frequently used as a means to
restructure a company’s liabilities by transferring the company’s
assets to a newly incorporated subsidiary free of any liabilities
which the company is unable to pay in full, or to effect a sale of a
company to a third party. A pre-pack involves the documentation
and terms of the sale being negotiated and agreed in advance and
then completed by the administrator immediately upon, or shortly
after, their appointment. This is often preferable to the sale being
executed by the company’s directors because it is the administrator,
rather than those directors, who bears the responsibility of ensuring
that the assets are sold for the best possible value. Furthermore, a
pre-pack sale is often executed quickly and can be publicised to
creditors and third parties as a way of rationalising a company’s
liabilities so it can trade on successfully, which reduces the “stigma
of insolvency” for the company.
Currently, it is not possible to cram-down a dissenting class with a
Scheme or a CVA (such that a Scheme will fail if a class votes against
it). However, the government has proposed a new restructuring plan
procedure which would be similar to a Scheme, but would allow
dissenting classes of creditors to be crammed-down in certain
circumstances.
3.3 What are the criteria for entry into each restructuring procedure?
A company must be insolvent (on either a balance-sheet or cash-
flow basis) in order to be placed into administration by its directors.
In order for a secured creditor to appoint an administrator to a
company the creditor’s security must be enforceable in accordance
with its terms.
Schemes and CVAs can be initiated by the directors of a company at
any time but, as mentioned above, require a certain threshold of
creditors to vote in their favour together with, in the case of a CVA,
the consent of any affected secured creditors.
3.4 Who manages each process? Is there any court involvement?
Administration and liquidation
A qualified insolvency practitioner must be appointed as an
administrator or liquidator of a company and, for all intents and
purposes, manage the company in place of its directors (including to
effect a pre-pack).
Schemes and CVAs
In a CVA, a qualified insolvency practitioner will act as
“supervisor” of the CVA and carry out the steps and actions
provided for in the CVA proposal (which sets out the terms of the
CVA). The directors remain in control of the company, although
they will co-operate with the CVA supervisor in order for it to be
properly implemented. There is no requirement for a qualified
insolvency practitioner to supervise a Scheme, it is simply carried
out by the company’s directors in accordance with the terms of the
Scheme.
A CVA proposal must be filed at court and creditors who feel they
have been unfairly prejudiced by a CVA or there has been a material
irregularity in the CVA process may challenge a CVA via a court
application within 28 days of its approval. There is more court
involvement in a Scheme as the court must, at a first hearing,
approve the company’s classification of its creditors to vote on the
Scheme in meetings convened for that purpose. Then, if the
requisite number of creditors vote in favour of the Scheme at those
meetings and assuming that the court is satisfied that the Scheme is
fair to the company’s creditors, they will “sanction” and approve the
Scheme at a second hearing.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A company entering into an insolvency process does not
automatically cause contracts to which the company is party to
terminate, although those contracts may contain terms which allow
the counterparty to terminate the contracts upon the process
commencing. Certain essential utilities and IT suppliers may not
terminate their contracts as a result of their customer entering
administration or a CVA. The relevant suppliers are protected by
virtue of payment for post administration supplies having the higher
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priority of an expense of the administration and, in addition, the
suppliers may apply to court to terminate the contract if continuing
to supply the company is causing them hardship.
An administrator or liquidator may simply refuse to perform the
company’s obligations under contracts if doing so is in the best
interests of the company’s creditors. Creditors are prevented from
court action to enforce breaches of contract without the
administrator/liquidator’s approval or an order of the court and even
if action is successfully taken, the counterparty has an unsecured
claim against the company which ranks alongside all other
unsecured creditors (so effectively is not worth pursuing).
A liquidator has additional powers to “disclaim” unprofitable
contracts (including leases) to which the company is party (which
has the effect of determining the counterparty’s rights under the
contract upon the disclaimer becoming effective and entitles the
counterparty to an unsecured claim against the company).
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
If an administrator or liquidator trades a business, the costs and
expenses of the process (including their fees) will usually be
discharged from the receipts of the trading. An administrator or
liquidator may also seek additional funding which is then repaid as
an “expense of the administration or liquidation” (ranking above
ordinary unsecured claims). However, outside of that possibility,
within a formal insolvency process there is no statutory mechanism
for rescue/debtor in possession financing under English law.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Companies looking to wind down their affairs, and creditors who
wish for a company to be wound up, can initiate a liquidation,
whereby a liquidator realises the company’s assets, distributes the
proceeds to creditors and then winds the company down.
There are two types of liquidation: voluntary liquidation; and
compulsory liquidation. Voluntary liquidations can either be made on
a “solvent” basis (known as a members’ voluntary liquidation)
(“MVL”) where the company’s directors are willing to swear a
statement to the effect that the company has sufficient assets to meet
its liabilities over the next 12 months, or on an “insolvent” basis
(known as a creditors’ voluntary liquidation) (“CVL”) where the
directors are unwilling or unable to give that statement. Both types of
voluntary liquidation are initiated by a company’s shareholders;
however, in a MVL the shareholders nominate the liquidator, whereas
in a CVL the creditors have the final say in the choice of liquidator.
Compulsory liquidation is made by filing a petition at court,
followed by a court hearing. A hearing of the petition is then held at
court and if it can be demonstrated to the court that one or more
prescribed circumstances applies to the company (usually that the
company is insolvent) the company is placed into liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
Voluntary liquidations require a resolution of the company’s
shareholders (the exact proportion of those shareholders which are
required to pass the resolution will be determined by the company’s
constitutional documents – usually 75%) to initiate the process and,
in a MVL, that the directors swear the declaration of solvency
referred to above.
Compulsory liquidation requires that one or more prescribed
circumstances apply to the company. Usually, this is so that it can
be proved to the court that the company is “unable to pay its debts”
(i.e. is insolvent on either a balance sheet or cash-flow basis) which
is often demonstrated by serving demand on the company to pay
amounts owed to the petitioning creditor which, if not paid, can then
be used as evidence that the company is cash-flow insolvent.
4.3 Who manages each winding up process? Is there any court involvement?
There is court involvement in respect of a compulsory liquidation,
which requires a court hearing to order that the company enters
liquidation. Voluntary liquidations do not usually require any
involvement of the court. Once the company has entered liquidation,
the liquidation process is managed by the liquidator (with the
sanction of shareholders or creditors – see below).
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Liquidation, unlike administration, does not impose a moratorium
on the rights of secured creditors to enforce their security, so a
liquidator will either obtain the consent of the relevant secured
creditor before dealing with any secured assets or allow that creditor
to take its own action in respect of those assets. Liquidation does,
however, impose a stay on court proceedings, which can only be
lifted with the consent of the liquidator or approval of the court.
Liquidators (also unlike administrators) can only take certain
actions if sanctioned to do so. In a MVL, this sanction comes from
shareholders. In a CVL, sanction must be obtained from creditors.
It is also common, at least in larger liquidations, for a committee of
three to five creditors to be formed as a representative body and to,
amongst other things, scrutinise the steps taken by the liquidator and
approve certain actions taken by them.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Termination is covered above. Set-off provisions in contracts are,
however, superseded by mandatory set-off rules which apply in
liquidations and which provide that amounts owed by a creditor to
the company are set-off against amounts that the company owes to
the creditor (with only the net balance, if any, being claimable by
that creditor).
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Creditors holding “fixed” charges over a company’s assets
(essentially a charge over assets which the company is not able to
freely deal with, such as property) rank first, followed by the
expenses and costs of the liquidation/administration. Creditors with
“preferential” claims (usually only employees for unpaid wages,
holiday and pension contributions up to certain prescribed limits)
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rank next, followed by creditors with “floating” charges over the
company’s assets (assets which the company can freely deal with,
such as stock). A fund of up to £600,000 is also set aside for
unsecured creditors from realisations of floating charge assets
known as the “prescribed part”. If there are sufficient funds
available after the prior-ranking amounts have been paid in full, a
distribution can then be made to unsecured creditors. In the
somewhat unlikely scenario that unsecured creditors are paid in full,
they are then entitled to claim interest for the period of
administration/liquidation on their claims and, in the even more
unlikely scenario that all such claims to interest are paid in full, any
surplus is distributed to the shareholders.
4.7 Is it possible for the company to be revived in the future?
Yes, in theory, a company that is wound down and dissolved (which
is the outcome at the culmination of a liquidation) can be restored
for up to six years after it is dissolved by court order, although this
is extremely rare.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
CVAs and Schemes
A company is taxed in the usual way whilst going through a CVA or
Scheme. However, releases of debt usually incur a tax charge by the
company although this can be avoided if made pursuant to a CVA or
Scheme (which is an added benefit of the CVA or Scheme).
Administration and liquidation
Unpaid tax at the commencement of the administration or liquidation
is simply an unsecured debt of the company. Corporation tax on
gains which arise from the disposal of assets during the period of the
administration or liquidation is paid as an expense of the
administration or liquidation.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
CVAs and Schemes
CVAs and Schemes have no direct impact on a company’s employees.
Administration
Contracts of employment do not automatically terminate upon the
appointment of an administrator. There is a 14-day period which
commences upon a company entering into administration during
which the administrator can dismiss any employees who are not
required for the conduct of the administration. Wages, holiday and
sickness pay and pensions contributions due to employees retained
after this period are paid as expenses of the administration. If the
administrator sells the company as a going concern (either after a
period of trading or as a pre-pack) employees, as well as liabilities
owed to those employees, automatically transfer to the buyer.
Determining the number of such employees and the sums owed to
them is therefore a key area of diligence in sales by administrators.
Liquidation
A company entering compulsory liquidation automatically causes
its employees’ contracts of employment to terminate. The liquidator
then has to re-employ any employees needed for the conduct of the
liquidation. Voluntary liquidation does not automatically terminate
employment contracts, although the liquidator can simply refuse to
perform employment contracts (with the result that the affected
employee(s) can then claim as a creditor of the company for
amounts owed to them).
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Yes. At the time of writing, the EC Regulation on Insolvency
Proceedings (the “EC Reg”) provides that companies incorporated
in the EU but which have their “centre of main interests” (“COMI”)
(being their primary place of business activity) in England or Wales
can commence administrations, liquidations and CVAs (each of
which are governed by the EC Reg) in England or Wales as “main
proceedings”. EU companies which do not have their COMI in
England or Wales but which have a non-transitory “establishment”
here may open “secondary” proceedings which are restricted to
assets situated in England or Wales.
In the event of a “no deal Brexit” the EC Reg will no longer apply to
the UK and without any replacement legislation each Member States’
private laws will dictate whether UK proceedings are recognised by
its courts. It is expected that a company having its COMI in England
and Wales will continue to be the main consideration in the English
courts’ decision to accept jurisdiction over the company’s
insolvency. However, without the EC Reg the English courts will not
be prevented from accepting jurisdiction over the insolvency of a
company which has its COMI in a remaining EU Member State.
There is no requirement for a company to have its COMI or an
establishment in England or Wales in order to propose a Scheme.
Instead, overseas companies have been able to use Schemes where
those companies have demonstrated a “sufficient connection” to
England and Wales. The existence of such a connection has been
interpreted widely by the courts over recent years so that companies
have been able to (amongst other things) amend the governing law
of finance documents to English law in order to establish such a
connection.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Yes. At the time of writing, no deal has been agreed between the UK
and the EU so it is envisaged that from 29 March 2019 the UK will no
longer automatically recognise remaining EU Member States’
insolvency proceedings under the EC Reg (and vice versa). Despite
this, recognition of proceedings in jurisdictions outside the EU (and
possibly within the EU from 29 March 2019) is provided for in the
UNCITRAL Model Law on Cross-Border Insolvency, which has been
enacted into English law. English law does not require reciprocal
adoption of the UNCITRAL Model Law by the foreign jurisdiction in
order for the relevant proceedings to be recognised in the UK.
However, the English courts will not allow an English law debt to be
compromised by a foreign restructuring or insolvency process where
the creditors have not submitted to that foreign jurisdiction.
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7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Not commonly – because the English system is generally perceived to
be creditor-friendly, companies incorporated in England and Wales
(and their creditors) will usually want to use English insolvency and
restructuring proceedings. The only real exception to this is, whilst
also uncommon, companies establishing a link to the USA (which can
simply just involve opening a bank account or having a retainer with
a law firm) in order to use Chapter 11 bankruptcy and benefit from the
extensive automatic stay on proceedings it affords, will generally be
recognised by the English courts.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Each company within a group is, for the purposes of English law,
treated as distinct so there is no concept of group-wide proceedings.
Each company in a group will, therefore, need to go into an
insolvency process on an individual basis although it is common for
the same administrator or liquidator to be appointed to multiple
companies within a group.
This is in contrast to the position in respect of cross-border
insolvencies involving companies within the EU (including, as of
the time of writing, the UK). A “group coordinator” can be
appointed in such proceedings, to coordinate proceedings in a
number of jurisdictions and generally preside over them (albeit that
the proceedings themselves will still be conducted by the office-
holders appointed to the various insolvent companies).
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The UK government has proposed a raft of measures to boost
corporate rescues. These include:
■ a general moratorium on creditor enforcement which would
initially be for 28 days but could be extended;
■ a ban on clauses that allow suppliers to terminate supply
contracts due to a company’s insolvency; and
■ a new restructuring plan that would be similar to a Scheme
but allow for the cram-down of a dissenting class of creditors
where at least one class which will suffer an impairment on
its debt (subject to no impaired class being paid in priority to
any senior ranking classes via the plan) approves the plan and
a court considers it “fair” (particularly by comparison to the
likely alternative of administration or liquidation).
The government also plans to introduce potential liability for
directors of a holding company that disposes of an insolvent
subsidiary which shortly afterwards goes into administration or
liquidation. Directors would be liable if creditors were adversely
affected during the period between the disposal and the
administration or liquidation where the directors could not have
reasonably believed that the disposal would lead to a better outcome
for creditors than an immediate administration or liquidation. We
still await detailed draft legislation for these proposed reforms.
There will also be changes to recognition of cross-border
insolvencies within the EU as a result of Brexit (see questions 7.1
and 7.2).
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Paul Keddie Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2894
Email: [email protected]
URL: www.macfarlanes.com
Timothy White Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2796
Email: [email protected]
URL: www.macfarlanes.com
From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high-net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters.
Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals.
Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation.
We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.
Paul advises on a broad range of corporate restructuring and recovery issues.
His clients include companies in financial difficulties, their directors and shareholders, insolvency practitioners appointed over such companies, lenders to and other major creditors of troubled entities, investors interested in a “loan-to-own” strategy and buyers of businesses where there is an insolvency aspect.
Paul is a qualified insolvency practitioner, having passed the Joint Insolvency Examination Board examinations and is the co-author of the Insolvency and Restructuring Manual, 3rd Edition, which was published by Bloomsbury in 2018.
Tim advises on a range of financial transactions, with a focus on restructurings, insolvency and debt financings. His experience includes consensual debt restructurings, administrations, liquidations and other formal insolvency processes.
His clients include banks, alternative finance providers, corporate borrowers, creditors, insolvency practitioners and the shareholders and directors of distressed companies.
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law office waly & Koskinen ltd.
tuomas Koskinen
sami waly
Finland
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Finland is more of a creditor-friendly than debtor-friendly
jurisdiction. Both the legal framework and the praxis support the
enforcement of debt obligations through bankruptcy and execution.
The position of a secured creditor is strong in the event of
proceedings. Overall, the bankruptcy process is creditor-driven.
Simultaneously, the statutory restructuring procedure available to
debtors is a debtor-friendly process. Entering into restructuring
gives the debtor an extensive protection from the enforcement of
pre-existing debts. In court practice, debtors are often allowed to
enter into restructuring. However, a successful restructuring
process requires co-operation between the debtor and the various
stakeholders.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The Finnish legal system has one formal restructuring and one formal
insolvency process, restructuring (governed by the Restructuring of
Enterprises Act 47/1993) and bankruptcy (governed by the Bankruptcy
Act 120/2004), respectively. According to annual statistics published
by Statistics Finland, 2,534 bankruptcy proceedings and 408
restructuring proceedings were initiated during 2018. As such, both
proceedings are used in practice.
The Finnish legal framework has no statutory bars on informal
work-outs, but it also does not have any support for them. In
practice, a successful informal work-out requires either a limited
pool of creditors or existence of LMA-style documentation and an
intercreditor agreement. Such loan documentation and intercreditor
agreements are increasingly common among sophisticated creditors.
Such informal work-outs are much rarer than the formal
proceedings, but on average, they also typically concern much
larger companies with sophisticated creditors.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Under the Finnish Companies Act (624/2006), the directors of a
company have a general duty to act in the best interests of the
company and to prudently ensure the protection of the interests of
the company. Finnish company legislation does not recognise any
special interests owed to parent companies or other group
companies, and as such, all decisions must be done with the
corporate benefit of each individual company in mind.
The duties of the directors and managers do not differ greatly when
managing a company in financial difficulties. However, a key
consideration is that directors and managers may incur criminal or civil
liability if they continue to enter into further commitments even while
being aware that the company will not be able to meet them. A safe
course of action for directors in such a situation is to file for bankruptcy
or restructuring, if emergency financing is not available. Additionally,
payment of dividends from a company in financial distress is limited.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The legislative framework grants no formal power to stakeholders
over a company in financial difficulties which has not entered any
insolvency procedure. From a purely legal point of view, the debtor
company operates as it would during ordinary course of business.
Any stakeholder influence over the debtor is the result of contractual
arrangements in place or for purely business reasons.
The primary statutory method of influence granted to stakeholders
is the possibility to file for the debtor company’s bankruptcy or
restructuring. A creditor has the right to file for the debtor’s
bankruptcy almost at will, given that statutory requirements for a
bankruptcy filing are met. Creditors may also apply for the debtor’s
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restructuring, but such applications are uncommon and have limited
chance to succeed without the debtor’s co-operation. Influence of
stakeholders that are not creditors are somewhat more limited.
The Finnish enforcement regime contains the possibility to stay an
enforcement, but this generally requires the debtor or a third party to
provide a security. For this reason, the most practical legal
instrument for achieving the effects of a moratoria is applying for
either bankruptcy or the statutory restructuring described later. The
effect of applying for a restricting in practice acts as a moratorium.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The legislative framework for challenging, and potentially recovering,
transactions entered into by a company in financial distress is the Act on
the Recovery of Assets to a Bankruptcy Estate (758/1991). The same
Act is also applied to a restructuring process and execution proceedings.
Any transaction favouring a creditor or other party at the expense of
other creditors by either reducing the debtor’s assets or increasing the
debtor’s liabilities is potentially recoverable by the bankruptcy estate or
the administrator of a restructuring procedure. Primary considerations
for recovery are whether the debtor is legally insolvent and whether the
creditor was aware of the debtor’s insolvency.
The most significant ground for a challenge is if a debt was paid during
a three-month window prior to commencement of bankruptcy or a
restructuring process. Such a payment may be recoverable given three
alternative conditions: first, if the method of payment was unusual
(usually, anything else than money); second, if the payment was made
in advance to becoming due and payable; or, third, in excess of an
amount considered significant in relation to the estate’s assets. Court
practice has established that any payment in excess of 10% of the
assets of an estate at the time of bankruptcy is considered significant in
this respect. A counterargument for such recovery is if the payment is
considered to have been made in the ordinary course of business.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. The legislative framework has no bars for implementing an
informal work-out. However, there is no support for such a work-
out either. A method used in practice over purely informal work-
outs is one where the largest creditors reach a joint agreement in
advance with the debtor and any opposing minor creditors are dealt
with using the formal restructuring process.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Finnish legislation provides one formal restructuring process, the
restructuring of a company under the Restructuring of Enterprises
Act. The purpose of such a restructuring process is adopting a
restructuring plan acceptable by the creditors. The restructuring
plan allows for changes in the debt obligations, such as repayment
schedule, interest, or the principal itself. In practice, the amount of
principal owed is reduced almost as a rule. Secured obligations are
protected from this, since the principal of a secured debt cannot be
reduced below the secured amount.
Debt-for-equity swaps and pre-packaged sales are possible; however,
the statutory framework provides no tools for forcing such actions.
Pre-packaged sales in the form used in, e.g., the United States or the
UK, are not used in Finland.
Creditors may object to the initiation of restructuring by lodging their
formal opinion to the court. Typically, an application with required
support is accepted even if some creditors object. The commencement
of restructuring provides for a relief period from stakeholder pressure.
A security cannot be enforced during the preparation phase of a
restructuring plan, an exception being if the creditor shows that the
secured asset is unnecessary for the debtor’s business.
A restructuring plan is put to creditor vote and it does not need to be
adopted unanimously. Adopting the plan requires reaching a majority
in the different creditor groups, most typically secured and unsecured
creditors. Any dissenting stakeholders are automatically crammed-
down if they form a minority. However, a majority must be reached in
each class of stakeholders and an entire class cannot be crammed down.
However, the way that restructuring is set up means that a restructuring
has no realistic chances of succeeding if a majority cannot be reached.
3.3 What are the criteria for entry into each restructuring procedure?
The Restructuring of Enterprises Act stipulates that a company may
enter into restructuring proceedings if it lodges its own application
or a joint application with its creditors. Creditors have a legal right
to apply for restructuring without the debtor, but in practice this
almost never happens. The criteria, one of which must be met, for
entry into restructuring are 1) a joint application with, or the consent
of, two unaffiliated creditors which represent at least 20% of all the
debts of the debtor company, 2) an existing threat of the debtor
company becoming insolvent, or 3) the debtor company being
insolvent without any of the obstacles of restructuring being present.
Various statutory obstacles for entering into a restructuring procedure
exist, with the court having broad power of interpretation over some.
Such obstacles include, e.g. that the criteria for initiating restructuring
have not been met or that the debtor is trying to avoid debt collection
via restructuring. In legal practice, courts apply caution in ruling that
such obstacles exist, since typically courts lack enough evidence for
their existence in all but the most extreme cases.
3.4 Who manages each process? Is there any court involvement?
A court-appointed administrator manages the restructuring process.
Courts have an overseeing role in the process, by initiating it and
affirming the restructuring plan once approved by the creditors.
Courts also rule on objections made to individual creditor’s debts.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The Restructuring of Enterprises Act has the force of mandatory
legislation, superseding all conflicting contractual terms agreed by
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the debtor. According to the Act, only terms allowed in the Act itself
form an exception, and any other contractual terms conditional on
entering into restructuring are unenforceable, such as termination
and set-off provisions. In addition, the entry into restructuring is not
enough grounds for the debtor’s contractual parties to demand
additional security for the continuation of their services or the
provision of their goods. The Act therefore obligates contracting
parties to perform outstanding obligations irrespective of the
initiated restructuring process.
However, the debtor company entering into restructuring, but not
creditors, may terminate leases and leasing contracts, and any
termination clauses included therein notwithstanding. Such
termination may lead to additional liabilities owed by the company
entering restructuring in the form of compensation for premature
termination. Such compensation is subject to the restructuring
proceedings and, e.g., haircuts. The debtor company may also
terminate any agreements deemed unusual.
Any liabilities incurred by the debtor company after the initiation of
restructuring proceedings must be paid in due course and they are
not subject to haircuts. The same holds true for any obligations
agreed prior to restructuring but fulfilled only after the initiation of
restructuring. Failure to satisfy new debts accrued after starting the
restructuring is sufficient grounds for cessation of the provision of
further services or supply of further goods.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The costs of restructuring are borne by the company being
restructured itself. This includes the administrator’s fee. If the
restructuring fails and the company is declared bankrupt, any debt
obligations that have been entered into after the initiation of the
restructuring process have precedence over past debts when the
proceeds of the bankruptcy are divided between creditors.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Finnish law provides for two procedures to wind up a company:
bankruptcy under the Bankruptcy Act; and liquidation of a company
under the Companies Act. Liquidation proceedings are only
possible if the company is not insolvent, meaning that the company
has more assets than liabilities. Liquidation is initiated by the
shareholders of a company and does not involve court involvement.
Liquidation is not an insolvency procedure in itself, since it is
typically used only for companies that cease their business for other
reasons besides insolvency. For this reason, liquidation is not
considered any further in this article.
4.2 On what grounds can a company be placed into each winding up procedure?
The statutory grounds for the bankruptcy procedure to be initiated is
the insolvency of the debtor, meaning the inability to pay debts as
they fall due other than temporarily. Bankruptcy may be applied by
the debtor itself or any of its creditors. In a debtor application,
insolvency is presumed and usually not questioned. A creditor
requires either a court ruling (or a debt which is enforceable without
one) or a debt obligation which is otherwise indisputable enough.
The creditor must also provide proof for the debtor’s insolvency.
This is typically accomplished by sending out a payment demand
with the threat of filing for bankruptcy. If such a payment demand
is not paid within a week, the debtor is presumed insolvent.
4.3 Who manages each winding up process? Is there any court involvement?
The bankruptcy process is overseen by the courts in various stages.
Firstly, the bankruptcy process is managed by a court-appointed
administrator of the bankruptcy estate. The court appoints the
administrator based on the views of the largest creditors. Courts are
also involved in ending the bankruptcy proceedings and approving
the distribution list, as well as resolving various disputes, such as the
existence of a creditor’s debt or the enforceability of a security given
to a creditor.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The Finnish bankruptcy process is a creditor-driven process. All
major decisions are made by the creditors in a creditors’ meeting.
Each creditor has one vote for one euro of debt owed to them. Only
decisions of lesser implication are done by the administrator of the
bankruptcy estate alone. The administrator has also the duty to
safeguard the interests of all creditors on equal standing.
A security may be enforcement as normal during a bankruptcy
procedure. Upon a decision of the administrator, the bankruptcy
estate may temporarily prevent the enforcement of a security for two
months if the interests of the bankruptcy estate require such.
Typically, secured creditors may ask the administrator to enforce
and realise securities as part of the bankruptcy proceedings.
In a typical bankruptcy proceeding, shareholders have almost no
influence. Low-ranking creditors, i.e. creditors entitled to pay only
after all other creditors, such as shareholders or creditors of capital
loans (as statutorily defined), are typically barred from voting, if
their debts are not expected to receive payment. Influence of
shareholders in bankruptcy proceedings usually stems from the fact
that they have a double-role as creditors.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The Bankruptcy Act is mandatory legislation and supersedes all
conflicting contractual terms of the debtor’s agreements. Upon the
commencement of bankruptcy proceedings, the bankruptcy estate
assumes all the rights and liabilities of the bankrupt company. In legal
praxis, this has been interpreted to mean that the initiation of
bankruptcy proceedings itself does not change the rights and
liabilities of the bankrupt company. In Finland, almost all contractual
terms conditional on bankruptcy, such as those entitling the creditor to
terminate the contract or set-off liabilities, are unenforceable.
Parties to a contract are obliged to perform outstanding obligations.
The administrator of a bankruptcy estate has the right to terminate any
agreements unilaterally regardless of any commitments made by the
company prior to bankruptcy. If the bankruptcy estate upholds any
agreements, debts incurred after the initialisation of bankruptcy
proceedings are paid with the highest priority before any debts incurred
prior to bankruptcy, second only to the administrator’s own fee.
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4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The highest-ranking claims are those incurred by the bankruptcy
estate during the bankruptcy proceedings itself, among which the
administrator’s fee takes the top priority. Any such debts must be
paid in full before any bankruptcy debts can be paid. All other debts
get a pro rata share of the liquidated assets of a bankruptcy estate.
Exceptions to this primary rule are secured creditors, creditors
holding enterprise mortgages (floating charges), and creditors with
debts owed that were incurred during a restructuring procedure that
preceded the bankruptcy. Lower ranking debts consist of statutory
capital loans, various statutory sanctions and junior bonds.
4.7 Is it possible for the company to be revived in the future?
The Finnish legal framework provides for no method through which
a bankrupt company may be revived once the bankruptcy
proceedings start. Bankruptcy proceedings may be cancelled for
eight days if legal grounds for this are presented to the court.
In practice, especially in the case of a smaller company, it is not
atypical that a bankruptcy estate sells all or most of its assets,
including the business name to a new entity. Legally, this constitutes
the establishment of a new legal entity with a common name to the
bankrupt company.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The processes themselves do not typically give rise to tax liabilities.
In some cases, it is possible that certain actions, such as divestments,
may give rise to tax liabilities as a part of an insolvency procedure.
The tax creditor is on equal footing with other creditors. For
example, taxes accrued prior to the initiation of a bankruptcy
procedure are subject to the bankruptcy proceedings and the
bankruptcy estate is not liable for such taxes. The bankruptcy estate
is only taxed if it continues to conduct business during the
bankruptcy process. Realisation of assets is not typically taxed.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
An initiated restructuring procedure allows for a shorter notice of
termination. If the accepted restructuring plan includes actions that
result in the termination of employment, this allows for the
termination of employment contracts with two months’ notice.
Additionally, if the restructuring leads to ceasing or decreasing of
work, the same two-month notice period applies. The employee has
the right to terminate their employment with 14 days’ notice during
a restructuring process.
When a bankruptcy process is initiated, all employment contracts
may be terminated on 14 days’ notice without the requirement of
any further grounds besides the bankruptcy itself. If there are no
sufficient funds in a bankruptcy estate to pay out salary debts, the
state-run pay security scheme pays out debts to employees given
certain conditions and becomes a creditor in the insolvency
proceedings instead of the employees themselves. Employee claims
are on equal footing with other unsecured creditors.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
The primary legislative framework for international insolvency in
Finland is the recast regulation (EU) 2015/848 of the European
Parliament and of the Council of May 2015 on insolvency proceedings
(the “Recast Insolvency Regulation”), applied both to bankruptcy and
restructuring. The Recast Insolvency Regulation grants jurisdiction to
the courts of the Member State in which the centre of a debtor’s main
interests is situated. The centre of main interests is the primary place
in which the administration of the debtor is conducted, which, unless
proven otherwise, is assumed to be the place of registered office. This
being considered, the jurisdiction of incorporation is not relevant if the
centre of a debtor’s main interests is situated within Finland, which
grants jurisdiction to Finnish courts over such a debtor.
If a debtor having its centre of main interests in another EU Member
State has an establishment in Finland, secondary bankruptcy
proceedings (but not restructuring) may be initiated in Finland.
Such a secondary bankruptcy proceeding is limited to the debtor’s
assets located in Finland. Additionally, the Member State in which
a real property involved in insolvency proceedings has exclusive
jurisdiction over such real property.
In addition, a treaty between the countries results in Finnish courts
having no jurisdiction over debtors that have entered into
bankruptcy proceedings in Iceland, Norway or Denmark, provided
that the debtor was domiciled therein.
If the Recast Insolvency Regulation does not apply, and there is no
relevant treaty in force, the legal starting point is that any company with
a place of business in Finland may enter into bankruptcy proceedings
before the Finnish courts. This holds true regardless of whether the
company conducted business in Finland through a registered
establishment or as an unregistered presence. Such bankruptcy
proceedings are limited to assets situated within Finland. These
proceedings are also rare and may require case-by-case evaluation.
The legal situation concerning restructuring of companies
incorporated in other non-Member State jurisdictions is unrefined.
A principle of international law is the equal treatment of bankruptcy
and insolvency proceedings (and similar). As such, it could be
entirely possible for a company incorporated out of the EU to enter
into restructuring in Finland. However, the foreign company must
have a business presence in Finland for the restructuring to have any
desired results. To the authors’ knowledge, such restructuring
proceedings of non-EU companies are almost unheard of.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
If an insolvency process has been commenced in another EU
Member State, the Recast Insolvency Regulation applies. This leads
to the automatic recognition of insolvency processes started in other
EU Member States. Under the Recast Insolvency Regulation, such
insolvency processes are construed according to the laws of the EU
Member State in which such a process was initiated in.
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In addition, Finland is a party to several conventions on the recognition
of foreign judgments, including the Brussels and Lugano conventions.
These have been largely replaced by applicable EU legislation
between Member States. If no convention applies, the recognition
of a restructuring or insolvency process initiated out of the EU
requires an exequatur from a Finnish court.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
The primary situation in which this happens is when another Member
State has jurisdiction over a Finnish company based on the Recast
Insolvency Regulation. Enforcement of insolvency proceedings
initiated outside of the EU and concerning companies incorporated in
Finland may be difficult. To the authors’ knowledge, such practices
are not commonplace.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Finnish company law and insolvency legislation treats each
company as a fully independent legal entity, regardless of whether it
has group interests. Thus, the insolvency process of each group
entity proceeds separately. Legally, a group company does not
differ in a material way from other stakeholders.
It should be noted that, from a recovery standpoint, transactions
between related parties are evaluated more stringently and the
critical period, during which challenges to transactions are possible,
is longer. Care should therefore be taken to make sure that any
significant transactions with related parties are done on an arm’s-
length basis, which may also be required for other reasons (e.g. tax
or corporate law).
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The Bankruptcy Act was last reformed in 2004 and the
Restructuring of Enterprises Act entered into force in 1993 with the
latest major changes entering into force in 2007. There have been
various discussions on amendments to these statutes, but the authors
are not aware of any major changes. Perhaps the largest proposed
change being discussed is the possibility for natural persons to
effectively declare bankruptcy, but no proposed acts have yet been
published.
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Tuomas Koskinen Law Office Waly & Koskinen Ltd. Rikhardinkatu 1, FI-00130 Helsinki Finland Tel: +358 09 4257 8780
Email: [email protected]
URL: www.wklaki.fi/en
Sami Waly Law Office Waly & Koskinen Ltd. Rikhardinkatu 1, FI-00130 Helsinki Finland Tel: +358 09 4257 8780
Email: [email protected]
URL: www.wklaki.fi/en
Tuomas Koskinen is a Partner at Law Office Waly & Koskinen Ltd. Besides insolvency, Tuomas focuses on dispute resolution, especially real estate and construction disputes, and white-collar crimes. He received his LL.M. from the University of Helsinki and also holds a bachelor’s degree in Business Administration, majoring in accounting, from the Aalto University School of Business.
Law Office Waly & Koskinen Ltd. is a Finnish boutique law firm with an office in the Helsinki capital focusing mostly on dispute resolution, white-collar crimes and insolvency, as well as general corporate advice to medium- and small-sized companies. The practitioners have a shared experience together involving more than 100 bankruptcy estates.
Our core value offered to our clients is that we provide excellent value service with predictable pricing. With the cost structure of a boutique firm, we can provide our services at a discount without compromising the quality of service provided.
Sami Waly is a Partner at the Law Office Waly & Koskinen Ltd. Besides insolvency, Sami focuses on dispute resolution and white-collar crimes. Sami also frequently advises clients from the Middle East region in various corporate matters. Sami received his LL.M. from the University of Helsinki.
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De pardieu Brocas maffei aarpi
Joanna gumpelson
philippe Dubois
France
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Historically, French bankruptcy law was generally considered to be
rather debtor-friendly. However, the French Bankruptcy Code has
been regularly amended since 2005 with a view to reinforcing
creditors’ rights both in the context of out-of-court workouts and
also insolvency proceedings. In particular, an ordinance dated 12
March 2014 reformed bankruptcy laws with a view to favouring
reorganisation at a preventive stage, strengthening the efficiency of
out-of-court proceedings and increasing the rights of creditors. In
addition, a bill dated 6 August 2015 introduced the possibility, under
certain limited conditions, to squeeze-out dissenting shareholders of
a bankrupt company in rehabilitation proceedings, notably to favour
debt-for-equity swap restructurings.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
French bankruptcy law provides for two main types of restructuring
proceedings:
■ Out-of-court proceedings: ad hoc proceedings and
conciliation proceedings are flexible, voluntary and
confidential proceedings that aim at facilitating work-outs
between a distressed company and its major creditors under
the supervision of a court-agent. Those are frequently used
especially for large groups of companies in the context of
financial restructurings.
■ Court-monitored formal proceedings: safeguard (as well as
pre-packaged safeguard); rehabilitation; and liquidation
proceedings. Safeguard and rehabilitation are formal
proceedings that aim, depending on the situation of the
company, to restructure the company’s liabilities whether
through a restructuring plan or a total or partial sale of its
business and/or assets. The liquidation aims to sell the
company’s assets (as a whole where possible or on an asset-
by-asset basis) where the rescue of the company appears as
obviously impossible.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The company’s legal representative must file for rehabilitation or
liquidation (if rehabilitation appears impossible), no later than 45
days from the date on which the company becomes insolvent (see question 3.3), unless conciliation proceedings (which are also
available to insolvent companies) are pending.
For certain specific breaches such as using the company’s assets or
credit for their own benefit or carrying out business activities at a
loss to further their own interests, directors can be forced to assign
their equity interest in the company and prohibited from managing
any business for up to 15 years.
Liability can also arise where, as a result of management errors
(other than mere negligence), a company’s assets do not cover its
debts: an action for mismanagement can lead to an insolvent
company’s directors being liable for all or part of its debts.
These liabilities can extend to formally appointed directors/managers
with representation powers, and to any individual or entity that,
although they are not officially a director/manager, repeatedly
influenced the company’s management or strategic decisions (de facto
directors/managers).
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
When a company faces difficulties, the French Commercial Code
provides for different types of warning proceedings (procédures d’alerte) to draw the directors’ attention to any matter likely to
jeopardise the continued operation of the company. They can be
triggered by the company’s external auditors, the employees’
representatives or shareholders provided that they own at least 5%
of the share capital.
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With respect to creditors, the opening of out-of-court proceedings
does not trigger an automatic stay. However, the debtor can apply
for a moratorium (for a maximum of two years) if any creditor
attempts to enforce its right while ad hoc proceedings or
conciliation proceedings are pending. In conciliation, the debtor’s
petition is submitted to the judge who had jurisdiction to open such
proceedings during both the negotiation phase and the
implementation phase (that is, after the workout agreement has been
approved by the court).
The opening of court-monitored proceedings triggers a stay on
enforcement (subject to few exceptions, see question 3.2).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
In rehabilitation or liquidation (but not in safeguard as those
proceedings are available to solvent companies only), any
transaction entered into during the hardening period (période suspecte) can be subject to clawback provisions. The hardening
period runs from the date when the company is deemed insolvent
and can be backdated by the court by up to 18 months before the
judgment opening rehabilitation or liquidation proceedings. If a
court-approved conciliation agreement has been entered into prior
to the opening of insolvency proceedings, the insolvency date
cannot be backdated to a date before the court order approving the
conciliation work-out agreement.
A limited number of transactions are automatically voided if
performed during the hardening period, for instance:
■ any deed entered into without consideration transferring a
title to moveable or immoveable property;
■ any bilateral contract in which the debtor’s obligations
significantly exceed those of the other party;
■ any payment by whatever means, made for debts that have
not fallen due on the date when payment is made;
■ any payment for outstanding debts, if not made by cash
settlement or wire transfers, remittance of negotiable
instruments, or Dailly-type assignment of receivables or any
other means commonly used in business transactions; or
■ any mortgage or pledge (both contractually agreed or court-
ordered) granted to secure a pre-existing debt (being noted
that, in view of the pending reform currently under
discussion, other types of security could be subject to
voidance in the future, see question 9.1).
In addition, any transaction or payment entered into during the
hardening period is subject to optional voidance if proper evidence
is brought that the contracting party or the beneficiary of the
payment knew the company’s insolvency (this knowledge being
presumed for companies belonging to the same corporate group).
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Ad hoc proceedings and conciliation proceedings are confidential
and consensual out-of-court proceedings that aim to facilitate the
negotiation of a work-out agreement between a distressed company
and its major creditors under the supervision of a court-appointed
agent. Trade creditors and major shareholders can also be invited to
take part in the negotiations. Social and tax authorities can be asked
to consent to a debt-rescheduling plan or a cancellation of debt.
A work-out agreement accepted by some creditors cannot be
imposed onto other dissenting creditors, as the process is consensual
and no cram-down can be imposed (subject to the subsequent
opening of pre-packed safeguard proceedings, see question 3.2). In
practice, majority rules provided for in the existing credit
documentation apply.
In conciliation specifically, the company has two options to
implement the work-out agreement:
■ It can obtain the president of the court’s approval, which does
not involve publicity.
■ It can request formal court approval, which encourages
creditors to extend credit to the company to benefit from a
super-senior repayment status (see “new money” privilege in question 3.6). Except where fraud has taken place, a court-
approved work-out agreement is also protected from the risk
of being voided in the future (see question 2.3). However, this
approval must be recorded in a full judgment accessible to the
public and therefore subject to challenge by a third party or
appeal. Employees’ representatives must be informed of the
agreement and invited to attend the court hearing.
Since 2014, the court-appointed agent may be entrusted with the
mission to arrange a pre-packaged sale of a business in conciliation,
which could ultimately be implemented in rehabilitation or
liquidation proceedings.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Safeguard proceedings
Safeguard proceedings allow solvent debtors to be restructured at a
preventive stage under the court’s supervision. They begin with an
observation period of up to six months (which can be extended) to
assess the company’s financial position. Once opened, there is an
automatic stay of all creditor payment and enforcement actions –
subject to few exceptions (and notably claims secured by a security
interest conferring a retention right, claims secured by a trust
(fiducie) and set-off of related claims) – against the main debtor and
individuals acting as guarantors and joint debtors.
The general outcome of safeguard proceedings is the approval by
the court of a safeguard plan that can involve a debt restructuring,
re-capitalisation of the company, debt-for-equity swap, sale of assets
or a partial sale of the business. However, it cannot include a
proposal to sell the business as a whole.
For companies of a certain size, three classes of creditors must be
arranged, comprising financial institutions, major trade creditors
and bondholders, which are invited to vote on the draft safeguard
plan at a two-thirds majority in value for each class. Subordination
agreements, if any, shall be taken into account by the administrator
in the computing of the votes.
If those classes are not set up, or if one of them has rejected the draft
plan, the plan must be negotiated on a one-to-one basis with each
creditor. The court can impose a 10-year maximum term-out to
dissenting creditors, but cannot impose any debt write-off.
If the plan provides for any operation requiring shareholder approval
(e.g. debt-for-equity swap), shareholders must also be consulted and
vote at a two-thirds majority. However, the court can reduce the
majority applicable to shareholder meetings on first notice.
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Once approved by the court, the safeguard plan is enforceable
against all members of the creditors’ classes, including the
dissenting minority within each class. French law, however, does
not allow inter-class cram-down, as the court cannot impose a plan
to a dissenting class of creditors when such class rejected the draft
plan. Yet, such inter-class cram-down mechanism is very likely to
be soon introduced by the upcoming reform of French bankruptcy
laws, under certain conditions which are still yet to be determined
(see question 9.1).
Pre-packaged safeguard proceedings
Two types of pre-packaged safeguard proceedings are available:
accelerated financial safeguard; and accelerated safeguard. Their
global purpose is to enable debtors, for which conciliation proved
unsuccessful to reach all participating creditors’ consent, to be
restructured in a very short timeframe with the consent of a two-
thirds majority within creditor classes.
Rehabilitation proceedings
As a whole, rules applicable to the observation period, the automatic
stay and classes of creditors are the same as in safeguard.
Unlike in safeguard, however, there are two main possible outcomes
for rehabilitation proceedings:
■ a rehabilitation plan, where the same principles apply as in
safeguard proceedings; and
■ a sale plan, where the court can authorise the administrator to
auction the business as a whole or in part. Creditors (except
for limited exceptions, e.g., creditors benefiting from a
retention right) have no say on the choice of the purchaser
made by the court when approving the sale plan.
As in a safeguard, if shareholder approval is required, the court can
reduce majority rules applicable on first notice. Moreover, in
rehabilitation proceedings only, if the insolvent company’s net
equity is not restored and shareholders have refused to increase the
company’s equity to at least half of its share value (which is a legal
requirement in France), the administrator can petition the court to
appoint an agent in charge of convening the shareholder meeting
and to vote, on behalf of the dissenting shareholders, on the
recapitalisation of the company for the amount suggested by the
administrator, when the draft plan provides for a change in the share
capital in favour of one or several committed investors.
In addition, under certain narrowly defined circumstances, the Court
can order the squeeze-out of shareholders through a forced sale of
all or part of their shares should those shareholders have refused to
implement the required change in the equity structure and hold
directly or indirectly a majority stake or a blocking minority stake in
the capital of the company, or through an imposed dilution of their
equity stake.
3.3 What are the criteria for entry into each restructuring procedure?
The French insolvency test is a pure cash-flow test: a company is
deemed insolvent (en état de cessation des paiements) when it is
unable to meet its due and payable liabilities out of its available
assets (those in the form of cash or those that can be quickly turned
into cash), taking into account undrawn committed facilities and
other credit reserves and moratoriums/standstills accepted by
creditors.
Ad hoc proceedings: the company must be solvent, although there
have been some recent precedents where ad hoc proceedings were
opened for insolvent companies (but for a very short period of time
only).
Conciliation proceedings: the company must face legal or financial
difficulties (whether actual or foreseeable) and can be insolvent but
for less than 45 days before the petition is filed.
Safeguard proceedings: the company must be solvent and facing
difficulties that cannot be overcome, with no restrictions applied to
the concept of “difficulty”.
Rehabilitation proceedings: the company must be insolvent, but
rescue does not appear to be impossible.
3.4 Who manages each process? Is there any court involvement?
In out-of-court proceedings, the court agent does not have any
management responsibilities. There are no restrictions on business
activities.
In formal court-monitored proceedings, the judgment opening
safeguard or rehabilitation proceedings appoints:
■ An insolvency judge (juge commissaire) who oversees the
whole procedure. He/she must approve all management
decisions that go beyond ordinary actions and any decision to
settle pending disputes.
■ An administrator (administrateur) who supervises or assists
the management to prepare the restructuring plan, but cannot
take over any management responsibility in safeguard
proceedings. In rehabilitation proceedings, he/she can be in
charge of assisting the management or also, in limited
situations, taking control of the company’s management.
■ A creditors’ representative (mandataire judiciaire) who
represents the creditors’ interests and assesses proofs of
claim, and who can be assisted by supervising creditors
(créanciers contrôleurs) appointed by the court.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Out-of-court proceedings
Since the 2014 reform of the French Bankruptcy Code, ipso facto
provisions are deemed null and void. More generally, any
contractual provision increasing the debtor’s obligations (or
reducing its rights) by that sole reason of the opening of out-of-court
proceedings (or of any filing for that purpose) is also null and void.
Safeguard and rehabilitation proceedings
Notwithstanding any contractual provisions, ongoing contracts
cannot be terminated by the sole reason of the opening of such
proceedings. The administrator can require the debtor’s contracting
party to perform ongoing contracts in exchange for the performance
of the debtor’s post-petition obligations. However, all contracts can
be terminated by court order at the request of the administrator,
should this termination be necessary to the company’s safeguard
and not excessively detrimental to the contracting party’s interests.
The contracting party can require the administrator to express
his/her position on the assumption of an ongoing contract, which
will be automatically terminated once a formal notice is sent to the
administrator and has remained unanswered within a month.
The debtor’s contracting party must perform its obligations despite
non-performance by the debtor of its own pre-petition obligations,
which will only allow the contracting party the right to file proof of
claim.
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For obligations resulting from certain kinds of financial instruments
only, early termination and set-off provisions remain enforceable
irrespective of the opening of insolvency proceedings.
In terms of protection, when an ongoing contract is assumed by the
administrator, the debtor must perform its post-petition obligations.
In rehabilitation proceedings, when the assumed ongoing contract
involves the payment of a sum of money, the contracting party can
require that the payment be made in cash on delivery.
In addition, in both safeguard and rehabilitation proceedings, the
contracting party benefits from the statutory privilege granted to
certain post-petition claims representing consideration in connection
with a business transaction directly connected to the company’s
activities continued during the observation period (see question 4.6).
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
New money, injected in the context of a court-approved work-out
agreement, entered into in conciliation benefits from a statutory super-
senior status if the debtor subsequently files for insolvency. In this
case, the new money providers do not have to suffer any rescheduling
in a term-out scenario and cannot have any write-off, debt-for-equity
swap or rescheduling imposed through the vote of creditor classes.
In safeguard and rehabilitation proceedings, post-petition claims
arising for the purpose of funding the observation period benefit
from a certain statutory privilege (see question 4.6).
In addition, the pending reform of French bankruptcy laws could
introduce new incentives, still to be defined, for cash contributions
granted notably in the context of safeguard and rehabilitation
proceedings (see question 9.1).
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Liquidation proceedings aim at liquidating a company by selling its
business, as a whole or per branch of activity, or by selling its assets
one by one. Creditors are repaid according to their rank and
privilege with the sale proceeds.
There is a simplified form of liquidation proceedings available for
small businesses, which lasts for a maximum of one year.
4.2 On what grounds can a company be placed into each winding up procedure?
The debtor must be insolvent and its rehabilitation must appear as
obviously impossible. Liquidation is the only possible outcome
when rehabilitation proceedings are attempted without success.
4.3 Who manages each winding up process? Is there any court involvement?
The judgment opening liquidation proceedings appoints:
■ An insolvency judge to oversee proceedings.
■ A liquidator, who is responsible for:
■ collecting in all of the company’s assets and paying the
creditors to the extent that funds are available; and
■ assessing proofs of claim and representing the creditors’
interests.
The liquidator has sole authority to bind the company and assumes
all management responsibilities.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Liquidation proceedings trigger an automatic stay of enforcement
against the company, subject to few exceptions. Yet, in liquidation
only (unlike in safeguard or rehabilitation), secured creditors
benefiting from a pledge can enforce their security interest through
a court-monitored allocation process (attribution judiciaire), that is,
request the court to be transferred ownership of the pledged asset(s).
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The same rules applicable in safeguard and rehabilitation apply to
liquidation proceedings, where the liquidator is recognised the same
prerogatives as the administrator.
However, in liquidation proceedings, ongoing contracts where the
debtor’s performance consists of the payment of a sum of money are
automatically terminated when the contracting party is informed of
the liquidator’s decision not to assume the contract.
In addition, in case a sale plan is approved by the court, some supply
contracts deemed necessary to continue the transferred activity are
judicially assigned to the transferee by the sole effect of the court’s
decision.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Where creditors rank on insolvency is complex, and any attempt to
provide a simple list can be misleading. However, a simplified
ranking of claims could be summed-up as follows:
■ Arrears of wages (see question 6.1): a portion of employees’
pre-petition claims benefit from a senior preferential status,
which protects the last 60 days’ wages in arrears before the
judgment opening insolvency. If the bankruptcy estate
cannot pay these claims from its available cash, they are paid
as advances by a national wage insurance body, which then
replaces the employees’ ranking as a creditor.
■ Post-petition court costs, which arose for the purpose of the
proceedings.
■ “New money” facilities granted in the framework of a court-
approved work-out in conciliation proceedings (if any) also
benefit from a senior legal privilege.
■ Post-petition claims: in safeguard and rehabilitation
proceedings, they benefit from a statutory privilege provided
that they either arise for the purpose of funding the
observation period, or represent consideration in a business
transaction directly connected to the company’s activities
continued during the observation period. They must be paid
when they fall due. If not, they rank ahead of both secured
and unsecured pre-petition claims.
■ Secured pre-petition claims.
■ Unsecured pre-petition claims.
■ Shareholders do not receive any repayment of their capital
investment, unless a surplus remains after all the creditors
have been paid in full (which is extremely rare).
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In liquidation proceedings, the creditors’ ranking is the same, except
that pre-petition mortgage claims rank ahead of post-petition claims
benefiting from the statutory privilege.
4.7 Is it possible for the company to be revived in the future?
The court closes the liquidation in two hypotheticals: hardly ever,
when all the creditors are repaid; or when no more proceeds can be
expected from the sale of the company’s business/assets. In the
second case, the company shall terminate and cannot be revived.
Once closed, liquidation may be re-opened if some of the debtor’s
assets have not been sold off, or if a legal action in the interests of
the creditors shall be initiated.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
A taxpayer remains liable for all taxes while undergoing
restructuring or insolvency proceedings and the French tax
authorities typically benefit from a preferential ranking as creditors.
In addition, if the taxpayer benefits from debt waivers granted by
creditors as part of these proceedings, the amount of these debt
waivers will typically be included in its taxable income, thereby
potentially generating additional tax liabilities. If a debt waiver is
granted as part of safeguard, rehabilitation or liquidation
proceedings or pursuant to a court-approved conciliation agreement,
the debtor can, however, fully offset its available carry-forward
losses against the amount waived. This possibility is expressly
provided for in the French tax code as an exception to the general
rule whereby carry-forward losses can only be used up to an
amount, in any given year, of €1 million plus 50% of the taxable
profits realised in that year. On the creditor side, whether the debt
waiver will be treated as a tax-deductible loss will mainly depend on
whether it can qualify as a “commercial debt waiver”, in which case,
it will typically be treated as deductible, or as a “financial debt
waiver”. A financial debt waiver may be tax deductible at the level
of the creditor if granted as part of safeguard, rehabilitation or
liquidation proceedings or pursuant to a court-approved conciliation
agreement, subject to limitations where the creditor is a shareholder
of the debtor.
Instead of granting debt waivers, creditors may subscribe to a share
capital increase of the debtor by way of offset against their
receivables, thereby implementing a debt-for-equity swap. This
would generally not trigger the recognition of taxable income at the
level of the debtor, which would then retain its existing carry-
forward losses intact. This, however, needs to be reviewed on a
case-by-case basis, having in mind also the resulting consequences
for the relevant creditors. A French corporate creditor having
recorded a depreciation on its receivable and treated this
depreciation as a deductible expense would need to reverse that
depreciation upon conversion of the receivable into shares, which
would create taxable income at its level. The recording of a
depreciation on the shares received in exchange would not be tax-
deductible if these shares constitute a participating interest and a
later sale of these shares for a price lower than the initial book value
of the receivable would also not generate a tax deductible loss. A
successful restructuring will thus also involve reconciling the
interest of both the creditors and the debtor from a tax standpoint.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment contracts remain in force during the restructuring
procedure.
Subject to certain conditions, lay-offs for economic reasons may be
implemented in this context. However, rules pertaining to the process
of making staff redundant are complex, and depend on the type of
proceedings and on the timing when lay-offs are implemented.
For instance, the redundancy process during the observation period
differ between safeguard and rehabilitation proceedings: while in
safeguard, there is no specific feature as to the redundancy for
economic reasons, in the context of rehabilitation proceedings, the
court-appointed administrator can be authorised by the insolvency
judge to implement a redundancy process for economic reasons if it
is deemed urgent, unavoidable and necessary.
In the context of liquidation proceedings or following a total or partial
sale plan of the business activities in rehabilitation proceedings, lay-offs
are implemented by the court-appointed administrator or the liquidator,
as the case may be, following a court’s judgment that provides for the
dismissal of the employees that were not transferred to the bidder.
With respect to employees’ claims, where they rank on insolvency is
complex, and any attempt to provide a simple list can be misleading.
However, in a nutshell, the following principles apply:
■ Regarding their pre-petition claims, and unlike other
creditors, employees are exempted from filing proof of claim,
and have the status of preferred creditors:
■ A portion of employees’ pre-petition claims benefits from a so-
called “super” senior status and ranks ahead all other claims.
This includes all forms of pre-petition remuneration left unpaid
for the last 60 days of effective work prior to bankruptcy, and
other limited compensations and indemnities (e.g. paid holiday,
payment in lieu of notice in case of termination of the
employment contract…), subject to certain caps.
■ Certain other employees’ pre-petition claims benefit from a
“general” senior status less favourable than the super-senior
status, such as pre-petition remuneration for the last six
months prior to bankruptcy, compensations and indemnities
protected by the super-senior status and other compensation
such as severance indemnities (subject to certain caps).
■ Employees’ post-petition claims benefit from the priority
rights offered to post-petition claims: they must be paid when
they fall due and if they’re not, they rank ahead of both
secured and unsecured pre-petition claims.
In addition, employees’ claims are guaranteed, under certain
circumstances, by a national wage insurance system (“AGS”),
which pays these claims as advances (subject to certain caps). For
all sums paid to employees, the AGS is subrogated in the
employees’ rights vis-à-vis the bankrupt estate.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Under Regulation (EU) 2015/848 of the European Parliament of the
Council of 20 May 2015 on insolvency proceedings, reforming the
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Regulation (EC) 1346/2000 on insolvency proceedings and
applicable to insolvency proceedings commenced after 26 June
2017 (the Insolvency Regulation), the EU Member State where a
company’s centre of main interests (COMI) is located shall have
exclusive jurisdiction to commence insolvency proceedings
regarding this company.
A company’s COMI is presumed to be the place of its registered
office unless it is proven that both:
■ Its COMI, as defined in the Eurofood decision of the
European Court of Justice, is in a country other than its place
of incorporation.
■ The company’s trade and financial partners are fully aware
that the COMI of such company is not its place of
incorporation.
Under this framework, a company incorporated in another EU
Member State can commence insolvency proceedings in France if
its COMI is located in France. If it only has an establishment based
in France, secondary proceedings can be subsequently commenced
in France which shall apply to its assets located in France.
With respect to a company incorporated outside of the EU, where no
international treaty applies, French courts have jurisdiction to
commence proceedings if such courts find that the company’s
COMI is located in France.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
If insolvency judgments are made in a jurisdiction that is party to a
treaty with France, they are recognised and enforceable in France.
In addition, the Insolvency Regulation allows insolvency
procedures in different EU Member States to be automatically
recognised.
In other cases, foreign judgments can only be recognised and
enforced if they have been subject to an inter partes recognition
procedure known as exequatur, which is intended to verify that the
foreign court had proper jurisdiction, international public policy has
been complied with and no fraud has taken place.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Some companies incorporated in France have entered into
insolvency proceedings in other jurisdictions, especially in schemes
of arrangement in the UK (e.g. Zodiac). Yet, it is not common
practice.
Contrariwise, it is far more common for foreign companies to seek
protection under French Bankruptcy Law and to commence
insolvency proceedings in front of French Courts, based on the
location of their COMI in France (e.g. Coeur Défense, Mansford,
Orco Property Group or NextiraOne).
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Under French law, a corporation is deemed to be an autonomous entity,
and the company’s assets should not be affected by insolvency
proceedings commenced against other companies within the same group.
However, the court can, under certain circumstances, find that there
is a ground for a consolidation of estates (confusion des patrimoines),
so that debt of several companies can be paid from a larger
consolidated pool of assets.
In addition, when insolvency proceedings are commenced against a
company, the same court has jurisdiction to hear any proceedings
relating to a company it controls or is controlled by, and a common
administrator and a common creditors’ representative may be
appointed for all the proceedings.
Furthermore, at least two administrators and creditors’ representatives
must be appointed by the court, if the net revenues of the debtor or
of one of the companies mentioned below reach at least a threshold
of €20 million and the debtor either:
■ Owns at least three secondary establishments located in the
jurisdiction of another Commercial Court than the one the
debtor is registered in.
■ Owns or controls at least two companies against which court-
monitored proceedings have commenced.
■ Is owned or controlled by a company against which court-
monitored proceedings have commenced and that owns or
controls another company against which court-monitored
proceedings have commenced.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Initiated by the currently discussed proposal for a directive dated 22
November 2016 and published by the European Commission, the
prospective reform of French bankruptcy laws is expected to soon be
implemented by way of ordinance. Mainly relating to the voting process
by classes of creditors on the draft safeguard or rehabilitation plan (see question 3.2), this pending reform may provide for the set-up of more
homogeneous classes of creditors, and the possibility, under certain
conditions which are still to be determined, to impose on dissenting
classes a plan that was accepted by one class of creditors only.
French law relating to security interests is also expected to be
amended in the coming years. Still under discussion, this reform is
expected to simplify and clarify rules pertaining to security interests
in the context of restructuring and insolvency proceedings.
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Joanna Gumpelson De Pardieu Brocas Maffei Aarpi 57 avenue d’Iéna 75016 Paris France Tel: +33 01 53 57 71 71
Email: [email protected]
URL: www.de-pardieu.com
Philippe Dubois De Pardieu Brocas Maffei Aarpi 57 avenue d’Iéna 75016 Paris France Tel: +33 01 53 57 71 71
Email: [email protected]
URL: www.de-pardieu.com
De Pardieu Brocas Maffei is one of France’s leading independent business law firms and currently has 33 partners. Founded in 1993, the Firm has become a key player in French business law and also has a highly regarded international practice. The Firm’s lawyers regularly advise on both domestic and international matters, and clients primarily include large French and overseas corporations.
The Restructuring and Insolvency team offers a full range of advisory and litigation services in relation to companies facing financial difficulties. The team regularly advises lending institutions, investment funds, credit insurers, factors and leasing companies, in connection with the drafting and negotiating of all types of agreements, including renegotiating existing loan documentation.
The team also represents listed and non-listed companies faced with financial difficulties and/or their shareholders, with respect to their reorganisation or the renegotiation of their debts, with solutions ranging from mandat ad hoc/conciliation to safeguard procedures and continuation plans.
Joanna Gumpelson specialises in insolvency proceedings and debt-restructuring. She represents French and foreign investment funds, banks, as well as lease-finance and factoring institutions, bondholders or suppliers, etc. She also regularly represents French or foreign issuers, in particular in the context of failing LBOs. She also handles commercial, banking and finance litigation cases.
Admitted to the Paris Bar in 2002, she graduated from HEC Paris (2000) and holds an advanced degree (DESS) in Tax and Business law from the University of Paris I Panthéon-Sorbonne (2000). She joined De Pardieu Brocas Maffei’s Restructuring & Insolvency team in 2002. She was appointed Counsel in 2009, before being co-opted as Partner in 2014.
Joanna Gumpelson was elected as “Lawyer of the Year 2017” by Best Lawyers in Restructuring and Reorganisation Law, and she is also recognised by the 2016 Who’s Who Legal – Restructuring & Insolvency publication.
Vice Chair of the Financial Institutions Subcommittee IBA (2017–2018).
Philippe Dubois has considerable experience in restructuring & insolvency. He advises banking and financial institutions as well as large French and foreign industrial groups in a wide range of economic sectors. His practice focuses on restructuring, litigation and arbitration in diverse areas such as shareholder disputes, indemnification agreements and liabilities.
He manages the firm’s Restructuring & Insolvency and Arbitration teams.
Admitted to the Paris Bar in 1994, Philippe Dubois is a doctor-at-law and teaches business law at the University of Paris X Nanterre. He joined the firm in 2008 as a Partner, after working at Jeantet (1984–2005) and Sonier Poulain (2005–2007).
He was named “Best Lawyer of the year” in Restructuring by Option Droit & Affaires magazine (2015).
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noerr llp
Dr. thomas Hoffmann
isabel giancristofano
germany
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The German Insolvency Act (“Insolvenzordnung, InsO ”) states that
the main goal of a formal insolvency proceeding is the equal
satisfaction of the creditors’ claims by liquidating the debtor’s assets
or otherwise by an insolvency plan, particularly to allow the
business of the debtor to continue. The German Insolvency Act
contains creditor-friendly tools, such as avoidance rights, director’s
criminal and civil liability for late insolvency filing, and cram-down
of shareholders or minority creditors in insolvency plan
proceedings. It also enables a debtor efficient restructuring by
providing for different kinds of measures, such as protective shield
proceedings, debtor in possession and insolvency plan proceedings.
Overall, the insolvency regime is slightly creditor-friendly.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Despite the ongoing EU discussion to implement a pre-insolvency
proceeding (“Vorinsolvenzliches Sanierungsverfahren”), there is so
far no legal framework for an out-of-court restructuring. There is
one exception: German law bonds can be restructured outside
formal insolvency proceedings via a majority vote under the
German Bond Act.
Informal work-outs are possible with the consent of all parties
involved. Due to recent court rulings, those out-of-court work-outs
bear certain risks for the management, creditors and advisors.
Formal insolvency proceedings require the involvement of a court
and an insolvency administrator or custodian. However, they grant
a wide variety of restructuring options, such as a sale of the debtor’s
business, an operational restructuring based on an insolvency plan
where the debtor’s business is continued, as well as financial
restructurings.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
There are strict rules under German statutory insolvency law:
managing directors are obliged to file for insolvency within three
weeks of the occurrence of an insolvency reason (illiquidity or
balance sheet over-indebtedness with no going-concern prognosis).
Directors are subject to criminal and civil law liability due to late
insolvency filing. This may include the payment of significant
amounts of damages to third parties as well as to the debtor. In
addition, directors are personally liable for any unpaid employee
social security contributions and wage and value-added taxes.
The directors of a company are obliged to continuously monitor its
financial status, irrespective of whether a crisis is occurring or not.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Apart from the debtor company itself, creditors are the most
important stakeholders in the financial crisis of a company. In
particular, only the debtor itself (through its directors) or creditors
may file for insolvency. Without an insolvency filing, insolvency
proceedings cannot be initiated against a company.
The debtor may file for insolvency if the company is balance sheet
over indebted without a going-concern prognosis, illiquid or
threatening to become illiquid. For a creditor filing there are
additional requirements. The creditor must have a legal interest in
the insolvency filing and must prove its claim against the debtor and
the reason for insolvency. This may be difficult to do as the creditor
will not have the required internal company information.
ger
man
y
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There are no specific rules for certain types of creditors outside of
formal insolvency proceedings. In principle, a creditor will have to
litigate its claim and show the enforcement was unsuccessful before
filing for insolvency. However, even if a creditor successfully
enforces against a company in financial distress, payments made to
him may be clawed back by the insolvency administrator under
certain circumstances.
As soon as insolvency has been filed, enforcement measures by a
single creditor are usually no longer admissible or can be clawed
back, unless the creditor had no knowledge of the filing.
Secured creditors may under certain circumstances directly enforce
into their assets (e.g. creditors with a retention of title claim or
where assets have been assigned as a security to a creditor).
Shareholders of the debtor will have few rights and influence in the
insolvency proceedings. They are not entitled to file for insolvency
(unless all managing directors have resigned – in that case the duty
to file for insolvency in time shifts to the shareholder with all legal
consequences). With few exceptions, shareholder loans are
subordinated in a German insolvency.
Outside of formal insolvency proceedings, no moratoria or stays are
available.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
In opened insolvency proceedings, the insolvency administrator has
a number of possibilities to claw-back certain acts (e.g. a payment,
granting of securities, delivery of goods) and reverse transactions.
The intention of the law is to distribute the debtor’s assets equally
amongst the creditors and avoid preferential transactions. For
creditors, this bears the risk that acts close to the insolvency –
specifically the three months preceding the filing – are clawed back.
Creditors must act carefully if they have knowledge of financial
distress of a business partner.
The consequence of a claw-back is that the insolvency administrator
can claim back payments, goods delivered or other advantages from
the recipient. If the recipient made a consideration, he may claim
such consideration back from the insolvency estate – however, only
as an unsecured insolvency claim.
The insolvency administrator may claw-back an act detrimental to
the creditors if it was undertaken:
■ within one month before the insolvency filing, if the
recipient was not entitled to receive the obtained, e.g. in cases
of early payment or granting of additional securities;
■ in the second or third month before filing, if the recipient
was not entitled to receive the obtained and the debtor was
either illiquid or the recipient had knowledge that the act was
detrimental to the creditors;
■ within a period of three months before filing, if the debtor
was illiquid or had filed for insolvency and the recipient was
aware of the illiquidity, circumstances that indicate
illiquidity, or the insolvency filing;
■ within one year before filing, payments on shareholder loans
or similar claims, but note that securities granted for
shareholder loans can be clawed back for 10 years;
■ within four years before filing, acts granted without
consideration (e.g. a donation or a payment or delivery of
goods without a fair consideration in return); or
■ within 10 years before filing, if the debtor acted wilfully to
disadvantage the creditors and the recipient was aware of
such an intention. The intention to disadvantage the creditors
is generally assumed by courts if the debtor acted in the
knowledge that it was (imminently) illiquid and the recipient
was aware of the financial distress. To limit claw-back
options for insolvency administrators and thereby grant
security for business transactions, a number of exceptions to
this provision were included in a reform of the claw-back
provisions in April 2017. However, a general claw-back risk
for up to 10 years continues to exist. This especially applies
in the event that the debtor is and has been in financial
difficulties for an extended period of time.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
There is no legal framework for informal restructuring work-outs
under German law. Therefore, they need the consent and
participation of all affected parties. In practice, informal work-outs
are the preferred option especially in financial restructurings. It is
important to note that an out-of-court restructuring requires a third-
party restructuring opinion (“Sanierungsgutachten”) to avoid
liability for all stakeholders involved, should the out-of-court
restructuring fail.
Should the parties not come to an agreement, the German
Insolvency Act provides for alternative restructuring options under
court and administrator or custodian supervision.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Insolvency proceedings under German law provide extensive tools
for the rescue of businesses. Both debt-for-equity swaps and pre-
packaged sales are possible in the framework of formal insolvency
proceedings. Secured creditors have rights to prevent detrimental
outcomes. However, dissenting stakeholders can be crammed down
in an insolvency plan.
Regular insolvency proceedings (as opposed to self-administration
(“Eigenverwaltung”)) are opened upon application of the debtor or
a creditor. An insolvency administrator is appointed, and in larger
insolvencies, a creditor committee, also creditor meetings are
scheduled. The administrator has to be an individual (not a firm).
He or she will assess the debtor’s assets and their value, evaluate
whether the assets will cover the costs of the insolvency proceedings
and ask creditors to file their claims. The administrator will also
keep an insolvency table and assess whether it is feasible to continue
the debtor’s business and if financing is necessary and available.
Once the insolvency proceedings are opened, only the insolvency
administrator may dispose over the debtor’s assets. The shareholders
or the debtor’s managers lose control over the business.
Regularly, the insolvency court does not open insolvency proceedings
immediately after the filing. There is a preliminary insolvency period
of regularly around three months during which the wages of the
German-based employees will be borne by the German state.
The administrator (with the consent of the creditor committee or
assembly) can arrange a pre-pack sale in the period before the
opening of the proceedings instead of preparing a liquidation of all
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assets. During this time, the administrator will set up a bidding
process with the aim of selling the business as a whole on the
opening date. Such sales are usually asset deals as the debtor entity
remains intact with the insolvency debt. The business can then be
continued in a purchaser entity. The administrator will distribute the
sale proceeds to the creditors after deducting the costs of the
insolvency proceedings (“Übertragende Sanierung”).
Alternatively, the debtor’s business can be restructured. This would
usually take place in the framework of an insolvency plan. The debtor
entity would remain the owner of the business and not be liquidated.
Insolvency plan proceedings provide a flexible restructuring of a
business supervised by the court. Either the debtor or the insolvency
administrator/custodian (for self-administration, see below) may
prepare and file an insolvency plan. The plan will contain measures
to restructure the business, such as waivers, haircuts and payment
deferrals, change of the legal form of the debtor entity, sale of
shares, reduction and increase of the share capital (also combined)
and debt-for-equity swaps. The creditors are divided into groups
which separately vote on the plan. If the majority of the groups
approve the plan, the plan is deemed accepted, thereby cramming
down the dissenting voting creditor groups.
As an alternative to an insolvency administrator managing the
insolvency procedure, the debtor can apply for self-administration.
Courts have to allow these proceedings unless there are
circumstances indicating that this would be disadvantageous for the
creditors. In self-administration, the debtor remains entitled to
dispose of its assets and continues to manage the business
supervised by a court-appointed custodian.
In order to gain further flexibility for business restructuring, in 2010
protective shield proceedings were introduced. The debtor can
apply for protective shield proceedings if it is balance sheet over-
indebted and imminently illiquid, but not yet illiquid, and a
restructuring is not evidently unfeasible. The application needs to
contain a confirmation by an experienced practitioner that these
requirements are met. The court can then grant a period of up to
three months in which the debtor is protected from enforcement in
order to present an insolvency plan. The court will usually appoint
a preliminary creditor committee and custodian to supervise the
debtor during this period. In practice, the application for a
protective shield proceeding will require thorough preparation and
consensus with the key stakeholders.
Shareholder and creditor rights:
■ Shareholders generally lose control over the debtor when
insolvency proceedings are opened. They cannot participate
in the insolvency proceedings other than as regular creditors
if they have recognised claims against the debtor other than
shareholder loans (in practice, most shareholder claims will
be classified as loans, even if they concern other agreements).
■ Creditors are entitled to vote on material decisions in the
insolvency proceeding through an appointed creditor
committee. If no committee is appointed, the creditors
decide in the creditor assembly (see below under question 4.4
for creditor rights).
■ Secured creditors. Retention of title is unaffected in
insolvency proceedings. If a creditor has full title to an asset,
it must be returned to the creditor and the creditor does not
take part in the insolvency proceedings. Most securities only
grant a right to receive the proceeds of their sale which the
administrator takes care of and receives a fee for. Therefore,
secured creditors have to file their claims with the insolvency
administrator and participate in the proceedings.
3.3 What are the criteria for entry into each restructuring procedure?
Any formal insolvency proceeding requires an insolvency filing.
Special proceedings must be applied for within the filing, such as
self-administration, insolvency plan proceedings or protective
shield proceedings.
An insolvency filing will only lead to opened insolvency
proceedings, if:
■ an insolvency reason exists (illiquidity, imminent illiquidity
or balance sheet over-indebtedness with no going-concern
prognosis); and
■ the assets of the debtor are sufficient to cover the costs of the
insolvency proceeding.
3.4 Who manages each process? Is there any court involvement?
In preliminary insolvency proceedings (the period between
insolvency filing and opening of the proceedings), the debtor
regularly continues to manage its business, albeit with the consent
of the preliminary insolvency administrator only.
In opened insolvency proceedings, the insolvency administrator
manages the proceedings and ensures the satisfaction of the creditors
by implementing the tools explained under question 3.2 above.
Only in self administration proceedings can the debtor itself,
through its executive directors, manage the proceedings. In this
case, the debtor is monitored by a court-appointed custodian who is
also responsible for actions usually reserved for an administrator
(such as claw-back of transactions).
The court is always involved in insolvency proceedings; it
supervises the participants and decides on specific issues (i.e.
insolvency plan, change from self-administration to regular
insolvency proceedings).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
In principle, insolvency proceedings do not affect contracts. They
continue to be valid and effective, but special provisions apply to
some contracts:
■ Certain legal relations are terminated automatically, such as
instructions and powers of attorney, profit and loss
agreements.
■ Any contracts which are not fully implemented can either be
fulfilled by the insolvency administrator or rejected. If the
administrator rejects fulfilment, any claims of the other party
are unsecured insolvency claims.
■ In principle, long-term agreements such as property leases
remain in force and cannot be terminated by the other party
on grounds of the insolvency only. Claims arising before the
insolvency opening can only be filed as unsecured claims.
Any claims arising after the opening of the proceedings can
be claimed from the insolvency mass as a privileged claim.
However, the insolvency administrator may terminate such
agreements early in order to free the insolvency estate from
disadvantageous liabilities.
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■ The possibility of a set-off for a creditor may be affected by
the opening of insolvency proceedings, depending on when
the claims subject to the set-off become due and how they
were acquired.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Granting a loan to a company in financial distress bears risk as the
lender may be liable towards other creditors for delaying its
insolvency filing if it had no chances of a successful restructuring.
Out-of-court rescue funding is therefore only privileged in an
insolvency proceeding if it is based on a third-party restructuring
opinion (“Sanierungsgutachten”) confirming that the business can
be restructured successfully before granting loans.
In a formal insolvency proceeding, the insolvency administrator
may take up a loan if he deems such loan can be paid back from the
insolvency mass. Such loan repayment claims are qualified as
privileged claims. The administrator may take up loans and incur
privileged insolvency claims during preliminary insolvency
proceedings with prior authorisation of the court.
The German Employment Agency pays all employee salaries for a
period of up to three months between insolvency filing and the
opening of insolvency proceedings. The debtor’s business can be
continued without the personnel costs and the costs saved can be used
to restructure the business. As soon as insolvency proceedings are
opened, the employee’s claims become privileged claims and have to
be borne by the debtor. The insolvency administrator can therefore
only continue to employ staff if the insolvency mass is sufficient to
pay the salaries, social security contributions, loan taxes, etc.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Solvent liquidation can be resolved by the shareholders. The debtor
company is then wound down, i.e. its assets are liquidated and debt
paid. Solvent liquidation is only possible if all liabilities can be met.
If the debtor does not have sufficient funds for a solvent liquidation,
it must file for insolvency as soon as an insolvency reason exists
(see section 3 above). The liquidation of a company is regularly
implemented in a regular insolvency liquidation proceeding by an
insolvency administrator.
4.2 On what grounds can a company be placed into each winding up procedure?
See section 2 above. The managing directors of a company are
obliged to file for insolvency if an insolvency reason exists.
Creditors are also entitled to file for insolvency, but under stricter
requirements.
4.3 Who manages each winding up process? Is there any court involvement?
In a solvent liquidation, a liquidator is appointed by the
shareholders. This liquidator can be the former managing director
of the company. The liquidator manages the winding up of the
company until no liabilities remain and it can be deleted from the
commercial register when it ceases to exist.
In insolvency proceedings, an insolvency administrator or, in self-
administration, a custodian manages the liquidation of the debtor’s
assets and the distribution to the creditors. The creditor committee
and creditor meeting approve the important decisions, and the
insolvency court monitors the proceedings (see question 3.6 above).
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Shareholders are in full control of the company during a solvent
liquidation and creditors have no special rights as all claims will be
fully satisfied.
In an insolvency proceeding, shareholders generally lose control
over the debtor company. The insolvency administrator or custodian
takes over the management and disposal of assets completely,
including the realisation of security. The creditor assembly resolves
via majority votes on major issues, i.e. it approves acts of the
administrator with special importance, such as the sale of the
business. It can also dismiss the insolvency administrator and
appoint or dismiss the creditor committee. The creditor committee
has additional tasks and rights and may request detailed information
from the administrator or custodian and actively participate in the
decision making regarding the management of the debtor. The
creditors therefore have a clear influence on the proceedings and can
instruct to, or prevent the administrator from, taking actions that the
creditors do not agree with.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
See question 3.5 above.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Secured creditors I: Creditors with full title to an asset can claim for
the asset to be separated from the insolvency mass and handed over to
them. They do not have to participate in the insolvency proceedings.
This is, for example, the case for creditors with retention of title claims.
Secured creditors II: Creditors with other security rights (e.g. with
a mortgage, security transfer or assignment) participate in the
insolvency proceedings as creditors. The insolvency administrator
will liquidate such assets, separate the proceeds and pay them out to
the secured creditor.
Privileged creditors: Creditors which have made agreements with
the insolvency administrator, e.g. all liabilities the administrator
incurs while continuing the business, such as wages, new orders for
goods and services made after the opening of the insolvency
proceedings. The insolvency administrator is personally liable for
these claims. The costs of the insolvency proceedings, including the
administrator’s or custodian’s fees, also fall in this rank.
Unsecured creditors: These include all unsecured claims that
originated before the opening of the insolvency proceedings. These
claims are satisfied from the proceeds of the liquidation of the debtor’s
assets or the continuation of the business. In practice, unsecured
creditors only receive a small quota on their insolvency claims.
Subordinated creditors: These are usually shareholder loans or
similar claims as well as claims for interest, etc.
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4.7 Is it possible for the company to be revived in the future?
In the framework of liquidation procedures, the debtor company is
usually liquidated and deleted from the commercial register. After
deletion, it ceases to exist.
However, in insolvency plan proceedings, when the insolvency plan
is fully implemented and no new insolvency reasons exist, the
company continues to operate and exist.
If the insolvency reason is removed for other reasons (e.g. a
shareholder payment), the company can also continue to operate and
the insolvency proceedings are terminated.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
In principle, tax laws do not provide special provisions for
insolvency. Particularly, there are no exceptions regarding the
payment of VAT, wage, income, corporation and capital gains taxes.
Especially in insolvency plans, the tax effects have to be considered
carefully to avoid extraordinary restructuring gain
(“Sanierungsgewinne”) taxes. Usually, in complex proceedings, a tax
opinion from the competent tax authority is requested to mitigate tax
risks, especially those arising in connection with the debt restructuring.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment agreements remain valid, irrespective of an insolvency
filing or the opening of insolvency proceedings. The insolvency
administrator or custodian may terminate employment agreements
with a notice period of three months (unless the employment
agreement provides for a shorter term). Employee claims are
standard unsecured insolvency claims, no special rules apply for
them.
If the business is continued, the standard rules apply for termination
of employment agreements. The German Dismissal Protection Act
is applicable and employees can only be terminated if the required
criteria apply (“social selection”). Also, works councils have to be
involved. When mass terminations are necessary, the insolvency
administrator must negotiate and agree on a social plan for the
employees which will usually provide for compensation payments
to the employees (privileged claims).
In a business transfer, all employees of a business automatically
transfer to the acquirer. Only the employee, not the acquirer, can
object to such a transfer. This provision is also applicable in a
company’s insolvency. Social plans can provide for employees to
be transferred to a special transfer vehicle where employees are
trained and transferred to new employers. However, such vehicles
are costly, and the acquirer will likely have to bear a large part of the
costs.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Insolvency proceedings can only be initiated in Germany, if an
entity has its COMI – centre of main interest – in Germany. Courts
will review the question of COMI carefully. It is not uncommon for
German courts to pull insolvency proceedings of foreign entities to
Germany if the entity’s COMI is deemed to be located in Germany
by the court, especially in group insolvencies.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Foreign insolvency procedures can be recognised under EU
regulations as well as the German Insolvency Act as foreign main or
secondary proceedings. Acts of foreign administrators and receivers
can be recognised under such proceedings, including claw-back,
set-off and the subordination of claims. These rules are especially
relevant in cross-border group insolvencies where intra-group or
cash pooling claims exist.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
In large insolvencies and where sufficient connection to another
state exists, it is not uncommon to implement restructuring measures
admissible in other jurisdictions. Specifically, restructuring measures
under English law have been used by larger German companies in
the past to achieve a financial restructuring (scheme of arrangement).
Due to the time and cost effort of such foreign proceedings, as well
as increasingly strict court decisions on the requirements for and
validity of the restructuring measures, in practice foreign insolvency
proceedings are used only in a very small number of cases.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
On 20 April 2018, new provisions in the German Insolvency Act
regarding group insolvencies were implemented.
Under the new provisions, a group debtor can apply for joint
jurisdiction of all concerned group entities at the same insolvency
court. If one of the group debtors files for insolvency and the court
declares itself competent, other insolvency proceedings for entities
of the same group will be opened at the same court and judge.
The new group insolvency rules contain further provisions on the
interaction of the parties to the group insolvency proceedings.
Insolvency administrators of the same group (if one administrator
not is appointed for several entities) are obliged to co-operate and
keep each other informed. The same applies to creditor committees.
A group creditor committee can be appointed.
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Dr. Thomas Hoffmann Noerr LLP Börsenstraße 1 60313 Frankfurt am Main Germany Tel: +49 69 9714 77161
Email: [email protected]
URL: www.noerr.com
Isabel Giancristofano Noerr LLP Tower 42, 25 Old Broad Street London EC2N 1HQ United Kingdom Tel: +44 20 7562 4338
Email: [email protected]
URL: www.noerr.com
Thomas Hoffmann has been advising companies in distressed situations and during insolvency proceedings for over 20 years. He co-heads Noerr’s Restructuring and Insolvency practice group.
His typical instructions include bridge and restructuring financing on the basis of restructuring plans that meet the requirements of the German Federal Court of Justice as well as the restructuring of syndicated loans or listed bonds. The preparation and, if necessary, implementation of insolvency (plan) restructurings in self-administration proceedings on the debtor’s side is just as much a part of his advisory activities as the representation and analysis of restructurings in the interests of shareholders or creditors.
Thomas is a managing director of Team Treuhand GmbH, a Noerr company which offers services in distressed situations, e.g. as a restructuring shareholder in a dual-benefit trust, a security trustee or a joint representative of bond creditors under the German Bonds Act.
Noerr stands for excellence and an entrepreneurial approach. With highly experienced teams of strong characters, Noerr devises and implements solutions for the most complex and sophisticated legal challenges. United by a set of shared values, the firm’s 500+ professionals are driven by one goal: our client’s success.
Listed groups and multinational companies, large and medium-sized family businesses as well as financial institutions and international investors all call on the firm.
As one of the leading European law firms, Noerr is also internationally renowned with offices in 11 countries and a global network of top-ranked “best friends” law firms. In addition, Noerr is the exclusive member firm in Germany for Lex Mundi, the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide.
Offices: Alicante; Berlin; Bratislava; Brussels; Bucharest; Budapest; Dresden; Düsseldorf; Frankfurt; Hamburg; London; Moscow; Munich; New York; Prague; and Warsaw.
Isabel Giancristofano is a member of Noerr’s Corporate Department and the firm’s Restructuring & Insolvency Group. She specialises in complex cross-border transactions, particularly with German-UK aspects. Isabel regularly advises on international insolvency and restructuring cases as well as issues relating to the launch of new businesses in Germany and the co-ordination of multi-jurisdiction matters. Isabel has good knowledge of the German, UK and Iberian markets.
Special group co-ordination proceedings can be opened upon
application of a debtor, a (preliminary) insolvency administrator or
a (preliminary) creditor committee. The court will then appoint a
group co-ordinator independent from the other parties to the
proceedings who shall ensure the aligned administration of the
insolvencies. The co-ordinator can also present a coordination plan
to the group insolvency court, which is not binding for the
insolvency proceedings of each entity.
For groups with foreign entities, the rules explained under section 7
above apply.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The introduction of an out-of-court restructuring procedure is
discussed both on an EU level and in the German literature and
practice. On an EU level, a directive on preventive restructuring
measures and measures to increase the efficiency of insolvency and
restructuring procedures is set to be voted on for 26 March 2019 in the
European Parliament. On a national level, an expert commission,
which was established to evaluate the effects of the German insolvency
law reform in 2012, found that the self-administration proceedings are
largely successful and have proved to be attractive in practice. As a
result, the government plans to reinforce this procedure.
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Zepos & yannopoulos
emmanuel mastromanolis
giorgos vavatsioulas
greece
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
As a general principle, winding up proceedings (bankruptcy) are
less creditor-friendly than pre-bankruptcy rehabilitation and
reorganisation proceedings, which give leeway to creditors to apply
for their initiation or to contribute to negotiations with the debtor,
while being subject to stricter completion deadlines as opposed to
winding up. Also, pre-bankruptcy rehabilitation and reorganisation
proceedings, special administration, and recently, out-of-court
workout contribute to the maximisation of going concern value of
the business of debtors and are subject to the “no worse off
principle”, in application of which creditors may not be found in a
worse financial position in comparison with the level of their
satisfaction in the context of bankruptcy.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
In principle, the legislative framework in Greece does not allow for
informal work-outs; however, there are two specific insolvency-
related processes available to debtors, which, although not informal,
can inherently boast certain scintilla of informality.
The new extrajudicial debt settlement mechanism called “Out
of the Court Workout” (“OCW”) introduced by virtue of law
4469/2017. OCW allows for the extrajudicial settlement of amounts
due by a debtor to any creditor by submitting an online application
before the Special Secretariat of Private Debt Management until
31.12.2018 via a special electronic platform held on the latter’s
official website. The proceeding may be also initiated by the
creditors (Greek state, Social Security Funds, Public Law Legal
Entities or financial institutions) by inviting in writing the debtor to
be submitted to the OCW. Law 4469/2017 provides for the
possibility (and not the obligation) of the Settlement Agreement’s
judicial ratification (by means of a Court ruling). The judicial
ratification is required in order for the Settlement Agreement to
legally bind the non-contracting creditors. The Court decision
ratifying the Settlement Agreement constitutes an ex lege
enforcement title.
The pre-bankruptcy Rehabilitation process provided for by art.
99-106f GBC. The core of this process is the – private –
rehabilitation agreement which is contracted by and between the
debtor and a qualifying majority of its creditors, i.e. a majority of
60% of total claims, including at least 40% of the claims secured by
securities in rem or a pre-notation of mortgage or holding a special
lien, providing for the restructuring of the debtor’s debts with the
aim that the debtor remains operational after the ratification.
However, this process cannot be deemed informal since it involves
the ratification by the competent Court of the relevant rehabilitation
agreement.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors managing a company in financial distress may be held
liable: a) in case they do not meet their obligation to file a timely
application for bankruptcy; or b) in case they have intentionally
caused the cessation of payments of the company, i.e. the
insolvency. The cessation of payments is the objective requirement
in order to be declared insolvent; the cessation of payments shall
constitute a general and permanent inability of the company to meet
its outstanding monetary obligations in a serious and consistent
manner and such inability should demonstrate lack of
creditworthiness. Such liability applies also to the persons who
influenced the directors (i.e. shareholders, non-executive members,
etc.). In addition, the GBC provides for the directors’ criminal
liability for certain practices, which took place during a particular
period. Nevertheless, directors will be held liable towards social
security organisations and tax authorities for certain company debts,
while they may also be held liable for any tortious acts or omissions
that took place during their management or representation of the
company. In particular:
a) Undue delay of bankruptcy (GBC art. 98 par. 1): According
to the GBC, the management (directors, administrators) of
the debtor company is obliged to file a bankruptcy
application within 30 days from the point of time when it
ceased its payments. Unreasonable (wilful) delayed filing of
a bankruptcy application may cause further damage to the
company, the creditors and the market as a whole, as it allows
the continuation of a business which is not capable to pay its
creditors while its debts are increasing. In that case, the
directors of that company will be found jointly and severally
liable towards the company’s creditors for not filing the
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bankruptcy application within the aforementioned timeframe
either because they knew or they wilfully ignored the cessation
of payments. Such liability applies even if the delay is caused
due to efforts to place the company under a restructuring
programme (unless the restructuring efforts flourish and there
is no damage). However, any management’s efforts made in
good faith aiming to avoid the insolvency (i.e. due to the fact
that the management subjectively considered the restructuring
of the company possible) will be taken into consideration for
liability mitigation purposes. It should be noted that due to the
difficulty in proving the actual facts, in practice, it has been
really difficult to substantiate the directors’ liability on above
grounds.
b) Causing the cessation of payments (art. 98 par. 2 GBC): In
case the cessation of payments is attributed to the
management’s wilful misconduct or gross negligence, the
directors will be held liable jointly and severally towards the
company’s creditors for the damage caused. In substance, the
directors will be liable for mismanagement, false business
decision-making, frivolous risk undertaking, competitive
actions to the detriment of the company, and in general any
action or omission harming the company’s creditors. To be
noted, when examining the extent of the directors’ wilfulness,
the “business judgment rule” (art. 102 of Greek law
4548/2018) shall not apply. The liability for causing the
cessation of payments shall be distinguished from the case in
which the company was already in financial difficulties and
the management just aggravated the situation. In the latter
case, the general rules of the Greek corporate law regarding
the administrative liability will apply.
c) Criminal liability (art. 171 GBC): In case the directors cause
the cessation of payments, even though the company
objectively would not have reached, without their acts and/or
omissions, a general, permanent, and not transitory, inability
to pay its commercial debts when they fall due, then the
directors of the company might be found criminally liable
and be sentenced to the payment of criminal fines or
imprisonment of a minimum duration of two years (art. 171
GBC). The GBC provides for certain illegal practices which
may be used by the directors and lead to a false cessation of
payments such as the following: (a) concealing or
compounding assets belonging to the bankruptcy estate of the
company contrary to the rules of wise financial
administration; (b) conclusion of risky, detrimental or
speculatory agreements contrary to the rules of wise financial
administration or spending extremely high amounts on
betting; (c) sale of goods at extremely low prices contrary to
the rules of wise financial administration; (d) false
presentation of the company as a debtor of third parties or
false recognition of inexistent third-party rights; (e)
compounding, hiding or destroying of the fiscal books and
documents of the company in order to prevent the
examination of the financial status of the company; (f) failing
to draft the annual financial statements of the company; or (g)
decreasing the company’s estate by any means. Such
practices are also illegal as such, i.e. irrespectively of the fact
whether they lead or not to a cessation of payments status,
when they are adopted during the suspect period or within six
months prior to the declaration of bankruptcy.
Directors may also be held personally criminally liable (facing up to
two years of imprisonment) for favourable treatment of creditors
while the company face a situation of cessation of payments or of a
threatened inability to regularly meet outstanding monetary
obligations, satisfy creditors’ claims, provide security or knowingly
favour a creditor against other creditors and in case of receiving in
advance payments exceeding those provided for in the company’s
articles of association.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The shareholders of a company are not deemed creditors; therefore,
they are not able to influence a company’s situation, nor can they
proceed with a relevant action against the company. In general, any
action taken against the company is associated with the enforcement
measures and therefore there is a distinction among secured and
unsecured creditors. Creditors secured in rem are able to initiate
enforcement proceedings against the debtor, whereas, all
enforcement proceedings against the debtor are suspended for
unsecured creditors as of the time of such declaration. However, the
law grants a general ranking privilege to employees (art. 154 par. 1
(b)), while there is a particular regime regarding: a) the right of third
parties to retrieve their objects that are in the debtor’s possession
(known as “Separation Right”); b) the right of third parties to seek
their goods which were delivered to the debtor in order to be resold
(known as “Bankruptcy Claim”); and c) the preservation of the
bilateral and employment agreements, retention of title agreements
and set-off arrangements (art. 28 GBC et seq.) (please refer to
question 4.5 below).
With respect to available stays on enforcement, in the bankruptcy
regime, besides the ipso jure suspension of enforcement measures as
of the time of the declaration of bankruptcy, the Court (provided that
an application for bankruptcy has been filed) following a petition by
anyone bearing legitimate interest, may order any appropriate
injunction measure(s) for safeguarding the debtor’s property from
any alterations thereto as per art. 10 GBC. Said injunction
measure(s) may indicatively prohibit the disposition of any assets of
the debtor, the suspension of any enforcement measures against the
creditors or the appointment of an escrow agent; said measure(s)
shall remain in force until the issuance of the decision declaring the
debtor bankrupt or dismissing said application.
In the context of the rehabilitation procedure, besides the ipso jure
suspension of enforcement measures as per art. 106 GBC for the
period between the filing of the application for the ratification of the
rehabilitation agreement by the Court and the issuance of the
decision by the Court ratifying the agreement or dismissing such
petition, the Court may order pursuant to art. 106a GBC any
proactive injunction measure(s) in accordance with art. 10 GBC
following a petition by anyone with legitimate interest. Such
measures apply to claims, which were born before the filing of the
application for the ratification of the rehabilitation agreement and
shall remain in force until the issuance of the decision by the Court
on the ratification or non-ratification of the rehabilitation agreement.
To be noted that said injunction measures may also be granted prior
to the filing of the application for the ratification of the
rehabilitation agreement by the Court following a respective
application of the debtor or (a/the/any) creditor(s) provided,
however, that: (a) creditors representing at least 20% of the total
claims provide their written consent therefor; and (b) there is
imminent danger to the debtor, said measures remain in force until
the filing of the abovementioned application and in any case for no
longer than four months.
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2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Art. 41 GBC provides that certain transactions which were made
within the timeframe of the cessation of payments of the debtor and
the declaration of insolvency and can be detrimental for the
creditors’ group must be revoked. The law also provides for certain
transactions which may be revoked.
According to the provisions of art. 42 GBC, the following
transactions entered into by a company may be considered to be
detrimental to the creditors of the company and must be mandatorily
revoked by the receiver:
■ repayment of debts which are not yet due;
■ repayment of due debts by means other than cash or the
agreed performance; and
■ the provision of a security in rem, including registration of a
pre-notation of mortgage or provision of other securities of
contractual nature for pre-existing obligations, for which the
debtor has not undertaken a relevant obligation or in order to
secure new obligations undertaken by the debtor in
replacement of formerly existing obligations.
Under the provisions of art. 43 GBC, every payment by the debtor
with respect to outstanding debts that was made after the cessation
of payments and before the declaration of liquidation bankruptcy by
the competent Court (i.e. liquidation) may be revoked, if the counter
party was aware at that time that the debtor was in a cessation of
payments status and such act was detrimental for the other creditors.
Furthermore, art. 44 GBC provides that any transaction of the debtor
that has been effected intentionally (by the debtor) to the detriment
of its creditors during the last five years prior to the declaration of
insolvency (i.e. liquidation/receivership) by the competent Court,
must be recalled and reversed, to the extent that such third parties
were aware of the fraudulent intent of the debtor.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Considering that an “informal work-out” has the notion of a process
not taking place before the Court, reference should be made to the two
specific insolvency-related processes described above under question
1.2. However, in both cases, in order for the agreement entered into
(as the case may be) to be legally binding erga omnes and to have any
enforcement power, this should be ratified by a Court decision.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram down dissenting classes of stakeholder?
In general, the Greek bankruptcy legal framework provides for a
number of rescue proceedings aiming at the satisfaction of the
business’s creditors and the restructuring of the liabilities of
distressed companies. Below is a brief summary of the pre-
bankruptcy rescue procedures available under Greek law.
A. The Rehabilitation Proceeding (art. 99 GBC et seq.): The
core rescue (pre-bankruptcy) procedure provided by the GBC
is the rehabilitation proceeding (in Greek: “προ-πτωχευτική διαδικασία εξυγίανσης”) (the “Rehabilitation Proceeding”)
the main purposes of which are: a) for a company debtor to
secure the viability of its operations while avoiding the
implications and constraints of statutory bankruptcy
(including but not limited to the alienation of the company
debtor from the management of its property and the latter’s
submission to the powers of the bankruptcy administrator);
and b) for creditors to avoid the absolute freezing of their
claims (subject to the ipso facto suspension effects of
rehabilitation and the potential order of provisional measures
by the bankruptcy Court, while achieving an “à la carte”
satisfaction of those claims, other than according to the
ranking and the timeframe provided by the GBC for statutory
bankruptcy. In the context of the rehabilitation proceeding,
the company debtor concludes an “early” agreement with its
creditors (the “Rehabilitation Agreement”) in order to
rescue and restructure its operations at the pre-bankruptcy
(insolvency) stage; the pattern, timing and conditions of
satisfaction of creditors are regulated by the – freely
negotiated – “pre-packaged” Rehabilitation Agreement that
becomes valid and enforceable upon its ratification by the
bankruptcy Court.
The Rehabilitation Agreement is, in principle, a settlement
agreement, with no mandatory minimum content, whereas
the parties may freely negotiate and agree on its terms and is
concluded between the debtor and its creditors representing
specific percentages of the debtor’s obligations (creditors
holding 60% of the total debts of the company debtor
including 40% of any in rem secured debts). Although the
agreement may provide any arrangement of the debtor’s
assets and liabilities towards the viability and the
restructuring of the business, the law provides for indicative
content which may be freely negotiated and agreed upon
between the debtor and the creditors. By way of indication,
the agreement may provide for:
■ the adjustment or alteration of the conditions and timing
of payment of the company debtor’s financial obligations
(e.g. the change of the interest rate, etc.);
■ the capitalisation of such obligations, the arrangement of
the relationships among different creditors, especially
following the capitalisation of the company debtor’s
obligations;
■ the “haircut” of the creditors’ claims;
■ the suspension of the creditors’ individual actions for the
satisfaction of their claims following the ratification of the
agreement;
■ the assignment of the business of the company debtor to a
third party; and
■ the divestiture of the company’s assets of the company’s
business en bloc or of parts thereof, etc.
The Rehabilitation Agreement may also include inter-
creditors agreements regulating the sequence and priority of
satisfaction of the claims of each of the creditors or of each
creditor’s class, while the transfer to the debtor’s business in
whole or in part as a restructuring tool can also be agreed
upon in the Rehabilitation Agreement (art. 106d GBC). In
particular, such transfer of business can be effected in two
ways: a) either by means of the Rehabilitation Agreement in
which the acquiring party shall by a signatory as well; or b)
by a separate (subsequent) agreement, concluded in
execution of the Rehabilitation Agreement. In addition, the
GBC provides that, while the assets of the company debtor
can be transferred as a whole (unless otherwise agreed), the
liabilities are not transferred, unless otherwise agreed. Non-
transferred debt is repaid by the purchase price of the
business transfer or is written off or capitalised (art. 106d par.
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1 GBC). The debtor’s business can be transferred to: a) any
third party; or b) by way of a contribution in rem to a Greek
Société Anonyme especially established by the creditors or to
any other (existent or newly established) company.
B. The Special Administration Process (Greek law 4307/2014):
An attempt-to-rescue pre-bankruptcy procedure provided by
Greek law 4307/2014 is the special administration process
(the “Special Administration Process”), which is more of a
liquidation nature than of a restructuring one. In particular,
no restructuring amendments are provided therein, nor are
any debt arrangements relevant. Instead, it aims at
maintaining and divestiture of the business, if possible, as a
whole. It is a fast track procedure pursuant to which shall
either succeed within a timeframe of one year (a success is
considered to be the divestiture of 90% of the assets) or fail in
which case the business is driven to bankruptcy.
C. The Out-of-Court Work Out Mechanism (“OCW”) (Greek
law 4469/2017): OCW allows the extrajudicial settlement of
amounts due by a debtor to any creditor by submitting an
online application before the Special Secretariat of Private
Debt Management initially until 31.12.2018 and currently
extended until 31.12.2019 (as art. 4 par. 1 of Greek law
4469/2017 was amended, by virtue of art. 45 par. 3 of Greek
law 4587/2018) via a special electronic platform held on the
latter’s official website. OCW aims at the conclusion of a
debt settlement agreement through the involvement of a
coordinator who is in charge of notifying all creditors of the
debtor referred to in the application. Creditors representing
50% of all claims should participate in order for the settlement
to proceed.
The debt settlement agreement is concluded between the
debtor and specific majorities of the participating creditors
(i.e. � of all claims and � of secured claims). The parties
may decide freely on the terms of the debt restructuring
agreement subject to certain restrictions, the most important
of which are:
(a) the creditors must be no worse off under the out-of-court
settlement that what they would have been if the debtor’s
assets were liquidated through the enforcement procedure
of the Code of Civil Procedure; and
(b) restrictions regarding the write-off and/or settlement of
the claims of the Greek State and the social security funds;
for the calculation of such amounts and considerations,
the following are deducted from the creditors’ claims: (i)
the aggregate amounts of interest due for late payment;
(ii) 95% of the claims of the Greek State stemming from
fines imposed by the tax administration; and (iii) 85% of
the claims of the Greek State and the social security funds
stemming from increases and interests for late payments.
The relevant legislative framework provides for the option
(and not the obligation) of the debt restructuring agreement’s
judicial ratification by means of a Court ruling. The judicial
ratification is required in order for the settlement agreement
to legally bind the non-contracting creditors. The Court
decision ratifying the Settlement Agreement constitutes an ex lege enforcement title.
In view of the above and the brief outline of the available
distress rescue tools, the current legislative framework
provides for a wide range of restructuring measures mostly
freely negotiable among the involved parties.
From Hold-out to Cram-down
Due to the fact that a company’s restructuring measure usually
requires a shareholders’ consent or approval, in the context of the
Rehabilitation Proceeding, there is a measure explicitly provided in
the GBC in case shareholders fail to cooperate by providing their
required consent to the restructuring measure or obstruct the
relevant measure (the “Hold-Out”). In case one or more debtor’s
shareholders declare that they will not participate in the General
Shareholders’ Meeting or that they will countervote the relevant
item of the agenda, and they actually do so, the Court, if it deems
such approach abusive, may appoint a special representative
empowered to exercise the standing and voting rights of the debtor’s
shareholders who do not cooperate in making the required decisions
for the implementation of the Rehabilitation Agreement, subject to a
prior application by the debtor or a creditor.
Nevertheless, once a Rehabilitation Agreement or an OCW debt
settlement agreement has been ratified by the Court, it binds all
creditors, even those who have dissented in the proceeding or did not
participate in (the “Cram-down effect” or the “Mandatory
Settlement”); however, their claims are regulated therein, which
means also that provisional (suspension) measures provided under the
rehabilitation agreement are binding on non-consenting creditors, but
only for a three-month period as of the ratification. To the extent that
different classes of creditors/stakeholders exist, the above provisions
apply even in case of dissenting classes of stakeholder, which means
that, as long as the majority criteria (mentioned under paragraph A.
above, the dissenting or non-participating creditors/stakeholders are
bound by the Rehabilitation Agreement.
It should be noted that, although rare in practice, dissenting
stakeholders may claim indemnification against the company and the
creditors in case in the context of a Court assessment, it could be
evidenced that after liquidation, relevant proceeds could have arisen.
3.3 What are the criteria for entry into each restructuring procedure?
All procedures analysed above under question 3.2 can be initiated
by any eligible person under the GBC (merchants and association of
persons with legal personality that pursue an economic purpose)
while independent professionals who are not eligible under the GBC
may exceptionally and under certain circumstance (not yet fully
regulated thereof ) initiate the OCW procedure. In particular:
A. The Rehabilitation Proceeding: A debtor company is eligible
to file a ratification application, if it can establish a current or
future (threatened) inability to meet its non-contingent and
outstanding monetary debts. Such inability must be of a
general nature and relate to all or the vast majority of the
company’s outstanding debt. The inability should
nevertheless not be necessarily durable (i.e. non-reversible),
because, should this be the case, it would amount to a
“cessation of payments” justifying the opening of a
bankruptcy proceeding (rather than a pre-bankruptcy
rehabilitation proceeding). Alternatively, the rehabilitation
proceeding can also be initiated when actual inability of the
debtor to meet its obligations, as they fall due, is not yet
present but there is a likelihood of insolvency of the debtor
and the bankruptcy Court considers that its insolvency could
be avoided through the recovery proceeding. Nevertheless,
any contracting creditor may file as well the ratification
application with the Court, in case there is an agreement
between the company debtor and the creditors. Otherwise, in
case of an agreement only among creditors, the ratification
application may only be filed by one of the creditors. To be
filed by creditors, the Rehabilitation Agreement must relate
to a debtor company that is already in cessation of payments
(i.e. neither in a status of threatened inability or of likelihood
of insolvency, as above).
B. The Special Administration Process: The going concern
businesses to which such mechanism refers to must be
domiciled in Greece, pursue a commercial scope and must be
unable to fulfil their overdue financial obligations in a
general and permanent manner. Corporations (and capital
companies in general) can also be placed under special
administration, if the conditions for their placement under
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liquidation or under corporate law are met for two consecutive
fiscal years (i.e. when either the corporation does not have the
minimum capital provided for by the law, or the shareholders’
equity is less than � of the nominal share capital and the
general meeting of shareholders does not take any measures to
cure the shortfall). The special administration process is
initiated by an application filed by lender(s) representing at
least 40% of the debtor’s aggregate obligations, among which
at least one is a financial institution, a financial leasing
company or a factoring company.
C. The OCW Mechanism: Individuals who may be declared
bankrupt according to the Greek Bankruptcy Code, i.e.
merchants – natural or legal persons – and associations of
persons with legal personality, which pursue economic purpose;
and legal entities which earn income from business activity
pursuant to the Greek Tax Income Code and have a tax
residence in Greece, are considered eligible debtors and can
submit an application until 31.12.2019 (as per the recently
amended provisions) in order to be placed under the beneficial
provisions of the relevant law, provided that any of the
following main conditions are met: (a) as of 31.12.2017: (i) the
debtor had outstanding debts towards financial institutions
arising from loans or credits in arrears for at least 90 days; (ii)
the debtor had debts settled after 01.07.2016; (iii) the debtor had
outstanding debts towards tax authorities or social security
funds or other public law entities; (iv) the debtor had issued
checks that have bounced; or (v) payment orders or Court
judgments for outstanding debts had been issued against the
debtor; (b) the total debts to be settled exceed €20,000; and (c)
for debtors keeping double-entry accounting books, the debtor
must have positive EBITDA or positive equity at least in one of
the three financial years preceding the submission of the
application and for debtors keeping single-entry accounting
books, the debtor must have positive net EBITDA in at least one
of the three years preceding the submission of the application.
Pursuant to the recent amendments of Greek law 4469/2017, by virtue
of art. 45 par. 3 of Greek law 4587/2018, the use of the OCW platform
is extended to certain categories of – until now – ineligible debtors
regarding the bilateral settlement of their debt towards the State/social
security funds and the amount of debt now amounts to €125.
The general partners of General Partnerships and Limited
Partnerships are able to settle their eligible personal debts, in case
their personal activity is terminated but the Partnership remains
active, whereas in case of dissolution of the Partnership but
maintenance of their personal business activity, the general partners
are able to apply for the OCW, including the debts arising from the
partnership.
3.4 Who manages each process? Is there any court involvement?
In general, the Greek Court is involved in all restructuring procedures.
While in the context of the Rehabilitation Proceeding and the OCW
debt settlement agreement, the Court’s involvement, inter alia, lies in
the ratification of the relevant agreements rendering them binding erga omnes, and in the special administration process the Court intervenes in
two stages in order: a) to accept the respective application and appoint
the special administrator; and b) to approve the special administrator’s
report on the highest bidder for the sale of the debtor’s assets.
Nevertheless, each restructuring procedure has or may have a
competent individual managing the respective process. In
particular, in the context of the OCW, the coordinator (the
“Coordinator”) is appointed by the competent authority by a
coordinators’ registry held therein and is in charge of supervising the
overall proceeding. Similarly, in the Special Administration
Process, an administrator is appointed by the Court with a mandate
to liquidate the debtor’s asset by conducting a public auction for at
least 90% of the book value of the debtor’s business and assets (the
“Special Administrator”). Whereas the Rehabilitation Proceeding
does not provide for a particular person supervising the pre-
ratification process, the Court pursuant to the ratification ruling of
the agreement and following a debtor’s or creditor’s application,
may appoint a special proxy in order to safeguard the debtor’s
assets, to proceed with certain administrative actions and the overall
supervision of the agreement’s perfection (the “Special Proxy”).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The rationale of the Rehabilitation Procedure aims at the
preservation, exploitation, restructuring and recovery of the debtor
business, without the impairment of the creditors’ collective
satisfaction. To this effect, the debtor is expected to continue its
business and, subject to the terms of the Rehabilitation Agreement,
to maintain its contractual relationships. In practice, Rehabilitation
Agreements may provide for the continuation of certain contractual
relationships considered beneficial for the debtor’s business and the
termination of others. As regards the counterparties who are forced
to perform their outstanding obligations in principle there is not a
statutory remedy available, since the rationale of the Rehabilitation
Procedure is to preserve the sustainability of the debtor’s business.
However, one could argue that to the extent that such a pertinent
contract provides that the entrance into a rehabilitation agreement
may constitute a material ground for an immediate termination of
the agreement and to the extent that they have not been committed
pursuant to the ratified Rehabilitation Agreement, they may be
entitled to terminate the contract.
With regard to the Special Administration Process and the OCW
Mechanism, the respective legal frameworks explicitly provide that
the fact that a debtor enters into such a procedure does not constitute
grounds for the termination of existing contracts. Also, in case a
transfer of business is agreed in the context of the above procedures,
contracts may be transferred as well, regardless of any transfer
restriction, to the extent such transfer is favourable to the creditors
and the debtor’s counterparty agrees.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
In general, entering into a restructuring process is not subject to the
available debtor’s assets to cover the relevant costs. However,
insufficient funds will render each process unfruitful. In any case,
the satisfaction of creditors (depending on their ranking) comes after
the repayment of any restructuring costs which will be covered from
the proceeds of any agreed restructuring measures (in the case of the
Rehabilitation Agreement and the OCW debt settlement agreement)
and the divestiture of the debtor’s assets (plus any applicable financing
available) transfer (in the case of the Special Administration Process).
Regarding the safeguards available in order to secure financing in
order to enter into one of the restructuring processes described above,
this is mostly agreed among the parties pursuant to the agreements.
However, only in the context of the Special Administration Process
is there an explicit reference to the financing necessary to be sought
by the Special Administrator for the purposes of the business
continuation. In particular, the law states that in order for the
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Special Administrator to be able to operate the business and to cover
the relevant costs (including his fees), he may receive financing.
What is of importance is the general privilege granted to the creditor
providing such financing in accordance with art. 154 par. 1(a) GBC.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure available in the Greek jurisdiction to
wind up a company is “bankruptcy” (the term “bankruptcy” can
relate both to the legal status and to the procedure – the latter being
the case for this analysis), which is regulated by art. 1-98 GBC.
Insolvency is commenced by virtue of a Court decision, whereas the
satisfaction of certain both subjective and objective conditions is a
prerequisite for the issuance of the decision declaring bankruptcy.
Persons entitled to file for a bankruptcy application (art. 5 GBC) are
(i) the debtor’s creditors bearing lawful interest, i.e. having an
existing and legally enforceable monetary or pecuniary claim, (ii) the
eligible debtor itself, (iii) the Attorney General on public interest
grounds, or even (iv) other third persons (e.g. the foreign bankruptcy
administrator of the main bankruptcy proceedings who may opt for
the opening up of secondary insolvency proceedings in Greece, if the
debtor is domiciled in another EU country, has been declared
bankrupt in that other country and has an establishment in Greece).
Upon the declaration of bankruptcy, a bankruptcy administrator
(syndikos) is appointed by the Court and is responsible for the
administration of the debtor’s assets for the purposes of liquidating
and distributing the proceeds of such liquidation to the creditors, in
accordance with their respective rights of priority. In line with the pro rata satisfaction of creditors, their claims may only be partly satisfied.
One of the most important consequences of the declaration of
bankruptcy is the suspension of enforcement proceedings against
the debtor for unsecured creditors as of the time of such declaration;
no suspension is provided in the case of secured creditors.
However, if the secured assets are closely connected with the
debtor’s business, enforcement measures on them by the secured
creditors are temporarily suspended, too. If the business is sold as a
whole by the bankruptcy liquidator, the above suspension applies
until completion of the sale of the business.
4.2 On what grounds can a company be placed into each winding up procedure?
The decision declaring a company bankrupt will be issued if the
following subjective and objective conditions – besides the typical
prerequisite of the lawful filing of the respective application – are met:
i. Subjective condition: According to art. 2 GBC, the debtor
shall have a commercial status as per art. 1 of the Commercial
Code or constitute “an association of persons bearing legal
personality and having an economic objective”. A person –
natural or legal or association of persons with legal
personality – has a commercial status if it professionally
carries out commercial activities or objectives or when it can
be attributed such status automatically by virtue of the law
(ex. a limited company, a limited liability company, a private
capital company, a shipping company, a partnership, etc.).
Single member and foreign EU companies may also be
declared bankrupt.
ii. Objective conditions: (1) According to art. 3 GBC, (a) a
debtor who is unable to fulfil his pecuniary obligations as
they become due in a general and permanent manner
(cessation of payments) is declared bankrupt, (b) a threatened
inability of a debtor to fulfil its pecuniary obligations, as they
come, constitutes grounds for bankruptcy, provided that the
debtor itself files the bankruptcy application, and (c) the
likelihood of insolvency constitutes grounds for bankruptcy
provided that the debtor itself files the bankruptcy application
along with a proposed restructuring plan as per art. 107 GBC
et seq. (2) The Court presumes – based on the provided
financial data – that the debtor’s assets suffice for covering
the expenses of the bankruptcy procedure.
4.3 Who manages each winding up process? Is there any court involvement?
A bankruptcy administrator (syndikos) is appointed by the
bankruptcy Court and is responsible for the administration of the
debtor’s assets for the purposes of liquidating and distributing the
proceeds of liquidation to the creditors, in accordance with their
respective rights of priority.
The declaration of bankruptcy is an in-Court procedure since it takes
place by virtue of a decision issued by the competent multimember
Court of the place of the centre of the debtor’s main business
interests. The Court in its bankruptcy declaring decision also (i)
appoints the rapporteur judge and the bankruptcy administrator, (ii)
orders the sealing of the debtor’s property, (iii) incorporates
provisions on the convocation of the assembly of creditors, and (iv)
defines the exact time when the cessation of payments presumably
commenced. This decision is valid erga omnes.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The shareholders of the company are not creditors; therefore, they
are not able to influence the bankruptcy process. The only influence
it can be deemed they have on the bankruptcy proceedings is
associated with their participation in that general meeting, which
will resolve on the filing of the bankruptcy application with the
Court (provided that the company, under its capacity as the debtor,
files the application itself ).
To assess the restrictions imposed on the creditors of the company,
such restrictions being first and foremost associated with the suspension
of enforcement proceedings, a primary distinction among secured and
unsecured ones shall be made. The secured in rem creditors are able to
initiate enforcement proceedings against the debtors, whereas, all
enforcement proceedings against the debtor are suspended for unsecured
creditors as of the time of such declaration. However, if the secured
assets are closely connected with the debtor’s business, enforcement
measures on them by the secured creditors are temporarily suspended,
too. If the business is sold as a whole by the bankruptcy liquidator, the
above suspension applies until completion of the sale of the business.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The general rule is that existing contracts remain in force despite the
declaration of a debtor’s bankruptcy (art. 28 GBC). However, a
distinction between instant and continuous contracts shall be made.
Upon bankruptcy, instant contracts become inactive, i.e. they are not
terminated (subject to provisions in the contract or the law to the
contrary), but their performance is put on hold. The bankruptcy
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administrator has an option to decide on their performance or non-
performance on business criteria (art. 29 GBC). Should the contract
be deemed beneficial to the creditors or the administrator wishes to
transfer the whole contractual relationship, then the latter, following
permission by the rapporteur judge, may service a performance
statement (for the whole and not part of the contract); otherwise, the
administrator may reject such contract in whole either explicitly or
implicitly by not responding within the deadline the counterparty
may have set.
Continuous contracts (or contracts with consecutive repeated
considerations) maintain their force, unless otherwise specified (art.
31 par. 1 GBC). The administrator does not have to declare their
performance and no permission by the rapporteur judge is needed.
However, continuous contracts may be terminated pursuant to the
respective provisions in the Greek Civil Code.
However, there are certain exceptions to the above, which can be
grouped as follows: (i) certain exceptions provided by the law (for
example, art. 40 of PD 34/1995 on the commercial lease agreements
provides that bankruptcy constitutes an ex lege cause for
termination); (ii) personal contracts, which are ex lege terminated
upon the declaration of a counterparty as bankrupt; and (iii)
contractual clauses that may provide for termination of the contract
in case of bankruptcy of one of the contracting parties. Lastly, it
should be mentioned that certain provisions (art. 34 GBC) apply in
case of employment contracts and that financial contracts
contemplating the provision of banking, security and investment
services are excluded and therefore can be automatically terminated.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The ranking of claims is depicted in the respective table composed
by the bankruptcy administrator as per the provision of both the
GBC and the Greek Civil Procedure Code (“GCPC”); the table
contains debts that have been announced and confirmed during
bankruptcy and is declared enforceable by the rapporteur judge.
The ranking is as follows:
■ Group debts and expenditures (art. 154 GBC). The GBC
does not specifically define these debts, which indicatively
can refer to Court expenses, expenses for the administration
of the bankruptcy property, etc. In case the auction is
enforced by a creditor secured in rem, group debts will
cumber only the group and not those creditors secured in rem;
however, they will be paid on priority, unless they are
privileged as per GCPC (ex. employment claims created after
the declaration of bankruptcy).
■ Claims bearing general privileges (art. 154 and 21 point
b. GBC). These claims are ranked in a specific order as per
art. 975 GCPC. This category includes indicatively claims
stemming from the funding of the debtor’s business for
securing continuation of business and payments, its rescue,
the maintenance or increment of assets strictly as per the
rehabilitation or restructuring plan. It should be noted that
this privilege is valid regardless of the non-ratification of the
rehabilitation plan and that it does not concern contribution
by the shareholder in case of a share capital increase.
■ Creditors secured in rem with claims bearing special
privileges and collateral securities (art. 155 and 21 point
c. GBC). These claims are ranked in a specific order as per
art. 976 GCPC. These are claims associated with
expenditures for the preservation of the assets or the
collection of their proceeds deriving during the six-month period
prior to bankruptcy and the capital and its interest accrued during
the last two years corresponding to claims with pledge, mortgage
or pre-notation of mortgage (in case of real estate).
It should be noted that art. 156 GBC as well as new art. 156A
GBC recently introduced by law 4512/2018 deal with the –
usually encountered – case of concurrence of the privileges
set forth in arts 154 and 155 GBC and/or non-privileged
claims and set out their respective ranking of satisfaction.
■ Ordinary/unsecured and book creditors (art. 21 point a.
GBC). Claims that are not in rem secured or do not bear a
privilege fall under this category. These claims are ranked
pari passu within said category.
■ Remaining or bottom-tier creditors (art. 21 point d.
GBC). These claims are satisfied provided that all other
claims (as set forth above) have been satisfied and there has
been a remainder of the liquidation proceeds.
The costs of the procedure vary; therefore a rough estimate could be
misleading.
4.7 Is it possible for the company to be revived in the future?
The former version of the GBC contained provisions on the
restoration of the debtor that had been declared bankrupt or was
about to be declared so. The effects of the repealed institution of
restoration have been transferred as regards natural persons to the
mechanism of declaring such person excusable (art. 167 par. 4
GBC) and as regards legal persons to the final ratification of the
restructuring plan (art. 164 par. 2 GBC). Should the restructuring
plan be finally ratified by the Court, then, provided that all
bankruptcy creditors have been paid off, the company can be
revived according to the legal provisions set forth in company law.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The GBC provides for certain tax exemptions. In the regime of
insolvency (bankruptcy), art. 133 GBC provides that all contracts
and deeds that are entered into pursuant to the GBC provisions (art.
135–145) on the sale of the debtor’s business as a whole, as well as
any transfers, transcriptions with the land registries, etc. by virtue of
said contracts and deeds are exempted from the imposition of any
taxes, stamp duties or any rights of the State or third parties,
excluding VAT. This exemption applies ipso iure.
On the contrary, the above exemption does not apply in the context
of restructuring.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
According to art. 31 par. 1 GBC, contracts of “durable performance”
(e.g. employment agreements, lease agreements) remain valid as from
the declaration of bankruptcy. However, any contract can provide for
a termination right in the event of declaration of insolvency of one of
the parties to the contract. Automatic termination is nevertheless not
possible, even if it is provided in a contractual clause.
Art. 34 GBC stipulates that the employment agreements are not
terminated due to the declaration of insolvency. The receiver
(syndic) may terminate an employment agreement of indefinite time
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if the employer is the debtor. In case there are chances for the
viability of the company, the syndic and the debtor may ask for the
maintenance of the necessary employment contracts until the
approval of the rejection of the reorganisation plan.
Claims of the employees against their employer (debtor) that were
born before the declaration of insolvency are considered as claims
within the insolvency procedure for which the employees can be
satisfied according to the privileged claims provided in art. 154 GBC.
Art. 154 (d) GBC provides that claims that arose within the last two
years before the declaration of insolvency, for the provision of
salaried work and compensation claims due to the termination of the
employment agreement, are placed in the fourth place of the priority
claims of the classification list drafted by the syndic, right after
claims of creditors of any kind of the company, claims for funeral or
hospital treatment of creditors and claims regarding provision of
first aid needs such as food supplies necessary for the creditor, if
such claims arose during the last six months as from the declaration
of the insolvency.
On the other hand, claims of the employees that are born after the
declaration of insolvency due to the continuation of the employment
agreements are considered as collective claims of the creditors.
The recently adopted law 4512/2018 provides for an addition in
respect to the privileged classification of employees’ claims that
arose before the declaration of insolvency; more specifically, it
provides that claims arising before the declaration of insolvency and
pertaining to unpaid salaries under dependent labour spanning up to
six months and up to the equivalent of the product of the monthly
salary payable per employee entitled to the statutory minimum
salary provided by law for employees over 25 years of age
multiplied by 275%, are given priority over any other claim
(enhanced preference right), after deduction of any Court expenses,
insolvency estate management expenses, including any provisional
and final retainer fees of the insolvency administrator and any
collective creditors’ claims arising under the liquidation procedure,
as the case may be.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
The initiation of insolvency proceedings in Greece follows the rule
of art. 4 of the GBC, according to which Greek Courts are
competent to hear an insolvency case only as long the COMI (centre
of main interests) of the debtor is located in Greece. COMI is
designated by the location of which the debtor administers its
interests, in a manner recognisable by third parties. For companies,
there is a presumption that COMI coincides with their statutory seat.
In light of the above, only debtors established in Greece are subject
to insolvency proceedings under the GBC, save for companies that
have their statutory seat in other third countries, but still their COMI
is located in Greece.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
In the case of debtors having their COMI in an EU Member State
(other than Denmark), Regulation EU 848/2015 comes into play,
and insolvency proceedings initiated in the Member State where the
COMI of the debtor is located are automatically recognised in
Greece, without any further formalities or requirements. Greek
Court jurisprudence on the issue is scarce, although the principle of
automatic recognition has been occasionally confirmed by both a
lower Court (decision 166/2012 of the Court of First Instance of
Rethymno) and the Supreme Court (decision 838/2015). Likewise,
the initiation of secondary insolvency proceedings in Greece
(pursuant to art. 34 of Regulation 848/2015) has been ordered by
Greek Courts (see, e.g., Athens First Instance Court decision
32/2014). By contrast, if the Regulation does not apply, recognition
of non-Greek insolvency proceedings is only possible if the COMI
of the debtor is located in a country signatory of the UNCITRAL
Model Law on cross-border insolvencies (in which case, however,
recognition is not automatic but is subject to an approving Greek
Court decision, pursuant to art. 15 of law 3858/2010, having
implemented the UNCITRAL Model Law in Greece).
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Foreign insolvency of debtors established in Greece should depend
on the applicable laws of the country where the initiation of each
proceeding is sought.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Under Greek law, a separate insolvency proceeding applies for each
company of a group. However, when the centre of main interests of
each of the companies of the same group are located in different EU
Member States, arts 56–77 of Regulation 848/2015 apply; therefore,
local administrators for each company are under the duty to co-operate
with each other, as also different bankruptcy Courts in each Member
State, where individual insolvency proceedings have been initiated for
companies of the group.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Other than the most recent reforms introduced by virtue of law
4512/2018, on “Arrangements for the implementation of the Structural Reforms of the Economic Adjustment Programme and other provisions” which came into force on 17.01.2018, there are no
specific upcoming proposals for the reform of the corporate rescue
and insolvency regime.
Acknowledgment
The authors would like to thank Messrs. Antonis Giannakodimos
(Senior Associate, LL.M.) and Danai Eirini Falconaki (Associate,
LL.M.) of Zepos & Yannopoulos for their contributions to the chapter.
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Emmanuel Mastromanolis Zepos & Yannopoulos 280 Kifissias Av. Halandri, 15232 Athens Greece Tel: +30 210 696 7000
Email: [email protected]
URL: www.zeya.com
Giorgos Vavatsioulas Zepos & Yannopoulos 280 Kifissias Av. Halandri, 15232 Athens Greece Tel: +30 210 696 7000
Email: [email protected]
URL: www.zeya.com
International Orientation
Zepos & Yannopoulos is an independent Greek law firm with a unique international orientation. The vast majority of the clients of the firm are foreign-based. Zepos & Yannopoulos is the Greek member of numerous non-exclusive associations of leading law firms. For example, Zepos & Yannopoulos is the exclusive member in Greece for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide. Zepos & Yannopoulos is the Greek member firm for Taxand.
Client Focus
Our legal advice is customer friendly and tailored to the needs of each client. Given our international orientation we have developed particular expertise in alerting our international clients to the specificities of the Greek business and legal environment.
Comprehensiveness
Our firm is particularly well known for providing quality and comprehensive legal and tax advice in areas of law of interest to our clients. Our tax practice, widely acknowledged as the leading in the country, works hand-in-hand with all different practice groups to provide seamless and comprehensive services to our clients.
Professional Integrity and Business Ethics
Our firm is fully committed to professional integrity and practices that promote business ethics. Zepos & Yannopoulos is the corresponding firm in Greece for Trace (Transparent Agents and Contracting Agencies), a non-profit association providing anti-bribery support.
Emmanuel Mastromanolis is a Partner of the corporate commercial practice and head of the competition/anti-trust practice and insolvency practice. He was admitted to the Athens Bar in 1991 and joined our firm in 1998.
Emmanuel focuses on corporate, commercial, antitrust, trademarks, distribution and bankruptcy law, as well as in mergers and acquisitions (“M&A”).
Emmanuel gives advice regarding a wide area of issues arising following the enactment of the new bankruptcy laws, especially those involving Greek or foreign credit institutions and novel financial products, covered or not with collateral. Concurrently with his professional practice, he also represents clients before bankruptcy courts. Emmanuel is Assistant Professor of Commercial Law at the Faculty of Law of the University of Athens, teaching a wide array of subjects, including Competition Law, Bankruptcy Law and Corporate Law. His scholarly publications relate to Commercial Law.
Giorgos Vavatsioulas is a member of Zepos & Yannopoulos’ corporate commercial practice. He was admitted to the Athens Bar in 2015 and joined the firm in 2017.
Giorgos focuses on corporate, commercial, M&A, anti-trust and bankruptcy law. He is engaged in carrying out legal due diligences, advising clients on company establishment and structuring, ongoing corporate governance, their entry into commercial agreements and contracts, as well as in drafting share purchase and ancillary agreements. He also deals with cases pertaining to competition law, including cartels, abuse of dominance and merger control, and advises clients on bankruptcy law-related issues.
Giorgos is admitted before the Court of First Instance and works in Greek and English.
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Hong Kong
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Hong Kong’s insolvency regime, like its commonwealth
counterparts, has always been very creditor-friendly. In the right
circumstances, courts even have the power to exercise their
discretion to wind up foreign companies. Although the statutory
rescue procedure under the Companies Ordinance of Hong Kong by
way of a scheme of arrangement is designed to provide a debtor
company with more control than the traditional insolvency
proceedings, the scheme is still required to be approved by the
company’s creditors and the court.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The Companies Ordinance of Hong Kong provides for the
following formal restructuring and insolvency procedures for
companies in financial difficulties:
(1) a members’ voluntary liquidation;
(2) a creditors’ voluntary liquidation;
(3) a compulsory liquidation;
(4) appointment of a receiver; and
(5) a scheme of arrangement.
In practice, most restructurings take place by way of informal work-
outs, compositions and arrangements essentially made by agreement
of the parties concerned.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
General/Common Law Duties
As a general rule, the director of a company has certain fiduciary
duties towards the company and its members. However, as a
company approaches insolvency, a director has a duty to take into
account the interests of the company’s creditors. If he/she breaches
those duties, he/she may be ordered to compensate the company for
any loss or damage that has been suffered as a result of those
breaches or repay, restore or account for the money or property
appropriated or acquired.
Misfeasance
Where a director has breached his duties to the company by
misapplying or retaining any money or property, the court can
compel repayment of money or restoration of property or
contribution by way of compensation by that director.
Fraudulent Trading
A director may be personally liable if he/she was knowingly
involved in carrying on any business of the company with the intent
to defraud its creditors. The court may make an order that the
director be personally liable for all or any of the debts and liabilities
of the company. He is also exposed to criminal liability and
potentially liable to a fine and imprisonment.
Disqualification
A director may be disqualified for a period of up to 15 years if
he/she: engages in fraudulent trading; is unfit to be concerned in the
management of a company; is convicted of an indictable offence in
connection with the promotion, formation, management, or
liquidation of any company such as falsifying the company’s books;
or is found guilty of any other misconduct in relation to the
company.
Whether or not a company must enter a restructuring or insolvency
process will depend on various factors, including whether it is
solvent or not. A solvent company will be able to restructure using
schemes of arrangement at any time.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Insolvency
In a creditors’ voluntary liquidation and a compulsory liquidation,
generally the creditors have the most significant influence on the
company’s situation. In a compulsory liquidation, the creditors
initiate the process and are also responsible for nominating and
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voting for the appointment of a liquidator, and a committee of
inspection to supervise the liquidator in the conduct of the liquidation.
In a creditors’ voluntary liquidation, the liquidator nominated by the
creditors will normally prevail in the event of a conflict with the
liquidators appointed by the shareholders and creditors.
Secured creditors stand outside the liquidation as they are generally
entitled to be paid out of the proceeds of their security ahead of all
other claims.
Unsecured creditors have limited rights in any liquidation as they
are ranked the lowest amongst all creditors. An unsecured creditor
would not rank higher than other creditors even if leave was granted
in his favour to proceed with or commence an action against the
company in compulsory liquidation and that action was ultimately
successful.
A landlord would not be allowed to distrain for rent due before the
commencement of winding up of the company in respect of which
he is a creditor, but will need to prove his debt.
Employees would be considered unsecured creditors of the
company, except in respect of any statutory claims arising under the
Companies Ordinance, which would constitute preferential debts.
Creditors with lien would have the right to hold the assets of the
debtor, although this right would not generally extend to the power
of sale (which should be sought from the Court).
Generally, an unpaid vendor with a retention of title arrangement
would be entitled to retain possession of goods which he has sold
but not delivered to an insolvent purchaser.
Restructuring
In a restructuring (whether formal or not), it is again the creditors
who have the most significant influence on the company’s situation.
There are no provisions available for moratorium or stays on
enforcement. The fact that a company is in the process of
restructuring does not prevent an individual creditor from suing the
company, seizing the company’s property or presenting a winding
up petition.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Transactions at an Undervalue and Unfair Preferences
A transaction at an undervalue takes place when the company makes
a gift or enters into a transaction with a person without receiving any
consideration, or enters into a transaction for a consideration, the
value of which is significantly less than the value of the
consideration provided by the company. The liquidator may
challenge the validity of any such transactions which took place five
years prior to the commencement of the winding up.
An unfair preference occurs where a payment has been made by the
company to a creditor when it is insolvent, but before the
commencement of its winding up, with the effect of putting the
creditor in a better position than it would otherwise have been in the
liquidation of the company. The liquidator may challenge the
validity of any such transactions which took place two years prior to
the commencement of the winding up if the creditors are
‘associates’ (e.g. director or employee) or six months for any other
creditor. If the challenge is successful, the court may restore the
position to what it would have been if the company had not entered
into the relevant transaction.
Extortionate Credit Transaction
The court may set aside any extortionate credit transactions entered
into three years before the commencement of a voluntary winding
up, the date on which a special resolution was passed to wind up the
company or on the date of the winding up order made by the court.
A transaction will be considered extortionate if, having regard to the
risk accepted by the person providing the credit, the terms require
grossly exorbitant payments in respect of the provision of credit or
grossly contravene ordinary principles of fair dealing.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. Most restructurings in Hong Kong take place by way of
informal work-outs, compositions and arrangements essentially
made by agreement of the parties concerned.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
There are no formal procedures available to achieve a restructuring
of the company’s debts in Hong Kong. The only exception is a
scheme of arrangement. The Companies Ordinance of Hong Kong
provides for procedures for court-sanctioned schemes of
arrangements which may be entered into by a company with its
creditors or members, or both, and for companies’ amalgamation (as
among group companies).
A debt-for-equity swap arrangement may form part of a
restructuring of a company. This will generally involve the dilution
or elimination of existing shareholders’ equity in the company.
Unlike many jurisdictions, there are no statutory provisions on pre-
packaged insolvencies in Hong Kong, or any arrangement whereby
the business of the company is carried on under a new and separate
special corporate vehicle. That said, it is nevertheless not uncommon
for companies to be restructured under a pre-packaged arrangement.
The fact that a company is in the process of negotiating a work-out
or putting in place a scheme of arrangement does not prevent an
individual creditor from suing the company, seizing the company’s
property or presenting a winding up petition. Some (often smaller)
creditors will deliberately take such actions once they know:
(a) they are not getting a better deal from the proposed scheme of
arrangement or even paid off in full; and
(b) that major creditors are in favour of the scheme of
arrangement.
The only way of cramming down dissenting stakeholders is in a
sanctioned scheme of arrangement. If a scheme of arrangement is
sanctioned by the court, it becomes binding on all creditors and, as
a result, the rights of creditors may change. Until that point,
however, unsecured creditors may take any enforcement actions
available to them against the company.
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3.3 What are the criteria for entry into each restructuring procedure?
There are no specific criteria to be met by a company before
negotiating a work-out or a scheme of arrangement. That being
said, restructuring arrangements have to be agreed by, and made
binding on, all creditors, otherwise a dissenting creditor may
frustrate the rescue plan and petition for a winding up.
3.4 Who manages each process? Is there any court involvement?
A work-out is managed by the creditor(s) and the management of
the company.
On the contrary, a scheme of arrangement is substantially
supervised by the court, although the management of the company
remains in place throughout the restructuring process. Once a
proposal has been devised and presented to the shareholders and
creditors, an application is made to the court to convene meetings of
the respective classes of shareholders and creditors.
After the court makes an order that the meetings of the respective
classes of creditors and shareholders can be convened, notice of the
date and time of these meetings is advertised. At these meetings: (a)
a majority of 75 per cent in value; and (b) 50 per cent in number is
required to approve the proposed scheme.
After approval, a petition for sanction must be issued and, at the
hearing of such petition, the court will consider whether or not to
sanction the scheme. If the scheme is sanctioned by the court, a
copy of the relevant court order must be filed with the Companies
Registry in Hong Kong.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The impact of a restructuring procedure on existing contracts
depends on the terms of the scheme and the terms of the contract.
For example, a contract may contain restrictions on restructuring or
allow counterparties to terminate the contracts in the event of a
restructuring. There is no statutory protection for those who
continue to perform their outstanding obligations when the
restructuring process is underway. Termination and set-off
provisions in the contract would be upheld subject to the terms of
the scheme.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
A consensual restructuring on an informal basis can be achieved
through a debt-for-equity swap, which involves the creditors
exchanging some or part of their debt for shares in the company, the
issuance of convertible notes at a low rate of interest with an option
of converting into shares, and/or through ‘white knight’ investors.
Currently, there is no legislation granting any protection to rescue
financing.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedures available to wind up a company are
as follows:
(1) a members’ voluntary liquidation (it should be noted that this
is a solvent liquidation);
(2) a creditors’ voluntary liquidation; and
(3) a compulsory liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
A members’ voluntary liquidation is only available where the
company is solvent. Having made a full inquiry into the company’s
affairs, the directors must have also formed an opinion that the
company will be able to pay all its debts within 12 months of the
commencement of the winding up and sign a certificate of solvency
to that effect. The shareholders must also pass a special resolution
to wind up in a General Meeting.
A creditors’ voluntary liquidation will occur where the company
decides to place itself into voluntary liquidation but the directors are
unable to certify the solvency of the company (i.e. the company is
insolvent), or the liquidator is at any time of the opinion that the
company will not be able to pay its debts in full within the specified
period.
A compulsory winding up order may be made by the court where:
(1) the company has passed a special resolution for winding up by
the court;
(2) the company has failed to commence its business within one
year from its incorporation, or suspends its business for a whole
year;
(3) the company has no members;
(4) the company is unable to pay its debts as and when they fall due;
(5) the event, if any, occurs if the memorandum and articles provide
that the company is to be dissolved; or
(6) the court is of the opinion that it is just and equitable that the
company be wound up.
4.3 Who manages each winding up process? Is there any court involvement?
A voluntary liquidation is managed by the directors of the company
until the appointment of the liquidator.
A compulsory winding up is commenced by issuing a petition
against the company. The court will hear the petition and make an
order for compulsory winding up if it is satisfied that grounds for
winding up have been established. It is managed by a provisional
liquidator, Official Receiver or the liquidator, as the case may be.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
On the appointment of a liquidator in a members’ voluntary
liquidation, all the powers of the directors cease, although a
liquidator or the shareholders in a General Meeting can sanction
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their continuance. Similarly, in a creditors’ voluntary liquidation,
the powers of the directors will also cease. However, the committee
of inspection or, if there is no committee, the creditors, can sanction
their continuance. In contrast, appointments of directors, agents and
employees are automatically terminated when the court makes a
winding up order under a compulsory winding up.
The rights of the shareholders will also lapse, although it is worth
noting that the shareholders may still vote in a General Meeting for
the continuance of the directors’ powers in a members’ voluntary
liquidation.
Unsecured creditors have limited rights in any liquidation as they are
ranked the lowest amongst all creditors. When a winding up order
has been made or a provisional liquidator has been appointed,
creditors must seek leave from the court to continue with, or
commence proceedings against, the company. An unsecured creditor
would not be ranked higher than other creditors even if leave was
granted in his favour to proceed or commence an action against the
company in compulsory liquidation and the action is successful.
On the other hand, secured creditors stand outside the liquidation as
they are entitled to be paid out of the proceeds of their security ahead
of all other claims. That said, if the security created is a floating
charge, the preferential debts (e.g. sums owing to employees and the
government) must be paid before the floating charge holder.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
See the answer to question 2.3 above in respect of avoidance of
disposition of property after a presentation of petition and avoidance of
transfers after commencement of a voluntary winding up. As explained
in question 2.3 above, the liquidator also has the power to avoid or set
aside certain transactions to ‘clawback’ assets of the company in order
to increase the funds available to distribute to creditors.
Set-off applies in liquidation where there have been mutual credits
or mutual debts or other mutual dealings between the company and
the creditor before a winding up order is made.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The order of payment in a liquidation is generally as follows:
(1) expenses of the winding up, including the liquidator’s
remuneration. The order of priority of the costs in a winding
up is set out in rule 179 of the Companies (Winding up) Rules
(Cap. 32H);
(2) preferential debts;
(3) any preferential charge on distrained goods;
(4) the company’s general creditors; and
(5) shareholders.
4.7 Is it possible for the company to be revived in the future?
In a voluntary liquidation, the company will be permanently
dissolved three months after the liquidator files the final account and
return with the Companies Registry in Hong Kong following the
final meeting of creditors.
In a compulsory winding up, the liquidator can apply to the court for
an order to permanently dissolve the company once the affairs of the
company have been completely wound up. Dissolution brings the
company to an end.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
If the company continues to trade or sells its assets, it would be
subject to tax on its profits.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Restructuring
A work-out or a scheme of arrangement has no effect on employees.
Insolvency
On a compulsory winding up, all employment contracts will be
automatically terminated, unless the court orders otherwise. On the
other hand, the commencement of a voluntary liquidation does not
automatically terminate the service contracts of employees. In the
event an employee’s contract is terminated, that employee becomes
a preferential creditor of the company in respect of any statutory
claims such as unpaid wages, severance payments, etc. They could
expect to receive ex gratia payments out of the Hong Kong
Protection of Wages on Insolvency Fund if the employer is put into
liquidation. The Fund covers wages owed in respect of services
rendered to an employer during the four months prior to the last day
of service (capped at HK$36,000), pay for untaken annual leave and
untaken statutory holidays (capped at HK$10,500), wages in lieu of
notice (capped at HK$22,500) and severance payment (capped at
HK$50,000 plus 50% of any excess entitlement) payable to an
employee under the Employment Ordinance.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Whilst the United Nations Commission on International Trade Law
(UNCITRAL) has adopted the Model Law on Cross-Border
Insolvency, there are no statutory provisions in Hong Kong to
implement the UNCITRAL Model Law. Notwithstanding this, a
foreign liquidator may initiate a new liquidation in Hong Kong
against the foreign company. However, the court will only exercise
its discretion to make a winding up order against a foreign company
if, amongst other requirements, there is sufficient connection within
the jurisdiction of Hong Kong.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
A foreign liquidator may be able to protect assets of a foreign debtor
in Hong Kong where the foreign winding up order is extraterritorial
gall Hong Kong
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(i.e. extends to assets situated in Hong Kong) and is fair (i.e. does
not depart from the pari passu rule for treating all creditors equally).
In order to achieve this, the foreign liquidator may commence
proceedings in Hong Kong seeking a declaration regarding the
effect of the foreign insolvency proceedings and to recover debts.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Although it is common for Hong Kong companies to have assets
and operations elsewhere, there are obvious difficulties in dealing
with insolvencies of such companies in jurisdictions other than
Hong Kong, especially while safeguarding and realising the assets.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Hong Kong does not have the group liquidation concept. Generally,
in a winding up of a group company/companies, each company of
the group is treated as a separate legal entity and the interest of a
single company is not sacrificed for the larger interest of the group.
To secure co-operation and also for practical reasons, the court may
permit the same liquidator to take control of insolvent companies
within a group, subject to any conflict of interest.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The key proposals for reform in the current insolvency regime
include, inter alia, the introduction of:
(1) provisional supervision rescue provisions for companies with
minimum court involvement;
(2) a moratorium on creditors’ claims;
(3) provisions relating to payment of outstanding wages and
benefits to employees; and
(4) stringent provisions for insolvent trading in order to
encourage directors to initiate provisional supervision at an
early stage.
gall Hong Kong
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Nick Gall Gall 3/F, Dina House, Ruttonjee Centre 11 Duddell Street, Central Hong Kong Tel: +852 3405 7688
Email: [email protected]
URL: www.gallhk.com
Ashima Sood Gall 3/F, Dina House, Ruttonjee Centre 11 Duddell Street, Central Hong Kong Tel: +852 3405 7688
Email: [email protected]
URL: www.gallhk.com
Gall is a leading dispute resolution law firm in Hong Kong. We specialise in handling highly complex disputes, many of which involve multi-jurisdictional litigation. Our lawyers have a wealth of experience in a wide variety of litigation, mediation and arbitration.
Our core practice areas include commercial litigation, fraud and asset tracing, employment disputes, restructuring and insolvency, obtaining emergency injunctive relief remedies, regulatory and criminal matters, family matters and China-related matters.
Gall has a highly respected insolvency practice noted particularly for its expertise in high-profile, cross-border contentious insolvency matters. We deal with all areas of contentious insolvency including: advising appointment takers such as liquidators; provisional liquidators and receivers; applications for the appointment of provisional liquidators; the identification, protection and realisation of assets in insolvent estates; investigations and examinations; security enforcement; corporate and personal debt recovery; and cross-border insolvency issues.
Our clients also include appointment takers, creditors, bondholders, financial institutions, investment funds, distressed companies and company directors and practitioners in Hong Kong.
Nick Gall is Senior Partner and head of the insolvency practice at Gall. His practice areas cover commercial litigation, insolvency, fraud and asset tracing, regulatory/criminal and employment matters.
Nick has extensive experience in a range of contentious insolvency and bankruptcy proceedings where he has acted for liquidators, receivers, creditors and directors. He advises on the appointment of provisional liquidators, the identification, protection and realisation of assets in insolvent estates, investigations and examinations, security enforcement, corporate and personal debt recovery and cross-border insolvency issues.
Ashima Sood is an Associate at Gall. She has experience in general commercial and corporate litigation and contentious insolvency matters. Ashima’s contentious insolvency experience includes advising and assisting clients in respect of shareholders’ and directors’ disputes; identification, protection and realisation of assets in insolvent estates; security enforcement; corporate and personal debt recovery; and cross-border insolvency issues.
gall Hong Kong
chapter 16
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aZB & partners
Bahram n. vakil
gausia shaikh
india
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
One of the main principles driving the design of the Insolvency and
Bankruptcy Code, 2016 (Code) was to ensure a balance between
creditor rights across classes of creditors on one hand and between
creditors and the debtor on the other. The Code is largely creditor-
friendly with collective resolution proceedings empowering a
committee of creditors to make commercial decisions for the
resolution of the corporate debtor. However, sufficient checks and
balances have developed through jurisprudence, to ensure that the
debtor, represented by its directors, is kept informed of the decisions
of the creditors. Recent judgments have also called for sharing of
the restructuring plan with the erstwhile board of directors of the
corporate debtor.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The legislative framework in India currently provides for formal
restructuring and insolvency proceedings. However, an informal
work-out in the form of a settlement is permitted under the Code by
way of withdrawal of an ongoing insolvency application. Such
withdrawal post-initiation of the corporate insolvency resolution
process is only permitted when 90% of the committee of creditors
has assented to such withdrawal. Further, to the extent admission of
the insolvency application and initiation of the corporate insolvency
resolution process has not occurred, parties may enter into out-of-
court settlements outside the process stipulated under the Code.
However, informal work-outs have been formulated through
private, out-of-court negotiations and the directions of financial
sector regulators such as the Reserve Bank of India (RBI). For
instance, the RBI issued a circular dated February 12, 2018 on the
revised framework for the resolution of stressed assets, under which
banks were directed to classify such large stressed accounts as
Special Mention Accounts (SMA) and to formulate restructuring
plans to resolve such situations within 180 days from such
classification, failing which such accounts would be required to be
referred for insolvency under the Code.
In addition to the above, an initiative called “Project Sashakt”
(“Sashakt” is a Hindi word which means empowered) has also been
recommended by an expert committee, for the resolution of stressed
assets. Under this initiative, a bank-led resolution approach has
been recommended outside of any regulatory processes, which
includes the following:
(a) for loans up to USD 7.3 million, a steering committee has
been recommended to be formed within the bank for
resolution of such debt;
(b) for loans of value between USD 7.3 million to USD 73
million, the banks would be required to work together for
resolution of such debts based on an inter-creditor agreement
entered into by several banks voluntarily; and
(c) for loans above USD 73 million, the committee had
recommended the formation of an asset management
company with investment from private players for the
acquisition and turnaround of such assets.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The Code introduces the concept of wrongful trading, which does
impose liability on directors and managers. It requires directors and
managers to assess whether there is a reasonable prospect of
avoiding insolvency proceedings of a company in financial distress.
If such prospects are not determined, then the company should file
for insolvency proceedings under the Code. The directors/managers
are also required to take such steps prior to the insolvency
proceedings, as to mitigate losses likely to be suffered by the
creditors of the company. The standard for taking such steps is:
reasonable due diligence. The point at which insolvency
proceedings ought to be initiated by the company has not been
provided in the Code but the trigger is a default of USD 1,451. The
liability imposed on directors held to have committed wrongful
trading is that they may be required to make such contributions to
the assets of the corporate debtor as the National Company Law
Tribunal (NCLT) may deem fit.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The Code makes a differentiation between financial and operational
creditors. Financial creditors are creditors whose debt is based on the
time-value of money. Such creditors typically include banks and bond
holders, both domestic and international. Operational creditors on the
other hand, are vendors and service providers to the corporate debtor.
Both financial and operational creditors can initiate insolvency
proceedings against the corporate debtor upon a default of USD 1,451.
With respect to special rights being granted to unsecured creditors,
special rights have been accorded to purchasers of commercial and
residential real estate. If such purchasers have dues outstanding
against the corporate debtor then such purchasers qualify as
financial creditors. Upon admission of insolvency proceedings
against a corporate debtor, a moratorium is imposed which prevents
security enforcement, sale or transfer of assets and initiation of legal
proceedings against the corporate debtor. Special dispensations
from the moratorium have been granted in respect of the following:
(a) providers of essential supplies to the corporate debtor are
required to continue to provide such supplies;
(b) lessors of immovable property cannot repossess property in
possession of the corporate debtor; and
(c) the Central Government may, by notification, notify financial
securities transactions which are exempt from the
moratorium. This provision is intended to cover financial
collateral arrangements, but no such notification has been
released by the Central Government so far.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The Code does permit the resolution professional/liquidator to
examine certain transactions for initiating avoidance actions against
such transactions. The Code permits the avoidance of the following
transactions:
(a) preferential transactions or transactions in which preference is
given to one party as against all other persons;
(b) undervalued transactions or transactions involving a gift or
transfer of assets at less than the market value of such assets;
(c) transactions where creditors have been defrauded with the
objective of moving the assets of the corporate debtor beyond
their reach or to prejudice their rights;
(d) extortionate credit transactions or transactions where the
corporate debtor has taken a debt at exorbitant rates; and
(e) fraudulent/wrongful trading or the conduct of business with the
intent to defraud creditors or for any other fraudulent purposes.
The look-back period for such actions is two years for transactions with
related counterparties and one year for transactions with unrelated parties.
An application to the NCLT made by the resolution
professional/liquidator may lead to one or all of the following
consequences:
(i) reversal of the transactions;
(ii) release or discharge of any security interest granted by the
corporate debtor;
(iii) any person, who is/was a party to the transaction, may be
required to repay any amount received by her; or
(iv) payment of such consideration for the transaction as may be
determined by an independent expert.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Please refer to our response to question 1.2 above.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
As mentioned above, formal rescue procedures available in India
are processes under the Code and the RBI circular dated February
12, 2018. Both the Code and the RBI Circular are not prescriptive
on the modes of restructuring and it is permissible for lenders to
swap debt for equity. At the same time, it is customary for many
financial contracts to contain rights of lenders to convert debt into
equity upon default by the company. This is a contractual right and
can be exercised outside the regulatory or judicial process.
Pre-packaged sales are not possible under the current regime. This
is because the resolution professional who takes control over the
corporate debtor is required, by law, to invite resolution proposals
from all eligible applicants and the committee of creditors is
expected to choose the most profitable proposal.
As mentioned above, upon commencement of the corporate insolvency
resolution process under the Code, a moratorium is enforced which
prevents, among other things, the enforcement of security interest. This
prevents creditors and/or other stakeholders from blocking such
procedures or threatening action against the corporate debtor.
Approval of a resolution plan under the corporate insolvency resolution
process requires 66% consent from the committee of creditors. An
approval pursuant to such consent is then binding on all stakeholders,
including dissenting stakeholders. However, the Code does provide a
right to anyone affected by the resolution plan to be heard by the NCLT.
In addition to the above, the Companies Act, 2013 permits a
corporate debtor to enter into a compromise or arrangement with its
creditors or a class of its creditors. However, there is no moratorium
in such scheme and the creditors are free to enforce their security
interest and block the restructuring of debts process.
3.3 What are the criteria for entry into each restructuring procedure?
For initiating insolvency proceedings against a corporate debtor
under the Code, there must be a default of payment of more than or
equal to USD 1,451 by such corporate debtor. Once such a default
takes place, a financial creditor, operational creditor or the corporate
debtor itself may initiate insolvency proceedings against such
corporate debtor.
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3.4 Who manages each process? Is there any court involvement?
Once the corporate insolvency resolution process commences, a
resolution professional is appointed. Such appointment is
confirmed by the committee of creditors. The tenure of the
resolution professional continues till the corporate insolvency
resolution process. During such period, the powers of the board of
directors of the corporate debtor stand suspended and such powers
vest exclusively with the resolution professional. The resolution
professional has to run the corporate debtor as a going concern
during the corporate insolvency resolution process. For this
purpose, the resolution professional is also responsible for
operational decisions for running the affairs of the corporate debtor.
However, all significant decisions (such as the sale of assets outside
the ordinary course of business, equity issuances and creation of
security), the resolution professional is required to obtain approval
from the committee of creditors. While the NCLT does not oversee
the day-to-day functions of the committee of creditors and the
resolution professional, it can be approached in case of any
deviation from the rules of conduct.
The committee of creditors is primarily responsible for approving
resolution plans or deciding to liquidate the corporate debtor. However,
the final approval for such decisions is to be made by the NCLT.
If the committee of creditors and NCLT approve the liquidation of the
corporate debtor, the committee of creditors is disbanded and a
liquidator is appointed. Such liquidator is then answerable to the NCLT.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Please refer to our response to question 2.2 in relation to essential
supplies, lessors and financial securities transactions notified by the
Central Government. Subject to the treatment of such
contracts/transaction, contractual counterparties are not restricted
from terminating contracts.
No, all parties are not obliged to perform outstanding obligations,
only parties providing essential supplies and lessors are obliged to
do so. To the extent that such parties are forced to perform their
outstanding obligations, dues accruing to such parties are treated as
insolvency resolution process costs. Such costs need to be paid out
in full before recovery is made by any other stakeholder.
On termination and set-off provisions, while termination is permitted
in cases as mentioned above, set off is not permitted for the purpose
of the corporate insolvency resolution process. However, the
liquidation process does provide for set-off provisions to be upheld.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The transaction cost of running the enterprise, fees of the resolution
professional, legal fees and other operating expenses and costs are
met out of the cash flow of the corporate debtor. Such cost is treated
as the corporate insolvency resolution process cost and if unpaid has
top priority in the distribution of the proceeds proposed in a
resolution plan or recovered upon liquidation.
The Code does provide for fresh debt to be infused into the
corporate debtor for working capital requirements or for funding the
restructuring process. Such interim finance is also treated as part of
the corporate insolvency resolution process cost and has top priority
in the distribution of the proceeds proposed in a resolution plan or
recovered upon liquidation.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Winding up (understood to be a liquidation under the Indian law)
can be sought under the Companies Act, 2013 on certain grounds
such as, when the company has acted against the interests of the
sovereignty and integrity of India, friendly relations with foreign
states, public order, decency or morality. However, in the event of a
payment default, stakeholders cannot seek direct liquidation. They
will first have to achieve resolution under the corporate insolvency
resolution process, which may last up to a maximum period of 270
days. If resolution is not viable, then liquidation proceedings may
be initiated against the corporate debtor. The Code also provides for
voluntary liquidation provided the company does not have any debts
or if it can discharge its debts from the proceeds of liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
Please refer to our response to question 4.1 above.
4.3 Who manages each winding up process? Is there any court involvement?
Under the Companies Act and the Code, the liquidator manages the
conduct of the liquidation process. However, unlike the liquidation
process in the Code, the winding up process under the Companies
Act, 2013 is under close supervision and monitoring by the court.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Once a liquidation order has been passed by the NCLT under the
Code, a moratorium is imposed on the filing of suits and other legal
proceedings against the corporate debtor. However, a specific
power is granted to secured creditors to choose to realise their
security interest outside the Code.
Additionally, under the Companies Act, 2013 once a winding up
order has been passed, no suit or other legal proceeding can be
commenced or continued against the corporate debtor, except with
the permission of the tribunal.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
In liquidation, the restrictions placed on lessors and providers of
essential supplies are lifted. Further, the liquidator also has the
power to disclaim onerous contracts. As mentioned above, set-off
provisions may be upheld in liquidation.
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4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The Code ranks claims of creditors and costs of the process in the
following manner, for the distribution of the liquidation estate:
(a) insolvency resolution process costs and the liquidation costs
(which include interim finance, fees paid to the insolvency
professional, etc.);
(b) in equal priority: (i) workmen’s dues for the period of 24
months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured
creditor has relinquished security;
(c) wages and any unpaid dues owed to employees other than
workmen for the period of 12 months preceding the
liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) in equal priority: (i) any amount due to the Central
Government and the State Government including the amount
to be received on account of the Consolidated Fund of India
and the Consolidated Fund of a State, if any, in respect of the
whole or any part of the period of two years preceding the
liquidation commencement date; and (ii) debts owed to a
secured creditor for any amount unpaid following the
enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
4.7 Is it possible for the company to be revived in the future?
The corporate insolvency resolution process under the Code is
intended for the revival of the corporate debtor. If liquidation is
ordered, then the Code provides for the distribution of all assets of the
corporate debtor, its dissolution and the striking out of its name from
the records and registers of the relevant authority (being the Registrar
of Companies). However, recent judicial precedents indicate that
liquidation of a corporate debtor may be conducted as a going concern
but it is not clear how this will play out in practice.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Dues accruing to tax authorities constitute operational debt.
Therefore, during the corporate insolvency resolution process, such
authorities are required to submit a proof of claim as operational
creditors. The Code mandates that all operational creditors must be
provided at least the liquidation value of their debts in resolution
plans. The same applies to tax authorities as operational creditors.
In liquidation, however, such authorities rank fifth in the waterfall as
described in our response to question 4.6.
The Code also provides an exemption from applicability of tax laws
in accordance with Schedule III of the Code. Further, in respect of
computation of the Minimum Alternate Tax, the book profits of the
corporate debtor undergoing the corporate insolvency resolution
process can be reduced by the amount of total loss brought forward
and the unabsorbed depreciation.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
The Code differentiates between two categories of persons
employed by the corporate debtor: workmen; and employees.
For the corporate insolvency resolution process, both employees
and workmen qualify as operational creditors. Therefore, they must
be provided at least the liquidation value of their dues.
In liquidation, dues of workmen owed for the two years preceding
the liquidation commencement date are treated at par with the dues
of secured creditors and are second only to the insolvency resolution
process and liquidation process costs, in ranking. For employees on
the other hand, dues preceding one year prior to the liquidation
proceeding date rank third in the waterfall of distribution.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
The Code is not currently applicable to companies (i.e. corporate
debtors) incorporated outside India. However, foreign creditors
may file an application under the Code to initiate CIRP against
companies incorporated in India.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
The Code provides recognition to restructuring or insolvency
processes commenced in foreign jurisdictions, provided reciprocal
arrangements are in existence with such jurisdiction. The Code also
empowers the Central Government to enter into agreements with
foreign jurisdictions for enforcing the provisions of the Code. The
Central Government may also, by notification, direct that the Code
be applied in relation to assets or property of the corporate debtor
located in a jurisdiction with which reciprocal arrangements have
been made.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Under several foreign laws, companies not incorporated in a
jurisdiction can also initiate insolvency proceedings under the laws
of such jurisdiction (including Chapter 11 of the US Bankruptcy
Code). The Code does not prohibit Indian companies from going
through, say, Chapter 11. However, Indian creditors are likely to
oppose such proceedings especially when proceedings under the
Code have been imitated. In such case, the Courts and tribunals in
India are unlikely to recognise such foreign proceedings.
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8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Currently, there is no provision for substantial consolidation in
insolvency proceedings of group companies. However, attempts
have been made towards procedural coordination where a common
resolution professional is appointed and all proceedings with group
members are transferred to a single bench of the NCLT. The
Insolvency and Bankruptcy Board of India has recently constituted
a Working Group to recommend the complete regulatory framework
for group insolvencies.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The following reforms are being contemplated in India:
(a) introducing a regulatory structure for group insolvencies;
(b) introduction of provisions for cross-border insolvency; and
(c) notification and implementation of the personal insolvency,
including that of personal guarantors to corporate debtors.
aZB & partners india
Bahram N. Vakil AZB & Partners AZB House, Peninsula Corporate Park Ganapatrao Kadam Marg, Lower Parel Lower Parel West Mumbai, Maharashtra – 400013 India Tel: +91 22 6639 6880
Email: [email protected]
URL: www.azbpartners.com
Gausia Shaikh AZB & Partners AZB House, Peninsula Corporate Park Ganapatrao Kadam Marg, Lower Parel Lower Parel West Mumbai, Maharashtra – 400013 India Tel: +91 22 6639 6880
Email: [email protected]
URL: www.azbpartners.com
AZB & Partners is a leading law firm with expertise in all practice areas including restructuring and insolvency matters in India. Bahram N. Vakil, one of the firm’s founding partners, was a member of the Bankruptcy Law Reforms Committee (BLRC) constituted by the Ministry of Finance, Government of India. The BLRC was entrusted with the task of drafting the policy and legislative framework for the Insolvency and Bankruptcy Code, 2016 (IBC) and for drafting several of the key IBC rules and regulations – which form the backbone of the operation of the IBC.
Bahram is also a member of the Insolvency Law Committee constituted by the Government of India to examine the functioning and implementation of the IBC and make recommendations for legal reform.
AZB is at the forefront of advising all stakeholders involved in restructuring such as insolvency professionals, committees of creditors, acquirers, distressed asset funds and the Reserve Bank of India.
Bahram N. Vakil is a founding partner of AZB & Partners. He was a member of the Bankruptcy Law Reform Committee (which provided and led to the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC)) and is currently serving on a Committee that has proposed amendments to the IBC. Bahram is recognised by Chambers and Partners, The Legal 500 and other publications as a leading lawyer for restructuring, banking & project finance in India. Bahram has also served as a member on various high-level government committees on financial reform, foreign direct investment and securities market reform.
Gausia Shaikh is an associate at AZB & Partners, Mumbai. She is the co-creator of the FRG Insolvency Cases Dataset, a first of its kind dataset of orders passed under the Insolvency and Bankruptcy Code, 2016. She has presented her work on the Indian insolvency reforms at various events such as the Institute for Global Law and Policy’s 2018 Conference at Harvard Law School, the INSOL India Annual Conference, 2018 and the IBBI-IGIDR insolvency and bankruptcy reforms conference. Her work has also been published in publications such as Business Standard, Moneycontrol, BloombergQuint and The Leap Blog. She has also taught Bankruptcy Laws to the LL.M. batch of NMIMS Kirit P. Mehta School of Law, Mumbai.
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ali Budiardjo, nugroho, reksodiputro
theodoor Bakker
Herry n. Kurniawan
indonesia
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Restructuring and insolvency proceedings in Indonesia are
regulated under Law No. 37 of 2004 concerning Bankruptcy and
Suspension of Payments (“Bankruptcy Law”); the term used is
bankruptcy and suspension of payments.
We would consider the Bankruptcy Law to be creditor-friendly,
subject to proper implementation of the law; in both bankruptcy and
suspension of payments proceedings, the creditors play key roles to
determine/decide on key issues, which substantially affect the result
of such proceedings. Whether or not bankruptcy or suspension of
payments proceedings could be successfully concluded will be
subject to the agreement and participation of the creditors, including
but not limited to the following:
1. the creditors have the right to file a petition for bankruptcy or
a petition for suspension of payments against the debtor;
2. if the company proposes a composition plan, the creditors
have voting rights to approve or reject the composition plan.
In the event of rejection, the company will be declared
bankrupt (in suspension of payment procedures) and declared
insolvent (in bankruptcy procedures); and
3. if deemed necessary, the creditors may request the
supervisory judge to establish a creditors’ committee to work
with the administrator or the receiver.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Indonesian law allows for informal work-outs to restructure a
company’s debt through mutual agreement between the company
and the creditor(s).
As for formal restructuring and insolvency proceedings, the
Bankruptcy Law provides two procedures for companies having
financial difficulties, namely:
a. bankruptcy procedures; and
b. suspension of payments procedures.
Formal restructuring and insolvency proceedings are particularly
used when the company and the creditor(s) could not mutually agree
on the informal work-outs.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
In bankruptcy procedures, upon the declaration of the company’s
bankruptcy, the directors lose the power to manage the company. The
power is transferred to the court-appointed receiver, who then manages
the bankruptcy estate and the settlement of the company’s debts.
In suspension of payments procedures, the company is still entitled
to carry on its business activities. The directors of the company,
jointly with the court-appointed administrator and supervised by the
supervisory judge, run the management of the company.
Directors are personally liable for the losses suffered by the
company if both:
a. the company is declared bankrupt and the bankruptcy is the
result of the directors’ fault or negligence; and
b. the company’s assets are not sufficient to cover the
company’s obligations.
There is no specific point at which a company must enter a
restructuring or insolvency procedure.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
There is no other stakeholder who may influence the company
situation during the suspension of payments or bankruptcy
procedures. During the bankruptcy and suspension of payments
procedures, there should be no action that the creditors take against
the company.
There are no special rules or regimes applicable to particular types
of an unsecured creditor. The Bankruptcy Law does not
differentiate specific unsecured creditors.
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For 90 days after the bankruptcy decision or a decision of
suspension of payments, secured creditors are stayed from
undertaking any enforcement action against the assets.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Certain transactions favouring one creditor over other creditors,
entered into before the bankruptcy declaration, can be set aside
under the fraudulent conveyance (actio pauliana) principles set out
in the Bankruptcy Law. For a pre-bankruptcy transaction to be set
aside, all of the following requirements must be met:
■ The transaction was voluntary. This means that the
transaction did not arise from a contractual obligation.
Examples of voluntary transactions include:
■ the granting of security to one particular creditor;
■ the payment of a debt that is not yet due and payable; and
■ the sale of an asset against non-cash payment or with set-
off of the purchase price against a debt.
■ The transaction harmed creditors’ interests. This includes
most situations where the condition of the bankrupt estate
would have been better if the transaction had not been entered
into, for example:
■ a sale of goods below their fair market value; or
■ transactions resulting in the increase of the company’s
liabilities (for example, the granting of a guarantee or
other form of security by a subsidiary for the debt of its
parent company).
■ The company and the contracting party had knowledge of
the harm caused to other creditors. Knowledge of harm to
other creditors is presumed in a number of circumstances.
Generally, there is a rebuttable presumption of knowledge
where the following categories of transaction are performed
less than one year before the bankruptcy:
■ transaction for which the value received by the company
is substantially less than the value of the asset sold;
■ payment of a debt that is not yet due and payable, or
granting security for such debt;
■ transaction between the company and related parties (that
is, relatives or companies controlled by relatives, insiders
and legal entities belonging to the same group); and
■ donations.
The payment of a debt that was due and payable can also be set aside
if it is shown that either:
■ the recipient of the payment knew that, at the time of receipt,
a bankruptcy petition had been submitted; or
■ payment was the result of a consultation between the
company and the creditor with the intention of preferring that
creditor over other creditors. It is generally believed that this
requirement is only fulfilled if some measure of collusion
between the parties is established.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. It is possible to implement an informal work-out in Indonesia.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
The suspension of payments procedure is the formal procedure to
achieve a restructuring of debts. The suspension of payments
procedure is provided for a company that faces temporary liquidity
problems and is unable to pay its debts but may be able to pay them
some time in the future. It gives the company temporary relief in
order for it to reorganise and continue its business, and ultimately to
satisfy the creditors’ claims.
A debt-for-equity swap is possible to be offered by the company in
a composition plan to be agreed by the creditors in the suspension of
payment procedure. The debt-for-equity swap requires the approval
of the existing shareholders, and thus the approval is required to be
obtained before the debt-for-equity swap proposal is offered to the
creditors. The proposal itself must be approved by the creditors in
the creditors meeting.
Pre-packaged sale is also a possible scheme. An approval from the
supervisory judge (who supervises the suspension of payments
procedure) is required for the sale of the company’s assets.
Creditors’ Influence
The creditors play substantial roles in a suspension of payment
procedure, as follows:
a. the creditors can file a suspension of payments petition
against the company with the Commercial Court; and
b. the creditors have voting rights to agree or not with the
proposal/composition plan offered by the company; the
rejection of the composition plan by the creditors will result
in a bankruptcy declaration by the company.
The secured creditors could not enforce its security right during the
stay period in bankruptcy procedure.
Unsecured creditors who vote against the composition plan are
crammed down if the composition plan is approved by the secured
and unsecured creditors and ratified by the Commercial Court.
Shareholders’ Influence
The Bankruptcy Law does not specifically discuss the powers of the
shareholders during the suspension of payment procedure, but it is
understood that the shareholders are still entitled to pass resolutions
with respect to the company’s matters except for those which pertain
to assets and management. Moreover, shareholders’ approval is
required for voluntary filing on the petition for suspension of
payment and for the debt-for-equity swap.
Cram-down
If a composition plan is approved by the requisite majority, the
dissenting secured creditors are effectively crammed down, but they
must be compensated by the lower of the value of the collateral they
hold or the actual value of their claim.
3.3 What are the criteria for entry into each restructuring procedure?
The company or the creditors can apply for a suspension of
payments if the debtor either cannot pay its debts or foresees that it
will not be able to pay its debts.
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3.4 Who manages each process? Is there any court involvement?
Yes, there is court involvement in suspension of payments
procedure. The directors of the company, jointly with the court-
appointed administrator and supervised by the supervisory judge,
will manage the process and run the management of the company.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The granting of a suspension of payment does not change the
validity of a contract which has been validly entered into by the
company; it only stays the obligations of both parties for a
maximum period of 270 days. Therefore, except during the stay
period, the company is still obligated to continue performing its
obligations under the contract.
Notwithstanding the foregoing, if the contract expressly stipulates
that the contract will be expired or terminated in the event the
company is granted a suspension of payments, then such provision
will prevail.
In a suspension of payments procedure, the creditors can set off
sums owed by them to the company against amounts owed by the
company to them. However, the said set-off right can only be
exercised if: (i) the claim and the debt already existed prior to the
suspension of payments proceedings; or (ii) the claim and the debt
exist as a result of transactions/actions carried out by the company
before the suspension of payments proceedings.
A person who has taken over the debt or receivables from a third
party prior to the pronouncement of suspension of payment cannot
exercise a set-off if: (i) the taking over of the debt and receivables
was not based on good faith; and/or (ii) the taking over of the debt
or receivables was done after the initiation of the suspension of
payment process.
If at the time the decision declaring bankruptcy is rendered, the
parties to a contract have not fulfilled their obligations or have
fulfilled them only partially, the non-bankrupt party may request the
receiver to confirm the continuation of the performance of the
contract. The receiver must decide on whether the contract is to be
resumed within a certain period agreed to by the receiver and the
non-bankrupt party. If no agreement on the period is reached, the
supervisory judge will determine the said period.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The costs incurred in a suspension of payments procedure, including
but not limited to the administrator’s fees, must be paid by the
company. With prior approval from the administrator, the company
in suspension of a payments process may obtain loan or credit from
any third party for the sole purpose of increasing the value of the
company’s estate. However, if the company intends to obtain a
secured loan, it should be previously approved by the supervisory
judge. Also, security rights can only be encumbered over the
company’s asset which has not been encumbered with any security
rights. The creditor providing the above-described loan shall be
treated the same as the other creditors involved in the suspension of
the payment process.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The insolvency procedure available to wind up a company facing
financial difficulties is the bankruptcy procedure.
The bankruptcy shall be pronounced by the Commercial Court if it
fulfils the following requirements: (i) the company has at least two
creditors (plurality of creditors); and (ii) at least one of the two debts
could not be paid by the company when it becomes due and payable.
If, following its bankruptcy declaration, (i) no composition plan is
submitted by the company to the creditors, (ii) a composition plan is
submitted but subsequently rejected by the creditors, or (iii) a
composition plan is submitted and subsequently approved by the
creditors but is not ratified by the Commercial Court, then the
company shall be declared insolvent. Where the company becomes
insolvent, the bankruptcy procedure shall be concluded with the
liquidation and dissolution of the company.
4.2 On what grounds can a company be placed into each winding up procedure?
A company can be placed in bankruptcy or suspension of payments
if it passes all tests or conditions as described in question 4.1 above.
4.3 Who manages each winding up process? Is there any court involvement?
The receiver manages the bankruptcy process after declaration of
bankruptcy by the Commercial Court. The administrator, together
with the directors of the company, manages the suspension of the
payments process after the granting of suspension of payments by
the Commercial Court.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Creditors’ Influence
In a bankruptcy procedure, the creditors are entitled to submit a
petition for bankruptcy against the company with the Commercial
Court.
If, after the declaration of bankruptcy, the company proposes a
composition plan, then the unsecured creditors are entitled to
approve or reject the composition plan. Secured creditors are not
entitled to take the vote regarding the composition plan and are not
affected by the result of the vote. If the majority of the unsecured
creditors reject the composition plan, then the company becomes
insolvent and the bankruptcy procedure shall be concluded with the
liquidation and dissolution of the company.
Shareholders’ Influence
The Bankruptcy Law does not specifically discuss the powers of the
shareholders during the bankruptcy procedure, but the shareholders
are still entitled to pass resolutions with respect to the company’s
matters, except for those which pertain to assets and management.
The shareholders’ approval is required for the voluntary filing of a
petition for bankruptcy by the company and for a debt-for-equity
swap.
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4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The bankruptcy of a company, in principle, does not change the validity
or the terms of a contract which has been validly entered into by the
company. The rights and obligations of the parties to such contracts
remain unchanged. However, the receiver does not have the obligation
to perform the contract. If the receiver confirms performance, he must
guarantee performance; if he confirms cancellation, the other party will
have to submit a damages claim as an unsecured creditor.
The Bankruptcy Law stipulates that in a bankruptcy procedure, the
creditors can set off sums owed by them to the company against
amounts owed by the company to them. However, the said set-off
right can only be exercised if: (i) the claim and the debt already
existed prior to the declaration of bankruptcy; or (ii) the claim and
the debt exist as a result of transactions carried out before the
declaration of bankruptcy.
These rules make a creditor’s set-off right in an event of bankruptcy
more favourable than its set-off right outside of a bankruptcy
procedure, since there is no requirement for the debts to be currently
due and payable. However, there is uncertainty as to whether the
receiver must approve an intended set-off.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In bankruptcy and suspension of payment procedures, the ranking of
creditors’ claims is as follows:
■ Preferred creditors (kreditur preferen). Preferred creditors
are entitled to receive payment in full from the bankruptcy
estate. Preferred claims are tax claims and post-
bankruptcy/suspension of payments claims, such as:
■ fees of the receiver/administrator;
■ fees of experts appointed by the supervisory judge;
■ costs of liquidation of the bankruptcy estate or costs
incurred during the suspension of payments process;
■ post-bankruptcy/suspension of payments financing;
■ lease of the bankrupt’s house or offices; and
■ employees’ wages.
■ Secured creditors (kreditur separatis). These are the creditors
holding security rights over some or all of the assets of the
company.
■ Unsecured creditors (kreditur konkuren). Unsecured creditors
rank as follows:
■ specific statutorily preferred creditors whose preference
relates only to specific assets;
■ general statutory priority creditors; and
■ non-preferred unsecured creditors.
■ Shareholders. Generally, the shareholders of the company
rank behind all other creditors in the distribution of the proceeds
of the bankruptcy estate. Any distribution they receive is
proportional to the shares that they hold in the company, if there
are remaining assets after distribution to other creditors.
4.7 Is it possible for the company to be revived in the future?
Yes, it is possible. The bankrupt company can be revived if the
composition plan proposed by the company is agreed by the
creditors and ratified by the Commercial Court, or if the claims of
the creditors have been fully satisfied by the bankruptcy estate.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Tax risks will depend on the approach and actions taken during the
procedure. Tax liabilities are ordinarily incurred during each of the
procedures if the business is continued during each procedure. The
written-off amounts in haircuts and debt write-offs are subject to
income tax on the part of the company.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Claims of employees fall into the classification of estate creditors,
and as such they are entitled to payments in full of their claim on the
basis of the employment contract.
If the employer is declared bankrupt, termination of employment
may be conducted by the employer, which triggers payment of the
severance package for the employees.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Yes, companies which conduct their profession or business in the
territory of the Republic of Indonesia, even if incorporated
elsewhere, can use the bankruptcy/suspension of payments
procedure in Indonesia.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
No, the Bankruptcy Law adopts the principle of territoriality and
does not recognise cross-border bankruptcy or suspension of
payment cases. Moreover, foreign court judgments cannot be
enforced in Indonesia. Therefore, any court judgments, orders, or
reliefs made during foreign bankruptcy or suspension of payment
proceedings cannot be enforced in Indonesia and shall not affect the
status of assets situated in Indonesia.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
No, the Commercial Court does not recognise bankruptcy/insolvency
and suspension of payments/rescue procedures in other jurisdictions;
insolvency proceedings outside Indonesia cannot affect the status of
assets located in Indonesia.
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Theodoor Bakker Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia Tel: +62 21 250 5125
Email: [email protected]
URL: www.abnrlaw.com
Herry N. Kurniawan Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia Tel: +62 21 250 5125
Email: [email protected]
URL: www.abnrlaw.com
Mr. Theodoor Bakker graduated from Leiden University in the Netherlands, is admitted to the Amsterdam Bar and is a registered Foreign Lawyer under the Indonesian Advocates Law. He has worked in Southeast Asia since 1984, over time building up extensive experience in: direct foreign investment; project finance work, including private power and petrochemical projects; aircraft finance; infrastructure development; and general manufacturing investment. During the Asian financial crisis, he was involved in many aspects of restructuring and insolvency, and has advised on foreign law issues of bankruptcy reform in Indonesia. His practice now also encompasses capital market transactions, structured finance, and mergers and acquisitions. He has published various articles on insolvency and cross-border investment issues and teaches at the Faculty of Law of the University of Indonesia and at the Ministry of Law and Human Rights.
Ali Budiardjo, Nugroho, Reksodiputro, usually abbreviated to ABNR, was established in Jakarta in 1967 as a partnership of legal consultants in Indonesian business law. The firm is one of Indonesia’s largest independent full-service law firms. The commitment we make to clients is to provide broad-based, personalised service from top-quality teams of lawyers with international experience that includes ground-breaking deals and projects. ABNR’s reputation has been recognised around the world by independent industry surveys and law firm guides. ABNR was selected, based on its high level of integrity and professionalism, to be the sole Indonesian member of the world’s largest law firm association Lex Mundi and of the prestigious Pacific Rim Advisory Council (“PRAC”).
Mr. Herry N. Kurniawan joined ABNR as an associate in 1999 and became a partner on 1 January 2012. His specified areas of practice are mergers and acquisitions, foreign investment, project and corporate finance, restructuring and bankruptcy, in which fields he has both intensive and extensive regulatory knowledge. He was involved in the project for the monitoring of the implementation of the Indonesian Bankruptcy Law in 1999, which gave him further in-depth regulatory knowledge in bankruptcy and suspension of payments matters. He co-writes various articles and publications on bankruptcy, mergers and acquisitions, and speaks in seminars and workshops on bankruptcy and suspension of payments, as well as on investment, and mergers and acquisitions. He has also acted as counsel in numerous bankruptcy/suspension of payments and commercial litigation/arbitration.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The Bankruptcy Law does not recognise the bankruptcy or
suspension of payment proceedings of a corporate group. Petition
for bankruptcy or suspension of payment may only be submitted
against an individual or legal person, and the bankruptcy of a
company does not affect the status of other companies within the
group. There is no scope for co-operation between officeholders.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
There are currently no governmental proposals for the reform of the
corporate rescue and insolvency regime in Indonesia.
Acknowledgment
The authors would like to thank their colleague, Ridzky Firmansyah
Amin, for his invaluable assistance in the preparation and
finalisation of this chapter.
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mccann Fitzgerald
michael murphy
grace armstrong
ireland
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Corporate insolvency and restructuring law in Ireland has developed
to respond to the needs of both creditors and debtors by balancing
the protection of both parties’ rights. Our framework provides a
broad range of flexible legislative remedies, with perhaps a
marginal emphasis on the stability engendered by the protection of
the rights of secured creditors. Where previously such secured
creditors overwhelmingly comprised regulated financial
institutions, with the recent advent of loan sales in the market,
private institutions have become the holders of security and have
frequently been involved in restructuring and enforcement actions.
Where such proceedings come before the courts, the courts are
mindful to ensure careful adherence to contractual and statutory
rights, to ensure that debtors are protected notwithstanding that their
obligations have been assigned to third parties.
Unsecured creditors do not enjoy priority in a winding up.
However, retention of title clauses are valid as a matter of Irish law
and may permit the unsecured creditor to recover goods supplied.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
There are a comprehensive range of procedures available to an insolvent
Irish company. These include liquidation, either following a court order
or a shareholders’ resolution, receivership (the appointment of a receiver
by a secured creditor pursuant to contractual rights in a security
document) and examinership, a court-managed restructuring procedure.
Examinership is a corporate rescue and restructuring procedure
whereby an insolvent company is provided with court protection for
a limited period to enable it to negotiate with creditors, seek new
investment and write down its liabilities.
Irish company law also provides a mechanism for a company to
reach a compromise with its creditors on a less structured basis than
examinership and the recently revised company legislation reduced
the number of court appearances required for such compromises.
These scheme of arrangement provisions are very similar to the
English scheme provisions. Until recently, such arrangements have
not been widely availed of. However, there has been a noticeable
focus on our scheme provisions.
Troubled companies will typically seek to resolve their financial
difficulties through consensual discussion and agreement with
creditors, whether documented by way of a formal standstill or
settlement agreement. Failing such resolution, examinership,
receivership and liquidation are commonly availed of under Irish
law.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
When a company is insolvent, or close to insolvent, its directors owe
fiduciary duties to the creditors of the company and not to its
shareholders. Recent amendments to company law have codified
directors’ duties in a non-exhaustive list of formerly pre-existing
common law (fiduciary), equitable and statutory duties. These
include but are not limited to the duty to act honestly and
responsibly and in good faith in the interests of the company, to act
in accordance with the company’s constitution and the law, not to
use the company’s property for his/her benefit, to avoid conflicts of
interest and to exercise due skill, care and diligence.
The thrust of Irish company law sanctions against directors (which
includes shadow and de facto directors) of an insolvent company is
to penalise individuals who are recklessly incurring credit or who
deplete the company’s assets where the directors cannot, on any
reasonable or objective basis, believe that the company will be able
to operate as a going concern, or who were knowingly party to
fraudulent trading. Personal liability may be imposed for all or part
of the liabilities of the company. In addition, criminal sanctions
may apply.
Directors of companies in insolvent liquidation are at risk of being
subjected to restriction orders where they cannot show that they
acted honestly and responsibly in relation to the affairs of the
company. If restricted, a director is prevented from continuing to
act as a director unless the company meets certain minimum paid up
share capital requirements.
No specific mandatory triggers exist under Irish law for entry into
restructuring or insolvency procedures. There are two tests for
insolvency: the balance sheet test; and the cash flow test. If a
company is considered to be insolvent under either of the above
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tests, its directors will need to keep their decision to continue to trade
under constant review. The difficulty with applying the balance sheet
test revolves around the valuation of the company’s assets. This test
can easily be triggered, particularly if the company has significant
bank borrowings. It is therefore more important for directors to focus
on the cash flow test in the short term while at the same time planning
how to reduce the balance sheet deficit in the longer term.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Secured creditors, unsecured creditors and shareholders can directly
influence the company’s situation. An examinership is the only
means by which a company in financial difficulty can obtain a
moratorium from action by its creditors. An application for the
appointment of an examiner can be made by the company itself, its
directors, a creditor or member.
In an examinership, once a company has been placed under court
protection, the creditors of the company (which term includes
retention of title creditors and landlords) are prevented from taking
any action to enforce their security or to take enforcement action of
any kind against the company.
Secured creditors who apprehend a risk of examinership and wish to
prevent the appointment of an examiner will typically move quickly
to appoint a receiver. The appointment of a receiver is the main
method by which a secured creditor will enforce its security. A court
will refuse to hear a petition for examinership in relation to a
company in respect of which a receiver has been appointed for a
period of three continuous days prior to the date of presentation of
the petition and a receiver will be removed if a petition for the
appointment of an examiner is presented within three days of his
appointment.
A winding up petition may be presented by the company itself, its
creditors, any of its creditors or contributories, the Director of
Corporate Enforcement and any person entitled to bring shareholder
oppression proceedings. In every liquidation, a committee of
inspection is typically appointed by creditors. The main duty of a
committee is to oversee the activities of the liquidator and approve
the liquidator’s fees and expenses.
Shareholders who can show the affairs of the company are being
conducted in a manner which is oppressive to their interests may
apply to the court for relief.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Certain transactions to which an insolvent company is party may be
attacked by, among others, a liquidator appointed to the company
and where such challenge is successful, the transactions may be set
aside.
Where property is disposed of and it is possible to show that the
effect of such disposal was to perpetrate a fraud on the company, its
creditors or members, the court may direct the return of such
property. There is no prescribed period within which an application
must be brought.
Irish company law prohibits certain transactions where a company
provides financial assistance in connection with the acquisition of
shares in that company. Such transactions are voidable at the option
of the company against a third party with notice and a breach of the
legislation is a criminal offence. Directors are also restricted from
entering transactions with the company except within certain
specified conditions. In the event of a breach, such a transaction is
voidable and a director may risk personal liability.
Transactions in favour of a creditor taking place within six months
of the commencement of a winding up (or within two years if in
favour of a connected person) made with a view to giving such
creditor a preference are liable to be set aside.
Where a company is being wound up, a floating charge created
within 12 months of the commencement of the winding up can in
certain circumstances be declared invalid.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Informal work-outs as between debtors and creditors frequently
occur. While creditors may be willing to provide standstill
agreements during a period of negotiation, a company in financial
difficulty will not be able to avail of immunity from suit during this
period and will be vulnerable to actions by non-secured creditors,
including the Revenue Commissioners. Accordingly, where a
company perceives a significant threat of liquidation or receivership,
but where it believes it has a reasonable prospect of survival,
examinership may be a more viable option.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Examinership is the main rescue procedure for an insolvent
company (or group of companies) which comprises three main
components: new investment into the company; a forced write down
of the company’s current liabilities; and a “legal stay” or protection
period which prevents any enforcement action being taken against
the company for a period of up to a maximum of 100 days. During
the period of examinership, no enforcement action can be taken by
creditors, including secured creditors or against guarantors of the
company’s liabilities. Unless an existing shareholder is the investor,
examinership will result in a change of ownership of the company.
Existing shares will be cancelled and new shares will be issued to
the proposed investor.
If an objecting party establishes that a company in examinership does
not have a reasonable prospect of survival as a going concern or that
the examiner’s proposals for a scheme of arrangement are unfairly
prejudicial, a court will not confirm the proposals. However,
liquidation is the inevitable consequence of a failed examinership.
Debt-for-equity swaps and pre-packaged sales do occur, and while
in practice the appointment of a receiver or examiner may take place
on the basis that a pre-ordained outcome is to be implemented, there
is no current legislative basis for a pre-packaged sale.
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3.3 What are the criteria for entry into each restructuring procedure?
The criteria for entry into examinership are threefold: the company
is insolvent or likely to become insolvent; no resolution has been
passed (nor has any order been made) to wind up the company; and
there is a reasonable prospect of survival of the whole or part of the
business as a going concern. An application for the appointment of
an examiner must (save in exceptional circumstances) be
accompanied by an independent expert’s report, which verifies that
the company has a reasonable prospect of survival as a going
concern.
3.4 Who manages each process? Is there any court involvement?
An examinership is commenced by way of a petition to the High
Court (or in certain circumstances, the Circuit Court) and the
process is closely monitored by the court. The directors of the
company remain in place and the company continues to trade, while
the examiner analyses the company’s finances, establishes which
parts of the business can be rescued and negotiates with investors,
creditors and shareholders to prepare proposals for a scheme of
arrangement which, if implemented, will facilitate the company’s
survival. Once he has formulated his proposals, the examiner must
convene meetings of each class of creditors who may vote in favour
of or against the proposals. The examiner will then prepare a report
which is filed in court. In order for a scheme to become binding on
the members and creditors of a company, the court must make an
order confirming the proposals. It may only do so if at least one
class of impaired creditors has voted in favour of the proposals and
the court will not approve a scheme if its purpose is to avoid tax or
if it is unfairly prejudicial to any class of creditors.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Examinership does not itself terminate contracts, albeit most contracts
provide that examinership activates a right of termination. However,
where a company is under the protection of the court, its creditors
are prevented from exercising rights against the company, such as
any claim for damages which may arise.
The company in examinership may, with the approval of the court,
repudiate any contract under which some element of performance
other than payment remains to be rendered by both parties. Any
person who suffers loss as a result of the repudiation becomes an
unsecured creditor in the examinership and the court may assess the
value of his loss. This provision is frequently availed of by tenant
companies to repudiate expensive leaseholds. The landlord becomes
an unsecured creditor, the liability on him being discharged under the
scheme.
The examiner may obtain court approval to dispose of property
subject to a fixed or a floating charge on the basis that this would
facilitate the survival of the company. The market value of the
property sold must be accounted to the holder of the charge. The
liabilities of a secured creditor can in certain circumstances be
crammed down.
During an examinership, no proceedings may be commenced
against guarantors or other third parties liable in respect of debts of
the company. Particular rules govern the enforcement of guarantees
in an examinership and certain steps must be taken by secured
creditors to preserve their rights under the guarantees, thereby
protecting the creditor’s right to pursue the guarantor, even if the
underlying debt is crammed down in the examinership.
During the examinership, the company must be able to fund itself
and discharge all new liabilities incurred as they fall due. Further,
the examiner’s proposals should result in a more favourable
outcome for the creditors than would be the case in a liquidation or
receivership.
Set-off provisions will be upheld and can be applied, notwithstanding
that a company is in examinership.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The costs of an examinership can be significant and will be met out
of the assets of the company. An examiner has the power to certify
a liability at the time it is incurred if he forms the view that it is
necessary for the survival of the company that the debt should be
incurred. Such certification affords priority to any such liability
over other creditor claims in the event of the subsequent liquidation
of the company. No specific protection exists under Irish law for
any new finance provided to a company by way of rescue funding.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
An insolvent company may be wound up by the Irish courts where,
amongst other things, its members by special resolution have
resolved that the company be wound up by the court or where the
company is unable to pay its debts. The petition for a compulsory
liquidation can be made by the company itself, any creditor(s)
and/or, subject to some restrictions, any members. In limited
circumstances, the Director of Corporate Enforcement (who has a
supervisory role in respect of liquidations and insolvent companies),
the Central Bank of Ireland and the Registrar of Companies may
also petition for a compulsory liquidation of the company.
A company may also be placed in a creditors’ voluntary liquidation
where, amongst other things, the members by ordinary resolution
resolve that the company cannot by reason of its liabilities continue
its business and that it be wound up voluntarily.
The appointment of a receiver by a secured creditor pursuant to
contractual rights contained in a security document is the main
method by which a secured creditor enforces its security. However,
receivership is not a process for the dissolution of a company.
4.2 On what grounds can a company be placed into each winding up procedure?
A company can be placed in compulsory liquidation by the court if
the company is insolvent, or on just and equitable or public interest
grounds. A creditors’ voluntary liquidation may be initiated by the
company in a general meeting, resolving that it cannot by reason of
its liabilities continue its business, and that it be wound up as a
creditors’ voluntary liquidation. A company may be placed in a
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solvent liquidation if its directors are in a position to confirm that it
will be in a position to meet its liabilities in full within a period of 12
months.
4.3 Who manages each winding up process? Is there any court involvement?
A liquidator is appointed to manage the realisation of the company’s
assets and distribution of claims. While compulsory liquidations
were previously actively managed by the High Court, recent
legislative change altered this position. A committee of inspection
(comprising creditors of the company) may now be formed and the
liquidator is obliged to report to the committee throughout the
liquidation. The committee can authorise the exercise of certain
powers and sanction payment of the liquidator’s fees, costs and
expenses.
The Director of Corporate Enforcement is tasked with ensuring
compliance with company law and a liquidator is obliged to report
to the Director in relation to the conduct of the directors of a
company in liquidation.
Voluntary liquidations take place without court involvement. A
solvent voluntary liquidation can be controlled by the company’s
shareholders, in contrast to an insolvent voluntary liquidation,
which is managed by a liquidator but may be overseen by a
committee of inspection, if such a committee is formed by the
company’s creditors. As in the case of a court liquidation, the
committee can authorise the exercise of certain powers by the
liquidator and sanction payment of the liquidator’s fees, costs and
expenses.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Typically, the liquidator is nominated by the petitioning creditor or
the company, if it is initiating the winding up process. Following the
appointment of a liquidator or a provisional liquidator, the leave of
the court is required in order to commence or continue proceedings
against the company.
The rights of secured creditors are unaffected by a liquidation,
assuming such rights do not fall foul of any avoidance provisions
and the secured creditor may elect to appoint a receiver or to allow
the liquidator to realise its security and account to it for the
proceeds. However, the claims of preferential claims will rank
ahead of floating charge realisations.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Contractual provisions which allow for termination of the contract
on the entry by the company into an insolvency or restructuring
process are common and are enforceable against a liquidator.
The liquidator may, with court approval, within 12 months after the
commencement of the liquidation, disclaim any property of the
company being wound up which consists of, amongst other things,
(a) unprofitable contracts, or (b) any property which is unsaleable or
not readily saleable by reason of its binding the possessor to the
performance of any onerous act or to the payment of money. The
liquidator’s hand may be forced – any person interested in the
property may require him to decide whether or not he will disclaim
and if the liquidator wishes to disclaim in such circumstances, he
must give notice within 28 days that he intends to apply to court to
disclaim.
Under statutory insolvency set-off rules, set off of “mutual credits
and debts” is permitted, but not mandatory. In addition, contractual
set-off will survive insolvency and is enforceable against a
liquidator.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The key principle of distribution of property of a company under
Irish law is that claims, subject to certain exceptions, shall rank pari passu. Where a liquidator realises assets on behalf of a fixed charge
holder, his costs and expenses in respect of such realisation will by
agreement be retained out of such realisation. Once assets have
been distributed to the holders of a fixed charge, super preferential
creditors (comprising unpaid employee withholding tax), trust
monies returned and following the application of set-off rights
which may apply, the order of priorities in a liquidation are as
follows:
(1) the costs and expenses of the liquidation;
(2) preferential creditors (comprising employee entitlements and
unpaid taxes);
(3) floating charge holders;
(4) unsecured creditors; and
(5) members and contributories.
In the event of a liquidation following an examinership, the
examiner’s costs and expenses have priority over all over claims,
including those of secured creditors. Any expenses certified by an
examiner will rank in priority to a floating charge creditor.
The order of priority of claims in a receivership will be set out in the
security document pursuant to which the receiver has been
appointed.
4.7 Is it possible for the company to be revived in the future?
Where a company has been dissolved, the court may within a two-
year period on an application being made by the liquidator or
another interested party, make an order declaring the dissolution to
have been void. It is also possible to apply for the annulment of a
winding up order or resolution. In practice, both such applications
are rare.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The commencement of insolvency proceedings does not per se give
rise to a tax liability; however, tax liabilities will continue to be
incurred in the ordinary way in an insolvency or restructuring
procedure, including, for example, corporation tax, VAT, employee
withholding taxes, capital gains tax and stamp duty.
A liquidator or receiver will register for tax on their appointment
and any pre-existing tax liabilities will be dealt with in the
liquidation or receivership and are likely to have preferential status.
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In an examinership, liabilities to the Revenue Commissioners can be
crammed down; however, the court will not confirm a scheme
which is unfairly prejudicial to any creditor, including the Revenue.
However, the write down of debt may trigger a capital gains tax
liability or a VAT liability where VAT deductions have been claimed
for the full value of invoices subsequently written down by the
examiner’s proposals. A liquidator appointed pursuant to a solvent
voluntary liquidation will be obliged to obtain tax clearance before
finalising the liquidation.
A key question is whether trade has ceased in a liquidation or a
receivership. If a liquidator or receiver is simply realising trading
assets, trade is likely to have ceased, in which case the income
received is currently taxed as a post-cessation receipt at a corporation
tax rate of 25%, as opposed to the standard rate of 12.5%.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In a receivership, the appointment of a receiver will not terminate
employment contracts. However, a receiver may choose to
terminate employment contracts and any claims by employees (for
example, in respect of unpaid wages) which accrued prior to his
appointment will have preferential status in the receivership.
Similarly, in an examinership, the appointment of the examiner will
not terminate employment contracts as the business of the company
will continue to be traded. Pre-existing claims by employees,
including prospective or contingent claims, can be crammed down
in the examiner’s proposals.
In a liquidation, contracts of employment are generally terminated
by the liquidator. Employee claims will typically rank as a
preferential claim, ahead of floating charge creditors. Certain
claims by employees (in respect of, for example, unpaid wages,
holiday pay and redundancy payments up to certain thresholds)
which cannot be met by the insolvent company will be paid out of a
government-funded insolvency fund (the “Fund”). The Fund is
then entitled to claim in the liquidation for all amounts paid to
employees and will rank as a preferential creditor in the liquidation.
Where a transfer is effected or proposed to be effected of the
business of the company in liquidation, the employees and the
employers’ liabilities to its employees may under specific
legislation automatically transfer to the purchaser. The legislation
provides certain exemptions for insolvency proceedings which may
be applicable depending on the circumstances.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
By virtue of the Insolvency Regulation, subject to certain
exclusions, where a foreign insolvent company (whether or not the
insolvent company is Irish incorporated) has its “centre of main
interests” (“COMI”) in Ireland, “main proceedings” can only be
instituted before an Irish court. Under the Insolvency Regulation,
“main proceedings” have, subject as otherwise provided in the
Regulation, universal scope and as such encompass all of the
debtors’ assets and creditors located in the EU (with the exception of
Denmark). In the case of Ireland, main proceedings for the purposes
of the Insolvency Regulation include compulsory winding up by the
Irish court, examinership and creditors’ voluntary winding up (with
confirmation by the Irish court). Further, a foreign company
incorporated in a country which is not subject to the provisions of
the Insolvency Regulation may, in certain circumstances, be wound
up by the Irish Court.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Ireland has not adopted the UNCITRAL Model Law on cross-
border insolvency and domestic legislation does not contain a
mechanism for the recognition of restructuring or insolvency
processes commenced elsewhere. Where the proceedings are those
to which the Insolvency Regulation applies, such proceedings will
automatically be recognised in Ireland. Where the proceedings fall
outside the scope of the Insolvency Regulation, the insolvency
officeholder may apply to the High Court for recognition of the
process under common law principles.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
The range of remedies and procedures available under Irish law
means that in practice this is rare.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Each Irish company will be dealt with as a separate legal entity and
accordingly the assets and liabilities of a company in liquidation
will not automatically be taken on by another group company.
However, where two or more related companies are being wound
up, and if a court is satisfied that it is just and equitable to do so, both
companies may be wound up together as if they were one company.
This is known as a pooling order.
In deciding whether it is just and equitable to make a pooling order,
a court will have regard to (among other things): the extent to which
any of the companies took part in the management of any of the
other companies; the conduct of any of the companies towards the
creditors of any of the other companies; the extent to which the
circumstances that gave rise to the winding up of any of the
companies are attributable to the actions or omissions of any of the
other companies; and the extent to which the businesses of the
companies have been intermingled.
An order will not be made simply because one company is related to
another, or because the creditors of the company being wound up
have relied on the fact that another company is or has been related to
the first company.
Where an examiner is appointed to a company, either at the same
time or later, an application may be made to appoint him to one or
more related companies. The court must have regard to whether the
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Michael Murphy McCann FitzGerald Riverside One, Sir John Rogerson’s Quay Dublin 2 Ireland Tel: +353 1829 0000
Email: michael.murphy@
mccannfitzgerald.com
URL: www.mccannfitzgerald.com
Grace Armstrong McCann FitzGerald Riverside One, Sir John Rogerson’s Quay Dublin 2 Ireland Tel: +353 1829 0000
Email: grace.armstrong@
mccannfitzgerald.com
URL: www.mccannfitzgerald.com
Michael is Head of the Insolvency and Restructuring team. He has wide experience of advising in a number of significant restructurings, examinerships, receiverships and liquidations on behalf of all stakeholders including companies, directors, office holders, banks and other creditors. As well as advising when financial difficulties are identified, Michael advises on solvent reorganisations and on mitigating insolvency risk in transactions in the making.
Michael is a member of the Irish Society of Insolvency Practitioners and INSOL Europe. He has written and lectured extensively in the area of corporate recovery and insolvency.
McCann FitzGerald is one of Ireland’s premier law firms, with 77 partners and almost 350 lawyers and professional staff.
The firm is consistently recognised as being the market leader in many practice areas and its pre-eminence is endorsed by clients and market commentators alike. Our principal office is located in Dublin and we have overseas offices in London, Brussels and New York. We provide a full range of legal services, primarily to commercial, industrial and financial services companies. Our clients include international corporations, major domestic businesses and emerging Irish companies. We also have many clients in the State and semi-State sectors.
Grace is a Senior Associate on the Insolvency and Restructuring team at McCann FitzGerald. As such, Grace has experience acting on behalf of a range of parties in restructuring matters, insolvency proceedings including liquidation, receivership and examinership and bankruptcy and debt collection proceedings.
appointment would facilitate the survival of the company or the
related company or both and must be satisfied that there is a
reasonable prospect of survival of the related company. The
protection period of the related company is limited to the period
available for the first company.
The recast EU regulation on Insolvency Proceedings contains a
chapter on group insolvency proceedings, including provisions on
cross-border cooperation of insolvency courts and insolvency
practitioners from various insolvent group companies and a
coordination procedure to afford a greater chance of rescuing the
group as a whole, where possible. Insolvency practitioners can
coordinate a joint restructuring plan and seek a stay of asset
realisation measures.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Irish company law was modernised in 2015, resulting in the
consolidation of 12 acts into one, including all provisions which
deal with corporate rescue and insolvency. Accordingly, substantive
legislative reform is not anticipated. Irish insolvency law was also
amended to incorporate so-called “Alternative A” contained in
Article XI of the Aircraft Protocol to the Cape Town Convention.
The most significant change arising from this is in examinership. In
the event of an examinership of an airline or a company which owns
or leases or has mortgaged aircraft under interests that fall within the
scope of the Cape Town Convention, the examiner will have, at
most, 60 days to cure all defaults and to agree to perform the
company’s obligations in full. If he does not do that then he must
deliver possession of the aircraft to the creditor at the end of the
examinership or 60-day period, whichever is the earlier.
Ireland is party to the recast EU regulation on Insolvency
Proceedings.
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pirola pennuto Zei & associati massimo Di terlizzi
italy
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
With the first Italian bankruptcy law (R.D. 267/1942 “the
Bankruptcy Law”), bankruptcy in Italy was considered an indelible
social stain and the returning in bonis was considered difficult to
implement and socially unacceptable. As a result, the legal system
was primarily aimed at the liquidation of the debtor and not at the
recovery of the debtor.
It is only with the reforms starting from 2003 that the focus of the
legislator turned to the recovery of the debtor by emulating the
mechanism of the so-called “second chance”, born in the US.
The subsequent reforms, until 2012, had as their primary aim the
recovery of the debtor’s productive capacity through compositions
with creditors, also in “blank”, which facilitated the continuation of
the business activity, with the further possibility, through these
compositions, to split the debtor into classes.
In addition, the legislator implemented the so-called “certified”
restructuring plan and debt restructuring agreement, which are
independent of jurisdictional control during the formation phase.
The reforms from 2013 to 2015 introduced instruments aimed at the
interests of the creditors in the context of the compositions with
creditors, such as minimum payment thresholds, “concurrent bids”
and specific informational obligations, in particular in the “blank”
compositions.
Furthermore, by the Delegation Law of 2017, the legislator reached
a point of balance between the protection of the interests of creditors
and interests of the debtor, the continuation of the business activity
being their main objective.
Indeed, with the new Legislative Decree n. 14/2019, which will
come into force definitively on 15 August 2020, the creditors and the
debtor will both obtain new protections. On the one hand, the
creditor will be able to constantly monitor the health conditions of
the company through some monitoring tools and, on the other hand,
the debtor will be aware of his crisis before the “judicial liquidation”
(the “new name” for the bankruptcy procedure given to avoid the
stigmatisation of the debtor) and he will be able to access various
alternative instruments in order to ensure the continuity of the
business of the company. In other words, the Italian Legislator has
anticipated the moment in which the company itself as well as the
creditors will become aware of the crisis of the company in order to
allow the latter to restructure the company and maintain the value of
the business.
Within this new frame, the liquidation of the company is considered
the last option for the company, to be activated only when other
procedures are not feasible.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
According to the actual Italian legal system, it is possible to
distinguish between:
1) pre-bankruptcy procedures: a certified restructuring plan
(“piano di risanamento” – art. 67 of the Bankruptcy Law) and
a debt restructuring agreement (“accordo di ristrutturazione del debito” – art. 182bis of the Bankruptcy Law);
2) procedures that are not yet bankruptcy: composition with
creditors (“concordato preventivo” – art. 160 et seq. of the
Bankruptcy Law) that can aim to rescue the company or to
wind up the company; and
3) bankruptcy (“fallimento” – art. 5 et seq. of the Bankruptcy
Law), bankruptcy agreements (“concordato fallimentare” –
art. 124 et seq. of the Bankruptcy Law) and compulsory
administrative liquidation (“liquidazione coatta amministrativa” – art. 124 et seq. of the Bankruptcy Law).
There are also special procedures provided by Legislative Decree
270/1999 (so-called “Prodi-bis”), as amended by the “Marzano Decree”, that involve large companies.
In light of the last Reform contained in Legislative Decree n. 14/2019,
the Italian legal system will provide for a single procedure in order to
access the abovementioned procedures under points 1, 2 and 3 which
will all be regulated in the “Crisis and Insolvency Code”.
Only the so-called Extraordinary Administration of Large
Companies procedures will remain regulated by special laws
(“Prodi-bis” – Legislative Decree n. 270/1999 and “Marzano Decree” – Decree n. 347/2003).
ital
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2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
There are different possible liability scenarios that directors can
encounter:
i. not having promptly detected the symptoms of the crisis or
not having reacted promptly;
ii. having caused or aggravated the company’s crisis;
iii. having badly used the necessary or useful tools in order to
deal with the crisis or limit its effects; and/or
iv. not having guaranteed the “par condicio creditorum”.
A company crisis depends not necessarily on the behaviour of the
directors, but it may happen where the directors, due to the improper
capacity to manage the company, can make decisions that, even though
they were chosen to dispel a crisis, can in fact aggravate the situation.
In principle, the decisions taken by the directors remain
unquestionable by the court (“business judgment rule”), unless the
decisions taken by them are manifestly non-economic, imprudent or
risky for the company.
Directors must prepare organisational tools that allow them to know
as soon as possible of any financial crisis that can lead to insolvency.
In other words, they must be able to ascertain whether a company
can continue its business or not, due to the financial situation of the
company and its capacity to make profit.
There are also potential criminal liabilities for directors as a result of
actions or omissions that have led to the insolvency of the company.
There is no specific moment in which it can be identified when a
company enters into financial crisis. However, it is important to pay
attention to the symptoms of the financial crisis of a company, such
as delay or non-payment of withholdings, taxes, social contributions
or repayment of mortgage or the receipt of injunctions notified by
the creditors.
The Reform of Legislative Decree n. 14/2019 also extends the
duties of the company’s directors with regards to the maintenance of
the company’s assets. Specifically, the reform amends, with
immediate effect, art. 2476 of the Italian Civil Code concerning the
liability of the company’s directors, introducing their liability
towards the creditors (and not only towards the shareholders as it
was prior to the Reform) for the non-observance of the obligations
inherent to the preservation of the integrity of the company’s assets.
According to the new framework, the lawsuit can be proposed by
creditors when the assets are insufficient to satisfy their credits.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The other stakeholders may influence the company’s situation
through the filing of legal actions or executive actions against the
company in order to obtain the repayment of their credits. There are
no special rules applicable to unsecured creditors; in the case where
a company is not able to face the legal actions of the creditors, the
latter can also claim the court for the declaration of judicial
liquidation of the company. The Italian legal system, as amended by
the 2019 Reform, will consider the judicial liquidation (the old
“bankruptcy”) as the last remedy for the company in crisis. This
could change the way in which creditors can interfere with the credit
recovery.
Furthermore, in some proceedings involving the restructuring of the
companies (such as in case of a certified restructuring plan or debt
restructuring agreement), the main creditors (often the banks) may
ask for a change in the governance, especially regarding the
management, selecting the new director to whom they assign the
process of business turnaround.
The 2019 Reform has also amended the moratoria agreement and
stays on enforcement in the Italian legal system.
First of all, the duration of the moratoria agreement, regulated by
art. 182-septies, paragraph 5 (Bankruptcy Law), having the purpose
of stabilising relations with the company’s financial creditors for a
set period of time established, has been extended.
The moratoria agreements are not necessarily linked to other crisis
instruments regulated by the bankruptcy law and can be efficiently
used to the aim of the undersigning:
1) of a certified recovery plan, according to art. 67, third
paragraph, lett. d), Bankruptcy Law;
2) of a debt restructuring agreement, according to art. 182bis of
the Bankruptcy Law;
3) of a restructuring agreement with financial intermediaries,
according to art. 182-septies Bankruptcy Law;
4) of a direct or indirect arrangement with creditors, according
to art. 161 Bankruptcy Law; and
5) of a settlement agreement with creditors.
Through the 2019 Reform, the moratoria agreement negotiated
between the debtor company and one or more participating banks or
financial intermediaries, representing 75% of financial credits, also
produce effects with respect to non-adherent banks and financial
intermediaries if they have been informed of the start of negotiations
and have been able to participate.
According to the 2019 Reform, the agreement will also be extended
to creditors who are not qualified as banks/financial creditors under
the condition that they are identified in categories that are
homogeneous.
Furthermore, there is also the “automatic stay”, to be used in case of
access to a procedure in case a company’s crisis changes with the
mentioned Reform. The new system will no longer provide
automatic inhibition of individual executive actions, rather the debtor
will have to ask the judge to declare the “automatic stay” within his
claim for the admission to the procedures.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
In case of transactions entered into by a company in financial
difficulties during the so-called “suspect period” (i.e. the period
preceding the declaration of insolvency), the Italian legal system
provides for the possibility of “claw-back” actions underlying such
payments with the following terms and conditions:
i. the payments made by the debtor are within the suspicious
period of two years, in order to settle debts that would have
expired in the period following the declaration of bankruptcy
may be clawed-back;
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ii. the “abnormal” transactions listed in the Bankruptcy Law
that took place within the suspicious period of one year or six
months – depending on the type of transaction – may be
clawed back if the other party does not prove that they were
unaware of the debtor’s insolvency status;
iii. the “normal” transactions listed in the Bankruptcy Law that
took place within the suspicious period of six months prior to
the declaration of insolvency can be clawed back if the
bankruptcy trustee proves that the other party knew of the
insolvency of the debtor;
iv. the Bankruptcy Law also provides cases in which claw-back
actions cannot be exercised (e.g. payments for goods and
services that can be included: in the normal course of
business with standard terms; payments due to employees;
acts and payments made or securities granted on a debtor’s
assets on the basis of a certified restructuring plan, a debt
restructuring agreement or a composition with creditors; sale
or preliminary contracts of sale of real estate at a fair price;
and payments on a bank account when they do not
permanently reduce the debtor’s exposure); and
v. in addition, transactions entered into between companies of
the same group may be clawed back under the rules
governing extraordinary administration proceedings (the
suspect period is extended to three/five years).
Transactions entered into by a company in financial difficulties may
also be clawed back under the rules governing the ordinary claw-
back actions.
In order to avoid claw-back actions and the related responsibility of
the company, the counterpart and any other third parties involved in
such transactions, transactions are made according to pre-
bankrupcty procedures provided by the law, which are suitable and
considerable in nature and amount.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
There is the possibility to enter into informal work-out agreements
between the debtor and its creditors, so long as it is understood that
these agreements i) are freely negotiable between the parties, and ii)
are binding only for the parties who have entered into them.
Nevertheless, what often occurs is that such agreements are
finalised to hide – and so postpone – a financial crisis.
These work-out agreements, in case of the subsequent default of the
company, may have consequences in terms of claw-back actions and
criminal liabilities, too; therefore, it is preferable to enter into the
restructuring agreements provided by the law.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
In order to restructure the liabilities of distressed companies, the
Italian system provides the following options:
■ CERTIFIED RESTRUCTURING PLAN (“piano di risanamento” – art. 67 of the Bankruptcy Law)
The Certified Restructuring Plan is a private agreement
between the debtor and its creditors, and it is named
“certified restructuring plan” since it has to be “certified” by
an independent expert, who guarantees the feasibility and
truthfulness of the plan. In this process the court is not
involved.
Only the payments and, in general, the transactions made in
accordance with the certified plan, are not subject to claw-
back actions.
The most relevant effects connected with the adoption of a
certified restructuring plan are provided by arts 166 and 324
of the Code, which contemplate, respectively, i) the
exemption from the claw-back action of the deeds and
payments made in the execution of the plan, and ii) the
exemption from penal responsibilities relating to the crimes
of preferential bankruptcy and simple bankruptcy possibly
resulting from the fulfilment of such acts and payments.
The 2019 Reform amended the systematic structure of the
rules concerning the “certified restructuring plan” by
introducing a specific article (art. 56 of the new “Crisis and
Insolvency Code”) regulating such tool, while in the prior
system they were regulated by claw-back actions. In the new
framework, the claw-back actions are regulated separately.
■ DEBT RESTRUCTURING AGREEMENTS (“accordo di ristrutturazione del debito” – art. 182bis of the Bankruptcy Law)
Debt restructuring agreements agreements are aimed at
allowing a debtor in financial difficulties to restructure its
debts and obtain protection against creditors, through the
validation by the court of an agreement made with at least
60% of its creditors.
This is a private negotiation between the debtor and its
creditors; the court is involved only at the end of the
negotiation process to obtain the validation of the
restructuring agreement.
The application for the validation must include a fairness
opinion by an independent expert regarding, among others,
the reasonableness of the restructuring agreement to ensure
full payment of any creditor who is not party to the agreement.
These creditors have to be paid within i) 120 days from the
validation of the agreement in case of expired credits, or ii)
120 days from the expiring of the credits in case these credits
are not expired at the date of the validation of the agreement.
For the companies that have, for the most part, their debts to
banks and other financial operators, there is the possibility to
enter into an agreement with a part of such creditors in order
to delay the payment of their credits; such agreements are
also binding for the creditors that have not entered into them
(so-called “stand still agreements”).
Before the restructuring agreement is signed, it is always
possible for the company to block any individual action by
the creditors, by filing an application with the court including
i) the proposal of the restructuring agreement, ii) an affidavit
certifying the ongoing negotiations with creditors, and iii) a
fairness opinion by an independent expert confirming the
suitability of the proposed agreement.
After the validation of the agreement, every dissenting
stakeholder that has not entered into the agreement may file
an opposition against the agreement.
Art. 57 of the new “Crisis and Insolvency Code” substantially
reproduces the content of the current art. 182bis Bankruptcy
Law not modifying the features of the ordinary discipline of
the restructuring agreements, while the new art. 61 of the
Code, as mentioned above under question 2.2, extends the
effectiveness of a restructuring agreement not only to
financial creditors, but also to non-financial creditors.
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■ COMPOSITION WITH CREDITORS (“concordato preventivo” – art. 160 et seq. of the Bankruptcy Law)
This procedure involves an agreement between the debtor
and its creditors, subject to the supervision of the court, with
the aim of: i) avoiding the bankruptcy by means of
liquidation of the company (“concordato liquidatorio”); or ii)
reaching an agreement with its creditors in order to
restructure its debts and continue the business (“concordato con continuità”).
The procedure initiates the filing with the Bankruptcy Court
of: i) a petition; ii) a plan (that has to provide for the payment
of, at least, 20% of the unsecured creditors and may also
provide for the division of the creditors in classes); and iii) an
expert’s opinion confirming the feasibility of the plan and the
truthfulness of the accounting data.
The court is involved in verifying the existence of the legal
requirements (for instance, the minimum payment ration of
unsecured creditors of 20%) to enter into the procedure, but
the approval is made by the creditors. The composition is
approved by the favourable vote of the unsecured creditors
(who will be subject to the partial repayment of their credits)
representing the majority of the claims admitted to vote.
Creditors whose rights accrued prior to the date of filing of
the compositions cannot take legal action against the debtor
to enforce their claims until the court’s approval becomes
definitive; creditors whose rights accrued after the filing of
the composition have the right to be paid before the other
admitted creditors (“creditori prededucibili”).
The decision to file a composition with creditors is taken by
i) the directors in case of limited companies, and ii) by the
shareholders in case of partnership.
The new regulation of the composition with creditors is
provided by the “Crisis and Insolvency Code” in art. 44 and
following, with reference to the general rules for the access to
any procedure, and in art. 84 and following, with reference to
the specific rules applicable only to composition with
creditors. The new legislation about composition with
creditors reduces the terms for the deposit of the plan and the
protective measures, which will be subject to a specific
request of the debtor and in any case limited to 12 months.
■ EXTRAORDINARY ADMINISTRATION
Extraordinary Administration is a special insolvency
procedure that is: i) supervised by the Ministry for Productive
Activities; ii) applicable to large entities with significant
indebtedness; and iii) specifically aimed at the restructuring
of the company.
It may be implemented through i) the sale of the business run
by the company, on the basis of a programme to be completed
in one year, or ii) the restructuring of a company’s debt on the
basis of a business plan aimed to restore the company in two
years.
Once the competent authority admits the debtor to Prodi or
Marzano’s extraordinary administration proceedings, the
creditors, whose rights accrued prior to the date of the
admission, cannot take legal action against the debtor in order
to enforce their claims.
Debt-for-equity swaps
This form of satisfaction of creditors (accepting to receive
shares, bond and similar in exchange of their credits),
initially has been introduced as an alternative form of
extraordinary administration and then extended to other
bankruptcy procedures, but it is not often used.
Pre-packaged sales
In case of crisis of the company, it is possible to perform pre-
packaged plans (i.e. providing for the sale or lease of the
debtor’s assets to a third party). These plans can be
performed: i) in accordance with a restructuring procedure
(for example, certified restructuring plans, debt restructuring
agreements and compositions with creditors) and in this case
it is not subject to claw-back actions; or ii) out of a
restructuring procedure but, in this case, the operation can be
subject to claw-back actions.
3.3 What are the criteria for entry into each restructuring procedure?
The criteria for entry into the below restructuring procedures are as
follows:
■ DEBT RESTRUCTURING AGREEMENT AND
COMPOSITION WITH CREDITORS
All companies that perform commercial activities may enter
into a debt restructuring agreement or file a petition for a
composition with creditors unless the debtors are expressly
excluded by the Bankruptcy Law (art. 1).
In the light of the new Reform, non-commercial entrepreneurs
will have access to the procedures described above, with
percentages of agreement depending on the type of debtor
requesting and the objective that the plan sets.
■ EXTRAORDINARY ADMINISTRATION
For Prodi’s proceedings, it is necessary that the company has
more than 200 employees and a total indebtedness of no less
than two-thirds of the aggregate of the total assets and the
revenues of the preceding financial year.
For Marzano’s proceedings, it is necessary that the company
has more than 500 employees (also considered in a group)
and a total indebtedness of no less than 300 million euros.
3.4 Who manages each process? Is there any court involvement?
■ THE CERTIFIED RESTRUCTURING PLAN (art. 67 of
Bankruptcy Law)
This is a mechanism completely unrelated to the involvement
of the court and it is managed by the directors of the
company.
■ THE DEBT RESTRUCTURING AGREEMENTS (art.
182bis of Bankruptcy Law)
The court is involved in the final phase for the approval of the
agreement while the execution of the agreement is managed
by the directors of the company. The court has no duty of
supervision on the execution of the agreement.
■ COMPOSITIONS WITH CREDITORS
In compositions with creditors, the court is involved in the
process of the approval of the agreement; the execution of the
agreement is assigned to a judicial liquidator who is
supervised by a judicial commissioner, both appointed by the
court who then is involved in case of extraordinary
transactions not planned in the agreement.
■ EXTRAORDINARY ADMINISTRATION
In Prodi and Marzano’s extraordinary administration
proceedings, two phases can be identified: in the first one the
judicial commissioner, appointed by the court, supervises the
management of the company and expresses its opinion on the
existence of the conditions for the approval of such procedure;
and in the second one, the Ministry of Economic Development
is involved in the appointment of the extraordinary
commissioner who manages the company.
These rules will still apply according to the new “Crisis and
Insolvency Code”.
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3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Among the innovations introduced by the 2019 Reform 2019
regarding the pending contracts in case of access to an insolvency
procedure, there is:
i. an express provision granting the trustee the right of
termination of the preliminary real estate sale contract;
ii. an express provision stating the automatic termination of
contracts of a personal nature; and
iii. a specific provision regarding the employment contracts in
force at the time of the opening of judicial liquidation
granting the trustee the right to decide the termination or
maintenance of the contracts and stating that in case the latter
does not communicate his decision within four months from
the opening of judicial liquidation, the contract is considered
terminated by law.
■ THE CERTIFIED RESTRUCTURING PLAN AND DEBT
RESTRUCTURING AGREEMENT
The existing contracts are not affected and they normally
perform as ordinary management of the company; the chance
to terminate the contract is subject to the decision of the
parties.
■ COMPOSITIONS WITH CREDITORS
Regarding the compositions with creditors aimed to
restructure the company (“concordato con continuità”), the
existing contracts normally continue, but it provides the
possibility for the debtor to apply for the suspension or
termination of pending contracts (with an indemnity provided
for the counterparty according to the provisions of the
contract). The Bankruptcy Law also provides the
inapplicability of the above rules to employment contracts,
rental of real estate, preliminary agreement of a real estate,
leasing and financing for a specific deal.
■ EXTRAORDINARY ADMINISTRATION
The extraordinary commissioner can terminate pending
contracts not completely performed by both parties.
In any case, the counterparty (“contraente in bonis”) could
terminate unperformed contracts according to the Italian
Civil Code rules about the breach of contracts.
Set-off operations are possible, according to Italian
Bankruptcy Law, if both credits arose before the filing for
declaration to the court, even if the creditor’s title has not yet
expired. Compensation is excluded in the following cases:
i. the creditor’s unexpired credit was purchased by the inter vivos act after the declaration of bankruptcy or in the
previous year (this rule also applies to overdue credits); and
ii. the credit is subject to certain conditions and this has not
yet occurred.
These rules will still apply according to the new “Crisis and
Insolvency Code”.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
In general, the restructuring procedures are aimed at the
reimbursement of the credits of the company but it may happen that,
in order to perform the targets provided in the plan, the debtors need
new financing.
This new financing has to be included in the plan and the
independent expert must give an opinion about the possibility to
reimburse this new financing.
In the event of subsequent judicial liquidation of the company, the
credit arising further to this new financing is satisfied with
preference to the other creditors (“prededucibile” according to
Bankruptcy Law).
The 2019 Reform amended this matter, significantly restricting the
effectiveness of the said funding.
Firstly, it has completely eradicated the possibility for the debtor
obtaining the financing to be satisfied with a preference to the other
creditors (“prededucibile”) which had been disbursed prior to the
filing of the claim to access to the procedure, even if provided by the
following plan of the said procedure. It is therefore no longer
reproduced in the provision of the second paragraph of art. 182-
quater Bankruptcy Law.
Secondly, the possibility to apply for the so-called “prededucibile”
financing is limited to cases in which it is provided for the
continuation of the activity, even if only for a limited period of time.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
According to Italian law, there are i) procedures only aimed at the
winding up of the company: bankruptcy; bankruptcy agreements;
and compulsory administrative liquidation, and ii) procedures that
can also be aimed at the winding up of the company: certified
restructuring plan, debt restructuring plan; compositions with
creditors; and extraordinary administration (Prodi’s procedures).
4.2 On what grounds can a company be placed into each winding up procedure?
In the case where the company is in a status of crisis or if the
corporate purpose has been reached or has become impossible to
reach, the company can enter into a voluntary winding up process
firstly finalising the payment of its creditors.
In the case of the liquidation of the assets of a company which is
able to fully repay its debts, it is not necessary to apply for an
insolvency procedure as, in order to avoid responsibility of the
directors and to guarantee in the correct way the rights of all
creditors, it is necessary that the process of liquidation is run
according to one of the tools provided by the law.
As abovementioned, once it is verified that the company is not able
to satisfy all the creditors, it becomes mandatory to wind up the
company according to one of the following insolvency procedures:
■ BANKRUPTCY AND ADMINISTRATIVE LIQUIDATION
The commencement of these procedures is mandatory and
the liquidation of the company begins immediately after the
declaration by the court (the administrative liquidation only
applies to banks and insurance companies). Regarding the
case of bankruptcy, the liquidation process can also be
performed and closed through a bankruptcy agreement
(“concordato fallimentare”) in which a creditor or a third
party can propose a plan aimed at full or partial
reimbursement of the creditors.
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■ COMPOSITIONS WITH CREDITORS, DEBT
RESTRUCTURING AGREEMENTS AND CERTIFIED
RESTRUCTURING PLANS
The commencement of these procedures is an opportunity for
the company and the liquidation is activated with the filing of
the proposal or the subscription of the agreements. These
types of procedure allow the avoidance of bankruptcy.
The 2019 Reform has amended art. 2486 of the Italian Civil
Code regarding the liabilities of the directors upon the
occurrence of a cause for dissolution of the company.
4.3 Who manages each winding up process? Is there any court involvement?
■ BANKRUPTCY
This is managed by the bankruptcy trustee with the
supervision of the court and the creditors’ committee.
■ BANKRUPTCY AGREEMENTS
Once the agreement is approved by the court, the execution
of the agreements is performed by the directors and
supervised by the appointed judge, bankruptcy trustee and
creditors’ committee.
■ ADMINISTRATIVE LIQUIDATION
The Public Authority manages the procedure and authorises
the extraordinary acts proposed by the extraordinary
commissioner, who is appointed by the Ministry and who is
entrusted with the management of the company.
■ COMPOSITIONS WITH CREDITORS AND DEBT
RESTRUCTURING AGREEMENTS
See the answer to question 3.4.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Regarding the insolvency procedures, the creditors cannot influence
the winding up process; they simply have to file a petition to the
court through the bankruptcy trustee, in order to request to be
included in the list of the creditors.
Starting from the admission of the debtor to any of the winding up
procedures, the creditors cannot take executive legal actions
individually. The creditors assisted by general or special privilege
(also by pledge or mortgage) have no right to perform individual
executions; they simply have the right to be satisfied, with
preference respecting the other unsecured creditors, with the sum
obtained by the sale of the secured assets. In the case that the sum
obtained is lower than the value of the credits, for the remaining
debts, such creditors will be treated as the unsecured creditors.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
■ BANKRUPTCY AND COMPULSORY ADMINISTRATIVE
LIQUIDATION
There is a general rule that the declaration of bankruptcy of a
company determines the suspension of the execution of the
contract until the bankruptcy trustee, upon the approval of the
creditors’ committee, decides whether to perform or terminate it.
The Bankruptcy Law also provides some exceptions for
contracts that automatically perform (such as: rental contracts;
and insurance contracts) or terminate automatically (such as:
banking contracts; or proxy contracts).
Finally, contracts are provided which perform automatically
but the bankruptcy trustee can make the decision regarding
their termination (such as a rental contract with the
insolvency of the renter) or contracts which terminate
automatically but the bankruptcy trustee can decide on their
performance (such as tender).
The same rules apply for compulsory administrative
liquidation.
■ COMPOSITIONS WITH CREDITORS AND DEBT
RESTRUCTURING AGREEMENTS
See the answer to question 3.5.
The counterparty (“contraente in bonis”) could terminate
unperformed contracts according to the Italian Civil Code rules on
the breach of contracts.
Furthermore, in bankruptcy and in compulsory administrative
liquidation, set-off operations are possible, according to the Italian
Bankruptcy Law. Please see the answer to question 3.5.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The ranking of claims is the following:
i. costs of the procedure (“crediti prededucibili” according to
the Bankruptcy Law);
ii. privileged creditors in order of priority provided by law (e.g.
employees, artisans, professionals, taxes, contributions, etc.);
iii. creditors secured by guarantees (in the case where the value
of the secured property is lower than the credit, the remaining
part of the credit is admitted as unsecured); and
iv. unsecured creditors.
4.7 Is it possible for the company to be revived in the future?
Despite there being no specific provision in Italian law, it is possible
that a company will revive in the future in the case that its business
is sold for prospective business continuity, so that the company may
continue its activity as a different entity.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
In the context of restructuring and insolvency procedures, the tax
liabilities are included in the debts of the company with privileged
nature.
Regarding tax risks (i.e. arising from future and eventual tax
assessment), the art. 14 paragraph 5bis of Legislative Decree
472/1997 (Italian law related to tax penalties and fines) provides that
in the case of a sale of business of a company, performed according to
a restructuring procedure (art. 67 and art. 182bis of Bankruptcy Law)
or insolvency procedure, the buyer is not responsible for the tax
liabilities of the seller (except in the case of fraud).
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6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In case of “certified” restructuring plans, debt restructuring
agreements and compositions with creditors aimed at restructuring
the company (“concordato in continuità”), there are no specific
effects on employment contracts.
The procedures of bankruptcy, compulsory administrative
liquidation or extraordinary administration are not causes for
dismissal but, from the commencement of these procedures, the
performance by the employees is suspended until the bankruptcy
trustee or the commissioner decide on their performance or
termination. In this period, the employees are entitled to receive a
social contribution aimed at integrating their salary (so-called
“cassa integrazione guadagni”). In case of bankruptcy, the credits
of employees towards the company are satisfied by the National
Social Welfare Institution.
With reference to the changes introduced by the Reform regarding
employment contracts, please see question 3.5 above.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
EC Regulation 1346/2000 and EU Regulation 848/2015 introduced
the concept of COMI (Centre Of a debtor’s Main Interest) according
to which the declaration of the principal insolvency procedure (that
involves all the assets of the debtor) must be filed before the court of
the state in which the company has the centre of its interests (for the
companies it is presumed that the COMI has to be identified with the
place in which there is the registered office).
It is also possible to open secondary procedures in other EU States
in which the debtor has a form of dependence, limited to the assets
located in those other states.
The concept of COMI is especially useful in resolving bankruptcy
proceedings of groups of companies with offices in different
Member States.
Pursuant to EU Regulation 848/2015, the Italian Legislator has
introduced in the new “Crisis and Insolvency Code” a provision on
jurisdiction according to which the court, when it opens a cross-border
insolvency procedure in accordance with EU Regulation 848/2015,
shall declare whether the procedure is main, secondary or territorial.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
EC Regulation 1346/2000 and, from June 2017, EU Regulation
848/2015, provide that the judgment is automatically recognised in
all other Member States from the moment in which it produces its
effects in the State in which the procedure was opened, without
needing judicial intervention. This effect is produced even if the
debtor, according to the national law of another Member State,
cannot be subject to insolvency proceedings.
The effects that the recognition of the procedure involves in every
other Member State are those “provided for by the law of the State of opening”, unless a secondary procedure is opened in other States.
Such second procedure (that anyway is not compulsory), if opened,
produces its effects only in the State in which is opened.
In case of procedures opened in States outside the EU, the relevant
effects are regulated by Italian law n. 218/1995.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Companies incorporated in the Italian jurisdiction can restructure or
enter into insolvency proceedings according to EU Regulations for
other Member State’s jurisdictions, while in the case of States
outside Europe, it depends on the specific treaties or legal rules
provided by the foreign jurisdictions. Although this possibility is
provided by law, such rules did not have an effective execution in
the past, since these types of rules are mostly suitable in the case of
insolvency of a large company.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The 2019 Reform has provided an organic regulation for group
company crises. In particular it provided, for the first time in the
Italian legal system, a group definition, which is the following: “all
the companies, businesses and entities, excluding the State, which,
pursuant to arts 2497 and 2545-septies of the civil code, are subject
to the direction and coordination of a company, of an entity or of a
natural person, on the basis of a participatory constraint or a
contract, for this purpose it is presumed, unless proved otherwise,
that: 1) the management and coordination of companies is exercised
by the company or body required to consolidate their financial
statements; 2) the companies directly or indirectly controlled or
subject to joint control are subjected to the management and
coordination of a company or entity with respect to the company or
body that exercises management and coordination activity.”
Following the intervention of the Reform 2019, a coordinated
procedure for the management of insolvency proceedings regarding
groups is now available within the Italian legal system.
Specifically, the request to access the new coordinated procedure
shall not necessarily be presented by the holding company, since
such company may not be in a crisis and, as a consequence, may not
be interested in the procedure.
However, this does not exclude that the same or other companies of
the group not in crisis may, according to the plan, participate in the
management of the crisis.
1) Management and coordination
In order to access the mentioned procedure, the group shall
be subject to management and coordination activity.
If a company that exercises management and coordination
activities is not in crisis, the competent court will be
identified having regards to the company that has the highest
debt exposure according to the last approved financial
statements. The new rule aims to avoid that the competent
court is that of the seat of the holding company without any
connection with the court that is competent regarding the
other companies actually in crisis.
pirola pennuto Zei & associati italy
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Massimo Di Terlizzi Pirola Pennuto Zei & Associati Via Vittor Pisani no. 20 Milan 20124 Italy Tel: +39 02 66 99 52 03
Email: [email protected]
URL: www.pirolapennutozei.it
Pirola Pennuto Zei & Associati was established as an association of professionals in the early 1980s by its founders who, from the 1970s, have been engaged in providing tax and statutory consulting services to companies and multinational groups. It is currently one of the leading independent Firms in Italy.
Pirola Pennuto Zei & Associati, through the experience and high professionalism of over 500 professionals who integrate technical and specialist skills, provide a wide range of tax, corporate and statutory consulting services, both nationally and internationally, using advanced methodologies and an extensive network of correspondents.
Pirola Pennuto Zei & Associati is an authoritative partner in business, academic and professional circles, with offices in Milan, Rome, Turin, Bologna, Padua, Verona, Naples, Brescia, Florence, Parma, London, Shanghai and Beijing.
Admitted to the roll of Lawyers of the Italian Court and to the roll of Solicitors of the Senior Courts of England and Wales.
Registered with the Italian Register of Certified Tax Advisors and the Italian Register of Certified Public Statutory Auditors.
Equity Partner, Member of the Executive Committee and of the Board at Pirola Pennuto Zei & Associati (Milan).
Equity Partner and Managing Partner at Pirola Pennuto Zei & Associati UK LLP (London).
Chairman at Pirola Consulting China Co. Ltd (Beijing and Shanghai).
Chairman at Pirola Corporate Finance SpA (Milan). Knowledge of and experience with corporate, commercial and tax law, M&A, private equity and restructuring.
Member of Boards of Directors and Statutory Auditor of Italian companies and Italian subsidiaries of foreign multinational groups.
2) The unique proposal
The proposal, with its unitary plan or its connected plans,
shall show that the group procedure concerning the
individual companies in crisis is suitable to allow the
recovery of the debt exposure of each single company in
crisis, ensuring at the same time the convenience of a group
procedure for the creditors.
3) Single procedure
The companies of a group may access a procedure before the
court (either a procedure of composition with creditors or a
judicial liquidation) by filing a single appeal, asking to access
the single procedure. In these cases, a form of coordination
of the procedures shall be highlighted with respect to the
procedure the companies are willing to access and would not
have existed in case of individual procedures.
4) Single court
In order to proceed with a single procedure there will be the
appointment of a sole court (“giudice delegato”) and a sole
trustee of the procedure to simplify the management of the
single procedure.
5) Claw-back action
The trustee of the procedure in the context of a unique
procedure or of a plurality of procedures, may take actions
aimed to obtain the declaration of ineffectiveness of the acts
performed in the five years prior to judicial liquidation.
The trustee of the procedure may also claw back deeds and
payments carried out by other group companies before the
starting of the judicial liquidation and in the two years before
the same.
pirola pennuto Zei & associati italy
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The new Legislative Decree n. 14/2019, the “Crisis and Insolvency
Code”, will be introduced into the Italian legal system, which will
substitute the previous Bankruptcy Law (R.D. 267/1942). The
decree will completely enter into force on 15 August 2020, but the
articles concerning the changes of the Italian Civil Code related to
directors’ liabilities is already in force.
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mori Hamada & matsumoto
Daisuke asai
Dai Katagiri
Japan
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
In restructuring proceedings, the creditor cannot take the initiative,
nor do they have the right to control the proceedings both
institutionally and factually in Japan. For instance, in general, the
debtor in civil rehabilitation proceedings or the trustee in corporate
rehabilitation proceedings has the right to control almost the entire
restructuring proceedings. In addition, the trustee in bankruptcy
proceedings or the debtor in special liquidation proceedings also has
the right to control almost the entire liquidation proceedings. As a
result, we believe that Japan is a debtor-friendly jurisdiction.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Informal financial restructurings of distressed companies are
allowed and being increasingly used, especially for small or mid-
sized companies. Such restructurings are encouraged through the
alternative dispute resolution mechanism available for business
revitalisation under the Alternative Dispute Resolution Act (2007),
and soft law such as the Guidelines for Individual Debtor Out-of-
Court Workouts (2013).
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
There are no specific provisions of law that place enhanced duties
on the directors of distressed debtors. However, they owe
obligations under general provisions of the Companies Act, such as
the duties of diligence and loyalty. Thus, for example, directors
could be held liable for damages to the company or creditors if they
breach their duty of diligence. In addition, certain acts (such as
gratuitous ones) by an insolvent company are vulnerable to being
challenged as being legally null and void. Furthermore, any director
or officer who engages in fraudulent conduct before the filing of the
company’s bankruptcy proceedings may be held liable for such
conduct under criminal or tort law, or both.
In general, directors of distressed debtors are not obliged to file
restructuring or insolvency proceedings. However, any liquidator of
a company under voluntary liquidation is obliged to (i) file for
special liquidation if the company’s debts are suspected to exceed its
assets, and (ii) file for bankruptcy if the liquidator finds that the
company’s debts exceed its assets. Failure to comply with these
obligations may result in fines and the liquidator being held liable
for damages to the creditors.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Upon the commencement of insolvency/restructuring proceedings, in
general, civil actions and civil execution proceedings with respect to
unsecured claims are suspended, and unsecured creditors are prohibited
from commencing new civil actions or civil execution proceedings.
However, exercising security interests is not prohibited, and secured
creditors may collect their claims regardless of the commencement of
such proceedings, except corporate reorganisation proceedings which
prohibit secured creditors from exercising their security interests.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
In civil rehabilitation, corporate reorganisation and bankruptcy
proceedings, the debtor’s pre-insolvency transactions may be
challenged. The company or trustee (as applicable) must exercise
this right through court proceedings within two years after the
commencement of each of these proceedings.
There are two elements to the grounds for such challenges. The first
pertains to the timing of the transactions, which must be conducted
after the debtor falls into financial crisis. The second pertains to the
harmfulness of the transactions to the debtor.
If such challenges are successful, the subject transactions basically
become null and void. Bona fide third parties, however, may be
protected from such challenges.
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In special liquidation proceedings, such challenges are not
available, but creditors may challenge transactions that are harmful
to creditors based on the Civil Code. This challenge is not special to
insolvency proceedings, and may apply to transactions in general.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
It is possible to implement an informal work-out in addition to
restructuring court proceedings. Restructuring plans in an informal
work-out must be approved by all creditors.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
There are two types of restructuring procedures in Japan: civil
rehabilitation proceedings (minji-saisei); and corporate reorganisation
proceedings (kaisha-kosei).
In civil rehabilitation proceedings, the debtor must propose and
submit to the court a rehabilitation plan within the period specified
by the court. Registered creditors also have the right to propose and
submit a rehabilitation plan that must be approved at a creditors’
meeting by a majority number of creditors present and voting at the
meeting and a majority by value of all creditors who hold voting
rights. If approved, the court authorises the rehabilitation plan,
which will bind the company and the creditors.
In corporate reorganisation proceedings, the trustee must propose
and submit to the court a reorganisation plan within the period
specified by the court. The debtor company, registered creditors or
stockholders may also propose and submit a reorganisation plan.
The reorganisation plan must be submitted to and approved at a
stakeholders’ meeting. If approved, the court authorises the
reorganisation plan, which will bind the stakeholders. Different
classes of stakeholders (e.g. unsecured creditors, secured creditors
and shareholders) vote separately, and approval must be obtained
from each class. The Corporate Reorganisation Act sets forth
different thresholds for different classes (for example, the requisite
majority for unsecured creditors is a majority by value).
Debt-for-equity swaps are possible in both proceedings. In
corporate reorganisation proceedings, the process set forth under the
Companies Act for the issuance of shares (such as a special
resolution of the shareholders’ meeting or a resolution of the board
of directors) will not apply if the debt-for-equity swap scheme is
provided for by the approved reorganisation plan. In civil
rehabilitation proceedings, however, the issuance of shares is
subject to certain requirements under the Companies Act.
Pre-packaged sales are commonly used in Japan, especially in civil
rehabilitation proceedings. In cases where a pre-packaged sale
process is used, the proceedings are generally shorter than the
standard period. While there are no specific provisions in the Civil
Rehabilitation Act for proceedings involving pre-packaged sales,
these sales are subject to the same requirements as under normal
proceedings (for example, pre-packaged sales must be stipulated in
the rehabilitation plan and approved at a creditors’ meeting).
Creditors and/or shareholders may file an immediate appeal against
the court’s decision to commence civil rehabilitation proceedings or
corporate reorganisation proceedings. Commencement of civil
rehabilitation proceedings does not automatically affect any secured
creditor’s right to enforce its security interests; provided, however,
that in exceptional circumstances, the court may impose certain
restrictions on the secured creditors’ right to enforcement. On the
other hand, once corporate reorganisation procedures commence
with respect to the debtor corporation, enforcement of security
interests will be subject to certain limitations as contemplated in the
Corporate Reorganisation Act.
Cram-down is permitted under corporate reorganisation proceedings.
When one or more classes of stakeholders approve the reorganisation
plan, the court may authorise the reorganisation plan by providing a
clause to protect the interests of dissenting creditors.
3.3 What are the criteria for entry into each restructuring procedure?
The entry requirement is for (i) there to be a risk that the debtor will
not be able to pay its debts as they become due or that its debts
exceed its assets, or (ii) the debtor to be unable to pay its debts
already due without causing significant hindrance to the
continuation of its business.
3.4 Who manages each process? Is there any court involvement?
In civil rehabilitation proceedings, the board of the debtor company
remains in control and has the power to manage the company’s
business. However, the court may require the debtor to obtain
permission of the court in order to conduct certain types of
activities, including (but not limited to): (i) disposing of property;
(ii) accepting the transfer of property; (iii) borrowing money; (iv)
filing an action; (v) settling a dispute or entering into an arbitration
agreement; and (vi) waiving a legal right. In practice, the court
appoints a supervisor in most cases and grants him or her the
authority to give such permission to the debtor on its behalf in
respect of the debtor’s activities. In addition, under exceptional
circumstances, a court-appointed trustee may take over control of
the company’s business.
In corporate reorganisation proceedings, a trustee must be appointed
for the corporate debtor. The trustee, who is appointed by the court
and is usually an attorney with expertise in insolvency cases, has
control and possession of the debtor’s business and its assets.
However, the trustee may also be a business person who is deemed
fit to operate the debtor’s business. Even under corporate
reorganisation proceedings, there are increasing numbers of cases in
which the court appoints trustees from the current management.
Such proceedings are called ‘debtor-in-possession-type’ (‘DIP-
type’) reorganisation proceedings, as opposed to traditional
‘administration-type’ proceedings. In those cases, the court usually
also appoints a supervisor who monitors the management’s
activities. Thus, the proceedings look similar to civil rehabilitation
proceedings.
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3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
If the company and its contract counterparty have not yet
completely performed their obligations under a bilateral contract by
the time of commencement of civil rehabilitation proceedings or
corporate reorganisation proceedings, the company or trustee (as
applicable) may either cancel the contract or cause the company to
perform its obligations and request the counterparty to perform.
When the counterparty is required to perform its obligations, the
counterparty’s claims are categorised as a common benefit claim
that can be paid at any time without going through the proceedings.
Even though existing contracts with the debtor often contain a
termination clause providing that the filing of restructuring proceedings
is a cause for termination, such clauses are often regarded as void.
If a creditor owes a debt to the debtor at the time of commencement
of restructuring proceedings, the creditor may set-off its claim
against the debtor’s claim under certain circumstances.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The costs or expenses of restructuring proceedings are borne by the
debtor. In both civil rehabilitation and corporate reorganisation
proceedings, the debtor’s or the trustee’s right to borrow new money
is subject to the court’s permission. The court will grant permission
if the debtor proves that new funding is necessary to continue
trading and maximise the value of the company’s business. The
lender can collect its claim outside these proceedings as a common
benefit claim. This places the new lender in a better position than
prior unsecured creditors, but the new funding will not have priority
over secured creditors in respect of their secured assets.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are two options for court liquidation for insolvent companies:
bankruptcy proceedings (hasan); and special liquidation
proceedings (tokubetsu-seisan), the latter being more flexible than
the former. Special liquidation proceedings allow a director or an
officer of the company to be the liquidator to execute the
liquidation, while bankruptcy proceedings require a court-appointed
trustee to execute the liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
For bankruptcy proceedings, a company can be placed into them if:
■ the company is characterised as being ‘unable to pay its
debts’ – that is, where the company is generally and
continuously unable to pay its debts as they become due; or
■ the company is characterised as ‘insolvent’ – that is, where
the company’s debts exceed its assets.
For special liquidation proceedings, a company can be placed into
them if:
■ there are circumstances prejudicial to implementation of the
voluntary liquidation; or
■ there is suspicion that the company is ‘insolvent’.
4.3 Who manages each winding up process? Is there any court involvement?
Upon commencement of bankruptcy proceedings, a trustee is
appointed by the court and takes over control and possession of the
company’s property. The trustee is usually an attorney, and is
supervised by the court. On the other hand, in special liquidation
proceedings, the liquidator who has been appointed by the company
continues to hold control and possession of the company’s property.
The liquidator’s activities are subject to the court’s supervision.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
In bankruptcy proceedings, creditors are prohibited from receiving
payment in respect of any claim arising from any cause occurring
before the commencement of the proceedings (‘Bankruptcy Claim’)
or otherwise acting in any manner that has the effect of satisfying
their claim outside the proceedings. Civil actions and civil
execution proceedings with respect to Bankruptcy Claims are
suspended, and the Bankruptcy Claims are prohibited from
commencing new civil actions or civil execution proceedings. On
the contrary, exercising security interests is not prohibited, and
secured creditors may collect their claims regardless of the filing or
commencement of bankruptcy proceedings. The shareholders’
rights are not formally affected by the commencement of
bankruptcy proceedings. Nevertheless, shareholders will have little
stake in the proceedings because the company’s shares are
effectively valueless, and because both the company and its shares
will be extinguished upon closing of the proceedings.
In special liquidation proceedings, the company must give public
notice in the Official Gazette to request that its creditors register
their claims during a certain specified period of time. The company
cannot pay or otherwise satisfy creditors’ claims during this period.
Claims without security or priority are called ‘agreement claims’,
and must be paid on a pro rata basis. Exercising security interests is
not prohibited, and secured creditors may collect their claims
regardless of the filing or commencement of special liquidation
proceedings. However, the court may order suspension of the
exercise of security interests for the general benefit of creditors.
Shareholders of the company under special liquidation will have
little stake in the proceedings because the company’s shares are
effectively valueless, and because both the company and its shares
will be extinguished upon closing of the proceedings.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
In bankruptcy proceedings, bilateral contracts are not automatically
terminated. However, when the company and its contract
counterparty have not yet completely performed their obligations
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under a bilateral contract by the time of commencement of the
bankruptcy proceedings, the trustee may either:
■ cancel the contract; or
■ perform its obligations and request the counterparty to
perform theirs.
However, creditors are not prohibited from offsetting their claims
against their obligations to the company except in limited
circumstances.
In special liquidation proceedings, the proceedings themselves do
not automatically affect the legal status of the existing contracts.
Creditors are not prohibited from offsetting their claims against their
obligations to the company except in limited circumstances.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In bankruptcy proceedings, creditors’ claims are ranked in the
following order:
i. estate claims (e.g. fees for trustees, administrative expenses,
tax claims that became due within one year before the
commencement of bankruptcy proceedings, employee
compensation for their work within three months before the
commencement of bankruptcy proceedings);
ii. superior bankruptcy claims (e.g. tax claims and employee
compensation that are not estate claims);
iii. ordinary bankruptcy claims; and
iv. subordinated bankruptcy claims (e.g. interests after the
commencement of bankruptcy proceedings).
In special liquidation proceedings, creditors’ claims are ranked in
two categories. Claims in the first category basically correspond to
estate claims and superior claims in bankruptcy proceedings. Claims
in the second category basically correspond to ordinary bankruptcy
claims and subordinated bankruptcy claims in bankruptcy
proceedings. The first category is superior to the second category.
The priority of shareholders is the lowest rank both in bankruptcy
and special liquidation proceedings. Japanese law does not have
any rule of equitable subordination.
4.7 Is it possible for the company to be revived in the future?
In principle, the company will be extinguished and not be revived if
bankruptcy or special liquidation proceedings end. However, if
assets are found after the proceedings have already ended, the
company will be deemed to survive its corporate capacity and a
liquidator will be appointed by the court.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
In general, tax claims before the commencement of restructuring
proceedings are treated as claims with general priority, whereas tax
claims after the commencement are treated as common benefit
claims that can be paid at any time outside the proceedings. In
restructuring cases, it is very important for the debtor company to
avoid taxation on income from discharge of indebtedness by
applying deductible expenses to such income.
Tax claims before the commencement of bankruptcy proceedings
are treated as estate claims if they became due within one year
before the commencement of bankruptcy proceedings; otherwise,
they are treated as superior bankruptcy claims. Tax claims after the
commencement of bankruptcy proceedings are treated as estate
claims if they are categorised as administrative expenses; otherwise,
they are treated as subordinate bankruptcy claims.
In special liquidation proceedings, tax claims are treated as superior
claims that can be paid at any time outside the proceedings.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In restructuring proceedings, in general, the company or trustee (as
applicable) tries to maintain employment contracts with its
employees. If the company or trustee (as applicable) terminates
employment, it must do so in a manner consistent with Japanese
employment law (which is employee-friendly). Claims for unpaid
wages before the commencement of restructuring proceedings are
treated as claims with general priority, whereas claims for wages
after the commencement are treated as common benefit claims that
can be paid at any time outside the proceedings.
In insolvency proceedings, in many cases, the debtor company
dismisses all or part of its employees before filing for commencement
of the proceedings. If the company or trustee (as applicable)
terminates employment after the commencement of the
proceedings, it must do so in a manner consistent with Japanese
employment law, which requires 30 days’ notice before such
termination (or equivalent compensation). The company or trustee
may continue to employ some of the employees so that they can
assist with its administration. In such cases, wages are treated as
estate claims, which can be paid at any time outside the proceedings.
Claims for unpaid wages before the commencement of the
proceedings are also granted certain priorities.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
As long as the company has an office or assets in Japan, a debtor
incorporated outside Japan can enter into restructuring or insolvency
proceedings in Japan.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Local courts in Japan may recognise foreign restructuring or
insolvency proceedings. The process is initiated by a debtor’s filing
with the Tokyo District Court, which has exclusive jurisdiction on
such recognition proceedings. The test for recognition is based
mainly on the necessity of such recognition. For example, if foreign
restructuring or insolvency proceedings are obviously ineffective
over assets in Japan, such recognition would be denied.
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7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is not common practice, but companies incorporated in Japan can
enter into restructuring or insolvency proceedings in other
jurisdictions. For instance, Azabu Buildings Co. Ltd. entered into
Chapter 11 bankruptcy proceedings in the U.S. in 2006.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
In general, there are no specific legal provisions on how to treat
group companies in restructuring or insolvency proceedings.
However, in practice, group companies will usually file these
proceedings at the same time because they must resolve guarantee
claims with respect to bank loans, typically in situations where the
parent company has guaranteed its subsidiary’s bank loans.
There are no specific legal provisions on cooperation between
officeholders. However, in general, the court will usually appoint
the same trustee if group companies have a parent-subsidiary
relationship. If the relationship is other than that of a parent-
subsidiary, and a subsidiary is extremely large or there are potential
conflict issues among the group companies, the court sometimes
will appoint different trustees. Nevertheless, the same court will
have jurisdiction over the group companies in most cases, which
makes it easy to proceed with several restructuring or insolvency
proceedings at the same time and to construct a cooperative
relationship between the trustees.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
No proposals are pending.
mori Hamada & matsumoto Japan
Daisuke Asai Mori Hamada & Matsumoto 16th Floor, Marunouchi Park Building 2-6-1 Marunouchi, Chiyoda-ku Tokyo 100-8222 Japan Tel: +81 3 6266 8752
Email: [email protected]
URL: www.mhmjapan.com/en
Dai Katagiri Mori Hamada & Matsumoto 16th Floor, Marunouchi Park Building 2-6-1 Marunouchi, Chiyoda-ku Tokyo 100-8222 Japan Tel: +81 3 6266 8774
Email: [email protected]
URL: www.mhmjapan.com/en
Mori Hamada & Matsumoto (‘MHM’) is a full-service law firm that has served clients with distinction since its establishment in December 2002, by the merger of Mori Sogo and Hamada & Matsumoto. MHM has an extensive insolvency practice, acting on behalf of both debtors and creditors, as well as financial advisors, from a variety of jurisdictions, in all types of Japanese bankruptcy and reorganisation proceedings. MHM always ensures that our focus and efforts are directed towards achieving the best possible outcome for our clients. We take pride in our high success rate in restructuring cases and especially in out-of-court workout cases. The firm has been engaged in a number of pioneering transactions that involve a variety of corporate, M&A and financing techniques in conjunction with insolvency proceedings, including corporate demergers, securitisations, DIP financings, asset-backed lending and debt-equity swaps. The depth and breadth of the firm’s practice enables us to provide comprehensive services in transactions and proceedings involving financially distressed companies.
Daisuke Asai is an Attorney-at-Law admitted in Japan and New York who specialises in restructuring, litigation and M&A, both domestic and international. He has broad experience in cross-border restructuring and bankruptcy, and has represented domestic and foreign clients/trustees in many large bankruptcy cases of global businesses. He is a member of various associations for restructuring practitioners including INSOL and EAAIR (East Asian Association of Insolvency and Restructuring). He earned his LL.M. from Cornell Law School in 2015 and has experience practising with a U.S. law firm in Washington, D.C. during 2015–2016. He served as a lecturer at the University of Tokyo, Faculty of Law during 2017–2018.
Dai Katagiri is a Senior Associate at Mori Hamada & Matsumoto who is admitted in Japan and New York, and has extensive experience in both out-of-court and court-supervised restructurings and bankruptcy proceedings for domestic and foreign clients. He also specialises in litigation, M&A and corporate law, which include litigation in multiple jurisdictions and cross-border transactions. He earned his LL.M. from the University of Pennsylvania Law School in 2016 and has experience working at Pillsbury Winthrop Shaw Pittman LLP, New York office in 2016–2017.
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Barun law llc
thomas pinansky
Joo Hyoung Jang
Korea
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Korea is more debtor-friendly in the sense that, except for certain
restrictions on creditors’ rights to exercise their claims and on
debtors’ rights to manage the business and dispose of its assets, there
are not many restrictions and each proceeding has several measures
that aim to achieve the above goals.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The legislative framework in Korea allows informal work-outs, as
well as formal restructuring and insolvency proceedings.
Informal work-outs include (a) Voluntary Agreements, and (b)
Work-outs under the Corporate Restructuring Promotion Act
(“CRPA”). Formal proceedings available under the Debtor
Rehabilitation and Bankruptcy Act (“DRBA”), which are
supervised by the courts, include (a) rehabilitation proceedings, and
(b) bankruptcy proceedings.
Since each procedure has different levels of court intervention and
creditor autonomy, appropriate procedures are used depending on
the circumstances of a debtor company and creditor’s judgment.
A. Informal work-outs
a) Voluntary Agreement
Based on the creditor-financial institutions’ review of the
debtor’s potential for rehabilitation, a voluntary agreement
may be entered into among them. The creditor-financial
institutions can relieve the debtor’s financial stress by, for
example, extending the term of the loan.
b) Work-out procedure under the CRPA
A work-out procedure governed by the CRPA may be
commenced by a resolution of a committee composed of
creditors who own financial credits (upon the consent of
at least 75% of the total financial credits). This is a more
formal process in which the Korean Financial Services
Commission (the “FSC”) may impose corrective
measures or administrative fines for failure to abide by the
CRPA. The previous CRPA expired on June 30, 2018.
However, as the demand for the work-out procedure has
not been diminished, it was re-enacted as of October 16,
2018, and shall be effective until 2023.
Informal work-outs are flexible and have relatively minimal
impact on the debtor’s credit rating.
B. Formal proceedings under the DRBA
a) Rehabilitation proceeding
A company may restructure its debts through a court-
supervised rehabilitation proceeding, in which the
interested parties (e.g., creditors) and the court approve a
rehabilitation plan.
When a debtor that is unable to pay its debts when due
without a significant impact on the continuity of its
business or its total debt is larger than its total assets, the
debtor may apply for the rehabilitation proceeding. A
creditor who has credits in the amount of at least 10% of
the debtor’s equity or a shareholder of the debtor who
owns at least 10% of the debtor’s ownership interests may
also apply for this proceeding.
If the court determines that the debtor’s continuing value
is larger than the debtor’s liquidation value, it can order a
receiver to submit a rehabilitation plan. Once the court
and the interested parties approve the rehabilitation plan
submitted by the receiver, the receiver restructures the
debtor’s debts according to the rehabilitation plan.
A receiver owes a fiduciary duty and typically, the courts
appoint the debtor’s representative director as a receiver in
order to ensure that a person who is familiar with the debtor’s
business is involved in the rehabilitation proceeding.
b) Bankruptcy proceeding
A debtor or the debtor’s creditor may petition for a
bankruptcy in case the debtor is unable to pay its debts
when due or its total debt is larger than its total assets.
Also, the court may at its discretion declare a debtor
bankrupt if a debtor’s continuing value is less than its
liquidation value. In the latter case, the debtor’s debts are
examined and the debtor’s assets after being monetised
are distributed to its creditors. A trustee appointed by the
court implements the bankruptcy procedures.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Under the Civil Code, a director owes a fiduciary duty to the
company. The Supreme Court of Korea has recognised a director’s
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duty to monitor the adequacy of other directors’ performance under
the relevant laws, regulations and articles of incorporation and to
take necessary measures to prevent illegitimate activities.
Also, if a company suffers damages or loss due to a cause
attributable to a director’s wilful misconducts or negligence in
performing his/her foregoing duties, the director is responsible for
compensating such damages to the company under the Commercial
Code and the Civil Code and could potentially be subject to criminal
penalties for a breach of fiduciary duty.
Other than such fiduciary duties, there is no law, regulation or
precedent to date that explicitly requires a director to petition for a
rehabilitation or a bankruptcy proceeding when the company is in
financial distress.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The rules/regimes that apply are the following:
■ A debtor may enter into a voluntary agreement with its
creditor-financial institutions or may petition for a
rehabilitation proceeding or a bankruptcy proceeding.
■ Creditor-financial institutions may enter into a voluntary
agreement or may commence a work-out procedure according
to the CRPA.
■ A creditor who has credits in the amount of at least 10% of
the debtor’s equity value may petition for a rehabilitation
proceeding, and any creditors may petition for a bankruptcy
proceeding.
■ A shareholder of a debtor who owns at least 10% of the
debtor’s ownership interest may petition for a rehabilitation
proceeding, and any shareholder may petition for a
bankruptcy proceeding.
■ The exercise of rights of unsecured creditors (such as
landlords, employees or creditors with retention of title
arrangements) is not restricted solely because the financial
situation of the debtor company is difficult, unless informal
work-outs or formal proceedings have been initiated.
■ In case a debtor petitions for a rehabilitation proceeding, the
court may put a halt to all compulsory execution proceedings
already being enforced on the debtor’s assets until it makes a
ruling on the debtor’s petition or issue a “general prohibition
order” on compulsory execution on all rehabilitation creditors
and rehabilitation secured creditors.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
A. Creditor’s right to challenge
A creditor may petition to the court for cancellation of a
debtor’s legal action and a restitution of the relevant assets as
a fraudulent conveyance if such action has reduced the
debtor’s assets and the debtor committed such action
knowing that such action would impair the creditor.
B. Receiver’s (rehabilitation proceeding) or trustee’s
(bankruptcy proceeding) right to challenge
Prior to the commencement of a rehabilitation proceeding or
declaration of bankruptcy under the DRBA, a receiver for the
rehabilitation proceeding or a trustee for the bankruptcy
proceeding may petition to the court for the cancellation of
the debtor’s legal actions and restitution of the relevant assets
under one of the following cases:
(1) the debtor’s acts would be detrimental to other creditors at
the time such acts were taken, provided that the
beneficiary was aware that such acts would be detrimental
to other creditors;
(2) the debtor’s acts would be detrimental to other creditors or
repay any debt or provide collateral after a suspension of
payment or the filing of rehabilitation proceedings
(collectively, the insolvency event), provided that the
payee or the secured party was aware that the insolvency
event had occurred or that such acts would be detrimental
to other creditors;
(3) the debtor’s acts that repay debt or provide collateral after
or within 60 days prior to an insolvency event when the
insolvent debtor was not obliged to do so at such time,
provided that the payee or secured party was aware that
the insolvency event had occurred or that such acts will
prejudice the equal treatment of the insolvent party’s
creditors; and
(4) the debtor’s acts that took place after or within six months
of the occurrence of an insolvency event and that
conferred benefits on the beneficiary in exchange for no
or nominal compensation.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. Please refer to question 1.2.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
A formal rescue procedure available in Korea to restructure the
liabilities of distressed companies is a rehabilitation proceeding
under the DRBA. Both debt-for-equity swaps and pre-packaged
sales are possible.
The debt/equity swap whereby creditors’ rehabilitation credits are
swapped into the debtor’s equity according to the rehabilitation plan
is commonly used because from the creditor’s perspective, it is more
beneficial to receive stocks (which may later be monetised) than to
reduce its credit amounts. From the debtor’s perspective, such
restructuring method could prevent repaying the debts out of its own
pocket.
Pre-packaged sales were adopted on August 30, 2016 under the
amended DRBA, by which a creditor (who owns at least 50% of the
debtor’s debts) or a debtor (who obtained consent from such
creditor) may submit a plan to the court before the commencement
of a rehabilitation proceeding and the court may expedite the
process based on the plan.
A creditor who has credits in the amount of at least 10% of the
debtor’s equity value may petition for a rehabilitation proceeding
and any creditors may petition for a bankruptcy proceeding. A
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shareholder of a debtor who owns at least 10% of the debtor’s
ownership interest may petition for a rehabilitation proceeding.
Also, creditors and shareholders participate in the rehabilitation plan
approval process. At least ⅔ of the rehabilitation creditors’ consent,
at least ¾ of secured creditors’ consent and at least ½ of the
shareholders’ consent are required to approve a rehabilitation plan.
In case the approval requirement of any of the stakeholders is not
satisfied, the court may nevertheless approve the rehabilitation plan
with safety measures protecting the stakeholder who did not
consent. The person who drafted the rehabilitation plan may also
request the court to approve the plan.
3.3 What are the criteria for entry into each restructuring procedure?
A. Informal work-outs
The work-outs under the CRPA may be commenced by a
resolution of a committee composed of creditors who own
financial credits (consent of at least 75% of the total financial
credits).
B. Formal rehabilitation proceeding
A rehabilitation proceeding under the DRBA may be
voluntarily applied to the court by a debtor that is unable to
pay its debts when due without a significant impact on the
continuity of its business or its total debt is larger than its total
assets. This proceeding may also be involuntarily applied by
a creditor who has credits in the amount of at least 10% of the
debtor’s equity or a shareholder of the debtor who owns at
least 10% of the debtor’s ownership interests.
3.4 Who manages each process? Is there any court involvement?
A. Informal work-outs
Informal work-outs are supervised and implemented by
creditors without the court’s involvement. However, the FSC
may impose corrective measures or administrative fines for
failure to abide by the CRPA.
B. Formal rehabilitation proceeding
A court-appointed receiver has the authority to manage the
debtor’s affairs and to dispose of its assets. Typically, the
court appoints the debtor’s representative director as the
receiver in order to ensure that a person who is familiar with
the debtor’s business is involved in the rehabilitation
proceeding.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A. Informal work-outs
There is no impact on the existing contracts entered into by
the debtor. However, the voluntary agreement and/or the
corporate restructuring plan under the CRPA may have an
impact on the rights and obligations of the debtor’s existing
contracts.
B. Formal rehabilitation proceeding
a) General rule
In principle, there is no impact on the existing contracts
entered into by the debtors (even in the event of a
rehabilitation proceeding).
b) Exceptions
According to the DRBA, an executory contract that has
not been completely performed by the debtor and the
counterparty at the time of the commencement of the
rehabilitation proceeding may be revoked or terminated
by the receiver, and the receiver may demand the
counterparty to perform its obligations after completing
the debtor’s obligations. The counterparty may demand
the receiver to confirm its position as to whether the
receiver will revoke/terminate the contract or to perform
the contract. The receiver will be deemed to have waived
its revocation/termination right if the receiver fails to
provide his/her position within 30 days after receipt of the
notice.
The claim that arose out of the counterparty’s supply
between the petition for a rehabilitation proceeding and
the commencement of the rehabilitation in a bilateral
contract that imposes obligation of continuous supply, is a
priority claim and therefore will be reimbursed prior to
other claims.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
A. Informal work-outs
Typically, a debtor funds the restructuring process. However,
it may be otherwise agreed under the voluntary agreement or
the corporate restructuring plan under the CRPA.
B. Formal rehabilitation proceeding
The person who petitions for a rehabilitation proceeding must
pay the costs prescribed by the court in advance. On the other
hand, in case a stakeholder other than a debtor petitions for a
rehabilitation proceeding, the petitioner may be reimbursed
for the costs paid by the debtor out-of-pocket in case the court
decides to commence the rehabilitation proceeding.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure in Korea is bankruptcy proceedings
under the DRBA, which are led and supervised by the court.
4.2 On what grounds can a company be placed into each winding up procedure?
If a debtor company cannot repay its debts when they become due or
has more liabilities than the total amount of its assets, either the
debtor or a creditor may file an application for a bankruptcy
proceeding. Further, the court has the authority to declare
bankruptcy of the debtor during the rehabilitation proceedings
without the relevant application from the debtor or creditor if the
value of the continuation of the debtor’s business is deemed to be
lesser than the value of it when it is liquidated.
4.3 Who manages each winding up process? Is there any court involvement?
The court-appointed bankruptcy trustee plays the pivotal managing
role in the bankruptcy procedure including, but not limited to,
exercising the avoidance power, managing and disposing the
debtor’s properties, and monetising such properties into cash to
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make distribution to creditors. Bankruptcy Trustees are under the
supervision of the court, but the court does not have general
command over the Trustees’ performance of their duties.
A person who is appointed as the bankruptcy trustee cannot be
dismissed without justifiable grounds, he/she must perform her or
his duties with the fiduciary duty, and he/she may receive
remuneration and expenses from the debtor’s property in the amount
determined by the court.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The creditor may apply for a bankruptcy proceeding, and the
relevant bankruptcy proceeding is commenced if the competent
court which received the creditor’s application declares the debtor
bankrupt. However, once the bankruptcy proceeding is commenced,
the creditor cannot influence the bankruptcy proceeding and is only
entitled to the payments pursuant to the respective credit amounts.
Still, a holder of the security interests over the debtor’s properties,
who has a right to enforce outside bankruptcy, may enforce the
security for the fulfilment of its obligations without resorting to the
bankruptcy proceeding.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
A. General Rule
In general, the declaration of bankruptcy does not impact the
obligations, terms and effects of the pre-existing contracts
involving the debtor.
B. Exceptions
The general rule may not apply to the following cases:
a) DRBA
According to the DRBA, an executory contract that has
not been completely performed by the debtor and the
counterparty at the time of bankruptcy declaration may be
revoked or terminated by the bankruptcy trustee and the
trustee may demand the counterparty to perform its
obligations after completing the debtor’s obligations. The
counterparty may demand the bankruptcy trustee to
provide a definitive answer as to whether the contract is to
be revoked, terminated or upheld. In such cases, when the
bankruptcy trustee fails to provide a definitive answer
within a reasonable time from the date on which he/she is
so notified, the relevant contract shall be deemed to have
been revoked or terminated by him/her.
b) Civil Code
If a lessee has been declared bankrupt, either the lessor or
the bankruptcy trustee may terminate the relevant lease
agreement. If the lessor has been declared bankrupt, the
bankruptcy trustee may terminate the relevant lease
agreement if the lessee does not meet the requirements to
claim against a third party. In the case of employment
agreements, the employee or the bankruptcy trustee may
terminate the employment agreements of the bankrupted
employer. The contractor or the bankruptcy trustee may
terminate the contract for work when the person who
ordered the contracted work has been declared bankrupt.
c) Commercial Code
The insurance contract shall lose its effect upon the lapse of
three months after the declaration of bankruptcy of the
insurance company and the policyholder may terminate her
or his insurance contract once the relevant declaration is
made. Further, the bankruptcy trustee may terminate the
insurance contract if the insurer has been declared bankrupt.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In Korea, the creditors may be categorised into three different
groups based on the priority of their claim: A. the holder of the right
to enforce outside bankruptcy proceedings (the “Secured Creditor”);
B. the estate creditor; and C. the bankruptcy creditor. The
bankruptcy creditors may be further divided into the following three
categories: bankruptcy creditors with preferred claims; bankruptcy
creditors with general unsecured claims; and bankruptcy creditors
with subordinate bankruptcy claims.
A. Secured Creditors
The Secured Creditor who holds the security right over the
debtor’s properties is generally deemed as the highest priority
creditor in relation to the secured subject property, since the
Secured Creditor may enforce the security for the fulfilment of
its obligation without resorting to the bankruptcy proceeding.
B. Estate Creditors
Estate creditors are creditors with estate claims, such as costs
of judicial proceedings, tax claims, wage and severance
claims, management expenses incurred in connection with
management, liquidation and distribution of the bankruptcy
estate, or other claims arising from the administration of the
bankruptcy estate. These estate claims shall be reimbursed
prior to the bankruptcy claims at any time without resorting
to the bankruptcy proceeding.
C. Bankruptcy Creditors
A bankruptcy claim is a property claim that accrues before the
debtor is declared bankrupt and it shall not be exercised without
resorting to bankruptcy proceedings. During bankruptcy
proceedings, the bankruptcy claims shall be repaid in
proportion to the amount of each claim. While the bankruptcy
claims with preferential rights under the relevant Acts shall take
precedence over other general bankruptcy claims, the claims for
any interest accrued after the declaration of the bankruptcy or
any damages caused by the failure to comply with any
obligation after the declaration of the bankruptcy shall be
deemed subordinate to the general bankruptcy claims.
4.7 Is it possible for the company to be revived in the future?
A. Discontinuation of the bankruptcy proceeding
The debtor may request the discontinuation of the bankruptcy
proceeding if all bankruptcy creditors agree or if the debtor
provides securities to the creditors from whom the debtor
fails to obtain the consents. The court decision to discontinue
the bankruptcy proceeding invalidates the relevant
bankruptcy procedure.
B. Revocation of the declaration of the bankruptcy
The creditors or debtors may contest in relation to the
declaration of the bankruptcy within 14 days from the date of
notification regarding the relevant bankruptcy if the facts
leading to bankruptcy do not or no longer exist. If the court
revokes its declaration of the bankruptcy, the relevant
declaration becomes void.
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C. Commencement of the rehabilitation procedure
If the decision on commencement of rehabilitation proceeding
is made prior to or after the declaration of the bankruptcy, the
relevant bankruptcy proceeding shall be suspended. When
the rehabilitation plan is approved, the suspended bankruptcy
proceeding loses its effect.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The commencement of the restructuring or insolvency procedure
itself does not give rise to special tax liabilities. Still, tax claims in
the rehabilitation proceedings receive different treatment based on
their timing. In other words, if the liabilities for the tax were
incurred before the commencement of the rehabilitation proceeding,
the related tax claims shall be deemed to constitute rehabilitation
claims. In such case, the relevant repayments shall be made
according to the rehabilitation proceeding. Alternatively, the
liabilities for the tax incurred after the commencement of the
rehabilitation proceeding shall constitute priority claims, and shall
be reimbursed without resorting to the rehabilitation proceeding.
On the contrary, the liabilities for the tax incurred prior to the
commencement of the bankruptcy proceeding is different from that
of the rehabilitation proceeding, since they shall constitute estate
claims which shall be repaid in preference to other bankruptcy
claims without resorting to the relevant bankruptcy proceeding.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
A. Wages and severance payments
The wages and severance payment of the debtor’s employees
shall constitute either priority claims or estate claims in the
rehabilitation and bankruptcy proceeding, respectively,
which shall be reimbursed in preference to other claims.
Employees can claim wages, severance payment and disaster
compensation. Claim for wage of the last three months of
employment and claim for severance payment for the last
three years of employment take priority over all other claims.
B. Dismissal
The commencement of a rehabilitation or a bankruptcy
proceeding itself may not constitute a justifiable ground to
dismiss the employee of the relevant employer. Instead, the
employer must satisfy the following conditions set out in the
Labor Standard Act in order to properly and legitimately
dismiss its employees: (1) there is an urgent managerial need;
(2) the employer shall make every effort to avoid dismissal;
(3) the employer shall establish and follow reasonable and
fair criteria for choosing employees subject to dismissal; (4)
the employer shall inform and consult with the labour union
or the representative of employees regarding intended
dismissal; and (5) an employer that intends to dismiss more
than 10% of its total employees shall report such intention to
the Minister of Employment and Labor.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Under the CRPA, the companies established under the laws of
foreign nations shall not be subject to the work-out procedures
under the CRPA.
However, under the DRBA, foreigners and the companies
established under the laws of foreign nations shall have the same
status as that of peoples and corporations of Korea. Further, the
district court is deemed to have jurisdiction over the place of
business of the foreign company as well as the location of its
property. Thus, a foreign company which has its property in Korea
may utilise the Korean rehabilitation and bankruptcy proceedings
without having an office in Korea.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Under the DRBA, a foreign bankruptcy proceeding may be
recognised if there is a relevant petition and decision to approve the
foreign bankruptcy proceeding.
A. Application for approving Foreign Bankruptcy Proceedings
The representative of the foreign bankruptcy proceeding may
file an application with the following statements with the
Seoul Bankruptcy Court for approving the foreign bankruptcy
proceeding:
■ a written statement concerning the legal basis and a
summary of the overall foreign bankruptcy proceeding;
■ a written statement attesting to the commencement of the
foreign bankruptcy proceeding;
■ a written statement attesting to the qualification and
authority of the representative of the foreign bankruptcy
proceeding;
■ a written statement concerning the main points of the
foreign bankruptcy proceeding for which an application is
filed for their approval (including statements of creditors,
the debtor and interested parties); and
■ a written statement concerning all other foreign bankruptcy
proceedings over the debtor, which are known to the
representative of the foreign bankruptcy proceeding.
B. Approval decision of the Seoul Bankruptcy Court
The court shall decide whether to recognise and confirm the
foreign bankruptcy proceeding within one month from the
date on which the relevant application is filed, and the court
shall dismiss such application in any of the following cases:
■ where expenses determined by the court are not prepaid;
■ where each written statement provided is not submitted or
the establishment and contents of any such written
statement is not bona fide; or
■ where approving the foreign bankruptcy proceeding is
contrary to the good public morals and social order of
Korea.
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7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is not common for companies incorporated in Korea to restructure
or enter into insolvency proceedings in other jurisdictions.
Still, a domestic bankruptcy proceeding and a foreign bankruptcy
proceeding for the same debtor may be jointly and simultaneously
pending in the court of Korea and foreign courts in order to protect
the debtors in foreign countries. In such case, close coordination
between the two proceedings are required. When a domestic
bankruptcy proceeding and a foreign bankruptcy proceeding for the
same debtor are jointly and simultaneously pending in the Korean
court and foreign courts, the DRBA stipulates that the court shall
coordinate the progression of multiple proceedings in order to make
sure that the domestic bankruptcy proceeding plays a central role.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The DRBA does not stipulate a combined rehabilitation or
bankruptcy proceeding for multiple debtors; thus each procedure
must be conducted individually. In other words, each company
must file an application for commencement of rehabilitation
proceeding or, for a bankruptcy proceeding, the court shall make a
decision on commencement of rehabilitation proceeding or
declaration of bankruptcy and appoint a bankruptcy trustee or
conductor for each debtor.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
In 2016 and 2017, there were several proposals to reform or modify
the CRPA as well as the DRBA, and multiple amendments were
made in order to reflect and incorporate those proposals.
A. CRPA
The previous CRPA expired on June 30, 2018, but the
demand for the work-out procedure has not been diminished,
especially in the vulnerable sectors. Therefore, the CRPA
was re-enacted as of October 16, 2018, to facilitate constant
corporate restructuring, promote the stabilisation of financial
markets and the development of the national economy. It
maintained most of the existing provisions while reflecting
certain improvements to the regime. It is a temporary statute
and will be effective until October 15, 2023.
B. DRBA
In order to secure a constant stream of new funds to the
debtor in the rehabilitation proceeding, the rights of the
creditors who have provided new funds have been
strengthened to induce new fund support to the debtor. Also
the Korean pre-package system was introduced, and the
Bankruptcy Court was newly established.
There is no scheduled revision on the DRBA regarding
corporations in 2019.
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Barun law llc Korea
Thomas Pinansky Barun Law LLC Barun Law Building, 92 gil 7, Teheran-ro Gangnam-gu, Seoul 06181 Korea Tel: +82 2 3479 7517
Email: [email protected]
URL: www.barunlaw.com
Joo Hyoung Jang Barun Law LLC Barun Law Building, 92 gil 7, Teheran-ro Gangnam-gu, Seoul 06181 Korea Tel: +82 2 3479 7519
Email: [email protected]
URL: www.barunlaw.com
Barun Law LLC (“Barun Law”) is Korea’s fastest growing and most dynamic full-service law firm. Founded in 1998, Barun Law has quickly taken its place among Korea’s top full-service law firms. Conveniently located in Seoul’s Gangnam Business District, next to one of Asia’s largest and most prestigious convention centre complexes, Barun Law is comprised of over 200 attorneys who, together with highly-qualified support staff, provide a full range of legal services.
The firm’s partners include some of the most prominent and well respected members of the Korean Bar, while a sophisticated and highly experienced team of foreign lawyers adds international savvy and recognised expertise, creating a substantial comfort factor for international clients.
Mr. Pinansky is the Senior Foreign Attorney at Barun Law. He plays a leading role in the firm’s international practice and advises an extensive number of international and Korean clients on business and legal issues arising in the context of international operations, including international transactions and cross-border disputes. Mr. Pinansky recently completed a three-year term as a Vice-Chairman of the American Chamber of Commerce in Korea, and he currently serves as a Special Advisor to the AmCham Board. He also serves on the Board of the Canadian Chamber of Commerce in Korea and as Special Advisor to the Kiwi Chamber of Commerce in Korea. He was appointed as the “Honorary Ambassador” of the US State of Maine to Korea. He served as the Chairman of the Asia-Pacific Council of American Chambers of Commerce, an organisation comprised of over 25 American Chambers of Commerce throughout the Asia-Pacific Region. He received his B.A. from Harvard College and J.D. from the University of Pennsylvania Law School.
Mr. Jang is a Partner Attorney at Barun Law LLC. Since joining the firm in 2005, his practice has focused on cross-border transactions, M&As and general corporate matters. He has accumulated a broad range of experience and expertise in the fields of cross-border transactions and M&As, and general corporate matters. He has served as a Member of the Digital Media City of Seoul since 2003; and Vice-Commissioner of the International Committee of the Korean Bar Association and is a member of the In-House Lawyers’ Special Committee of the Korean Bar Association since 2011. Mr. Jang received his B.A. in law from Seoul National University and his LL.M. from Columbia Law School. He is a member of the Bar of the Republic of Korea.
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loyens & loeff luxembourg
anne-marie nicolas
véronique Hoffeld
luxembourg
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Luxembourg is generally perceived as a secured creditor-friendly
jurisdiction, especially in light of the very wide implementation under
Luxembourg law of the financial collateral arrangements directive.
Luxembourg financial collateral arrangements cover any pledge or
assignment of financial instruments and receivables (including most
types of shares and bonds). Any such security is “bankruptcy proof”
as well as very cost effective, subject to few formalities and easy to
put in place and to enforce.
Luxembourg courts have, for instance, held that a Luxembourg
financial collateral arrangement can be enforced:
■ without the condition of an acceleration under the underlying
financing documentation having to be fulfilled; and
■ regardless of the existence of a criminal attachment.
Finally, courts have also held that they cannot impose provisional
measures that could interfere with the enforcement of financial
collateral arrangements.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Contrary to many other civil law jurisdictions, Luxembourg has not
tried to adopt more efficient recovery proceedings such as the (pre-
pack) administration, the scheme of arrangement or US Chapter 11
type proceedings. Instead, it has three traditional formal recovery
procedures consisting of controlled management (gestion contrôlée), composition with creditors (concordat préventif de faillite) and suspension of payments (sursis de paiement).
None of these procedures are much used in practice due to the lack
of flexibility, cost and/or publicity that they entail.
As regard to insolvency proceedings, bankruptcy proceedings
(faillite) are the most common proceedings in Luxembourg. These
proceedings aim at winding-up a company’s assets in the best
interests of the estate and its creditors.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Under Luxembourg law, the directors of a company may generally
be liable for (i) the non-execution of their mandate, (ii) any
misconduct in the management of the company’s affairs, and (iii)
any damages caused by their fault or negligence (torts).
The directors of an insolvent company must file for bankruptcy
within one month of the date on which it has ceased to pay its debts,
provided that the company has also lost its creditworthiness
(cumulative insolvency criteria). The loss of creditworthiness
criteria is a very important addition to the more standard insolvency
tests of cessation of payments as it allows a company not to be
considered insolvent as long as it is, for instance, in restructuring
talks with its creditors.
Not filing for bankruptcy within the statutory timeframe constitutes
serious misconduct, which can lead the court to recognise the
directors’ civil or criminal liability and order the directors to bear all
or part of the liabilities of the company.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
In bankruptcy proceedings, the court assesses at its sole discretion
whether the conditions for bankruptcy are met and, if so, appoints a
bankruptcy receiver to liquidate the assets. In principle, creditors and
shareholders have no say or control over the procedure or decisions
made but the receiver may decide to involve them, at its discretion.
There is no credit-bidding process provided under Luxembourg law.
Employees, tax and social security authorities are super-privileged
creditors in a bankruptcy scenario.
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Also, a reservation of title clause allows an unpaid seller to retain
title to the sold assets (non-fungible movable assets) until the
purchaser has paid the full purchase price. In the same vein, a
retention right provides a creditor with the right to keep goods for as
long as its due and payable claim regarding such goods is
outstanding. A retention right is only effective if the creditor has
actual possession of the goods.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The Luxembourg Commercial Code sets out the conditions
according to which certain transactions made by the debtor can be
declared null and void. The court first determines the occurrence of
the cessation of payments and the duration of the hardening period
or période suspecte. The hardening period must not date back more
than six months as from the date of the declaratory judgment of
bankruptcy.
Some specific transactions may be set aside or declared null and
void, if so requested by the bankruptcy receiver. These include,
among others:
■ the granting of a security interest for antecedent debts;
■ the payment of debts that have not fallen due; and
■ the payment of certain debts that have fallen due entered into
during the hardening period (or the 10 days preceding it).
However, security interests qualifying as financial collateral
arrangements are not affected by the suspect period, as these are
“bankruptcy remote”.
In addition, the bankruptcy receiver can challenge any fraudulent
payments and transactions made before the bankruptcy, without any
time limit.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Luxembourg does not expressly provide for an informal out-of-
court restructuring framework and has, in this respect, not followed
the European trend to implement more effective and flexible
recovery proceedings based on UK schemes of arrangement, (pre-
pack) administrations and/or US Chapter 11 proceedings.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Luxembourg provides with three formal rescue procedures in order
to restructure the liabilities of distressed companies:
■ Suspension of payments (sursis de paiement) which allows
a commercial company who faces temporary liquidity
difficulties to apply for a suspension of payments until its
financial liabilities can be met. This procedure is mainly used
in respect of regulated entities.
■ Controlled management (gestion contrôlée) which entitles
a commercial company to either reorganise and restructure its
debts and business or to realise its assets in the best interest of
creditors. In practice, this procedure is very rarely used.
■ Composition with creditors (concordat préventif de faillite)
allows a debtor facing financial difficulties to negotiate a
settlement or a rescheduling of its debts with its creditors,
which must be approved by the court to avoid bankruptcy
proceedings. In practice, this procedure is very rarely used.
Each of these formal rescue procedures can be challenged by the
creditors. A majority of creditors will be needed in order to make the
rescue procedure a binding procedure and cram-down other creditors.
Debt-for-equity swaps are possible but not provided by statute.
Security interests qualifying as financial collateral arrangements may
be enforced notwithstanding the opening of insolvency proceedings.
3.3 What are the criteria for entry into each restructuring procedure?
Suspension of payments procedures can be initiated upon the
debtor’s request and can be granted if either the debtor’s temporary
financial difficulties are due to extraordinary and unexpected
circumstances and the debtor has sufficient means to pay off all its
creditors; or the debtor is in a situation where the re-establishment
of a proper balance between assets and liabilities appears likely.
The suspension of payments requires the consent of a majority of
creditors representing 75% of the debtor’s liabilities and the
approval of the Superior Court of Justice.
Controlled management (gestion contrôlée) can be initiated by the
debtor who must file an application before the district court sitting
in commercial matters, and can be granted to a commercial
company where the company is acting in good faith and either
suffers from a loss of creditworthiness or faces difficulties in
meeting all of its commitments and its creditors wish to proceed
with enforcement procedures. More than 50% of the creditors (in
number) representing more than 50% in value of the debtor’s debts
must approve the plan, which must in turn be approved by the court.
Composition with creditors (concordat préventif de faillite) can be
initiated on the debtor’s request before the district court sitting in
commercial matters. The debtor must be unable to meet its engagements
or have lost all creditworthiness. In addition, the applicant must be
deemed unfortunate and acting in good faith (débiteur malheureux et de bonne foi), as determined by the court at its discretion. To be successful,
the application requires the consent of a 75% majority of the creditors,
must meet the relevant legal requirements and must not be deemed
contrary to the public interest or the interests of the creditors by the court.
3.4 Who manages each process? Is there any court involvement?
Formal insolvency proceedings (whether bankruptcy or a restructuring
proceeding) are all heavily court-lead in Luxembourg. Debtors and
creditors will in principle only have very limited intervention rights
or influence on the process.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Once placed under controlled management, the debtor cannot,
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without the court appointed commissioners’ prior approval and
under penalty of nullity, dispose of its assets or take any actions,
including granting mortgages, making commitments or payments,
borrowing money or receiving funds. The commissioners can also
compel the company to perform a given action.
As regard to composition with creditors, during the proceedings and
up to the date of the ratification of the composition, the debtor
cannot dispose of its assets, grant mortgages or make any
commitments without the authorisation of the delegate judge. Once
the plan is adopted, the debtor must act within the frame of the latter.
Finally, concerning the reprieve from payments, the debtor cannot,
without the court appointed commissioners’ prior approval, dispose
of its assets or take any actions, including granting mortgages,
making payments, borrowing money or receiving funds.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
There is no statutory protection or privilege given to new money.
However, Luxembourg case law recognises contractual subordination,
which is enforceable against the parties having accepted the
subordination of their claims (usually to new money claims).
Equitable subordination is not implemented nor applied in
Luxembourg.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure is the bankruptcy proceeding which
is the most common proceeding filed against commercial
companies in Luxembourg. This proceeding aims at winding-up a
company’s assets in the best interests of the estate and its creditors.
Luxembourg law does not cater for insolvent liquidations.
The State prosecutor can file an application for compulsory
liquidation which must then be ordered by the court if a commercial
company has pursued illegal activities or has seriously infringed the
provisions of, among other things, the Commercial Code, the
domiciliation law or the company law.
4.2 On what grounds can a company be placed into each winding up procedure?
A commercial entity may be declared bankrupt by the court when
the following two criteria are met:
(i) the company has ceased payments and is unable to meet its
commitments (cessation des paiements) that is, the company
cannot, or does not, fully pay its due, certain and liquid debts
as they fall due; and
(ii) the company has lost its creditworthiness (ébranlement de crédit) that is, the company is unable to obtain credit (i.e.,
new money, waivers, maturity extension, grace periods,
standstills etc.) from any source.
4.3 Who manages each winding up process? Is there any court involvement?
Once a bankruptcy procedure is opened, the directors/managers are
removed from their functions and a bankruptcy receiver is appointed
by the court. The receiver is responsible for realising the debtor’s
assets and distributing the proceeds to the creditors, under the
supervision of a supervisory judge. The receiver, together with the
supervisory judge, decides how to liquidate the assets of the
bankruptcy estate.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Individual legal actions by privileged and unsecured creditors
against the debtor are suspended once the company has been
declared bankrupt for the entire duration of the bankruptcy.
Creditors must file a proof of claim (déclaration de créances) with
the court. “Bankruptcy proof” secured creditors holding financial
collateral security can, however, freely take enforcement actions
regardless of the opening of bankruptcy proceedings.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
In bankruptcy proceedings, contracts will automatically continue
(except for intuitu personae contracts and contracts whereby
bankruptcy is a termination event) following the opening of a
bankruptcy proceeding. The receiver cannot, in principle, reject or
disclaim a contract after the judgment opening the insolvency
proceeding and must comply with its terms. However, upon
establishing that it is in the interest of creditors, the receiver may
request that the insolvency judge terminates an agreement to which
the debtor is a party. See also question 2.3 above on actions during
the suspect period.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
“Bankruptcy proof” secured creditors (such as creditors benefiting
from security interests under the financial collateral law and
mortgagees) are outside the bankruptcy process (hors masse), meaning
that they are not, in principle, subject to ordinary distribution and
priority rules. These creditors can enforce their security and do not have
to wait for the distribution of the assets by the bankruptcy receiver.
For other creditors, the order of priority payments during a
bankruptcy proceeding (faillite) is as follows:
■ Creditors of the bankruptcy. These are bankruptcy
expenses (the bankruptcy receiver’s fees or procedure costs)
and have a preferential status over all other claims.
■ Preferred creditors of the bankrupt estate. Preferred
creditors include:
■ preferred creditors by law (créanciers privilégiés), such
as employees in respect of certain debts owed to them and
tax authorities; and
■ creditors with a non-bankruptcy proof contractual or judicial
security (créanciers ayant une sûreté conventionnelle ou judiciaire), ranking behind preferred creditors by law.
■ Ordinary unsecured creditors (créanciers chirographaires).
These are paid pro rata out of the remaining assets, if any.
Shareholders are treated as subordinated creditors unless they have
other contractual arrangements in place as creditors (Luxembourg
law does not recognise the concept of equitable subordination) and
may receive a surplus from the liquidation (boni de liquidation), if
any, in proportion to their shareholding.
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4.7 Is it possible for the company to be revived in the future?
Yes, but the revival process is very rarely admitted by the courts since
the insolvency state is assessed by the court on the day of the judgment.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The claim of the tax authorities is super privileged in case of
bankruptcy. They may hold a preferential right over a specific asset
or a general preferential right over all of the debtor’s assets.
Also, in terms of restructurings, having creditors waive part of their
claims against a Luxembourg debtor may create taxable income for
that debtor.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment contracts are terminated with immediate effect upon the
declaration of entry into bankruptcy by the company. Save for the
case of the bankruptcy receiver deciding to let the company continue
its activities, employees of a bankrupt company are entitled to:
■ the salary for the month in which the declaration is made and
for the following month; and
■ compensation of 50% of their monthly salary for the notice
period to which they are statutorily entitled to.
The amount owed to employees for the last six months of work and
all compensation due as a result of termination of the employment
contracts, up to an amount equal to six times the minimum salary,
must be paid prior to any payments to secured creditors.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Pursuant to the Recast Insolvency Regulation (as defined below), a
foreign EU Member State debtor whose COMI is located in
Luxembourg, may enter into restructuring or insolvency proceedings
in Luxembourg.
Luxembourg courts generally hold that courts in the jurisdiction (outside
of the EU Member State and thus of the scope of the Recast Insolvency
Regulation) of the principal establishment of a company have
jurisdiction to decide on matters of insolvency regarding that company.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Judgments regarding insolvency procedures introduced in a non-EU
Member State or not covered by the Regulation (EU) 848/2015 on
insolvency proceedings (recast) (Recast Insolvency Regulation) are,
in principle, recognised in Luxembourg (which recognises the
principle of universality of bankruptcy) without the need for a
further order for enforcement of the award, subject to the following
conditions:
■ the judgment must be rendered by a competent court;
■ due process must be complied with;
■ the foreign court must have applied the appropriate
Luxembourg conflict of law rules;
■ the foreign judgment must not contravene Luxembourg
public policy; and
■ the foreign insolvency law which has been applied must have
extra-territorial scope.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is relatively common practice for Luxembourg holding and
treasury companies to restructure their debt or enter into rescue
proceedings in other jurisdictions. The most frequently seen
proceedings are UK schemes of arrangements and Chapter 11
bankruptcies in the US or similar proceedings elsewhere.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Except in certain cases of shadow directorship, fraud co-mingling of
assets etc., Luxembourg law generally treats each company and
bankruptcy estate separately so that a company may be insolvent
and put into bankruptcy without necessarily affecting its affiliates.
Under the Recast Insolvency Regulation, in case insolvency
proceedings are opened in relation to several companies of a same
group, the courts and the office-holders appointed will have to
cooperate and communicate with each other. Luxembourg law does
not specifically cater for this issue but very often in practice the
Luxembourg receiver will cooperate with the foreign insolvency
professionals appointed for other group entities.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
On 1 February 2013, the government filed a draft bill No. 6539 on
the preservation of business and modernisation of bankruptcy law.
This draft bill includes various preventive, repressive, restorative
and social provisions which aimed to reduce the number of
bankruptcies in Luxembourg. It was heavily redrafted in March
2018 and is currently under discussion.
New measures include, in particular, the decriminalisation of
fraudulent bankruptcy, an accelerated administrative dissolution
procedure without liquidation and an easing of the conditions
required for a debt contribution action.
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Anne-Marie Nicolas Loyens & Loeff Luxembourg 18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 314
Email: [email protected]
URL: www.loyensloeff.com
Véronique Hoffeld Loyens & Loeff Luxembourg 18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 232
Email: [email protected]
URL: www.loyensloeff.com
Anne-Marie Nicolas, attorney at law, is a partner in the banking, debt restructuring and finance practice of Loyens & Loeff Luxembourg. She specialises in banking and finance law and acts for banks, financial institutions, private equity sponsors, corporates and investors in various types of cross-border finance transactions. She also advises on regulatory, and corporate governance matters.
Anne-Marie holds masters in French and German Law from the University of Paris I-Pantheon-Sorbonne and the Universität zu Köln, and an LL.M. in American law from Boston University.
Anne-Marie is a member of INSOL, the Luxembourg directors association (ILA), the Luxembourg Bankers’ Association (ABBL) and the Luxembourg association of bank lawyers (ALJB) and is an active member of several working groups related to the financial services and restructuring industry. She has published a number of articles on restructuring and corporate governance-related issues.
Anne-Marie is admitted to the Luxembourg Bar and to the New York Bar.
Loyens & Loeff is a leading independent Luxembourg law firm which provides comprehensive and fully integrated legal and tax advice on corporate and commercial law, tax law, banking and finance, investment management, M&A, private equity, real estate and litigation. Our clients include private companies, family offices, financial institutions, investment funds and individuals.
The close cooperation between legal and tax specialists within a single firm places us in a unique position both in our home market, the Benelux and Switzerland, and internationally, and benefits our clients by facilitating an approach to issues from different angles, creating synergies and increasing efficiency.
Loyens & Loeff’s culture is characterised by a strong sense of independence, entrepreneurship, high-quality services and involvement. The principles of quality, transparency and short-line communication form the foundation for an informal and inspiring culture, which stimulates the search for pragmatic but secure solutions to complex legal and tax issues. Loyens & Loeff pays particular attention to education and training, and to creating an exciting and challenging work environment. This enables the firm to attract outstanding young talent and to guarantee the highest standards of service.
Véronique Hoffeld, is a member of the Management Committee of Loyens & Loeff Luxembourg and heads the Luxembourg Litigation & Risk Management Practice Group. She can be considered as a generalist lawyer, and her activities cover matters in the areas of commercial law (negotiation of contracts), litigation, insolvency, arbitration and IP law.
She has experience in advising on a broad range of complex, high-value multi-jurisdictional litigations and arbitrations. She also has extensive experience in proceedings before the civil courts and arbitration tribunals, as well as in mediation proceedings. She focuses in particular on commercial disputes especially financial and corporate litigation. Together with her team, she has worked on various high profile arbitration cases that involve interesting and partly unresolved issues related to recognition and enforcement of ICC arbitral awards.
Véronique has been a member of the Luxembourg Bar since 1996.
Acknowledgment
The authors would like to thank Richard Steichen for his invaluable
assistance in the writing of this chapter. Richard is an associate in
the banking and finance practice of Loyens & Loeff Luxembourg.
He specialises in cross-border banking and finance work and acts
for lenders, borrowers and sponsors in various types of transactions,
including debt restructurings.
Richard was admitted to the New York Bar in 2017 and admitted to
the rolls of solicitors of England and Wales in 2017.
Tel: +352 466 230 492 / Email: [email protected]
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mauritius
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Mauritius generally provides good protection to creditors, and in the
context of commercial transactions, especially to secured creditors.
The most commonly used securities are capable of enforcement
without any court involvement.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The Mauritian legislation expressly provides for out-of-court
workouts (i.e. a deed of company arrangement in the context of a
voluntary administration or a compromise with creditors) and court-
sanctioned work-outs (i.e. scheme of arrangements). Whilst the
same were not commonly used previously, these types of work-outs
have been increasingly used in recent years and it can be said that the
Mauritian practitioners and courts are now well acquainted with their
procedure and intricacies. In addition, it is not uncommon for local
banks to engage non-statutory work-outs (by, for example,
restructuring banking facilities by amending the finance documents).
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
A director who believes that a company is unable to pay its debts as
they fall due must forthwith call a meeting of the board of directors
to consider whether the board of directors must appoint a liquidator
or an administrator. If a director fails to do so and the company is
subsequently placed in liquidation, that director may be personally
liable for the losses suffered by creditors as a result of the company
continuing to trade.
Similarly, if a board has been convened, but the directors did not
resolve to appoint an administrator or liquidator, without having any
reasonable ground for believing that the company was able to pay its
debt as they fell due, and the company is subsequently placed in
winding up, the directors who voted against the appointment of the
administrator or liquidator may be personally liable for the losses
suffered by creditors as a result of the company continuing to trade.
A director owes his/her duties to the company and not the creditors.
However, when the company is in the vicinity of insolvency, a
director must also take into account the interests of the creditors of
the company (and not just the interest of the company) when
exercising its powers as directors of the company.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
All creditors are treated equally, unless they have a preferred claim.
A list of the preferred claims is expressly provided for in the
Mauritian legislation. In practice, secured creditors tend to be more
pro-active with the other stakeholders, with the aim of finding a
solution for the company.
The landlord of property leased to the company has a priority claim
(ranked together with beneficiaries of charges) for rental payments
for the period of up to six months prior to the commencement of
winding up.
There is a stay of enforcement of claims or securities against a
company if the company is in voluntary administration. Also, a
person must seek permission from the court before commencing or
continuing proceedings against a company that is in winding up.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
There is a “twilight period” of two years preceding the commencement
of winding up of a company. Certain preferences, transactions at
undervalue, charges or gifts enter into or provided by the company
during the “twilight period” may be set aside. As regards charges
and gifts, the company must have been unable to pay its debt at the
time of providing the same in order for the same to be set aside.
In addition, the alienation of property by the company, within five
years of the commencement of the winding up, with intent to
defraud a creditor may also be set aside.
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The court may, in addition to setting aside the above-mentioned
voidable transactions, make an order for the re-transfer of the asset
or interest therein or the payment to the liquidator of a sum of
money not exceeding the value of the asset.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes, it is indeed not uncommon for Mauritian banks to engage in
informal work-outs by restructuring the banking facilities availed to
borrowers.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
During voluntary administration of a company, the administrator
may propose a deed of company arrangement to the creditors of the
company at a watershed meeting. The proposed deed of company
arrangement will require the approval of creditors who represent
being at least a majority, representing 75% in value of the creditors
or class of creditors voting at the meeting. If the minimum majority
of creditors approve the deed of company arrangement, the
dissenting creditors are “crammed down” and the deed of company
arrangement is binding on all creditors.
In addition, a company may restructure its liabilities pursuant to a
court-approved scheme of arrangement or out-of-court compromise
with creditors. In both cases, if the requisite majority of creditors
approve the proposal by the company, the dissenting creditors will
be “crammed down”.
Debt-for-equity swaps are not usually done in Mauritius because of
regulatory provisions restricting local banks from holding equity as
investments.
Pre-packaged sales are possible and not uncommon in Mauritius.
3.3 What are the criteria for entry into each restructuring procedure?
The directors of the company or a provisional liquidator or liquidator
of the company may appoint an administrator where the company is
or may become insolvent. In addition, a secured creditor may
appoint an administrator if its security has become enforceable.
A scheme of arrangement or compromise with creditors may be
initiated at any time (whether the company is solvent or insolvent)
and is driven by the directors of the company.
3.4 Who manages each process? Is there any court involvement?
A registered insolvency practitioner will act as administrator and
deed administrator. The process of having an acceptable deed of
company arrangement is undertaken by the administrator, usually in
consultation with the principal creditors.
Compromise with creditors is managed by the board of directors.
A scheme of arrangement is initiated by the company and is
supervised and approved by the court.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Generally, none of the procedures unilaterally amends or terminates
an existing contract, unless where it is specifically provided for in
the contract.
The parties are obliged to continue performing their outstanding
obligations. There is no specific protection afforded to those who
are obliged to perform their outstanding obligations.
Also, Mauritius law will generally uphold termination or set-off
provisions, even if a company has engaged into a restructuring
procedure.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The restructuring process is usually funded by the company’s own
funds. It is very unusual to find rescue financing in Mauritius, even
though financiers who protect or preserve the assets of the company
are afforded a first-ranking priority under Mauritius law and count
as a “cost of liquidator”.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
A company may be wound up either under the supervision of the
court (pursuant to a compulsory winding up initiated by the
company, a director, a shareholder or a creditor) or pursuant to a
voluntary process (either a members’ voluntary winding up or a
creditors’ voluntary winding up).
4.2 On what grounds can a company be placed into each winding up procedure?
A members’ voluntary winding up can only be commenced by a
special resolution of shareholder(s) of the company and if their
company is solvent.
A creditors’ voluntary winding up can be commenced by the
directors of the company only if the company is insolvent.
A compulsory winding up may be initiated for one or more of the
prescribed conditions, although the most common condition is the
company inability to meet its debt.
4.3 Who manages each winding up process? Is there any court involvement?
In cases of voluntary winding up, the liquidator manages the process
without any court involvement.
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In cases of compulsory winding up, while it is still the liquidator
who manages the process, the liquidator has a duty to report to the
court on the progress and actions taken during the winding up.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The liquidator is the sole decision-maker and has to exercise its
rights and perform its duties in accordance with the law. In cases of
creditors’ voluntary winding up, a committee of inspection
consisting of no more than five members may be set up. Such
committee does not have the power to give directions or instructions
to the liquidator, though.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Generally, none of the procedures unilaterally amends or terminates
an existing contract, unless where it is specifically provided for in
the contract.
The parties are obliged to continue performing their outstanding
obligations. There is no specific protection afforded to those who
are obliged to perform their outstanding obligations.
However, a liquidator has the power to disclaim an unprofitable
contract or an onerous property.
Save for certain transactions that occurred during the “twilight
period” and at a time when the company was unable to pay its debt
as they became due, a company’s counterparty will continue to
enjoy the right to set-off. Also, Mauritius law will uphold
termination provisions, even if a company has engaged into a
restructuring procedure.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The Mauritian legislation lists the order of priority of creditors in the
winding up of a company. By way of example, winding-up costs are
given first priority.
4.7 Is it possible for the company to be revived in the future?
A company that has been removed from the registers kept by the
Registrar of Companies may be restored to the registers either by the
Registrar of Companies or by the court. Grounds for restoration
include the fact that the company was still carrying on business, was
party to ongoing legal proceedings or was in receivership or
liquidation or both.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
As a general rule, amounts received by the company as value added
tax or deducted at source by the company are not considered to form
part of the estate of the company during its winding up or
receivership. These sums are not catered for in distribution
schedules/plans and failure to do so will result in the creditors
receiving dividends below the anticipated amounts.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
None of the insolvency procedures automatically alter or terminate
an employment agreement. An administrator becomes personally
liable for the payment of wages unless the administrator has
provided lawful notice of termination of the employment agreement
within 21 days of the appointment of the administrator. Similarly, a
receiver becomes personally liable for the payment of wages unless
the receiver has provided lawful notice of termination of the
employment agreement within 14 days of the appointment of the
receiver.
In the winding up of a company, employees of the company have a
third-ranking (i.e. after costs of the liquidator and amounts owed to
government and its agencies) preferential claim for wages or salary
in respect of services provided during the period of one month before
the commencement of winding up, capped at a sum of Rs 30,000.
Employees are unsecured creditors for any balance owed to them.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
The local restructuring procedures (scheme of arrangement,
compromise with creditors or voluntary administration) or
insolvency proceedings (i.e. winding up, or receivership) can
only be availed by companies incorporated or registered in
Mauritius.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Although the Mauritian legislator has enacted the UNCITRAL
Model Law on Cross-Border Insolvency (approved by the General
Assembly of the United Nations on 15 December 1997), the relevant
provisions have been proclaimed and do not have force of law.
Presently, the Mauritian courts will be guided by English common
law principles to recognise foreign restructuring or insolvency
proceedings. We have not come across any such case so far.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is not common for Mauritian companies to enter into insolvency
proceedings in foreign jurisdictions. However, we have seen
several examples of Mauritian global business companies investing
in Indian companies entering into solvent court-approved
restructurings or schemes of arrangements in India.
Benoit chambers mauritius
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Anjeev Hurry Benoit Chambers Level 9, Orange Tower CyberCity Ebene Mauritius Tel: +230 403 6900
Email: [email protected]
URL: www.benoitchambers.com
Benoit Chambers is consistently a top choice for the largest and most complex cases and transactions involving the Mauritian jurisdiction every year. The Firm is well known for valuing excellence, sharp legal analysis, and a practical commercial approach which has often led to the development of innovative solutions to suit clients’ needs.
The Firm specialises in company law, financial services and commercial litigation. We offer advisory and advocacy services covering the whole spectrum of those areas. We have a sophisticated knowledge of insolvency, taxation and employment law, as well as the emerging areas of intellectual property and competition law.
Our clients include local and foreign conglomerates, financial institutions, global business companies and regulatory bodies, amongst others.
Members of Chambers appear before every jurisdiction in Mauritius as well as the Judicial Committee of the Privy Council in London. We are also active in the arbitration of commercial matters and international investment disputes.
Anjeev read law at the London School of Economics and Political Science, and is a barrister of the Honourable Society of the Middle Temple, England. He has developed a good practice for banking and financing transactions, as well as an acumen for complex industrial, green field and real estate projects. Also, he regularly advises on issues relating to company law and insolvency, financial services, securities law and taxation. Anjeev is a registered insolvency practitioner who has diligently completed the winding up of several companies and has acted as an administrator, receiver and manager of several companies.
Benoit chambers mauritius
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
If two or more related companies are in liquidation, a liquidator,
creditor or shareholder may apply to the court and ask that the
liquidations in respect of each company must proceed together as if
they were one company. The court may impose such terms as it
thinks fit when granting such application.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Although discussions are on-going at the level of the Company Law
Advisory Committee, the author is not aware of any current or
specific proposal to reform the corporate rescue and insolvency
regime in Mauritius.
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solcargo
Fernando pérez correa camarena
abimael Hernández Hernández
mexico
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Mexico is considered to be a neutral jurisdiction with regard to
being debtor and creditor-friendly. One of the objectives of the
Commercial Insolvency Law (CIL) is to procure the conservation
and operation of the debtor, but also to protect the interests of the
creditors.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Yes. However, an informal work-out is not a practice used by
debtors in Mexico. Formal restructuring is only used by complex
companies, serving as an example that since 2000 when the CIL was
enacted, there have been only approximately 750 insolvency
proceedings in Mexico.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The director or board of directors and key personnel can be held
liable for a company’s insolvency only in the following
circumstances:
1. If they voted or decided about a matter concerning the
company’s properties and assets knowing they had a conflict
of interest regarding the matter.
2. If they intentionally favour a shareholder or group of
shareholders injuring or prejudicing the rest of the
shareholders.
3. When, without a legitimate cause and because of their
position or job, they obtain an economical benefit for
themselves or a third party, including a group of shareholders.
4. If they generate, spread, publish, provide or order
information, knowing it is false.
5. If they order or provoke that the Company’s operations do not
get registered, if they modify or order the modification of the
registries to hide the true nature of the operations, affecting
the Company’s statement of account.
6. If they order or accept to register false data in the Company’s
accountancy.
7. If they destroy, modify or order the modification of the
Company’s accountancy.
8. If they modify or order the modification of the active or
passive accounts of the Company or the agreements
subscribed by the Company conditions, as well as register
inexistent expenses of the Company.
These conducts can only be reported by the Company, not by the
creditors or a third party, and the penalty is limited to payment of
damages in favour of the debtor.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Some creditors may affect a company’s situation in a very important
way. For instance: tax creditors may have the capacity to seize the
bank accounts of a Company; and/or Labour creditors (employees)
may initiate a strike against the Company and/or attach the assets of
a Company even if it is under an insolvency proceeding. There are
no special rules for unsecured creditors.
The Court may dictate ex officio or by request of the creditors some
remedies, including:
■ prohibition against payments of obligations due before the
date of admittance of the petition for insolvency;
■ moratorium and stay of enforcement proceedings against the
assets and rights of the Company, with the exception
mentioned before (employee’s credits);
■ prohibition against the Company’s performance of sales,
transfers or encumbrances of the principal assets of its
enterprise;
■ appointment of a judicial administrator;
■ prohibition against performance of transfers of funds or
securities in favour of third parties; and
■ arrest warrants, among others.
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2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Irrespective of the date on which they have been performed (except
for the general commercial rule that sets the statute of limitations at
10 years), acts in fraud of creditors are those that meet the following
requirements: (i) were performed prior to the declaration of
commercial insolvency; (ii) through them creditors were knowingly
defrauded; and (iii) the third party involved in the act was aware of
the fraud.
The following are acts that are considered to be creditor fraud, so
long as they have been performed within the date of retroaction (270
days prior to the date of the judgment declaring the Company under
insolvency): (i) gratuitous acts; (ii) acts and sales in which the
debtor pays a price with a clearly higher value or receives a price
with a clearly lower value to the considerations offered by its
counterpart; (iii) transactions performed by the debtor in which
conditions or terms are established that are significantly different to
the prevailing conditions of the market in which they have been
performed, on the date of their performance, or from commercial
practices and uses; (iv) debt remittances; and (v) payments of
unmatured obligations; among others.
The CIL deems that the performance of any of these acts inherently
includes the bad faith of the person performing it, both of the
debtors and the other parties involved therein. In all those cases, the
transaction will be declared null and void by petition of any of the
parties (creditor, comptroller, conciliator, liquidator).
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Yes. However, companies recur to formal work-outs because the
Company do not need the approval of all the creditors, only 50% of
them. Another benefit is that a reorganisation agreement is
mandatory for all unsecured creditors, even for those who did not
sign the agreement.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Out-of-court restructuring
Out-of-court restructuring will be entered into with all or a portion
of the debtor’s creditors. Non-party creditors are not bound by the
restructuring terms, which do not therefore affect their original debt
terms and conditions. As a result, out-of-court restructuring has no
practical effect or use for dissenting stakeholders.
Pre-packaged restructuring
The CIL provides for two restructuring schemes:
■ formal proceeding (reorganisation), which is similar to the
reorganisation procedure regulated under Chapter 11 of the
US Bankruptcy Code; and
■ pre-packaged restructuring, where the debtor with the
majority of its creditors can file for an insolvency proceeding
with an agreed restructuring plan. If it fulfils all legal
requirements, the Bankruptcy Court will issue a ruling
approving the plan if it does not contain any clause in
violation of the law (public interest) or third parties’ rights.
Reorganisation procedure
Debtors may file a voluntary petition for reorganisation at any time
before bankruptcy adjudication. Admission of the petition requires
the filing of evidence showing in a presumptive manner that the
debtor is in payments cessation at the time of filing.
The debtor enjoys a 185-day period, extendable up to 180 additional
days from the date of the Court’s resolution admitting the debtor’s
petition, during which it must draft a reorganisation plan and obtain
the consent of the required majorities of creditors secured and non-
secured creditors.
The restructuring plan must receive the approval of more than 50% of:
■ all unsecured creditors; and
■ secured creditors that signed the reorganisation agreement.
Once the plan is endorsed and performed, the Court will issue a
resolution declaring the reorganisation to be concluded and
finalising the intervention of the conciliator.
Creditors cannot block any insolvency procedure or threaten action,
but they can seek enforcement of collaterals if they are not
necessary to the operation of the debtor.
Finally, insolvency procedures in Mexico only allow to cram down
dissenting stakeholders if those dissenters form a majority of
creditors (veto).
3.3 What are the criteria for entry into each restructuring procedure?
In Mexico, the eligibility criteria for initiating a restructuring
procedure are based on proving that the Company has failed to fulfil
its payment obligations in a general manner.
The CIL considers that a Company is in a general state of non-
performance if there exists a payment default to two or more
creditors. One of the two following conditions should exist if the
insolvency petition is filed by the Company and both conditions if
the insolvency petition is filed by the creditors:
■ Insolvency – 35% or more of the Company’s payment
obligations are at least 30 days past maturity on the date that
the restructuring proceeding is filed.
■ Lack of liquidity – The Company has insufficient assets to
fulfil at least 80% of its matured payment obligations on the
date that the restructuring proceeding is filed.
In addition, the CIL foresees several events that constitute a
presumption that a Company is in a general default of payment of its
obligations (e.g. the non-existence or insufficiency of assets over
which enforcement may be brought in the case of an attachment).
3.4 Who manages each process? Is there any court involvement?
Yes, the Bankruptcy Court (Federal Court) is the director of the
process, therefore it is involved in all the restructuring proceedings
supervising the conciliator’s performance, and it must resolve all
petitions of the creditors and debtor.
Also, the Court will determine whether a debtor must be declared
insolvent. The court must issue a ruling declaring the ranking and
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priority of all the creditors. The court issues a judgment approving
the reorganisation agreement entered into by the Company and its
creditors.
In general, the court conducts the restructuring proceeding and
resolves all motions filed by the parties and the conciliator.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
As a general rule, the validity of the contracts is not affected by the
restructuring procedure. However, the CIL makes a casuistic
classification:
■ the validity of the agreements concerning only personal
goods will not be affected, as well as inalienable goods, those
exempt of attachment and those not subject to a statute of
limitation;
■ preparatory and definitive agreements must be complied with
by the Company, unless the liquidator considers that it will
harm the estate;
■ the seller can oppose delivering goods or property regarding
purchase agreements in which the Company is the buyer,
unless the Company pays the full price agreed by the parties
or guarantees the payment of the goods;
■ deposit agreements, loan agreements and commission and
agency agreements will not be terminated for the liquidation
procedure, unless the liquidator considers it necessary;
■ existing account agreements will be terminated, unless the
Company states its continuation with the consent of the
liquidator;
■ securities repurchase agreements will be terminated;
■ lease agreements will not be cancelled by the liquidation
procedure, unless the Company is the lessee and the
liquidator considers it necessary, in which case the receiver
must pay the penalty agreed in the contract or three months’
rent for the anticipated termination;
■ personal service agreements will not be cancelled;
■ lump-sum construction contracts will be cancelled, unless the
Company agrees to comply with the agreement with the
liquidator’s authorisation; and
■ insurance contracts will not be cancelled if the Company is
the insured party, but if the Company is the insurer, the
insured party can choose to terminate the contract.
Regarding repurchase, securities loans, futures and derivatives
transactions, the declaration of commercial insolvency will lead to
the early termination of those transactions, provided that:
■ the debts and credits resulting from these transactions are
offset;
■ the outstanding balance that may result from the set-off
against the debtor may be claimed by the corresponding
counterpart by means of the acknowledgment of the credits
procedure; and
■ in the case of a balance in favour of the debtor, the
counterpart will be bound to pay the conciliator for the
benefit of the estate within a term not exceeding 30 calendar
days, calculated from the date of the declaration of
commercial insolvency.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
During the restructuring process, the Company is able to obtain further
credit or take out additional secured loans during an insolvency
procedure. The debtor can request authorisation from the Court in
order to obtain further credit (DIP Financing) and secure loans during
the insolvency procedure, if the resources required are strictly
necessary to maintain the Company’s operations.
Other costs, such as payment of salaries, taxes and all ordinary
expenses of the Company (rents, utilities, etc.) are funded by the assets
of the Company while it is in operation, but it can be also funded by
third parties, meaning the creditors themselves or any other party.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Out-of-court liquidation: Out-of-court liquidation does not require
the filing of a complaint or evidence to demonstrate that the debtor
is in payments cessation. Shareholders of the Company may agree
on a voluntary dissolution of the Company. Such resolution shall be
approved at a partners’ meeting (dissolution meeting), in which one
or more liquidators are to be appointed.
Winding up proceedings begin immediately after the Company’s
dissolution minutes have been duly registered with the Public
Registry of Commerce.
The sole manager must provide all corporate and accounting
documents, information and books to the liquidator, which must be
registered in an inventory. The liquidator is entitled to act on behalf
of the Company, acting as legal representative of the partnership,
therefore having all the obligations, responsibilities and limitations,
as well as the authority and powers of attorney and of a legal
representative.
Unless the dissolution minutes or law provides otherwise, the
liquidator is obliged to:
■ wind up the outstanding transactions and operations;
■ collect due payments and pay debts;
■ sell the assets;
■ distribute the remaining assets proportionately to their
partnership interest;
■ draft the liquidation balance sheet; and
■ hold the partnership’s documents and corporate and accounting
books in deposit for 10 years following the date of the
partnership’s winding up.
The final liquidation balance sheet must be approved by partners in
a winding up meeting. Liquidators may then proceed to:
■ pay partners’ equity against their corresponding partnership
interests;
■ give notice of the liquidation to the Ministry of Finance and
Public Credit; and
■ request the cancellation of the taxpayers’ registry and
partnership’s registry in the Public Registry of Commerce.
Partners will decide during the winding up meeting on the
distribution of the remaining assets (distribution agreement) once
the liabilities have been paid or their amount has been deposited
whenever payment is not possible. The liquidator will determine the
amount or assets that each partner is entitled to receive as final
payment for its ownership interest.
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Simplified Out-of-court liquidation: A recent Reform of the
General Law of Business Entities (that came into force on July 25th,
2018) has introduced two innovations for the winding up and
liquidation procedure of companies:
■ First, it establishes that a judicial resolution or administrative
decision by a Court is ground for dissolution, in accordance
to the tendency set by the legislator to recognise these
grounds for dissolution in the case of Simplified Stock
Companies.
■ Second, and most importantly, is the addition of Articles
249bis and 249bis 1 to the General Law of Business Entities,
of which enact a simplified winding up procedure, without
the need to notarise the dissolution and winding up of
meetings.
Pursuant to Article 249bis, business entities can conduct the
simplified winding up procedure if, and only if, the entity complies
with the following requirements:
■ if they are comprised exclusively by partners and
shareholders that are individuals;
■ if they do not operate illegally or habitually commit illicit
acts;
■ it must publish in the Secretary of the Economy’s electronic
system its Special Book of Partner or its Stock Registry with
the current share structure as of 15 business days from the
date of the meeting in which the winding up was agreed
upon;
■ it has not undertaken any operations or emitted any electronic
invoices during the last two years;
■ it has complied with all of its tax, labour, and social security
obligations;
■ it has not imposed any monetary obligations on third parties;
■ none of its legal representatives are a part in criminal
investigations for possible financial or property crimes;
■ it is not insolvent; and
■ it is not an entity within the financial system.
Court liquidation: The debtor Company may voluntarily file an
insolvency proceeding requesting the liquidation of all its assets,
properties, goods and rights. The Federal Institute of Commercial
Insolvency (IFECOM) will appoint a receiver (liquidator) to
manage the Company and sell the assets and rights of the Company
in order to pay the debts recognised in favour of the creditors.
The compulsory liquidation will take place when the Company
creditors request that the court liquidate the assets, or if the
Company and creditors do not reach a reorganisation agreement
during the conciliation stage of the insolvency proceeding (365 days
maximum).
The only regulatory difference between voluntary liquidation and
compulsory liquidation is that if the compulsory liquidation is filed
by the creditors, the Company may reject such petition and the
insolvency proceeding will begin from the conciliatory stage.
4.2 On what grounds can a company be placed into each winding up procedure?
Out-of-court liquidation: It will suffice that the Company (debtor)
proves that it is facing general economic or financial difficulties.
Court liquidation: The liquidation procedure may be initiated:
■ if the debtor Company applies for an insolvency proceeding
in the liquidation stage; or
■ if two or more creditors request the liquidation stage.
In both cases, it must be demonstrated (even in a presumptive way)
that the debtor has defaulted in the payment of its obligations in a
general manner. In order to prove this condition of general non-
performance, a payment default to two or more creditors should
exist alongside the following conditions:
■ at least 35% of all Company obligations are at least 30 days
past maturity; and
■ the Company has insufficient liquid assets to satisfy at least
80% of its matured obligations on the date of the petition.
Also, a debtor can file for liquidation if it will imminently incur any
of the two scenarios mentioned before, taking into consideration
that the CIL provides that it will occur imminently if the default will
take place within the period of 90 days.
4.3 Who manages each winding up process? Is there any court involvement?
The out-of-court liquidation is managed by the shareholders and
directors of the Company. The court liquidation is managed by the
Bankruptcy Court.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Regarding out-of-court liquidation, shareholders decide if the
Company will enter in a dissolution and winding up process, and
creditors can act reluctantly and seek enforcement of security.
Regarding court liquidation when it is requested by the Company, it
is mandatory for the shareholders to sign a letter accepting that the
Company is going under bankruptcy itself, in the case that the
bylaws of the Company do not request additional requirements.
Also, secured creditors may seek enforcement of their collateral in a
different lawsuit, generally in a State Court.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The effects are the same as in the restructuring procedure. The
general rule is that the contracts entered into by the Company
(debtor) will continue to be valid, except when the liquidator rejects
them in the best interest of the estate.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Claims are divided into two categories:
■ Those filed before the judgment issued by the Court declaring
the company in insolvency; in that case, the claim will be
followed by the Company with the supervision of the conciliator.
■ Those filed during the insolvency proceeding, where the
lawsuits do not have to be accumulated to the insolvency.
The costs of those procedures will be assumed by each party.
4.7 Is it possible for the company to be revived in the future?
Yes. If a Company is declared in liquidation (bankruptcy) that does
not mean that the Company will lose its capacity to continue in
operations in the future when new sources of financing are found, if
all creditors are paid.
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5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The CIL has foreseen that all tax credits will continue to cause fines
and accessories that correspond to pursuant applicable regulations.
In case of reaching a reorganisation agreement, the fines and
accessories caused during the conciliation stage will be cancelled.
However, the issuance of a judgment of bankruptcy will not be
sufficient cause to interrupt payment of taxes and social security
contributions of the Company, for being considered as indispensable
for the operation of the Company.
From the judgment of insolvency and until the end of the period for
the conciliation stage, all administrative procedures for the execution
of tax credits will be suspended, even though the tax authorities may
continue any process to determinate the tax credits of the Company.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employees must be paid since an insolvency procedure is not a
justification to interrupt payments of salaries and wages.
Employees will be ranked as creditors against the bankruptcy estate
(first ranking) when the labour claim has a connection with unpaid
salaries for the last two years. But when the credit of an employee
comes from a different concept, the ranking will be equal to tax
creditors without collateral.
During insolvency procedures, any attachment of assets is forbidden
for all creditors, with the exception of when the attachment is
requested by a Labour Court for concept of unpaid salaries for the
last two years.
Creditors (including employees) who have not been paid in full,
individually retain their rights and actions for the unpaid amount
against the merchant.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
If a foreign Company does business or has agencies or offices in
Mexico, under Mexican law it is considered a merchant under the
Mexican Commercial Code and the court with jurisdiction in the
place where the foreign Company does business can order the
insolvency proceedings or liquidation of the foreign Company’s
agencies and offices. However, it will be limited to the rights,
goods, assets and properties located in Mexico.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Yes. Mexican Courts recognise the validity of foreign insolvency
proceedings when:
■ a foreign court or representative requests for assistance from
the Mexican courts regarding a foreign insolvency proceeding;
■ when the insolvency proceeding takes place in Mexico and a
foreign country; and
■ when foreign creditors ask for an insolvency proceeding to be
initiated in Mexico.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Yes, it is common for global companies with a branch or subsidiary
in Mexico.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The bankruptcy of a Company that comprises a corporate group will
be accumulated, but it will follow its own course of action.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
No, there are not.
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Fernando Pérez Correa Camarena SOLCARGO Avenida Insurgentes Sur 1602 Floor 11, office 1102 Colonia Crédito Constructor, Benito Juárez P.C. 03940, Mexico City Mexico Tel: +52 55 5062 0050
Email: [email protected]
URL: www.solcargo.mx
Abimael Hernández Hernández SOLCARGO Avenida Insurgentes Sur 1602 Floor 11, office 1102 Colonia Crédito Constructor, Benito Juárez P.C. 03940, Mexico City Mexico Tel: +52 55 5062 0050
Email: [email protected]
URL: www.solcargo.mx
Founded in 1995, SOLCARGO is a top-tier law firm in Mexico, with a highly-qualified, internationally educated team with working experience in tier 1 law firms across the world. The firm is capable of implementing efficient legal solutions, while taking into consideration its clients’ business rationale. SOLCARGO performs corporate engagements for Fortune 500, large multinational companies, ambitious middle market and emerging growth companies, and capital market participants including public and private investment organisations, investment banks, commercial lenders and other financial institutions. SOLCARGO is recognised as a leader in the private equity, venture capital, arbitration, litigation, mediation, restructuring and bankruptcy proceedings, IP and pharmaceutical industries. SOLCARGO adopts a multidisciplinary approach in counselling its clients and draws upon the firm’s unparalleled resources, including the creation of firm-wide task forces to address important industry and topical client needs.
Fernando Pérez Correa Camarena is a lawyer with more than 20 years of experience in dispute resolution, civil and commercial litigation, arbitration and mediation. He is admitted to practise in the state of New York and in the federal courts of the 2nd Circuit of the United States of America. He is a certified mediator before the Superior Court of Justice of Mexico City, and since 2005 he is registered as conciliator and receiver before the Federal Institute of Specialists in Insolvency Proceedings (IFECOM). Since 1998 he has been the managing partner of the dispute resolution practice area. He has experience as a party lawyer in more than 25 international commercial arbitrations, four investment arbitrations and more than 20 bankruptcy proceedings. He is listed in classifications such as Chambers and Partners, The Legal 500 and Latin Lawyer.
Abimael Hernández Hernández is a lawyer with more than 13 years of experience in civil and commercial litigation (domestic and international) including enforcement and annulment of arbitration awards and foreign judgments. He has participated in different commercial and investment arbitration proceedings. He has also vast experience in claims for damages against private entities, as well as public authorities. In the last six years he has focused and specialised his practice on commercial insolvency, restructuring and bankruptcy proceedings. During 2010 and 2012 he worked for the law firm O’Melveny & Myers, LLP at Newport Beach, California, USA, and in 2013 he achieved a Masters of Law at UCLA. He is listed and recommended in classifications such as Chambers and Partners, The Legal 500, Global Law Experts (commercial litigation), and Corporate Advisory Network.
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stibbe
Job van Hooff
Daisy nijkamp
netherlands
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The Dutch jurisdiction is primarily creditor-friendly, the primary
aim of the Dutch Bankruptcy Act (“DBA”) – more specifically the
bankruptcy proceedings – is to ultimately satisfy the creditors, and
not to give the debtor a remedy to reorganise its business and to
grant a (full or partial) discharge of debts.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The DBA provides for two formal corporate insolvency proceedings:
bankruptcy (faillissement; corporate liquidation proceedings); and
suspension of payments (surseance van betaling; corporate
restructuring proceedings).
In both formal insolvency proceedings the debtor can offer a
composition plan (akkoord) to its (ordinary) creditors, but this does not
happen often.
The legislative framework also allows informal work-outs, for
example, by means of a plan of composition. Such an informal
composition – currently – requires the cooperation of all creditors. The
Dutch legislator is working on a proposal allowing for more
possibilities for formal restructurings outside insolvency proceedings.
Suspension of payments are rarely successful and are often followed
by bankruptcy. In practice, bankruptcy is the most used insolvency
proceeding.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The managing directors of the debtor are not under a statutory
obligation to file for the opening of insolvency proceedings.
Although the DBA does not contain such obligation, the managing
directors may become personally liable vis-à-vis the creditors if the
managing directors have allowed the company to incur obligations
towards a third party which they know, or should have known, the
company will not be able to timely meet. In such circumstances, the
managing directors will be required to take appropriate measures,
which could – depending on the circumstances – include the
cessation of trading and the filing for suspension of payments or
bankruptcy.
A managing director can be held liable for losses suffered by the
company due to improper management if the managing director can
be seriously blamed (ernstig verwijt), taking into account all facts
and circumstances, such as the allocation of duties within the
management board, the management board guidelines, information
which the member of the management board is or should have been
aware of, etc. These proceedings can only be initiated by the
company, or by the bankruptcy trustee in case of a bankrupt
company.
Managing directors are liable for the deficit of the estate if it is
plausible that the management board manifestly improperly
managed the company and this was an important cause of the
bankruptcy. Certain legal presumptions apply. This liability
towards the bankruptcy estate also applies to a de facto managing
director.
Although the main rule is that only the company (and not its
managing directors) is liable towards third parties such as creditors
of the company, personal liability towards third parties may
nevertheless arise if a managing director has committed an unlawful
act towards such third party by violating his general duty of care. In
all cases, the standard of liability is that the member of the
management board can be seriously blamed for this.
Members of the management board may further become jointly and
severally liable for the payment of certain taxes. This liability arises
in the case of manifestly improper management. If the company or
any of the managing directors timely filed a notification of non-
payment, the tax authorities have to demonstrate that there was such
manifestly improper management. If the company or any of the
managing directors failed to timely file the notification, it is legally
assumed that the non-payment of taxes was caused by the managing
director, unless he proves otherwise.
In conclusion, certain criminal law provisions apply, e.g. in case of
fraudulent conveyance.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
In the Netherlands it is fairly easy for creditors to obtain leave for
conservatory attachment. Such creditors may also file a petition for
bankruptcy. The filing of such petition can trigger contractual
clauses that make it possible to terminate existing contracts.
Dutch law further provides for a broad retention of title regime.
Suppliers can arrange to reclaim their goods until all invoices have
been paid.
Secured creditors (financiers) also have a strong influence. In
practice, a company in financial difficulties will be placed under the
supervision of the financiers’ special management department
because certain covenants under the financing agreements will be
breached. Formally, the secured creditor has no role within the
company but in practice the company often cooperates with the
bank, in the knowledge that the cooperation of the financiers is
required for any restructuring due to all assets being pledged.
Employees take a special position in the Netherlands. Outside of a
bankruptcy scenario, the possibilities to dismiss employees are
limited. This is one of the reasons why it is difficult to successfully
restructure a company outside insolvency proceedings.
In the Netherlands, suspension of payments (moratorium) is granted
on a preliminary basis if a debtor foresees that it will be unable to
meet its obligations. During suspension of payments proceedings,
the debtor cannot be forced to pay his debts and all actions in
progress to recover those debts are suspended. However, this regime
only affects the ordinary creditors. See question 3.2 and further.
A freeze period can apply in bankruptcy or suspension of payments
(see question 4.4).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The bankruptcy trustee is entitled to invalidate legal acts of the
bankrupt debtor which were carried out before the declaration of
bankruptcy and which were detrimental to the creditors. No
hardening period applies. The burden of proof may be reversed in
respect of voluntary legal acts that took place less than a year before
the debtor was declared bankrupt (e.g. legal acts entered into with
related parties or transactions at undervalue).
Voluntary legal acts by the bankrupt debtor, of which the results are
detrimental to creditors (which is established when the action is
invoked), may be invalidated if both the debtor and its counterparty
knew or should have known (at the time the legal act was voluntarily
entered into) that such legal act would have a detrimental effect on
the creditors. The fact that a transaction was at arm’s length does
not necessarily mean that a transaction cannot be challenged.
Also, compulsory legal acts can be invalidated if (a) the creditor
knew that the request for bankruptcy was pending, or (b) if the
creditor consulted with the debtor with the intention to put him in a
more favourable position than the other creditors. These must be
proven by the bankruptcy trustee. There is no presumption of
knowledge as in the case of voluntary legal acts.
Outside of formal insolvency proceedings, transactions can also be
challenged. As a matter of Dutch law, every creditor may nullify (by
a simple declaration) any legal act entered into by a debtor with a
third party if the requirements for voidable preference outside
bankruptcy are met.
The validity and enforceability of the obligations of a debtor under
e.g. guarantee or security interest may be successfully contested by
a debtor (or its bankruptcy trustee) if the execution of the security
document is not within the scope of the corporate objects of the
debtor (doeloverschrijding) and the counterparty of such debtor
under the security document knew or ought to have known (without
enquiry) of this fact.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
As a general rule, the Dutch legislative framework currently only
allows informal work-outs if all creditors cooperate and approve the
informal work-out. In exceptional cases, creditors can be forced to
approve the informal work-out (i.e. in case of abuse of power). A
debt-for-equity swap can be part of an informal work-out.
Legislation on extrajudicial restructuring plans to avert bankruptcy
is in the making (see question 9.1).
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Suspension of payments is the main formal rescue procedure
available in the Netherlands. Suspension of payments only affects
the rights of ordinary creditors; the obligations of the debtor to pay
its ordinary creditors are suspended. The rights of the secured and
preferential creditors are not affected.
The debtor can offer a composition plan which provides for a full or
partial payment of the suspended claims of the creditors, in full
satisfaction of their claims. Using the plan of composition during
suspension of payments may lead to a successful reorganisation.
Dissenting ordinary creditors can be forced to accept the
composition if – in summary – the majority of the creditors vote in
favour of the plan and the plan is approved by the court. However,
in practice, it is difficult to achieve a successful restructuring by way
of offering a composition plan.
A pre-packaged sale is also allowed under Dutch law. Although
there is no specific legislation regarding pre-packaged sales yet (see
question 9.1), the majority of Dutch courts allowed for pre-
packaged sales. Since the European Court of Justice has decided
that the transfer of undertaking rules in respect of employment
contracts can be applicable in pre-packaged sales, the pre-packaged
sale has not been very popular. There is a risk that employees of the
debtor automatically transfer to the purchaser in a pre-packaged
asset sale.
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3.3 What are the criteria for entry into each restructuring procedure?
The debtor can file a petition in court for a suspension of payments
if it foresees that it will be unable to continue to timely meet its
obligations. Suspension of payments is immediately granted on a
preliminary basis. In theory, the object of a suspension of payments
is to allow the debtor time either to overcome temporary illiquidity
or to propose a settlement to its creditors. An application for
suspension of payments cannot be made by creditors or other third
parties.
3.4 Who manages each process? Is there any court involvement?
Upon granting a preliminary suspension of payments, the court will
appoint an administrator (bewindvoerder). A supervisory judge is
usually also involved. The administrator, in co-operation with the
management board of the debtor, will administer the affairs of the
debtor and investigate the possibilities of a reorganisation of the
debtor’s company and/or full or partial payment of the creditors
through a plan of composition. By law, the management and the
administrator may only act together; the administrator is de facto in
control during suspension of payments. In practice, the preliminary
suspension of payments is most often shortly followed by a
bankruptcy, because the administrator considers that a successful
reorganisation is unlikely.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
In principle, suspension of payments does not affect existing
agreements. However, the debtor’s payment obligations in relation
to ordinary claims are suspended. Moreover, these contracts might
contain provisions on the consequences of the granting of
suspension of payments on any of the parties to the agreement, and
these remain in principle valid. The same applies to set-off
provisions.
Although agreements in principle are not affected by suspension of
payments, the administrator/debtor does not have to perform all
obligations under agreements as this may conflict with his duty to
treat all creditors equally (e.g. not obliged to make payments,
deliver goods). The counterparty can file its (ordinary) claim in the
bankruptcy estate. The administrator/debtor does have the
obligation to passively perform (e.g. honour the lease agreement if
the debtor is the lessor). If such obligations are not honoured, the
counterparty has a direct claim on the estate.
If both the debtor and the counterparty have not or have only
partially performed under an agreement, the counterparty can
request the administrator/debtor to confirm within a reasonable time
whether it is willing to perform under the contract. If the
administrator/debtor does not confirm this, he loses the right to
claim performance of the counterparty’s obligations. If the
administrator/debtor confirms that he will perform, the
administrator/debtor has to provide security.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Reorganisation of the company will generally be funded by the
debtor itself. The debtor can generate money by selling certain
assets in order to pay off debts.
Rescue financing is not protected by any legislation. However, after
the opening of insolvency proceedings it is possible for a financier
to provide a preferential loan that has a higher rank than other debts
of the debtor if the bankruptcy trustee or the administrator agrees.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure available to wind up a company is
bankruptcy.
4.2 On what grounds can a company be placed into each winding up procedure?
A debtor can be declared bankrupt by a Dutch court if it resides or has
a place of business in the Netherlands and either applies for bankruptcy
itself or an application for bankruptcy is filed by a creditor.
The petition must reveal facts and circumstances which constitute
prima facie evidence that the debtor has ceased to pay its debts.
This is considered to be the case if there are at least two creditors,
one of whom has a claim which is due and payable and which the
company cannot or refuses to pay. The DBA does not require that
other creditors support the petition.
In addition, the administrator in suspension of payments might have
to file for bankruptcy. This would, for example, be the case if there
is no outlook that the debtor will be able to satisfy its creditors or the
debtor acts in bad faith.
4.3 Who manages each winding up process? Is there any court involvement?
When making the bankruptcy order, the court appoints a supervisory
judge (rechter-commissaris) and at least one bankruptcy trustee
(curator). The bankruptcy trustee is entrusted with the
administration of the bankruptcy and is exclusively entitled to
administer and dispose of the assets. The bankruptcy trustee is
usually an attorney of the local bar association and, especially in
case of larger bankruptcies, a specialised insolvency lawyer.
The supervisory judge’s task is to supervise the bankruptcy trustee
and he has a statutory duty to approve certain decisions to be made
by the bankruptcy trustee.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The management board is not authorised to file for bankruptcy
without a resolution to do so from the general meeting of
shareholders. Other than that, shareholders have little influence on
the bankruptcy proceedings.
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The court may, depending on the type and size of the bankruptcy,
decide to form a creditors’ committee which task is to advise the
trustee. If a creditors’ committee is installed, the bankruptcy trustee
is obliged to seek advice from the committee with regard to the
subjects referred to in the DBA. In addition, creditors have the right
to file a request with the supervisory judge objecting to acts of the
bankruptcy trustee or demanding an order from the supervisory
judge.
Ordinary creditors are not entitled to enforce their claims; all
attachments on the debtor’s assets which benefit specific creditors,
are replaced by a general bankruptcy attachment which benefits all
creditors. Pending legal proceedings are suspended. Creditors have
to file any claims on the debtor in the bankruptcy estate.
Creditors that have a right of mortgage or right of pledge have more
influence. Subject to any applicable freeze order, secured creditors
are entitled to foreclose their collateral during bankruptcy. The
bankruptcy trustee is in principle not entitled to the proceeds of the
sale of the secured assets, nor is he entitled to withhold these assets.
The secured creditors cannot be charged with the costs of the
bankruptcy.
However, the bankruptcy trustee may impose on the mortgagee or
pledgee a reasonable deadline for selling the collateral. If secured
creditors do not execute the collateral before the deadline, the
bankruptcy trustee is entitled to liquidate the collateral himself,
notwithstanding the creditor’s right of priority to the proceeds as a
preferential creditor. In that case the secured creditor has to share in
the costs of the bankruptcy, which may mean that they will receive
little or no proceeds.
The supervisory judge may declare a freeze period, during which
recourse can only be sought against (some of the) assets of the estate
or assets in the possession of the bankruptcy trustee, after having
obtained authorisation from the supervisory judge. The freeze
period applies for a maximum period of two months and may be
extended once, for a maximum of two months.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
In principle, bankruptcy proceedings do not affect the validity or the
content of an agreement. Set-off provisions and termination
provisions will be upheld. The DBA provides for broad set-off
possibilities.
Although agreements are in principle not affected by the bankruptcy
proceedings, the bankruptcy trustee does not have to perform
obligations under agreements that may conflict with his duty to treat
all creditors equally (e.g. not obliged to make payments, deliver
goods). The counterparty has to file its claim with the bankruptcy
estate. The bankruptcy trustee does have the obligation to passively
perform (e.g. honour the lease agreement if the debtor is the lessor).
Alternatively, the counterparty has a direct claim on the estate.
If both the debtor and the counterparty have not, or have only
partially performed under an agreement, the counterparty can
request the bankruptcy trustee to confirm within a reasonable time
whether he is willing to perform under the contract. If the
bankruptcy trustee does not confirm this, he loses the right to claim
performance of the counterparty’s obligations. If the bankruptcy
trustee confirms that he will perform, he has to provide security.
The DBA does grant the bankruptcy trustee with the right to
terminate lease agreements and employment contracts.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The ranking of claims is as follows:
Estate claims (boedelvorderingen) are direct claims against the estate.
Estate claims have priority over all other claims. An exception applies
to the claims of secured creditors which have timely foreclosed their
security, as they can act as if there is no bankruptcy at all.
Estate claims are claims which arise by virtue of law (e.g. rental
payments during the bankruptcy, and salaries dating from after the
date of the bankruptcy order), from legal acts performed by the
bankruptcy trustee in his capacity and resulting from actions of the
bankruptcy trustee in breach of an obligation or commitment
applicable to him in his capacity as bankruptcy trustee. The salary
and costs of the bankruptcy trustee are estate claims as well.
Claims of secured creditors are claims of creditors which are
secured by a right of mortgage (hypotheek) or a right of pledge
(pandrecht). Subject to any applicable freeze order, secured
creditors are entitled to foreclose their collateral during bankruptcy
(see above under question 4.4). To the extent that not all claims can
be satisfied from the proceeds of the enforcement of the security
rights, the remainder is treated as an ordinary claim.
Preferential claims are claims that have a priority right to the
proceeds of the assets of the estate. There are several categories of
preferential creditors, all of whom have a right of priority to the
proceeds of the assets of the estate. Their preference may relate to
the proceeds of all assets or to the proceeds of specific assets only.
The claims of the tax and social authorities (taxes and social
insurance contributions) as well as certain claims of employees are
the most important categories of preferential claims. Preferential
creditors only receive payment if all estate claims are paid. With
regard to the proceeds of fixtures and fittings tax claims take
preference over secured claims under certain circumstances.
Ordinary claims are claims that already existed on the date of the
bankruptcy order or were already a part of the legal position of the
creditor at the date of the bankruptcy order. Ordinary claims must
be submitted for verification. The ordinary creditors receive a pro rata share of the remainder after the estate claims and preferential
claims are paid.
Post-insolvency claims are claims that arise after the bankruptcy
and do not fall within one of the abovementioned categories. Those
claims cannot be submitted for verification.
4.7 Is it possible for the company to be revived in the future?
In theory, the bankruptcy can end with a plan of composition
offering the creditors a partial payment of their claim. The bankrupt
legal entity then emerges from bankruptcy and can continue to do
business. In practice, the plan of composition is almost never
offered in case of bankruptcy proceedings.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Restructuring and insolvency proceedings can significantly affect
the fiscal position of the company. Certainly in group relationships,
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complex tax regulations can have far-reaching consequences that
affect not only the distressed company itself, but also the group of
companies to which it belongs. Examples of possible tax risks are:
■ Companies in distress are obliged to timely report to the tax
authorities their inability to pay tax debts.
■ Many groups of companies form a fiscal unity (fiscale eenheid). If a company in a fiscal unity goes bankrupt, the
unity automatically terminates in relation to that company.
This can be relevant in relation to corporation tax and VAT.
■ If a creditor remits a claim, this can lead to a taxable profit for
the debtor (kwijtscheldingswinst). Under Dutch law there is
a specific regulation concerning these kinds of profits.
Remission is also possible within the company’s tax unity.
It is therefore important to map out the distressed company’s tax
position adequately and timely.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
With authorisation from the supervisory judge, the bankruptcy
trustee is entitled to terminate the employment contracts. The
applicable termination period depends on the terms of the relevant
employment agreement, but at the longest is six weeks.
The salary and pension contributions between the bankruptcy date
and the date of termination of the employment agreement rank as
estate claims. Claims that predate the bankruptcy date and arose
within one year prior to that date are preferential claims. Any
further claims rank as ordinary claims. The same regime applies in
a suspension of payments.
In practice, most of the employee’s claims on the estate will be paid
by the Employee Insurance Agency (“UWV”) under the wage
guarantee scheme. It concerns the amount that ranks as estate claim
(with a maximum of six weeks) and also the salary for the period
until 13 weeks prior to the bankruptcy and certain other amounts
(e.g. holiday pay and holidays for the year preceding the
bankruptcy). The UWV in turn will subrogate in the claims of the
employees towards the estate.
In a suspension of payments, the administrator and debtor acting
jointly can terminate the employment contracts together. They
require a dismissal permit from the UWV. The termination period
can vary depending on the relevant employment contract.
European rules on the transfer of undertaking are not applicable in
case of an asset sale during bankruptcy proceedings. This, however,
might differ in the case of a pre-packaged sale due to the recent
judgment of the European Court of Justice in relation to Smallsteps;
see also question 3.2 above.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Any debtor residing in the Netherlands or with its centre of main
interest located in the Netherlands can enter into insolvency
proceedings in the Netherlands.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
There is a difference between proceedings commenced in an EU
Member State and those commenced in a non-EU Member State.
Insolvency proceedings commenced in EU Member States (with the
exception of Denmark) are recognised pursuant to the EU
Insolvency Regulation (recast).
Proceedings commenced in non-EU Member States are formally not
recognised in the Netherlands absent any treaty, but in practice do
have some effect. When determining a claim for recognition of
insolvency proceedings rendered by a court in a non-EU Member
State, Dutch courts will apply the Dutch private international rules
for recognition of foreign judgments. Foreign judgments will be
recognised if the authority of the relevant court is based on
internationally accepted standards and the foreign judgment does
not conflict with the Dutch public order. The recognition of the
foreign insolvency order is, however, limited by the principle of
territoriality. This means that the foreign proceeding, for example,
cannot impair the rights of creditors to take recourse on assets
located in the Netherlands.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Occasionally, companies incorporated in the Netherlands enter into
insolvency proceedings or restructuring proceedings in other
jurisdictions. Dutch incorporated companies have, in the past, for
example, used the English scheme of arrangement in order to restructure
their debt. It is not unusual, but neither is it common practice.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Dutch legislation does not provide for a formal procedure with
regard to the insolvency of a group of companies. The main rule is
that each company has to be separately liquidated.
In exceptional cases, the bankruptcies can be settled jointly by
means of what is known as a consolidated settlement. At the request
of the bankruptcy trustee, the appointed supervisory judge is
authorised to decide whether a consolidated settlement is necessary.
Dutch law does not provide for a statutory obligation for bankruptcy
trustees to cooperate with one another.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The Act on the Modernisation of Bankruptcy Proceedings has
recently (on 1 January 2019) become effective. This legislation
aims to limit the ‘social costs’ resulting from a bankruptcy and to
contribute to increasing the revenues for the creditors.
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Job van Hooff Stibbe Beethovenplein 10 1077 WM Amsterdam Netherlands Tel: +31 20 546 06 71
Email: [email protected]
URL: www.stibbe.com
Daisy Nijkamp Stibbe Beethovenplein 10 1077 WM Amsterdam Netherlands Tel: +31 20 546 02 54
Email: [email protected]
URL: www.stibbe.com
Job co-heads Stibbe’s restructuring and insolvency group, specialising in liability, security rights and restructuring. He advises and litigates on complex matters, often relating to situations in an international context or to situations of financial distress. He also acts as a court appointed administrator and bankruptcy trustee. Job is an active member of Insolad, INSOL World and INSOL Europe and he regularly teaches and publishes on subjects of liability, including directors’ liability, security rights and bankruptcy law.
About Stibbe
Stibbe is an international law firm advising on the laws of the Benelux countries and European law, with offices located in Amsterdam, Brussels and Luxembourg as well as in Dubai, London and New York.
Our practice groups include restructuring and insolvency, employment, pensions and incentives, corporate, mergers and acquisitions, real estate, construction, telecom, media and technology, administrative law, environment and planning, private equity, capital markets, finance, tax, litigation and dispute resolution, EU competition, energy and intellectual property.
In addition to our own international offices, we collaborate closely with other top-tier firms for cross-border matters outside our Benelux home jurisdictions. These relations are non-exclusive and enable us to assemble a tailor-made, integrated team of lawyers with the best expertise and contacts for each specific matter. This guarantees efficient coordination on cross-border matters, whatever their complexity and nature.
Restructuring & Insolvency
Stibbe’s Insolvency & Restructuring team is recognised as top tier and its members are considered front runners in their field. Our practice is active in all major areas of international Insolvency & Litigation.
Our team stands out in the Dutch market because it combines (i) restructuring/insolvency advisory work, (ii) appointments by the Court to act as bankruptcy trustee or administrator in suspension of payments procedures, and (iii) litigation. We know how bankruptcy trustees and supervisory judges act and think and we know them very well. We can apply that knowledge towards strategy decisions and litigation tactics.
Our Insolvency & Restructuring team has ample experience in (international) insolvency procedures, litigation and in representing creditors and shareholders in disputes and negotiations with bankruptcy trustees.
Daisy has proven experience litigating and advising on liability, security rights and insolvency law issues for a broad spectrum of clients. She regularly advises on complex restructurings and acts as a trustee in bankruptcy matters. Daisy also has expertise in banking and finance. In 2014, she was seconded to an international Dutch bank as in-house counsel to advise the financial restructuring and recovery team. Daisy is an active member of Insolad and INSOL Europe and regularly teaches on security rights and bankruptcy law.
The following developments in the context of reform of the
corporate rescue and insolvency regime in the Netherlands are
worth mentioning:
■ Legislation regarding pre-packs (Continuity of Enterprises
Act). The purpose of this proposal is to provide a legal basis
for the working method that has arisen in practice, whereby
in certain cases an intended bankruptcy trustee is appointed
prior to an expected bankruptcy, often termed a ‘pre-pack’.
The effect of the Court of Justice ruling mentioned under
question 3.2 is that the number of situations in which the
proposal will be used is more limited than was taken into
account at the start of the legislative process. For the time
being, the legislation process has been suspended.
■ Legislation introducing the possibility to get court
confirmation for an extrajudicial restructuring plan to
avert bankruptcy (Act on Court Confirmation of
Extrajudicial Restructuring Plans to Avert Bankruptcy). The
purpose is to include a regulation in the DBA providing for
court confirmation of a restructuring plan concerning the
restructuring of debts where this is necessary to avert
imminent bankruptcy. The purpose of the proposal is to
introduce formal reorganisation proceedings containing
elements which are comparable to the US Chapter 11 and UK
scheme of arrangements. Although the wording of the
proposal is not yet officially published, it is understood that
the proposal contains mechanisms that allow for changing the
rights of creditors.
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miyetti law
Dr. Jennifer Douglas-abubakar
Jude odi
nigeria
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Nigeria is a substantially creditor-friendly jurisdiction, especially
for debts acquired by Nigeria’s public assets management body, i.e.
Assets Management Corporation of Nigeria (AMCON). With
creditors other than AMCON, the extant laws still tilt highly in
favour of creditors, who have an array of options, including winding
up, by which they may realise or recover debts.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Legislative frameworks in Nigeria have made express provisions for
formal restructuring and insolvency proceedings in the form of
mergers or amalgamations, takeovers, acquisitions, bankruptcy or
winding up proceedings. (See Sections 117–152, Investment and
Securities Act, 2007 (ISA) which laid down the procedures for
such.) Insolvency proceedings are more formal as provided for
under the Asset Management Corporation of Nigeria Act
(AMCON Act), 2010 (as amended), for AMCON-acquired debts,
and under the Companies and Allied Matters Act (CAMA), Cap.
C20, LFN 2004 and the Bankruptcy and Insolvency Act (BIA),
2017 for other debts.
On the other hand, informal work-outs are accommodated by extant
laws, albeit without detailed regulations. For instance, under the
Banks and Other Financial Institutions Act (BOFI Act) Cap. B3,
LFN 2004, a bank can enter into an agreement or arrangement that
will result in: the change in control of the bank; sale, disposal or
transfer of the whole or any part of the business of the bank;
amalgamation or merger of the bank with any other person;
reconstruction of the bank; or employment or transfer of the business
of the bank to a management agent. Whatever the restructuring
might be, Section 7 BOFI Act requires prior consent of the Governor
of the Central Bank of Nigeria (CBN). Similarly, the AMCON Act empowers AMCON to accept work-outs or indulge a restructuring.
With respect to other private creditors, work-outs and restructuring
are feasible only to the extent spelt out in loan agreements, offer
letters or as may otherwise be mutually agreed by the parties.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The Directors of a company in financial difficulty are liable to be
proceeded against if found wanting under Section 290, CAMA. This
Section provides that where money and/or property was received by
a company by way of loan for specific purpose or by way of advance
payment from a party for the execution of a contract or project, and
not so channeled, the directors and/or officers would be personally
liable to the party for such misappropriation.
In terms of duties, the directors owe a duty to make a declaration of
solvency or otherwise at a General Meeting of the company. Where
the company is found to be in financial difficulties, it may elect to
voluntarily wind up. Otherwise, creditors of the company may file
a petition in court to wind up the said company. Where this is the
case, the Board of Directors has a duty to approve the special
resolution and call an Extraordinary meeting. Additionally, where a
receiver/manager or a liquidator might have been appointed to
assume management of a company, the Directors shall become
functus officio (without further authority or legal competence).
However, while at the helm of affairs over a company in financial
difficulties, the Directors must take care to ensure that the monies
received by way of loan or advance payment are channeled to the
right source, or risk personal liability. Likewise, BIA entitles a
trustee to bring an application to court, and the court may inquire
into any transactions (e.g. dividend redemption or purchase on
cancelled shares) approved by the Directors of a company, to
ascertain whether it occurred at a time when the corporation was
insolvent or whether it rendered the corporation insolvent. If the
court finds that the act of the Directors in this regard has rendered
the company insolvent, the court will enter judgment against the
directors in the amount of the dividend or redemption or purchase
price, with interest thereon.
With regards to the time frame for a company to restructure, there is
no specific point at which a company must restructure, as
restructuring is a continuous process and could occur in moments of
solvency (e.g. arrangement on sale) or insolvency (compromise).
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For insolvency proceedings, however, it may be initiated once a
company, after being served with demand notice, fails or is unable
to pay any debt in excess of N2,000. This is as provided for in
Section 408, CAMA and upheld in the recent Supreme Court
decision of Unifam Ind. Ltd. v. Ecobank (Nig.) Ltd. [2019] 1 NWLR (Pt. 1653) SC 187.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Statutory bodies including AMCON, the Nigerian Deposit
Insurance Corporation (NDIC), the Securities and Exchange
Commission (SEC), the Corporate Affairs Commission (CAC), the
National Social Insurance Trust Fund (NSITF), the Federal Inland
Revenue Service (FIRS) have influence over a company’s situation.
These, however, are substantially regulatory, except for AMCON,
NSITF and FIRS, which are purely debt, social insurance and tax
recovery agencies, respectively. Other stakeholders that might
influence the situation of a company, especially in times of financial
difficulties, are debenture holders, employees and landlords.
The law defines their priority, how and when they can bring an action
against a company and to what extent they can recover. Under the
relevant laws, preferential payments shall be made to pay off debts in
the nature of charges, rates and other taxes that the company owes,
within 12 months preceding its insolvency. Deductions accruable to
NSITF and wages or salaries of clerks, servants, workmen, labourers
or employees of the company also enjoy priority. Likewise, a
landlord of a property demised to a company is equally entitled to
claim payment from the company or its liquidator for arrears of rent.
With respect to restructuring, such as mergers, the same will not be
sanctioned (made enforceable) by the court until adequate provisions
are made for the employees to be affected.
The moratoria allowed for commencement of bankruptcy and
winding up proceedings under AMCON Act are 30 and 60 days from
the date of judgment and bankruptcy, respectively. With respect to
other creditors, moratoria are as spelt out in the loan agreements or
offer letters duly executed by the company and its creditor.
Stay on enforcement can only operate against unsecured creditors.
Secured creditors cannot be restrained from the realisation of a loan
before winding up proceedings. Additionally, under Section 412, CAMA, where a petition for the winding up of a company is before
a court, a company, its creditor or its contributory may obtain a stay
or restraining order against all other suits in any other court, pending
the outcome of the winding up proceedings, or apply to have such
other matter transferred to the court hearing the petition.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The directors of a company can lawfully act for and on behalf of a
company until a receiver/manager or liquidator is appointed either
by the company, creditors or by the court. At such point, every
action taken for the company must be made by the receiver/manager
or liquidator; otherwise, it is voidable. A member of a company,
past or subsisting director or officer, a creditor, the CAC or any
other appropriate person may apply to the court for remedies where
it is perceived that the business of a company has been conducted in
an unfairly prejudicial and oppressive manner. Such remedies
include rescission of a transaction, damages and criminal indictment
and/or conviction. Likewise, a company and its affairs may be
investigated by the CAC and where the investigation may result in
civil action or criminal proceedings (piercing the veil) of the
company, to make the culpable alter egos (agents) accountable.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
An informal work-out is possible in Nigeria. It will, however,
require the concession of the parties, especially the creditor, to take
place. For AMCON acquired loans, AMCON has a statutory power
to initiate or participate in any restructuring, rearrangement or other
compromises. Further, with respect to banks and other financial
institutions, as noted in question 1.2 above, they can enter into an
agreement or arrangement with the consent of the CBN Governor.
Indeed, there had been quite a number of such restructuring since the
continual recapitalisation exercise by the CBN which started in 2009.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
The formal restructuring procedures available in Nigeria are
numerous. Prominent among these are mergers, takeovers and
acquisitions. It is apt to say that swaps are permissible in Nigeria.
Section 160 (2), CAMA allows a company to acquire its own shares
for several purposes, one of which is to settle or compromise a debt
or claim asserted by or against it, or satisfy the claims of a dissenting
shareholder. Also, Section 166, CAMA allows a company to borrow
money for the purposes of business or objects and may mortgage or
charge its undertakings, property and uncalled capital, or any part
thereof, and issue debentures, debenture stock and other securities
whether outright or as security for any debt, liability or obligation of
the company or a third party. Lastly, Section 383 (3), CAMA, gives a
clear indication of the power of Nigerian companies to allot unissued
shares to debenture holders or creditors as shares fully paid up.
The restructuring procedures are never embarked upon without
carrying the stakeholders along. Merging companies must hold
separate meetings and obtain a yes vote of persons who own at least
¾ of the total value of shares in the companies. With respect to
intermediate and large mergers, notices of the proposed merger must
be served, personally or through trade unions, on the employees to
be affected by the merger. Sections 129 and 130, ISA makes an
ample provision by which a transferee company may acquire shares
of dissenting shareholders, and the right of dissenting shareholders
to compel acquisition of their shares, respectively. For mergers, the
transferee company must command at least 51% of the controlling
shares of the transferor company, whereas for takeover, control of
up to 30% would be sufficient to kickstart the bid. It might be a
regular or hostile takeover. The Takeover Bid must be served on the
SEC, the board of directors of the companies, the shareholders and
the creditors of the target company. Nine tenths of the members of
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the target companies must endorse it for it to scale through. The
interest of the dissenting � can be acquired, at a price to be fixed by
a court-appointed independent share valuer. To this extent, it is right
to say that dissenting classes of shareholders can be crammed down.
3.3 What are the criteria for entry into each restructuring procedure?
The foremost criteria for entry into a merger as noted in question 3.2
above is for the acquiring or transferee company to wield a
controlling share interest of at least 51% in the targeted company.
Other detailed criteria for a merger is determined by the size of the
merger, which could be small (not more that N500 million worth),
intermediate (more than N500 million but less than N5 billion worth)
or large (more than N5 billion worth, or exactly N5 billion worth)
merger. For the most part, however, the common criteria are that
SEC must be notified, SEC must consider its suitability vis-à-vis
competition and public policy. Upon SEC approval, it must be
sanctioned by order of the Federal High Court which must be
gazetted and published in at least one national newspaper.
The criteria for takeover are a controlling share interest of at least
30% in the target company, a resolution by the acquiring/controlling
company, a takeover bid document, an inspector to be appointed by
SEC to consider the fairness of the bid and prepare a report on same
and sanctioning order by the FHC of the report.
3.4 Who manages each process? Is there any court involvement?
Informal restructurings that are done internally are piloted by the
directors and shareholders of the company, sometimes with
influences from creditors. The company only ensures statutory
regulations are adhered to.
For formal restructurings that are often external, the SEC manages
most of the processes. The CAC comes in mostly in the returns area
by the company to update their records.
As for court involvement, the Federal High Court is involved in both
mergers and takeovers. Additionally, AMCON may be involved in
a restructuring, utilising as appropriate or a judicial involvement.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A contract duly entered into in compliance with CAMA shall
survive every restructuring procedure and be enforceable against the
entity that emerges from such restructuring unless the contract itself
takes into account the event of the restructuring of the company.
According to Section 71(2), CAMA, an existing contract shall bind
the company and its successors and all other parties thereto, their
heirs, executors, or administrators, as the case may be.
It is important to note the peculiarity with AMCON-acquired assets.
The recent amendment (Section 4, Asset Management Corporation of Nigeria (Amendment) Act, 2015) entitles AMCON to ‘rights’
alone, without any prior existing ‘obligations’. Thus, giving a rigid
interpretation may suggest that AMCON may refuse to be bound by
a contract between a third party and the bank from which AMCON
acquired an eligible asset. Parties obliged under such contracts may
apply for it to be varied or discharged mutually. Often, because of
the insertion of arbitration clauses in such contracts, the party may
decide to terminate the relationship and where the facts create a
possibility for set-off, it may be adopted to fully discharge the rights
and obligation between the parties.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Internal restructuring is funded internally. Company stakeholders,
including shareholders, debenture holders, creditors and directors,
depending on the module of restructuring involved, may be
expected to make compromises. For external or more formal
restructurings like mergers and takeovers, the funding is handled by
both companies, but substantially by the acquiring or transferee
company. With regards to rescue financing, Section 383 (1), CAMA
requires the directors of the company to earmark a reasonable sum
as a reserve and capitalisation before making any declaration for the
dividend at the end of any financial period.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are two broad types of winding up proceedings in Nigeria:
compulsory winding up (i.e. winding up by the court, or subject to the
supervision of the court); and voluntary winding up (i.e. members’
voluntary winding up and creditors’ voluntary winding up).
4.2 On what grounds can a company be placed into each winding up procedure?
The grounds for winding up by the court are: inability of a company
to pay its debt; shortfall in membership of the company below two
adults; default in filing of statutory report by the company; where a
court considers winding up just and equitable; or where the
members by a special resolution call for a court winding up.
Sometimes, a company may pass a resolution for voluntary winding
up but the court is petitioned for the processes to be completed by
the court. Then it is said to be winding up subject to the supervision
of the court.
The grounds for members’ voluntary winding up are effluxion of the
lifespan of the company or happening of a predefined occurrence
after which the company was to be wound up as provided in its
article of association, and where the company decides by a special
resolution that it be wound up voluntarily.
The ground for a creditor’s voluntary winding up is an inability on
the part of the directors of the company to issue a declaration of
solvency pursuant to Section 462, CAMA.
4.3 Who manages each winding up process? Is there any court involvement?
A substantial number of interfaces take place in all the winding up
procedures, involving different persons at different stages. For a
winding up by the court or subject to the supervision of the court, the
Board of Directors, the Extraordinary General Meeting, CAC, a
provisional liquidator, the FHC and a liquidator are all involved at
different stages. Upon the appointment of the provisional
liquidator, the directors take a back seat, and the liquidator becomes
the key person who follows the procedure through.
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In the case of a members’ voluntary winding up, the Directors, the
General Meeting, a liquidator, an auditor and CAC are involved at
different stages. Again, the directors hand over to the liquidator
immediately once he is appointed.
A creditors’ voluntary winding up engages the Directors, the
General Meeting, the creditors of the company, the Liquidator (who
is appointed as the pilot by the creditors), the Extraordinary General
Meeting, the auditor and the CAC.
Ultimately, the Federal High Court is vested with the exclusive
power to wind up a company.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
In a creditors’ voluntary winding up proceedings, the creditors play
key roles capable of greatly influencing the process. Section 473, CAMA gives the creditors a wide power in the appointment of the
liquidator for a creditors’ voluntary winding up. Upon such
appointment, the directors of the company must refrain from the
running and management of the company. The creditors, however,
retain the power to fill vacancies for the position of liquidator
occasioned by either death, resignation or otherwise. Moreover, the
creditors may decide to appoint a committee of inspectors which
oversees the activities and determines the remuneration of the
liquidator(s).
The influence shareholders have over any winding up proceedings
lies in their power to vote at every general meeting, including one
for a resolution to commence winding up proceedings. As such,
they have the potential to halt the process. Even minority rights are
protected through the existence of a company, in the event that a few
shareholders are dissenting.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
As with question 3.5 above, a valid contract entered by a company
being wound up subsists even after winding up, unless the contract
provides otherwise. The receiver/manager or liquidator has a duty
to take care of all liabilities and assets of the company, which must
be distributed in the order of priority and on the basis of laid down
guidelines. Under Section 441, CAMA, the court may, at any time
after making a winding up order, make an order on any contributory
for the time being on the list of contributories to pay, in the manner
directed by the order, any money due from him or from the estate of
the person whom he represents to the company, exclusive of any
money payable by him or the estate by virtue of any call. Moreover,
when all the creditors are paid in full, the money due on any account
whatsoever to a contributory from the company may be allowed to
him by way of set off against any subsequent call. It is important to
note that any conveyance, mortgage, delivery of goods, payment,
execution or other act relating to property, where done by or against
a company, in fraudulent preference of its creditors, in the event of
its being wound up, shall be invalid.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The ranking of claims are deemed as followed:
1. costs and expenses of winding up;
2. secured creditors;
3. social and contractual liabilities, such as:
■ local rates and charges, all pay-as-you-earn tax deductions,
assessed taxes, land tax, property or income tax assessed on
or due from the company;
■ deductions under the Nigeria Social Insurance Trust Fund
Act;
■ wages or salary of any clerk or servant in respect of services
rendered to the company;
■ wages of any workman or labourer, in respect of services
rendered to the company; and
■ accrued holiday remuneration payable to any clerk, servant,
workman or labourer or their heirs on the termination of their
employment before or by the effect of the winding up; and
4. debenture holders under a floating charge and other
unsecured creditors.
4.7 Is it possible for the company to be revived in the future?
A wound up company can still be revived in the future. Section 524, CAMA gives room for a company under liquidation to be revived.
The law also provides for the voiding of a dissolution order within
two years upon the application of an interested party or the liquidator.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Restructuring or insolvency does not usually attract the risk of direct
taxation. Indirect taxes or incidental taxes might, however, come in
the territory of stamp duties, value-added taxes on professional
services retained, withholding tax on dividends offset or tax on
gains of capital asset disposal.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment contracts are usually reviewed or terminated during
restructuring or insolvency, respectively. An employee may be
reabsorbed or laid off after a restructuring, hence the provision under
ISA for them to be put in the picture during such restructuring. With
respect to insolvency, their job cannot be safeguarded. However, they
are settled as discussed in question 4.6 above. Finally, Section 566, CAMA empowers a company to make provisions for its employees on
cessation or transfer of its business, where said provisions can be made
from the undertakings of the company itself, or its subsidiaries, if any.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
SEC reserves the power to authorise and regulate cross-border
securities transactions. However, foreign direct investment requires
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domestication of a company in Nigeria by its parent branch outside of
Nigeria. For instance, Celtel was severally restructured as Vmobile,
Zain and currently Airtel but is not a wholly Nigerian company.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
This depends on the rule of reciprocity where similar decisions from
Nigerian courts will be enforced. This is possible via bilateral
arrangements as per Section 10, Foreign (Reciprocal Enforcement) Act. This section requires the existence of a satisfied foreign
monetary judgment.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Save for the provision of CAMA that requires foreigners holding
shares undergoing compromises, restructuring or other forms of
arrangements to obtain SEC approval, there is no other law that
recognises the enforcement of cross-border insolvency procedures,
unless if in conformity with what is obtainable as discussed in
question 7.2 above. Noteworthy, SEC has the power to authorise
and regulate cross-border securities transactions, and may to this
extent, have control over cross-border insolvency proceedings
involving securities companies.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There are no specific provisions of the CAMA that deals with the
restructuring or liquidation of a group of companies. However, if
individual companies are in such a situation, they may appoint the
same insolvency officers so as to save cost and avoid multiplicity of
actions. There are also provisions for audits and investigations to
extend to subsidiaries of groups of companies or a holding
company. CAMA also requires the directors of a group of
companies to also prepare group financial statements annually.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The CAMA (Amendment) Bill has been passed by both Houses of the
National Assembly, though it is awaiting presidential assent. Some
notable changes in the new bill include: the provision for e-
registration; pre-action notice and a restriction on the levy of
execution; increase in the minimum share capital for companies;
electronic signature; exemption from audit requirements for small
companies; and registration of a one-man company, etc. There is
also the Bankruptcy & Insolvency Act, (Repeal & Re-enactment) Bill, 2016. Experts have been brainstorming on the need for
insolvency proceedings to be settled out of court, thereby exploring
the Alternative Dispute Resolution (ADR) schemes. This is geared
towards ensuring that companies may be able to settle their debts (at
agreed periodic intervals) thereby minimising the risk of being
liquidated.
Acknowledgments
The authors would like to thank others who worked on this
contribution: Umar Abubakar; Ifedolapo Oladimeji; and Jennifer
Chu.
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Dr. Jennifer Douglas-Abubakar Miyetti Law 1 Nwaora Close, Off Gana Street Maitama, FCT Abuja Nigeria Tel: +234 09 904 6440
Email: [email protected]
URL: www.miyettilaw.com
Jude Odi Miyetti Law 1 Nwaora Close, Off Gana Street Maitama, FCT Abuja Nigeria Tel: +234 8090 205 904
Email: [email protected]
URL: www.miyettilaw.com
Miyetti Law is a boutique law firm providing representation to individuals and organisations worldwide. With over a decade of collective experience, our lawyers provide representation to foreign and local business organisations in corporate, energy, financial and other related sectors. Our team of lawyers and legal specialists approach complex legal problems using expert knowledge of the current domestic legal environment and international resources.
At Miyetti Law, our lawyers have real-world business experience and are ready to work with individuals and organisations to ensure that the legal advisory provided helps clients meet their short-term objectives and long-term goals.
Miyetti Law adopts an inventive approach to handling different clients’ issues via a multi-disciplinary approach to legal advisory. This approach incorporates solutions from the legal field and public policy, business sector and expert partnerships to mention a few. We provide customised solutions in the areas of corporate services and complex corporate litigation, international law, private client and government relations.
Jennifer Douglas-Abubakar is the Managing Partner at Miyetti Law in Nigeria. Her practice focuses on corporate financing transactions and transnational asset recovery. Jennifer provides strategic counsel and general advisory to governments, domestic and international corporations navigating the regulatory environment in Nigeria. Jennifer is also the Editor-in-Chief of the Miyetti Quarterly Law Review.
Jude is a versatile litigation attorney and chartered tax consultant. He heads the litigation team at Miyetti Law. He is renowned for his attention to detail, in-depth research and analysis of issues. His dynamism and sound legal rhetoric has earned him commendation and admiration from clients, the bar and the bench. His practice areas include: litigation; tax advisory and enforcement; asset tracing and debt recovery; election & constitutional matters; anti-graft; criminal and court martial trials; and labour law.
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synum aDv
alexander Zadorozhny
artem Kazantsev
russia
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Russian bankruptcy legislation may be characterised as pro-creditor,
both in theory and practice. The following provisions of the Federal
Law No. 127-FZ “On insolvency (bankruptcy)” (the “Law on
Bankruptcy”) emphasises Russia as a pro-creditor jurisdiction, due to:
■ enhancement of subsidiary responsibility of the persons
controlling the debtor, including the presumption of guilt for
controlling persons under certain circumstances, the
challenging burden of which is assigned to the controlling
person. Herewith, the controlling person can be brought to
subsidiary responsibility both out of the bankruptcy matter
and in the case of its termination;
■ special bankruptcy conditions for challenging a debtor
transaction, which resulted in the withdrawal of assets or one
or several creditors were provided with a preferential
satisfaction of obligations;
■ banks and tax authorities are entitled to apply for debtor
bankruptcy without court resolution, as opposed to all other
creditors, which right to apply for bankruptcy arises upon a
legally effective court decision on debt collection;
■ pledge lenders are entitled to vote on the meetings of the
creditor on key aspects, including the selection of an applicable
bankruptcy proceeding as well as the matters referring to
removal or selection of an insolvency manager candidate;
■ deprivation of the debtor’s right to choose an insolvency
manager candidate in case of initiation of the bankruptcy
matter by such debtor; and
■ authorisation of employees to apply for declaration of
bankruptcy of the employer without any costs to the
bankruptcy matter.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The Law on Bankruptcy obliges the management of a company to
take measures on bankruptcy prevention should financial
difficulties arise, which may lead to the initiation of a formal
bankruptcy procedure.
The obligation of bankruptcy prevention is assigned to managers,
shareholders and other persons, who may give mandatory
instructions to a company’s management.
In relation to the companies carrying out ordinary business (small
and medium-sized business) the bankruptcy legislation does not
contain a list of specific measures that the management of the
company should take in order to prevent bankruptcy. Meanwhile,
there is a provision in Russian legislation obliging the manager to
take measures on bankruptcy prevention.
Such measures can be taken in the form of reestablishing a debtor’s
solvency. Herewith, the creditors can directly participate in such
reestablishing through entering into the agreements with the debtor.
Russian legislation specifies financial recovery as one of the
bankruptcy prevention measures, which result in the provision of
financial aid to the debtor by shareholders in an amount sufficient to
satisfy all the debts of the debtor.
The regulation of banks’ bankruptcy prerequisites is accounted in
more detail in the Russian bankruptcy legislation.
The legislation provides the following measures on the prevention
of bankruptcy in banks, which can also be applied to ordinary
companies:
■ financial recovery of the company, may include the following
measures:
1) financial aid to the company from its subscribers and
other persons;
2) change of the structure of the assets and liabilities of the
company;
3) change of the organisational structure of the company;
and
4) harmonisation of the share and equity capital of the
company;
■ company reorganisation; and
■ other measures.
Considering that the list of measures on bankruptcy prevention both
for ordinary companies and banks is non-exhaustive and subject to
broad interpretation, managers have the right at their discretion to
take any measures that can potentially help to overcome financial
difficulties.
Such measures may include the agreements with the creditor on
change of obligation terms, deferred payments, decrease of interest,
provision of compensation and novation of the obligations.
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2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The Law on Bankruptcy provides for the possibility of bringing the
head of the company to administrative and criminal liability, as well
as imposing liability on the head of the company in terms of
liabilities that were not paid during the bankruptcy procedure.
Bringing the head of the company to subsidiary liability is possible
in the following cases:
■ If the actions of a manager, shareholder or other controlling
person have become a proven reason for failure in repaying
all claims of the creditors in full. In this case, the amount of
liability is equal to the amount of the creditors’ claims, which
were not cancelled during the bankruptcy procedure.
■ If the manager, shareholder or other controlling person has
not timely applied to the court with a statement on
bankruptcy of the debtor. In this case, the amount of
subsidiary liability is equal to the amount of unpaid claims
that arose after the obligation to file for bankruptcy appeared.
Russian bankruptcy laws have established the following cases
where the debtor’s manager is obliged to file a bankruptcy petition
with a company:
■ payment in favour of one creditor or several creditors will
make it impossible for the debtor to fulfill monetary
obligations in full to other creditors;
■ decision of the head of the company on liquidation of the
debtor with subsequent application to the arbitration court on
recognising the insolvency of the debtor;
■ foreclosure of the debtor’s property will significantly
complicate or make the economic activity of the debtor
impossible;
■ the debtor meets the criteria of insolvency and/or insufficiency
of property; and
■ there are wage arrears outstanding for more than three
months due to insufficient funds.
The obligation to file a bankruptcy petition must be performed by
the manager within one month after the occurrence of any of the
circumstances above.
The head of the company may be held: (a) criminally liable in the
event that the bankruptcy of the company is proved to be fictitious
or deliberate; and (b) administratively liable for failure to comply
with the requirements of bankruptcy laws.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Other interested persons who may influence the company through the
initiation of a bankruptcy matter, except the head of the company, are:
■ shareholders/members;
■ other controlling persons of the debtor;
■ liquidator or liquidation committee;
■ employees of the debtor; and
■ creditors.
According to Russian bankruptcy legislation, the controlling person
of the debtor is a person, that has or had the right to give mandatory
instructions to the debtor or an opportunity to define its actions
otherwise, including instructions on entering into the transactions
and defining their terms, for not more than three years prior to the
signs of a bankruptcy arising, before the debtor’s bankruptcy
application was adopted by the arbitration court.
In the event a company manager failed to apply to the court for
bankruptcy of the company, shareholder or other controlling person
of the debtor, they may demand an early meeting with the managing
body of the company in order to apply to the arbitration court for
bankruptcy of the debtor.
Russian bankruptcy legislation obliges the liquidator to apply for
bankruptcy of the debtor, in the event the company meets the signs
of insolvency and/or lack of property within the liquidation process.
The right of employees or former employees of the company to
apply for bankruptcy arises, if there is an effective court decision on
wage or discharge allowances claims.
There are two types of debtor creditors:
■ creditors with privileged status concerning the origination of
the bankruptcy matter – banks and tax authorities, which may
apply to the bankruptcy of the debtor without an effective
court decision; and
■ ordinary creditors and creditors secured by a pledge, which
have the equal right to originate a bankruptcy matter, provided
that there is an effective court decision on debt recovery.
Hereafter, creditors secured by the pledge have sufficiently
limited voting rights on the meetings of the creditors.
The question of moratorium and suspension of obligation performance
is regulated individually for each procedure applicable in the
bankruptcy matter and depends on the scope of activities of the
debtor (banks, insurance company, town-forming enterprises, etc.).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Transactions that are committed by a company in the face of
financial problems that have occurred may be invalidated with the
use of corresponding consequences, both for general reasons and for
special reasons provided for by the Russian bankruptcy legislation.
The transactions made at pre-foreclosure stage fall into shady and
preferential transactions.
In turn, shady transactions fall into transactions made with the
purpose to cause property damage to creditors and transactions with
unequal counter-performance.
A transaction with an unequal counter-performance is a transaction
made within one year prior to, or after the adoption of a bankruptcy
application, if the debtor transferred property at a price lower than
the price at which similar transactions are carried out.
A transaction made with the purpose of causing damage to creditors
is a transaction made within three years prior to the adoption of a
bankruptcy application, or after it, if the transaction resulted in the
alienation of property of the debtor and the other party was aware of
the purpose of the transaction made.
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A preferential transaction is a transaction made within one month
prior to the adoption of the bankruptcy application, or after it, if such
transaction influences or may influence a preference towards one of
the creditors instead of another creditor.
The consequence of rendering the abovementioned transactions
ineffective is returned to the debtor of the assets, which were
transferred by the debtor and withdrawn from him under the
transaction. In case of the impossibility to return the property to the
debtor, the counterparty to the transaction should compensate the
market value of the assets from the moment it was acquired, as well
as the damages caused by its subsequent price change.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Informal work-out procedures are the more preferred means of
solvency reestablishing in Russia than the procedures stipulated in
the Law on Bankruptcy due to an unsatisfactory level of legal
regulation of rehabilitation procedures and their rare implementation
in practice.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
The restructuring can be carried out at several stages of the
bankruptcy procedure, which consists of observation, external
management, financial recovery, settlement agreement and
bankruptcy administration. The following procedures belong to
solvency rehabilitation: financial recovery; external management;
and settlement agreement.
Besides, the Law on Bankruptcy provides sanation. Sanation is a
provision of financial assistance by the shareholders of the company
in order to reestablish debtor solvency. Russian legislation does not
contain a detailed regulation of sanation. The provision of financial
assistance can be accompanied by obtaining obligations by the
debtor or other persons in favour of the persons which provide
financial assistance.
Financial recovery procedure is applied in respect of the debtor in
order to reestablish its solvency and debt repayment in accordance
with an approved schedule.
The purpose of external management is financial recovery of
enterprise with transfer of management authorities of the debtor to
the receiver. External management is carried out in accordance with
the schedule approved by the creditors.
A settlement agreement can be concluded at any bankruptcy stage
that should contain the conditions on procedure and terms of
obligation performance of the debtor in monetary form.
In respect of a pro-creditor orientation of regulation, the procedures
aimed at recovering the company are rarely applied in practice. The
creditors usually choose bankruptcy administration, as a rule, in
order to enforce the recovery of property at a reduced value, which
is defined by tender.
Replacing of assets is possible at the stage of external management
and bankruptcy administration. The decision to replace assets shall
be taken only by unanimous approval of the creditors secured by the
pledge.
Shareholders, minority lenders and other persons do not have the
option to obstruct decisions on implementation of a certain bankruptcy
procedure, which was adopted by the meeting of shareholders.
3.3 What are the criteria for entry into each restructuring procedure?
The observation procedure is the first stage of bankruptcy, which
can be initiated by both the debtor and the creditor.
After observation, on the basis of the decision of the first meeting of
creditors, the court makes a decision on the introduction of the
following procedure. The decision is made at the creditor meeting
by a majority vote.
In order to participate in the creditor meeting, the latter must be
included in the register of creditors’ claims.
Financial recovery is introduced at the request of the debtor on the
basis of the decision of its members, which is approved by the
majority of creditors.
External management is introduced on the basis of the creditors’
decision.
A settlement agreement shall be accepted by a majority of creditors’
votes and is considered accepted once all the creditors secured by
the pledge have voted for it.
Sanation may be carried out only in case of the provision of
financial assistance to the debtor by its founders, creditors or third
parties. Provision of financial assistance may be accompanied by
the commitment of the debtor or other persons in favour of the
persons who have provided financial assistance.
3.4 Who manages each process? Is there any court involvement?
In bankruptcy procedures, debtor management is carried out by an
insolvency officer that is approved by a majority vote on the meeting of
creditors of the debtor. Functionality and obligations of the insolvency
officer varies depending on the stages of bankruptcy procedure.
The whole bankruptcy procedure is under the control of the court that
makes decisions on key aspects of the procedure, including: the
approval of an insolvency officer candidate selected by the creditors;
approval of the bankruptcy stage selected by the creditors;
consideration of individual disputes within the bankruptcy matter
referring to the inclusion of creditors on the list of creditors; claims of
actions/omission of the insolvency officer; the recovery of the damages;
the question of challenging the transaction of the debtor made with
preference or fraudulent conveyance; and bringing controlling persons
of the debtor to subsidiary liability (corporate veil piercing).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
From the date that recognises the debtor as bankrupt, the period for
the fulfillment of obligations under contracts arising prior to the
recognition of the debtor as bankrupt is considered to have occurred.
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Therefore, all creditors have the right to demand performance of the
contract by filing an application for inclusion in the register of
creditors’ claims, after which the arbitration court can verify the
reasonableness of the creditors’ claims.
External management procedure provides for the right of the debtor
to refuse to execute transactions if they interfere with the restoration
of the debtor’s solvency. In this case, the counterparty has the right
to demand compensation from the debtor for damages caused by the
refusal. This waiver cannot be filed in respect of transactions
concluded during the observation with the consent of the insolvency
manager or during the financial rehabilitation.
After the introduction of bankruptcy, the creditor’s claims against
the debtor are not allowed.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
As a general rule, the bankruptcy procedure is financed through the
property account of the debtor.
If the property of the debtor is insufficient for financing the
procedure, the court may assign creditors to finance the procedure
with their consent. The court may also require the creditor to
transfer funds on a special deposit account of the court.
If the property of the debtor is insufficient or no consent of the creditors
is obtained, the court can terminate the bankruptcy procedure.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The bankruptcy of a debtor being liquidated is the key insolvency
procedure available to wind up a company. The debtor is liquidated in
the manner prescribed by the Law on Bankruptcy, if the value of the
property of the debtor, in respect of which the decision on liquidation
was made, is insufficient to satisfy the claims of the creditors.
In addition to the bankruptcy of the debtor being liquidated, the
meeting of creditors or the person providing security during the
financial rehabilitation of the debtor has the right to decide on the
reorganisation of the debtor through merger, accession, division,
separation or transformation, while the debtor ceases to exist in all
types of reorganisation, except for separation.
4.2 On what grounds can a company be placed into each winding up procedure?
Any winding up procedure is introduced only by the decision of the
court based on the application received from the owners of the
company, creditors of the company or tax authority.
The reorganisation of the company with subsequent liquidation of
the debtor requires a relevant decision from the creditors’ meeting
and the application of a company’s CEO in the event the
reorganisation helps to restore the company’s solvency.
4.3 Who manages each winding up process? Is there any court involvement?
Each winding up process is managed by a liquidation manager. An
insolvency winding up procedure develops within a particular
matter of the court under regular control of the judge.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Shareholders have no influence on the winding up process, as the
shareholders’ meeting can lose its power after an insolvency manager
enters into power. In the meantime, creditors have all the influence on
the process due to the key role of the resolution of the creditors’
meeting. Actions decided during the creditors’ meeting have no
restrictions subject to its compliance with the law. For example, the
right to determine the procedure and conditions for the sale of the
pledged property in the bankruptcy proceedings, as well as the right to
first priority satisfaction of their claims from the money raised from the
sale of the pledged property, is granted only to the secured creditors.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Refusal to execute existing contracts and other transactions of a
debtor can be declared, if such transactions impede the restoration
of the debtor’s solvency or if the debtor’s execution of such
transactions entails losses for the debtor as compared to similar
transactions concluded with comparable circumstances.
It is not allowed to terminate the debtor’s monetary obligations by
offsetting a homogeneous claim, if this violates the legal order of
satisfying creditors’ claims.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
It is necessary to distinguish competitive and current (extraordinary)
lenders.
Only those creditors of a debtor whose monetary claims arose
before filing an application to the court of arbitration for declaring a
debtor insolvent (bankrupt) can be recognised as bankruptcy
creditors. If the claims against the debtor appeared after the
introduction of the monitoring procedure, then such creditors are
current creditors.
Claims of current creditors are satisfied in the course of insolvency
procedures, regardless of the transition to settlements with creditors,
while satisfaction of the requirements of bankruptcy creditors
occurs only in the case of transition to settlements with creditors.
Current claims are ranked in the following order:
■ The first order: current payments of the debtor, to include
payment for the services of an arbitration manager, court
costs and other costs associated with property management.
■ The second order: requirements of the employees who quit
both before and after the declaration of bankruptcy. Payment
of wages for the worked period and severance pay is carried
out, except wages of the head, chief accountant, their
deputies, etc., which shall be paid after the debt repayment to
the first three orders of the creditors.
■ The third order: payment for the services of persons engaged
by an arbitration manager for bankruptcy proceedings and
property management.
■ The fourth order: payment of utility and energy supplying
services.
■ The fifth order: satisfaction of requirements for other current
payments.
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The fulfilment of obligations within one queue takes place in
calendar order.
The following expenses are redeemed out of ranking (before current
claims):
■ claims of creditors for current payments to creditors whose
claims arose before the application for declaring the debtor
bankrupt; and
■ the cost of carrying out activities to prevent the occurrence of
man-made and/or environmental disasters, or death.
Claims of bankruptcy creditors are satisfied in the following order:
■ The first order: payments for causing harm to the life or
health of citizens.
■ The second order: payment of severance payments and/or
wages to persons working under an employment contract,
remunerations to the authors of intellectual property.
■ The third order: payments to the other creditors.
Payment to the creditors for a transaction declared invalid in
bankruptcy proceedings are made after settlements with the other
creditors of the third order.
The claims of creditors for obligations secured by the pledge of the
debtor’s property are satisfied at the expense of the value of the
collateral.
Claims of the owners of bonds with no maturity are satisfied after
the claims of all other creditors are satisfied.
4.7 Is it possible for the company to be revived in the future?
The company may be revived in the following events:
■ restoration of the company’s solvency during either financial
recovery or external management;
■ conclusion of a settlement agreement;
■ refusal of all the creditors involved in a bankruptcy case from
the stated requirements; or
■ satisfaction of all the creditor claims included in the register
of creditor claims in the course of any procedure applied in a
bankruptcy case.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Due to the initiation of bankruptcy matter the debtor and the creditor
have the following tax consequences:
The debtor at any bankruptcy stage remains a taxpayer until the
bankruptcy management procedure is finished.
The debtor should continue to pay property taxes (property tax and
land tax) and keep a record of property sales operations for income
tax and VAT calculation subject to recovery and payment to the
budget, if VAT paid to the seller had been previously declared by the
debtor as tax deduction by acquisition of respective assets. Such
taxes can be recorded as current receivables that are to be satisfied
prior to the other listed claims.
Income tax will occur when the property can be sold at a price
higher than the remaining cost according to balance, and taxable
income will originate. This income will be reduced to current losses
from the collection of receivables and other property (if the cost of
its sale proved to be lower than the remaining cost), to losses formed
by uncollectible debt relief and so on. At the same time, different
situations can occur, and, notwithstanding specified provisions, the
final financial result can be positive. Current income formed during
bankruptcy management can be redeemed by the losses of previous
years. But such redemption can take place under the condition of
documentary confirmation of business transactions for the period of
losses formation, and such redemption cannot cause income tax
reduction for more than 50%. Thus, a positive financial result from
the sale of the property of the debtor under bankruptcy management
is subject to income tax.
As a general rule, asset disposition operations and the sale of
property of the debtor are not subject to VAT taxation. However, the
operations for the performance of works and services, and the
provision of property for use are not excluded from the operations
subject to VAT taxation. That is, if the debtor continues to carry out
income activity during bankruptcy management, the obligation to
pay VAT will increase.
There is also a risk that tax amounts adopted by the debtor to be
deducted by the acquisition of property used in the activity, within
which the operations on products (works, services) sales subject to
VAT taxation were carried out, are subject to recovery. That is, if
bankruptcy management is introduced in respect of the company
and the depreciation term of the property is not expired by the time
of its sale, the amount of previously calculated tax deduction should
be recalculated, as situations can occur where VAT tax burdens in
respect of bankruptcy assets will increase.
From a creditor’s point of view, by the time bankruptcy
management of the debtor is finished, the creditor obtains the right
to acknowledge losses formed due to bankruptcy of the counterparty
for the purpose of income taxation, which is considered to be a
compensatory measure for taxpayers.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
The employees and former employees are entitled to apply for
bankruptcy of the debtor along with the other creditors. The
manager of the debtor should inform employees about bankruptcy
procedure implementation.
The insolvency officer should call a meeting for employees and
former employees, where they will elect a representative to
participate in the bankruptcy procedure, however, it can be held
earlier upon the initiative of the employees or the manager of the
organisation. Herewith, the payment for services of the
representative of the employees should be carried out on account of
the debtor. The representative of the employees has the right to
participate in the meeting of the creditors together with the
employees, but doesn’t have the right to vote. He has the right to
apply to bring the debtor’s controllers to subsidiary liability.
The insolvency officer of the debtor is entitled to dismiss employees
by compliance with the established procedure.
The requirement to pay remunerations and discharge allowances is
a second priority in the claims of the creditors on current payments
(arose upon bankruptcy application and payable prior to listed
claims) – after payment of expenses in respect of bankruptcy
procedure, however, before the rest of current claims.
Employee claims are a second priority in the list of creditors – right
after the claims concerning personal injury and before the rest of the
claims of the creditors.
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Upon the application of an insolvency officer, the court has the right to
reduce the wage rate of the employees, in the event the wage rate was
increased within six months before the bankruptcy application was made.
In the event of a bankruptcy of a town-forming enterprise (an
enterprise with the number of employees exceeding 5,000 persons,
or an enterprise where no less than 25% of a town population is
working) additional guaranties to employees can be provided. That
way, by the sale of an enterprise during bankruptcy, the obligation of
the buyer to retain no less than 50% of workplaces within a specified
term (no more than three years) can be established.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
This question is applicable to Russian legislation and it does not
contain any direct prohibition for foreign persons to go through the
procedure of restructuring or bankruptcy in Russia.
There is a general provision in the Arbitration Procedure Code that
allows Russian courts to consider disputes involving the tight connection
of the legal relationship in dispute with the territory of the Russian
Federation, and there have been cases of carrying out bankruptcy
procedures on foreign citizens on this basis, because they conducted
their main activity in Russia. However, there are no bankruptcy
procedures for foreign entities in the Russian Federation in practice.
That aside, foreign companies may file their claims in the creditors’
claims register for Russian insolvent companies.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Resolutions of foreign courts, including bankruptcy matters, are
recognised and enforced in Russia by judicial procedure as well as upon
international contracts and principles of mutuality. However, Russian
legislation doesn’t consider that bankruptcy is an extended process and
requires separate recognition of every judicial act under one case.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
There are no cases of restructuring or bankruptcy of Russian
companies in other jurisdictions.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Russian legislation does not contain any provisions on the
bankruptcy of corporate groups, and manager cooperation is not
specifically regulated.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The Supreme Court of Russia brought a bill in Russian Parliament,
which suggests the empowerment of insolvency officers to include
the claims of creditors in the register of creditors’ claims
independently, without any adoption of a judicial act. Herewith,
other parties to a case will have the right to challenge such decisions
of an insolvent officer in court. This bill is currently under
consideration by Russian Parliament.
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Alexander Zadorozhny Synum ADV Yakimanskaya Naberezhnaya 4, building 1 Moscow Russia Tel: +7 495 90 99 924
Email: [email protected]
URL: www.synum.ru
Artem Kazantsev Synum ADV Yakimanskaya Naberezhnaya 4, building 1 Moscow Russia Tel: +7 495 90 99 924
Email: [email protected]
URL: www.synum.ru
Alexander Zadorozhny is Russian lawyer with more than 15 years of experience in litigation, bankruptcy and corporate law.
With Alexander’s input, legal disputes have been successfully completed, as a result of which the principals were able to retain ownership of the property that makes up the energy business; large land plots for development and corporate rights. Alexander Zadorozhny has a wealth of experience in supporting bankruptcy proceedings, protecting the interests of both creditors and debtors, including the experience of participating in bankruptcy proceedings of credit organisations.
Alexander is a regular author of bankruptcy articles and relevant lectures.
Alexander holds a Master’s degree in private law from the Russian School of Private Law under the President of the Russian Federation (Moscow). He is fluent in Russian and English.
Synum ADV is a Russian law firm specialising in litigation, bankruptcy and corporate conflicts. Due to rapid development, Synum ADV now successfully represents the interests of major Russian and international companies both in legal consulting and in conflict situations.
Being professional participants of the distressed assets market we represent interests of business in bankruptcy, corporate and property disputes. Synum ADV has consistent experience of solicitation in all instances of state arbitrazh courts, city courts and international commercial arbitration courts.
Synum ADV leverages its unique litigation experience for advising its clients in corporate law issues, the legal support of investment projects and merger and acquisition deals.
Lawyers of Synum ADV have a long record of successfully consulting of companies in respect of a wide range of legal issues, as well as a constant integrated legal support of business.
Artem Kazantsev is Russian lawyer with over 15 years of experience in dispute resolution, bankruptcy and commercial law.
He has a unique experience in developing the laws of the constituent entities of the Russian Federation regulating economic activities.
Artem’s experience includes work in international law firms, such as DLA Piper and Gide Loyrette Nouel.
Artem graduated from Rostov State University and studied in the graduate school of the Moscow State Law University named after O.E. Kutafin. He is fluent in Russian, English and French.
synum aDv russia
chapter 28
allen & gledhill llp
Kenneth lim
edward tiong
singapore
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Singapore takes a relatively balanced stance. Our legislative
framework strives to allow deserving debtors time and space to
resolve short term issues and to propose long term solutions to their
creditors, while ensuring that the interests of creditors are protected
by requiring proof of creditor support and periodic disclosure of
financial information, amongst other things.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Our statutes do not directly address informal work-outs, and debtors
and creditors are free to reach agreements to restructure financial
obligations inter se.
If an informal work-out is not possible, debtors and creditors may
have to resort to the formal restructuring regimes provided under
Singapore law: proposing a scheme of arrangement; or placing the
debtor company under judicial management.
A scheme of arrangement may be proposed by the company to its
creditors on a standalone basis, or may be proposed by a judicial
manager as part of the judicial management process (with some
differences in the judicial management context). Generally, the
value of a scheme of arrangement is that it allows a compromise that
has been approved by the statutory majority and by the Court to
become binding on all of the creditors or the relevant class of
creditors.
The judicial management regime hands control of the debtor
company to a judicial manager and places it under a moratorium,
with the aim of providing some breathing space to either allow the
company to be nursed back into financial health, obtain the approval
of a scheme of arrangement for the company and its creditors or
achieve a better realisation of its assets than would have been
possible in a liquidation scenario. Judicial management is not a
debtor in possession regime, and is particularly helpful when
creditors lack confidence in the existing management of the debtor.
The scheme of arrangement regime is generally more commonly
used than judicial management. Schemes of arrangement are debtor
in possession regimes, and are generally less costly than judicial
management. In addition, the scheme of arrangement regime was
enhanced following amendments to the Companies Act (Cap. 50)
(“CA”) in 2017, which provided enhanced automatic moratorium
provisions to allow debtors time to finalise and propose a scheme to
their creditors, as well as the ability to cram-down dissenting
creditor classes in certain circumstances.
If formal restructuring is unsuccessful, or deemed unlikely to
succeed, the debtor company may be placed into voluntary
liquidation by resolution of its shareholders or into compulsory
liquidation by order of Court. Insolvency proceedings are usually
taken as a last resort.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
In addition to their usual duties, when a company is insolvent or
close to insolvency, directors in carrying out their duties must act in
good faith and give particular regard to the interests of creditors of
the company generally rather than the shareholders, and failure to
do so may give rise to a breach of fiduciary duties.
Furthermore, directors should not cause a company to enter into
voidable transactions, as doing so would be a breach of directors’
duties. We elaborate further on these voidable transactions in
question 2.3 below.
Directors of companies which are insolvent or close to insolvency
also should be wary of committing offences under the Act which
include, in particular, being party to the contracting of a debt when,
at the time the debt was contracted, the director had no reasonable
expectation that the company would be able to pay it.
There is no requirement under Singapore law for a company to initiate
restructuring or insolvency proceedings once a specific threshold or
event has been reached. Anecdotally, debtors tend to delay reaching
out to restructuring professionals until creditor goodwill and funds are
running low. Consequently, restructuring can become more difficult
as a result of inertia. Restructuring professionals should be consulted
when directors become aware of signs of distress in order to reduce
the likelihood of directors becoming personally liable and to increase
the chances of a successful restructuring.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The stakeholders that can influence a company’s situation will vary
depending on the type of business carried out by the company and
the assets held by the company.
Generally, creditors are able to significantly influence the
company’s situation. Secured creditors may appoint receivers to
enforce their security. Creditors may also apply to place the
company under judicial management or liquidation, which as
mentioned above would displace the management of the company
in favour of the nominated judicial manager or liquidator.
Moratoria are available in support of schemes of arrangement and as
part of the judicial management regime, and preclude, amongst
other things: the commencement/continuation of proceedings
against the company; the enforcement of security over property of
the company; and repossession of goods held by the company under,
amongst others, retention of title agreements and the enforcement of
any right of re-entry or forfeiture under any lease of premises
occupied by the company, save with leave of Court.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
A liquidator (or, with Court sanction, a judicial manager) may apply
to reverse or set aside certain transactions entered into before the
commencement of winding up or the making of a judicial
management order. In particular:
(1) transactions at an undervalue;
(2) unfair preferences;
(3) the provision of credit on terms which require grossly
exorbitant payments, or are harsh and unconscionable or
substantially unfair having regard to the risk accepted by the
creditor;
(4) floating charges granted by the company for insufficient or
nil consideration; and
(5) registrable charges which are not registered within the
statutory timelines.
If the statutory requirements are met, the transaction will be voided
and the relevant counterparties will be required to take the necessary
steps to reverse the transaction.
In addition to the above, the Singapore Courts will generally not
give effect to contractual arrangements in a liquidation scenario:
(1) that intend to deprive a party of its property (or rights) on the
insolvency of that party (the anti-deprivation rule); and
(2) that provide a creditor with more than his proper share of the
available assets or where debts due to the creditor were to be
dealt with other than in accordance with the statutory regime
(the pari passu rule).
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
As mentioned above, yes, it is possible to implement an informal
work-out in Singapore.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Singapore law provides for two formal rescue/restructuring
procedures: schemes of arrangement; and judicial management.
Debt-for-equity swaps are possible, and may be implemented as part
of either an informal work-out or a formal restructuring procedure.
A scheme of arrangement proposed between a company and its
shareholders or its creditors outside of judicial management may be
blocked at the scheme meeting by (i) a majority in number of
shareholders or creditors (as the case may be) in a given class, and/or
(ii) shareholders or creditors (as the case may be) representing more
than one-fourth in value of the shareholders or creditors.
In the case of a scheme proposed within the context of judicial
management, it may be blocked at the scheme meeting by creditors
representing more than one-fourth in value of the creditors present
and voting in each class.
Cram-downs are possible. The Singapore Courts retain the power to
approve a scheme of arrangement despite there being dissenting
classes of creditors, if the Court is satisfied that the scheme does not
discriminate unfairly between classes of creditors, and is fair and
equitable to the dissenting class(es).
3.3 What are the criteria for entry into each restructuring procedure?
In relation to a scheme of arrangement, a company should generally
make an application to Court for approval to call a meeting of
creditors after they have formulated a proposal of a scheme to be
considered by the creditors.
In the case of judicial management, a company or its creditors may
apply for the company to be placed under judicial management if
the company is or is nearing insolvency, and there is a reasonable
probability of achieving one of the aims of judicial management, i.e.
rehabilitating the company, preserving all or part of its business as a
going concern, or achieving a better realisation of its assets than
would have been possible in a liquidation scenario.
3.4 Who manages each process? Is there any court involvement?
The scheme of arrangement process is managed by a scheme
manager, who is generally appointed by the debtor company. The
Court is involved at key points in the process, namely deciding
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whether any long term moratorium protection should be extended to
the company, whether a meeting of shareholders or creditors should
be summoned to consider the scheme and whether the scheme
should be made binding after the requisite approval of the
shareholders or creditors has been obtained.
Judicial management, on the other hand, is initiated upon a successful
application to Court for a judicial management order. Following on
from this, the existing management of the debtor company is
displaced in favour of a judicial manager who will manage the affairs,
business and assets of the company. The initial judicial management
order is valid for 180 days, and the judicial manager must return to
Court to apply for any extension of this period. In the meantime, the
judicial manager is required to keep the Court apprised on, amongst
other things, the proposals which he intends to make to the creditors
to achieve the aims of judicial management, and the outcome of the
creditors’ meeting to consider his proposals.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
While a judicial management order is in effect, and where
moratorium protection has been sought to facilitate the proposal of
a scheme of arrangement, creditors will be unable to commence or
continue proceedings against the company without leave of Court.
That being said, it is common for contracts to contain ipso facto clauses,
i.e. clauses which provide that the entry of a contracting party into a
restructuring or insolvency procedure will entitle the other contracting
parties to terminate the contract. These clauses are not currently
affected by the moratoria mentioned above. This position will be
affected by the commencement of the Insolvency, Restructuring and
Dissolution Act. We elaborate further on this in question 9.1 below.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Both restructuring processes are generally funded out of the assets
of the debtor company, unless arrangements can be made with
creditors or a third-party investor or funder.
The Court has the power to grant super priority for financing which
is necessary for the survival of a company or to achieve a better
realisation of its assets than would have been possible in a liquidation
scenario. The Court may in appropriate circumstances order that:
(1) in the event that the company is wound up, the debt shall be
treated as part of the costs and expenses of the winding up, or
shall have priority over other unsecured debts;
(2) the debt be secured by security over unencumbered property; or
(3) if the existing security holder’s interest is sufficiently protected,
the debt be secured by a security interest on property subject to
existing security, on an equal or higher priority than the existing
security interest.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Under Singapore law, a company may be wound up voluntarily or
by order of court, which is also known as compulsory winding up.
Voluntary winding up may be divided into two further categories,
members’ voluntary winding up or creditors’ voluntary winding up.
Generally, compulsory winding up and creditors’ voluntary winding
up apply to insolvent companies, and only solvent companies
should be placed into members’ voluntary winding up.
4.2 On what grounds can a company be placed into each winding up procedure?
A company may be placed into voluntary winding up by the passing
of a special resolution by its shareholders. In the case of a members’
voluntary winding up, the directors of the company must make a
declaration of solvency, stating in essence that they have formed the
opinion that the company will be able to pay its debts in full within
12 months of the commencement of winding up.
If the directors of the company are not able to make a declaration of
solvency, a meeting of the creditors shall be summoned immediately
after the meeting at which the resolution for voluntary is to be proposed,
for the creditors to, amongst other things, nominate a liquidator.
Compulsory winding up is primarily initiated by creditors, rather
than by the shareholders. Briefly, an application must be made to
Court by a party with standing for the company in question to be
wound up. The most common ground for seeking such an order is
that the company is unable to pay its debts.
4.3 Who manages each winding up process? Is there any court involvement?
A liquidator is appointed to manage each winding up process.
However, the party appointing the liquidator is likely to be different
in each case. In a members’ voluntary winding up, the liquidator is
appointed by the shareholders. In a creditors’ voluntary winding up,
the shareholders and the creditors will at their respective meetings
nominate a liquidator, with the creditor’s nomination trumping the
shareholders’.
In the case of a compulsory winding up, the Court is required to exercise
its discretion whether to place a company into winding up or not.
However, once a company is placed into winding up, whether
voluntary or compulsory, the Court is generally less involved than in
the case of a scheme of arrangement or judicial management. That
being said, it is common for liquidators to apply to Court to seek
directions or sanction of major decisions, in particular in relation to
litigation funding, if required.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
In a members’ voluntary winding up, the liquidator will usually seek
the views of the shareholders on important matters.
However, in a creditors’ voluntary winding up or in a compulsory
winding up, the views of the creditors are sought instead.
The creditors may appoint a committee of inspection to represent
the interests of the creditors, and the committee of inspection may
approve the exercise of certain powers by the liquidator.
If the creditors and/or shareholders do not agree with the decisions
of the liquidator, the liquidator, creditor or shareholder may apply to
Court for directions. In appropriate cases, it is possible for the
creditors and/or shareholders to apply to Court to show cause for
removal of a liquidator.
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When a company is put into liquidation, creditors and/or shareholders
will not be able to commence or continue proceedings against the
company without leave of Court. There is generally no restriction
on the enforcement of security, save that the liquidator has the right
to challenge security in appropriate circumstances, e.g. see question
2.3 above.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Save that mandatory insolvency set-off of mutual debts will displace
contractual rights of set-off, the commencement of winding up
generally does not, without more, affect existing contracts.
As mentioned in question 3.5 above, ipso facto clauses currently give
contractual counterparties the right to terminate existing contracts
upon the commencement of insolvency. This position will be
affected by the commencement of the Insolvency, Restructuring and
Dissolution Act. We elaborate further on this in question 9.1 below.
The liquidator may, with leave of Court or the Committee of
Inspection, disclaim onerous property or unprofitable contracts if
such disclaimer would facilitate the liquidation process. In such
cases, the other party may prove as a debt in the liquidation the loss
suffered as a result of the disclaimer, calculated on the basis of
damages for breach of contract.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
In brief, claims against an insolvent company are ranked as follows:
(1) secured creditors and certain quasi-security holders;
(2) debts arising from rescue financing accorded super priority;
(3) the costs and expenses of winding up;
(4) wages and salary of employees;
(5) retrenchment benefits or ex gratia payments due to employees;
(6) work injury compensation due under the Work Injury
Compensation Act (Cap. 354);
(7) Central Provident Fund (“CPF”) contributions;
(8) Remuneration payable to employees in respect of vacation
leave;
(9) taxes;
(10) retirement and retrenchment benefits payable under the
Employment Act;
(11) claims secured by floating charge;
(12) claims of the general body of unsecured creditors; and
(13) shareholders.
4.7 Is it possible for the company to be revived in the future?
If the company has not yet been dissolved, it is possible to apply for
a stay of the winding up proceedings, which halts the winding up
proceedings and allows the management to resume control from the
date of the stay. It should be noted that the threshold for such a stay
is a relatively high one.
Where a company has been dissolved, the Court may at any time
within two years after the date of dissolution, on application of the
liquidator of the company or of any other person who appears to the
Court to be interested, make an order upon such terms as the Court
thinks fit declaring the dissolution to have been void. The Court’s
general approach would be to exercise that discretion carefully and
judicially, bearing in mind that in some instances, a winding up
ought to be reversed to ensure fairness and justice. A non-
exhaustive list of scenarios that might warrant a reversal include the
presence of overlooked realisable assets, prejudice or fraud, or
reasons stemming from broader considerations of justice. Once the
Court has made such a declaration, proceedings may be taken as
they might have been taken if the company had not been dissolved.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The tax implications arising from a restructuring depends on the
specific form and structure of the relevant transaction. A company
under judicial management is still required to submit its income tax
return (Form C-S/C), audited/unaudited financial statements and tax
computations to the Inland Revenue Authority of Singapore
(“IRAS”) annually.
In relation to an insolvency, the liquidator must not distribute any
assets of a company to its shareholders unless he has made provision
for the payment in full of any tax which may be found payable by the
company under the Income Tax Act, Chapter 134 of Singapore, and is
required to carry out certain actions including submitting all
outstanding tax returns, financial statements and tax computation(s) of
the company in liquidation up to the date of liquidation. Tax clearance
may also be obtained in certain circumstances from the IRAS.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Schemes of arrangement generally do not have any direct effect on
contracts of employment.
The onset of judicial management also will not have a direct effect
on contracts of employment. That being said, the judicial manager
has the power to terminate these contracts, and should decide
whether to adopt or terminate these contracts within 28 days of the
making of the judicial management order. If the employees
continue to work for the company after the 28-day period, the
judicial manager may be personally liable for their wages.
As mentioned above in question 4.6, in a liquidation scenario, save
that claims for wages and salary and retrenchment benefits are
subject to a cap, claims by employees for wages and salary,
retrenchment benefits, work injury compensation, CPF contributions,
remuneration for vacation leave and retirement and retrenchment
benefits are given priority.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
The Singapore Courts have the discretion to wind up a foreign
company if the company has a substantial connection with
Singapore. In this regard, the following factors are relevant when
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determining whether a foreign company has a substantial
connection with Singapore:
(1) whether Singapore is the centre of main interest of the
company;
(2) whether the company is carrying on business in Singapore or
has a place of business in Singapore;
(3) whether the company is registered in Singapore under the CA;
(4) whether the company has substantial assets in Singapore;
(5) whether the company has chosen Singapore law as the
governing law for its transaction documents; or
(6) whether the company has submitted to the jurisdiction of the
Singapore Courts for the resolution of disputes involving the
company.
A foreign company which has a substantial connection with
Singapore may similarly avail itself of Singapore’s scheme of
arrangement or judicial management regime if it is able to meet the
relevant statutory requirements.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
An application may be made to the Singapore Courts by the foreign
representative for recognition of the foreign restructuring or insolvency
proceedings, where the main proceeding takes place in the state where
the debtor has its centre of main interests or, if the debtor has an
establishment within the foreign state for non-main proceedings. Such
foreign proceedings may not be recognised in Singapore if it is found
that they are contrary to the public policy of Singapore, although the
Singapore Courts have shown willingness to grant limited recognition
in such cases where required by justice and fairness.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It is not unusual for companies incorporated in Singapore which are
in judicial management or winding up to commence ancillary
insolvency proceedings in other jurisdictions to, amongst other
things, recover assets located in said jurisdictions.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The starting position is that group companies are considered
separate legal entities, and the insolvency of one group company,
without more, will not directly affect the others.
However, where there have been dealings between persons
connected with a company, which is often the case in groups of
companies, the statutory time limit for a transaction to be considered
an unfair preference is extended, and certain adverse presumptions
will be made in relation to the transaction which may facilitate
insolvency clawbacks.
In addition, where it is shown that a company is used as a façade for
other solvent entities, the corporate veil may be lifted so as to treat
the companies as a single entity. Another example where the veil
may be lifted is where the controller of the company treats the
companies as a single entity and has complete control over them.
On the other hand, Singapore’s legislative framework also facilitates
the rehabilitation of groups of companies by permitting the
extension of a Section 211B moratorium to a subsidiary, a holding
company or an ultimate holding company where such company
plays a necessary and integral role in the compromise or
arrangement.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
Singapore has been taking significant steps to improve its corporate
restructuring regimes. A raft of substantial amendments to the Act
were introduced in 2017 and include in particular enhanced stay and
cram-down provisions in support of schemes of arrangements, super
priority for rescue financing in relation to both schemes of
arrangement and judicial management and the adoption of the
UNCITRAL Model Law.
Further, the landmark omnibus Insolvency, Restructuring and
Dissolution Act (“IRDA”) was passed by Parliament in October
2018 and is expected to come into force in 2019. Amongst other
things, this Act consolidates personal and corporate insolvency
laws, and the laws relating to debt restructuring by individuals and
companies into a single piece of legislation.
The key changes under the IRDA include:
(1) restrictions on the operation of certain types of ipso facto
clauses;
(2) the scope for appointment of the Official Receiver as
liquidator has been reduced. Applicants must show that they
have taken reasonable steps, but were unable to appoint a
private liquidator, and they must obtain the consent of the
Official Receiver;
(3) a new “wrongful trading” provision will replace the current
“insolvent trading” regime at Sections 339 and 340 of the
CA;
(4) in relation to schemes of arrangement, certain specified
proceedings may be allowed to proceed unaffected by
moratoria if so prescribed by regulations; and
(5) in relation to judicial management, debtor companies will be
permitted to place themselves into judicial management
without the need for an order of Court, if they are able to
obtain a resolution of the company’s creditors for the
company to be placed into judicial management.
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Kenneth Lim Allen & Gledhill LLP One Marina Boulevard #28-00 Singapore 018989 Tel: +65 6890 7811
Email: [email protected]
URL: www.allenandgledhill.com
Edward Tiong Allen & Gledhill LLP One Marina Boulevard #28-00 Singapore 018989 Tel: +65 6890 7887
Email: [email protected]
URL: www.allenandgledhill.com
Kenneth is a Partner at Allen & Gledhill LLP. His main areas of practice are litigation, restructuring and insolvency, and international arbitration. Kenneth regularly represents lenders, borrowers and insolvency professionals in relation to liquidation, judicial management, receivership, schemes of arrangement, and complex multi-jurisdictional restructurings. He has substantial experience representing clients in complex contentious matters involving contractual claims, property disputes, shareholder disputes, banking claims, trust disputes, directors’ duties, media and entertainment disputes, employment, and defamation.
He has been consistently cited and recommended for his expertise in restructuring and insolvency. He is named as a Rising Star by IFLR1000, recommended by The Legal 500 Asia-Pacific, and cited as a Noted Practitioner by Chambers Asia-Pacific. He is also recognised as a Future Star in International Arbitration and Commercial and Transactions by Benchmark Litigation Asia-Pacific.
Allen & Gledhill is an award-winning, full-service South-east Asian commercial law firm which provides legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which are the first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number of practice areas, and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also been named ‘Regional Law Firm of the Year’ and ‘SE Asia Law Firm of the Year’ by many prominent legal awards. With a growing network of associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular, on matters involving South-east Asia and the Asia region. With its offices in Singapore and Myanmar; its associate firm, Rahmat Lim & Partners in Malaysia; and its alliance firm, Soemadipradja & Taher in Indonesia, the Allen & Gledhill network has over 550 lawyers in the region, making it one of the largest law firms in South-east Asia.
Edward is a Partner at Allen & Gledhill LLP. His main areas of practice are corporate restructuring and insolvency, commercial and banking litigation and property disputes. He has been lead counsel in several high-profile cases, in particular, restructuring matters (both cross-border and domestic), and commercial disputes.
In insolvency, he has advised statutory boards, government-linked companies, major banks, corporates and financial institutions on schemes of arrangements and compromise, judicial management, liquidation and clawbacks.
Edward has been recommended for his expertise in several legal publications, Chambers Asia-Pacific, The Legal 500 Asia-Pacific and Benchmark Asia-Pacific. He is also listed as an expert for Restructuring & Insolvency in Who’s Who Legal and mentioned as a prominent partner in Global Restructuring Review. Recent accolades from Chambers Asia-Pacific note that he “has very good commercial awareness and client-liaison skills; his management of the relationship
is exceptional ” and is “a good, sound practitioner ”.
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Additional Author
Edward Kwok, [email protected]
Edward’s main areas of practice are restructuring and insolvency,
commercial litigation, employment law and tenancy law.
On the restructuring and insolvency front, Edward has advised directors,
financial institutions, statutory boards and multinational corporations. He
also has extensive experience with restructuring and insolvency-related
litigation, including winding up, schemes of arrangement, judicial
management and litigation on behalf of insolvency practitioners
involving breaches of directors’ duties and misappropriation of assets.
In litigation, Edward has assisted in a number of high value suits,
representing banks, real estate investment trusts and multinational
corporations.
Edward graduated from King’s College London in 2009, was called to the
Singapore Bar in 2012 and has been with Allen & Gledhill since. He is
also a contributor to Listing in Singapore: Corporate Governance Perspectives.
chapter 29
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sca legal, slp
pedro moreira
isabel Álvarez
spain
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Historically, Spain has been a creditor-friendly jurisdiction, in the
sense that the law – only in very limited terms – allowed for limitations
of the creditors’ rights or for any reductions of the debt burden imposed
on the creditors. Under such scenario, creditors’ rights are fully
enforced, no matter the financial condition of the debtor, in terms that,
in many cases, ended with the liquidation of the debtors’ assets on a
“first come, first served” basis. In practical terms, this does not mean
that creditors end up recovering their credits in better terms than they
would otherwise do, but the fact is that, at least from a legal
perspective, the law has been always on the creditors’ side.
This scenario has not substantially changed with the passing of the
first insolvency legislation in 1922 nor with the enactment, in 2003,
of Law 22/2003, as of 9 July, on Insolvency (hereinafter “Spanish
Insolvency Act” or “SIA”). With the SIA, Spain gained a modern
insolvency legal framework, although, so far, in general terms,
neither debtors nor creditors have been able to use it in a manner that
generates better ratios of credit recovery and fewer winding ups of
debtors.
This has several reasons, one of them being the fact that a high
number of debtors file for bankruptcy at a very late stage of financial
stress, where even liquidity available to pay debts generated after
the bankruptcy declaration may be scarce, something that makes
recovery much more difficult than at an earlier stage. Nonetheless,
other reasons thereto have to do with certain options followed by the
legislator, based on the principle that credits are to be honoured,
such as (i) the high majorities required for the approval of a
creditors’ agreement (article 124 SIA), (ii) the protections given to
creditors with security on debtor’s assets, which in practical terms
leaves them almost immune to the effects of the bankruptcy
proceedings (articles 56 (1) and 155 SIA), and (iii) the fact that
senior credits (tax and social security contributions, among others)
are excluded from the mandatory effects of a creditors’ agreement
(article 100 (2) SIA), which means that such credits will not be
subject to the pardons and/or delays foreseen in such an agreement.
And, last but not least, the technical option followed by the SIA to
set forth a unique type of bankruptcy proceedings, though with an
alternative development that avoids the winding up (the approval of
a creditors’ agreement), also plays a role in the bad fate of most of
the bankruptcy proceedings held in Spain. Due to the mentioned
unique type of bankruptcy proceedings, with long and complex
steps, in cases where simple and rapid steps could have made a
difference, debtors find themselves in a scenario where, much to the
regret of some if not all stakeholders, winding up is the most
common outcome.
Therefore, from a legal point of view, Spain is definitely a more
creditor-friendly jurisdiction. Nonetheless, in practical terms, the
insolvency regime may lead to undesired outcomes for the creditors,
as the winding up of bankrupt debtors, to which most are fated,
tends to generate insufficient proceeds, resulting in most of the
credits, notably non-senior ones, being left unpaid. This is actually
the most common scenario in the case of small and mid-size
companies in the services area, which tend to operate with few
assets and, as such, generate scarce proceeds at the time of being
liquidated via bankruptcy proceedings.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
From a legal perspective, nothing prevents informal work-outs
between creditors and debtors who are interested in negotiating an
arrangement. If all creditors accept a certain work-out, this
agreement would be fully enforceable and there would be no need
for the debtor to initiate insolvency proceedings.
Nonetheless, in most situations, with a reasonable number of
creditors, it is not easy for a debtor to bring in all its creditors.
Therefore, in most cases, only some of the creditors would end up
engaging in a work-out, and this is what makes them less used than
they could be.
In practice, informal work outs are not used as much as they could
be, because creditors (notably, banks and other providers of finance)
tend to refuse to engage in these sort of arrangements, as they see
them as bearing the risk of being repealed in case the debtor initiates
bankruptcy proceedings or, if not for any other reason, because they
tend to see them as an undue intent of the debtor to sweeten its
obligations under the initial finance agreements, or, in the best case,
as an attempt to treat the creditors that participate in the arrangement
in terms less favourable than those applied to the holdout creditors.
Informal refinancing tends to be accepted by banks when negotiated
in advance by smarter debtors who, at the time of the negotiations,
are still in good standing.
As for formal restructuring and insolvency proceedings, both are
provided by the SIA. The SIA provides two types of formal
restructuring: refinancing agreements, under article 71 bis, a
provision added in 2013; and out-of-court payment arrangements,
under articles 231 to 242, all added in 2013.
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Pursuant to article 71 bis SIA, refinancing agreements are
arrangements reached with some of the creditors before the debtor is
declared bankrupt by a court, that cannot be turned down by this, in
case the debtor is declared bankrupt at a later stage, if they (i)
increase the amount of credit available to the debtor, if they
refinance the debtor, or (ii) modify or extinguish any of the debtor’s
debts, (iii) provided that, in any case, such measures are part of a
viability plan that allows the continuation of the debtor’s activity in
the short- and mid-term.
Regarding out-of-court payment arrangements, these can be used by
companies only if they are already bankrupt and if their debts and
assets do not amount to more than €5 million each (articles 232.2
and 190 SIA). These arrangements need to be managed by an
official bankruptcy mediator, appointed either by a notary public or
the Companies’ Registrar (article 233 SIA). If successful, these
arrangements end with an agreement that can include any of the
following measures: (i) a delay of no more than 10 years; (ii) an
acquaintance; (iii) an assignment to the creditors of the debtor’s
assets to cover its debts, either in full or partially; (iv) debt equity
swaps, where credits are converted into new equity to be issued by
the debtor; or (v) the conversion of such credits in certain types of
loans or financial instruments (callable preferred stock, convertible
bonds, debt instruments where interest is paid in debtor’s shares,
junior debt, etc.).
Pursuant to article 5 bis SIA, the initiation of negotiations aimed at
reaching a refinance agreement or an out-of-court payment
arrangement give the debtor a four-month period, during which: (i)
no creditor is allowed to request the courts to declare the bankruptcy
of the debtor; and (ii) no enforcement of credits against assets used
by the debtor in its activities can be initiated or, in case they had
already been, will be subject to a stay. If the debtor could, during the
said four-month period, not reach any such arrangements that
excludes it from the obligation, foreseen in article 5 SIA, to request
the court to initiate bankruptcy proceedings, then it is mandatory for
the debtor to do so (article 235 SIA).
As for insolvency proceedings, as mentioned before, the SIA rules
on a unique type of insolvency proceedings, covering all parts of the
same, both in substantive and procedural terms, and ruling on the
regime applicable to the receivers.
The use of the insolvency proceedings is much more widespread
than that of the informal work-outs and formal restructuring,
although not so much as one would think at first, notably in what
concerns small- and mid-size indebted companies.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
As a rule, the directors of a company are not liable for the
company’s debts. Nonetheless, in case this is declared insolvent,
within bankruptcy proceedings, they may be liable for the unpaid
debts in case they took decisions that are considered, by the court
that hears the case, as the cause of debtor’s inability to pay its debts
or a part thereof, insofar as those decisions lead such court to qualify
the bankruptcy as blameworthy (article 165 (1), 1st, SIA).
Article 5 (1) SIA provides that the debtor has to file for a bankruptcy
process in the two months following the time when it acquires
knowledge that it cannot comply with its due obligations, i.e., that
its available liquidity is not enough to allow it to comply with its
obligations (article 2 (2)).
In the case of companies, the obligation to file for a bankruptcy
process lies on the directors of the bankrupt company. Failure by
the debtor to comply with this obligation is a ground for the court to
qualify the bankruptcy as blameworthy under the aforesaid article
165 (1) SIA. In such scenario, those persons (directors,
shareholders, etc.) who failed to file for bankruptcy at the time
foreseen by the SIA may be deemed personally liable for the
unpayable debts of the bankrupt debtor.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The most important stakeholders are creditors (creditors in general,
employees and public creditors) and employees and landlords, not
as creditors but as parties interested in keeping their respective
condition of suppliers of labour and offices/land to the debtor in the
future.
Creditors play an important role in the sense that, when the debtor
does not request its winding up, either at the time of filing for
bankruptcy or at a latter stage during the bankruptcy proceedings,
the survival of the debtor, under a creditors’ agreement, will
basically depend on their will to approve such an agreement, which
will mean, to some of the credits, pardons and/or delays.
When a court declares the bankruptcy of a debtor, this automatically
imposes a moratorium or a stay on the enforcement of the creditors’
rights. From that point on, their credits will be enforceable under
the less favourable terms of a creditors’ agreement, in case this
comes to be approved, or within the liquidation process, in case it
does not.
Therefore, new individual enforcements are never allowed during
the bankruptcy proceedings (article 55 (1) SIA), save in case of
enforcement of credits secured by assets, which are allowed, though
in some cases with a moratorium of one year (article 56 SIA). As for
stays on enforcement, pursuant to article 55 SIA, the fact that a
debtor is declared bankrupt by a court necessarily determines such
stay, though with several exceptions (enforcement of administrative
rights and labour credits, provided that the seizure of any of the
debtor’s assets was ordered before the bankruptcy declaration and if
those assets are not necessary for the debtor’s business activity).
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The SIA sets forth that certain transactions entered into by the
debtor in the two years before the date when a company initiates an
insolvency process can be challenged (article 71), either by the
insolvency practitioner (“receiver”) or, in case this fails, by the
creditors (article 72), whenever such transactions can be deemed
harmful to the debtor’s assets.
Defiance of those transactions in court can lead the court to declare
them void, in which case their effects will be repealed (article 73),
e.g., in case of a sale of a debtor’s asset that is declared void by the
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court, such asset will return to the debtor’s balance sheet and any
monies paid by the buyer will be returned to the debtor.
Nonetheless, as mentioned before, the transactions entered into by
the debtor with the aim of avoiding insolvency can be excluded
from any challenges if they meet certain requirements, as is the case
of the refinance agreements, carried out under article 71 bis SIA, as
mentioned in the answer to question 1.2.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
An informal workout between a debtor and its creditors is always
possible under Spanish law, if the parties agree to engage in such an
arrangement. Once the parties reach an agreement, unless it
breaches any mandatory regulations, in principle, this would be
enforceable between them.
However, if the debtor does not succeed in convincing all its debtors
to accept the terms of the work-out and if the debtor, no matter the
existence of such an arrangement, is still unable to comply with its
obligations before any holdout creditors, any of the latter may
request the court of commerce to declare the debtor in bankruptcy.
And if bankruptcy is actually declared, the arrangements reached by
the debtor with some of the creditors may be turned down by the
court, on request of the receiver or, a creditor.
Nonetheless, article 71 bis SIA, added in 2011 and modified in
2014, waives the possibility of those arrangements (reached with
some of the creditors before the debtor is declared bankrupt by a
court), being repealed by the court, if they increase credit available
to the debtor or modify or extinguish debts of this, provided that
certain other requirements are met and when those measures can be
deemed part of a viability plan that forecasts the continuation of the
debtor’s activity in the short- and mid-term. Provided that some
other requirements are also met, the arrangements can be ratified by
the court, in which case, they could not be repealed at a later stage,
either by the receiver or the creditors (fourth additional provision of
the SIA).
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholders?
The SIA provides for a unique bankruptcy process (“process”),
though with two different types, main and abridged (articles 183–
191 quater SIA), whose use does not depend on who files for
bankruptcy (the debtor or its creditor) but on the dimension of the
debtor.
The process begins with a common phase, where the financial
situation of the debtor is fully accessed and ends with two reports
submitted by the receiver, where it discloses the debtor’s assets and
their debts at the time of the declaration of bankruptcy, with the
grade assigned to them (first order, senior, ordinary and/or junior)
by the receiver.
From this point on, the process can either proceed to the winding up
of the debtor or to the negotiation of a creditors’ agreement.
In the first case, the debtor will be extinguished, and its assets sold,
with a view to use the proceeds of the sales to pay the creditors. This
phase begins with the approval of a liquidation plan (where pre-
packaged sales may definitely be carried out) and once this is
approved, the receiver begins with the sale of the assets. Once the
proceeds have been collected, the receiver starts paying the credits
in accordance with their grade, from the highest to the lowest. In
case the proceeds are not sufficient to pay all credits qualified with
the same grade, the receiver will pay them in proportion.
Creditors have a say in the outcome of the process, in the sense that, if
the majority of the ordinary creditors, as foreseen in article 124 SIA,
does not accept the terms of a creditors’ agreement submitted either by
some of the creditors or by the debtor, the company will automatically
be wound up. Therefore, creditors actually have the power to block
any restructuring of the credits and the survival of the debtor.
The debtor also has a say in the process in the sense that it can either
request the court to wind it up (article 142 (1) SIA) or submit a draft of
a creditors’ agreement (article 124 (1) and (2) SIA). However, it
cannot avoid the winding up if it fails to convince the required majority
of creditors to accept the creditors’ agreement submitted to them.
As the decisions to be taken by the debtor under the SIA, as a rule
lie in the hands of the debtor’s directors or former directors, the
debtor’s shareholders tend to have very limited input in the process.
The only area in which shareholders can play a significant role is in
the case of debt-for-equity swaps, as the issue of new equity is a
matter reserved for the shareholders’ meeting (article 160 of the
Spanish Companies Act). Nonetheless, if the shareholders’ meeting
refuses to authorise an increase of the share capital within a debt-
for-equity swap, this may lead the bankruptcy to be declared by the
court as blameworthy, and the shareholders voting against the said
share capital increase will be deemed liable for the unpaid credits
(article 165 (2) SIA).
3.3 What are the criteria for entry into each restructuring procedure?
In its initial version, the SIA foresaw a unique bankruptcy type for the
court process. Nonetheless, in 2013, Law 14/2013 added a chapter to
the SIA (Title X, with articles 231 to 242), which provides out-of-court
formal work-out proceedings, to be managed by a bankruptcy mediator.
Companies can file for this process only in case they (i) meet the
requirements foreseen in article 5 (1), in relation to (article 2 (2),
and (ii) would qualify for an abridged court process (article 231 (2)),
two things that are not required in the case of physical persons.
Therefore, in the case of companies, the criteria foreseen by the SIA
for court and out-of-court bankruptcy proceedings are the same, i.e.
a company can initiate these work-out proceedings only if it is
already at a stage where it cannot comply with its obligations, not at
an earlier stage where it may have reasons to think that it will fail to
comply with those obligations in the future.
3.4 Who manages each process? Is there any court involvement?
Bankruptcies declared by a court are managed by the receivers
appointed thereto by the court. Receivers are in charge of
identifying the assets and liabilities of the debtor, managing the
company in certain cases or authorising the decisions taken by the
directors in other cases, preparing reports for the court, requesting
the court to declare void certain transactions on the ground of
damaging the creditors, liquidating the company, requesting the
court to declare the bankruptcy as blameworthy, etc.
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Some of the decisions taken by the receiver can be defied by the
creditors or even the debtor before the court of commerce that is
hearing the case. The court will rule on the dispute after hearing the
other party or parties.
Nonetheless, the most important decisions in the process are up to
the court hearing the case, notably the decisions to initiate (articles
14-15 SIA) and terminate the process (article 176 SIA), approve a
creditors’ agreement (article 127 SIA), wind up the debtor (articles
142 and 143 SIA) and declare the bankruptcy as fortuitous or
blameworthy (article 172 SIA).
Out-of-court payment arrangements are negotiated by a bankruptcy
mediator, whose functions cease once they have been approved by
the shareholders who accepted to engage in the negotiation. These
arrangements in no way require court involvement, save in case one
creditor decides to challenge them, in which case it would be up to
the court to rule on the dispute (article 239 SIA).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The fact that a debtor is declared bankrupt does not in itself lead to
the termination of the contracts in force at the time of the declaration
of bankruptcy (article 61 (2) SIA). Any termination or set-off
provisions to be applied in case of bankruptcy of one of the parties
to an agreement would breach the provision set forth in article 61 (2)
SIA and, as such, would be deemed void.
Nonetheless, the receiver, in case the directors of the debtor have
been removed, or otherwise the debtor, with the receiver’s approval,
can request the court to order termination of the agreements if they
deem this convenient to the interest of the process. The court will
hear the other party to the agreements and in case the parties do not
reach a termination agreement, uphold the claim in case it also
considers that termination is convenient for the process. This
decision is a court ruling just like any other and should be
enforceable in the very same terms.
The other party to an agreement in force at the time the debtor is declared
bankrupt cannot terminate that agreement on the ground of such
declaration. Although the credits generated to such party after the
declaration of bankruptcy will be treated as first order credits, i.e., credits
excluded from the bankruptcy proceedings and that are to be paid once
they become due (“first grade credits”). The risk of unsettlement of this
type of credit is small, although in no way non-existent.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
The funding of any restructuring process depends on the will of the
creditors or any third parties to provide funds that allow the debtor
to leave the state of insolvency. Funding can be either in the form of
a pardon, a delay, a debt-equity swap or fresh credits.
Any fresh credits granted after the declaration of bankruptcy will
always be qualified as first grade, and as such payable before any
other with different grades. Regarding credits granted before such
declaration, the SIA sets forth that those granted under the regime
foreseen in article 71 bis will are graded as senior.
Rescue finance can also be granted as a condition for the creditors to
approve a creditors’ agreement. It can be provided either by a third
party (a shareholder, existing or new, a bank, etc.) or a creditor. In
such scenario, the protection granted to the new funding will be
agreed between the rescuer and the creditors, provided that it does
not breach the rules on creditors’ agreements foreseen by the SIA.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The SIA provides a unique insolvency procedure, during the course
of which the court, under certain circumstances, can order the
winding up of the debtor. When, in the end of the so-called
“common phase” of this process, the court rules in these terms, then
the winding up phase is initiated.
Basically, the winding up of a company consists of two steps: first,
when the court orders the winding up, at which point the company
immediately ceases to be a legal person with organs and assets and
liabilities; and secondly, consists of a liquidation process, where the
remaining assets that once belonged to the debtor are sold and the
proceeds therefrom used to pay its debts or, in most of the cases, a
part thereof.
The liquidation process shall follow the mandatory rules foreseen
thereto in the SIA (articles 142–162) and those included in the
liquidation plan to be approved by the court under article 148 of this
piece of legislation. As a rule, the assets need to be sold in auctions
organised by the court, though, in some cases, a direct sale to a
certain buyer can be authorised by the court if certain requirements
thereto are met. In addition, though the rule is that each asset shall
be sold in an independent manner, the SIA provides a subsidiary rule
for the sale of business units, under which terms this type of unit
should preferably be sold as a whole.
4.2 On what grounds can a company be placed into each winding up procedure?
A bankrupt company can be placed into a winding up process at its
own request, at any time during the bankruptcy proceedings (article
142 SIA). In addition, if the creditors do not agree on a creditors’
agreement during these proceedings, the same will necessarily end
with the winding up of the company (article 143 SIA).
4.3 Who manages each winding up process? Is there any court involvement?
The winding up process consists of two subphases, the first where a
decision to wind up the debtor is taken by the court and the second for
liquidation, where the debtor’s assets are sold and the proceeds are
used to pay the creditors. Whereas the first subphase always lies in
the hands of the court upon a request of the debtor or in case of failure
to approve a creditors’ agreement, the second is managed by the
receiver, previously appointed by the court, under the supervision of
the court. The receiver will liquidate the assets and pay the creditors
in accordance with the rules provided by the SIA (articles 148–162).
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The ability of the creditors and/or shareholders to influence the
winding up process is null. Once the court orders the winding up of
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the debtor and approves the liquidation plan, all that is left to be
done is the sale of the debtor’s assets in accordance with such plan
and the use of the proceeds to pay the creditors in accordance with
each credit’s grade. Though the legality of each decision taken by
the receiver at this stage can still be defied in court, what is at stake
is no longer how the process should evolve in the future but only
whether the measures adopted by the receiver to liquidate the
company comply with the laws and the liquidation plan.
The rights of the creditors with security on a certain debtor’s assets
can be enforced at any stage during the process in separate
enforcement proceedings or within the process. Their rights will in
no way be affected by the winding up, as the proceeds of the sale of
the secured asset will be assigned to the secured credit and only the
remaining amount, if any, after this settlement, will be available to
pay any other credits (article 155 SIA).
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The decision in itself to wind up a company does not automatically
determine the termination of all agreements, although, at the end of
the liquidation process, all agreements necessarily terminate, unless
an assignment of the same could be worked out before that point.
Nonetheless, while the agreement has not been validly terminated
by either of the parties (e.g., on the ground of a breach of its
obligations by the other party), it remains in force during the
winding up procedure, and this, in itself, is no ground for
termination by the other party.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The ranking of credits follows the rules set forth in the SIA (articles
84 and 89 to 93).
The main distinction is between the credits out of the bankruptcy
proceedings (“outs”) and those in these proceedings (“ins”).
The outs are credits of first order, in the sense that they are payable
once due and in any case before the ins (article 154 (1) SIA). With a
few exceptions (certain labour credits, the cost incurred by the debtor
with the declaration of bankruptcy claim, etc.), almost all of the outs
are credits generated after the declaration of bankruptcy (article 84
SIA), and the reason for their priority is the intent to avoid the debtor
being banished from engaging in any transaction after its bankruptcy
declaration, as the risk of unsettlement for the other party (provider,
seller, etc.) would be too high.
As for the ins, all credits qualified in these terms are credits due, although
unsettled, at the time of the bankruptcy declaration. These credits, if
admitted by the receiver in the listing of such credits to be approved in
the first phase of the process, will be paid after the outs, with the
remaining liquidity. In the said listing, the receiver will assign one of the
following alternative grades to each of the admitted credits: senior (with
or without security over the debtor’s assets); ordinary; or junior.
Ordinary credits are ins that, pursuant to the SIA, should not be
qualified either as senior or junior (article 89 (3)).
Senior credits will be paid after the outs and no ordinary credits are
payable until all seniors have been paid in full. Nonetheless, the
proceeds from the senior secured credits will be used to pay the
creditors secured by them and only in case the senior secured credits
have been paid will the remaining proceeds be used to pay non-
secured senior credits.
Once all senior credits have been paid in full and there is still
liquidity outstanding, this will be used to pay the ordinary ones.
And if such liquidity is enough to pay all the ordinary credits and
there is still liquidity outstanding, then payment of the juniors will
begin.
As mentioned before, if the proceeds available are not sufficient to
pay all credits qualified with the same grade, they will be paid in
proportion.
4.7 Is it possible for the company to be revived in the future?
Under the Spanish Companies’ Act, a decision to wind up a non-
bankrupt company would not prevent it from being revived if the
shareholders agree (article 370 (1)), although such decision could not
be taken after the termination of the liquidation process. If it were
taken thereafter, instead of a revival, the shareholders would have to
set up a new company, foreseeably with the same name, though with
a different tax number and fully independent, in terms of assets and
liabilities, from the wound up company.
Nonetheless, in case of a company engaged in insolvency
proceedings, after the court has decided to wind it up, its revival
would be possible only in case those proceedings could be
terminated on the ground of the full payment of its debts (article 176
(1), 4th, SIA). In such a scenario, though the SIA does not expressly
provide so, there is no legal reason why the company could not be
revived, and this is the logical outcome of the company if it
succeeds in paying all its debts.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Tax creditors share the risks borne by any creditors, in the sense that,
if the debtors’ assets are not enough to cover all their liabilities,
creditors may face losses.
However, part of the tax credits are graded as senior, something that
increases their chances of being paid, if not in full at least in part. This
is on the ground that they will be paid before any lower graded credits,
but also because, as mentioned before, in case of approval of a
creditors’ agreement, senior credits are excluded from it, which is
something that will eradicate them from any pardon or delay.
From the debtor’s perspective, tax does not incur specific risks.
However, in case the bankruptcy proceedings are qualified as
blameworthy, the unpaid tax credits will stand, just like any other
credits, at the time of determining the bulk of the unpayable credits
of the debtor for which certain persons provided by the SIA may be
deemed personally liable.
In addition to the above, it is worth bearing in mind that, in case of
pardons granted by the creditors in a creditors’ agreement, this
would generate capital gains in the debtor, which would be taxed in
accordance with the corporate tax regulations (article 15 of Law
27/2014, on Corporate Tax). Against this, debt-for-equity swaps
arranged between the debtor and any of its creditors, in principle,
would not have any tax effects, at least in terms of corporate tax
(article 17 (2) of the said Law 27/2014, as interpreted by the Tax
General Directorate, in its binding resolution V3463-16, passed on
20 July 2016).
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6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
A distinction should be made between employees’ credits and jobs.
As for employees’ credits, the SIA distinguishes between credits for
salaries earned in the last 30 days of work before the initiation of the
debtor’s bankruptcy process and up to the double of the minimum
salary, which are subject to the regime provided in article 84 SIA,
and any other labour credits. The regime provided in article 84 is the
most protective for the creditors, in the sense that it allows payment
of the credits to which it applies before any other credits. Credits
covered by the said article 84 are payable once they become due and
the said labour credits, provided by its section (1) are so on spot.
Concerning the remaining labour credits, the SIA distinguishes
between certain labour credits (salaries and indemnities for labour
accidents and/or illnesses), which are deemed senior under article
91, and the remaining ones, which may be ordinary (article 89 (5))
or even subordinated (article 92).
In terms of jobs, the initiation of a bankruptcy process does not in
itself determine the termination of any labour contracts or a change
in the terms of these. During the bankruptcy process, those
agreements can be either terminated or modified by the debtor’s
appointed receiver, under the rules foreseen in the labour legislation
with the specialties set forth in article 64 SIA. Nonetheless, with
some minor exceptions, any labour disputes or issues arising during
the bankruptcy process will not be heard by a labour court but by the
court of commerce where such process is pending (article 8 SIA).
Whereas, as we have said, the initiation of a bankruptcy process does
not in itself determine the termination of any labour contracts, the
initiation of a winding up process necessarily leads to the termination of
all labour agreements at the end of the liquidation or even before that,
save in case the company is revived in terms mentioned in the answer to
question 4.7 or in case of a sale of a business unit of the debtor, as
provided in labour legislation (article 44 of the Spanish Labour Act). In
this last case, if a business unit of the debtor is sold to a third party, the
debtor’s employees that worked in that unit are automatically assigned
to the acquirer and therefore their contracts are not terminated.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Article 10 SIA distinguishes between main and territorial insolvency
proceedings, the former being any proceedings initiated in the
country where the debtor has its registered office and/or its main
place of business, in which case they cover its worldwide assets, and
the latter being any proceedings that pertain only to assets owned by
the debtor in the territory where such proceedings are pending.
Under the said rules, insolvency proceedings can be initiated in
Spain in relation to a company incorporated elsewhere, provided
that such company has its main place of business in Spain, in which
case the proceedings will be deemed main, or, in case it does not,
provided that it has assets in this country, in which case such
proceedings will be territorial.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
As a rule, insolvency processes that have commenced elsewhere will
not be recognised in Spain until the corresponding rulings given in a
foreign country obtain exequatur (article 220 SIA). Nonetheless, in
the case of processes initiated in another EU Member State, they
would be fully recognised in Spain without any exequatur, pursuant to
the Regulation (EU) 2015/848, of the European Parliament and the
Council of 20 May 2015, on insolvency proceedings.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Pursuant to the said EU regulation 2015/848, a company
incorporated in Spain can initiate proceedings in other EU
jurisdictions, if it has its main place of business in such jurisdiction,
in which case those proceedings should be main ones, or if it has
assets in such jurisdiction, in which case they should be territorial. Nonetheless, so far, it is not common practice for a Spanish
company to file for bankruptcy in other EU Member States.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
The SIA provides that any members of a group of companies can file
for bankruptcy in a single petition and creditors are also allowed to
request the declaration of bankruptcy in the same proceedings of
any such members (article 25 SIA).
In addition, during a bankruptcy process, either the debtor or the
receiver can also request two or more pending processes be merged
into a single one, if those processes pertain to companies that belong
to a group (article 25 bis SIA).
Regardless, both in case of joint or merged processes under articles
25 and 25 bis SIA, respectively, as a rule, neither the assets nor the
debts of each of the bankrupt companies can be merged (article 25
ter SIA); the only effect of the joint handling of the cases is that they
will be handled in a coordinated manner.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
For the time being, no reform of the Spanish corporate rescue and
insolvency regime has been announced.
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Pedro Moreira SCA LEGAL, SLP Calle Castelló 82, 4º I 28006 Madrid Spain
Tel: +34 91 781 50 40
Email: [email protected]
URL: www.sca-legal.com
Isabel Álvarez SCA LEGAL, SLP Calle Castelló 82, 4º I 28006 Madrid Spain
Tel: +34 91 781 50 40
Email: [email protected]
URL: www.sca-legal.com
Established in 2001, SCA LEGAL is an independent Spanish business law firm with offices in Madrid and representative offices in São Paulo (Brazil) and Buenos Aires (Argentina).
The firm counts on a team of lawyers used to work on international transactions involving different sets of laws, flexibility to adapt to the clients’ needs, a reliable work method, underpinned by a solid body of experience, and a cost/benefit approach.
In the beginning, the firm specialised in commercial and corporate law. Now that its practice has expanded to other areas, the commercial and corporate practice is still one of the most thriving. And, within this, insolvency has been one of most thriving subareas, as the firm has advised, in many occasions, (i) creditors of bankrupt companies, (ii) bankrupt companies, and (iii) directors of bankrupt companies in liability claims filed against them.
In addition, one of the firm’s partners has been appointed receiver in several bankruptcy cases heard by some of the Madrid’s Courts of Commerce.
A founding Partner of SCA LEGAL, SLP Pedro Moreira has almost 20 years of experience as a litigation lawyer, specialising in civil, commercial and corporate law disputes. Thanks to his expertise in those areas of law and his background in economics and business administration, he regularly advises clients, from different jurisdictions and sectors, in complex litigation cases (in relation to the breach of commercial contracts, damage claims, shareholders conflicts and other corporate law issues, bankruptcy and insolvency matters, etc.), some of them multijurisdictional and/or heard by a court of arbitration. Mr. Moreira advises also on a regular basis on non-contentious matters, mostly in commercial and corporate law. Mr. Moreira has also been appointed receiver in several bankruptcy cases by some of Madrid’s Courts of Commerce.
Mr. Moreira graduated in Law from the Complutense University of Madrid and also has a BA in Law from the Catholic University of Lisbon, a MA in Economics (Diploma de Estudios Avanzados en Economía) from the Complutense University of Madrid and an MBA from the EAE/Camilo José Cela University (Madrid). He is a member of the Madrid Bar Association, speaks fluent Spanish, Portuguese and English and has also a working knowledge of French and German.
Isabel Álvarez is a Partner at SCA LEGAL, SLP. She has almost 10 years of experience as a litigator, her practice focusing on civil, commercial and labour law disputes. She regularly advises Spanish and foreign clients in complex litigation cases (in relation to breaches of contract, damage claims, real property and inheritance disputes, termination of labour agreements with directors and other senior staff, etc.). She advises also on a regular basis on non-contentious matters, mostly in civil and commercial law.
Ms. Álvarez holds a BA in Law from the Complutense University of Madrid and is a member of the Madrid Bar Association. She speaks fluent Spanish and English.
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carolina wahlby
Fredrik olsson
sweden
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Sweden has elements of offering a debtor-friendly procedure –
company restructuring and protecting over-indebted debtors from
its creditors in order to recover the business. At the same time,
company restructurings cannot go on forever (a bit more than one
year is the maximum) and no write down of debt will occur unless a
qualified majority of creditors vote in favour of it.
The second procedure – the bankruptcy processes – is a creditor-
friendly procedure where the administrator shall strive to achieve
the best possible outcome for the creditors.
In general, when it comes to insolvency proceedings, we would
place Sweden on the more creditor-friendly end of the scale.
Please note that our answers below are only taking into account
debtors as limited liability companies and do not include the special
provisions that apply for companies under the supervision of the
Swedish Financial Supervisory Authority.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The Business Reorganisation Act (Sw. lag (1996:764) om företagsrekonstruktion) provides for formal proceedings involving a
court, and is used in practice. The intention of the legislator has
been that the reorganisation would be used at an early stage of the
financial difficulties, but in practice companies tend to then try to
find solutions through informal out-of-court restructurings while
applying for a formal reorganisation procedure first when the
difficulties are rather advanced. The reason for this is often to avoid
the publicity that the formal reorganisation procedure entails.
There is no legislative framework for informal out-of-court
restructurings. However, informal debt write-downs and extensions
involving only the main creditors are commonplace. Informal
elements may also occur within formal insolvency proceedings, as
some creditors may be willing to accept a renegotiation of terms to
enable the company to continue as a going concern.
If the parties involved in an informal work-out so agree, they can
amend existing agreements between them. However, it will only
bind the parties involved. To also bind non-consenting parties, the
company will have to initiate a formal reorganisation in accordance
with the Business Reorganisation Act. In case of a negotiated
agreement being made during a formal restructuring, the
administrator is generally involved.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The board of a limited liability company is obliged to prepare a
control balance sheet if the board members have reason to believe
that the net assets of the company are less than half of the share
capital or if an attempt of levy of execution (Sw. utmätning) has
taken place without there being sufficient assets.
Upon preparing the control balance sheet, the board must promptly
summon an extraordinary general meeting (referred to as the first
control general meeting) at which the shareholders shall decide
whether to liquidate the company or not. If no liquidation decision
is made despite the first control balance sheet showing that less than
half of the share capital was intact, a second control balance sheet
must be prepared and a second control general meeting must be held
within eight months from the first general meeting. Should the
share capital then not be fully restored, the shareholders are obliged
to resolve to liquidate the company. Absent such decision, the board
members are obliged to initiate the liquidation process themselves.
Should the board fail to take any of the required measures in a
timely manner and incur further liabilities, the board members
become personally and jointly liable for all such liabilities incurred
from the date they should have taken the relevant action until doing
so. The same applies to any representative of the company or a
shareholder of the company that is aware of the board’s failure and
nonetheless participates in incurring further liabilities.
There is no obligation to enter any reorganisation proceeding or to
apply for bankruptcy. However, the board members should be
aware of the risk of becoming personally liable for tax payments
(see question 5.1 below). Further, not initiating an insolvency
proceeding may under certain circumstances have consequences.
For example, the Swedish Penal Act (Sw. brottsbalken) comprises
certain criminal acts jointly referred to as crimes against creditors,
of which one is to continue to run a business, utilising thereby
considerable means without a corresponding benefit to the
company, although the representatives of the company are aware
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that the company is insolvent or is in manifest danger of becoming
insolvent.
In addition thereto, the general provisions regarding liability for
damages by negligence are stipulated by the Swedish Companies
Act (Sw. aktiebolagslagen (2005:551)) will apply.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Counterparties, employees and creditors may try to influence the
company’s situation within the boundaries of their agreement with
the company. Once starting to suspect that the company may be in
financial difficulties, most counterparties and creditors will start to
investigate what actions they may take to limit their losses in case a
formal insolvency procedure would follow. Counterparties and
creditors should in their interactions with the company be aware of
the clawback risks (see question 2.3 below).
A creditor may try to collect a claim through the Swedish
Enforcement Authority or apply for the debtor to be put in
bankruptcy (or, very rarely, company restructuring). However,
should the company be in a company restructuring, a stay on
enforcement will apply (see question 3.2 below), and no levy of
execution or other enforcement measures may take place in respect
of the debtor, unless the creditor possesses a general or particular
lien or if special cause exists to believe that the debtor is executing
or failing to execute a particular measure and is thereby jeopardising
a creditor’s rights. If creditors wish to take actions otherwise, they
must first make the court decide on a cessation of the company
restructuring.
There are no special rules or regimes which apply to particular types
of unsecured creditor prior to entering into any formal insolvency
proceeding.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Once in a formal reorganisation procedure (provided that it involves
debt composition proceedings) or in a bankruptcy, an administrator
may seek to challenge transactions taken by the company prior to
proceedings initiated by way of clawback, upon which a transaction
is recovered to the company or the bankruptcy estate.
Generally, a prerequisite for clawback is that the transaction has
adversely affected the creditors and the purpose of a clawback is that
the clawback shall return the financial position of the relevant
company to as if the challenged transaction had not taken place.
The time limits (the hardening periods) range from between three
months to eternity, depending on the type of transaction, but
transactions between related parties are generally easier to claw
back than transactions with third parties.
The general clawback provision stipulates that any action whereby a
creditor is unduly put in a better position than other creditors, or
assets of the debtor are being deprived from the creditors or the
debts of the debtor are increasing, may be clawed back if the debtor
was, or as a result (directly or indirectly) of the action, has become
insolvent. However, this shall only apply if the counterparty knew,
or should have known, about the debtor’s insolvency and the
circumstances that made the action undue. It is assumed that related
parties have such knowledge.
Further, payment of a debt which has been made prior to initiating a
formal insolvency proceeding and which was made by other than
ordinary means of payment, or prior to the due date or with such
amount that the financial situation of the debtor became
considerably worse, may be clawed back if the circumstances under
which the payment was made do not make it an ordinary payment.
Other clawback provisions relate to, inter alia, gifts, salaries or
other remunerations. Another example is that security that the
debtor has transferred within a hardening period is annulled unless
it was provided when the debt was created or was transferred
without delay after the creation of the debt.
It is not a general requirement that the transaction was made with
actual intent to defraud creditors, and some clawback provisions can
be applied even if the company was not insolvent or became
insolvent as a result of the transaction but thereafter entered into
company restructuring or bankruptcy.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
See question 1.2 above.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
The key restructuring procedure is reorganisation in accordance
with the Business Reorganisation Act. The purpose of such
procedure is to give companies in financial difficulties a possibility
to avoid bankruptcy, by, for example, providing protection from
certain enforcement actions from creditors or giving a grace period
in respect of payments of debts that had arisen before the
reorganisation was initiated. Further, one common reason to apply
for company restructuring is to try to achieve a debt write-down.
Provided that a qualified majority has approved thereof, all
unsecured debt will be written down pro rata and the company shall
be given a grace period of up to one year. A debt composition
proposal, which yields at least 50 per cent of the amount of the
unsecured debt, shall be deemed to be accepted by the creditors,
where three-fifths of the creditors voting have accepted the proposal
and their claims amount to three-fifths of the total amount of claims
held by the creditors entitled to vote. Where the debt composition
percentage is lower, the debt composition proposal shall be deemed
to be accepted where three-fourths of the creditors voting have
approved the proposal and their claims amount to three-fourths of
the total amount of the claims held by the creditors entitled to vote.
During the reorganisation process, the management continues to
control the business and to run the daily operations of the relevant
company, and the board of directors have full capacity to represent
the company. However, an administrator is appointed by the court
to supervise all activities. The company may not assume new legal
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obligations, nor may it transfer, pledge or grant a third party any
rights to property which is of substantial importance to the business
operations without the consent of the administrator. Furthermore,
the company is prohibited from paying, or granting security for, any
debt that occurred prior to filing for company reorganisation without
the consent of the administrator. However, the absence of such
consent does not affect the validity of the transaction.
As a general rule, a reorganisation may not continue for more than a
year.
Swedish law does not as such recognise a “pre-pack” as an
instrument. However, Swedish law does not explicitly prohibit
entities from taking steps and measures prior to a bankruptcy, such
as finding suitable buyers for assets, which can be implemented in
the bankruptcy. Which pre-pack measures may be taken must be
decided on a case-by-case basis.
Debt-for-equity swaps may be made both by shareholders and by
third parties if the shareholders approve of the equity issue. Third
parties who acquire distressed debt may use it to gain an equity
interest in the debtor.
During the reorganisation, secured creditors may still enforce
certain types of security. Other enforcement measures may only
take place in respect of the debtor if there are special reasons to
believe that the rights of a creditor are jeopardised. The court may
then take appropriate measures to safeguard such rights.
Upon request by a creditor, the court may appoint a creditors’
committee who the administrator should consult with during the
reorganisation. A creditors’ committee may consist of a maximum
of three creditors, and if the company has more than 25 employees,
it is entitled to appoint a fourth member.
3.3 What are the criteria for entry into each restructuring procedure?
A prerequisite for entering into a reorganisation process pursuant to
the Business Reorganisation Act is that the company is incapable of
paying its debts, or that such incapacity presumably will occur in the
near future. Further, an application to enter into a reorganisation
shall be dismissed if there is no reason to expect that the
reorganisation will be successful. In practice, courts often approve
an application for reorganisation so that an administrator is
appointed and can investigate this further.
3.4 Who manages each process? Is there any court involvement?
A court approval is required in order to enter a reorganisation and
the court will also make the decision to terminate the reorganisation.
As described in question 3.2, an administrator is appointed by the
court to supervise the activities of the company.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A reorganisation provides protection to the company, as it prevents
counterparties from terminating agreements by sole reason of the
company’s late payments or performance (or anticipated delays of
such nature) if the company (with the consent of the administrator)
upon request by the counterparty informs the counterparty that it
wishes the agreement to continue in force. A provision in a contract
that a party may be entitled to terminate the agreement due to the
insolvency of the company may be unenforceable.
If the contract stipulates that it is time for the counterparty to
perform its obligation under the contract, the counterparty may
require that the company performs its obligations (e.g. pays)
simultaneously, or that the counterparty receives security for such
performance. A counterparty may also in other situations be entitled
to request security if necessary, in order to protect it from making a
loss.
Set-offs will be accepted, with a few exceptions. A set-off is not
permitted if the debt was acquired (from someone else not having
the right of set-off) within a three-month period starting from when
the reorganisation was initiated or if the creditor reasonably should
have known about the insolvency.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Most suppliers will start to require advance payments or payments
upfront in order to deliver goods needed, wherefore the company
will need cash at hand during the reorganisation.
The state wage guarantee (see question 6.1 below) will provide
some support, but a company is often dependent on contributions
from its shareholders or external funding in order to be able to
continue to run the business.
Although not provided for by law, in practice an administrator takes
control of the funds of the company by having them transferred to an
escrow account controlled by the administrator during the
reorganisation.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure is bankruptcy in accordance with the
Bankruptcy Act (Sw. konkurslag (1987:672)), providing for all
assets of the debtor to be fairly distributed to the creditors and for
the company to be subsequently dissolved. Further, the Companies
Act entails certain provisions regarding mandatory liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
A company can apply for bankruptcy voluntarily or be forced into
bankruptcy upon the application of a creditor, if the company is
considered insolvent. A company is considered insolvent if it
cannot pay its debts as they fall due and this incapacity is not
temporary. A statement by a company that it is insolvent is assumed
to be correct, unless there are circumstances giving the court reason
to believe that this is not the case.
In case a creditor files for bankruptcy, it would have to provide
evidence as to why the company would be insolvent or would have
to rely on certain stipulated presumption rules. A creditor cannot
force a company into bankruptcy if its claim is protected by
sufficient security.
A mandatory liquidation must be initiated, inter alia, when the
solidity is below the levels stipulated by the Companies Act (see
question 2.1 above).
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4.3 Who manages each winding up process? Is there any court involvement?
An application for bankruptcy must be submitted to the district
court, which should then make a prompt decision on the matter. The
bankruptcy is managed by one or more administrators appointed by
the court who have the special insight and experience required and
are otherwise appropriate for the assignment, and the work of the
administrator is supervised by the Swedish Enforcement Authority
(Sw. kronofogdemyndigheten).
A liquidation will be administrated by a liquidator proposed by the
company and approved by the court or the Companies Registration
Office (Sw. bolagsverket) (the former if the liquidation is a part of a
court proceeding).
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
During the reorganisation, secured creditors may still enforce
security if the creditor has the security assets in its possession, i.e.
excluding, for example, business mortgages and security obtained
through registration.
Levy of execution (Sw. utmätning) may not take place in respect of
the debtor other than if the creditor has priority rights in respect of
its claims (see question 4.6 below).
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The bankruptcy estate may choose not to honour existing
agreements, and the counterparty will then have a claim on the
company. However, there are no unified rules that apply to the
contracts of a company in bankruptcy. If there are specific
provisions set out in any legal act, those will, however, override any
clause in the agreement. Hence, all contracts will not automatically
terminate and a clause stipulating that a counterparty may terminate
the agreement due to the bankruptcy may be unenforceable. If not
regulated by law, the terms of the contract will apply.
One law limiting the right to terminate an agreement is the Sales of
Goods Act, but that provision is also invoked analogously in other
contractual relationships. The creditor (or supplier or similar) may
not terminate the agreement before giving the bankruptcy estate the
opportunity to step into the contract. If the estate decides to do so
and the performance by the creditor is due, the creditor may demand
that the estate completes its performance as well or, under certain
circumstances, that the estate provides security if necessary in order
to protect him against loss. If the estate does not step into the
agreement or grant security in accordance with the aforesaid, the
creditor may terminate the agreement.
As regards set-offs, please see question 3.2 above.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The Bankruptcy Act prioritises all costs of the bankruptcy procedure
and debt arising after the time of bankruptcy. Any surplus thereafter
shall be distributed to the creditors in accordance with the Priority
Rights Act (Sw. förmånsrättslag (1970:979)). If, however, the
creditor enforces a security on its own, which is possible for certain
so-called possessory liens (see question 4.4 above), the costs of the
bankruptcy estate cannot be taken from such proceeds.
According to the Priority Rights Act, firstly, debts secured by
specific property are paid out of the proceeds of the sale of that
specific property, including, inter alia, (in the order of priority as
listed): maritime liens and aircraft liens; international interests in
aircraft and aircraft engines which are registered pursuant to the
International Interests (Mobile Equipment) Act (2015:860); pledges
and rights to retain possession of personal property as security for a
debt (possessory liens); as well as grants of security interests made
on the basis of registration or notice pursuant to the Central
Securities Depositories and Financial Instruments Accounts Act
(SFS 1998:1479), security interests based upon mortgages granted
in ships, or shipbuilding, or aircraft and reserve parts for aircraft.
Thereafter would be a creditor having received security in the form of
business mortgages or security in the form of real property mortgages.
Thereafter there are claims of general priority, i.e. in the following
order of priority: costs for filing for bankruptcy; the costs for a
previous reorganisation process; costs arising with the consent of a
reorganisation administrator (in case there has been a preceding
reorganisation procedure) provided that it has clearly arisen in the
best interests of the creditors; audit costs; and employees’ salaries
and remunerations.
Lastly, all other unsecured creditors will share the remaining funds
(if any) pro rata between themselves and if all unsecured creditors
have been fully paid, the surplus will be paid to the shareholders.
4.7 Is it possible for the company to be revived in the future?
While the company is typically dissolved after its assets are
liquidated, assets of the company, such as the brand name or
business model, may be acquired for use in a new venture. If there
is a surplus after a bankruptcy, the company itself must, however,
not be liquidated, but this is a rather unlikely scenario.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Generally, a restructuring or insolvency procedure does not give rise
to any further tax risks, but the procedure may result in forfeiture of
tax losses. However, taxable income may crystallise in case of
informal work-outs.
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A failure to apply for a restructuring or insolvency procedure when
a company becomes unable to pay all taxes in a due manner may
result in the board members incurring personal liability for the tax
payments of the company. Hence, it is important that all taxes are
duly paid.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
A bankruptcy or reorganisation does not automatically cause the
employments to be terminated. If a Swedish company is insolvent
and therefore unable to pay salaries due to its employees, the state
wage guarantee (Sw. lönegaranti) will be triggered. A prerequisite
for the guarantee to be applicable is that the company has been
declared bankrupt or is in a company reorganisation procedure and
the total amount per employee that can be paid out corresponds to
four base income amounts (Sw. prisbasbelopp), which for 2019
adds up to a total of SEK 186,000. All different categories of
employees are covered, excluding, however, independent
contractors. As a general rule, the guarantee only covers salary
claims that have fallen due within three months prior to the date of
the bankruptcy filing.
Normally, employees have a general right of priority (Sw. allmän förmånsrätt) for wages or other compensation arising from the
employment. The general right of priority is however limited in
time and certain criteria must be fulfilled. As claims having a
specific right of priority (for example, secured creditors) has
precedence over claims having a general right of priority, secured
creditors rank ahead of employees. However, the employees rank
before, for example, unsecured creditors and shareholders.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
For members of the EU (other than Denmark), the new Regulation
(EU) 2015/848 of the European Parliament and of the Council of 20
May 2015 on insolvency proceedings (the Insolvency Regulation),
which came into force on 26 June 2017, provides that the courts of
the EU Member State within the territory of which the centre of the
debtor’s main interests is situated shall have jurisdiction to open
insolvency proceedings (main insolvency proceedings). The centre
of main interests shall be the place where the debtor conducts the
administration of its interests on a regular basis and which is
ascertainable by third parties. However, if a company has an
establishment within the territory of another Member State, the
courts of such Member State may open insolvency proceedings in
respect of such assets (territorial proceedings). Generally, territorial
proceedings may not be opened if main insolvency proceedings have
been initiated, but there are certain exceptions to this general rule.
As regards situations where the Insolvency Regulation does not
apply, a Swedish court may initiate insolvency proceedings to the
extent it deems that the centre of main interests of the company is
located in Sweden, if the company has assets in Sweden or in a
limited number of other scenarios.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
The main rule is that foreign insolvency proceedings will not be
recognised or enforced in Sweden. Notwithstanding the aforesaid,
Swedish authorities must recognise restructuring and insolvency
proceedings initiated in accordance with the Insolvency Regulations
(see question 7.1 above). Further, the Nordic countries have agreed
on the Convention between Denmark, Finland, Norway, Sweden
and Iceland on Bankruptcy which continues to apply between all
Nordic countries except between Sweden and Finland (as the
Insolvency Regulation supersedes the convention).
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It would be unusual for a Swedish company to restructure or enter
into an insolvency proceeding in a jurisdiction other than Sweden.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
From a legal point of view, each entity is treated separately from one
another. Notwithstanding the aforesaid, it is commonplace that
members of the group file at the same time and request that the same
administrator should be appointed for all Swedish members of the group.
The new Insolvency Regulation (see question 9.1 for further details)
includes provisions to enable an administrator to request the
opening of group coordination proceedings if one or more members
of a group are in bankruptcy proceedings in different jurisdictions.
If the request is approved, a coordinator will be appointed and may
make recommendations to the administrator.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The Insolvency Regulation came into force on 26 June 2017, and will
further harmonise the insolvency proceedings in the EU. A new EU
proposal has been presented on preventive restructuring frameworks,
second chance and measures to increase the efficiency of restructuring,
insolvency and discharge procedures and amending Directive
2012/30/EU, which will further harmonise the EU insolvency regime.
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Carolina Wahlby Hannes Snellman Attorneys Kungsträdgårdsgatan 20 SE-103 96 Stockholm Sweden Tel: +46 760 000 070
Email: [email protected]
URL: www.hannessnellman.com
Fredrik Olsson Hannes Snellman Attorneys Kungsträdgårdsgatan 20 SE-103 96 Stockholm Sweden Tel: +46 760 000 006
Email: [email protected]
URL: www.hannessnellman.com
Hannes Snellman is a premier Nordic law firm focusing on significant business transactions and complex dispute resolution. We serve our clients with commitment, creativity and quality.
Hannes Snellman is a key player in the Nordic financial centre with the capacity and specialist know-how to handle any demanding local or cross-border transaction or dispute.
Hannes Snellman’s restructuring and insolvency practice provides a broad range of legal, strategic and commercial advice, with extensive experience in domestic and international restructuring and insolvency matters, to navigate clients through the turmoil of situations involving financially distressed companies. Our insolvency practice represents debtors, creditors, bondholders, investors, boards of directors, auditors, and creditors’ committees in complex corporate restructurings, bankruptcies, work-outs and in bankruptcy planning, negotiations and litigations. The insolvency team works closely with the corporate, finance, tax and litigation practices to provide a complete and comprehensive service to the Firm’s clients.
Carolina Wahlby is a Managing Associate in the Finance and Restructuring team, and specialises in financing, including providing advice on restructurings and bankruptcies, where she has acted as counsel on all sides of the proceedings.
Her more recent experience includes representing a blue chip company in its strategic counterparty insolvency, representing a creditor considering a pre-pack in relation to the bankruptcy of one of its key counterparties as well as representing clients in debt-to-equity swap discussions.
The head of the Finance and Restructuring practice at the Stockholm office, Fredrik Olsson has vast experience of finance-related work, including restructurings and insolvencies. He has experience of representing a variety of different parties, including debtors, distressed financial institutes, syndicates of banks and other creditors and counterparties. He is experienced both in formal and informal reorganisations, and of providing advice in cases in simultaneous proceedings in several jurisdictions. In addition thereto, he advises clients on transactions involving the purchase of debt and debt-for-equity swaps.
Examples of his previous experience include representing groups with insolvency procedures in their Swedish subsidiaries, as well as representing a company within the public sector in connection with the company reorganisation of its counterparty and being counsel to a company investigating the possibility of doing a debt-to-equity swap.
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tanja luginbühl
Dr. roland Fischer
switzerland
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The recovery and insolvency of companies incorporated in
Switzerland is governed by the Swiss Code of Obligations (CO) and
the Swiss Debt Enforcement and Bankruptcy Act (DEBA). The CO
and the DEBA provide for a fair balance of rights and obligations of
both debtors and creditors.
In 2014, the DEBA was amended to make in-court restructuring
options more appealing to debtors. Based on our experience so far,
this has slightly shifted the balance. In turn, the trigger events set
forth in the CO to initiate insolvency proceedings are currently
under review and it is to be expected that the focus will shift from
balance sheet triggers to liquidity triggers.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
There are two main types of formal insolvency and restructuring
proceedings in Switzerland: bankruptcy (i.e., liquidation) proceedings
(Konkursverfahren/faillite); and composition proceedings
(Nachlassverfahren/concordat). Whereas in bankruptcy proceedings
a company is eventually wound up, composition proceedings can
either: (i) be used to liquidate and realise the debtor’s assets in a more
flexible manner than in bankruptcy (composition agreement with
assignment of assets); (ii) result in a debt restructuring (be it through
a debt-rescheduling or a dividend agreement or a combination
thereof); or (iii) be used as a mere restructuring moratorium, which
may be terminated without the need to reach a composition agreement
or to open bankruptcy liquidation proceedings if the debtor can be
successfully restructured during the moratorium. Further, Swiss law
provides for the possibility of an informal work-out; please see
question 3.1 below for more details. Special insolvency regimes exist
for certain types of companies, most notably banks, securities dealers,
insurance companies and other players in the financial industry.
It is fair to say that although both types of formal proceedings are
used in practice, bankruptcy proceedings are opened significantly
more frequently than composition proceedings. Due to the higher
costs linked to the latter, they are primarily (albeit not exclusively)
used by major companies in financial distress.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The CO provides for various inalienable and non-transferable
responsibilities of the directors of a Swiss company that specifically
apply in financial distress. The regime is identical for the corporate
forms most frequently used in practice, i.e., corporations
(Aktiengesellschaften/sociétés anonymes) and limited liability
companies (Gesellschaften mit beschränkter Haftung/sociétés à résponsabilité limitée).
If, based on the last financial statements, half of the share capital and
the legal reserves of the company are no longer covered by its assets
(article 725 par. 1 CO, Kapitalverlust/perte de capital) the directors,
inter alia, have to convene an extraordinary shareholders’ meeting
and to propose appropriate restructuring measures. If a Swiss
company is over-indebted (überschuldet/surendetté) within the
meaning of article 725 par. 2 CO, i.e., if its assets no longer cover its
liabilities, the board of directors must notify the court without delay
unless certain creditors are willing to subordinate their claims to
those of all other company creditors in an amount sufficient to cover
the capital deficit and any losses anticipated to be incurred in the
next 12 months. Notification of the court will typically lead to the
opening of bankruptcy proceedings. Furthermore, bankruptcy
proceedings have to be initiated if a shareholders’ meeting resolves
on the dissolution of the corporation as a result of its illiquidity
(zahlungsunfähig/insolvable) pursuant to article 191 DEBA.
As an alternative to filing for bankruptcy, a company (or a creditor
entitled to request the opening of bankruptcy proceedings) may apply
for the postponement of bankruptcy (Konkursaufschub/ajournement de faillite) or the opening of composition proceedings. However, it is
not required for the admissibility of composition proceedings and the
grant of a moratorium that the company is over-indebted within the
meaning of article 725 CO, i.e. if its assets no longer cover its
liabilities, or that it is unable to pay its debts within the meaning of
article 190 par. 1 section 2 DEBA. Still, the debtor must make it
plausible to the court that over-indebtedness and/or illiquidity are
likely to occur in the near or more distant future unless a restructuring
is pursued under the protection of a moratorium. Furthermore, court
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precedents hold that a company which is over-indebted may continue
to trade if there are good prospects that the company can be
restructured within a short period of time. The timeframe available
to the directors is typically viewed to be in the range of four to six
weeks from the determination of over-indebtedness.
Directors’ liability typically arises in bankruptcy. The general legal
basis as regards the civil liability of directors (Haftung für Geschäftsführung/responsabilité dans la gestion) is article 754 CO,
pursuant to which the members of the board of directors and any
person entrusted with the management or the liquidation of a
corporation shall be liable for damages “caused by wilful or
negligent violation of their duties”. Accordingly, the liability of a
director requires: (i) a breach of the director’s duties; (ii) damages
caused to the corporation or a particular creditor; (iii) a wilful or
negligent conduct (fault); and (iv) a causal link between the breach
and the damage. According to the above, courts have held directors
who failed to take the steps required by law by not notifying the court
about the over-indebtedness of the company liable. In such
scenarios, damages typically cover the increase of loss that occurred
between the moment the directors should have known of the
corporation’s distressed situation and failed to take appropriate
actions and the moment the bankruptcy was actually declared
(Konkursverschleppung/retard de la prononcé de la faillite). Further
liability risks may arise in case of a mismanagement or the context of
transactions that are at risk of being challenged (see question 2.3).
Several provisions of the Swiss Criminal Code (CrimC) may also
apply in the context of the activity undertaken by a director. Article
165 CrimC punishes debtors whose acts of mismanagement have
caused the company’s bankruptcy (Misswirtschaft/gestion fautive).
This criminal provision expressly refers to the case of the debtor
who, by means of an insufficient capital endowment, causes or
aggravates its over-indebtedness before being declared bankrupt.
Special attention must also be paid to article 167 CrimC, which
deals with the issue of the advantages granted to certain creditors by
an insolvent debtor who is subsequently declared bankrupt
(Bevorzugung eines Gläubigers/avantages accordés à certains créanciers). As for disqualification (Berufsverbot/interdiction d’exercer une profession) issues, article 67 par. 1 CrimC (which is in
fact very rarely implemented) provides that the court may prevent a
convicted person from exercising their profession for a period
extending from six months to five years if this person has been
punished either by an imprisonment sanction exceeding six months
or a fine exceeding 180 day rates for an offence committed within
the exercise of a profession when the circumstances give reason to
fear new abuses from the convicted person.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Moratoria and stays on enforcement are generally available under
Swiss insolvency laws, as outlined in detail in question 1.2 above
and questions 3.2 et seq. below. They would not, however, prevent
foreclosure in all types of collateral. Most importantly, foreclosure
in assets where legal title has been transferred for security purposes
may still occur despite a composition moratorium and certain types
of intermediated securities may also be realised during a stay.
As to the possibility of using other stakeholders to influence the
company’s situation, firstly it should be noted that the company’s
statutory auditors (Revisionsstelle/organe de révision) must notify
the court if the company is over-indebted and the board of directors
fails to notify the court itself. In addition, creditors may petition the
court to open bankruptcy proceedings or composition proceedings
in respect of the company under certain circumstances. As long as
no such proceedings have been opened by the court, creditors may
take the same debt enforcement actions against a company in
financial distress as they may against a company in good standing.
Also, there are no special rules and regimes applicable to particular
types of unsecured creditors as far as the enforcement of their claims
is concerned, i.e. the available enforcement actions under the DEBA
are the same for all unsecured creditors. This notwithstanding, the
claims of certain creditor categories such as employees or social
security insurances are privileged in the context of insolvency
proceedings (see also question 4.6 below) and some creditors may
have additional contractual rights vis-à-vis the debtor under Swiss
substantive laws (e.g. the right of termination of the landlord in case
of non-payment of the rent). A particular constellation in this
context consists of the so-called lien of the landlord (Retentionsrechts des Vermieters) which, under certain circumstances, provides that
the inventory kept in the premises leased under a commercial lease
shall secure outstanding rent payments for a period of up to a year-
and-a-half. If the lessee is declared bankrupt or otherwise liquidated
by means of formal insolvency proceedings, the landlord would
need to register its claims and the pertaining lien – subject to a
number of limitations and requirements – in the course of such
proceedings. Whether or not such claims and the lien would then be
admitted to the schedule of claims is decided by the receiver in
bankruptcy, with other creditors being able to contest both the
existence and amount of the claim itself as well as the lien.
Finally, with regard to retention of title arrangements in general, it
should be noted that while Swiss law in theory allows for such
arrangements to be established, the pertaining formal requirements
are rather cumbersome and the retention of title does not protect
against the bona fide acquisition of title by a third party.
Consequently, such constellations are of very little relevance and do
not confer any additional creditor rights in insolvency proceedings.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
According to the DEBA, certain preferential or fraudulent acts made
by the debtor within certain suspect periods may become subject to
challenge. The avoidance regime set forth in articles 285 et seq.
DEBA provides for three different avoidance actions
(Anfechtungsklage/action révocatoire), i.e.: (i) the action to avoid
gratuitous transactions (Schenkungsanfechtung/révocation des libéralités) which targets, in particular, all gifts and all dispositions
made by the debtor without any, or without adequate, consideration
during the year prior to the opening of bankruptcy proceedings, the
granting of a moratorium or the seizure of assets; (ii) the voidability
of certain specified transactions during the year prior to the opening
of bankruptcy proceedings, the granting of a moratorium or the
seizure of assets while the debtor is already over-indebted
(Überschuldungsanfechtung/révocation en cas de surendettement) i.e., the granting of a security interest for existing debts without
being, by prior agreement, contractually obligated to create the
relevant security interest, the settlement of a monetary claim in a
manner other than by usual means of payment, or the payment of a
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debt which was not yet due, in each case provided that the recipient
is unable to prove that it was unaware and must not have been aware
of the debtor’s over-indebtedness; and (iii) the avoidance for intent
(Absichtsanfechtung/révocation pour dol) which targets dispositions
and other acts made by the debtor within a period of five years prior
to the opening of bankruptcy proceedings, the granting of a
moratorium or the seizure of assets if the disposition was made by the
insolvent with the intent to disadvantage its creditors or to prefer
certain creditors to the detriment of other creditors and if the
privileged creditor knew or should have known of such intent. For all
challenges, it is further required that the challenged transaction has
caused damages to other creditors of the debtor. The rules regarding
avoidance for intent as well as avoidance of gratuitous transactions
provide for an inversion of the burden of proof whenever these
transactions are entered into by related parties (including affiliated
entities). Accordingly, in such cases the benefiting party must prove
that it could not have been aware of the disproportion between
performance and consideration (in case of avoidance of gratuitous
transactions) or of the intention of the insolvent debtor to prefer
certain creditors over others (in case of avoidance for intent).
If all prerequisites are met, the court orders the defendant to return
the specific assets to the estate. If the return of a specific asset is no
longer possible, the court may order the defendant to compensate
the estate in cash. In recent case law, the Swiss Federal Supreme
Court has shown a tendency to apply rather low standards for a
successful avoidance for intent.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
In case of a loss of capital (Kapitalverlust/perte de capital), the
board of directors must convene an extraordinary shareholders’
meeting and propose appropriate restructuring measures (article 725
par. 1 CO, see question 2.1). No court needs to be involved for the
proposition or implementation of such measures.
While, according to article 725 par. 2 CO, there is a general obligation
to notify the court in case of over-indebtedness
(Überschuldung/surendettement), court precedents hold that, during a
short window of a few weeks, an informal work-out may be carried out
without court involvement in case of good prospects of success (see
question 2.1). Furthermore, the court may, at the request of the board
of directors or a creditor, postpone the adjudication of bankruptcy,
provided that there is the prospect of a financial reorganisation
(Konkursaufschub/ajournement de la faillite). Such reorganisation
may occur under the supervision of an administrator, which is instated
by the court. That said, the opening of composition proceedings (see
question 3.2 below) is requested more frequently in such instances.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Formal rescue procedures are available in the form of composition
proceedings. The restructuring of liabilities may be achieved in two
ways, with or without a cram-down element:
First, composition proceedings may be used as a mere restructuring
moratorium (article 296a DEBA). A termination is only possible if
it can be established before the court that the debtor is restructured
(without the need for a debt rescheduling or a dividend agreement).
An individual agreement must be reached with each single creditor
who is expected to make a concession.
Second, where it is not possible to receive consent from each single
creditor, a composition agreement may be proposed. In a debt-
rescheduling agreement (Stundungsvergleich/concordat moratoire)
the debtor offers the creditors full discharge of their claims
according to a fixed time schedule and, hence, the contractual terms
and conditions of the credits are modified. In a dividend agreement
(Prozent- oder Dividendenvergleich/concordat dividende), the
debtor offers the creditors only a partial payment of their claims in
connection with a creditors’ waiver of the remainder. The debtor is
not wound-up as a consequence of such debt-rescheduling or
dividend agreement and once such agreement has been adopted by
the required quorum of creditors and the competent court, the debtor
would have full power to manage the company’s affairs. The
composition agreement must be approved by a majority of creditors.
These are rarely used to restructure large companies.
Debt-for-equity swaps and/or composition agreements with
incorporation of a company (Nachlassvertrag mit Gesellschaftsgründung/concordat avec constitution de société) are
admissible in Switzerland. In a typical debt-for-equity swap, creditors
receive interests in the debtor in proportion to their recognised claims.
Under a composition agreement with incorporation of a company, the
debtor undertakes to assign its assets to a newly created company in
which the creditors obtain interests in proportion to their recognised
claims. Furthermore, pre-packaged sales are possible under Swiss
law. Such sales may require the consent of the court-appointed
administrator (Sachwalter/commissaire) and the court.
Specific rules apply to debt-for-equity swaps for certain entities that
are subject to a special insolvency regime, most notably to banks.
During the moratorium, creditors of claims are not entitled to
commence or continue debt enforcement proceedings
(Betreibung/poursuite). This restriction does not apply to creditors
whose claims are secured by real estate who are, however, precluded
from foreclosing on the real estate. For further limitations on the
effects of a stay see question 2.2.
As soon as a draft composition agreement
(Nachlassvertrag/concordat) is proposed, the administrator
convenes a creditors’ meeting. Only creditors who have filed claims
in time are given the right to vote in the creditors’ meeting. Other
than the right to vote in the creditors’ meeting, creditors are
generally not able to influence composition proceedings.
Approval of the proposed composition agreement requires an
affirmative vote by a quorum of either (i) a majority of creditors
representing two-thirds of the total debt, or (ii) one-quarter of the
creditors representing three-quarters of the total debt. Creditors with
privileged claims and secured creditors (to the extent that their claims
are covered by the estimated liquidation proceeds of the collateral)
will not be entitled to vote on the composition agreement. After
approval by the creditors, the composition agreement requires
confirmation by the composition court. With the court’s
confirmation, the composition agreement becomes valid and binding
upon all creditors of claims subject to the composition agreement,
whether or not they have participated in the composition proceedings
and irrespective of their non-approval of the composition agreement.
It is, thus, possible to cram-down dissenting creditors in such
proceedings. In turn, Swiss law does not provide for different classes
of creditors which are subject to a composition agreement and, hence,
no cram-down of dissenting classes of creditors is available.
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As opposed to the creditors, shareholders have no voting rights over
court-adjudicated composition agreements. The DEBA, however,
provides that in order for an ordinary composition agreement to be
approved by the court, the equity holders must make an appropriate
contribution to the restructuring efforts.
3.3 What are the criteria for entry into each restructuring procedure?
Composition proceedings are typically initiated by the debtor. No
specific trigger event exists which must have occurred for the debtor
to be entitled to request the opening of composition proceedings. In
addition, both creditors entitled to request the opening of
bankruptcy proceedings and the bankruptcy court may request the
opening of composition instead of bankruptcy proceedings.
Upon receipt of a request to this effect, the court grants a provisional
moratorium (provisorische Nachlassstundung/sursis provisoire) of
up to four months. Furthermore, a provisional administrator
(provisorischer Sachwalter/commissaire provisoire) may be
appointed by the court to permit an assessment of the prospects of a
successful reorganisation or of a composition agreement.
If the court finds that there are reasonable prospects for a successful
reorganisation or that a composition agreement is likely to be
concluded, it must grant a definitive moratorium (definitive Nachlassstundung/sursis concordataire) for a period of four to six
months and appoint an administrator (Sachwalter/commissaire). Upon
application by the administrator, the duration of the moratorium may
be extended to up to 12, and in particularly complex cases, 24 months.
3.4 Who manages each process? Is there any court involvement?
If the provisional moratorium is made public, it is not compulsory
(but customary) to appoint an administrator during the provisional
moratorium. An administrator must always be appointed for the
duration of the definitive moratorium. In addition, the court may
appoint a creditors’ committee (Gläubigerausschuss/commission des créanciers) to supervise the administrator and the proceedings
in general.
The debtor may continue its business activities under the supervision
of the administrator and the court. The composition court may,
however, direct that certain acts shall require the administrator’s
participation in order to be legally valid, or authorise the
administrator to take over the management from the debtor. Without
the authorisation of the composition court or the creditors’ committee
(if appointed), the debtor is prohibited from divesting, encumbering
or pledging certain assets and to grant guarantees or to make gifts.
Major steps in the composition proceedings require the involvement
of the court. This holds true for the opening of composition
proceedings, the appointment of an administrator, the approval of
certain transactions involving the debtor and, finally, the approval of
the composition agreement.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Contractual relationships between the debtor and its counterparties
generally continue to be effective unless (i) there is a specific
statutory provision under applicable contract law providing for an
automatic termination of the relevant agreement or a termination
right upon the grant of a moratorium, or (ii) the specific contract
provides for an automatic termination or a termination right upon
the grant of a moratorium. If so, the termination would generally be
valid and enforceable vis-à-vis the Swiss debtor and the
administrator from a Swiss insolvency law perspective.
Notwithstanding the foregoing, there are certain restrictions (see
question 3.4) which may prohibit the debtor from disposing of its
assets or continuing its business.
If, in contrast, a contract is not terminated, while the contracting
party would generally have to perform its obligations in kind, it may
demand that security be provided if the debtor’s restructuring has an
adverse effect on the counterparty’s claim (which would typically be
the case). In the event that no security is provided in due course –
with the applicable time period depending on the underlying
circumstances – the counterparty is entitled to unilaterally rescind
the relevant agreement. In case of long-term contracts
(Dauerschuldverhältnisse/contrats de durée), to the extent the
counterparty performs its obligations during a moratorium with the
consent of the administrator, its claims against the debtor constitute
so-called debts of the estate (Masseverbindlichkeiten/dettes de la masse) and have to be paid as a matter of priority (prior to all other
non-secured creditors).
Further, the administrator has the authority to order conversion of a
performance owed by the debtor in kind into a monetary claim of
corresponding value, which will then become subject to the terms of
the composition agreement. Set-off rights are modified upon the
grant of a moratorium in much the same way as upon the opening of
bankruptcy proceedings (see question 4.5 below).
Finally, with the consent of the administrator, the debtor may
extraordinarily terminate long-term contracts
(Dauerschuldverhältnisse/contrats de durée) during the moratorium
against full indemnification of the counterparty if the continuing
existence of these contracts would defeat the restructuring purpose
(article 297a DEBA).
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Costs triggered by composition proceedings qualify as debts of the
estate (Masseverbindlichkeiten/dettes de la masse) and have to be
paid with priority from funds available at the outset of the
proceedings, trading results or realisation proceeds. External
funding is possible. An administrator will carefully analyse whether
external funding is appropriate.
As to rescue financing, whether or not the provision of such
financing is given protection depends on the individual
circumstances of the restructuring context. In particular, a
distinction needs to be made between rescue financings made
available prior to the opening of insolvency proceedings and loans
granted in the context of composition proceedings. As a result of the
most recent revision of the DEBA, transactions made during
composition proceedings with the approval of the competent court
or – if applicable – the creditors’ committee are explicitly exempted
from the scope of avoidance actions as described in question 2.3
above and, thus, benefit from claw-back protection. In addition, any
claims arising out of such transactions qualify as debts of the estate
(Masseverbindlichkeiten/dettes de la masse) which are paid with
priority before any distributions are made to other creditors.
In light of the most recent court precedents, it is not clear if – and on
what conditions – rescue financing granted prior to the opening of
insolvency proceedings (so-called Sanierungsdarlehen/prêt accordés
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dans un but d’assainissement) may benefit from claw-back
protection. As a consequence of such unclear and ambiguous case
law, pre-insolvency rescue financing presents a rather high risk for
potential lenders.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The key insolvency procedure which leads to the winding up of a
company is bankruptcy. Additionally, composition proceedings can
be used to liquidate and realise the debtor’s assets in a more flexible
manner than in bankruptcy (composition agreement with assignment
of assets, Nachlassvertrag mit Vermögensabtretung/concordat par abandon d’actif ) but with the same result, i.e., winding up of the
company.
4.2 On what grounds can a company be placed into each winding up procedure?
A company may be placed into bankruptcy proceedings by the
competent court: (i) if a creditor whose claim has not been settled
but upheld within the course of debt enforcement proceedings has
successfully requested the opening of bankruptcy proceedings
(Konkursbegehren/réquisition de faillite); (ii) upon a debtor’s
request by declaring to the court that it is insolvent; (iii) upon a
creditor’s request if the company has committed certain acts to the
disfavour of its creditors or if it has ceased payments or if certain
events have happened during composition proceedings; or (iv) upon
a notification of the court by the board of directors (or the statutory
auditors) of the company that the company is over-indebted within
the meaning of article 725 par. 2 CO. As to the opening of
composition proceedings with the intention of concluding a
composition agreement with assignment of assets, see question 3.3
above.
4.3 Who manages each winding up process? Is there any court involvement?
Bankruptcy proceedings are opened by the competent court and,
within the course of bankruptcy proceedings, the insolvent company
is represented exclusively by the bankruptcy administration. If the
rules for ordinary bankruptcy proceedings apply (summary
proceedings are ordered if the proceeds of the bankrupt’s assets are
unlikely to cover the costs of ordinary proceedings or in non-
complex circumstances), the bankruptcy estate is administered as
follows: the bankruptcy administration publishes a notice of
bankruptcy instructing all creditors and debtors to file their claims
and debts within one month and inviting creditors to a first creditors’
meeting. The first creditors’ meeting may appoint a private
bankruptcy administration acting instead of the state bankruptcy
office as well as a creditors’ committee which has certain
supervisory (and limited decisive) competencies. A second
creditors’ meeting is convened to pass resolutions as to all important
matters, including the commencement or continuation of claims
against third parties and the method of realisation of the assets
belonging to the bankruptcy estate (the actual realisation, however,
is reserved for the bankruptcy administrator). Following
distribution of the proceeds (according to question 4.6 below), the
bankruptcy administration submits its final report to the bankruptcy
court. If the court finds that the bankruptcy proceedings have been
completely carried out, it declares them closed. For composition
proceedings with assignment of assets please refer to question 3.4
above. Once a composition agreement with assignment of assets
has been approved and confirmed by the creditors and the court, the
liquidator would take over the realisation of the assets.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Once bankruptcy proceedings have been opened, all debt
enforcement proceedings come to an end and creditors may not
commence new debt enforcement proceedings against the debtor.
Apart from attending the creditors’ meetings (see question 4.3
above), unsecured creditors have no individual rights to enforce
their claims. Secured creditors have to (i) notify the bankruptcy
administrator if they are holding assets owned by the debtor within
30 days as from the public announcement of the opening of
bankruptcy proceedings, and (ii) hand in the collateral to the
bankruptcy administrator. As a rule, contractual or statutory rights
to privately realise such collateral are no longer enforceable in
bankruptcy. Notable exceptions exist with respect to individual
assets, most importantly for certain intermediated securities.
Furthermore, the restrictions do not apply to certain types of
security interests involving an outright transfer of title. In any
event, the secured creditors keep their preferential rights with
respect to the collateral and will be satisfied out of the net proceeds
of the sale of such collateral in priority to any other creditors. Real
estate mortgages are only realised and proceeds paid out to creditors
if their claims against the debtor are due; claims secured by real
estate mortgages that are not yet due are transferred to the acquirer
of the real property.
For composition proceedings with assignment of assets, please refer
to question 3.5 above. Once a composition agreement with
assignment of assets has been approved and confirmed by the
creditors and the court, private realisation of collateral is available
for movable assets on the basis of article 324 DEBA.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
Whether existing contracts are terminated upon the initiation of
winding up procedures is primarily governed by substantive
contract law and the specific terms of a contract, which are generally
upheld in a Swiss winding up proceeding. Under Swiss contract
law, certain types of contracts are terminated ex lege, whereas others
can be terminated immediately by one party in case of bankruptcy of
the other.
If contracts are not terminated, the contracting party would
generally have to perform its obligations in kind but it would be
bound to accept a dividend rather than full payment or specific
performance. However, should the bankruptcy administration elect
in its sole discretion to pursue the performance of a contract which
was not or was only partially fulfilled at the time of the opening of
the bankruptcy proceedings, the counterparty may demand that
security be provided, and it may further expect full performance by
the bankruptcy administration. The right of the bankruptcy
administration to elect performance of the contract is excluded in
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the case of financial future, swap, option and similar strict deadline
transactions, if the value of the contractual performance can be
determined based on market or stock exchange prices at the time of
the opening of the bankruptcy. The bankruptcy administration and the
contractual partner are each entitled to claim the difference between
the agreed value of the contractual performance and the market value
at the time of the opening of the bankruptcy proceedings.
Special insolvency rules apply to long-term contracts. Even if they
are not terminated upon the opening of bankruptcy procedures, future
claims arising under such long-term contracts will only be admitted to
the schedule of claims if they cover the period until the next possible
termination date (calculated from the opening of bankruptcy) or until
the end of the fixed duration of a contract. If the bankruptcy estate has
made use of performances under the long-term contracts, article 211a
DEBA provides for the indemnification thereof to be a claim against
the bankruptcy estate (Masseverbindlichkeiten/dettes de la masse)
and, thus, to be paid with priority.
Set-off rights are also available in bankruptcy but the substantive set-
off rules are subject to certain modifications in bankruptcy. First, a
distinction needs to be made between (i) claims of the insolvent party
forming part of the insolvency estate and claims against the insolvent
party (Konkurs- oder Nachlassforderungen/créances dans la faillite ou le concordat) to be satisfied with a dividend payment out of the
proceeds of the insolvency estate on the one hand, and (ii) claims of,
and against, the insolvency estate (Masseforderungen und –verbindlichkeiten/créances et dettes de la masse) which are mainly
characterised by the fact that they have come into existence only after
the opening of insolvency proceedings with the consent of the
insolvency administration. As a rule, set-off is only possible between
claims of the same category. In addition, set-off of claims of the first
category is not admissible if (i) the debtor of the insolvent party
became a creditor of the latter only after the opening of bankruptcy
proceedings or the grant of a moratorium, respectively, or (ii) the
creditor of the insolvent party did not become a debtor of the
insolvent party or the insolvency estate until after the opening of the
bankruptcy proceedings or the grant of a moratorium, respectively.
Furthermore, set-off is voidable if a debtor of the insolvent party
acquires a claim against the latter prior to the opening of bankruptcy
proceedings or the grant of a moratorium, respectively, but in
awareness of the insolvency in order to gain an advantage for himself
or a third party to the detriment of the insolvency estate.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Secured claims (pfandgesicherte Forderungen/créances garanties par gage) are satisfied directly out of the proceeds from the
realisation of the collateral. Should the proceeds not be sufficient to
satisfy the claim of a secured creditor, such creditor shall rank as an
unsecured and non-privileged creditor for the outstanding amount of
its claim.
Unsecured claims are ranked within three classes of claims.
Leaving aside claims which are irrelevant in a corporate context, the
classes are composed as follows: the first class consists of claims of
employees (i) derived from the employment relationship which
arose during the six months prior to the opening of bankruptcy
proceedings and which do not exceed the maximum insurable
annual salary as defined by the Federal Ordinance on Accident
Insurance (which is currently CHF 148,200), (ii) in relation to the
restitution of deposited security, and (iii) derived from social
compensation plans which arose during the six months prior to the
opening of the bankruptcy proceedings. The first class also includes
claims of the assured derived from the Federal Statute on Accident
Insurance and from facultative pension schemes, as well as claims
of pension funds against employers. The second class includes
claims of various contributions to social insurances. All other
claims are comprised in the third class. Claims in a lower ranking
class will only receive dividend payments once all claims in a higher
ranking class have been satisfied in full. Claims within a class are
treated on a pari passu basis.
The costs incurred during the bankruptcy proceedings are debts of
the estate (Masseverbindlichkeiten/dettes de la masse) and have to
be paid with priority; i.e., before any other creditor is paid.
4.7 Is it possible for the company to be revived in the future?
Once the bankruptcy proceedings have been terminated, this is
generally not possible. In this scenario, following distribution of the
proceeds, the bankruptcy administration submits its final report to
the bankruptcy court which declares the bankruptcy proceedings
closed if it finds that they have been completely carried out. As a
consequence, the company ceases to exist and will be removed from
the commercial register. However, in case previously unknown
assets of the insolvent are discovered after the bankruptcy
proceedings have been closed, the bankruptcy administration
distributes the proceeds of such assets without further formalities.
In contrast, there are limited options for the debtor to have
bankruptcy proceedings revoked during the course of proceedings.
At the outset of bankruptcy proceedings, the debtor has the
possibility to appeal the declaration of bankruptcy ordered by the
competent court within 10 days. To this effect, the debtor must (i)
make it plausible that it is able to pay its debts (zahlungsfähig/ solvable), and (ii) provide evidence that the relevant claim has been
settled or deposited with the court on behalf of the respective
creditor or that the creditor having requested the opening of
bankruptcy proceedings renounces that such proceedings be carried
out. Alternatively, at a later stage, as from the expiration of the
deadline for the creditors’ call (Schuldenruf/appel aux créanciers)
until the closure of proceedings, the debtor may request the
competent court to revoke bankruptcy (Widerruf des Konkurses/revocation de la faillite), provided that the debtor (i) is
able to evidence that all claims have been settled, (ii) submits a
written statement of all creditors having requested the opening of
bankruptcy proceedings that such request is withdrawn, or (iii) a
composition agreement has been achieved.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
As a rule, companies in financial difficulties do not benefit from any
special tax treatment under Swiss law. In particular, dissolving
hidden reserves or the forgiveness of debt granted by third parties is
generally considered a taxable profit. However, companies in
financial difficulties have generally incurred losses in previous
years that can be set-off against these profits. In this context, one
must note that Swiss tax law enables set-off with reported losses of
the seven prior years. The forgiveness of debt granted by
shareholders is, under certain circumstances, treated as a
contribution for no remuneration and is subject to an issuance stamp
duty (Emissionsabgabe/timbre d’émission) of one per cent, as is the
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case with respect to an increase of capital. The same analysis
prevails in case of a reduction of the share capital followed by an
increase of the share capital or the contribution for no remuneration
(“Harmonika”). However, in case of a financial restructuring, a
company may apply for a waiver of issuance stamp duty to the
extent that the increase of share capital, the contribution for no
remuneration or the forgiveness of debt does not exceed CHF 10
million and further provided that such amount covers losses of the
company. In addition, even if such threshold is exceeded, a waiver
of stamp duty can be obtained if levying such duty would be
excessively harsh for the company.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment agreements are not automatically terminated upon the
opening of insolvency proceedings of the employer. In case the
employer becomes insolvent, though, an employee may terminate the
employment relationship without notice unless such employee is
provided security for claims arising from the employment relationship.
Subject to such termination rights, the bankruptcy administration may
decide to maintain some employment contracts. The administration
may also, as it happens in the majority of cases, cease the business and
therefore decide to terminate the work contracts. When doing so, it has
to comply with the applicable notice period. Unpaid salaries have to
be claimed and scheduled. Composition proceedings generally have a
legal effect that is similar to bankruptcy with respect to employment
contracts. That said, it is much more common to maintain employment
contracts than in bankruptcy.
Employee claims’ are privileged claims and rank in the first class of
creditors. They comprise (i) claims having their basis in the
employment relationship which arose during a period of six months
prior to the opening of insolvency proceedings, up to a maximum
amount determined by Swiss accident insurance legislation which is
currently equivalent to CHF 148,200 (see also question 4.6 above)
as well as employee claims for (ii) return of deposits, and (iii) social
compensation plans (Sozialplan/plan social) that came into
existence or fell due no earlier than six months prior to the opening
of insolvency proceedings. Claims exceeding such maximum
amount are allocated to the third class of (unsecured and non-
privileged) creditors while claims in relation to social insurance
contributions are privileged and rank in the second class.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Pursuant to the DEBA, bankruptcy and composition proceedings
may only be opened in respect of companies incorporated in
Switzerland, meaning that such company must be registered with
the Swiss commercial register (Handelsregister/register du
commerce). A Swiss court is not competent to order the bankruptcy
or composition of a company with a registered seat outside of
Switzerland, even if such company has substantial trade and
business activities in Switzerland. A company incorporated outside
of Switzerland may, thus, only restructure or enter into insolvency
proceedings in Switzerland after such company has re-domiciled to
Switzerland. For the sake of completeness, it should be noted that
Swiss legal doctrine discusses the availability of main Swiss
proceedings for a non-Swiss incorporated entity in exceptional
circumstances where main insolvency proceedings in the
jurisdiction at the registered seat are either unavailable or
impracticable (high requirements) and that there is a close nexus to
Switzerland (which may be satisfied through a debtor’s main centre
of interest (COMI) in Switzerland). We are, however, not aware of
a precedent which would have opened main proceedings in
Switzerland on the basis of this theory. This notwithstanding, in
case a debtor incorporated outside of Switzerland operates a branch
in Switzerland, Swiss insolvency proceedings may be opened
against such debtor in the jurisdiction where the Swiss branch is
located (Niederlassungskonkurs/faillite de la succursale). Such
proceedings, however, are limited to obligations incurred by the
branch (article 50 DEBA).
In particular, it should be noted that Switzerland is not an EU Member
State and, thus, the centre of main interest (COMI) principle laid
down in EU Regulation 2015/848 on insolvency proceedings is not
applicable in cross-border cases involving Switzerland.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
In bankruptcy matters, Switzerland follows the principle of
territoriality. Accordingly, a foreign bankruptcy or any similar
proceeding has no effect in Switzerland unless it has been
recognised. The recognition of foreign proceedings
(Anerkennung/reconnaissance) is governed by a special chapter in
the Swiss Private International Law Act (PILA). The conditions for
recognition are as follows: (i) the insolvency decree must have been
rendered in the state of the debtor’s domicile or where the debtor has
its centre of main interest (COMI) outside of Switzerland; (ii) the
petition for recognition has been introduced by the bankruptcy’s
administrator, by the debtor itself or by a creditor; (iii) the
bankruptcy decree must be enforceable in the state where it was
rendered; and (iv) the bankruptcy must not be inconsistent with
Swiss public policy and the fundamental principles of Swiss
procedural law. As from 1 January 2019, reciprocity is no longer a
requirement. As soon as the petition for recognition has been filed,
the court may, on application of the petitioner, order conservatory
measures. In principle, once the recognition is granted, the foreign
bankruptcy decree has the same effects as a Swiss bankruptcy
decree with regard to the debtor’s assets located in Switzerland.
The provisions relating to the recognition of foreign insolvency
proceedings of the PILA have been revised with effect as of 1
January 2019 (see question 9.1 below). Prior to such revision, the
opening of Swiss ancillary proceedings in case of bankruptcy was
mandatory whereas, under certain circumstances, such ancillary
proceedings were not necessary in case of the restructuring-type of
proceedings (Nachlass- oder ähnliches Verfahren/concordat ou procedure analogue). Under the revised PILA, it is now possible for
the Swiss courts to waive the opening of ancillary proceedings also
in case of a recognition of a foreign bankruptcy decree, provided
that (i) a request to this effect is made by the foreign bankruptcy
administration, (ii) there are no creditors in Switzerland the claims
of which are privileged or secured by a pledge, and (iii) the claims
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of non-privileged and unsecured creditors in Switzerland are
adequately taken into account in the foreign proceedings and such
creditors were granted an opportunity to be heard. In case no
ancillary proceedings are opened, the foreign insolvency
administration may carry out all actions to which it is authorised
pursuant to the applicable foreign law in Switzerland, including,
most notably, the transfer of assets of the foreign debtor located in
Switzerland to the foreign insolvency estate. In this context, the
foreign insolvency administration must ensure that it is at all times
compliant with all applicable Swiss laws. In particular, it must not
perform any official acts, use any means of coercion or adjudicate
on any disputes.
If, by contrast, ancillary insolvency proceedings are opened,
pursuant to article 172 par. 1 PILA, only certain claims may be
included in the schedule of admitted debts, i.e. (i) the claims secured
by pledged assets located in Switzerland according to article 219
pars. 1 to 3 DEBA, (ii) the unsecured but privileged claims of
creditors having their domicile in Switzerland according to article
219 par. 4 DEBA (first and second classes), and (iii) claims for
liabilities on account of a branch (Zweigniederlassung/succursale)
of the debtor registered in the commercial register in Switzerland.
After the satisfaction of these creditors, any remaining balance is
remitted to the foreign bankruptcy estate (article 173 par. 1 PILA).
This transfer, which represents the result of the Swiss ancillary
bankruptcy, requires, however, the prior recognition of the foreign
schedule of claims, whereby the Swiss courts review, in particular,
whether the creditors domiciled in Switzerland were fairly treated in
the procedure and were granted an opportunity to be heard.
Special provisions exist for banks and other financial institutions
where foreign insolvency proceedings are recognised by the Swiss
Financial Market Supervisory Authority (FINMA).
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
As stated in question 7.1 above, Swiss courts have exclusive
jurisdiction on companies registered in Switzerland for the opening
of insolvency proceedings. The fact that a company domiciled and
registered in Switzerland has already requested the opening of
insolvency proceedings outside of Switzerland would not prevent
the Swiss court from opening separate Swiss main proceedings. In
fact, the Swiss authorities would not accept any proceedings outside
of Switzerland in such instances. Accordingly, companies
domiciled in Switzerland and registered with the Swiss commercial
register do not, in practice, restructure or enter into insolvency
proceedings in other jurisdictions.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Swiss insolvency law is based on the principle of “one company one
proceeding”. Hence, in case multiple members of the same
corporate group request the opening of insolvency proceedings,
there will be separate insolvency proceedings for each group
member. The group itself is not subject to insolvency. This
principle notwithstanding, pursuant to article 4a DEBA, Swiss
bankruptcy authorities have to coordinate their actions to the extent
possible in a group insolvency scenario. In particular, based on
article 4a DEBA it would be possible to appoint one sole
administrator in the insolvency proceedings of affiliate entities
within the same group or to decide on the exclusive jurisdiction of
the insolvency courts and authorities which are competent for one
group entity for all affected group entities, subject to prior
agreement of all involved authorities. However, as this provision
was introduced only recently, there is little guidance available with
regards to how such coordination is handled in practice.
This duty to cooperate does not extend to foreign insolvency
proceedings of group members outside of Switzerland. In practice,
however, Swiss bankruptcy authorities in charge of liquidating a Swiss
group member often enter into mutual agreements with foreign
insolvency administrations, settling mutual claims amicably.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
A change to articles 725 et seq. CO, currently dealing, inter alia,
with the issue of loss of capital and over-indebtedness (see question
3.1 above), is being contemplated. It is intended to lower the current
triggering threshold of loss of capital and define additional
circumstances which would trigger certain additional obligations of
the directors of a Swiss company at an earlier stage of financial
distress. The purpose of this reform is to induce the directors to take
countermeasures as early as possible in times of financial
difficulties. In this context, it is also proposed to extend the
maximum term of a silent moratorium from four to eight months.
These amendments are subject to parliamentary discussion and may
still change or be discarded entirely.
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Tanja Luginbühl Lenz & Staehelin Brandschenkestrasse 24 CH-8027 Zurich Switzerland Tel: +41 58 450 80 00
Email: [email protected]
URL: www.lenzstaehelin.com
Dr. Roland Fischer Lenz & Staehelin Brandschenkestrasse 24 CH-8027 Zurich Switzerland Tel: +41 58 450 80 00
Email: [email protected]
URL: www.lenzstaehelin.com
Lenz & Staehelin is one of the leading law firms in Switzerland, having offices in Zurich, Geneva and Lausanne. The firm comprises more than 200 lawyers and has a strong and long-standing practice in insolvency and restructuring matters. The Firm regularly represents creditors, as well as debtors in debt collection, bankruptcy or reorganisation cases pending before Swiss courts. We advise Swiss and international clients in the context of official or out-of-court debt restructurings.
Tanja Luginbühl is a partner in the corporate, M&A and insolvency group of the Zurich office of Lenz & Staehelin. She studied law at the University of Zurich, and is a graduate of the LL.M. programme at the New York University School of Law (1999), USA. Tanja Luginbühl specialises in the area of insolvency and restructuring, corporate, M&A and secured financing. She has been involved in various insolvency cases and advises banks, rating agencies, creditors and companies in situations of financial distress.
For a full biography, please visit:
http://www.lenzstaehelin.com/people/attorneys/profile/56/tanja-luginb%C3%BChl/.
Dr. Roland Fischer is a partner in the Zurich office of Lenz & Staehelin and specialises in domestic and cross-border insolvency law, finance and restructurings. He graduated from the University of Zurich and obtained an LL.M. degree (Corporate Law) from New York University (2007). He has extensive experience in counselling creditors and debtors in insolvency and restructuring situations, and advises banks and corporates on finance transactions of all types and related enforcement matters.
For a full biography, please visit:
https://www.lenzstaehelin.com/people/attorneys/profile/48/roland-fischer/.
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Dirican | gozutok
gökben erdem Dirican
ali gozutok
turkey
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Under Turkish law, the collection of receivables, bankruptcy and
restructuring procedures are mainly governed by the Execution and
Bankruptcy Law (Law No. 2004) (the “EBL”) (published in the
Official Gazette dated June 19, 1932 and numbered 2128). The EBL
provides provisions tending to balance the interest of the creditor
and the debtor. We may give as examples of such tendency that
while the creditor may initiate an execution proceeding against the
debtor without basing its claims over any document or Court
judgment, the debtor may suspend such proceeding by merely
raising an objection. Article 85 of the EBL provides that the
execution officer must equilibrate the interests of both parties. The
EBL sets forth provisions aiming to prevent the immoderate
violation of the debtor’s right of property, such as certain assets of
the debtor necessary for the conduct of the debtor’s business and his
house which is proper to his financial situation which cannot be
attached.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
The financial restructuring may be conducted in an informal way
with an agreement executed between the debtor and its creditors.
Such a financial restructuring would not be binding on creditors
who are not parties to such agreements. The agreements must not be
executed to hide assets from other creditors, which shall prevent
them from collecting their receivables and cause them to incur
losses. The debtor who executed agreements with the intention of
causing his creditors damage shall be considered as fraudulent
bankrupt and shall be punished as per the Turkish Criminal Code
(Law No. 5237) (published in the Official Gazette dated October 12,
2004 and numbered 25611). Both informal work-outs and formal
restructuring and insolvency proceedings are widely used in
practice.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
In the event of a suspicion that a company is in debt, the board of
directors must prepare an interim balance sheet. Pursuant to Article
179 of the EBL and Article 376 of the Turkish Commercial Code
(Law No. 6102) (published in the Official Gazette dated February
14, 2011 and numbered 27846) (“TCC”), in case the liabilities of the
company exceed its assets and/or it is understood from the interim
balance sheet that the company is deeply in debt, the board of
directors must apply to the Commercial Court with a bankruptcy
request. As per Article 377 of the TCC, the members of the board or
a creditor may also request concordat restructuring during the trial
process of bankruptcy at the Court.
Article 345/a of the EBL provides that in case the authorised
individuals of a company fail to apply for bankruptcy, they must be
punished with imprisonment for up to three months upon the
complaint filed by one of the company’s creditors. The board of
directors shall be liable for the damages arising from such failure.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
When a joint stock company suffers losses, which reduce its paid-up
share capital by two-thirds, the board of directors is required to call
an extraordinary general assembly meeting. At this meeting, the
shareholders must resolve either to compensate the company in cash
for the accumulated loss or to decrease the company’s paid up share
capital to one-third of its existing share capital. If the shareholders
do not take one of these steps, the board of directors is required to
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file a lawsuit before the relevant Commercial Court for bankruptcy.
Please also see question 4.2. There are special debt collection
procedures available for some creditors such as landlords, creditors
with retention of title arrangements, banks, and creditors bearing
negotiable instruments. There are also special rules for a sped-up
trial process for employees.
The creditors can make an agreement to enter into a stay or
moratorium. The creditors will not, during the standstill period, take
action to enforce security, to make demands or speed up loans or
other debt claims, to bring legal proceedings against the company
and possibly, not to exercise rights of set-off.
The postponement of bankruptcy provisions enabling an insolvent
company or person to avoid declaring bankruptcy if and to the
extent that its financial situation is improvable, is abolished by the
Law No. 7101 (published in the Official Gazette dated March 15,2018 and numbered 30361) amending the EBL.
Stays on enforcement can be applicable depending on the
precautionary measures which may be taken by the Court.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The hardening period is a key concept in insolvency and bankruptcy
proceedings, providing that a transaction entered into during a
hardening period may be deemed invalid by a Court. During the
debt collection and liquidation process, the transactions of the
insolvent/bankrupt completed prior to its insolvency/bankruptcy,
particularly transactions within the hardening period, shall be
considered and reviewed, which may result in the cancellation of
such transactions provided that such fall within the scope of Articles
278, 279 and 280 of the EBL stating three different hardening
periods.
The one-year hardening period applies to (i) security interests if
such security interest is created to secure an existing debt and the
security collateral provider has not committed to provide security
interest at the time of incurring a debt, (ii) payments made via
instruments other than cash or ordinary payment instruments, (iii)
payments made before their due date, and (iv) certain annotations to
the title deed registries. These transactions should have been made
within one year prior to the bankruptcy of the debtor or the
attachment of its assets in order for these transactions to be annulled.
The two-year hardening period applies to donations or gifts.
The five-year hardening period applies to transactions made by the
debtor with one of its creditors with the aim of harming its other
creditors provided that the creditor with whom the transactions are
made is aware of the insolvency and the aim of the debtor at the time
of the transaction.
In order for the aforementioned transactions to be annulled, they
should have been made within five years prior to the initiation of
bankruptcy or execution proceedings.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Please see question 1.2.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Under Turkish law, the main types of restructuring are concord
restructuring and amicable restructuring.
Concord restructuring is proposed by the debtor or a creditor to
compromise certain liabilities in accordance with a plan. The key aim
is to present a probable success through a concordat plan, with no
intention to cause any damage or loss to the creditors. The restructuring
can be implemented in three different ways: as the ordinary concordat;
the concordat in bankruptcy; and the concordat through asset
abandonment. Some restrictions are imposed on creditors enforcing
their rights over companies under a temporary period and a precise
period of concordat. During the temporary period and precise period of
concordat, no proceedings may be filed against the company and any
proceedings previously initiated are suspended. Prescription periods
and statute of limitations deadlines shall be suspended. Preliminary
injunctions shall not be applicable. Foreclosure proceedings, mortgage
claims and commercial pledges may be initiated/continued provided
that protective measures cannot be taken by creditors and the sale of
pledged property cannot be performed.
Amicable restructuring is applicable for capital stock companies
and cooperatives. If a company is not able to pay its debts or its
receivables are not enough to recover its debts or if the company is
under the threat of facing these steps, such company may apply to a
Commercial Court in order to request the amicable restructuring.
With regard to debt-for-equity swaps, it is known that the principal
element of any debt-for-equity swap is a restructuring of the balance
sheet of a corporate debtor so that the relevant participating
creditors receive equity interests in a reorganised capital structure in
consideration for reducing their debt claims against the company.
Pursuant to Article 329 and Article 602 of the TCC, joint stock
companies and limited liability companies are liable for their debts
only by their assets owned as a legal entity. It is not possible to
impose an attachment on a shareholder’s shares due to a debt of the
company as a legal entity. Pursuant to Article 133 of the TCC, in
equity companies, in the event the creditors have a receivable from
a shareholder, the relevant creditors are entitled to request that the
shares owned by the debtor shareholder be attached as per the
relevant provisions of the EBL regarding movable assets and
request that such be sold and converted into cash.
For all trade companies, the creditors are also entitled to obtain their
receivables out of the receivables of the debtor shareholder from the
company, and also impose an attachment for such. Please also note
that the abovementioned provision does not hinder the creditors to
apply to the assets of the debtor shareholders out of the company.
With respect to pre-packaged sales, under Turkish Law, a pre-
packaged sale is possible in terms of Article 538 of the TCC.
Pursuant to the said Article, unless decided otherwise by the general
assembly, the liquidator can perform the sale of the active assets of
the company by way of negotiation. If the subject of the sale
constitutes a wholesale of a significant amount, then a general
assembly resolution is required. The sale shall then be conducted by
the liquidators.
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Concerning the concord restructuring, in case the Court does not
approve the concord or cancels the concord period, it will
immediately decide on the bankruptcy of the debtor upon the report
of the concord commissar. Creditors may apply to the Court for the
termination of the concord restructuring if it is found that the debtor
acted in bad faith in having the restructuring proposal approved or
that the debtor breaches the provisions of the concord.
Concerning the amicable restructuring, if the restructuring project is
successful, the debtor will continue to operate. If the company
breaches the terms of the amicable restructuring, the company
should seek to agree with creditors and to have an amendment
approved by the Court to the restructuring proposal. In the absence
of an agreement, a creditor may apply to the Court for the
termination of the restructuring. In case the Court realises that the
company did not fulfil its obligation arising from the amicable
restructuring, it will decide on bankruptcy.
There are no other cram-down provisions in the Turkish insolvency
legislation. Concord and amicable restructuring may include terms
that provide for the cram-down of creditors as a whole.
3.3 What are the criteria for entry into each restructuring procedure?
Concord restructuring is regulated under Articles 285–309 of the
EBL targeting the liquidation of the debts by protecting both the
debtor in poor financial standing and his creditors. Concord
restructuring may be proposed (i) by the debtor, where he/she will
submit a concord pre-plan to the Court together with documents
evidencing his/her financial status, the list of creditors and
privileged creditors, a chart comparing the amount to be provided to
creditors with concord restructuring and the amount the creditors
may receive upon a bankruptcy, financial analysis reports issued by
independent audit companies authorised by the Capital Markets
Board, with a petition stating the reason for its request, or (ii) by a
creditor, having the right to request bankruptcy by submitting its
petition, stating the reason for its concord request.
The Court shall grant a temporary period by appointing a commissar
and taking all necessary measures for the protection of the debtor’s
assets. The concord request will then be announced and within
seven days following the announcement, creditors can object the
concord request.
Should the Court consider the concord plan viable, it may accept it,
once it has received a positive report from the concord commissar.
The Court shall grant a precise one-year concord period with the
appointment of a commissar and a creditors board, if this is
necessary. In case the Court does not approve the concord or
cancels the precise concord period, it will decide on the bankruptcy.
Amicable restructuring is applicable for capital stock companies
(excluding banks and insurance companies) and cooperatives. The
company shall submit its restructuring plan which has been
previously negotiated and accepted by the creditors who are affected
by the terms of the plan. The creditors, who are invited to the
negotiation of the restructuring plan, are also deemed creditors who
are affected by the terms of the plan. The Court holds a hearing in
which opposing creditors can state their case. For the plan to
become effective, it shall be accepted by half of the total number of
the creditors and by a two-third majority by value of creditors who
participated in the voting of the plan. An amicable restructuring
plan must be approved by the Court.
3.4 Who manages each process? Is there any court involvement?
Concerning concord restructuring, the concord commissar is liable
to supervise the acts of the debtor, report to the Court and inform the
creditors regarding the concord period (Article 290 of the EBL).
The creditors board shall supervise the acts of the commissar and
has the right to request a new appointment of a new commissar from
the Court when and if necessary.
Concerning amicable restructuring, if the Court takes measures to
protect the debtor’s assets until its decision on ratification or
rejection of the amicable restructuring plan, the creditors and debtor
– or, if the same fail to agree on one, the Court – can appoint one or
more mid-term auditors to assume responsibility for directing,
managing and supervising the debtor’s activities from the date of
appointment until the Court’s ratification or rejection of the plan
(Article 309(ö) of the EBL).
In the event that the plan is ratified by the Court, it may in its
ratification decision appoint one or more plan supervisors, who will
have the authority to supervise and monitor whether the plan is
being fulfilled and to report on the situation to the creditors (Article
309(p) of the EBL).
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
The provisions of agreements accepting concord claims as a valid
legal ground for a termination shall not be enforceable. In the
absence of such a provision, it is legally not possible to terminate an
agreement by referring to concord as a termination reason.
Agreements bearing perpetual liabilities may be terminated by the
debtor in case such agreements create a risk for the successful
completion of the concord with the positive view of the commissar
and approval of the Court. A set-off performed with an aim to
damage the rights of the creditors may be subject to objections
before a Court and the date of the temporary period shall be
considered. Please also see question 3.2.
Pursuant to Article 297 of the EBL, the debtor may continue his
activities under the supervision of the Commissar. The Court may
decide whether certain transactions are valid only with the
permission of the commissar or if the commissar should carry out the
operating activity in lieu of the debtor. The debtor cannot use liens,
warrants, transfers, and restrictions to gratuitously delay the ongoing
proceedings of the operation even partially without the leave of the
Court from the date of the respite decision. Otherwise, the
transactions are null and void. The Court has to take into account the
view of the creditors and the commissar for certain transactions
before granting its decision. There is no specific protection provided
for the parties performing their outstanding obligations.
With respect to the amicable restructuring, the restructuring
project’s terms will override all agreements executed with creditors
affected by the project. The following rules in agreements will not
apply, regardless of whether the agreements were concluded with
creditors that are affected by the project:
■ Rules that could lead to the amendment or termination of the
project.
■ Rules providing that a debtor’s use of restructuring is an act
of default or breach of the agreement.
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3.6 How is each restructuring process funded? Is any protection given to rescue financing?
As per Article 285 of the EBL, the Court expenses and charges shall
be deposited in advance by the applicant. Pursuant to the Annex 1
of the Law of Charges, a fixed charge shall be paid while applying
for a concord request. There are other fees and charges applicable
such as expert examination fees, announcement expenses, concord
commissar expenses and other service expenses which shall also be
paid by the applicant in advance.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
The insolvency procedure types provided by the EBL are: voluntary
bankruptcy; and bankruptcy.
4.2 On what grounds can a company be placed into each winding up procedure?
When a joint stock company suffers losses, which reduce its paid-up
share capital by two-thirds, the board of directors is required to call
an extraordinary general assembly meeting. At this meeting, the
shareholders must resolve either to compensate the company in cash
for the accumulated loss or to decrease the company’s paid up share
capital to one-third of its existing share capital. Otherwise, the
board of directors is required to file a lawsuit before the relevant
Commercial Court of First Instance for bankruptcy. If the board of
directors does not file a voluntary bankruptcy lawsuit, each director
shall be personally, jointly and severally liable for any and all real
damages incurred by the creditors and the shareholders.
Bankruptcy
Ordinary bankruptcy
Ordinary bankruptcy involves a creditor bringing bankruptcy
proceedings against a debtor. Bankruptcy can only apply to merchants
(that is, an entity or a person engaged in the purchase and sale of
commodities for profit), in relation to their unpaid (and due) debts.
Special bankruptcy
A creditor who holds negotiable instruments (cheques, bonds or
promissory notes) can bring special bankruptcy proceedings for
negotiable instruments against the debtor.
Direct bankruptcy
Direct bankruptcy is possible where the debtor’s liabilities are
greater than its current assets. Individuals authorised to manage and
represent those companies, co-operatives or any of the creditors, can
apply for the debtor’s bankruptcy. A separate direct bankruptcy
reason is foreseen in the law for companies, which occurs when the
liabilities of a company is more than its assets.
4.3 Who manages each winding up process? Is there any court involvement?
Following the bankruptcy decision, the Court notifies such decision
to the Bankruptcy Office, which prepares a list of assets, takes the
necessary measures and calls a first creditors’ meeting.
At the first creditors’ meeting, the candidates for the bankruptcy
managers are notified to the Execution Court. Accordingly, the
Execution Court appoints the bankruptcy managers which constitute
the bankruptcy management.
Within one month after the declaration of the bankruptcy, the
creditors shall register to the bankruptcy management. After the
registry period provided for the creditors has expired and the
bankruptcy management has been elected, the bankruptcy
management examines the registrations, and prepares a list of
creditors, stating the orders of the creditors for the payment, submits
the relevant list to the bankruptcy office, and notifies the creditors
by way of announcement.
The Bankruptcy Administration, after determining the creditors,
shall invite to the second meeting the creditors whose claims are
accepted by the bankruptcy administration in part or in whole and
who have filed a suit for inclusion in the schedule of ranking, and
accepted to attend the meeting.
The powers of the second creditors’ meeting are more extensive
than the first meeting. The second creditors’ meeting decides as to
whether the bankruptcy administration shall continue its work or
not, claims of ownerships, whether the suspended lawsuits shall
continue or not, sale of certain goods by bargaining and the concord
offer made by bankruptcy.
The bankrupt’s estate shall be sold and distributed by the bankruptcy
administration. The administration shall request the closing of
bankruptcy by presenting a final report and the Commercial Court,
which has commenced the bankruptcy, has to decide on closing as well.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Any proceedings with an attachment request that were started
against the debtor for debt recovery before its bankruptcy are
suspended on the commencement of bankruptcy (that is, the
judgment of the Court) and terminated when the bankruptcy
decision becomes conclusive (that is, after the finalisation of the
appeal process).
A creditor with a prior perfected pledge/mortgage has a preferential
right to the proceeds of the pledged property. The pledged/mortgaged
assets will be sold at the earliest and most appropriate time by the
bankruptcy administration and the proceeds will be paid to the
pledgee/mortgagee without waiting for the end of the liquidation.
The pledgee/mortgagee may initiate an execution by way of
foreclosure of the pledge/mortgage and/or continue its previously
filed execution proceedings against the bankruptcy estate following
the declaration of the bankruptcy. If the pledged/mortgaged
property is insufficient to discharge the debt, the pledgee will be an
unsecured creditor for the remainder.
In case the bankrupt’s claim was deemed as unnecessary to pursue
by the bankruptcy administration, such claim may be transferred to
any requesting creditor. If the latter succeeds in such claim, the
amount to be obtained will be received by the relevant creditor after
deducting the expenses.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
The effect of the opening of the bankruptcy on the existing contracts
of the bankrupt is a very comprehensive issue depending on the type
and conditions of the contract. Some of the existing contracts might
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be deemed as terminated upon the opening of the bankruptcy. For
instance, contracts related to usufructuary lease, financial lease,
mandate, commission, agency, ordinary partnership and current
account might be deemed as automatically terminated upon
bankruptcy. On the other hand, some of the existing contracts are
not terminated despite the bankruptcy. For instance, contracts
related to sale, barter, donation, ordinary lease, commodatum,
mutuum, employment, construction, insurance and surety might still
be deemed as not terminated despite the opening of the bankruptcy.
While it is possible to continue the business operation for the
management of the company until the bankruptcy decision is
rendered, after the opening of the bankruptcy, since the management
will have no disposal and/or representation authority, continuance of
the business operation by the management is not legally possible.
Following bankruptcy, the bankruptcy administration will be
entitled to continue to execute the existing (but not yet
executed/performed) contracts, but is not obliged to do so. If
execution of the contract (performance of the bankrupt’s obligation
arising from the contract) is more beneficial for the bankrupt’s
estate, the bankruptcy administration shall prefer to execute the
contract. Otherwise, the subject of the contract will be converted
into money and registered as bankruptcy receivable on the
bankrupt’s estate.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
The Bankruptcy Office shall distribute the amount as per Articles
206 and 207 of the EBL. Receivables of preferred creditors are
firstly taken into consideration by the Bankruptcy Office. Ordinary
creditors shall be paid only after the preferred creditors are fully
satisfied. Concerning a receivable arising out from a contract,
please kindly note that such receivable is in principle an ordinary
receivable unless it is secured by a pledge or mortgage.
The liabilities of the estate are determined by a schedule of ranking.
The accepted portion and rank of every credit registered to the estate
and every claim other than ownership claims shall be shown in a
schedule of ranking.
Once the costs of procedure are paid, property that is
pledged/mortgaged forms part of the bankruptcy estate and a party
with a prior perfected pledge/mortgage has a preferential right to the
proceeds of the pledged property. The pledged/mortgaged assets
will be sold at the earliest and most appropriate time by the
bankruptcy administration and the proceeds will be paid to the
pledgee/mortgagee without waiting until the end of the liquidation.
The pledgee/mortgagee may initiate an execution by way of
foreclosure of the pledge/mortgage against the bankruptcy estate
following the declaration of the bankruptcy.
If the pledged/mortgaged property is insufficient to discharge the
debt, the pledgee is an unsecured creditor for the remainder.
The receivables secured but not covered by a pledge/mortgage, or
unsecured receivables are registered in order to be paid in the
following order:
■ First Rank: Receivables of the employees including
severance and notice pays arising from the employment
relation and accrued for the year before the opening of the
bankruptcy together with the severance and notice pays they
earn due to the termination of the employment relation due to
bankruptcy.
The debts of the employers to the foundations and institutions
which had been established in order to form provident funds
or other aid institutions for the employees and in order to
perpetuate such.
All sorts of alimony receivables arising from family law
which had accrued for the year before the opening of the
bankruptcy.
■ Second Rank: Receivables of the persons whose properties
are entrusted to the debtor because of parentship and
appointed guardianship.
■ Third Rank: Receivables which had been determined as
preferential receivables.
■ Fourth Rank: Unprivileged claims.
All the creditors in a category must be satisfied before creditors in
the following category are paid. If the remaining money is not
sufficient for the unprivileged receivables, it will be distributed
between those creditors in proportion to their receivables.
The expenses of the Bankruptcy Office or Bankruptcy Administration
can be requested from the bankrupt’s estate. Expenses regarding the
announcement of the bankruptcy decision, protection of the assets,
fees of the liquidators, etc., constitute some examples of these
expenses. The payments regarding estate debts have priority over
bankruptcy receivables.
4.7 Is it possible for the company to be revived in the future?
As per Article 547 of the TCC, if it is determined that the liquidation
was not duly accomplished, and an additional liquidation must be
performed, upon the request of the board members, creditors,
shareholders or liquidation officers, the competent commercial
Court may decide that the company be restituted for an additional
liquidation. The shareholders may cancel a liquidation decision
before the commencement of the distribution of assets between the
shareholders.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
A corporation which goes bankrupt shall be subject to the
liquidation process which is regulated under Article 17 of the
Corporate Income Tax Code (the “CIT Code”) (Law No. 5520)
(published in the Official Gazette dated June 21, 2006, and
numbered 26205). The liquidation period shall be considered
instead of the fiscal period.
According to subparagraph (a) of Article 17 paragraph (1) of the
CIT Code, the liquidation process starts on the registration date of
the General Assembly resolving that the company goes into
liquidation and such process is completed on the registration date of
the liquidation resolution.
In cases where liquidation is closed with loss, the liquidation result
shall be corrected towards the previous liquidation periods and the
taxes overpaid in the previous periods shall be refunded to the
taxpayer.
If the liquidation process starts and concludes within the same
calendar year, the liquidation tax return shall be submitted to the
affiliated tax office within 30 days following the date on which the
liquidation is concluded. If these are realised in different calendar
years, the liquidation tax return for each liquidation period shall be
submitted to the tax office from the first day until the evening of the
25th day of the fourth month following the month when the
liquidation period is closed.
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As per Article 17 paragraph (4) of the CIT Code, the tax base of a
corporation which goes into the liquidation shall be the liquidation
profit. The liquidation profit is the positive difference between the
value of the assets at the end of the liquidation period, and the value
of the assets as at the date of the commencement of the same.
During the calculation of the liquidation profit:
■ any and all kinds of payments that were made to the
shareholders or to the owners of the corporation as advanced
or otherwise shall be added to the value of the assets which is
calculated at the end of the liquidation; and
■ the payments that were made by the shareholders or the
owners of the corporation in addition to the current capital,
and the earnings and the proceeds obtained during the
liquidation, which were exempt from tax, shall be added to
the value of the assets which is calculated at the beginning of
the liquidation period.
During the calculation of the liquidation profit, related provisions of
the CIT Code in relation to the deductible expenses, loss deduction,
other deductions and non-deductible expenses shall be taken into
consideration. Upon calculation of the net liquidation profit, the
corporate income tax at the rate of 20 per cent shall be declared and
paid over such profit.
Without setting aside a provision in accordance with the Article 207
of the EBL for i) taxes already accrued on behalf of the company, ii)
taxes calculated according to the liquidation tax returns, and iii)
other disputed tax assessments, liquidation officers cannot pay to
the creditors stated in Article 206 of the EBL and cannot make
distribution to the shareholders.
From any and all kinds of tax assessments and tax penalties owed by
companies who have been already liquidated and the legal
personality of whom have been cancelled from the trade registry,
those which pertain to the pre-liquidation period shall be imposed
on behalf of one of the liquidator officers, and those which pertain
to the liquidation period shall be imposed on behalf of the legal
representatives as they will be held as severally liable.
For the public receivables which are pertaining to the pre-
liquidation period, shareholders of limited companies shall be held
liable limited to the proportion of the share capital that they invested
in the company. The liquidation officer’s liability is limited with
regard to the amount distributed as a result of the liquidation.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In all procedures, credits arising from the compensations to be paid
by the employers regarding the employment agreements are
determined to be the first rank of unsecured credits. Please also see
our answer to question 4.6.
The employees may claim receivables of the employees including
severance and notice pays arising from the employment and accrued
for the year before the opening of the bankruptcy together with the
severance and notice pays arising from the termination of their
employment. In case of bankruptcy, the receivables of employees
are accepted as privileged receivables at the first rank.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Pursuant to Article 154 of the EBL, the competence of the
Commercial Court at the place where the debtor’s business centre is
located pertains to the matter of public order and is exclusive. The
Commercial Court at the place where the debtor’s business centre is
located has jurisdiction over the concord restructuring and amicable
restructuring applications. Therefore, the companies incorporated
abroad cannot enter into insolvency proceedings in Turkey.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Please refer to question 7.1. Turkish authorities do not recognise
and execute bankruptcy judgments of other jurisdictions granted for
a Turkish entity. A decision given for a foreign entity may be
enforced in Turkey following the enforcement and recognition
process.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
As explained above under question 7.2, since the competence of
Turkish Courts over the bankruptcy and restructuring proceedings
pertains to the matter of public order, Turkish authorities do not
recognise or execute bankruptcy procedures and bankruptcy
judgments of other jurisdictions granted for Turkish entities.
Therefore, it is not a common practice for Turkish companies to
enter into insolvency or restructuring proceedings in other
jurisdictions.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There is no specific provision pertaining to the insolvency of the
members of groups of companies and co-operation in this regard.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
There are no other governmental proposals.
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Gökben Erdem Dirican Dirican | Gozutok Nispetiye Caddesi 4/1 Besiktas, Levent Istanbul Turkey Tel: +90 212 278 3170
Email: [email protected]
URL: www.dgb-law.com
Ali Gozutok Dirican | Gozutok Nispetiye Caddesi 4/1 Besiktas, Levent Istanbul Turkey Tel: +90 212 278 3170
Email: [email protected]
URL: www.dgb-law.com
Recognised by European Legal Experts as one of the few top-tier litigators in Turkey and by The Legal 500 as a leading individual, Gökben is the co-founder of Dirican | Gozutok. Gökben represents mainly international clients in matters of litigation, arbitration and alternative dispute resolution. She is also a well-known specialist with more than a decade’s experience advising multinationals and financial institutions on complex cross-border transactions in a variety of industries. She has advised extensively on legal and regulatory regimes and corporate structures.
Dirican | Gozutok is a full-service law Firm established in Istanbul. The Firm boasts a wealth of experience in handling numerous proceedings and has unique experience in dispute resolution spanning mediation, arbitration and litigation. Its highly regarded Partners advise clients in all types of disputes before Courts and arbitration tribunals, in domestic and international matters. The Firm advises and represents major banking and financial institutions with its experience and insight in all aspects of banking operations, bringing efficiency to any transactional need. The Firm advises clients on their general corporate and commercial advisory needs, including those relating to the incorporation of companies and company acquisitions. In response to the complex requirements of local and international transactions, the Firm brings together the knowledge, skills and experience of different practice areas to form focused, creative and hands-on teams for specific transactions. For more information, visit: www.dgb-law.com.
Ali is the co-founder of Dirican | Gozutok. Ali has over 20 years of experience and expertise in cross-border litigation and arbitration. He has had extensive involvement in many local and cross-border transactions, cases relating to banking, real estate, competition, intellectual property, restructuring and insolvency-related matters. As an esteemed legal practitioner, Ali has successfully handled many complex cases and transactions for companies and institutions across a wide range of industries.
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engarDe attorneys at law
Dmytro Donenko
artem parnenko
Ukraine
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Currently, the Ukraine Law “On Restoring Debtor’s Solvency or
Declaring it Bankrupt”, which entered into force on January 19,
2013 (with subsequent amendments), regulates bankruptcy issues in
Ukraine. In contrast to the previous law, the current edition contains
more detailed provisions regarding the procedure for the sale of a
bankrupt’s property, regulates the terms of the relevant procedures
and changes the rights of secured creditors, etc. In general, the
procedure has become more regulated. At the same time, the terms
are not always observed in practice.
An application for opening a bankruptcy case can be filed both by
the debtor and by the creditors. Following the introduction of the
relevant procedure, the control over the procedure is within the
majority of creditors. Operational management is carried out by the
arbitration manager. At the stage of disposing the bankrupt’s
property (at this stage there can be no agreements between the
debtor and the creditor), the court appoints the arbitration manager
selected by the automated system. At the stage of rehabilitation
(when there are agreements between the creditors and the debtor),
the arbitration manager may be appointed at the request of the
creditors’ committee. At the liquidation stage (the stage at which the
debtor loses control), the arbitration manager may be appointed at
the request of the creditors’ committee. In this regard, the court has
the right to appoint the arbitration manager independently.
In general, the legislator is trying to maintain a balance between the
rights of the debtor and creditors, but in practice, a better-trained
participant always has the advantage.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
In Ukraine, the debtor’s rehabilitation procedure can be applied
before the opening of bankruptcy proceedings. The debtor or
creditor has the right to initiate such a procedure, subject to the
following conditions:
■ respective written consent of the owner of the property (the body
authorised to manage the property) of the debtor is obtained;
■ respective written consent of the creditors, the total amount
of the claims of which exceeds 50 per cent of the debtor’s
payables according to its accounting records is obtained; and
■ a rehabilitation plan is agreed in writing by all secured creditors
and approved by general meeting of creditors of the debtor.
Such procedure is applicable in cases where the debtor and the
majority of creditors, as well as the secured creditors are in friendly
relations. In practice it does not happen often. Therefore, bankruptcy
cases are more often considered according to the normal procedure.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The legislation of Ukraine provides that in the event of signs of
bankruptcy, the head of the debtor is obliged to send the founders
(participants, shareholders) of the debtor and the property owner
(the body authorised to manage the property) of the debtor a notice
informing them of the signs of bankruptcy.
In general, the debtor is obliged to apply to the court with an
application to initiate a bankruptcy case, if:
■ fulfilling the claims of one or several creditors will make it
impossible for the debtor to fulfill its monetary obligations in
full to other creditors (insolvency threat);
■ during the liquidation of the debtor not in connection with the
bankruptcy procedure, the impossibility of the debtor to
satisfy the creditors’ claims in full was established; or
■ in other cases, it is stipulated by the legislation.
It should also be noted that the debtor, as well as the creditor, may
apply to the court to initiate a bankruptcy case if the sum of the
indisputable claims of the creditor (creditors) is at least 300 in
minimum wages i.e. approximately EUR 41,072 (this is a sum of
court decisions) and the debtor is unable to fulfill such obligations
within three months.
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2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
The creditors and the arbitration manager have the main influence on
the company during the bankruptcy proceedings. Creditors are persons
who have monetary claims against the debtor. At the same time, the
Ukrainian legislation distinguishes the creditors depending on whether
their claims are collateralised or not. The creditors, whose claims are
not secured by collateral, have the right to vote at a creditor meeting. At
the same time, the pledge creditors have the right to coordinate/veto the
sale of pledged property, rehabilitation plan, and settlement agreement.
The legislation also provides for the priority of meeting the claims
of creditors. Thus, first of all, the wage claims of former and current
employees are met, then so are the demands for paying taxes and
fees. In the third place, the claims of non-secured creditors are met,
and in the fourth, the claims of secured creditors at the expense of
the bankrupt’s property, which is the subject of collateral, are carried
out in an extraordinary manner.
At the opening of a bankruptcy case, the court renders a ruling
which, among other things, introduces a moratorium on the
satisfaction of creditors’ claims. Also, such a court ruling resolves
the issue of taking measures to secure creditors’ claims by
prohibiting the debtor and the property owner (the body authorised
to manage the property) of the debtor to make decisions on
liquidation, reorganisation of the debtor, as well as to alienate fixed
assets and pledged items. The court is also entitled, at the request of
the parties or participants in the bankruptcy case or on its own
initiative, to take other measures to secure the claims of creditors.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Deals or property actions of a debtor committed by a debtor after
initiating a bankruptcy case or within one year prior to initiating a
bankruptcy case may be respectively invalidated or refuted by the
court in bankruptcy proceedings upon the application of an arbitration
manager or non-secured creditor according to the following grounds:
■ the debtor alienated the property for free, assumed
obligations without corresponding property actions of the
other party, waived its own property claims;
■ the debtor has fulfilled their property obligations before the
deadline;
■ the debtor assumed obligations before initiating a bankruptcy
case, as a result of which he became insolvent or his
monetary obligations to other creditors became completely or
partially impossible;
■ the debtor alienated or acquired the property at prices lower or
higher than the market prices, provided that at the time of the
commitment or as a result of its fulfillment, the debtor’s property
was, or rather became insufficient to satisfy the creditors’ claims;
■ the debtor has paid the creditor or accepted the property in
order to fulfill the monetary claims on the day when the sum
of the claims of the creditors to the debtor exceeded the value
of the property; and
■ the debtor assumed secured liabilities to ensure the fulfillment
of monetary claims.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
In Ukraine, the debtor’s rehabilitation procedure can be applied
before the opening of the bankruptcy proceedings. The debtor or
creditor has the right to initiate such a procedure, subject to the
following conditions:
■ respective written consent of the owner of the property (the
body authorised to manage the property) of the debtor is
obtained;
■ respective written consent of the creditors, the total amount
of the claims of which exceeds 50 per cent of the debtor’s
payables according to its accounting records is obtained; or
■ a rehabilitation plan is agreed in writing by all secured
creditors and approved by the general meeting of debtor
creditors.
The rehabilitation plan is subject to approval by the court. At the
same time, the court is obliged to approve it, except for the cases
when:
■ violations of the law were made when approving the
rehabilitation plan that affected the voting outcome of the
general meeting of creditors;
■ a creditor who did not participate in voting or voted against
the adoption of a rehabilitation plan proves that if the debtor
was liquidated in the manner specified by this Law, his
claims would be satisfied in an amount exceeding the amount
of claims that will be satisfied in accordance with the terms of
the rehabilitation plan;
■ there is no written approval of the rehabilitation plan by all
secured creditors; or
■ inaccurate data on accounts payable were provided by the
debtor.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
According to Ukrainian legislation, the following bankruptcy
procedures are applied to the debtor:
■ disposal of the debtor’s property;
■ amicable settlement;
■ rehabilitation (reestablishing of solvency) of the debtor; and
■ liquidation of a bankrupt.
The property management is understood as a system of measures to
supervise and control the management and disposal of the debtor’s
property in order to ensure the preservation and effective use of the
debtor’s property assets, analyse its financial position, and
determine the following optimal procedure (rehabilitation,
settlement or liquidation) to meet the creditors’ claims in full or in
part.
Rehabilitation is understood as a system of measures taken during the
bankruptcy proceedings to prevent the debtor from being declared
bankrupt and his liquidation, aimed at improving the debtor’s financial
and business situation, as well as meeting the creditors’ claims in full
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or in part through restructuring of the enterprise, debts and assets
and/or changes in the organisational, legal and production structure
of the debtor.
The settlement agreement in a bankruptcy case is understood as an
agreement between the debtor and creditors regarding postponement
and/or payment by installments, as well as forgiveness (write-off) of
the debtor’s debts by the creditors, which is executed by entering
into an agreement between the parties.
The liquidation procedure in a bankruptcy case is understood as a
system of measures for the complete cessation of the debtor’s
activities, its liquidation, the sale of its property and the satisfaction
of creditors’ claims in full or in part.
In the Ukrainian legislation, there are no provisions that directly
regulate the procedure for converting the payables into the
authorised capital. At the same time, the legislation stipulates that
the settlement agreement, as well as the rehabilitation plan, may
contain conditions on the satisfaction of creditors’ claims in other
ways that do not contradict the law.
Ukrainian legislation provides that an agreement between the debtor
and the creditor (creditors) to conduct a debtor’s rehabilitation
before the commencement of proceedings (proceedings) in a
bankruptcy case can be achieved before the debtor’s debt arises. For
example, a transaction on the basis of which a debtor’s monetary
obligation arose. Such a procedure may include improving the
position of the debtor, including by selling the assets of such a
debtor. Thus, in any case, such actions must be agreed upon by the
majority of creditors, as well as by all secured creditors.
The main influence on the development of bankruptcy proceedings
is carried out by the debtor’s creditors. As a general rule, decisions
are made by a majority of lenders. Such decisions are binding on all
lenders. The debtor is not entitled to vote at the meetings of
creditors. The mortgage lenders, as not having the right to vote, at
the same time, have the right to veto the sale of the pledged property,
the rehabilitation plan, the amicable settlement (which, in turn, can
be rejected by allocating such pledged property).
3.3 What are the criteria for entry into each restructuring procedure?
The general procedure provides for the application of the property
disposal procedure with the subsequent transition to the
rehabilitation, liquidation or amicable settlement procedures.
During the disposal of the property, a search and subsequent
approval by the court of the register of creditors – the formation of a
creditors’ committee – shall be carried out by a body representing
the interests of all creditors.
The rehabilitation procedure shall be introduced by a court decision
at the request of the creditors’ committee for a period of six months.
During the rehabilitation, a rehabilitation plan shall be developed
and further approved by the court with the participation of
prospective investors.
The rehabilitation procedure shall be terminated prematurely in case
of failure to fulfill the conditions of the rehabilitation plan and/or in
case of a debtor’s failure to fulfill its current obligations, therefore
the court shall declare the debtor as a bankrupt and open the
liquidation procedure.
The amicable settlement can be concluded at any stage of the
bankruptcy proceedings. In the procedure for disposing of the
debtor’s property, an amicable settlement can be concluded only
after the identification of all creditors and upon the approval by the
court of the register of creditors’ claims. The amicable settlement
shall be approved by the court.
The liquidation procedure shall be introduced by the court, as well
as by virtue of the creditors’ request, in cases where, as a rule,
neither the debtor’s rehabilitation nor the amicable settlement can be
implemented, and the amount of the debtor’s assets is not enough to
satisfy the claims of all creditors.
3.4 Who manages each process? Is there any court involvement?
Since the introduction of the property disposal procedure, the court
shall appoint a property manager from a group of arbitration
managers. The appointment of the property manager shall not be a
ground for termination of the powers of the head of the debtor or its
managing body. At the same time, after the appointment of the
property manager and prior to the termination of the property
disposal procedure, the debtor’s governing bodies are not entitled,
without the consent of the property manager, to make a number of
corporate decisions (on reorganisation, establishment of other legal
entities or branches, payment of dividends, withdrawal from other
entities, etc.).
In addition, the head or managing body of the debtor shall,
exclusively with the consent of the property manager, conclude
transactions regarding:
■ alienation or encumbrance of the debtor’s immovable
property, including its lease, pledge, contributing such
property to the authorised capital of another company or
business entity, disposing of the debtor’s immovable property
in any other way;
■ obtaining and granting loans (credits), providing guarantees,
warranties, assignment of demand, transfer of debt, and also
the transfer of debtor’s property to trust management; and
■ the disposition in any way of another debtor’s property, the
book value of which is more than one per cent of the book
value of the debtor’s assets, and the conclusion of other major
transactions.
If the debtor’s managing bodies fail to fulfill their obligations
properly, the court shall, at the request of the creditors, terminate the
powers of the debtor’s managing bodies and transfer them
temporarily to the debtor’s property manager.
Since the introduction of the debtor’s rehabilitation procedure, the
court will appoint a rehabilitation manager, who shall implement the
debtor’s rehabilitation procedure. From the moment of introduction
of the debtor’s rehabilitation procedure, the head of the debtor shall
be dismissed. Management of the debtor shall be passed to the
rehabilitation manager. At the end of the rehabilitation procedure,
the rehabilitation manager should provide a report, which must be
approved by the court.
The decision to conclude an amicable settlement shall be made on
behalf of the debtor by its head or the arbitration manager
(rehabilitation manager, liquidator), who fulfills the authority of the
managing bodies and the head of the debtors and signs the document.
On behalf of the creditors, the amicable settlement shall be signed by
the chairman of the creditors’ committee. At the same time, the
decision to conclude an amicable settlement on behalf of creditors
shall be made by the creditors’ committee by a majority of votes of
creditors and members of the committee, and shall be considered as
accepted, provided that all creditors whose claims are secured by the
pledge of the debtor’s property expressed a written consent to conclude
an amicable settlement. The amicable settlement shall be approved by
the court.
Since the introduction of the debtor liquidation procedure, the court
appoints a liquidator who shall perform all the functions of
managing the debtor, as well as implement the liquidation procedure
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of the debtor who has been declared as a bankrupt and ensure
satisfaction of the creditors’ claims. After completion of all
settlements with creditors, the liquidator must provide a report and
liquidation balance sheet, which must be approved by the court.
The acts or omissions of any of the arbitration managers at any stage
may be appealed in the court.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
Simultaneously, with the beginning of the disposal of property, a
moratorium on the satisfaction of creditors’ claims shall be introduced.
The moratorium on the satisfaction of creditors’ claims provides, inter alia, the suspension of the debtor’s fulfillment of monetary
obligations, the maturity of which is prior to the moratorium day, and
the termination of measures aimed at ensuring the fulfillment of these
obligations applied prior to the moratorium day. During the
moratorium, no penalty (fine, default interest) shall be charged; no
other financial sanctions shall be applied for non-fulfilment or
improper fulfillment of obligations to satisfy all claims to which the
moratorium applies. Also during the moratorium, the running of the
limitation period stops and the inflation index does not apply for the
entire period of delay in the performance of a monetary obligation, etc.
The moratorium does not apply to claims of current creditors, i.e. on
contractual obligations that arise after the initiation of a bankruptcy
case, on the payment of wages, claims on enforcement documents of
a non-property nature, obliging the debtor to perform certain actions
or to refrain from committing them, as well as a number of other
obligations.
In this case, the presentation of claims by current creditors to the
debtor and their satisfaction shall also be carried out in a special
procedure.
The action of the moratorium stops on the day of termination of the
bankruptcy proceedings.
During the rehabilitation procedure, the sale of property and the
satisfaction of creditors’ claims shall be carried out in accordance
with the rehabilitation plan. The action of the moratorium does not
stop until the debtor’s bankruptcy proceeding is terminated.
At the same time, since the opening of the liquidation procedure:
■ the maturity of all monetary obligations of the debtor is
considered to have occurred;
■ the debtor shall not have any additional obligations, except
for expenses related to the implementation of the liquidation
procedure;
■ the imposing of penalties (fines, default interest), interest and
other economic sanctions on all types of bankruptcy debts
shall discontinue; and
■ claims on the debtor’s bankruptcy obligations arising during
the bankruptcy proceedings may be made only within the
liquidation procedure within two months from the date of the
official publication of the information on declaration of the
debtor as a bankrupt and opening of the liquidation procedure.
As for the obligations under contracts to bankrupt, they remain in
force, unless otherwise provided by such contracts, and in the future
may be attributed to the property of the debtor, which is subject to
sale in order to satisfy the claims of creditors.
The offset of the counterclaims of the debtor and third parties is
considered through the prism of recognition of the claims of such a
party to the debtor (entry in the register of creditors). The legislation
provides for the satisfaction of creditors’ claims by offsetting
counter-claims shall be made with the consent of the creditor
(creditors) in cases where it does not violate the property rights of
other creditors.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
All expenses associated with the bankruptcy proceedings in the
court are firstly subject to reimbursement in bankruptcy proceedings
from the sale of the bankrupt’s property. A debtor’s rehabilitation
plan or an amicable settlement may provide for a special procedure
for reimbursement of such expenses.
Creditors can create a fund for the advancement of monetary
remuneration and reimbursement of expenses of the arbitration
manager. The formation of the fund and the use of its resources
shall be determined by the decision of the creditors’ committee and
approved by the court.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Liquidation procedure is where a debtor is subject to liquidation.
If, according to the results of the liquidation procedure, after the
satisfaction of the creditors’ claims, there is no property left, the court
shall decide to liquidate the legal entity as bankrupt. If the bankrupt’s
property was enough to satisfy the creditors’ claims in full, it shall be
considered to be debt free and can continue its business.
4.2 On what grounds can a company be placed into each winding up procedure?
The liquidation procedure shall be introduced by the court, as well
as by virtue of the creditors’ request, in cases where, as a rule,
neither the debtor’s rehabilitation nor the amicable settlement can be
implemented, and the amount of the debtor’s assets is not enough to
satisfy the claims of all creditors.
4.3 Who manages each winding up process? Is there any court involvement?
A liquidator is a person who manages the liquidation procedure. He
shall perform all the functions of managing the debtor, as well as
implement the liquidation procedure of the debtor who has been
declared as a bankrupt and ensure satisfaction of the creditors’
claims. After completion of all settlements with creditors, the
liquidator must provide a report and liquidation balance sheet,
which must be approved by the court.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
The impact of the debtor’s shareholders on the liquidation procedure
is very limited and may be exercised exclusively in cases when the
state holds more than 50 per cent in the property of the debtor.
Creditors have a larger impact on the liquidation procedure, during
which the liquidator reports to the creditors’ committee at least once
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a month about its activity, as well as financial status and property of
the debtor on the day of opening and during the liquidation
procedure, and the use of the debtor’s assets and other information
at the creditors’ committee request.
If the liquidator does not perform its obligations or performs them
inadequately, the commercial court at the request of the creditors’
committee may terminate its powers and appoint a new liquidator.
Besides that, after the opening of the liquidation procedure at the
request of the creditors’ committee, the court may rule to implement
the rehabilitation procedure if there is a rehabilitation plan and if it
happens before the start of the sale of the bankrupt’s property.
The sale of the bankrupt’s property, which is collateral, is carried out
with the permission of the court or the creditor, whose claims it
enforces.
The report of the liquidator presented at the end of the liquidation
procedure must be approved by the creditors’ committee.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
From the moment of opening the liquidation procedure:
■ all of the debtor’s financial obligations mature;
■ no additional obligations of the debtor arise, apart from
expenses, related to the liquidation procedure;
■ penalties (late charges, fines), interest and other economic
sanctions stop accruing on all types of the bankrupt’s debts;
and
■ claims on liabilities of the debtor, declared bankrupt, which
arose during the bankruptcy procedures, may be advanced
only within the liquidation procedure and no later than two
months after official notification regarding bankruptcy and
commencement of the liquidation procedure.
Third parties’ obligations to the bankrupt remain in force unless
otherwise specified by the contract. Settlement of creditors’ claims
by setting off similar counterclaims is conducted upon the creditors’
authorisation in cases when it does not infringe the property rights
of other creditors.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Ukrainian law utilises a queue system to rank the order of settlement
of claims:
■ First queue: payments to employees and related claims;
claims by creditors based on insurance contracts; and
expenses related to bankruptcy proceedings, etc.
■ Second queue: claims on obligations, arising out of harm to
health and injuries; and claims of contributors of trust
institutions.
■ Third queue: tax payment claims.
■ Fourth queue: claims of unsecured creditors.
■ Fifth queue: claims of payment of dues of members of the
workforce to the statutory capital of the enterprise; claims of
additional remuneration to the manager of the rehabilitation
or the liquidator.
■ Sixth queue: other claims.
The settlement of claims of secured creditors at the expense of the
debtor’s property, which is collateral, is free of queues.
4.7 Is it possible for the company to be revived in the future?
A company may renew its status after the commencement of
bankruptcy proceedings if claims of creditors are recognised as
unjustified, if the rehabilitation procedure is complete, or an
amicable settlement with creditors or creditors’ claims are fully
settled. If the company is liquidated, the liquidation balance sheet is
approved and changes are implemented in the registry of companies
of Ukraine – there is no procedure for the revival of such company
in Ukrainian law.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Ukrainian bankruptcy legislation prevails over the tax legislation.
Therefore, the special regime of discharge of obligations in the
bankruptcy procedure extends to the tax obligations.
At the same time, it is worth noting that the commencement of
bankruptcy proceedings is a ground for an unscheduled inspection
by the tax authorities.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
The debtor’s employees’ claims are included in the general registry
of creditors and are to be settled in the first queue. They may not be
cancelled (written off ), delayed and/or split into instalments
according to an amicable agreement. In the course of rehabilitation,
employees of the debtor, who may not be engaged in the process of
enforcement of rehabilitation plan, are fired. From the moment of
commencement of the liquidation procedure, all the debtor’s
employees shall be fired.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Ukrainian bankruptcy legislation regulates procedures regarding
debtors incorporated in Ukraine only.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Ukrainian legislation provides a possibility to recognise foreign
bankruptcy proceedings.
Foreign bankruptcy proceedings may be applied in accordance with
the international treaties of Ukraine and according to the reciprocity
principle.
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Recognition of a foreign bankruptcy proceeding includes recognition
of foreign judicial decisions as well as decisions on appointment,
dismissal or replacement of a foreign receiver, decisions regarding
the status of the foreign proceeding, its suspension or termination.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Ukrainian legislation envisages a principle, according to which the
bankruptcy proceeding regarding a debtor, which is incorporated
and conducts activity in accordance with Ukrainian law and on the
territory of Ukraine, is the main proceeding in comparison to any
other foreign proceedings. In light of this principle, the possibility
of initiating bankruptcy proceedings regarding Ukrainian debtors in
other jurisdictions is questionable.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Ukrainian bankruptcy legislation does not contain special
provisions regarding the bankruptcy of a debtor belonging to a
group of companies.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
On October 18, 2018 the Parliament of Ukraine has adopted the new
Code of Ukraine on bankruptcy procedures. As of the moment of
this publication, the Code has not been signed by the President and
is not published. The Code will enter into force six months after its
official publication.
The Code will update Ukrainian bankruptcy legislation. In
particular, it is anticipated that the effectiveness of procedures will
improve, the creditors’ right will be better protected, auction
procedure for sale of the debtor’s property will be enhanced, the
contracts and judicial decisions will be better enforced and issues of
renewal of solvency of natural persons will be better regulated.
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Dmytro Donenko ENGARDE Attorneys at law 45-v Honchara Str. Kiev 01054 Ukraine Tel: +38 044 498 73 80
Email: dmytro.donenko@
engarde-attorneys.com
URL: www.engarde-attorneys.com
Artem Parnenko ENGARDE Attorneys at law 45-v Honchara Str. Kiev 01054 Ukraine Tel: +38 044 498 73 80
Email: artem.parnenko@
engarde-attorneys.com
URL: www.engarde-attorneys.com
Being a well-established and dynamic Ukrainian law firm, we have a reputation for providing exceptional legal service. We are renowned for our commitment to excellence and for our ability to find innovative solutions to the most complex of legal problems.
Our focus is on dispute resolution, corporate law, and restructuring processes. We also have extensive experience in the following areas: mergers and acquisitions; international trade and investments; intellectual property; competition and antitrust; real estate and construction; and taxation.
Whatever the nature and role of our client – an individual or organisation, of Ukrainian origin or operating internationally – we combine our skills and legal expertise to deliver a service, which is not only tailored to suit clients’ needs but also represents true value for money.
Dmytro specialises in the areas of complex cross-border commercial litigation and international commercial and investment arbitration. He has been involved in high-profile matters related to corporate governance, M&A transactions, allegations of fraud and asset tracing, contractual disputes, and the validity of contractual instruments. Dmytro also represents clients in national courts.
Dmytro is permanently involved in organising the Kyiv Arbitration Days Conference in Kiev (2011–2018).
Artem has been practising law since 2004 and since that time he was exposed to important projects in many areas of financial and banking law. During his work as ENGARDE’s associate, an in-house lawyer for a leading leasing company and an industrial corporation, Artem developed outstanding expertise in corporate lending and leasing, debt collection, restructuring and bankruptcy.
Having joined ENGARDE after completing his LL.M. at the University of Amsterdam specialising in International Trade and Investment Law (International and European Law) and with seven years of prior legal experience, Artem immediately started working on high-value financial law projects.
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paul, weiss, rifkind, wharton & garrison llp
alan w. Kornberg
elizabeth r. mccolm
Usa
1 Overview
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
The United States can most accurately be described as reorganisation-
friendly. On the one hand, the United States could be considered
comparatively debtor-friendly in that management is typically
permitted to retain operating control of the business, there is a very
broad stay of creditor enforcement actions, debtors have exclusive
authority to propose a plan of reorganisation at the outset of a case,
and debtors are given powers, such as the option to reject
unprofitable contracts, that they are not afforded outside of a formal
insolvency proceeding. On the other hand, the United States could
also be considered creditor-friendly in that creditors are afforded
significant protections by the Bankruptcy Code, the bankruptcy
process is designed to be public and transparent, and creditors are
given a voice at every stage of the restructuring process.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
While informal out-of-court restructurings are commonplace and
are typically implemented by contract among the relevant parties,
there is no specific legislative framework to sanction such work-out
procedures. The relevant statute, the Bankruptcy Code, provides for
formal court-supervised proceedings, although the Bankruptcy
Code has several provisions which encourage pre-petition
restructuring negotiations.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
Directors are not personally liable for continuing to trade while the
company is in financial distress.
The fiduciary duties of a company’s directors are defined by the law
of the state of the company’s incorporation. The primary duties of
directors are those of care and loyalty. The duty of care requires a
director to discharge duties with the care an ordinarily prudent person
in a like position would exercise under similar circumstances. The
duty of loyalty requires directors to act in the best interests of the
corporation; it prohibits self-dealing and the usurpation of corporate
opportunities by directors. Ordinarily, decision-making by directors
is protected by the business judgment rule, even when a company is
insolvent. Civil liability may arise if the directors fail to adhere to
their duties of loyalty or care.
In general, when a company becomes insolvent, the directors must
exercise their fiduciary duty in the best interests of the corporation,
taking into account the interests of, among others, creditors. Upon
insolvency, creditors may under certain circumstances bring
derivative claims on behalf of the corporation against directors.
Causes of action for breach of fiduciary duty, fraud and fraudulent
conveyance may be appropriate to challenge the wrongful actions of
directors of insolvent corporations.
In addition, directors may be criminally or civilly liable under
federal and state laws for failure to comply with certain disclosure
obligations or for insider trading, or for the company’s failure to pay
certain taxes and wages, among other things.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
While in financial difficulty, but prior to a bankruptcy filing, a
company’s creditors, contract counterparties, employees, and interested
acquirers, among others, may all attempt to influence the company’s
situation within the bounds of whatever contractual agreements may
exist and applicable law. For this reason, and to make any potential
insolvency process smoother, a company in financial distress will
oftentimes seek to engage its stakeholders in restructuring discussions
prior to beginning an insolvency process. The commencement of a
bankruptcy case, however, effects an automatic stay that enjoins
secured and unsecured creditors from taking most actions against the
debtor or property of the estate absent further order of the court.
The Bankruptcy Code also prescribes special rules for certain
categories of creditors. For example, certain types of prepetition
claims (such as domestic support obligations, employee wages up to
$13,650 per individual, and certain tax obligations) are entitled to
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priority over other general unsecured claims. In addition,
counterparties to executory contracts and unexpired leases with the
debtor enjoy certain special rights. See question 3.2 for further detail.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
Transactions entered into by an entity in financial distress may be
attacked as an actual or constructive fraudulent transfer or as a
preference under the Bankruptcy Code and/or state law.
Under the Bankruptcy Code, a transfer may be avoided as
fraudulent if it occurred within two years before the bankruptcy
filing, and the debtor made the transfer with actual intent to defraud
creditors, regardless of whether the debtor was insolvent. In
addition, a trustee (or debtor in possession) may recover a transfer as
constructively fraudulent that occurred within two years before the
bankruptcy filing if the debtor received less than reasonably
equivalent value in exchange for such transfer, and (i) was insolvent,
(ii) was engaged in business for which the debtor was insufficiently
capitalised, (iii) intended or believed it would incur debts beyond its
ability to repay, or (iv) made such transfer to, or for the benefit of, an
insider under an employment contract and not in the ordinary
course. Bankruptcy trustees (or debtors in possession) can also
invoke state fraudulent transfer laws, which may have longer
reachback periods, to recover transfers for the benefit of the estate.
A transfer of an interest of the debtor in property made on account of
an antecedent debt, while the debtor was insolvent and within the 90
days prior to a bankruptcy filing (or within one year before the
bankruptcy filing if the transferee was an insider) that enables the
creditor to receive more than it would have received in a liquidation,
can be avoided as a preference, subject to certain exceptions. There
is a rebuttable presumption that a debtor is insolvent during the 90
days before the bankruptcy filing.
Transactions determined to be preferential or constructively
fraudulent can be avoided or reversed so as to return the parties to
their original positions. This can be effectuated through the
recovery of payments or unwinding of entire transactions.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
While out-of-court restructurings are commonplace and are
typically implemented by contract by and among the relevant
parties, there is no procedure by which a court will sanction such
work-outs. To receive the sanction of a court, a case must be filed
under the Bankruptcy Code.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
Chapter 11 is the primary procedure by which companies restructure;
although it may also be used for the purposes of an orderly liquidation.
Chapter 15 provides the procedure for recognition of a foreign
insolvency or restructuring proceeding and for conducting an
ancillary proceeding in the United States. Ancillary proceedings are
those in aid of a “foreign proceeding” administered by a foreign
representative and designed to foster cooperation between US and
foreign courts.
Debt-for-equity swaps are commonplace both in-court and out-of-
court. Depending on the terms of the debt-for-equity swap, existing
equity may be substantially diluted or, if the valuation supports it,
eliminated altogether.
“Pre-packaged” sales may be achieved either by means of (i) a pre-
packaged chapter 11 plan, which the Bankruptcy Code is designed
to facilitate, or (ii) a sale under section 363 of the Bankruptcy Code,
which has been negotiated by the parties and documented prior to
the chapter 11 petition being filed.
The filing of a voluntary bankruptcy petition automatically operates
as a stay that enjoins secured and unsecured creditors from taking
most actions against the debtor or property of the estate absent
further order of the court. The stay of actions against the debtor’s
property generally continues until such property is no longer
property of the estate or the case is closed or dismissed.
A chapter 11 restructuring aims to foster cooperation between
management (which may include significant shareholders) and the
Company’s creditors to agree on a value-maximising path forward
for the Company. Shareholders and creditors alike are welcome to
propose transactions that could lead to the Company’s emergence
from bankruptcy; however, only the company has the right to
propose a plan of reorganisation and solicit its acceptance for at least
the first 120 days following the date of the filing; such time period
is often extended beyond 120 days by the Court but may not be
extended beyond 18 months following the date of the filing.
Secured creditors have certain special rights, however. A secured
creditor may be entitled to adequate protection in the form of cash
payments, replacement liens or the “indubitable equivalent” of the
value of its collateral to the extent such value is depreciating as a
result of the stay or the debtor’s use of such collateral. If secured
creditors are oversecured, they have the right to receive post-petition
interest generally at the applicable contract rate. Secured creditors
may also be well-positioned to provide debtor-in-possession
financing, which may provide the secured creditor greater influence
over the reorganisation process. Secured creditors generally are also
afforded the right to credit bid in a sale of their collateral.
Cramdown
In a chapter 11 case, a dissenting class of claims or interests may be
crammed down if, among other things: (i) the plan does not
discriminate unfairly; (ii) the plan is “fair and equitable”; and (iii) if
a class of claims is impaired under the plan, at least one class of
impaired claims has voted to accept the plan, without counting the
votes of “insiders”.
It is generally understood that a plan does not unfairly discriminate
if the dissenting class receives relatively equal value under the plan
as compared to similarly situated classes.
A plan is fair and equitable if it complies with the absolute priority
rule. With respect to secured creditors, members of the class must
either: (i) retain their liens and receive deferred payments with a
value equal to the allowed amount of their secured claims, valued as
of the effective date of the plan; (ii) receive the proceeds from the
sale of their collateral, if such property is to be sold, including the
right to credit bid at any such sale; or (iii) receive the “indubitable
equivalent” of their secured claims.
A plan is fair and equitable with respect to unsecured creditors if the
members of the class receive property of a value equal to the
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allowed amount of their unsecured claims, or if such class is not
paid in full, no junior class will receive any estate property under the
plan.
3.3 What are the criteria for entry into each restructuring procedure?
Insolvency is not a prerequisite for chapter 11 relief. A company
may file a voluntary case under chapter 11 if the company has a
domicile, place of business or property in the United States.
An involuntary case may be commenced under chapter 11 by three or
more creditors that hold non-contingent, undisputed claims against
the company. The creditors (or an indenture trustee representing
them) must hold claims that aggregate $16,750 more than the value
of any collateral securing the creditors’ claims. If there are fewer
than 12 creditors of the debtor, a single creditor may file the petition.
If the petition is not timely controverted, the court will order relief.
However, if the petition is controverted, the creditors must establish
that the debtor is generally not paying its undisputed debts as they
come, or that a custodian was appointed within 120 days of the
petition date. Involuntary petitions filed in bad faith may result in
damages awarded against the petitioning creditor(s).
3.4 Who manages each process? Is there any court involvement?
Under chapter 11, management retains control, remains “in
possession”, and continues to run the daily business operations of
the debtor company, subject to oversight by the company’s board of
directors. A chief restructuring officer or similar professional often
is added to the management team. Transactions which are not in the
ordinary course of business require bankruptcy court approval.
Official and unofficial committees generally consult with the debtor
concerning the administration of the estate, may investigate the
conduct, assets and liabilities of the debtor and participate in the
formulation of a plan. A chapter 11 trustee may be appointed where
there has been gross mismanagement or fraud.
The court closely supervises proceedings under chapter 11.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A chapter 11 debtor may assume or reject most executory contracts
or unexpired leases, subject to the court’s approval. Subject to time
limits applicable to non-residential real estate leases, the debtor may
assume or reject a contract or lease at any time before confirmation
of a plan, but the court may order the debtor to act within a shorter
time. In most cases, the debtor’s counterparty must continue to
perform until the debtor assumes or rejects the contract or lease.
Provisions providing for termination upon a bankruptcy filing are
typically unenforceable under the Bankruptcy Code, though there
are exceptions.
A debtor’s counterparties also enjoy certain protections under the
Bankruptcy Code. For example, a debtor must continue to pay rent
under a non-residential real estate lease prior to its determination
whether to assume or reject such lease. In addition, a counterparty
may seek adequate protection of its interests in any property leased,
used, or sold by the debtor. Furthermore, to the extent a debtor
accepts, but fails to pay for, post-petition benefits under an
executory contract or lease, the counterparty will generally be
allowed claims with administrative expense priority. Except to the
extent the holder of an administrative expense claim agrees to
different treatment, a chapter 11 plan can only be confirmed if it
provides for cash payment of the full amount of allowed
administrative expense claims.
If a debtor chooses to assume a contract or lease, it will be bound by
the contract’s terms. The debtor may not assume such contract or
lease unless it: (i) cures or provides adequate assurance that it will
cure any default; (ii) compensates, or provides adequate assurance
that it will compensate, the counterparty for any actual pecuniary
losses resulting from the default; and (iii) provides adequate
assurance of future performance under the contract or lease.
However, a debtor is not required to cure a default that arises
because of a provision in the contract conditioned on the insolvency
of the debtor. The debtor may not assume a contract where
applicable law excuses the counterparty to the contract from
accepting performance from, or rendering performance to, an entity
other than the debtor, such as a personal services contract.
A debtor may reject a contract where it determines that performance
of the contract would be unduly burdensome. Rejection of an
executory contract or unexpired lease constitutes a breach and
generally gives rise to a general unsecured claim for damages.
If a contract or lease has been assumed, the debtor usually may
assign it, notwithstanding a provision in the contract that prohibits
or conditions such an assignment.
The Bankruptcy Code generally preserves a creditor’s non-
bankruptcy set-off rights. A right of set-off is treated as a secured
claim and a creditor seeking to exercise such right must first obtain
relief from the automatic stay. However, creditors that possess set-
off rights under certain types of repurchase agreements and other
specified financial contracts may exercise such rights without
violating the stay.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
A trustee or debtor in possession may use free cash in the ordinary
course of business without notice or a hearing, unless the court
orders otherwise. The debtor may not use encumbered cash unless
each entity with an interest in the cash collateral consents or the
court authorises such use upon a finding of adequate protection.
A trustee or debtor in possession may also obtain unsecured
financing in the ordinary course of business that will be allowed as
an administrative priority expense to pay the actual and necessary
costs of preserving the estate, including the payment of wages and
salaries after the commencement of the case, as well as taxes.
If the trustee or debtor in possession is unable to obtain unsecured
financing that would be allowed as an administrative priority
expense, the Bankruptcy Code contains a framework for permitting
other types of debtor-in-possession financing, including: (i)
unsecured financing allowed as a “superpriority” expense with
priority over all other administrative priority expenses; (ii)
financing secured by unencumbered estate property; (iii) financing
secured by a junior lien on previously encumbered estate property;
and (iv) financing secured by an equal or priming lien on previously
encumbered property (so long as the trustee or debtor in possession
is unable to obtain financing otherwise and each holder of a lien on
such property is adequately protected).
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4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
Chapter 7 provides the procedure for liquidation of a company. As
noted above, although chapter 11 is the primary procedure by which
companies restructure, it may also be used for the purposes of an
orderly liquidation.
4.2 On what grounds can a company be placed into each winding up procedure?
Insolvency is not a prerequisite for chapter 7 or chapter 11 relief. A
company may file a voluntary case under chapter 7 or chapter 11 if
the company has a domicile, place of business or property in the
United States.
The grounds for commencing an involuntary case under chapter 7
are the same as the grounds for commencing an involuntary case
under chapter 11. See question 3.3 for further detail.
4.3 Who manages each winding up process? Is there any court involvement?
In chapter 7, a trustee is appointed to marshal the assets of the
company, reduce them to cash and pay creditors. Officers and
directors are displaced. Courts closely supervise the chapter 7
process. As discussed in question 3.4, management generally
remains in possession during a chapter 11 case, even if the company
is liquidated during such case.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
Secured creditors are prevented from enforcing their security in the
same manner in chapter 7 as they are in chapter 11. See question 3.2
for further detail. Unsecured creditor interests are most often
represented by an official committee. While shareholders have
standing to be heard, they generally have less influence in a chapter
7 case because the company is set to be liquidated by the trustee
rather than restructured.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
A chapter 7 trustee or chapter 11 debtor may assume or reject most
executory contracts or unexpired leases, subject to the court’s
approval. See question 3.5 for further detail.
In chapter 7, the trustee must assume a contract or lease within 60
days of the order for relief or it will be deemed rejected, unless an
extension of time is granted by the court within such 60-day period.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Claims of secured creditors are entitled to priority with respect to
their interests in collateral and are secured only to the extent of such
interests. If a creditor is undersecured to some extent, such portion
is treated as a general unsecured claim.
The Bankruptcy Code confers priority on various categories of
claims. All claims in a higher priority must be paid in full before
claims with a lower priority may be paid. First priority is reserved
for unsecured claims for certain domestic support obligations (if the
debtor is an individual). Second priority is conferred on claims for
expenses incurred in connection with the administration of the
estate. Administrative priority expenses include wages and salaries
for employees for post-petition services rendered and compensation
for professionals retained in the case, including a chapter 7 trustee.
Lower priority categories include claims for certain pre-petition
wages and employee benefit plan contributions and pre-petition tax
claims, among others. General unsecured claims generally rank
equally with each other.
4.7 Is it possible for the company to be revived in the future?
While the company as an entity is typically dissolved after its assets
are liquidated, assets of the company, such as the brand name or
business model, may be acquired for use in a new venture.
5 Tax
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
The bankruptcy process does not, in itself, impose additional tax risks
on the debtor. Day-to-day tax liability is incurred during a bankruptcy
case and claims for such liability are generally paid as administrative
expenses. While cancellation of indebtedness typically gives rise to
taxable income under United States tax law, debt cancelled in a
chapter 11 or chapter 7 case is not included as taxable income.
6 Employees
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In chapter 11, the company may continue to employ its workers and
to pay their salaries and wages in the ordinary course of business.
To the extent the company owes pre-petition salaries and wages,
claims therefor will be entitled to priority status but only to the
extent of $13,650 for each individual earned within 180 days before
the bankruptcy filing.
The Bankruptcy Code restricts payments to “insiders”. Before a
company incurs an obligation to retain such a person, the court must
determine, among other things, that the obligation is essential
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because such person has received a job offer at the same or greater
rate of compensation and that the obligation incurred is not greater
than 10 times the amount of an obligation incurred to non-
management employees. A severance payment to an “insider”
officer or director may not be allowed or paid unless the payment is
part of a programme generally applicable to all full-time employees
and the amount of the payment is not greater than 10 times the mean
amount of severance pay provided to non-management employees.
A chapter 7 trustee will likely terminate most employees. They will
hold administrative priority claims for post-petition labour and
lower priority claims for any pre-bankruptcy filing wages owing to
the extent described above.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
A company may file a voluntary case under chapter 7 or chapter 11
if the company has a domicile, place of business or property in the
United States. Such company may also commence a chapter 15 case
in the United States for recognition of a judicial or administrative
proceeding in a foreign country.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
Yes. Chapter 15 cases are commenced by a foreign representative
filing a petition for recognition of a foreign proceeding in a US
bankruptcy court. A foreign proceeding is a collective judicial or
administrative proceeding in a foreign country in which the assets
and affairs of a debtor are subject to control or supervision by a
foreign court for the purposes of reorganisation or liquidation. In
chapter 15, the foreign representative may use such proceedings to
request assistance from the US court for such relief as entry of a stay
to protect property located in the United States.
A bankruptcy court will recognise the foreign proceeding if: (i) the
foreign proceeding qualifies as a “foreign main proceeding” (a foreign
proceeding pending in the country where the debtor has the centre of its
main interests) or “foreign non-main proceeding” (a foreign proceeding
pending in a country where the debtor conducts non-transitory
operations); (ii) the foreign representative applying for recognition is a
person or body authorised to administer the reorganisation or
liquidation of the debtor; and (iii) the petition is accompanied by
sufficient evidence of the commencement of the foreign proceeding and
of the appointment of the foreign representative.
Once the court has entered a recognition order concerning a foreign
main proceeding, several provisions of the Bankruptcy Code take
effect automatically, including the automatic stay and provisions
governing the use, sale or lease of property of the debtor in the US,
and other relief may be available upon request to the court. While
such relief is not automatically available with respect to a foreign
non-main proceeding, the court has discretion to grant similar relief.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
It would be unusual for a company incorporated in the US to enter
into plenary insolvency proceedings in other jurisdictions, although
this has occurred from time to time.
8 Groups
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Each member of a group of companies is treated as a separate entity
by the Bankruptcy Code. The insolvency of one group member has
no formal legal effect on other group members; each entity must file
its own case under the Bankruptcy Code. In practice, however, group
members usually file cases at the same time, in the same court, and are
often represented by the same professional advisors. In addition, their
cases generally are jointly administered for procedural purposes.
There is scope for court supervised cooperation between groups of
companies and their officeholders. In fact, it is typical for the first
day of a bankruptcy case to be devoted to motions designed to
maintain the “status quo” during the pendency of the case or cases;
courts often grant motions to continue a group cash management
system, group shared services agreements and other inter-group
arrangements during these so-called “first-day hearings”.
9 Reform
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
A proposal has been introduced with the aim of preventing debtors
from “forum shopping” for bankruptcy venues that are more
favourable to the debtors but may be less favourable to their
stakeholders. If approved, the proposal would amend the current
bankruptcy-venue provisions to require a debtor to file its
bankruptcy case in the U.S. District in which (i) its principal assets
are located, (ii) its principal place of business is located, or (iii) there
is a pending bankruptcy case of an affiliate that “directly or
indirectly owns, controls, is the general partner, or holds 50 per cent
or more of the outstanding voting securities” of the debtor. The
proposal would thus eliminate the current domicile-venue option, as
well as the current affiliate-venue option that allows larger parent
companies to file in the same court as a smaller subsidiary.
Although ancillary bankruptcy cases under chapter 15 of the
Bankruptcy Code are excluded, the proposal may affect foreign
debtors’ ability to file plenary bankruptcy cases in the United States.
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Alan W. Kornberg Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 USA Tel: +1 212 373 3209
Email: [email protected]
URL: www.paulweiss.com
Elizabeth R. McColm Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 USA Tel: +1 212 373 3524
Email: [email protected]
URL: www.paulweiss.com
Diversity of experience, senior-level attention and seamless delivery of multidisciplinary services are the foundations of the Paul, Weiss Bankruptcy & Corporate Reorganization Department.
We possess a thorough knowledge of every aspect of bankruptcy law, coupled with perspectives earned from representing every type of client. Our domestic and cross-border representations include debtors, official and unofficial committees of creditors and shareholders, secured and unsecured creditors and equity sponsors in chapter 11 cases, corporate reorganisations and workouts, non-bankruptcy insolvency proceedings and litigations and transactions involving financially distressed companies. We also represent purchasers of the assets, debt and securities of distressed companies.
Our Bankruptcy Department fields large, multidisciplinary teams that leverage the resources of our firm as a whole. By drawing on the expertise of our Corporate, Finance, Securities, Tax, Litigation, Employee Benefits, Real Estate and Environmental Departments, we are able to tailor our efforts to the specific business challenges that our clients face.
Co-chair of the Bankruptcy and Corporate Reorganization Department, Alan Kornberg handles chapter 11 cases, cross-border insolvency matters, out-of-court restructurings, bankruptcy-related acquisitions and insolvency-sensitive transactions and investments. Alan has represented a diverse range of clients spanning numerous industries in some of the most complex and contentious bankruptcy proceedings in recent years. Some of Alan’s significant cross-border and domestic debtor representations have included advising CGG S.A., Noranda, EnQuest, Quiznos, and Houghton Mifflin Harcourt Publishing Company. Alan also has extensive creditor-side experience, including representing ad hoc debtholder groups in the restructurings of Texas Competitive Electric Holdings Company, Tidewater, Pacific Exploration, and SquareTwo, and agents for lending syndicates to Genco Shipping & Trading Limited. Alan is recognised as a Band 1 practitioner by Chambers Global, and is also praised as a leading lawyer by The Legal 500, IFLR1000 and The Best Lawyers in America. He is one of only five practitioners in the U.S. to be recognised as a “Most Highly Regarded Individual” by Who’s Who Legal for restructuring and insolvency. Alan’s work has consistently received industry recognition by publications such as The American Lawyer and Financial Times, and he is also a prolific writer and speaker on industry topics. Alan is a Conferee of the National Bankruptcy Conference. He is a Fellow of the American College of Bankruptcy and a member of the International Insolvency Institute.
A partner in the Bankruptcy and Corporate Reorganization Department, Elizabeth McColm specialises in the areas of corporate restructurings and bankruptcy. She has been involved in major domestic and cross-border restructurings and bankruptcies representing debtors, creditors and acquirers of assets. Elizabeth’s recent creditor matters include advising key stakeholders in the restructurings of Pacific Drilling, GenOn, Armstrong Energy, Ultra Petroleum and SquareTwo Financial, and her noteworthy debtor representations include The Bon-Ton Stores and Noranda. The M&A Advisor selected Elizabeth’s representation of The Bon-Ton Stores and its affiliates, a national department store retailer, as its 2018 “Consumer Discretionary Deal of the Year (Over $100MM)”. The Financial Times has “Highly Commended” Elizabeth in its annual report on “U.S. Innovative Lawyers” for her work representing certain CEVA Group lenders in the company’s restructuring. Elizabeth is widely recognised as a leading restructuring practitioner, including by The Legal 500 and IFLR1000, and she speaks frequently at industry events.
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