Intl Legal Guide to Corp Recovery & Insolvency

Corporate Recovery & Insolvency 2009

Published by Global Legal Group with contributions from:

A practical insight to cross-border Corporate Recovery & Insolvency

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The International Comparative Legal Guide to:

ÆLEXAlexiou & Kosmopoulos Law FirmAli Budiardjo, Nugroho, ReksodiputroAnderson Mori & TomotsuneBlake, Cassels & Graydon LLPBonelli Erede PappalardoBredin PratCervantes, Aguilar-Alvarez y Sainz, S.C.Clifford Chance CIS LimitedDavis Polk & WardwellDe Brauw Blackstone WestbroekDillon EustaceDittmar & Indrenius

Leoni Siqueira AdvogadosLydian Mannheimer Swartling AdvokatbyråMeitar Liquornik Geva & Leshem BrandweinOzannesPachiu & AssociatesPaul Varul Attorneys-at-LawSchönherrSérvulo & AssociadosSiemiatkowski & DaviesSlaughter and MayUría MenéndezWhite & Case

DSK Legal

Edward Nathan Sonnenbergs

Elvinger, Hoss & Prussen

Estudio Uriburu Bosch & Asoc.

Ferenczy / Gide Loyrette Nouel

Georgiades & Mylonas

Gorrissen Federspiel Kierkegaard

Grasty Quintana Majlis & Cia.

Hengeler Mueller

Jadek & Pensa

Lee & Ko

Lenz & Staehelin

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DisclaimerThis 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 profes-sional when dealing with specific situations.

Further copies of this book and others in the series can be ordered from the publisher at a price of £200. Please call +44 20 7367 0720

Contributing EditorSarah Paterson,Slaughter and May

Brand ManagerOliver Smith

Marketing ManagerGeorge Archer

Cover DesignF&F Studio Design

EditorCaroline Blad

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Managing EditorAlan Falach

PublisherRichard Firth

Published byGlobal Legal Group Ltd.59 Tanner StreetLondon SE1 3PL, UKTel: +44 20 7367 0720Fax: +44 20 7407 5255Email: [email protected]: www.glgroup.co.uk

Printed byAshford Colour Press Ltd.May 2009

Copyright © 2009Global Legal Group Ltd.All rights reservedNo photocopying

ISBN 978-1-904654-61-2ISSN 1754-0097

The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2009

General Chapters:1 The Valuation Issue and English Schemes of Arrangement- Sarah Paterson, Slaughter and May 12 Valuation in Chapter 11: Overview and Tools for Consensual Resolution - Marshall S. Huebner &

Damian S. Schaible, Davis Polk & Wardwell 5

Country Question and Answer Chapters:3 Argentina Estudio Uriburu Bosch & Asoc.: Fernando Bosch & Rafael Algorta 114 Austria Schönherr: Dr. Wolfgang Höller 145 Belgium Lydian: Peter De Ryck & Tom Geudens 196 Brazil Leoni Siqueira Advogados: Antonio Carlos Monteiro da Silva Filho &

Cristiano Rodrigo Del Debbio 277 Canada Blake, Cassels & Graydon LLP: Susan M. Grundy & Steven J. Weisz 328 Chile Grasty Quintana Majlis & Cia.: José Francisco Sánchez & Eduardo Marchi 409 Cyprus Georgiades & Mylonas, Advocates & Legal Consultants: Yiannos G. Georgiades

& Rebecca E. Howarth 4510 Czech Republic White & Case: Aleš Zídek & Petr Kuhn 5111 Denmark Gorrissen Federspiel Kierkegaard: Lars Grøngaard 5812 England & Wales Slaughter and May: Sarah Paterson & Thomas Vickers 6313 Estonia Paul Varul Attorneys-at-Law: Paul Varul & Helmut Pikmets 7414 Finland Dittmar & Indrenius: Mika J. Lehtimäki & Juha-Pekka Mutanen 8015 France Bredin Prat: Tim Portwood & Nicolas Laurent 8616 Germany Hengeler Mueller: Dr. Ulrich Blech 9217 Greece Alexiou & Kosmopoulos Law Firm: Dr. Constantine Alexiou & Sotiris Foteas 9818 Guernsey Ozannes: Jeremy Wessels & Jeremy Le Tissier 10319 Hungary Ferenczy / Gide Loyrette Nouel: Dr. Balázs József Ferenczy & Dr. Tibor Nagy 10720 India DSK Legal: Raksha Kothari & Sajit Suvarna 11321 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Theodoor Bakker & Herry N. Kurniawan 11922 Ireland Dillon Eustace: Lorcan Tiernan & Adrian Benson 12423 Israel Meitar Liquornik Geva & Leshem Brandwein: Dan Geva & Debbie Kahila 13124 Italy Bonelli Erede Pappalardo: Vittorio Lupoli & Andrea De Tomas 13925 Japan Anderson Mori & Tomotsume: Tomoaki Ikenaga & Nobuyuki Maeyama 14726 Jersey Ozannes: Marcus K. Stone & Johannes H. Botha 15327 Korea Lee & Ko: Eunjai Lee & Wan Shik Lee 15728 Luxembourg Elvinger, Hoss & Prussen: Marc Elvinger & Philippe Prussen 16229 Mexico Cervantes, Aguilar-Alvarez y Sainz, S.C.: Alejandro Sainz &

Manuel Ruiz-de-Chávez 16830 Netherlands De Brauw Blackstone Westbroek: Sijmen de Ranitz & Lucas Kortmann 17531 Nigeria ÆLEX: ‘Funke Adekoya SAN & Olanipekun Orewale 18132 Poland Siemiatkowski & Davies: Michael Davies & Magdalena Witek 18633 Portugal Sérvulo & Associados: Carlos Pereira da Costa & Rui Simões 19234 Romania Pachiu & Associates: Dr. Ciprian Paun & Silviu Predescu 19735 Russia Clifford Chance CIS Limited: Logan Wright & Ivan Marisin 20336 Slovakia White & Case: Silvia Belovicová & Tomáš Cibul’a 21237 Slovenia Jadek & Pensa: Simon Gabrijelcic 21938 South Africa Edward Nathan Sonnenbergs: Gary Oertel & Claire Morgan 22439 Spain Uría Menéndez: Alberto Núñez-Lagos Burguera & Ángel Alonso Hernández 22940 Sweden Mannheimer Swartling Advokatbyrå: Thomas Pettersson 23641 Switzerland Lenz & Staehelin: Daniel Tunik & Tanja Luginbühl 24042 USA Davis Polk & Wardwell: Karen E. Wagner 247

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EDITORIAL

Welcome to the third edition of The International Comparative Legal Guide to:Corporate Recovery & Insolvency.

This guide provides corporate counsel and international practitioners with acomprehensive worldwide legal analysis of the laws and regulations ofcorporate recovery and insolvency.

It is divided into two main sections:

Two general chapters. These are designed to provide readers with acomprehensive overview of key valuation issues affecting corporate recoveryand insolvency procedures in England and Wales and the US.

Country question and answer chapters. These provide a broad overview ofcommon issues in corporate recovery and insolvency in 40 jurisdictions.

All chapters are written by leading insolvency lawyers and we are extremelygrateful for their excellent contributions.

Special thanks are reserved for the contributing editor Sarah Paterson ofSlaughter and May, for her invaluable assistance.

Global Legal Group hopes that you find this guide practical and interesting.

The International Comparative Legal Guide series is also available online atwww.iclg.co.uk.

Alan Falach LL.MManaging EditorGlobal Legal [email protected]

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© Published and reproduced with kind permission by Global Legal Group Ltd, London

Chapter 1

Slaughter and May

The Valuation Issue andEnglish Schemes ofArrangement

Introduction

Marshall S. Huebner and Damien S. Schaible, in their chapter“Valuation in Chapter 11: Overview and Tools for ConsensualRestructuring” later in this guide, describe how questions ofvaluation are determined in disputes between senior and juniorcreditors in the US Chapter 11 process and the dynamic which thatproduces in negotiations between creditors.As Messrs Huebner and Schaible describe, a framework exists inChapter 11 for settling disputes about valuation between senior andjunior creditors and, ultimately, for the court to determine the rightallocation of value as between them in the event that a consensualresolution cannot be reached. By contrast, the differing structure ofthe English insolvency regime, and the absence of the absolutepriority rule which has done so much to drive the development ofChapter 11 in this area, means that England does not have such aframework. Consequently, questions of valuation are far lessdeveloped in English jurisprudence in this area. Nonetheless thequestion of value is essential to any restructuring and several recentcases in the English courts - focusing on the types of complexcapital structure which Messrs Huebner and Schaible describe -have had, at their heart, disputes over valuation.

1. English Schemes of Arrangement

Historically, when it has become necessary to restructure acompany's balance sheet, most typically by a debt-for-equity swapin respect of some or all of a company's debt, creditors in Englishlaw governed situations have tended to agree the restructuringwithout resorting to any form of process. However, high votingthresholds in many classes of debt issued in the last cycle, coupledwith divergent interests amongst the creditor groups (who mayrange from banks which bought at par to funds which bought atseverely depressed prices) and the sheer complexity of the capitalstructures have meant that more and more companies have resortedto using a scheme of arrangement in part or in whole to implementa restructuring. A scheme of arrangement is a process by which a compromise orarrangement becomes binding as between a company and itscreditors or, possibly, only those classes of its creditors with whomthe company chooses to make the compromise or arrangement. Wewill return to this latter point which has been important in a numberof cases. However, first it may make sense to describe the stages ofa scheme of arrangement. The first stage is an application to the court under section 895 of theCompanies Act 2006 (the “Act”) for an order that a meeting ormeetings of creditors be summoned. At this point, the company

identifies with whom it is proposing to make the compromise and itidentifies the class or classes of creditors to whom the proposal is tobe put. It is important, at this point, that the creditors are correctlydivided into the appropriate classes, the classic test for this being setout by the court in Re Hawk Insurance [2001] EWCA Civ 241. Inthat case, Chadwick LJ stated that a class “must be confined tothose persons whose rights are not so dissimilar as to make itimpossible for them to consult together with a view to theircommon interest”. The court held that when applying this test, onemust consider (i) the rights which are to be released or varied underthe proposed scheme, and (ii) the new rights (if any) which theproposed scheme gives to those parties whose rights are to bereleased or varied. When dealing with a scheme for a companywith a complex capital structure, the operation of this test usuallyresults in creditors with differing levels of seniority constitutingdifferent classes. Senior secured creditors might therefore form oneclass, senior unsecured lenders another class, and mezzanine orsubordinated creditors will form a third class.Once the court has concluded that the scheme classes are properlyconstituted, meetings are called and the scheme proposals are put toeach of the classes of the company's creditors. It is necessary thatthe proposals are approved by each class by a majority in numberrepresenting at least three quarters by value of those present andvoting. If the proposals are approved at the meeting or meetings, afurther application is made to court to obtain an order sanctioningthe compromise or arrangement. At the sanction hearing the court will consider whether the meetingor meetings have been summoned and held in accordance with theprinciples in Re Hawk and have been approved by the requisitemajority. The court will also, to some extent, consider the fairnessof the scheme in light of those who did not approve the proposals atthe meeting or meetings. The classic and much quoted formulationas to whether a court should sanction a scheme was set out byPlowman J in Re National Bank Ltd [1966] 1 WLR 819:

“In exercising its power of sanction the court will see, first,that the provisions of the statute have been complied with …secondly, that the class was fairly represented by those whoattended the meeting and that the statutory majority areacting bona fide and are not coercing the minority in orderto promote interests adverse to those of the class whom theypurport to represent …and thirdly, that the arrangement issuch as an intelligent and honest man, a member of the classconcerned and acting in respect of his interest, mightreasonably approve.”

It is a critical point that no “cram-down” mechanic exists in anEnglish scheme of arrangement. If a class of creditors, properlyconstituted, does not approve the proposed scheme then the scheme

Sarah Paterson

2

Slaughter and May The Valuation Issue and English Schemes of Arrangement

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will fail and the court has no discretion to approve it at the thirdstage. This contrasts with the position in the US which MessrsHuebner and Schaible describe where, although the junior creditorsmay "have their day in court" if they wish to oppose a plan,ultimately once the court has heard arguments as to valuation, it isopen to the court to approve the plan notwithstanding theirobjections. It may be thought, therefore, that it is not possible to usethe English scheme of arrangement to impose a scheme on juniorcreditors.

2. The English Scheme of Arrangement and a“Pre-pack”

However, as mentioned above, it is not necessary to propose ascheme of arrangement to all classes of a company's creditors. It istherefore possible to develop a restructuring plan that only involvessenior classes of creditors, and which combines the English schemeof arrangement with a further sale process in order to “strand” thejunior debt in the rump insolvent company. This sort of structurewas first pursued in the case of MyTravel Group plc [2004] EWCACiv 1734, in which certain junior creditors of the company objectedto the equity allocation offered to them as part of a consensualrestructuring. The structure adopted in MyTravel was in turn avariation on that used in In re Tea Corporation, Limited [1904] 1Ch. 12 (save that the Tea Corporation scheme was used to cut outordinary shareholders, rather than a class of creditors), in which theCourt of Appeal held that as the ordinary shareholders had nointerest in the assets of the business, their dissent from the schemewas “immaterial”.Given the difficulty of implementing a consensual restructuring inthe face of these objections, in MyTravel the company proposed ascheme of arrangement to its senior creditors but not itssubordinated bondholders. Although the structure undertook anumber of twists and turns for reasons which it is not necessary toconsider here, ultimately MyTravel proposed a scheme pursuant towhich, after restructuring the senior debt, the business and assets ofMyTravel would be sold to a newly incorporated company ownedby its senior lenders leaving its junior lenders behind witheffectively worthless claims against the legacy company. The subordinated bondholders challenged this structure at firstinstance and in the Court of Appeal. The question was ultimatelysettled by the Court of Appeal holding that it was not necessary toput a scheme of arrangement to every class of a company'screditors. As such, at the initial court hearing the subordinatedbondholders could not object to the convening of the classmeetings. It may be that they would subsequently have been ableto raise challenges to the fairness of the scheme at the sanctionhearing or have been able to challenge (as a transaction at anundervalue) the price at which the sale of the business and assetswas concluded, but none of this was a relevant issue at the initialstages. In the event, the threat of the implementation of thisstructure caused the subordinated bondholders to agree to aconsensual restructuring (and a much lower equity allocation thanthey had initially sought) outside a scheme of arrangement,meaning that the scheme did not need to proceed. More recently, McCarthy & Stone (a distressed company thebusiness of which is the development of retirement homes), adopteda very similar restructuring which completed in April 2009.McCarthy & Stone proposed a scheme of arrangement only to itssenior debt, leaving its junior creditors to receive nothing. Oncethat scheme of arrangement had been approved, the company wasplaced into administration purely for the purposes of selling itsbusiness and assets to a newly incorporated company owned by the

senior lenders. This left the junior lenders behind in the old rump,their debt claims being worthless. Objections to this structure wereraised at the first court hearing (in relation to the constitution ofclasses) but Mr. Justice Norris held that the purpose of that hearingwas only to approve the convening of the class meetings; it was nota forum to address legal challenges or lender discontent.Ultimately, the junior lenders did not choose to mount a challengeat the final sanction hearing. As discussed below, it is difficult tochallenge an enforcement sale by an administrator by raising thetypes of future value argument which Messrs Huebner and Schaiblerefer to.

3. Valuation Issue

This leads to the heart of the valuation issue. In general terms,MyTravel type schemes imply a value to the company'sundertaking, which in turn determines relative equity allocationbetween creditor groups, by posing administration or liquidation asthe alternative to the implementation of the scheme. As such, it isthe price which an administrator of a company could realise for itsbusiness that is treated as the appropriate benchmark. Anadministrator of a company, in selling its business and assets, isbound to obtain the best price reasonably obtainable but, unless it ispossible to construct an argument that he has the necessary fundingand will be preserving value by trading the business for a significantperiod of time in administration in order to achieve a sale in thefuture, the focus in challenging an administration sale will be on themarket value of the business today rather than the sorts of future“going concern” or “post-restructuring enterprise” value to whichMessrs Huebner and Schaible refer. In this respect, it is more orless irrelevant that the market for a distressed business is likely toyield a depressed price. This stands in stark contrast to the positionin the US, where the “going concern” value of the business iscentral and where bankruptcy courts are concerned that “marketvalue” is flawed because markets tend systematically to undervaluedistressed companies simply because they are distressed (KerryO'Rourke, Survey: Valuation Uncertainty in Chapter 11Reorganizations, 2005 Colum. Bus. L. Rev. 403, 419 (2005).In the MyTravel case, the judge at first instance did consider theissue of whether the bondholders had an economic interest in thecompany and concluded that it was “nil” based largely on acounterfactual of the company’s insolvency. However, asmentioned above, the Court of Appeal decision turned on the factthat the company had not chosen to make the bondholders party tothe scheme and, as a result, no challenge could arise at the firststage relating to whether the classes were improperly constitutedbased on the fact that the bondholders were not included within theclass. The Court of Appeal noted that the judge’s remarks oneconomic value at the first hearing were “plainly obiter dicta”. AndMr. Justice Norris, in McCarthy & Stone, held that the proper forumfor legal challenges to the scheme itself was at the sanction hearingat the third stage. Since the MyTravel decision, the European High Yield Associationhas been lobbying for support for the view that the US approachought to be adopted and that there ought to be a place in the Englishcourts for valuation disputes based on going concern value. Theirargument is that it is wrong that senior lenders, as a result of anequity allocation based on a depressed price, retain all of the valuewhich may, once the distress passes, be sufficient to repay themmany times over whilst junior creditors receive nothing,particularly where the value break is high in the capital structureand the vast majority of the creditors are “out of the money”.But opponents of this view argue that this outcome is simply the

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effect of the capital structure for which the junior creditorscontracted. As such, if the ability to enforce has arisen (eitherbecause of an event of default, at maturity or because of liquidityconcerns), the current market value is the appropriatecounterfactual, and it ought to be the senior lenders who are the firstto equitise who retain the lion's share of the company. Theargument is made that a system based on future “going concern”value enfranchises those who ought not to be enfranchised.

4. The English Approach and Consensual Restructuring

Given all of this, the reader could be forgiven for assuming that inan English restructuring there is never any need to give any value tojunior creditors, unlike the system which Messrs Huebner andSchaible describe based, as it is, on the junior creditors eitherapproving the plan or having their day in court. However, asMessrs Huebner and Schaible ably explain, the issue of a valuationdispute is far from straightforward and lenders will often wish toavoid the valuation question altogether. For this reason, it may verywell be better to achieve a consensual resolution rather than litigateover value. And this is where the UK and the US systems do tosome extent converge. Although in some cases on a “value today” basis, it will beabsolutely clear that the junior creditors are out of the money, thatwill not always be a straightforward question. There remains therisk of a challenge at the sanction hearing in the scheme processand, particularly as questions of valuation are not well developed inthe English scheme process, there is the potential for litigationuncertainty at this point. Furthermore, there is the risk of achallenge to the administration process. Moreover, a pre-packagedadministration itself may result in higher costs and cash leakage.

There may be costs for pursuing a pre-packaged administrationstructure which in all but the most distressed cases senior lenderswould prefer to avoid and, as a result, they would prefer to givesome value to junior creditors rather than pursue this morecomplicated route. Notwithstanding the fact, therefore, that Englishlaw has tended to focus on the enforcement value alternative forcreditors rather than future value, the same dynamic of causing theparties to try to agree a consensual restructuring where possibledoes, to a certain extent, exist.

5. Conclusion

Although the English approach to valuation questions is in manyways fundamentally different from that in the US, based as it hasbeen on the alternatives for the lenders today rather than the futurevalue of the business, in many cases the same dynamic ofencouraging a consensual restructuring rather than a more timeconsuming, complex and potentially costly process does to a certainextent still exist. It would be interesting to undertake a comparativestudy of the sorts of equity allocation which are offered to juniorcreditors in the US (against the backdrop of the possibility of avaluation dispute based on future value) as compared with thevalues given to junior creditors in consensual restructurings in theUK (against the alternative backdrop of a pre-packagedadministration sale of the business to a newly incorporatedcompany owned by senior lenders). Perhaps that is somethingwhich we can undertake after the current economic downturn haspassed.

4



Sarah Paterson

Slaughter and MayOne Bunhill RowLondon, EC1Y 8YYUnited Kingdom

Tel: +44 20 7090 3154Fax: +44 20 7090 5000Email: [email protected]: www.slaughterandmay.com

Sarah Paterson specialises in financing, restructuring and insolvencywork. She has advised on a wide range of restructurings andinsolvencies in recent years, acting for debtors, creditors andinsolvency practitioners and on both international and domesticmatters.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice.It has offices in London, Paris, Brussels and Hong Kong, as well as close working relationships with leading independentlaw firms around the world, which enable it to provide clients with first class and seamless legal advice worldwide.Slaughter and May has extensive experience in international restructurings and insolvencies, frequently involvingcomplex cross-border issues, as well as advising on high profile domestic cases.



Chapter 2

Davis Polk & Wardwell

Valuation in Chapter 11:Overview and Tools forConsensual Resolution

Introduction

One of the cornerstones of the U.S. Chapter 11 process is theabsolute priority rule, which requires that, unless they consentotherwise, junior creditors may not receive any value on account oftheir claims unless senior creditors are paid in full. The problem isthat it can be difficult to determine whether a given class ofcreditors is paid in full. In cases where the currency of payment isdebt or equity in a going-concern, valuation of the businessunderlies this important determination. But the valuation of agoing-concern is based in part on future performance, anddetermining that value is not an exact science. The bigger and morecomplicated the business, the more inexact the science. When the parties-in-interest in a U.S. Chapter 11 case cannot agreeon a valuation, it is up to the bankruptcy court, relying on thetestimony of dueling and contradictory experts hired by the variousparties, to determine the debtor’s value. The valuation of a largecompany in bankruptcy is a process fraught with uncertainty. JudgeD. Michael Lynn of the U.S. Bankruptcy Court for the NorthernDistrict of Texas captured the uncertain nature of bankruptcyvaluation in his oft-cited opinion in the 2005 Chapter 11 case ofMirant Corporation (“Mirant”), where he wrote that valuing acompany is “an exercise in educated guesswork [with] too manyvariables, [and] too many moving pieces in the calculation ofvalue…for the court to have great confidence that the result of theprocess will prove accurate in the future”. In re Mirant Corp.(“Mirant”), 334 B.R. 800, 848 (Bankr. N.D. Tex. 2005). In the current economic climate, valuation in Chapter 11 is evenmore complicated, and often more critical, than ever before.During the past decade, in part as a result of extraordinarily strongcredit markets, many companies became highly leveraged, oftenthrough the use of multilayered capital structures. Now, as a resultof the global economic downturn, a great number of thesecompanies are, or soon will be, seeking refuge in Chapter 11. Therewill be an unprecedented number of parties competing for pools ofassets that are rapidly shrinking in value.The increasing difficulty and importance of the valuation question,combined with its subjective and imprecise nature, means thatextremely protracted and expensive valuation litigation willdominate some - or many - cases in the coming wave ofrestructurings. Having the tools to understand and hopefullyresolve these issues outside of litigation can result in significantefficiency gains. This article discusses some of these tools.Beginning by charting the jurisprudential and legislative basis forvaluation and then examining how valuation disputes arecommonly resolved by bankruptcy courts, we discuss whyconsensual resolution of valuation disputes is usually preferable tolitigated resolution, and explore how consensual resolution can be

facilitated through an understanding of the differing goals of thevarious parties-in-interest and a willingness to explore creativesolutions to valuation disputes.

I. Why the Valuation Question is Posed: The Absolute Priority Rule

The need to value a debtor in a Chapter 11 proceeding stems fromthe absolute priority rule, which requires that claims senior inpriority be paid in full before those junior receive any value, andthat junior claims be paid in full before equity holders receive anyvalue. The rule arose as the result of a series of U.S. Supreme Courtdecisions in the early 20th century. The most important of thesedecisions were Northern Pacific Ry. Co. v. Boyd (“Boyd”), 228 U.S.482 (1913) and Case v. Los Angeles Lumber Products Co.(“Case”), 308 U.S. 106 (1939). In Boyd, the U.S. Supreme Courtheld that a plan of reorganisation could not impair junior creditorsunless they had approved the plan or had their day in court. Overtime this became known as the “fair and equitable principle”.However, Boyd left unanswered the question of the circumstancesin which a court-approved plan of reorganisation that lacked juniorcreditor approval was acceptable. This question was taken up andanswered by the U.S. Supreme Court in Case. In Case, JusticeDouglas, writing for a majority of the Court, held that the fair andequitable principle required that each creditor have its “full right ofpriority against the corporate assets”. Case at 122. The principlesarticulated in Boyd and Case were codified in §1129 of the modernU.S. Bankruptcy Code and serve as the foundation for the absolutepriority rule. Once a bankruptcy proceeding is commenced, the absolute priorityrule requires that creditors be paid according to their “relativepriority” (meaning their right to payment from the assets of thedebtor when there is a conflict with another creditor). Relativepriority is governed by the U.S. Bankruptcy Code, which dividescreditors into different classes and mandates their treatment. As abasic framework, the U.S. Bankruptcy Code provides that securedcreditors are paid first to the extent of their collateral, followed byadministrative (post-petition) creditors, certain priority creditors(e.g., certain claims by employees), general unsecured creditorsand, finally, equity holders. The absolute priority rule operates likea series of stacked champagne glasses, requiring that the glasses ofthe senior creditors that are first in line get filled completely beforeallowing any value to cascade down to the glasses of lower-rankingcreditors. Prior to 1978, Chapter X of the old U.S. Bankruptcy Act requiredthe absolute priority rule to be met in every reorganisation. In 1978,the Bankruptcy Act was replaced with the modern Bankruptcy

Damian S. Schaible

Marshall S. Huebner

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Davis Polk & Wardwell Valuation in Chapter 11


Code, and in connection therewith, the U.S. Congress effected anumber of important changes to the U.S. bankruptcy system. Oneof these changes included the absolute priority rule. Congresshaving determined that the old scheme was too rigid, under themodern Bankruptcy Code, senior classes can accept a plan thatprovides a return to junior classes even when senior classes are notpaid strictly according to the absolute priority rule.Senior classes may have a number of strategic reasons for allowingjunior classes to be paid in this manner. For example, junior classesmay be comprised of trade creditors or business owners withinstitutional knowledge necessary to facilitate the debtor’s post-bankruptcy operations. Receiving value in a plan of reorganisationmay induce these groups to continue their relationship with thedebtor. Alternatively, providing some payout to junior classes canalso be an effective means of reaching consensual resolution of aplan of reorganisation, thereby avoiding the need for litigation overenterprise value or over the amount or validity of the senior lenders’liens or claims.The absolute priority rule applies today under the Bankruptcy Codein all reorganisations where the different classes of creditors areunable to agree on a plan structure. For instance, the rule comes intoplay when a class of creditors votes against, or is deemed to haverejected, a proposed plan of reorganisation. A class of creditors isdeemed to reject a plan of reorganisation if it receives no value underthe plan. It rejects the plan if either 1/2 of the claimants in number or1/3 in amount of those voting vote against the plan. See 11 U.S.C.§1126(c),(g). In the face of objecting classes of creditors, the debtorcan still gain court approval for its proposed plan of reorganisation,so long as at least one class of impaired creditors who are not insidersaccepts the plan and certain other tests, including the absolute priorityrule, are met with respect to the dissenting classes of creditors. See11 U.S.C. §1129(b)(2)(B)(ii). The expected return in a plan thatcomplies with the absolute priority rule provides a starting point forcreditors in negotiations, because creditors know that if thenegotiations go awry, a plan complying with the rule can always beapproved and implemented over their objections.

II. Valuation Methods

Valuation disputes stem in large part from uncertainty associatedwith the valuation process. As Judge Lynn put it in Mirant,valuation is at times “not much more than crystal ball gazing”.Mirant at 848. The bankruptcy court in the 1989 Chapter 11 caseof Pullman Construction Industries similarly opined that “allvaluations of going business value are only educated estimates”. Inre Pullman Const. Indus., 107 B.R. 909, 932 (Bankr. N.D. Ill.1989). As one author has described it, there are two primary causes for thisuncertainty: “actual uncertainty” about the value of the debtor’sbusiness and “judicial valuation uncertainty”, meaning uncertaintyabout how the judge will decide to value the business. Kerry O’Rourke, Survey: Valuation Uncertainty in Chapter 11Reorganizations, 2005 Colum. Bus. L. Rev. 403, 414-415 (2005).Actual uncertainty stems from the fact that valuation requires anestimate of a business’ future prospects and the future is inherentlyuncertain. “Sources of actual uncertainty include imperfectinformation about the market for a debtor’s goods or services, theabilities of a debtor’s management team, and other factors relevantto the debtor’s business”. Id. at 415. Judicial valuation uncertaintystems from the fact that it is the subjective opinion of thebankruptcy judge that will ultimately determine the debtor’s value.A bankruptcy judge is not making a mathematical calculation of thedebtor’s worth, but rather relies on his or her personal and

subjective views of the circumstances and the testimony to make adetermination based on less than perfect information. Althoughjudges may be predisposed to approach these issues in a certainway, their past behaviour gives no guarantee as to how they willdecide valuation questions in the future. The role of a bankruptcyjudge in a Chapter 11 case will be discussed further in Section IV.A.Further contributing to the uncertainty of the valuation process isthe fact that the experts brought in to opine on value are not neutraland impartial arbiters; rather, they are hired by the goal-orientedparties-in-interest. Some variance in the valuations of differentexperts would be expected in any event, as different experts may beconsidering different factors even if using the same valuationmethod. See e.g., In re American Homepatient, Inc. 298 B.R. 152,187 (Bankr. M.D. Tenn. 2003), aff’d, 420 F.3d 559 (6th Cir. 2005)(“valuation of property is an inexact science . . . and variance ofopinion by two individuals does not establish a mistake in either”).However, given that experts are likely to be inclined to arrive atvaluations suiting their clients, some of the variance that occurs incertain cases may result from subtle or unsubtle bias. See, e.g.,Mirant at 815 (“[the expert] has served as an advisor to the debtorssince before commencement of these Chapter 11 cases…it isreasonable to infer that [the expert] would have some commitmentto a strategy (and its factual underpinnings) that he helped devise”).To minimise the effect of potential bias, courts will often discreditexperts who receive success fees, as this is seen as creating aconflict of interest and giving the expert too much incentive to aligntheir valuation with their client’s interests. See, e.g., In re OneidaLtd., 351 B.R. 79, 92 (Bankr. S.D.N.Y. 2006) (“[the] contingent fee,and the circumstances surrounding it, seriously undermine [theexpert’s] credibility”).It is thus before a backdrop of uncertainty that creditors andbankruptcy courts must decide how to value debtors. Thisuncertainty is exacerbated by the fact that there are severalapproaches to valuation, none of which is universally accepted, andeach of which has strengths and weaknesses. Understanding thedifferent approaches to valuation, and why each is imperfect, is animportant step in understanding why consensual resolution is oftenpreferable.

A. Discounted Cash Flow Method

A popular method for valuing a going-concern is the discountedcash flow method (“DCF”), which involves arriving at a presentvalue estimate of the company’s future earnings. See, e.g.,Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 526(1941) (“The criterion of earning capacity is the essential one if theenterprise is to be freed from the heavy hand of past errors,miscalculations or disaster, and if the allocation of securities amongthe various claimants is to be fair and equitable.”). Under thismethod, one estimates the relevant company’s future free cash flowand discounts it using a discounting factor such as the weightedaverage cost of capital, or a modification of that number that takesinto account risk, to arrive at a present value. The obvious problemwith this method is that predictions as to future earnings are alwaysquestionable, as a company could perform substantially better orworse than its projections would indicate. This is particularly truein the case of a reorganised entity that has not yet been tested in itsnew form or with its new management. Additionally, the discountfactor could be inaccurate by failing to take into account certain riskfactors or future events, such as inflation. Therefore, two parties,both using DCF to value a company, could produce vastly differentresults depending on their subjective views of future events.

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B. Comparable Transactions Method

A second method used by courts to value a company is the“comparable transactions” method, which, as the name suggests,uses prices from analogous third-party sale transactions to value theenterprise. This method avoids the problems presented by DCF,because it does not involve predicting the future. However, it isoften of limited utility because it can be used only in cases wherecomparable transactions exist and information about them isavailable. The comparable transactions approach can also beproblematic because no two companies or transactions are everexactly alike. Even very similar companies may be valueddifferently because of factors such as goodwill or the value of theirtrademarks. This is exacerbated in a Chapter 11 situation, as thedebtor company will be looked at differently from similarcompanies sold in non-distressed situations. In some cases, the debtor company itself may have been marketed,and bids for the company could be used to derive its value. In sucha case, the court will have to scrutinise the reasons why theproposed transaction did not materialise and whether new factorsneed to be taken into account, such as additional capital (e.g., exitfinancing), new management or changes in the market that wouldmake it inappropriate to use the previous valuation. Historically,U.S. courts have not been unanimously enthusiastic about using themarket approach to value a bankrupt company. See e.g., In re PennCentral Transp. Co., 596 F.2d 1102, 1115-6 (3d Cir. 1979) (holdingthat market prices are not an adequate measure of enterprise valuein bankruptcy). However, in Bank of America National Trust andSavings Ass’n v. 203 North LaSalle Street P’ship, 526 U.S. 434,456-7 (1999), the U.S. Supreme Court strongly validated the use ofmarket-based approaches to valuation, at least where there is acompetitive bidding process with multiple bidders.

C. Securities Valuation Method

The value of a debtor’s securities could provide information aboutthe debtor’s intrinsic value if such securities have continued to tradein a public market during the debtor’s bankruptcy. Using thismethod assumes that the market is liquid and reliable, and is notsubject to the risk of market manipulation or irrational behaviour.Even assuming that there is a liquid market for one type of security,such as the debtor’s stock, does not mean that there will be a marketfor others, such as the debtor’s bonds. In a bankruptcy situation itis likely that the relevant securities will be the debtor’s bonds, debtsand other claims on its assets, as they often convert into anownership stake in the debtor post-reorganisation, while preexistingequity will be rendered worthless. However, the market for claimsin a bankruptcy situation is limited because their value is uncertain,which frightens away many potential buyers. In the absence of apublic market for all relevant securities, the utility of this valuationmethod is questionable.

III. Why Consensual Resolution of the Valuation Question is Better Than Litigation

Litigation over enterprise valuation is costly and often destructiveof value. While an individual claimant may benefit from advancingand prevailing on a claim for a valuation favourable to his or herinterests, claimants as a whole always lose out because the litigationcreates both direct and indirect waste. Direct waste is created because of court costs, attorneys’ fees andthe costs of discovery and expert testimony. If the valuation

involves a large public company, the process can be incrediblycomplicated, and accordingly the costs will be high. There is noshortage of examples of protracted valuation litigation in U.S.Chapter 11 cases. See, e.g., In re Nellson Nutraceutical, Inc., No.06-10072 (CSS), 2007 Bankr. LEXIS 99, *3 (Bankr. D. Del. Jan.18, 2007) (“[t]he court devoted 23 trial days to determine theenterprise value of the [debtor]”); Mirant at 809 (“[t]he ValuationHearing . . . continued for 27 days over . . . 11 weeks”). Even if a party can get a verdict in its favour, there is always thelikelihood that competing parties-in-interest will appeal. This isespecially likely when the debtor company is large, and both juniorand senior claimants have substantial claims against it. Theprospect of a significant recovery that outweighs the direct costs oflitigation provides an incentive to keep the parties fighting.Indirect waste results from the fact that while the purported value ofthe debtor company is being litigated, its actual value is graduallydeclining as a result of externalities implicit in the bankruptcyprocess. While the litigation is ongoing, critical suppliers may notwant to do business with the debtor because of heightened fears thatthey will not get paid, customers may be reluctant to purchase itsproducts because of fears that warranties will not be honoured, andessential employees may decide to seek other opportunities becauseof uncertainty surrounding their jobs. Further, the debtor is alsoincurring significant costs in the form of professional fees for itslawyers and other advisors as well as having to pay the litigationcosts of certain other parties, such as the unsecured creditors’committee, as required by § 503(b)(3) of the Bankruptcy Code.These factors will contribute to a decline in the real value of thedebtor, which is detrimental to all parties-in-interest. While thevarious claimants are squabbling over the size of the piece of the pieeach will get, the debtor often has to remain in Chapter 11, with theentire pie shrinking, thereby leaving less for all involved. This isexactly the scenario that was feared in the 2003 Chapter 11 case ofConseco Corporation (“Conseco”), where the debtor, a largeinsurance holding company, faced the prospect of regulatory actionif its reorganisation was not completed quickly. In re ConsecoCorp., (“Conseco”) No. 02-49672 (Bankr. N.D. Ill., 2003). Thisfear prompted the bankruptcy court overseeing the case to mandatea process designed to arrive at a consensual resolution of thevaluation dispute that was holding up the debtor’s reorganisation.Senior creditors ultimately had to share with junior creditors someof the value that might have otherwise been owing to them in orderto arrive at a consensual resolution.

IV. Tools for Reaching Consensual Resolutionsto Disputed Valuations

In order to reach a consensual resolution to a disputed valuation, itis important to have an understanding of the different goals andmotivations of the various parties-in-interest and to be aware ofcreative solutions that can facilitate a resolution. It is primarily thetension between the parties-in-interest that makes valuation adifficult process. For example, senior creditors will invariablyprefer a lower valuation so that they can claim more of the debtor’sownership or assets, and junior creditors will want the opposite.Arriving at a consensual resolution in the face of this tensionrequires consideration of the goals of the various parties-in-interestas well as the motivations that may drive them toward litigation orconsensual resolution. The use of creative solutions, typicallyinvolving some method of reducing or eliminating valuationuncertainty, can facilitate a consensual resolution by helping toavoid the valuation question altogether.

8



A. Understanding the Key Parties-In-Interest

While there are a great many parties-in-interest in a U.S. Chapter 11case, this section focuses on five of the most important in manyvaluation disputes: senior creditors, junior creditors, the debtor (asrepresented by its management), the bankruptcy court judge and theattorneys.i. Senior CreditorsSenior creditors are in an advantageous position due to the absolutepriority rule, which allows them to insist on being paid in full beforeany payments are made to junior claimants. The fact that seniorcreditors are entitled be paid in full before other classes of claimantsreceive any value provides a strong incentive for them to advocatefor a low valuation, which will enable them to obtain a greaterpercentage of the reorganised debtor’s equity. A senior creditor’s position may also provide it with an incentive toseek quick and expedient resolutions to the bankruptcy process thatmay not fully maximise the debtor’s value. For example, seniorcreditors are highly motivated to accept a purchase offer for thedebtor’s business immediately and obtain a full recovery forthemselves and little or nothing for junior claimants, as opposed towaiting months or even years to permit a more fulsome sale orreorganisation process that might ultimately result in a higherrecovery for junior classes but with substantially increased risk anddelay to the senior creditors.One must also bear in mind that a class of senior creditors is usuallynot monolithic but instead is likely to be made up of members withdiffering incentives. For instance, an original lender in a seniorcredit facility or an investor that bought its position at or near par islikely to view a given restructuring very differently from adistressed investor that bought the same debt at 20 cents on thedollar after the borrower began to experience financial problems. Avaluation leading to a 30 cents on the dollar recovery may be adisaster for one and a home run for the other. Also, since distressedinvestors tend to focus heavily on the time value of the money theyhave invested and are less likely to have institutional relationshipswith the debtor, they may well be much more focused on a quickprocess and payout than an original lender that may be looking attheir claim as long-term equity in the reorganised borrower. ii. Junior Creditors The incentives of junior creditors are often opposite those of seniorcreditors. Since junior creditors know that the absolute priority rulewill keep them from receiving any value if the senior creditors arenot paid in full, junior creditors will insist on a high valuation forthe debtor so that they can share in the recovery with seniorcreditors. Further, because junior creditors often would not be “inthe money” should the company be sold today, they may well seekto postpone the timing of a potential sale or insist on areorganisation.Just as with senior creditors, junior creditors may have an incentiveto insist on their preferred valuation even if such valuations do notultimately prove accurate. An example of this is seen in the 2003Chapter 11 case of Exide Technologies, where the unsecuredcreditors’ committee proposed a value of $1.4 to $1.6 billion for thedebtor, while the debtor itself projected a value of only $950million. In re Exide Techs., 303 B.R. 48 (Bankr. D. Del. 2003). Thecourt, persuaded by the unsecured creditors’ committee, authoriseda plan that set the debtor’s enterprise value at $1.5 billion, andallocated a significant amount of shares to the unsecured creditors.Within a year, the value of the reorganised debtor’s stock had fallenmore than 50% from the value implied by the plan, meaning thathad the debtor been properly valued, the unsecured creditors wouldhave received nothing.

Junior creditors that realise they will receive little or nothing in aproposed plan may also be incentivised to threaten litigation.Threatening litigation, or actually litigating, allows junior creditorsto exercise leverage against senior creditors as a result of both thedirect and indirect waste caused by litigation. Douglas Baird andDonald Bernstein refer to this incentive as an “option that hasvalue”, because by requesting a valuation hearing the juniorcreditors can either prompt a settlement from the senior creditors orpossibly obtain a judicial valuation that puts them “in the money”.Douglas G. Baird and Donald S. Bernstein, Enterprise Valuationand the Puzzling Persistence of Relative Priority Outcomes inCorporate Reorganization, Univ. Cal., Berkeley Law and Econ.Spring Workshop 35 (2005).iii. The Debtor-As Represented by Its Management The debtor is the central figure in a U.S. Chapter 11 case. Inaddition to being the focus of the reorganisation to be effectedtherein, the debtor uniquely has a fiduciary duty to all parties-in-interest in the case. See Smart World Comm. v. Juno Online Servs.(“In re Smart World Tech.”), 423 F.3d 166 (2d Cir. 2005).However, the debtor is an entity and as such is represented by itsmanagement. A debtor’s management has an important role in anyvaluation of the debtor, because it is management’s projections as tothe company’s value and future performance that are the startingpoints for valuation by the other parties-in-interest. Although thedebtor has a fiduciary duty to all parties-in-interest, and shouldalways act fairly and impartially in that regard, in practice this is notalways the case. Management may, in certain circumstances, act ina self-interested manner. The current management of a debtor maywant to retain their positions and/or secure their legacy andreputation vis-à-vis the enterprise and as such may be more likelyto favour a reorganisation for the debtor rather than a liquidation.Further, management may tend to align with certain parties-in-interest to the detriment of others. For example, in the 1990Chapter 11 case of National Gypsum Company, which eventuallymade its way to the Texas Supreme Court, junior creditors allegedthat management had intentionally undervalued the debtor byhiding cost savings of $30 to $40 million, so as to benefit seniornote holders in exchange for retaining their jobs after thereorganisation. Browning v. Prostok, 165 S.W.3d 336 (Tex. 2005). Putting aside any self-interested inclinations to the contrary, adebtor’s fiduciary duty to all parties-in-interest should in manycases provide management a strong incentive to reach consensualresolution of valuation disputes whenever possible. Throughconsensual resolution, management can keep the value of the debtorfrom declining during a drawn-out litigation. iv. The JudgeIn a valuation dispute, the judge is the neutral arbiter who reviewsthe competing proposed valuations put before him or her and makesthe ultimate value determination. Judges are assumed by some tobe experts in enterprise valuation. However, even if a bankruptcyjudge has been through numerous valuation proceedings, he or shewill not in most instances be an expert on the debtor’s industry, norwill he or she be an expert in economic forecasting. The judge willtypically rely on the testimony of experts, which as discussed abovecan be biased in favour of their client. Resolving a valuation dispute, which a judge has a reputationalstake in doing correctly, can be an unpleasant experience for a judgewho is torn by two seemingly equally persuasive value projections.Further, bankruptcy judges generally favour expedient resolutionsthat don’t result in the costs and time loss of litigation and, frankly,don’t continue to encumber their often crushing dockets. Becauseof these concerns, a judge may well favour - and encourage - aconsensual resolution of a valuation dispute, as this will avoid thelaborious process of evaluating the arguments of competing

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experts, the possibility of being wrong in ascertaining the debtor’svalue, and the time and burden of litigation. v. The AttorneysAs repeat players in valuation disputes, attorneys are uniquelypositioned to know when consensual valuation will be better fortheir clients than litigation. For example, an attorney representingsenior creditors may view the junior creditors’ chances of prevailingin a valuation dispute (or an attack on fraudulent conveyance orpreference grounds) as significant, and therefore push forconsensual resolution to avoid the risk to his client. However, theincentives of attorneys in advocating for consensual resolution maybe mixed because of the fees to be gained from litigating thedispute. This incentive may be countered by the fact that attorneysalso value their professional reputation, and an attorney who isknown as an honest broker that doesn’t pointlessly litigate will bebetter perceived among the bar and other restructuring professionalsand may therefore garner more clients.

B. Creative Solutions

Given the diverse and conflicting goals of the various parties-in-interest, it is often easier and more efficient to bypass the valuationquestion altogether. Doing so, however, often requires awillingness on the part of the key parties-in-interest to explorecreative solutions. This section will briefly discuss a few suchmechanics from recent cases.i. Volume Weighted Average Price (“VWAP”)VWAP is a post-confirmation pricing mechanism that avoids theneed for valuation litigation by estimating the value of the debtorand assigning equity based on this estimate. In order to utilize theVWAP method, a number of shares of equity in the reorganiseddebtor are kept in reserve at emergence and not distributed pendingthe resolution of the VWAP process. To arrive at a valuation, thecourt then aggregates the value of all shares traded during a specificperiod and divides by the number of shares traded. The VWAPshare price is then multiplied by the total number of shares to arriveat a value for the company. At the conclusion of the VWAP process,certain classes of claimants are “trued-up,” or given more shares,based on the actual post-confirmation market value of the debtorand whether the debtor’s initial valuation was an underestimate oroverestimate. Under this approach, senior creditors would initiallyreceive the shares not held in reserve. The shares held in reserve aredistributed after the VWAP process to senior creditors if thedebtor’s value had been overestimated or to junior creditors if thevalue had been underestimated. This approach was usedsuccessfully in the 2007 Chapter 11 case of Dana Corporation todetermine the value of new shares in the reorganised debtor. In reDana Corp., Inc., No. 06-10354 (Bankr. S.D.N.Y. 2007).ii. Purchase ApproachThe purchase approach should be advocated by junior creditors whofeel that a senior creditor is intentionally undervaluing the debtor.Under this approach, junior claimants are allowed to purchaseclaims from the senior claimants at the price the senior claimantsassert is the true value. If the junior claimants are correct that thedebtor is really worth more than asserted by the senior claimants,they end up with the surplus. It also gives the senior claimants anincentive to be more realistic and not undervalue the debtor,because if they do so they will be bought out by the junior creditorsat an artificially low price. This approach was attempted in the1993 Chapter 11 case of E-II Holdings where a group of juniorcreditors led by financier Carl Icahn asserted that the proposed planundervalued the company and gave too much value to seniorcreditors. The junior creditors made a series of bids for the

company, each time valuing it slightly more than the amountproposed by the senior creditors, and each time the senior creditorsraised their plan estimate of the total value of the company toexceed the bid. In re E-II Holdings Inc., No. 92 B 43614 (CB)(Bankr. S.D.N.Y. 1992) (unpublished memorandum decision).iii. Auction ApproachIn certain circumstances where the relevant parties-in-interestcannot agree on a value for the debtor’s business, it may make senseto simply auction off the business. In this approach, the bankruptcycourt would approve a set of procedures for conducting the auctionand then the business (or significant parts thereof) are simply put upfor sale to the highest bidder. Whether or not a sale is ultimatelyapproved and effectuated, the auction process can help to set a valuefor the estate. An auction was successfully used in the Chapter 11case of Adelphia Communications Corporation (“Adelphia”) wherejunior creditors believed that a plan proposed by managementundervalued the debtor for the benefit of senior creditors. Thejunior creditors obtained court approval for an auction of Adelphia’sbusinesses, which ultimately led to Adelphia being sold to a groupled by Time Warner Cable and Comcast Corporation for $17.6billion. In re Adelphia Communications Corp., No. 02-41729(Bankr. S.D.N.Y. 2002).iv. Convertible SecuritiesValuation disputes can sometimes be avoided through the use ofstrategically-designed convertible securities. Such securities, whenissued as part of a plan of reorganisation, can be used to allocatevalue among competing groups of creditors based on the post-emergence market value of the reorganised debtor. For instance,senior creditors, believing that the value of a post-emergence entitywill be less than their claims, might receive the common stock ofthe reorganised debtor in their plan of reorganisation. However,junior creditors, believing that the reorganised debtor’s businesswill be worth more than the value of the senior creditors’ claims,might be granted warrants to purchase shares of common stock inthe reorganised debtor at a strike price indicating payment in full forthe senior creditors. In this way, if the senior creditors are correct,they will receive the full value of the entity; but if the juniorcreditors are correct, they will realise value over that required to payin full the senior creditors. See Douglas G. Baird and Donald S.Bernstein, Absolute Priority, Valuation Uncertainty, and theReorganization Bargain, 115 Yale L.J. 1930, 1964-1965 (2005). A similar approach was successfully utilised in the Conseco case.Senior creditors in that case believed that the reorganised debtorwould be worth significantly less than the value of their claims, sothey supported a plan of reorganisation that would have providedlittle value to junior creditors. However, the junior creditorsbelieved that the entity would be worth enough to pay the seniorcreditors in full and leave them with the equity in the company.Accordingly, a plan was structured such that the junior creditorsreceived the common stock of the reorganised debtor, while thesenior creditors received convertible shares. If the company werenot able to redeem the convertible stock by paying the seniorcreditors an amount sufficient to make them whole by a certain dateafter reorganization, the convertible stock would convert intocommon shares and effectively displace the junior creditors.Ultimately, the enterprise value of the reorganised Conseco provedto be substantially higher than the value of the senior debt and, as aresult, the junior creditors were able to realise significant valueeven after the senior creditors were paid in full. Conseco, No. 02-49672 (Bankr. N.D. Ill. 2003). Different securities, but to similareffect, were designed to resolve valuation disputes in the 2001Chapter 11 case of La Roche Industries, In re Laroche Indus., Inc.,No. 00-1859 (Bankr. D. Del. 2001), and in the 2008 out-of-courtrestructuring of Tekni-Plex, Inc.

10

Valuation in Chapter 11


DAVIS POLK & WARDWELL is a global law firm based in New York City. For more than 150 years, our lawyers haveadvised industry-leading companies and global financial institutions on their most challenging legal and businessmatters. Davis Polk ranks among the world’s preeminent law firms across the entire range of our practice, which spanssuch areas as insolvency and restructuring, capital markets, mergers and acquisitions, credit, litigation, investmentmanagement, executive compensation, intellectual property and tax. The firm has more than 600 lawyers in offices inNew York, Menlo Park, CA, Washington, D.C., London, Paris, Frankfurt, Madrid, Hong Kong and Tokyo.

Davis Polk has played a prominent role in many high-profile domestic and international restructurings and bankruptcies,representing debtors, agents to the lenders and other significant parties-in-interest. Representative cases include: DeltaAir Lines, Lyondell, Lehman, Tribune, Frontier Airlines, Enron, Adelphia Communications, Delphi, Refco, Conseco,Federal-Mogul, Loral, Polaroid, Collins & Aikman, Meridian Automotive, Bethlehem Steel, Dow Corning, Owens Corning,Johns-Manville, LTV, Drexel Burnham Lambert, Crown Paper, U.S. Office Products, Magellan Health Services andNtelos. For more information go to: www.dpw.com/practice/risk.htm


Conclusion

The uncertainty created by the valuation process (or other litigationthreats) gives junior creditors a “valuable option.” However,valuation litigation often has negative consequences for all parties-in-interest as a result of its direct and indirect costs. It is oftenvalue-maximising for the parties-in-interest to reach a consensualagreement on plan distribution. By doing so, the debtor’s value ispreserved or enhanced, and there is more value left to be shared. Inorder to help achieve this efficient result, it is essential to consider

the differing goals and perspectives of the various parties-in-interest, and for the key parties-in-interest to be willing to thinkcreatively in fashioning a plan of reorganisation.

AcknowledgmentThe authors would like to thank Arvin Abraham and Andrea Gildeafor their extensive and invaluable assistance in the preparation ofthis article.

Marshall S. Huebner

Davis Polk & Wardwell 450 Lexington AvenueNew York, NY 10017USA

Tel: +1 212 450 4099Fax: +1 212 450 3099Email: [email protected]: www.dpw.com

Marshall Huebner is co-head of the Insolvency and RestructuringGroup at Davis Polk. He has played a leading role in many majordomestic and international restructurings and bankruptcies,representing both financial institutions and corporations. He hasrepresented agent banks in several of the largest and most complexU.S. DIP financings including Lyondell ($8 Bl), Enron ($1.5 Bl) andAdelphia Communications ($1.5 Bl). Mr. Huebner recently acted aslead bankruptcy and restructuring counsel to Delta Air Lines in one ofthe largest and most successful restructurings in U.S. history and iscurrently advising The Star Tribune Company and Frontier Airlines intheir Chapter 11 reorganisations. Mr. Huebner also represents theFederal Reserve Bank of New York and the United States Departmentof the Treasury with respect to their $150 billion in multiple financingsand 79.9% equity stake in the American International Group. Othermajor bankruptcy proceedings and restructurings in which Mr.Huebner had a major role include Citation, Collins & Aikman, Loral,Polaroid, Magellan Health Services, Ntelos and Crown Paper. Mr.Huebner chaired the Courts Subcommittee of the Committee onBankruptcy and Corporate Reorganization of the New York City BarAssociation. He has been a guest lecturer at Yale Law School andColumbia Law School, is on the faculty of the New York UniversityAdvanced Bankruptcy Workshop and on the Board of Advisors of theYale Law School Center for the Study of Corporate Law. He hasauthored numerous articles and is presently writing Restructuring theTroubled Company, a full-length book to be published by OxfordUniversity Press in 2009. He attended Princeton University (awardedFulbright and Rotary Scholarships) and Yale Law School (awarded aFord Foundation Fellowship). Mr. Huebner has repeatedly beenrecognised as a leader in the field, including being named “Dealmakerof the Year” by The American Lawyer in 2007 and 2009.

Damian S. Schaible

Davis Polk & Wardwell 450 Lexington AvenueNew York, NY 10017USA


Damian Schaible is a senior associate in the Insolvency andRestructuring Group at Davis Polk. He has worked on a wide rangeof corporate restructurings and bankruptcies, representing debtors,creditors, agent banks, lenders, asset purchasers and other strategicparties. His experience spans transactional and litigation matters.Mr. Schaible recently served a lead role in Davis Polk’srepresentation of Delta Air Lines in one of the largest and mostsuccessful restructurings in U.S. history. He is currently serving asone of the lead lawyers in Davis Polk’s representation of FrontierAirlines in its Chapter 11 restructuring. In addition to insolvencyand restructuring work, Mr. Schaible has worked extensively oncomplex aircraft finance matters, representing owner participants,portfolio purchasers and lessees. He has also worked on a numberof general financing matters, representing borrowers, agent banksand creditors. Mr. Schaible attended the College of the Holy Crossand New York University School of Law. He clerked for theHonorable Danny J. Boggs, Chief Judge of the U.S. Court ofAppeals, Sixth Circuit. Mr. Schaible is the chair of the CourtsSubcommittee of the Committee on Bankruptcy and CorporateReorganization of the New York City Bar.



Chapter 3

Estudio Uriburu Bosch & Asoc.

Argentina

1 Issues Arising When a Company is in Financial Difficulties

1.1 How does a creditor take security over assets inArgentina?

If the credit was originally unsecured, the creditor could renegotiatewith the debtor and seek for some security or directly go to the courtto ask for a pledge or encumbrance.

1.2 In what circumstances might transactions entered intowhilst the company is in financial difficulties be vulnerableto attack?

All transactions that are not conducted under fair market conditionsor that impose on the debtor duties that can deteriorate itsconditions are vulnerable to attach. If the transaction is a fairtransaction conducted on an arm’s length basis, despite giving theother party certain securities in case the company fails to pay, arelegal and enforceable.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Argentina?

Directors are responsible to manage the company with due care andloyalty. If they don’t take the correct measures and, because of that,the situation of the company deteriorates, they could be held liablejointly and severally with the company. To become liable, however,they must be declared responsible by a civil or commercial court ina trial to which they must be a part of, having the chance to exercisetheir defensive right.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Argentina?

The main types of formal procedure are: Private ReorganisationProcess or Acuerdo Preventivo Extrajudicial (APE); or Prior toBankruptcy Proceeding (Concurso Preventivo).

2.2 What are the tests for insolvency in Argentina?

There is no formal requisite. The Bankruptcy law states that when

a company is not able to comply with its obligations (not just asingle one) when due and if that situation cannot be modified justby taking managerial measures, then it must seek for protectionunder the remedies available in the law.

2.3 On what grounds can the company be placed into eachprocedure?

The reorganisation process can only be filed by the company. Adebtor cannot ask the company to file it. However, debtors have theright to ask for the company to be placed into bankruptcy if theyhave the credit instruments to do so (unpaid checks, letters of credit,or similar instruments).

2.4 Please describe briefly how the company is placed intoeach procedure.

Please see the answer above.

2.5 What notifications, meetings and publications are requiredafter the company has been placed into each procedure?

In case of a Prior to Bankruptcy Procedure (Concurso Preventivo),the trustee that is appointed by the court sends a letter to eachcreditor recognised by the debtor, personally notifying about thesituations. Additionally, two public notices are published, one inthe Official Gazette and the other in a newspaper from the placewhere the company has its principal place of business. In case of a Bankruptcy Proceeding, only the public notices areposted.

3 Creditors

3.1 Are unsecured creditors free to enforce their rights in eachprocedure?

All creditors must get their credit recognised by filing a formalrequest to the trustee appointed by the court. Unsecured creditorswill get paid pari passu with other unsecured creditors in the termsand conditions as proposed by the debtor and approved by thecreditors (in case of a Concurso Preventivo) and with the result ofthe liquidation of assets in a Bankruptcy Proceeding. They are notentitled to enforce their rights.

Rafael Algorta

Fernando Bosch

12

Estudio Uriburu Bosch & Asoc. Argentina


3.2 Can secured creditors enforce their security in eachprocedure?

Once they get their credit recognised by the trustee they can enforcepayment.

3.3 Can creditors set off sums owed by them to the companyagainst amounts owed by the company to them in eachprocedure?

No, set off and compensations are not allowed by the law.

4 Continuing the Business

4.1 Who controls the company in each procedure? Inparticular, please describe briefly the effect of theprocedures on directors and shareholders.

In the Prior to Bankruptcy Procedures (Concurso Preventivo), thecompany is managed by the Board and controlled by theshareholders under the surveillance of the trustee and authorisationfor certain acts from the judge. In the Bankruptcy Proceeding, theBoard and the shareholders lose control over the company and theliquidation process will be held by the trustee, who must seek forthe judicial approval.

4.2 How does the company finance these procedures?

The Concurso Preventivo must be financed by the company. Thereare some instrument-like payment plans to pay the service of justice(0.75%, 1.5% or 3% over the liabilities). In the BankruptcyProceeding all the costs are paid with a right of preference from theliquidation of the assets.

4.3 What is the effect of each procedure on employees?

In case of Concurso Preventivo, as a general principle, the labouragreements are not modified. The collective bargaining agreementapplicable to the company could be suspended for 30 days. As partof the proposal of reorganisation the debtor could downsize thecompany and negotiate reductions of the severance owed to theemployees, of no more than 50%, with the labour unions.In case of a Bankruptcy Proceeding, the labour agreements areautomatically terminated and the former employees will have aspecial privilege to be paid from the liquidation process before anyother creditor. That being said, if there are creditors with mortgagesover assets, those assets are not used to cancel labour credits if thesecured creditor has not been paid in total.

4.4 What effect does the commencement of any procedurehave on contracts with the company and can the companyterminate contracts during each procedure?

In a Concurso Preventivo, the debtor may continue with thefulfillment of the agreements in the course of execution, whenreciprocal obligations are pending. To do so the debtor must requirea judge’s authorisation, who must make a decision bearing in mindthe previous opinion of the trustee. The continuity of the agreementallows the other party to demand the fulfillment of pendingobligations up to the date of the filing of the Prior to BankruptcyProcedure; if not, the agreement could terminate.

A third party could finish the agreement if he didn’t receive thenotification of the judge’s authorisation of continuity, within thirtyjudicial days from the day the judge declares the Concurso opened.He must notify his decision to the trustee and to the debtor.In case of Bankruptcy Proceedings, all agreements areautomatically terminated.

5 Claims

5.1 Broadly, how do creditors claim amounts owed to them ineach procedure?

In both cases (concurso preventivo and Bankruptcy Proceedings),creditors must seek the recognition of their credits to the trustee. Todo so they must file a petition describing the relation and givingsummary evidence of its credit.

5.2 What is the ranking of claims in each procedure? Inparticular, do any specific types of claim have preferentialstatus?

All the preferences are stated by law. There are special and generalpreferences. Special preferences have preferential status.Credits arising from the construction or maintenance of assets haveprivileges over those assets.Labour credits have privileges over finished goods and machinerythat exist in the plant. Taxes for certain goods have preferences over those goods. Credits secured with mortgages, liens or warrants over specificgoods have privileges over those goods.

5.3 Are tax liabilities incurred during each procedure?

Tax liabilities exist only in case of Concurso Preventivo where thecompany continues its operation.

6 Ending the Formal Procedure

6.1 Is there a process for “cramming down” creditors who donot approve proposals put forward in these procedures?

Only in case the company cannot get the payment proposalapproved, or if it fails to comply with it once approved, is there acram down process where any interested party registered in thespecial register opened by the judge, can make a proposal to thecreditors and get it approved by them within the due time that theygrant him.

6.2 What happens at the end of each procedure?

The Concurso Preventivo ends when the creditor complies with thepayment proposal, as this is when the creditor recovers fulladministration power. The Bankruptcy Procedure finishes when all the assets are sold andfunds have been distributed among the creditors. If the companyhas no assets then the judge must send the file to the criminal courtto investigate if there was any fraud committed by theadministrators.

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7 Alternative Forms of Restructuring

7.1 Is it common to achieve a restructuring outside a formalprocedure in Argentina? In what circumstances might thisbe possible?

Restructuring outside a formal procedure is a common procedurefor big companies with mostly financial debts, where the creditorsprefer not to go to court because of the terms that the formalprocedures take.

7.2 Is it possible to reorganise a debtor rather than realise itsassets and business?

Yes it is. The concurso preventivo is the procedure, by which onecan reorganise the debtor business to avoid liquidation.

7.3 Is it possible to achieve an expedited restructuring of thedebtor by means of a pre-packaged sale? How is such asale effected?

Yes it is. It is usually held as a private sale where the creditorswaived their credits until the sale is completed.

8 International

8.1 What would be the approach in Argentina to recognising aprocedure started in another jurisdiction?

There must be enough evidence of the existence of the procedureaccording to the applicable law for it to be recognised in Argentina.

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Fernando M. Bosch

Estudio Uriburu Bosch & Asoc.Av. Santa Fe 1531, 5th FloorCity of Buenos AiresArgentina

Tel: +5411 4815 9971Fax: +5411 4815 9971Email: [email protected]: www.uriburubosch.com

FERNANDO M. BOSCH is a Co Founder, a Member of the Board ofDirectors and coordinates the Bankruptcy Department of the Firm. Mr. Bosch concentrates his practice on Bankruptcy Matters andComplex Business Litigation. He is an expert in restructurings.Together with Mr. José A. A. Uriburu he has assisted several clientsin reorganising their capital and debt structures, outside ofbankruptcy, to facilitate bootstrap turnarounds and acquisitions. Prior to founding the Firm, he worked as a Court Clerk theCommercial Court Nº 12, as a Court Clerk for the Commercial Courtof Appeal, and as Judge of Commercial Court Nº 9 of the City ofBuenos Aires.

Rafael J. Algorta

Estudio Uriburu Bosch & Asoc.Av. Santa Fe 1531, 5th FloorCity of Buenos AiresArgentina

Tel: +5411 4815 9971Fax: +5411 4815 9971Email: [email protected]: www.uriburubosch.com

RAFAEL J. ALGORTA concentrates his practice on Corporate Law,Bankruptcy, and Labor matters. He has an intensive experience inall areas of commercial and labour law litigation, and also corporateacquisitions, including the use of bankruptcy proceedings topurchase assets. Mr. Algorta joined the Firm in 1988 and becamea Partner in 1995.As a member of The Entrepreneurship Department of the Firm since1999, he has been the legal advisor of several Start Ups. He is alsothe legal advisor of some of the most prestigious EntrepreneurshipCenters of Argentina, such as the Entrepreneurship Center of the IAEBusiness School; CEMA; Live Wire of Argentina (Shell Foundation),and ultimately the Entrepreneurship Center of ITBA (TechnologicalInstitute of Buenos Aires), where he is a Co Founder, and haslectured several courses on topics relating to Law for Entrepreneurs. Mr. Algorta received his degree from the El Salvador UniversitySchool of Law. He has attended a Post graduate course on BusinessManagement at the Berkeley University, California.

Estudio Uriburu Bosch & Asoc.was founded in 1988 by José A. A. Uriburu and Fernando M. Bosch, attorneys-at-law,who decided to combine their abilities and capacities after working together for many years.

The increase of the clients’ portfolio encouraged the founders to incorporate new associates in order to adapt thestructure of the organisation to the new legal requirements that their clients are faced with on a daily basis.

The relationship with our clients is based on the ever growing effective principle of acting preventively in order to avoiddisputes that, when they occur, may cause unexpected expenses.

Uriburu Bosch & Asoc.’s objective is to render a broad and general legal service for ordinary cases, and a more thoroughand specialised service especially for those more complex or extraordinary cases.

Our aim is to provide personalised attention as well as to give timely and effective answers. The experience of everymember of the Firm supports this principle.

History does not begin whenever we desire, nor does improvisation guarantee good results.

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Austria


1.1 How does a creditor take security over assets in Austria?

Austrian law recognises pledges (Pfandrechte), security transfers(Sicherungsübereignungen) and security assignments(Sicherungszession).In order to establish a legally binding security, certain principlesmust be respected:As a general rule, Austrian law does not recognise security interestsover a fluctuating pool of assets (no floating charge). Any collateralasset must be specified (bestimmt) or at least specifiable(bestimmbar). In order for a security to be valid in addition to an agreement, apublic act is required (Publizitätsprinzip). In case of real estate, thishappens through notification in the public real estate register(Grundbuch). In order to fulfil the publicity requirements formovable objects possession of the asset must be transferred to thecreditor/pledgee. The publicity requirements for non-corporalassets are satisfied by either notifying the debtor of the claim (thirdparty) or by annotation in the accounting records of the pledgor.A pledge (Pfandrecht) will only be valid, if the principle ofaccessoriness (Akzessorietät) - i.e. the dependence on existence of asecured debt - is adhered to. In particular: (i) the pledgee(Pfandnehmer) must be a creditor of the secured obligation; and (ii)upon a (temporary) discharge of the secured obligation the pledgewill cease to exist. It should also be noted that only monetaryclaims (geldwerte Forderungen) may be secured by a pledge(Pfandrecht).Pledges, security transfers and security assignments are possessorysecurity interests. As such, the effective possession by thepledgee/secured party (or its custodian [Besitzmittler]) is a pre-condition for perfection and maintenance of the respective securityinterest.


Transactions may be subject to an avoidance claim by a receiveraccording to the avoidance rules of the Austrian Bankruptcy Act(Konkursordnung - KO). Condition to an assertion of avoidance rights is that:(i) the challenged legal act took place within a certain “suspect

period” prior to the commencement of bankruptcyproceedings;

(ii) the challenged legal action caused a discrimination of theother creditors (Gläubigerbenachteiligung); and

(iii) the effect of a successful avoidance claim would be toincrease the bankrupt’s estate (Befriedigungstauglichkeit).

Intentional discrimination (Benachteiligungsabsicht)Transactions concluded in order to discriminate other creditors maybe challenged if they were entered into within 10 years precedingthe opening of bankruptcy proceedings and such bad intent wasknown by the beneficiary. This period is shortened to two years ifthe beneficiary did not have positive knowledge of thediscrimination but should have known. For the “familia suspecta”the burden of proof regarding the knowledge of the discriminationis reversed. The “familia suspecta” includes relatives and in-laws.In case of a company as debtor it may also include directors andshareholders.Squandering of assets (Vermögensverschleuderung)Transactions may be challenged if the insolvent party’s actionwithin the last year preceding the initiation of bankruptcyproceedings was seen as squandering of assets and if suchsquandering was known or deemed to be known by the solventparty.Dispositions free of charge (Unentgeltliche Verfügungen)Any transactions concluded free of charge or deemed to be free ofcharge may be challenged if they were made within the last twoyears before the opening of bankruptcy proceedings. Preferential treatment (Begünstigung)Transactions concluded within the last year preceding the openingof insolvency proceedings but after material insolvency or a motionon the initiation of bankruptcy proceedings or in the last 60 dayspreceding may be challenged if the transaction was eitherobjectively preferential or was intended to be preferential. Atransaction is qualified as objectively preferential if a creditoracquires a security or satisfaction to which he is not entitled at all,or in this form or at this time. A transaction is qualified as intendedto be preferential if the beneficiary knew or was deemed to know ofthe intent of the insolvent party to favour a certain creditor. Knowledge of insolvency (Kenntnis der Zahlungsunfähigkeit)Legal acts (Rechtshandlungen) having taken place within the lastsix months preceding the opening of bankruptcy proceedings butafter material insolvency (or a motion on the initiation ofbankruptcy proceedings) by which a creditor acquires security orsatisfaction may be challenged if the creditor knows or is deemed toknow of the debtor’s material insolvency.

Dr. Wolfgang Höller

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Transactions (Rechtsgeschäfte) of the debtor concluded after theabove mentioned point in time may be challenged if suchagreements are disadvantageous for other creditors.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Austria?

If the company is insolvent, each director is (severally) obliged tofile for bankruptcy without culpable delay - within 60 days at thelatest. If a director violates his duty to (timely) file for bankruptcy,he is liable towards the creditors for any damages arising out ofbankruptcy procrastination. Towards existing creditors(Altgläubiger) he is liable for the quota damage, i.e. for thedifference between any damage actually occurred and any (minor)damage which would have occurred had the managing directortimely filed for bankruptcy. As for the so-called “new creditors”(Neugläubiger) - i.e. creditors who contracted with the company instatu cridae - the managing director is liable for the negativeinterest. The creditor must be put in a position as if the relevanttransactions had never been concluded with the subsequentlyinsolvent debtor.According to the Austrian Act on Limited Liability Companies(Gesetz über Gesellschaften mit beschränkter Haftung - GmbHG)the managing director shall pay damages to the company(represented by the bankruptcy receiver) if he made payments afterthe point in time when he was obliged to file a bankruptcy petition.From the date the managing director is obliged to file a bankruptcypetition, he may not make further payments, except for paymentsmatching with deliveries, payments to secured creditors up to theamount of the security, payments against adequate consideration orpayments which are necessary to prevent the company’s immediatecollapse (e.g. rental payments, taxes, social security contributions,wages) and which will not reduce the company’s assets.The managing directors may also be liable for unpaid taxes andsocial security contributions owed by the company.There are several criminal offences stated in the Austrian CriminalCode (Strafgesetzbuch - StGB) that might affect directors for actscommitted in connection with a bankruptcy. The most importantprovision regards the grossly negligent encroachment of a creditor’sinterest (Grob fahrlässige Beeinträchtigung vonGläubigerinteressen, § 159 StGB). This includes effectuatinginsolvency in a grossly negligent manner. There are provisions forfraudulent interference with creditor’s claims (Betrügerische Krida,§ 156 StGB), withholding of social security duties (Vorenthaltenvon Dienstnehmerbeiträgen zur Sozialversicherung, § 153c StGB)and preferential treatment of creditors (Begünstigung einesGläubigers, §158 StGB).Persons convicted of the aforementioned offences may be disqualifiedfrom obtaining a business permit (Gewerbeberechtigung).

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Austria?

Austrian law distinguishes between two types of insolvencyproceedings governing the insolvency of companies: bankruptcyproceedings (Konkursverfahren); and judicial compositionproceedings (Ausgleichsverfahren). Bankruptcy proceedings aregoverned by the Austrian Bankruptcy Code (Konkursordnung -KO). Judicial composition proceedings are governed by the

Judicial Composition Code (Ausgleichsordnung - AO). Furthermore, Austrian law provides for reorganisationproceedings (Reorganisationsverfahren), which - although notconstituting insolvency proceedings - may affect creditors’ rights.Reorganisation proceedings, which are governed by the BusinessReorganisation Act (Unternehmensreorganisationsgesetz - URG),are, however, more of a theoretical interest than of practicalrelevance. Very few proceedings have been initiated in Austriasince the entry into force of the URG.

2.2 What are the tests for insolvency in Austria?

A company is qualified as insolvent, if it is illiquid(zahlungsunfähig) or over-indebted in terms of insolvency law(insolvenzrechtlich überschuldet). Illiquidity (Zahlungsunfähigkeit) means that the debtor is unable topay its debts in due time and is not in a position to acquire thenecessary funds to satisfy its due liabilities within a reasonableperiod of time. The examination of illiquidity must refer solely tomatured liabilities. A forecast is not required and liabilitiesmaturing in the future can be disregarded. A company is considered to be over-indebted in terms of insolvencylaw if the company’s liabilities exceed its assets and the companyhas a negative prospect (negative Fortbestehensprognose). For thedetermination of over-indebtedness, a special over-indebtednessbalance sheet (Insolvenzstatus) has to be drawn up. In this over-indebtedness balance sheet the company’s assets and liabilities haveto be evaluated by assuming the liquidation of the company. Theliquidation values of the company’s assets shall be compared withthe company’s liabilities. If the over-indebtedness balance sheet based on the liquidationvalues shows over-indebtedness of the company, it will be themanagement’s responsibility to examine whether such over-indebtedness constitutes over-indebtedness in terms of insolvencylaw (insolvenzrechtliche Überschuldung) by drawing up a forecaston the company’s continued existence (Fortbestehensprognose).This forecast examines whether the company will be solvent andthus viable in the future.


Bankruptcy proceedings (Konkursverfahren) must be opened by acourt whenever it has been established that a company is unable topay its debts in due time (zahlungsunfähig), or is over-indebted interms of insolvency law (insolvenzrechtlich überschuldet) (seequestion 2.2).Judicial composition proceedings (Ausgleichsverfahren) may beopened whenever the prerequisites mentioned for the opening ofbankruptcy proceedings are met, but also if the risk of the debtor’sinability to pay its debts is imminent (drohendeZahlungsunfähigkeit).


The application for the opening of bankruptcy proceedings may befiled with the competent court either by the debtor himself or by acreditor. A creditor applying for the opening of bankruptcyproceedings is required to substantiate that the debtor is insolvent orover-indebted.

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An application for the opening of judicial composition proceedingscan only be filed by the debtor.


The court edict which states the opening of the formal proceedingsis published online on www.edikte.justiz.gv.at. This edict mustcontain:

the name and address of the debtor; the name and address of the receiver; the date, place and purpose of the first creditor assembly;the request to all creditors to file their claims within a certaindeadline (Anmeldungsfrist);the request to all privileged creditors to claim their privilegewithin this deadline;instructions on the consequences of failure to adhere to thisdeadline;a possible court order of closing of business; andtime and place of the examination hearing(Prüfungstagsatzung) and the report hearing(Berichtstagsatzung) in case of the continuation of business.

The opening of insolvency proceedings takes effect as of 0:00 hoursof the day following publication of the edict in the officialinsolvency data base (www.edikte.justiz.gv.at). After the openingof insolvency proceedings the examination period begins, purposeof which is to establish the future fate of the debtor. This is decidedin the report hearing at the latest. During the examination periodcreditors shall file their claims with the insolvency court.

3 Creditors


Unsecured creditors are entitled to file their claim against the debtorincluding interest until the opening of the proceedings. They aresatisfied only pro rata according to the bankruptcy or compositionquota (Konkurs- oder Ausgleichsquote).Once formal proceedings have been opened it is not possible toobtain an executive lien anymore. All execution proceedingsagainst the debtor are suspended (Vollstreckungssperre).


The rights of secured creditors (Absonderungsberechtigte), such aspledgees, remain unaffected by the opening of insolvencyproceedings. The rights of the secured creditors may however beaffected by the application of the bankruptcy avoidance rules (seequestion 1.2). Furthermore, executive liens obtained within the last60 days before formal proceedings were opened expire.Secured creditors are entitled to preferential satisfaction withrespect to proceeds gained by the realisation of the relevant assetsprovided as collateral. They exclude unsecured creditors fromsatisfaction with respect to these assets.In bankruptcy proceedings it has to be taken into account that therelevant assets still form a part of the bankrupt’s estate and that theybasically have to be administered and realised by the receiver. Onlyif the creditor himself is holder of the relevant assets, he may eitherrealise the security in accordance with the provisions of the

Enforcement Act (Exekutionsordnung - EO) or according to theagreed extrajudicial enforcement of the security.


According to § 19 (1) of the Bankruptcy Code (Konkursordnung -KO) claims that can be offset against claims of the debtor at the timeof the opening of formal proceedings must not be claimed in theproceedings. The creditor simply declares his intention to offset.In order to avoid abuse, set-off is not permitted if:

the creditor became a debtor after the opening of formalprocedures;a debtor obtained his claim after the opening of formalprocedures; ora debtor obtained his claim within the last six months beforethe opening of formal procedures and at this point hadknowledge, or should have had knowledge, of theinsolvency.



With the opening of bankruptcy proceedings the debtor is deprivedof his right to dispose of the assets subject to bankruptcy, i.e. thebankrupt’s estate (Konkursmasse).Together with its decision on the opening of bankruptcyproceedings, the court appoints a receiver (Masseverwalter) and, ifit deems this necessary in view of the size of the debtor’s business,a creditors’ committee (Gläubigerausschuss) to assist the receiver.After the opening of bankruptcy proceedings only the receiver isentitled to act on behalf of the bankrupt’s estate.In judicial composition proceedings the debtor is not deprived of hisability to dispose of his assets. The court appointed receiver(Ausgleichsverwalter) usually only has a right to veto extraordinarytransactions of the debtor. The creditors’ committee(Gläubigerbeirat) has only an advisory function.The director(s) of the debtor is (are) required to support the receiverin his duty to act as the estate’s attorney. One of the main tasks isto assist the receiver by issuing a list of assets and a balance sheet.The directors are also required to attend the examination hearing.


The costs for the formal procedures are considered preferentialclaims. They must therefore come from the company’s assets. Inorder to initiate formal proceedings there must at least be sufficientassets to cover the costs of the proceedings. If the competent courtdenies the opening of formal proceedings due to the lack ofsufficient funds, the proceedings may be opened if a creditor iswilling to advance the initial costs. Should the business continue, further costs (e.g. wages, rent) mustcome from operative revenues. It is the receiver’s responsibility toensure the financial feasibility of continuing the business.

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The opening of bankruptcy proceedings itself does not affectexisting employment contracts. Only in case the company’sbusiness is shut down by the receiver or shall, in the course of thebankruptcy proceedings, not be continued for an indefinite period,(i) the employees may resign from the employment contract forgood cause; and (ii) the receiver may terminate the employmentcontract. If only parts of the company’s business are shut down, theemployee’s right to resign from the employment contract for goodcause as well as the receiver’s right to terminate the employmentcontract only applies with respect to those employees that areemployed in these parts of the company’s business.The same applies, mutatis mutandis, with respect to judicialcomposition proceedings.


Claims out of contracts that have been fully performed by thedebtor’s counterparty upon the opening of bankruptcy proceedingsbut have not been fully performed by the debtor by then have to beconverted into monetary claims and are qualified as bankruptcyclaims, i.e. that the creditor will only receive a quota payment. With respect to contracts that have not been fully performed by bothparties upon institution of bankruptcy proceedings, the bankruptcyreceiver may either perform the contract on behalf of the debtor andrequest the other party to perform its part, or rescind from thecontract according to. The contract will remain in force until thereceiver’s decision. Upon an application of the counterparty thebankruptcy court will ask the receiver to make this decision withina certain time, otherwise he will be assumed to have rescinded fromthe contract.If judicial composition proceedings are instituted, the debtor has theright to rescind from contracts not yet fully performed uponinstitution of judicial composition proceedings, but his rescission issubject to the composition receiver’s approval (§ 20b AO). Thecomposition receiver shall only approve the debtor’s rescission, ifthe performance of the contract could “endanger” the judicialcomposition.

5 Claims


Bankruptcy creditors shall file their claim with the bankruptcy courtwithin the time period set out by the bankruptcy court in thereceiving order (usually two to three months). The filed claims will be examined by the receiver and the debtor. Atthe so called examination hearing (Prüfungstagsatzung), which isheld at the bankruptcy court, the receiver has to declare whether heacknowledges or contests a filed claim. If the creditor’s claim isacknowledged, this creditor is entitled to participate in thebankruptcy proceedings, which means that he will finally receivethe quota that is paid to the unsecured creditors. If a creditor’sclaim is contested, the creditor has to assert his claim in civilproceedings in order to maintain his right to participate in thebankruptcy proceedings. Secured creditors do not have to file their secured claim with the

court but usually do so to inform the receiver, the debtor and thecourt of their collateral. The rights of secured creditors remainunaffected by the opening of insolvency proceedings (for furtherdetails see question 3.2).


Claims of unsecured creditors in bankruptcy and compositionproceedings, which were created before the opening of theseproceedings, are called bankruptcy claims (Konkursforderungen)and composition claims (Ausgleichsforderungen). These claimsrank pari passu. Taxes, social security contributions, wages andsalaries are not, as such, privileged or preferential claims underAustrian insolvency law.Claims which lawfully arose against the debtor’s estate after theopening of the proceedings, so-called privileged claims(Masseforderungen), or claims which are subject to a real security,so-called preferential claims (Absonderungsrechte), enjoy priorityin insolvency proceedings. In essence, privileged claims are, inter alia, the costs of theinsolvency proceedings including the receiver’s fees, courtexpenses, expenses of the administration and realisation of theassets and claims arising from the continuation of the debtor’sbusiness.


The opening of formal procedures does not have an effect on thegeneral tax regime. Insolvent companies are therefore required tocontinue to pay taxes.



There are two ways to achieve a composition in formal procedureswith the option of force the acceptance against the will of aminority. One is through composition proceedings, the otherthrough a compulsory composition during bankruptcy proceedings.Judicial composition proceedings are intended to disburden thedebtor of a part of his debts (up to 60%) and to enable the debtor tocontinue his activities. The debtor has to offer at least a quota of40% to the unsecured creditors, payable within two years. Aqualified majority of creditors must approve the composition planand the court must confirm it. Qualified majority means that thesimple majority of creditors in number present at the compositionhearing must vote in favour of the composition plan and that thetotal sum of these creditors’ claims must amount to 75% of theclaims represented at the composition hearing. If the compositionplan is accepted by the creditors, confirmed by the court andfulfilled by the debtor, the latter is released from the rest of hisdebts.Compulsory composition proceedings (Zwangsaus-gleichsverfahren) have the same purpose as compositionproceedings but are easier to finance than “regular” compositionproceedings since the mandatory minimum quota is 20% only. Theprocedure is similar to the judicial composition proceedings. Thepractical relevance of compulsory composition is pretty highregarding corporations and private businesses.



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Formal procedures must be repealed by court order and do not endautomatically. Such an order may be enacted if inter alia (i) allassets have been distributed; (ii) it becomes clear during bankruptcyproceedings that there are not sufficient assets to finance theproceedings; or (iii) a compulsory composition has become finaland all privileged claims have been settled.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Austria? In what circumstances might thisbe possible?

Extrajudicial restructuring is possible and quite common. There areno specific laws regulating such extrajudicial procedure. However,there are certain requirements that must be met in order to avoid laterchallenging of the restructuring by other creditors. The mostimportant requirements are the consent and the equal treatment of allcreditors. The equal treatment can be mitigated by the informationand consent of the other creditors. It is not possible to force adissenting creditor to agree to restructuring plans outside the formal(judicial) procedures. One should also be aware of the risks fordirectors involved in negotiating extrajudicial restructuring, as adelay of the request for the opening of formal procedures longer than60 days may lead to liabilities (see question 1.3).


As mentioned in question 6.1, it possible to reach a compositionunder Austrian law. Depending on whether the formal proceeding isa composition proceeding or a bankruptcy proceeding, theminimum quota is 40 or 20 percent. Composition in one of thesetwo proceedings enables a debtor to free himself of up to 60 to 80percent of his debt if a majority of his creditors approves (for detailssee question 6.1).If a composition can not be achieved the receiver is obligated torealise the assets of the debtor.


Austrian insolvency law doesn’t provide for an expeditedrestructuring through a pre-packaged sale.

8 International

8.1 What would be the approach in Austria to recognising aprocedure started in another jurisdiction?

Cross border insolvency proceedings are recognised based on twomain sources:The EU Regulation 1346/2000 requires the recognition of allproceedings opened in a fellow member state without a formalrecognition procedure from the time that it becomes effective in theState of the opening of the proceedings.The provisions on international insolvency law in the AustrianBankruptcy Code state that the effects of insolvency proceedingsopened in another state and the decisions issued in theseproceedings are recognised in Austria if: (i) the debtor’s centre ofmain interest is in that other state; and (ii) these insolvencyproceedings are comparable to Austrian proceedings, in particularAustrian creditors are treated equal to creditors from the state inwhich proceedings were opened. Notwithstanding such foreigninsolvency proceedings, bankruptcy proceedings may be openedand conducted in Austria with respect to the assets located inAustria. Insolvency proceedings conducted abroad are notrecognised in Austria if: (i) bankruptcy or composition proceedingswere opened in Austria or preliminary injunctions were ordered; or(ii) the recognition of proceedings would lead to a result whichapparently contradicts the fundamental values of the Austrian legalsystem.

Dr. Wolfgang Höller

Schönherr Rechtsanwälte GmbHTuchlauben 17A-1014 ViennaAustria

Tel: +43 1 534 37 281Fax: +43 1 534 37 6281Email: [email protected]: www.schoenherr.at

Wolfgang Höller is a partner of Schönherr and head of the firm’sRestructuring & Insolvency Group. Wolfgang represents Austrian andinternational corporates and credit institutions in Austria, advisingthem on all aspects of insolvency law and creditor protection. TheRestructuring & Insolvency Group works closely with Schönherr’sM&A teams in all transactions that involve insolvency related risksor concern targets that are close to or already affected by insolvencyproceedings. In addition, Wolfgang advises numerous banks onderivatives transactions with Austrian and Central Europeancounterparties and inter alia is Austrian counsel to ISDA on issuesof close-out netting.

Schoenherr is an international corporate law firm with a strong base in Central and Eastern Europe. From offices inBelgrade, Bratislava, Bucharest, Budapest, Brussels, Ljubljana, Kyiv, Prague, Sofia, Vienna, Warsaw and Zagreb morethan 300 professionals provide legal services to national and international clients in all fields of commercial law.



ChapterChapter 5

Lydian

Belgium


1.1 How does a creditor take security over assets in Belgium?

1.1.1 By contractBelgian law provides for three different types of consensualsecurity interests: (a) the mortgage; (b) the pledge; and (c) thefloating charge. (Note that a reference to a pledge implies referenceto a commercial pledge only, and not a civil law pledge.)MortgageGeneral: A Mortgage is a security right on real property, such asland, buildings, long leaseholds or other real rights on propertylocated in Belgium. A Mortgage entitles the mortgagee to apreference right upon the proceeds of the sale on foreclosure.Formalities: A Mortgage is created by way of a formal deedexecuted before a Belgian notary public. The Mortgage has to beregistered with the Register Office and the competent MortgageRegister in order to be enforceable towards third parties.Costs: The costs of taking a Mortgage can be estimated at 1.5% ofthe secured amount of the Mortgage.In order to limit the costs in taking a Mortgage, it has becomemarket practice to combine a so-called mini-Mortgage, i.e., aMortgage registered for a limited secured amount, with theremainder of the secured amount covered under a MortgageMandate. The Mortgage Mandate does not create a security assuch, but establishes a contractual obligation for the company toallow the creation of a Mortgage if and when the mortgagee wishesto do so (e.g. when financial covenants are not met, in case of apotential event of default, etc.). Parties can of course also opt tocreate a stand-alone Mortgage Mandate. A Mortgage Mandate hasto be enacted in a notarial deed.Enforcement: Court supervised sale.Floating Charge / Pledge over BusinessGeneral: A Floating Charge confers upon the beneficiary apreferential right on the assets constituting the business of thepledgor. Only companies conducting commercial activities cangrant a Floating Charge.Beneficiaries: Only banks and credit institutions that dispose of anadministrative authorisation are allowed as beneficiaries of aFloating Charge, being (i) credit institutions established in the EU,(ii) credit institutions acting through a duly licensed EU branch, or(iii) specific entities listed in a Royal Decree.Formalities: A Floating Charge is constituted between parties bymeans of a private written agreement and enforceable vis-à-vis third

parties by registration of the Floating Charge with the RegisterOffice and the competent Mortgage Register.Costs: The costs of taking a Floating Charge amount toapproximately 0.57% of the secured amount of the Floating Charge.A similar mechanism as described above for a Mortgage is often usedas an alternative to limit the costs related to a fully fletched FloatingCharge, being a “mini” Floating Charge combined with a FloatingCharge Mandate. The only difference with the combined mechanismas described for a Mortgage is that no notarial formalities have to becomplied with in order to create a Floating Charge Mandate.Movable Assets PledgeGeneral: A Movable Assets Pledge is an agreement by which adebtor delivers a movable asset in the possession of its creditor oran agreed third party to secure certain obligations. The pledge canrelate to tangible or intangible movable assets, such ascommodities, stock, machinery, etc.Dispossession: The key element of a Movable Assets Pledge is thatthe pledged asset must be delivered into the possession of thepledgee or an agreed third party. A Movable Assets Pledge is onlyeffected and will take rank only as of the moment the pledgordisposes of the asset. A validly created pledge will terminate assoon as the dispossession is discontinued. If the pledged asset is replaced on a regular basis (stock,commodities, etc.), the pledgee risks losing his priority ranking oreven being deprived of his security right. Belgian courts haveaccepted substitution of the pledged asset without affecting theoriginal security if certain conditions are met, such as the more orless immediate and simultaneous replacement of the originalpledged assets by assets of the same nature and value.Formalities: A Pledge over Movable Assets is established by thesole delivery of the asset to the pledgee or third party.Costs: No specific costs involved.Enforcement: Court supervised sale.Share PledgeGeneral: the form of the shares and any provisions restricting thepledging of the shares or the transfer of the shares should beidentified in the articles of association of the Belgian company orany related (shareholder) agreements.Only Share Pledges over registered shares are dealt with, but itshould be noted that special rules apply for Share Pledges overdematerialised shares, such as Euroclear securities. Moreover,since 1 January 2008, Belgium no longer allows the issuing ofbearer shares. Shareholders have until 31 December 2013 torequest the conversion of their existing bearer shares into registeredor dematerialised shares.

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Formalities: A Share Pledge has to be registered into theshareholder’s register of the Belgian company, or has to be notifiedto or accepted by the Belgian company, which will make the SharePledge enforceable vis-à-vis third parties.Costs: No specific costs involved.Enforcement: Out of court sale or appropriation of shares (ifprovided for).Receivables PledgeCreation: The Receivables Pledge is enforceable vis-à-vis thirdparties by the mere execution of the pledge agreement.Formalities: To be enforceable towards the debtor, the ReceivablesPledge should be notified to or acknowledged by such debtor. Thepledge is enforceable towards other third parties by the mereexecution of the agreement.Costs: No specific costs involved.Enforcement: The Receivables Pledge can be enforced byrequesting the debtors to pay directly to the pledgee, which may set-off the amounts received towards the outstanding debt.Accounts PledgeFormalities: The pledge has to be notified to or acknowledged bythe account bank in order to make it enforceable towards the latter.The pledge is enforceable towards other third parties by the mereexecution of the agreement.Costs: No specific costs involved. Enforcement: Out of court appropriation of the credit standing onthe balance of the bank account.IP PledgePledge over trademarks: A pledge over trademarks is perfected byregistration of the pledge in the trademark register of the relevanttrademark authority.Pledge over patents: A pledge over patents is perfected byregistration of the pledge in the competent patent register.Pledge over copyrights: Although contested or not possible in somecases, a pledge over copyrights is perfected by notification to a thirdparty to whom claims can be laid (e.g. Sabam, domain nameauthorities, etc.).Costs: No specific costs involved.Enforcement: Court supervised sale.Other priority creating mechanismsBelgian law also contains certain specific mechanisms pursuant towhich the creditor’s claim is protected from the principle ofequality of creditors. Parties can contractually agree on suchmechanisms, such as:

Reservation of title clause: a clause by which a sellerreserves the ownership title of movable assets until the pricehas been fully satisfied by the buyer. The seller remains thelegal owner of the assets and, in case the price is not fullysatisfied, the seller may re-claim the assets, provided thatcertain conditions are met.Transfer by way of security: the debtor transfers financialcollateral to the creditor as a guarantee to secure theunderlying debt. In case the secured debt is not satisfied, thecreditor may appropriate the financial collateral. Anagreement of transfer by way of security remainsenforceable, even in case of insolvency of the debtor.Set-off: see question 3.3.

1.1.2 By operation of lawBelgian law further provides for privileges or statutory liens whichprioritise the rights of certain creditors. Privileges are preferentialrights over certain or all assets of the debtor that are granted to

creditors by operation of law (as opposed to security interests thatare created by contract). The privileges are listed in the BelgianMortgage Law and relate, amongst others, to the privilege of thebeneficiary of a pledge over the proceeds of the realised pledgedasset, the privilege of the unpaid landlord, the privilege of theunpaid vendor, etc. Privileges exist by operation of law, but it isimportant to note that parties can mutually agree to waive theapplication of certain privileges.


Rule: All transactions entered into with a company in financialdifficulties prior to the initiation of any insolvency proceedingremain valid during any such subsequent insolvency procedure.Exception: Apart from certain rules of general application, Belgianbankruptcy law specifically provides that certain transactionsentered into with a bankrupt company during the so-calledhardening period may be declared unenforceable vis-à-vis thebankrupt estate. The hardening period is a period of maximum sixmonths prior to the declaration of bankruptcy by the CommercialCourt. A hardening period, which is the exception and not the rule,can only be put in place by a court decision when there are clearindications that the company was virtually bankrupt before the dateof the court decision declaring the company bankrupt. The actionsentered into during the hardening period which can be declaredunenforceable against the bankrupt estate are the following: (i)transactions entered into for free or entered into at extremelybeneficial terms; (ii) payments other than in money for debts due orpayments for debts that are not due; and (iii) security interestsprovided for debts existing prior to the insolvency date.All other payments for outstanding debts and all acts for valuableconsideration that took place during the hardening period can bedeclared unenforceable by the Commercial Court if the debtor’scontractor knew of the suspension of payment.Moreover, acts or payments at any time made by the debtor with theintention to cause damage to creditors are unenforceable.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Belgium?

Belgian Company Code: The Belgian Company Code describesvarious situations which may lead to civil liability of the directorsof a Belgian company. As a general rule, directors are liable for anyshortcomings in the performance of their duties. The companyitself can only invoke such liability.Directors may be further held jointly and severally liable for alldamages caused by a breach of the provisions of the BelgianCompany Code or the articles of association of the company. Suchliability may be invoked by the company and any third party.In case of bankruptcy, the directors may be held personally liablefor all or part of the debt of the company which exceeds the assetvalue, if the directors have committed a serious default thatcontributed to such bankruptcy. The Belgian Company Codeexplicitly states that e.g. tax fraud is to be considered as a “seriousdefault”.Tort liability: The rules of tort liability are applicable to directors,which may lead to payment of damages.Unpaid taxes and social security: Directors of a Belgian companyare under certain circumstances liable for unpaid taxes and socialsecurity.

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Criminal liability: A director may be held criminally liable forcriminal offences committed in the performance of his duties (e.g.,misuse of company assets), but may also be held criminally liablefor offences committed by the company itself (e.g., environmentalor accounting offences).Bankruptcy law also provides a series of criminal offences, which maylead to disqualification of a director’s mandate for three to ten years.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Belgium?

Belgian law provides three main regulated procedures:2.1.1 Pre-Insolvency proceedingsThe Belgian Law on Continuity of Companies (“LCC”) (in effect asof 1 April 2009) provides that any company can enter into anamicable settlement outside court with some or all of its creditors toredress its financial situation or to reorganise its enterprise (seesection 7 below).2.1.2 Insolvency proceedingsCompositionThe LCC provides for different types of composition:

an amicable settlement with two or more creditors;a collective settlement with all creditors resulting in theapproval of a reorganisation plan; andthe transfer of all or part of the activities of the stressedcompany to one or more third parties.

BankruptcyIf rehabilitation of the company has become impossible, thebankruptcy procedure may take effect. The provisions of theBankruptcy Law (“BL”) will apply.2.1.3 (Solvent) liquidationSolvent liquidation follows the dissolution of the company in orderto divide or realise the assets of the company and distribute themamongst its creditors and, possibly, the shareholders.

2.2 What are the tests for insolvency in Belgium?

Firstly, the clerk of the Commercial Court (“the Court”) gathersinformation which may indicate that companies are faced withserious difficulties.Secondly, the chambers for commercial investigations supervisecompanies in financial difficulties to preserve the continuity of suchcompanies and to protect and ensure the rights of the creditors.These chambers can evoke the representatives of those companiesfor a hearing at an early stage of the financial difficulties to assesswhat measures can be taken.The chambers for commercial investigations can also decide totransfer the case to the public prosecutor if they are of the opinionthat the company is in a state of bankruptcy. Finally, The LCC also provides certain other measures:

the mediator: the debtor can request the Court to appoint amediator, who will assist the company in its reorganisation;andthe court-appointed proxyholder: interested third parties(such as creditors) can request the Court to appoint aproxyholder in case of apparent and serious shortcomings ofthe debtor or his representatives which may endanger thecontinuity of the company.


CompositionThe Court can grant a moratorium to any debtor whose continuityis threatened. A company that is, from a theoretical point of view,bankrupt can also be the subject of a moratorium.BankruptcyThe court may declare a debtor bankrupt if the following conditionsare met:

the debtor is engaged in commercial activities;the debtor has suspended payments to its creditors; andthe debtor is no longer creditworthy, so he will continue notto meet his obligations to creditors.

LiquidationThe general meeting of shareholders can decide on a discretionarybasis to start a liquidation procedure. In exceptional circumstances,liquidation can be ordered by the Court.


CompositionThe debtor that is in financial difficulties can file a petition with theCourt to request suspension of his payment obligations in order toimplement one of the reorganisation measures as described underquestion 2.1, para 2.1.2.If the Court decides to open the composition procedure (whichtakes place within 18 days after the filing of the request), the debtoris granted a suspension of his payment obligations, so that nofurther execution measures on his movable or immovable assets canbe carried out.Under very strict conditions, a composition by way of transfer ofthe company (in whole or in part) can be initiated by the publicprosecutor, a creditor or every potential buyer of the company.Such procedure is possible if (i) the debtor is in a state ofbankruptcy without having filed for composition, (ii) the Courtrejected the composition request of the debtor or ordered thepremature termination of the composition procedure, (iii) thecreditors do not agree to the proposed collective reorganisationplan, or (iv) the Court refuses to ratify the reorganisation plan. Insuch circumstances the debtor can be forced to undergo the transferof his company.BankruptcyThe debtor must initiate the bankruptcy procedure with the Courtwithin one month after the suspension of payment. The Courtdecides whether the conditions for bankruptcy are met.A bankruptcy procedure can also be introduced by (i) any creditor,(ii) the temporary administrator of the company, or (iii) the publicprosecutor. The party that wishes to introduce the bankruptcyprocedure has to prove that the bankruptcy conditions are met.LiquidationThe board of directors initiates the liquidation procedure byproposing the dissolution and liquidation of the company to thegeneral meeting of shareholders, based on a special report and astatement of all assets and liabilities of the company, including areport of the company’s auditor.The dissolution is decided upon by the general meeting ofshareholders. The decision has to be adopted by a ¾ majority vote.The shareholders’ meeting will, at the same time, appoint theliquidators. The company will further exist solely for the purposes



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of its liquidation. The appointment of the liquidators needs to beapproved by the Court. After all assets and debts have been realisedand settled, the liquidation is closed by a final shareholders’meeting, approving the liquidation balance.


CompositionThe composition judgment is published in the Belgian StateGazette. The debtor is obliged by law to notify his creditorsindividually within fourteen days after the judgment.BankruptcyThe bankruptcy judgment is published in the Belgian State Gazette,as well as in two regional papers. The judgment provides the termfor creditors to declare their claims to the receiver and the Court(with a maximum period of thirty days).LiquidationThe decision of the general meeting to dissolve and liquidate thecompany is published in the Belgian State Gazette and the Centraldata bank for Enterprises.

3 Creditors


CompositionAs of the request for composition, all measures of execution aresuspended. The suspension applies to all unsecured creditors.Set-off during the judicial reorganisation procedure, however, ispossible (see question 3.3).BankruptcyAs of the initiation of the bankruptcy procedure, all measures ofexecution are suspended for all unsecured creditors.Set-off during the bankruptcy procedure, however, is possible (seequestion 3.3).LiquidationPreventive and protective measures and measures of execution ofunsecured creditors can still be enforced provided that such exerciseof rights does not damage the rights of other creditors.


CompositionGeneral: All creditors, including the secured creditors, aresubmitted to the suspension of payment.Exceptions: Secured creditors holding the benefit of a pledge overfinancial collateral and a pledge over receivables retain all rights toprotect and enforce their security interests throughout themoratorium procedure.In addition, an exception is provided for extraordinary creditors incase the moratorium is organised via a collective settlement.Extraordinary creditors are creditors having the benefit of amortgage, a special privilege and so-called creditor-owners (i.e., acreditor that owns a movable asset which is held by its debtor, e.g.,a seller that holds a reservation of title clause).

BankruptcyGeneral: All measures of execution are suspended.Exception: Secured creditors that have a security interest over aspecific asset by way of a Belgian right of pledge or mortgage mayenforce their rights during the bankruptcy proceeding subject to aninitial freeze period of approximately 45 days as of the date of theCourt order for the commencement of the bankruptcy procedureduring which they are unable to enforce their rights. In addition, the beneficiary of a pledge over financial collateral canenforce its rights notwithstanding the initial freeze period.LiquidationSecured creditors remain fully fletched during the liquidation of thecompany and can thus exercise all rights relating to their securedposition.


CompositionSet-off during the composition period is permitted under thefollowing conditions:

the claim of the creditor is subject to the composition andthus suspended;the debt of the debtor arises during the suspension period; andthe claim and debt are connected.

Further, the Belgian Financial Collateral Law provides that, in caseof insolvency, set-off agreements are enforceable if (i) suchagreement was concluded before the composition was initiated, or(ii) such agreement was entered into afterwards, but the creditorproves that he was, at that time, unaware of the existence of thecomposition.BankruptcyIn case of bankruptcy, set-off agreements are enforceable if thedebts are, before the initiation of the bankruptcy procedure, certain,liquid and claimable.The provisions of the Belgian Financial Collateral Law relating toset-off, as described above, equally apply in case of bankruptcy.LiquidationSame rules as under bankruptcy.



CompositionGeneral: During the composition procedure, the directors andshareholders of the debtor stay in charge of the company.Exceptions:1. The debtor may request the appointment of a mediator to

assist the company during its reorganisation process or, uponthe creditor’s request, the appointment of a court-appointedproxyholder (see question 2.2).

2. In case the debtor or, in exceptional circumstances, thepublic prosecutor, a creditor or an acquiring company,choose a composition by way of transfer of the company, thedirectors and shareholders loose control over the company asa direct consequence of the transfer.

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BankruptcyOnce the Court has declared the bankruptcy of the Debtor, the Courtappoints a receiver which takes full control over the company inview of collecting outstanding debt, realisation of the assets of thebankrupt estate and distribution of the proceeds to the creditors.LiquidationThe decision to dissolve and liquidate by the shareholders meetingof the company, triggers the dissolution of the board of directors.The general meeting of shareholders shall appoint a liquidator, whowill take over the mandate of the directors in view of the realisationof the assets and the subsequent liquidation. The appointment ofthe liquidator has to be approved by the Court.


CompositionThe costs of composition are borne by the debtor. A Royal Decreewill determine the fees of the court-appointed proxyholder.BankruptcyThe costs of bankruptcy (essentially the fees of the receiver) arecosts of the bankrupt estate and take rank as privileged debts. Thefees of the receiver are determined in a Royal Decree.LiquidationThe costs of liquidation are borne by the liquidated estate. If theliquidated estate is not sufficient to pay all debts of the debtor,including the costs related to the liquidation procedure, theshareholders will divide the costs of the procedure pro rata theamount of shares each of them owns.


CompositionA composition has no effect on employment contracts.Specific provisions apply on employment contracts in case of acomposition by way of transfer of the company. In the latter case,the acquiring company takes over all rights and obligations of thedebtor, including those arising out of employment contracts. However, the acquiring company is granted two exceptions:

the acquiring company may, after negotiations, amend thecollective or individual labour agreements in order tomaintain the employment level within the company; andthe acquiring company may choose which employees itwishes to take over. The choice has to be made based ontechnical, economical or organisational grounds and may notbe inspired by discriminatory motivations.

BankruptcyThe opening of a bankruptcy procedure does not terminate theemployment contracts as such. The decision of termination is leftwith the receiver.If the employment contracts are terminated, the employees canmake an appeal to a special compensation fund for their outstandingsalary and discharge compensation. The employees are alsogranted a special privilege for the discharge compensation.LiquidationThe liquidation of the company implies the winding-up of thecompany, so that the liquidator shall terminate all employmentcontracts. The employees can make an appeal to the compensationfund as described above.


CompositionGeneral: As a principle, a composition aims to preserve thecontinuity of a company as a going concern. Hence, the initiationof a composition does not terminate any contracts as such.Specifics: Penalty clauses such as default interest etc., cannot beenforced during the suspension period.The LCC further provides for a “remedy period”; i.e., a period offifteen days (taking effect as of notification of default) during whichthe debtor in composition may cure a contractual default thatoccurred prior to the composition. Consequently, the creditorcannot terminate the contract on the basis of such default if andwhen the debtor under composition fulfils his contractualobligations within the remedy period.Exception: The debtor has the right to no longer execute a contractduring the composition, and may consequently deviate from thegeneral rule of continuity of contracts, under the followingcircumstances:(i) the debtor notifies the creditor of his intention to no longer

carry out his obligations under the contract; and(ii) such decision is necessary in order for the debtor to be able

to implement a reorganisation plan or to transfer thecompany.

BankruptcyGeneral: All ongoing contracts (i.e., the contracts existing beforethe commencement of the proceedings) continue to existnotwithstanding the initiation of a bankruptcy. It will be up to thereceiver to terminate the ongoing contract, in accordance with theterms and conditions of such agreement. The receiver may evenchoose to continue the business of the debtor, and by consequencenot to terminate the contracts, if he receives the authorisation of theCourt and the continuation of the company does not cause anyprejudice to the creditors.Exceptions: Parties can contractually agree that a bankruptcyconstitutes an acceleration event.Intuitu personae contracts (i.e. contracts whereby the identity of theother party constitutes an essential element upon the signing of thecontract) are automatically terminated as of the bankruptcyjudgment since the debtor is no longer in charge of the company.Parties can however agree on continuing such contracts. LiquidationThe liquidation procedure does not terminate the existing contracts.The liquidator decides whether or not the contracts will beterminated. However, intuitu personae contracts can be terminatedby the counterparty.

5 Claims


CompositionThe debtor is obliged by law to notify his creditors individually withinfourteen days as of the Court approval of the composition request.BankruptcyThe creditors have to complete and file a declaration as to theclaims they have on the debtor within a certain period of timedescribed in the bankruptcy judgment.



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LiquidationNo formal procedure exists for claiming amounts under aliquidation. In practice, the liquidator will track down all creditorsin order to list the outstanding creditors’ claims.


CompositionThe ranking of claims is a non issue in case of composition, sincethe purpose of composition is to achieve the continuity of thecompany.BankruptcyIn case of bankruptcy, there is a clear and distinct ranking of theclaims.1. Estate debt: Costs and indebtedness incurred by the receiverduring the bankruptcy proceedings, the so-called “estate debts”,have the highest priority over all claims. In addition, if the receiverhas contributed to the realisation and enforcement of secured assets,such costs will be paid to the receiver in priority out of the proceedsof the realised assets before distributing the remainder to thesecured creditors.2. Security interests: Creditors that hold the benefit of a securityinterest have a priority right over the secured asset (whether bymeans of appropriation of the asset or on the proceeds uponrealisation).3. Privileges: After satisfying the claims of the secured creditors,the creditors having a particular privilege on certain or all assetswill be paid out (e.g., tax claims, claims for social securitypremiums, etc.). Privileges on specific assets take rank beforeprivileges on all assets of the debtor.4. Pari passu: Once all estate debts and creditors having the benefitof security interests and privileges have been satisfied, the proceedsof the remaining assets will be distributed by the receiver amongstthe unsecured creditors who rank pari passu (unless a creditoragreed to be subordinated).LiquidationSame rules as under bankruptcy.


CompositionThe debtor remains subject to corporate income tax and VAT.BankruptcyThe debtor is exempted from corporate income tax; VAT remainsapplicable.LiquidationThe debtor remains subject to the corporate income tax and VAT.



CompositionAll creditors are as a rule affected by the suspension of paymentunder the composition. The most important exceptions to the ruleare described in section 3 above.

BankruptcyThe bankruptcy judgment is effective vis-à-vis all creditors; theyare obliged to undergo all consequences thereof. The mostimportant exceptions to the rule are described in section 3 above.LiquidationAll creditors of the debtor will be affected by the liquidationprocess. Section 3 sets out certain measures which are still open forthe creditors during the liquidation process.


CompositionShort procedure: In case the debtor is no longer able to ensure thecontinuity of the company during a composition, the Court candecide to terminate the composition procedure. Such prematuretermination has to be requested by the debtor itself, the publicprosecutor or a creditor.If the Court orders the premature termination of the compositionprocedure, the Court may, under certain conditions, declare thedebtor bankrupt in the same judgment. The conditions are thefollowing:

the conditions for bankruptcy are met; andthe creditor or public prosecutor specifically requests theCourt to declare the debtor bankrupt.

Full procedure: The termination of the procedure will largelydepend on the nature of the proposed reorganisation measure(s)under the composition:

The conclusion of an amicable agreement with two or morecreditors: when the debtor agrees upon an amicableagreement with his creditors, the debtor may request theCourt to confirm the agreement. After confirmation of theagreement by the Court, the procedure is closed. Thejudgment will be published in the Belgian Sate Gazette.Any payments made within the scope of the amicableagreement will not be put aside in case of a later bankruptcyprocedure.The conclusion of a collective agreement with all creditors:when the debtor reaches a collective agreement with thecreditors, the agreement will have to be approved by theCourt. Such Court approval will terminate the compositionprocedure and will be published in the Belgian OfficialGazette.The transfer of the company: the court appointedproxyholder will effect the transfer of part or all of thecompany’s business (with the assistance of a notary public ifthe assets include real property). As of the completion of thetransfers, the proxyholder will request the Court to close thecomposition procedure. The closing of the procedure alsorelieves the acquiring company of all responsibilities of thedebtor that were not included in the transfer agreement.

BankruptcyShort procedure: A bankruptcy may be terminated by the Courtsummarily when it is established that the assets of the debtor willnot even cover the expenses of the receiver. The judgment orderingthe termination will be published in the Belgian State Gazette. Asa consequence of that Court decision, the debtor will automaticallybe dissolved and the creditors will regain their rights to enforcetheir claims against the debtor.Full procedure: If the assets of the debtor are sufficient to cover thecosts of the bankrupt estate, the receiver will start to realise theassets of the debtor and verify the claims of the creditors. Once allclaims are verified, the receiver proceeds with the distribution ofthe proceeds of the bankrupt estate to the respective creditors,

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taking into account the ranking of creditors (see question 5.2).Termination of the bankruptcy procedure can only be ordered by theCourt at the request of the receiver. The receiver will make hisrequest following a final creditors’ meeting where the final accountsof the bankrupt estate (including the ranking) are presented anddiscussed, and after the final distribution of the proceeds of thebankrupt estate. The Receiver is responsible for the publication ofthe final order in the Belgian State Gazette. Publication is onlymandatory if the debtor is discharged of the remaining debts as aresult of the order. An order where the debtor is not discharged ofthe remaining debts will cause the immediate dissolution of thedebtor.LiquidationOnce the liquidators have realised all assets of the debtor andverified all claims, the liquidators will submit the plan ofdistribution of proceeds to the Court. As of the Court approval, theliquidation procedure is closed by a final general meeting ofshareholders.After the closing of the procedure, all remaining assets aredistributed amongst the shareholders of the company. It is importantto note that a liquidated company can be declared bankrupt up to sixmonths after the closing of the liquidation procedure.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Belgium? In what circumstances might thisbe possible?

Since 1 April 2009, the LCC has introduced the amicable settlementto reorganise debt outside of court proceedings to provide a realalternative to the inner court insolvency procedures andreorganisations.Any company can enter into an amicable settlement with some orall of its creditors to address its difficult financial situation or toreorganise its enterprise. The parties to this amicable settlement arefree to determine its content but the amicable settlement does notaffect the rights of third parties. Under the LCC, the company canfile a copy of the amicable settlement with the court registry. Bydoing so, the terms of the settlement and the transactions concludedunder it are protected in case of a later bankruptcy proceeding.The amicable agreement is based on the free will of the debtor toenter into such agreement if and when he wants and with creditorshe chooses. The advantages of the amicable agreement outsidecourt are the lack of costs and the discretion that goes with an outof court settlement of debt (since such an amicable agreement is notpublished in the Belgian State Gazette).


The amicable agreement outside court as described under question7.1 is based on the free will of the parties involved, meaning that allagreements and measures can be agreed upon within the limits ofcontract.Also the formal composition procedure, as described under question2.1, para 2.1.2, provides the possibility to reorganise a distresseddebtor in other manners than by means of the traditional realisationof assets.


Again, parties can agree upon a pre-packaged sale under theamicable agreement outside court within the limits of contract.Also the formal composition procedure can be utilised to expedite arestructuring by means of a pre-packaged sale.

8 International

8.1 What would be the approach in Belgium to recognising aprocedure started in another jurisdiction?

Belgium is subject to the Council Regulation n°1346/2000 oninsolvency procedures. Consequently, if an insolvency judgment ispronounced by a court in one of the EU Member States, thejudgment shall be recognised in Belgium.Moreover, an insolvency judgment ordered by a non EU MemberState will be recognised in Belgium pursuant to BelgianInternational Private Law provisions.



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Peter De Ryck

Lydian Tour & TaxisHavenlaan - Avenue du Port 86c b1131000 BrusselsBelgium

Tel: +32 2 787 9000Fax: +32 2 787 9099Email: [email protected] URL: www.lydian.be

Peter De Ryck is a Partner in Lydian’s Corporate & Financedepartment. Peter graduated in 1996 with a law degree from theUniversity of Brussels (VUB). He then obtained a diploma inEuropean law at the University of Brussels (ULB) and followedpostgraduate programmes in company law (KUB) and businessadministration (EHSAL). His practice focuses on corporate law,M&A and restructurings. He is recommended by numerous legaldirectories, which qualify him as ‘a man of his word’ (IFLR) and ‘anexcellent attorney’ (Legal 500).

Tom Geudens

Lydian Tour & TaxisHavenlaan - Avenue du Port 86c b1131000 BrusselsBelgium

Tel: +32 2 787 9000Fax: +32 2 787 9099Email: [email protected] URL: www.lydian.be

Tom Geudens is a Counsel in Lydian’s Corporate & Financedepartment. Tom graduated in 2000 with a degree in law form theCatholic University of Leuven (KUL) and completed a post academicqualification in corporate law in 2002. Tom specialises inleveraged/acquisition finance, project finance, structured financeand commodity & trade finance. In addition, he has exceptionalexpertise with regard to capital markets, restructuring andinsolvency. Tom Geudens is recommended as ‘very clear in hisadvice and quick to respond’ and is consistently singled out byclients who state that they were ‘very impressed - whenever weneed local counsel, he’s the “go to” man’ (Legal 500).

Making the most of the opportunities created by the merger of large Belgian law firms into international networks,Lydian has successfully built a fully-fledged, stand-alone business law firm.

Lydian provides its clients (large and medium-sized Belgian and international entities) with prompt assistance and to-the-point advice, both in domestic and cross-border work. The firm delivers the quality and sophistication that can beexpected of large international firms, but with a personal touch. Based on the Anglo-Saxon model, Lydian stands outthrough the efficiency of its service, the pragmatic approach of its lawyers and their true commitment to the task athand.

Thanks to the unfailing devotion of its lawyers, who rank among the best in their field, Lydian has become one ofBelgium’s leading independent firms in just a few years.

Areas of practice

Lydian advises on a broad range of Belgian business law matters, including mergers and acquisitions, private equity,merger control, corporate finance, corporate restructuring, commercial matters, IP law, insurance, litigation, collectiveand individual employment, pensions, real estate, environment, public procurement, administrative law and tax.

The firm’s lawyers have specialist expertise in the fields of banking, corporate restructuring, energy, HRM in the publicsector, insurance, intellectual property, IT, life sciences, outsourcing, pensions, ports and logistics, private equity, publiccontracts and real estate investment.



ChapterChapter 6

Leoni Siqueira Advogados

Brazil


1.1 How does a creditor take security over assets in Brazil?

A creditor takes security over assets by contracting with the debtorand registering the security in the proper official record. Registrationis mandatory for the security to be opposable to third-parties.


In Brazil, transactions entered into with a company in financialdifficulty are not generally vulnerable to attack, unless they involvethe transfer or charging of assets when the company is alreadyinsolvent or becomes insolvent due to the transaction. In this case, ifthe transaction is entered into: (i) after a third-party has filed alawsuit to collect payment or claim property rights over the asset, thetransaction may be rendered ineffective; or (ii) before a lawsuit hasbeen filed, the third-party may request the Court to annul thetransaction if he can prove that the company acted with the solepurpose of defrauding creditors. In case the company is declaredbankrupt, certain transactions may be vulnerable to attack whether ornot the other party was aware of the company’s financial difficultiesand whether or not the company intended to defraud creditors. Thosesituations must be assessed on a case-by-case basis, but in generalthey involve: (i) sudden and recent charging of assets for debtsconstituted prior to the financial difficulties or after the decree ofbankruptcy; (ii) transfer of establishment or assets without leavingenough resources to settle liabilities; and (iii) any acts performedwith the intention of harming creditors or causing loss to thebankrupt state.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Brazil?

Directors are generally not liable for continuing to trade whilst thecompany is in financial difficulties, as long as they are not actingillegally or with the purpose of defrauding creditors. Brazilian Lawestablishes criminal liability for directors who commit fraudulentacts that result or may result in a loss to the creditors to obtain anunfair advantage. The penalty is confinement from three to six yearsand a fine. Even if criminal liability cannot be established (due to itshigher burden of proof), directors may still be civilly liable for illegalacts or acts committed to defraud creditors. A director criminally

convicted of defrauding creditors - or of any other crime set forth inthe Bankruptcy Law - also loses his qualification to manage thecompany or other firms.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Brazil?

Companies in financial difficulties may: (i) settle an out-of-courtreorganisation; (ii) claim judicial reorganisation; or (iii) claimbankruptcy. In general, reorganisation may involve any measuresuitable to overcome the company’s financial difficulties - which willvary according to the company and creditors, its activities and thecauses of the financial difficulty - such as, for example, granting ofspecial terms and conditions for the payment of obligations; spin-off,merger, consolidation or transformation of a company; change ofcontrol or shared management and sale of assets. Bankruptcyinvolves the liquidation of the company’s goods, assets andproductive resources, including intangible assets, to pay its creditors.

2.2 What are the tests for insolvency in Brazil?

A company is generally considered insolvent once its debt exceedsits assets, with no possibility to fulfill its current or future financialcommitments. There is no formal test to establish insolvency, whichis usually determined on a case-by-case basis by external signs offinancial distress such as multiple notices of default or the inabilityto provide assets for attachment in legal proceedings. BankruptcyLaw establishes the grounds for the decree of bankruptcy (seequestion 2.3 below), which may be considered an insolvency test forbankruptcy purposes.


Reorganisation claims are filed solely by the company, which mustdemonstrate that reorganisation is essential to overcome its financialdifficulties and protect its enterprise, workers and creditors.Bankruptcy claims may have one or more of the following grounds(bankruptcy test): (i) the company unreasonably fails to pay anobligation which exceeds 40 minimum wages; (ii) the company,executed for any liquid amount, fails to pay, deposit or allocate forattachment sufficient assets within the statutory term; (iii) thecompany liquidates its assets precipitately, or resorts to ruinous orfraudulent means to make payments; (iv) the company performs

Cristiano Rodrigo Del Debbio

Antonio Carlos Monteiro da Silva Filho



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simulated acts or transfer assets with the purpose to delay payment ordefraud creditors; (v) the company transfers its establishment withoutleaving enough resources to settle liabilities; (vi) the company isabsent without leaving a qualified representative with sufficient fundsto pay his creditors, abandons a place of business or tries to hide fromits domicile, the location of its headquarters or principal place ofbusiness; and/or (vii) the company fails to perform, within theestablished term, an obligation assumed in the in-court reorganisationplan.

2.4 Please describe briefly how the company is placed into eachprocedure.

A reorganisation claim can only be filed by the company itself.Creditors will be summoned to answer the claim, which they mayaccept, reject or propose modifications to. After discussion of thereorganisation plan, the Court will either approve the plan or reject itand decree the bankruptcy of the company. A bankruptcy claim maybe filed by the company or any creditor. If the bankruptcy test is met,the judge will decree the bankruptcy of the company and initiateproceedings aimed to seize the company’s assets, identify and classifyits creditors and liquidate the estate.


In the out-of-court reorganisation procedure, the company mustpublish in the official press, and in a major newspaper, a notificationto all creditors to submit their objections to the reorganisation plan.The company must also send letters to all of its creditors in Brazilnotifying the filing of the reorganisation claim. No meetings areofficially required. In the judicial reorganisation and in thebankruptcy procedures, all courts’ decisions must be published in theofficial press. Bankruptcy Law requires - both in judicialreorganisation and bankruptcy procedures - at least one meeting of thecompany’s creditors to organise the Creditor’s Committee (which willmonitor the proper development of the procedures). Other meetingsmay be scheduled whenever creditors need to vote or discuss relevantmatters regarding the procedure or the liquidation itself. The companymust publish the call to every meeting in at least two majornewspapers.

3 Creditors


The decree that grants judicial reorganisation suspends for 180 daysall lawsuits filed against the company. Unsecured creditors will havethe right to participate in the discussion of the reorganisation plan andvote for its approval or rejection. The decree of bankruptcy alsosuspends lawsuits filed against the company. Brazilian Lawestablishes that, as a general rule, creditors can only enforce theirrights through the bankruptcy procedure. Unsecured creditors do nothave privilege under the bankruptcy procedure and will receive theircredit only when every other creditor of the company is paid in full.


As mentioned above, in the judicial reorganisation procedure, alllawsuits against the company will be suspended for 180 days. Securedcreditors will have the right to participate in the discussion of the

reorganisation plan and vote for its approval or rejection. If thereorganisation plan is approved, all creditors must abide to its terms.The decree of bankruptcy, as mentioned above, suspends all lawsuitsagainst the company. Brazilian Law establishes that, as a general rule,creditors can only enforce their rights through the bankruptcyprocedure. Secured creditors have privileged credits and will be paidright after labor debts are solved.


In the judicial reorganisation procedure, compensation will obeycivil law - which allows compensation of credits as long as they aredue and of the same nature - and the terms of the approvedreorganisation plan. In the bankruptcy procedure, debts of thecompany falling due by the date of the decree of bankruptcy are offset,as long as they are both due and of the same nature. However,Bankruptcy Law does not allow compensation of credits: (i)transferred after the decree of bankruptcy (except if due to legalsuccession); or (ii) transferred maliciously or fraudulently, when thecompany’s financial condition was already known by the creditor.


4.1 Who controls the company in each procedure? In particular,please describe briefly the effect of the procedures ondirectors and shareholders.

In the judicial reorganisation procedure, directors will continue tomanage the company, under the Creditors’ Committee and with thejudicial administrator’s supervision. For reorganisation purposes,shareholders are considered unsecured creditors of the company andmay vote for the approval or rejection of the reorganisation plantogether with other unsecured creditors. In the bankruptcyprocedure, management of the company is transferred to a judicialadministrator. Shareholders become residual creditors of the bankruptstate, and will be paid only after all other classes of creditors receivetheir credit.


The judicial reorganisation procedure is generally financed with thecompany’s own resources. The bankruptcy procedure is financed bythe bankrupt estate.


In the judicial reorganisation procedure, employees may be kept orterminated, or have their hours of work or payment reduced, accordingto the approved reorganisation plan. In the bankruptcy procedure,employees are terminated and their credit - up to the amount of 150minimum wages - becomes privileged credit against the company.The exceeding amount is treated as unsecured credit.

4.4 What effect does the commencement of any procedure haveon contracts with the company and can the companyterminate contracts during each procedure?

In the out-of-court and judicial reorganisation procedures, contractsgenerally remain in force, although some of their conditions may beaffected by the approved reorganisation plan. Exceptionally, the

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reorganisation plan may provide for the termination of a contract.In the bankruptcy procedure, the judicial administrator mayterminate all contracts. Exceptionally, some contracts may be kept:(i) if their execution reduces or avoids further debt of the companyor (ii) if they help preserve the value of the bankrupt estate. Theother party of the terminated contract will have the right toindemnification, which will be classified as unsecured creditagainst the bankrupt state.

5 Claims


When a judicial reorganisation is filed or when a bankruptcy isdecreed, a debtor is required to present to Court a list containing thenames and addresses of all creditors, the amounts due to each ofthem and the nature of such credits. Such list will be published onthe official gazette, and creditors will then have 15 days to file theircredit qualifications - if their credit was not listed by the debtor, orto make correction requests - if they find discrepancies between theamount listed by the debtor and the amount effectively due. Onboth cases, the claim will be addressed to the judicial trustee, whowill be in charge of analysing the documents and, eventually, makethe necessary amendments on the List of Creditors. If the creditordoes not make the credit qualification or the correction requestwithin the 15-day term, he will still be able to file his claim, but hiscredit will be classified as a latecomer credit, and he will lose someimportant rights, such as the right to vote on creditors assemblies.Once the judicial trustee has received and analysed all creditqualifications and correction requests - but no later than 45 daysfrom the date of the first publication - another list of creditors willbe published on the official gazette, contemplating all thequalifications and corrections accepted by him. After thepublication of such amended list of creditors, any interested party,including the debtor himself or his shareholders, will have 15 daysto present impugnation against it. Such impugnation may claiminclusion, exclusion, reclassification or corrections of credits, andwill be addressed to the Judge, who will decide after receiving alegal opinion from the judicial trustee.


On a judicial reorganisation, article 54 of Federal Law 11.101/05determines that the reorganisation plan can not propose a termlonger than one year for the payment of labor credits orindemnification due to labor accidents. In addition, it provides thatthe reorganisation plan can not propose a term longer than 30 daysfor the payment of labor credits up to the limit of five minimumwages related to the three months prior to the filling of the judicialreorganisation. Also, the law gives special protection to certainsecured transactions involving the fiduciary assignment ofproperties or credit rights, by stating that such credit is not affectedby a judicial reorganisation. However, the greatest innovation of the Federal Law 11.101/05 wasprovided on article 67. Such provision establishes that creditsrelated to obligations contracted after the filing of the judicialreorganisation have preferential status over all the credits incurredon the procedure, in the event bankruptcy is later decreed. Inaddition, unsecured creditors affected by the judicial reorganisationthat keep granting credit to the company after the filing of the

judicial reorganisation will be able the elevate one step thepreferential status of his unsecured past credit, up to the limit of thecredit granted during the judicial reorganisation, in the event thebankruptcy is later decreed. This was the alternative found by thelegislator to stimulate the concession of credit to a company underjudicial reorganisation, because, otherwise, the attempt to try torecover a company in financial difficulties would be almostunreachable.In bankruptcy cases, article 83 defines the preference status ofcreditors, on the following order: (1st) Labour credits up to the limitof 150 minimum wages (the balance will be considered as generalunsecured credit) and indemnifications due to labour accidents withno limitation; (2nd) Secured credits, up to the fair market value ofsecurity (the balance will be considered as general unsecuredcredit); (3rd) Tax liabilities (excluding penalties); (4th) creditorswith special privilege, as defined on the Brazilian legislation; (5th)creditors with general privilege, as defined on the Brazilianlegislation; (6th) general unsecured creditors; (7th) credits derivedfrom penalties, including tax penalties; and (8th) subordinatedcredits, such as, but not limited to, amounts due to shareholders oradministrators with no employment bond.


On a judicial reorganisation, tax liabilities are not only excludedfrom the procedure, but also the debtor has to prove the absence oftax debts to have his reorganisation plan approved by the Judge(Article 6, 7th paragraph and article 57). This restriction seems tobe in contradiction with the spirit of the Corporate Recovery Law,since it is hard to imagine a company with financial difficulties inBrazil - a country known for its extremely high tax rates - beingable to timely pay its tax liabilities. For this reason, there areprecedents exempting the debtor from presenting Tax ClearanceCertificates, but this discussion is far from being over. On bankruptcy cases, tax debts (excluding tax penalties) will belocated on the third position on the preferential status order, asmentioned on question 5.2 above. In addition, tax liabilities relatedto tax triggering events that occurred after the bankruptcy is decreedwill have preferential status over all other credits.



To answer this question we must make a prior explanation on howthe process of approval of the reorganisation plan proposed by thedebtor takes place. After the proposal is presented, any creditor isentitled to make objections, in accordance with article 55. If at leastone objection is made, the Judge will then call a creditor’s generalassembly to discuss such proposal. On the creditor’s generalassembly, creditors will be divided into three categories, as follows:(i) category 1: labour and labour accidents creditor; (ii) category 2:secured creditors, with voting rights proportional to their respectivecredits, up to the limit of the value of the asset securing the credit;and (iii) category 3: the remaining creditors. The procedure toapprove the plan is provided on article 45, which establishes that itmust be approved by all categories, in accordance to the followingrules: (i) categories 2 and 3: The plan must be approved by creditorsholding more than 50% of the total credits of each category, and,cumulatively, must be approved by more than 50% of the individualvote of each creditor in each category that have attended theassembly, regardless the amount of the credits; and (ii) category 1:

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The plan must be approved by more than 50% of the individual voteof each creditor that has attended the assembly, regardless of theamount of the credits. In the event the plan is not approved underarticle 45, there is still an alternative for its approval. Article 58 states that the Judge may approve the plan rejected underarticle 45, if, on that very same assembly, all of the followingconditions were met: (i) it has been approved by creditors holdingmore than 50% of the total amount due by the debtor, regardless ofthe categories; (ii) it has been rejected by no more than one categoryunder article 45; and (iii) if, on the category that rejected the plan,1/3 of the creditors have approved it, and the plan treats suchcategory of creditors in an isonomic manner. However, thisalternative form of approval is quite nebulous, because article 58does not bind the Judge, and the law does not provide objectivecriteria to guide the Judge on such decision. This issue has broughtseveral discussions, and is far from being solved. We understand,however, that if the conditions set forth on article 58 are all met, andif there is sufficient proof of the economical viability of thecompany, the principle that grounds the Corporate Recovery Law,which is the protection of a viable company, must prevail, and theapproval will be imperative.


On a judicial reorganisation, if the plan proposed by the debtor isnot approved, bankruptcy will be decreed. If, on the other hand, theplan is duly approved, the judicial reorganisation will survive untilall obligations are met or after two years from the date the plan wasapproved, whichever comes first. If, after such two-year periodthere are still pending obligations, the judicial reorganisation willstill be concluded, but such obligations will survive and will entitlethe creditor to adopt any legal measure to enforce them on theproper jurisdiction. On bankruptcy cases, after the assets are realised and payments aremade (in whole or in part), the Judge will terminate the bankruptcyprocess. In addition, the obligations of the debtor will beconsidered extinct if at least one of the following events occur: (i)credits are paid in full; (ii) after realising the assets, more than 50%of the unsecured creditors are paid; and (iii) a five-year term isreached for bankruptcies with no crimes committed or 10-year termin bankruptcies for in which crimes have been committed.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Brazil? In what circumstances might this bepossible?

It is quite common the achievement of a restructuring outside aformal procedure in Brazil. Besides the regular restructuring steps(such as cost reduction and closing down unprofitable branches),renegotiations with major creditors are becoming more and morecommon, especially in this crisis scenario, that seems to havebrought creditors to a more friendly spirit to renegotiate. Due to itscontractual nature, out-of-court settlements have no legalrequirement to be entered into, besides, obviously, the free will ofthe parties involved. For this reason, it is more likely to achieve asuccessful result, since it can be implemented by the debtor beforethe crisis actually arrives, while in a formal procedure, especially aformal judicial reorganisation, the effective arrival of the crisissituation is a legal requirement. Debtor may have trouble including labour credits on out-of-court

settlements, because Brazilian Labour Law, due to its protectivenature, provides that such settlements are always subject to courtrevision in favour of the employees. There are alternatives toreduce risks, such as having the Union’s representatives interveningon the agreement, but even in those cases, the risk is not completelysurpassed.


There are no legal restrictions on the manner in which thereorganisation plan will be proposed. Article 50 of Federal Law11.101/05 gives a non-restrictive list of means of reorganisation,such as the concession of longer payment terms and specialpayment conditions, corporate restructuring, control change,concession voting of rights to creditors, lease of the business,salaries reduction, shared administration, and many others. As longas the proposal is duly approved under articles 45 or 58, any meansof reorganisation is, in theory, acceptable. In bankruptcy cases there are no alternatives other than therealisation of the assets, since this is the only objective of suchprocedure. However, when bankruptcy is required by any creditor,the debtor has the alternative to require the conversion of theprocedure into a formal judicial reorganisation. This will be thedebtor’s last opportunity to reorganise the company and preventbankruptcy.


On judicial reorganisation it is possible to achieve an expediterestructuring by means of a pre-packaged sale. Under article 60, thepre-packaged sale can involve either the whole business or specificunits or branches, and the acquirer will not be responsible for thepayment of any liabilities of the debtor (including tax liabilities),unless any relation between the acquirer and the debtor is detected. On bankruptcy cases it is also possible to realise the assets througha pre-packaged sale, as long as such option provides a better saleprice than the isolated sale of the assets.

8 International

8.1 What would be the approach in Brazil to recognising aprocedure started in another jurisdiction?

The approach in Brazil to recognising a procedure started in anotherjurisdiction will depend on the purpose of such recognition request.If the purpose is to extend to the Brazilian branches the effects of ajudicial reorganisation or a decree of bankruptcy initiated in aforeign country, such attempt will not be successful, since Brazilianlaw protects the Brazilian units by considering them, for judicialreorganisation or bankruptcy purposes, as independent units,subject to the Brazilian jurisdiction. If, however, the purpose ofsuch request is, for example, to repossess an asset located in Brazil,held by a third party, the approach would be similar to therecognition of any foreign decision in Brazil. The foreign courtorder - which must not be contrary to Brazilian public order - willfirst be addressed to the Brazilian Supreme Court, forhomologation, and after being homologated, the case will beaddressed to the proper jurisdiction to be enforced.

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AcknowledgmentThe authors earnestly thank senior lawyer Leandro Rinaldi, whosesound knowledge of the Brazilian Bankruptcy Law provided aninvaluable contribution to the writing of this article.

Antonio Carlos Monteiro da SilvaFilho

Leoni Siqueira Advogados Rua Olimpíadas, 66, 2.º floor - Vila OlímpiaSão Paulo - SPBrazil

Tel: +55 11 3638 7074Fax: +55 11 3077 3900Email: [email protected]: www.lsa.com.br

He earned Bachelor of Law (1993) and Masters in Civil Procedure(1998) degrees from the São Paulo University. Antonio Monteiro hassignificant expertise in commercial litigation and arbitration in Braziland overseas. Former partner of Grau, Forgioni and Monteiro da Silva Advogadosand of Lilla, Huck, Otranto, Camargo e Munhoz Advogados, both inSão Paulo. Recently, Antonio Monteiro has been active in insuranceclaims, class actions and in the defense of health managementorganisations. He also acted as an expert witness in Brazilian lawin arbitrations and court proceedings in New York and Chicago. Hepublished various articles on civil procedure and arbitration.Focus: civil and commercial litigation and arbitration.Languages: English and French.

Cristiano Rodrigo Del Debbio

Leoni Siqueira Advogados Rua Olimpíadas, 66, 2.º floor - Vila OlímpiaSão Paulo - SPBrazil

Tel: +55 11 3638 7086Fax: +55 11 3077 3900Email: [email protected]: www.lsa.com.br

Cristiano Del Debbio earned a Bachelor of Law degree from theCatholic University of Sao Paulo (1999), a Masters in CivilProcedure degree from the University of Sao Paulo (2005) and aMasters of Laws degree from the University of Chicago (2007). Hehas been active in commercial and antitrust litigation.Focus: civil and commercial litigation and arbitration.Languages: English.

Leoni Siqueira Advogados was established in 2004, in Rio de Janeiro, and currently operates offices also in São Pauloand Brasilia, comprising Brazil’s most important business centers. The law firm is especially active in Corporate Law,Corporate Finance, Capital Markets, Antitrust and Regulation, Tax Law and Litigation.

In the past years, Leoni Siqueira Advogados has been involved in several important projects and transactions, advisingand assisting clients to structure activities and investments for a broad range of subjects, from infra-structure investmenttransactions to complex civil litigation. The firm’s experience includes substantial legal advice on the transportation,telecommunications, oil and gas, energy, media and petrochemical industries. The firm rapidly obtained widerecognition and has contributed to the success of several mergers, acquisitions and corporate reorganisations, as wellas to some of the most significant corporate disputes and antitrust cases in Brazil.


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Chapter 7

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Canada


1.1 How does a creditor take security over assets in Canada?

In all provinces of Canada other than the civil law province ofQuebec, a creditor can take security over personal property byobtaining a security interest in collateral pursuant to a writtensecurity agreement. The security agreement may be in any form thatin substance creates a security interest in personal property,including a debenture, conditional sale, title retention, pledgeagreement or lease. The creditor must also “perfect” its securityinterest by filing a financing statement pursuant to the relevantprovincial personal property security legislation, or, for certain typesof personal property collateral, by taking possession of the collateral.In Quebec, security may be taken over personal property through amovable hypothec with delivery (also called a pledge) and througha movable hypothec without delivery. A movable hypothec withoutdelivery must be in writing and must be registered in the Registerof Personal and Movable Real Rights. A movable hypothec withdelivery is a possessory right that does not have to be in writing,although it is customary for commercial hypothecs with delivery tobe in written form. In all provinces other than Quebec, security can be taken over realproperty by taking a mortgage which creates a charge on land andwhich the debtor can redeem on payment of the debt secured by themortgage. In Quebec, the charging document is called a deed ofhypothec. In all provinces, the mortgage or deed of hypothec mustbe registered against title to the land under the relevant provincialland registration system.In addition, Canadian chartered banks can take security under thefederal Bank Act over inventory of specified classes of borrowers,certain production related equipment of farmers and fishermen, andover hydrocarbons and mineral rights.


A key inquiry in any insolvency is whether the assets available tocreditors have been reduced or prejudiced by the activities of thedebtor or others. There are a number of potential remedies, someunder the federal Bankruptcy and Insolvency Act (“BIA”) andothers under provincial law or under corporate statutes. Theseremedies are not mutually exclusive, and it is not unusual forcreditors or a trustee in bankruptcy to attack a transaction on anumber of grounds at the same time.

Transactions between the debtor and affiliated or related parties aresubject to particular scrutiny. A trustee in bankruptcy (a “trustee”), who is appointed upon thebankruptcy of a debtor, is empowered to review pre-bankruptcytransactions entered into by the debtor within certain statutorily-prescribed time periods with a view, generally, to attackingtransactions which:(i) were entered into with the intent of preferring one creditor

over other creditors (preferences); or(ii) were made for inadequate consideration and had the effect of

reducing the assets available to creditors (settlements orreviewable transactions).

A trustee also has a remedy against the directors or shareholders ofa bankrupt corporation where, within one year of the bankruptcy andwhile insolvent, the corporation paid a dividend or redeemed shares.Under certain circumstances, a creditor of the bankrupt can obtain acourt order to bring an action on the same grounds in the place of thetrustee.Where it can be established that the consideration paid was fair andreasonable, not conspicuously less than fair market value, and notmade with the intent to prefer one creditor over the other, theimpugned transaction will almost always survive any challenge. Outside of a bankruptcy, a creditor can bring an action underrelevant provincial statutes against a debtor where a debtor transfersproperty with the intent to defeat, hinder or defraud creditors(fraudulent conveyances) or where a creditor was preferred overanother (assignments and preferences). In addition, a creditor or ashareholder has recourse to an “oppression remedy” under mostCanada corporations statutes where, amongst other things, thebusiness or affairs of a corporation have been carried on orconducted in a manner that is oppressive or unfairly prejudicial to orthat unfairly disregards the interests of, amongst other persons, acreditor or shareholder of such corporation. Finally, under amendments to Canadian bankruptcy legislation thathave been passed but are not yet in force (the “ProposedAmendments”), a general remedy is created to permit a trustee or acreditor in a bankruptcy or a restructuring to attack “transfers atundervalue”.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Canada?

Trading while insolvent is not specifically a criminal offence inCanada. However, directors of a corporation in financial difficultyare often concerned about the potential personal civil liability theymay have to creditors. The decisions directors are faced with when

Steven J. Weisz

Susan M. Grundy

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a corporation is in financial difficulty often involve difficultjudgment calls, and creditors are increasingly looking to directorsas a source of recovery in insolvency. As a result, it has becomecommon for directors to obtain independent legal advice on theissues they are dealing with and, if the debtor’s financial positiondeteriorates to the point that there is no reasonable prospect that theobligations the corporation is incurring from continued operationscan ever be paid, the directors are usually advised to considerhaving the corporation file formal insolvency proceedings or ceasecarrying on business.There are a number of provincial and federal statutes that imposepersonal liability on directors of corporations. The most commonpotential areas of director liability are:1. employee wages and vacation pay and, in some provinces,

severance and termination pay;2. unpaid taxes and source deductions;3. non-compliance with environmental legislation; 4. unpaid pension contributions; and5. liabilities under corporation statutes, which impose

obligations on the directors of the corporation in theperformance of their duties as directors and expose directorsto potential liability under the oppression remedy.

The directors of insolvent companies may defend these claims onthe basis of their due diligence or proper performance of their dutiesas directors. However no such due diligence defences are availableif employees are not paid wages, vacation pay, or, in someprovinces, severance and termination pay. The failure of a corporation to comply with these statutoryobligations may result in quasi-criminal proceedings against thecorporation and against directors and/or officers who “acquiesce”in the breach of the statutory obligation.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Canada?

The formal procedures available in Canada are: (1) liquidationthrough (a) bankruptcy, (b) receivership, or (c) winding-up; and (2)restructuring through (a) proceedings under the federal Companies’Creditors Arrangement Act (“CCAA”) or (b) a “proposal” under thefederal Bankruptcy and Insolvency Act (“BIA”). BankruptcyBankruptcy is a legal process governed by the BIA for theliquidation of a debtor’s assets. Bankruptcy proceedings may bebrought against any corporation, wherever incorporated, that has anoffice or assets or carries on business in Canada, except banks,insurance companies, trust or loan companies and railways. Adebtor can become bankrupt voluntarily by making an assignmentin bankruptcy, or involuntarily by the granting of a bankruptcyorder by the court on the application of one or more of the debtor’screditors or as the result of a failed restructuring under the BIA. Aninvoluntary bankruptcy can only be commenced by unsecuredcreditors, as the rights of secured creditors are not affected by abankruptcy. Where it is shown to be necessary for the protection ofthe estate of the debtor, concurrent with an application for abankruptcy order, a creditor may apply to have an interim receiverappointed to take immediate possession of the property of thedebtor for the purposes of preserving and safeguarding the assetspending the hearing of the application for a bankruptcy order.Pre Conditions (Demand)Before exercising its rights under security provided to it by a debtor,

in most cases a secured creditor must make a demand for paymentand provide a statutory 10-day notice of its intention to enforce itssecurity against the assets of the debtor. Depending on thecircumstances, a secured creditor may be required to provideadditional notice under common law requirements that a securedcreditor provide reasonable notice of any defaults or demand forpayment prior to taking steps to enforce security provided to it bythe debtor.ReceivershipThe appointment of a receiver, who is empowered only to realise onspecific security, or a receiver and manager, who has authority tocarry on the business of the debtor, can be accomplished privatelypursuant to a right in a security agreement, or by court order underthe circumstances discussed below. A receiver or receiver andmanager (a “receiver”) is typically an accounting firm whichprovides insolvency and receivership services. (a) Court-Appointed ReceiverOnce the requisite notice periods (described above) have lapsed (orin exceptional circumstances where there is a possibility that thevalue of a debtor’s assets will erode) a secured creditor is entitled toapply to the court for the appointment of a receiver. A court-appointed receiver is an officer of the court and derives its powerssolely from the court’s order and takes its directions andinstructions from the court and not the creditor who appointed it.The court has the power to appoint receivers through statutes inmost provincial jurisdictions other than Quebec when it is “just andconvenient”, and under the federal BIA an “interim” receiver can beappointed where the statutory notice of intention to enforce securityis about to be sent or has been sent to take possession of andexercise control over all or part of all of the debtor’s property andbusiness and take such other actions as the court considersadvisable. In most cases, a secured creditor will apply for a jointappointment of a receiver/interim receiver under the applicableprovincial statute and the federal BIA. (b) Privately-Appointed ReceiverA receiver can be privately appointed by a secured creditor pursuantto a contractual right in a security agreement. A privately-appointedreceiver’s rights are dependent on the rights granted by the debtorin the security agreement. A privately-appointed receiver takes itsinstructions from the secured creditor who appoints it. In thesecircumstances, the privately appointed receiver can take possessionand dispose of the debtor’s assets without court intervention so longas the debtor does not object to the exercise of the rights under thesecurity and the steps taken to take possession of the debtor’s assets. Winding-upInsolvent banks, insurance companies, trust or loan companies andspecified trading companies can be liquidated under the Winding-upand Restructuring Act. This procedure is not commonly used andis not discussed further in this chapter.RestructuringCanada has two formal procedures for the restructuring of theliabilities of an insolvent business under court supervision, both ofwhich involve the debtor proposing a compromise to its creditors ofthe debtor’s pre-filing liabilities. They are: (i) a “proposal” underthe BIA; and (ii) a plan of arrangement under the CCAA (a “CCAArestructuring”).(a) ProposalThe BIA permits debtors to file restructuring plans or “proposals”to their secured and unsecured creditors. The process is relativelyrigid and codified under the BIA. A Debtor obtains a stay ofproceeding by filing a proposal or “notice of intention to make aproposal”. Where a notice of intention to make a proposal has been

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filed, the debtor will automatically obtain a 30-day stay which canbe extended by court order (a maximum 45-day extension is grantedper request with total of six months from initial filing, prior to beingrequired to file proposal or be deemed bankrupt). The terms of aproposal must meet certain statutory requirements to pay certainprior creditors such as the government for withholding taxobligations.A “trustee” under the proposal is also appointed to oversee theprocess and assist the debtor in preparing and administering theproposal. To be successful, a proposal requires approval by a“double majority” of the creditors of each class: a majority innumber and 2/3 in value. Once creditors have approved a proposal,the debtor must obtain approval of the proposal by the court on thebasis that the proposal is made in good faith and that the terms arereasonable and calculated to benefit the general body of creditors.Other than seeking extensions of the stay and approval of a proposal,most of the steps in this proceeding occur out of court.Consequently, the costs are generally lower and the time period torestructure is shorter than in a CCAA restructuring. (b) CCAA RestructuringLarge companies can also seek protection from their creditors bybringing an application under the CCAA. Creditors in certaincircumstances can also bring an application under the CCAA againsta debtor. The CCAA is a short statute which only provides aframework for the process. Court orders and the common lawprecedents set out the terms and many of the principles by which therights and obligations of a debtor and its creditors are modified orstructured in the process. A stay of proceedings will be imposed andcreditors generally will not be able to take any action against thedebtor in respect of prefiling indebtedness. A court-appointedmonitor is appointed to oversee the process, report to the court andassist the debtor in formulating, presenting and administering aclaims process and “plan of arrangement or compromise” to thevarious classes of creditors. A plan of arrangement or compromisemust be passed by the creditors on the same double majoritystandard as a proposal, and the court must approve or “sanction” theplan by reviewing the plan to determine whether it is fair, reasonableand equitable.

2.2 What are the tests for insolvency in Canada?

In order to make an assignment in bankruptcy, obtain a bankruptcyorder, or to seek protection under the proposal provisions of the BIA,a debtor must be insolvent. The general test for insolvency in a bankruptcy or proposalproceeding is if the debtor:(i) is unable to meet its obligations generally as they become

due; (ii) has ceased paying current obligations in the ordinary course

of business as they generally become due; or (iii) the aggregate of whose property is not, on a fair valuation,

sufficient or, if disposed of at a fairly conducted sale underlegal process, would not be sufficient to enable payment of allobligations due and accruing due.

A corporation must be insolvent to file under the CCAA, but there isno definition of insolvency under the CCAA. A debtor company thatis insolvent under either of the tests outlined above is insolvent forpurposes of the CCAA. A court may also determine that a companyis insolvent if at the date of filing there is a reasonably foreseeableexpectation that there is a looming liquidity condition or crisis thatwould result in the debtor running out of cash to pay its debts as theygenerally become due in the future, without the benefit of the stayand ancillary protection provided in a CCAA restructuring.


Bankruptcy(a) Bankruptcy AssignmentA debtor can make a voluntary assignment in bankruptcy if it isinsolvent and has an office, assets or carries on business in Canada.(b) Application for Bankruptcy OrderWhere a creditor has filed an application for an involuntarybankruptcy order, the petitioning creditor(s) must prove that thedebts owing to the applicant creditor(s) amount to at least Cdn.$1,000 and that the debtor has committed an “act of bankruptcy”within the six months immediately preceding the filing of theapplication. The most common act of bankruptcy relied upon is thatthe debtor has ceased to meet its liabilities generally as they becomedue. Restructuring ProposalUnder the BIA, a proposal may be made or notice of intention tomake a proposal may be filed by an insolvent person, by a bankrupt,or by a receiver, liquidator or trustee in bankruptcy of an insolventperson.CCAAA CCAA restructuring can be commenced by a debtor which isinsolvent and has outstanding debt of at least Cdn. $5,000,000 or, inthe case of a joint filing by several affiliated debtors, where theapplicants collectively have outstanding debt of at least Cdn.$5,000,000.ReceivershipA receiver may be appointed privately by a secured creditor pursuantto the terms of a security agreement following default under theobligations secured by the security. A receiver may be appointed bycourt order if the court is satisfied that it is “just and equitable” to doso. An interim receiver under the BIA may be appointed byapplication to the court if it is shown to be necessary for theprotection of the estate of a debtor or, where applicable, the interestsof a secured creditor or one or more creditors or of the creditorsgenerally at any time after the filing of an application for abankruptcy order and before a court is satisfied that a notice ofintention to enforce security or where a notice of intention to file aproposal or a proposal has been filed.


BankruptcyA voluntary assignment is filed by the corporation with the officialreceiver, who reports to the Superintendent of Bankruptcy (the“Superintendent”), the government administrator of bankruptcies. Acreditor may bring an application for a bankruptcy order in theapplicable provincial court. In addition, if a debtor files a notice ofintention to make a proposal and does not file a proposal or obtainextensions of the stay of proceedings in the requisite time periodsthen it will be deemed bankrupt as of the date of the initial filing. Inaddition, if a proposal is not approved by the creditors or the court,then there will be a deemed bankruptcy as of the date of the initialfiling. ProposalA debtor can initiate a proposal by lodging a written proposalsetting out its terms with a trustee or by filing a notice of intentionto make a proposal with the official receiver in the debtor’s locality,setting out certain particulars.

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ReceivershipA receiver may be appointed privately by a secured creditorpursuant to the terms of a security agreement and an appointmentletter, or by application for a court order in the applicable provincialcourt where the corporation has its head office or chief place ofbusiness.CCAA RestructuringIn order to commence a CCAA restructuring, the debtor (or in somecircumstances, creditors) can make an application requesting thatthe court make an order that grants the debtor protection from itscreditors for a period of time sufficient to allow it to formulate aplan of arrangement or compromise that it can present to itscreditors for approval. The proceedings are commenced in theapplicable provincial court where the head office or chief place ofbusiness is located. If there is no place of business in Canada, thenthey may be commenced where any assets are situated.


Bankruptcy(i) AssignmentOnce appointed, the trustee is required to give notice of thebankruptcy to all known creditors of the bankrupt, to convenemeetings of the creditors of the bankrupt and to report periodicallyon the progress of its administration of the bankrupt estate. (ii) Bankruptcy ApplicationAn applicant creditor must notify the debtor at least 10 days beforethe hearing of the bankruptcy application. ProposalWithin 21 days after the filing of a proposal, the proposal trusteemust send certain prescribed information to all known creditors ofthe debtor, including a copy of the proposal, a statement of thedebtor’s assets and liabilities and the date and time for a creditors’meeting to consider the proposal. The proposal trustee is requiredto prepare a report to the creditors, which sets out the debtor’sliabilities, the realisable value of the debtor’s assets, and certainother matters.ReceivershipWithin 10 days of its appointment, a receiver must report itsappointment to the Superintendent. After the initial notice, areceiver continues to have ongoing obligations to provide notice toany additional creditor of the debtor it becomes aware of during thereceivership and to file reports with the Superintendent on itsactivities.CCAA RestructuringIn a CCAA restructuring, the monitor, an official appointed by theinitial court order to assist and oversee the debtor in therestructuring and report to the Court, must send a copy of the initialorder to every known creditor of the debtor company with a claimof more than $250 within 10 days. A typical initial order willinclude a “comeback clause” which allows creditors and otherinterested persons to return to court if they wish to seek to amendor vary the terms of the initial order. Subsequent court orders willaddress the claims process. Following the filing of a plan, creditorswill be notified of the time and place of the meeting of creditors tovote on a proposed plan of arrangement.

3 Creditors


Unsecured creditors are stayed from enforcing their rights in allprocedures except a private receivership.


Secured creditors are typically stayed from enforcing their security ina restructuring or court receivership. Statutory stays apply in proposalproceedings and by court order under the CCAA and in court-supervised receivership proceedings. While not subject to the stay inbankruptcy proceedings, secured creditors are typically required toprove their secured claim prior to enforcing their security. Privatereceivership is a contractual remedy and no stay applies.A creditor in all proceedings may seek to lift the stay by applicationto the court for a declaration that the stay is no longer effectiveagainst it. Orders lifting the stay are uncommon. Under s. 69.4 ofthe BIA, the court may grant a creditor’s application to lift the stayif the court is satisfied that the creditor is likely to be “materiallyprejudiced” by the continued operation of the stay or that it isequitable on other grounds to make such a declaration. Under theCCAA there is no statutory test for lifting the stay and the court willbalance the interests of the affected parties in determining whetherthe CCAA proceedings should be terminated and a receiverappointed at the insistence of a secured creditor.


A creditor’s right of set-off that exists outside of an insolvencyproceeding is statutorily preserved within a proceeding, subject tocertain limitations. To the extent that a right of set-off depends on“mutuality” (or reciprocal obligations of debtor and creditor), thecontrol taken of property by a trustee or by a receiver can destroysuch mutuality. Generally a creditor is not permitted to set-off pre-filing obligations/receivables against post-filing obligations/receivables in BIA proposals or court-appointed receivershipproceedings.



In a bankruptcy or receivership, the company’s assets or businessare controlled by a trustee and a receiver, respectively. Thedirectors and officers and shareholders continue to control acompany in a CCAA or proposal proceeding. A monitor isappointed to monitor the business and financial affairs of thecompany in a CCAA restructuring but does not control thecompany. A trustee is appointed in a proposal proceeding forsimilar monitoring purposes. It is the duty of the directors tocontinue to act in the best interest of the company throughout therestructuring process. In addition, directors and shareholders, to theextent they are controlling the company through a shareholderagreement, should ensure that cashflows are sufficient to pay post-

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filing obligations in a restructuring.Corporate legislation provides for arrangements to be made withshareholders of a debtor company and these proceedings can bemerged with CCAA or proposal proceedings. Existing shareholderscannot expect to maintain a financial interest and participate in thedebtors restructuring where creditors’ claims are not paid in full,although in some cases shareholders receive some benefit from arestructuring if it is appropriate in the circumstances.


Financing will generally come from cash flow generated from theoperations of the business. In a CCAA restructuring or a proposalproceeding, the debtor, with court approval, may obtain debtor-in-possession financing (“DIP financing”) to finance the costs of theproceeding, the day-to-day operating costs of the company and theprofessional costs of its advisers if cash flow is insufficient. Acourt-appointed receiver may be granted the power to borrow fundsby the use of receiver’s certificates which are granted a courtordered priority charge over the assets of the debtor. DIP financingand receiver’s certificates will typically be secured by a “super-priority” charge on the debtor’s assets, in priority to securedcreditors. However, the cooperation of the secured creditors tothese arrangements will be important as these interests cannotgenerally be prejudiced or “primed” without their consent, althoughthe court’s are sympathetic to the debtor’s attempts to savebusinesses and jobs at least in the short term and will try to balancethe relative prejudice between secured creditors and the debtor,employees or other stakeholders.The BIA and CCAA do not contain any statutory provisionsallowing DIP financing. The concept and practice has developedthrough the common law. Under the Proposed Amendments, theprocedure for obtaining DIP financing will be codified and actualnotice to secured creditors who might be affected by a prioritycharge for DIP financing will be required.


BankruptcyIn a bankruptcy proceeding, employees are deemed to beterminated. There will be a super-priority charge (ranking ahead ofmost other claims) over the proceeds of current assets for arrears ofwages and vacation pay in the amount of $2,000 for each employeeover the inventory and receivables of the debtor (the “EmployeeSuper-Priority”). Employees will be preferred creditors for anyadditional claims (ranking ahead of unsecured claims, but behindsecured claims). There will also be a super-priority charge over allthe assets of the bankrupt with respect to certain pensionobligations.Proposal and CCAA RestructuringThe employer/employees relationship continues in a proposal andCCAA restructuring except that employees can be terminated suchthat they will have claims in the restructuring. Collectiveagreements continue to be effective in restructuring proceedings. Inorder for a proposal to be accepted by the court, provision isrequired to be made for the payment of employees back wages andcertain other amounts. The employee Super-Priority will also applyin respect of these proceedings.ReceivershipIn a receivership where the business is operated as a going-concern,employees are typically terminated at the outset and re-hired asnecessary on a term and task basis. However, if there is a union

involved, receivers are reluctant to operate going concernbusinesses due to potential successor employer claims that could bemade or brought against the receiver. The Employee Super-Prioritywill continue to apply.


BankruptcyBankruptcy proceedings generally have the effect of giving rise toa termination of contracts with the debtor as typically the debtorwill cease to operate and its assets will be liquidated. Mostcontracts will provide that they can be terminated on bankruptcyand if there is no concurrent court-appointed receivership whichwould stay any termination by the counterparty then they will beterminated.CCAA RestructuringCreditors are generally prohibited from terminating contracts witha debtor as a result of any prefiling breach or the actual filing underthe CCAA. Debtors, under the supervision of the court, mayterminate contracts as part of its restructuring, giving rise to a claimfor unsecured damages by the counterparty.ProposalSimilar to CCAA restructuring.ReceivershipUnless assumed by a receiver, a receiver will not be liable forcontracts of a debtor. The Receiver can be given the power to causethe company to terminate contracts by court order.Under the Proposed Amendments, the right to disclaim a contract ina CCAA case or in a proposal under the BIA have been modified.Before disclaiming the contract, the debtor must obtain the approvalof the monitor or the proposal trustee, as applicable, or the approvalof the court and must demonstrate that the disclaimer enhances theprospects of a viable proposal or arrangement being made, and isunlikely to cause significant financial hardship to the counterparty.The debtor does not have the right to disclaim certain types ofcontracts: an eligible financial contract (forward commoditycontracts), a collective agreement, lease of real property, or afinancing agreement where the debtor is the borrower.

5 Claims


Bankruptcy/ProposalIn a bankruptcy or proposal, creditors are required to file a proof ofclaim according to the statutory procedure. The trustee inbankruptcy or trustee under the proposal will review and accept ordisallow the claim. If disallowed, then the creditor must appeal tothe court within 30 days. A proof of claim must be filed prior to anymeeting of creditors to permit a creditor to vote at the meeting orprior to any distribution of assets to ensure the creditor receives adistribution. CCAA Restructuring/Court ReceivershipIn a CCAA restructuring or court receivership, the claims processand procedure for filing a proof of claim will be determined bycourt order. The court order typically follows the statutoryprocedure for a bankruptcy but the time periods may be different.In addition, there will be a claims bar date by which all claims must

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be filed or be extinguished. The claims bar order will also typicallyprovide for a form of substituted service on creditors by publicationof a notice in national newspapers on specified dates or for aspecific number of times.


Priorities of claims in Canada are affected by provincial and federallegislation, creating four categories of claimants: (1) priorityclaims; (2) secured claims; (3) preferred claims (such as employeesfor unpaid wages and landlords for arrears and accelerated rent);and (4) unsecured claims.Priority ClaimsA “deemed trust” claim by the federal Canada Revenue Agency(“CRA”) for employee withholding taxes has a super priority overalmost all of the claims against the debtor. Priority claims createdby federal and provincial statute for, amongst other things,obligations owed to tax collection authorities and arrears ofemployee vacation pay and pension contributions, may rank inpriority to secured creditors (typically as a “deemed trust” or lienover secured interests in inventory and receivables) outside ofbankruptcy or a BIA restructuring. However, within a bankruptcyor BIA restructuring, such priority claims rank beneath those ofsecured creditors. In a CCAA restructuring, it is unsettled whetherthese claims continue to have priority over secured creditors duringthe proceeding. “Super-priority” charges or liens can be created by court order inreceiverships and CCAA restructurings in respect of administrativecharges including professional fees, DIP or receivership borrowingsand for claims against directors.Trade suppliers have a limited remedy for the return of goodssupplied within 30 days of delivery of a demand following abankruptcy or receivership.A priority charge is created in bankruptcy and receiverships forclaims for certain unpaid wages and pension obligations of thedebtor over cash, cash equivalents, inventory and receivables of adebtor and related proceeds.


Tax liabilities can be incurred if a company or business continues tooperate in the normal course or expenses are incurred by a trusteeor receiver. Tax liabilities can also arise as a result of asset sales. In restructurings, tax losses of a company will be reduced as a resultof debt forgiveness arising from a compromise of claims against thedebtor. A debtor’s post filing obligations to tax authorities are notaffected in a restructuring.



There is no “cramdown” procedure in Canada. To becomeeffective, a CCAA restructuring must be approved by each class ofaffected creditors. The courts have been mindful of the negotiatingleverage that this requirement can provide to small creditor classesand have been reluctant to divide creditor classes so finely that itwould be impossible to get a plan approved.

To be approved, a CCAA restructuring must be passed by a doublemajority in each class of creditors: a majority of the total numberof creditors in the class and 66 2/3% of the total value of claims inthe class. The same double majority requirement applies in a BIAproposal. In certain circumstances, creditors may object to the manner inwhich their rights are affected in a restructuring or receivership,especially in respect of a sale of assets where a creditor may onlyhave recourse to the proceeds.


BankruptcyBankruptcies are ended by the trustee in bankruptcy applying for itsdischarge. Companies can only be discharged if all claims ofcreditors have been paid in full, which rarely if ever happens.The trustee must give notice to the Superintendent, the bankruptand every creditor who has proved its claim of the date fixed for thehearing before the court. The trustee provides a statement of receiptand disbursements, and dividend sheet, which must be approved bythe Inspectors and the Superintendent. A court order dischargingthe trustee will be obtained after certain notice periods elapse andthe court confirms that all documentation, fees and actions bytrustee are approved.ProposalFollowing creditor and court approval of proposal, all pre-filingdebts are compromised in accordance with terms of proposalfollowing fulfilment and implementation of terms of proposal. Theprocedure for discharge of the trustee under a proposal is similar toa trustee in bankruptcy. CCAA RestructuringFollowing creditor and court approval or sanctioning of the plan ofarrangement or compromise, all prefiling debts are compromised inaccordance with terms of the plan following fulfilment andimplementation of the terms of the plan. Procedures for the monitorto be discharged are similar to a proposal trustee, except reportingrequirements may be more extensive and the court may be moreinvolved due to the complexity of the matter.ReceivershipA company rarely exits receivership, as either the business or partsof it are sold as a going concern or liquidated or both. The receiverapplies for a discharge order at the end of the engagement once allassets and claims are dealt with, which entails approval by the courtof its actions and the fees and expenses incurred in the receivership.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Canada? In what circumstances might thisbe possible?

Yes. Before commencing formal proceedings a debtor almostalways has attempted some form of informal reorganisation orprivate compromise with its creditors and other key stakeholders. A debtor may be able to negotiate a restructuring of its obligationsby private agreement with its creditors, such as a standstill orforbearance agreement with a principal creditor that allows thedebtor’s business to continue operations while the creditor agrees toforbear from exercising its rights. The success of an informal process is dependent on the debtor’s

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ability to obtain the agreement of all creditors affected by theprivate compromise. There is no procedure to bind dissentingminorities, and the debtor remains vulnerable to action by creditorswho are not willing to participate. As a result, this type of informalcompromise is most often implemented by debtors with a limitednumber of creditor claims that have to be renegotiated. Informalworkouts work best when there are few key stakeholders because ofthe logistical difficulty of dealing with the varied and numerousdemands and interests of a large number of key stakeholders. Aninformal restructuring may also involve an exchange of all or partsof debts for equity.


The formal reorganisation of an insolvent debtor can be effectedthrough a restructuring under the CCAA or a proposal under theBIA.


Outside of a formal court process, the sale of the assets of aninsolvent debtor may be subject to attack under both the BIA and avariety of provincial statutes (see question 1.2). Many of theseprovisions are aimed at protecting creditors, if the transactionoccurred at a price that was under value in the view of the court. Inaddition, the Ontario Bulk Sales Act provides that a company cannotsell all its assets out of the ordinary course without making certainprovisions for its creditors and non-compliance may render thetransaction voidable by creditors of the debtor.It may be possible to present a pre-packaged sale in the context ofany of the insolvency processes. Which process is chosen willdepend on a variety of factors, although the end result may not be arestructuring but a sale of assets or all or part of the business of thedebtor. The court will typically order that certain marketingprocesses be undertaken in a CCAA or receivership process. If apre-packaged sale is presented to the court, the court will likelyrequire evidence that a marketing process similar to that which itwould normally approve has been conducted before it will approveof such a sale or that there are factors which require a quick sale tomaximise value or save jobs.

8 International

8.1 What would be the approach in Canada to recognising aprocedure started in another jurisdiction?

Both the BIA and the CCAA expressly provide for the recognitionof foreign insolvency proceedings in Canada. Under the Proposed Amendments, the UNCITRAL Model Law onCross Border Insolvencies will be adopted in Canada, withmodifications. BIACourts will assist foreign trustees in obtaining possession of assetsbased on the principles of comity. However, the Canadian courtsmaintain the discretion to determine the legality, propriety orrightfulness of their exercise of comity. Part XIII of the BIA alsodeals with international insolvencies which provides for therecognition of foreign bankruptcy proceedings and foreignrepresentatives that are similar to a trustee, liquidator or receiver.The filing of a certified or exemplified foreign order declaring theinsolvency of the debtor is accepted as proof of the debtor’sinsolvency and of the foreign representative’s appointment inrespect of the debtor. The foreign representative may then use thesedeterminations to obtain a bankruptcy order including a stay ofproceedings in Canada (which may be limited to the assets inCanada) and the appointment of an interim receiver.CCAASimilar to the BIA, courts may make such orders and grant suchrelief as it considers appropriate to facilitate, approve or implementarrangements that will result in a co-ordination of proceedingsunder the CCAA with any foreign proceeding. The court is notrestricted from applying such legal or equitable rules governing therecognition of foreign insolvency orders and assistance to foreignrepresentatives as are not inconsistent with the provisions of theCCAA. The court is not required to make any order that is not incompliance with the laws (including public policy) of Canada or toenforce any order made by a foreign court.

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CanadaBlake, Cassels & Graydon LLP

Susan M. Grundy

Blake, Cassels & Graydon LLP199 Bay Street, Suite 2800Toronto, Ontario, M5L 1A9Canada

Tel: +1 416 863 2572Fax: +1 416 863 2653Email: [email protected]: www.blakes.com

Susan is a senior partner in the Firm’s Restructuring & InsolvencyGroup. Her practice emphasises the commercial aspects ofinsolvency, including work-outs, debt restructuring, mergers andacquisitions transactions involving businesses in financial difficulty,bankruptcy and security enforcement. She has extensive experiencein insolvency proceedings of all kinds in domestic and cross-bordercases on behalf of both debtors and creditors, and she regularlyprovides advice on insolvency issues in structuring transactions.Susan has also been listed as a leading restructuring lawyer innumerous publications, including The Lexpert/American LawyerGuide to the Leading 500 Lawyers in Canada, Best Lawyers inCanada, Chambers Global: The World’s Leading Lawyers forBusiness, and PLC Cross-border Restructuring & InsolvencyHandbook. She is rated by Lexpert magazine as one of the top 25women business lawyers in Canada. She is the author of TheInsolvency Laws of Canada (2006). Susan is a fellow of theInsolvency Institute of Canada and a director of the CanadianAssociation of Insolvency and Restructuring Professionals.Admitted: Ontario, 1980.

Steven J. Weisz

Blake, Cassels & Graydon LLP199 Bay Street, Suite 2800Toronto, Ontario, M5L 1A9Canada

Tel: +1 416 863 2616Fax: +1 416 863 2653Email: [email protected]: www.blakes.com

Steven has been a partner in the Firm’s Restructuring & InsolvencyGroup since 1997 and is Practice Group Co-ordinator. Steven hasrepresented debtors, financial institutions, receivers, trustees,pension administrators, suppliers and other creditors andstakeholders in major insolvency and restructuring proceedings,including significant cross-border matters. He has extensiveexperience in a variety of litigation matters relating to insolvency,bankruptcy, commercial fraud and priority disputes, includingdisputes arising from equipment and inventory financing. Steven isa past president of the Turnaround Management Association (TMA)Toronto chapter. He has been an international director since 2002,and is currently a member of the executive committee, and the vice-president, international relations of TMA based in Chicago. Stevenhas been recognised as a leading lawyer in IFLR1000: The Guide tothe World’s Leading Financial Law Firms - 2008 Edition, PLCWhich Lawyer? Yearbook 2008 and in PLC Cross-borderRestructuring and Insolvency Handbook 2007/08.

Blake, Cassels & Graydon LLP (Blakes) is one of Canada’s leading business law firms providing guidance and expertisein virtually every area of Canadian business law across Canada, with more than 500 lawyers in offices in Montréal,Ottawa, Toronto, Calgary, Vancouver, New York, Chicago, London and Beijing. Blakes Restructuring & Insolvency Groupis one of Canada’s largest and most experienced and is ranked highly in industry rating services such as The CanadianLegal Lexpert Directory and Chambers Global: The World’s Leading Lawyers for Business. Blakes restructuring andinsolvency lawyers have had significant roles in almost every major domestic and international insolvency case inCanada in the last several years. Blakes has extensive experience in advising lender syndicates, secured and unsecuredcreditors, debtor-in-possession (DIP) lenders, debtors and other parties affected by business insolvency issues. Weregularly act as independent counsel for accounting firms serving as monitors in reorganisation cases, as receivers oras trustees in bankruptcy. We have also represented purchasers in a number of complex acquisitions from insolventestates.

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Chapter


Chapter 8

Grasty Quintana Majlis & Cia.

Chile


1.1 How does a creditor take security over assets in Chile?

In Chile, creditors may receive security to ensure payment of theircredits by way of various forms of guarantees contemplated byChilean law, which may be personal or real depending uponwhether the credit is guaranteed by the patrimony of another personor with a determined good or asset. The most common personal guarantees are: (i) the suretyship, byvirtue of which a third party is obligated to respond to another’sobligation in the event that the principal debtor does not pay theobligation; (ii) the joint and several guarantee, in which case theliability for default is enforceable against all of the debtors as agroup or against any one of them as an individual at the choice ofthe enforcing creditor; and, (iii) the penalty clause, by virtue ofwhich the debtor or a third party is subjected to a penalty or fine thatconsists of giving or doing something (usually in the form ofliquidated damages) in favour of the creditor in the event of non-fulfilment of the contracted obligation. For their part, real guarantees are constituted in respect of adetermined good or real estate, whether owned by the debtor or athird party, and empower the creditor to pursue the good or asset,dispose of it and obtain payment with the proceeds of the sale withpreference to the other creditors. The guarantee will be a pledge when the asset over which it isconstituted is a moveable good. There are various types of pledgeaccording to the nature of the asset or good. Goods that may bepledged vary from vehicles, machinery and equipment, toinventory, goods in process, chattels, accounts payable, shares,notes and commercial documents, among others.On the other hand, the guarantee will be a mortgage when securityis constituted in respect of real estate, mining concessions, waterrights and vessels (to name the most relevant). In general, realguarantees are registered in special registries. The aforementionedis notwithstanding the existence of other real and personalguarantees of lesser application.


Chilean legislation contemplates several actions that have the objectof restoring the debtors’ patrimony with assets that have beendisposed of. To this end, the situation varies depending upon the

time at which the acts of disposition have taken place, and severalthresholds exist, i.e. state of financial difficulties, cessation ofpayments, bankruptcy declaration. It is also relevant to determinewhether the debtor’s business is of a commercial or non-commercial nature.Firstly, creditors are not affected by any gratuitous acts that thedebtor may have entered into as of 10 days prior to the date uponwhich the debtor ceases any payments and until the date of thebankruptcy declaration. If the act of disposition is in favour ofcertain relatives, the term is extended to 120 days prior to the dateof cessation of payments.Secondly, creditors may also take legal action to request theannulment of other acts of disposition or contracts executed by thedebtor prior to the terms indicated hereinabove when the debtor hasentered into them in bad faith and has prejudiced the rights ofcreditors. In the case of gratuitous acts, it is necessary to prove thatthe debtor has acted in bad faith. Regarding onerous acts, inaddition to proving the debtor’s bad faith, one must prove theacquirer’s bad faith. In both cases the losses that were caused bysaid act must be evidenced. For these purposes, it is deemed thatthe act was carried out in bad faith when the parties are aware of thedebtor’s financial difficulties or the bad state of its business.Thirdly, in the case of debtors in mining, industrial, agricultural orcommercial businesses, creditors are not affected by certain acts orcontracts that the debtor may have entered into as of 10 days priorto the date upon which the debtor ceases any payments and until thedate of the bankruptcy declaration, such as: (i) advance payment ofobligations; (ii) payment of obligations made in a manner differentto the terms of the relevant title; and, (iii) mortgages and pledgesprovided to secure pre-existing obligations. In addition, any otherpayments, acts or contracts of onerous nature executed between thedate upon which the debtor ceases any payments and until the dateof the bankruptcy declaration, are deprived of any legal effect uponcreditors, i.e. are attributable to the mass of assets, when the thirdparty that received said payments or contracted with the debtorknew that that the debtor had ceased in the payment of anyobligations.Subsequent to the date of the bankruptcy declaration, the debtorsurrenders the administration of its assets to the Syndicate and anyacts or contracts entered into by the debtor would be of no legalforce or effect.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Chile?

Generally, directors are jointly and severally liable for the

Eduardo Marchi

José Francisco Sánchez

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Grasty Quintana Majlis & Cia. Chile

compensation of any damages that may arise from their actions orresolutions of the Board of Directors and they will incur civilliability when they have executed, authorised, approved orconcurred to actions or decisions contrary to the interests of thecompany, shareholders and third parties, unless they have expresslystated their opposition in the Board meeting where said resolutionsare made.The Board of Directors of a company that has ceased payments ofits obligations, or has been declared bankrupt, has the duty tosummon the shareholders to inform them of the situation.Furthermore, debtors in the mining, industrial, agricultural orcommercial sector must request the declaration of their ownbankruptcy when they have ceased in the payment of anycommercial obligations. Directors are liable for lack of compliancethereof.Directors may be held criminally liable when negligent orfraudulent acts, as defined in the Bankruptcy Law, cause thebankruptcy of a company. If convicted for such actions, directorsare also disqualified and unable to perform such role in anycorporations.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Chile?

The principal procedures are: a) Assignment of Assets: this consists of the voluntary

abandonment made by the debtor of its assets in favour of thecreditors when as a consequence of inevitable accidents itcannot pay its debts. However, this is of rare application inChile.

b) Judicial Agreements, which may consist of: (i) preventativejudicial agreements, whereby the debtor proposes anarrangement to its creditors prior to the bankruptcydeclaration. Chilean law also foresees the possibility thatcreditors that meet certain requirements may obligate thedebtor to present a proposal for preventative judicialagreement prior to the bankruptcy declaration; and, (ii) uponthe bankruptcy declaration, the adjudged bankrupt or anycreditor may propose a judicial agreement to terminate thebankruptcy. This is known as the Simply JudicialAgreement.

c) Bankruptcy: this is a procedure strictly regulated by lawwhere the debtor is placed under the authority of a Receiveror Syndicate who will manage the debtor’s business. All theassets of the debtor will be involved in this procedure for thepayment of all obligations, according to the preferencesrecognised by the law.

2.2 What are the tests for insolvency in Chile?

In Chile, our legislation does not contain a specific definition for theconcept of “insolvency”. It is generally construed by authors to bea complex business situation where the liabilities of a person orentity are greater than its assets. It is not a requirement to prove thestate of insolvency for an individual or company to obtain thedeclaration of its bankruptcy.Chilean legislation assigns important effects to the fact that a personceases in the payment of civil or commercial obligations. This is anobjective situation that triggers the need for certain debtors torequest the declaration of their own bankruptcy and will also havean effect upon certain acts or contracts of disposition of assets, asexplained hereinabove.

Notwithstanding, certain objective causes permit creditors torequest the bankruptcy of the debtor, and as may be seenhereinbelow, each case conveys the notion or evidence of apotential or actual state of insolvency.


Any debtor in the mining, industrial, agricultural or commercialsector must request the declaration of its own bankruptcy within 15days of the date upon which it has ceased in the payment of acommercial obligation.A debtor may be declared bankrupt at the request of creditors: (i)when it has ceased in the payment of a commercial obligation thatis stated in an executive title; (ii) when there exist three or moreexecutive titles against the debtor and at least two enforcementproceedings have been initiated, and said debtor has not presentedassets sufficient to pay that owed, plus costs, within the fourth dayof notification of the executive papers; and, (iii) when the debtorabsconds from the territory or goes into hiding without havingnamed an administrator of its assets with faculties to fulfil itsobligations.In the case of sections (i) and (ii) of the preceding paragraph, acreditor may request that the debtor present proposals for apreventative judicial agreement. This type of arrangement may alsobe proposed by the debtor, at its own initiative, at any time prior tothe bankruptcy declaration.The debtor may also request that the competent Court appoint anexpert who will evaluate its financial, accounting and economicsituation. The expert may either submit to the creditors a proposalfor a preventive judicial agreement, or if it deems fit, request theCourt to declare the debtor’s bankruptcy.Subsequent to the bankruptcy declaration, the adjudged bankrupt orany creditor may propose a simply judicial agreement to terminatethe state of bankruptcy.


In the case of bankruptcy, the debtor itself or its creditors mustpetition bankruptcy before the competent Court. Upon examinationof the circumstances, the Court will issue a resolution declaring thestate of bankruptcy and appoint a Syndicate to assume themanagement of affairs of the adjudged bankrupt.Regarding preventive judicial agreements, the debtor must presentbefore the competent Court proposals for an arrangement with itscreditors, which will be communicated to all creditors. The Courtwill appoint a Syndicate to evaluate the financial situation of thedebtor and present a report to the creditors. If approved with therequired quorum, the debtor will be ordered to abide by the terms ofthe agreement. If the preventive judicial agreement is rejected, thedebtor will be declared in a state of bankruptcy. If requested byqualified creditors, the Court shall force the debtor to propose apreventative judicial agreement to the Court. If such proposal ispresented by the debtor, its approval will be subject to the sameprocedure indicated above. If no such proposal is received within acertain period, the debtor will fall into bankruptcy. If an expert isappointed as indicated hereinabove, the approval of the preventivejudicial agreement or bankruptcy declaration of the debtor, as thecase may be, will occur in the same manner as explained.With respect to simply judicial agreements, it is enough that thedebtor or any creditor proposes the same to the Court and that it issubsequently approved with the required quorum.

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a) Bankruptcy: After a petition for bankruptcy by the creditor ispresented, the debtor will be served notice and the Court willpronounce on the application petitioned. The debtor may pay thedebts that have been invoked to request the bankruptcy and avoidthe bankruptcy. If bankruptcy is declared, a notification via theOfficial Gazette will be made and all creditors will be summoned topresent the documents evidencing their credits. The Syndicateappointed will present a report and thereon, the creditors will attendregular or extraordinary meetings as required to decide on themethod of payment of the credits, either by way of continuance oftotal or partial business of the debtor, sale of the ongoing businessor auction of the debtor’s goods and assets.b) Judicial Agreements: If a preventative judicial agreement orsimply judicial agreement is presented, the proposal shall benotified to all creditors by means of a publication in the OfficialGazette. All creditors are thereby summoned to a general meetingat which time they shall vote on the agreement, either accepting itor rejecting the terms thereof.

3 Creditors


Unsecured creditors shall be summoned to the bankruptcy andcreditors agreement proceedings, where they are free to vote andexercise their rights, provided, however, that they will be subject toall decisions adopted with the required quorum. If a judicialagreement is approved with the necessary majority, unsecuredcreditors shall abide by the terms thereof, even if they have votedagainst it. Unsecured creditors will be paid according to theregulations in force and subject to priority of credits.


Generally, secured creditors are not obligated to participate injudicial or extra-judicial agreements, and are not bound by theterms of such arrangements unless they are willing to concur orhave applied to participate in said proceedings.As regards bankruptcy, they may pursue the enforcement of theirsecurity via procedures distinct from a bankruptcy proceeding, butwould be barred from foreclosing: (i) if it is decided that the debtorin bankruptcy should continue carrying on business, a securedcreditor which voted for the continuation of the business would bebarred from foreclosing on the assets securing its credit if they arecontemplated in the business continuation; (ii) if it is decided thatall or a portion of the assets of the debtor in bankruptcy shall be soldas an economic unit and such unit encompasses assets covered by amortgage, pledge or another security interest, a secured creditorcannot separately foreclose thereon; instead, it would have a firstpriority claim against the proceeds of the sale of the assetsconcerned; and, (iii) if a proposal for judicial agreement ispresented with a certain majority, secured creditors would be barredfrom foreclosing for a certain period of time.Also, secured creditors are generally free to apply the proceedsraised upon the foreclosure of their mortgages, pledges or othersecurity interest to the amounts owed and secured thereby. Incertain cases, however, whenever it appears that claims forpreferred credits with statutory priorities under Chilean law would

not be satisfied in full from the proceeds of the sale of other assetsof the debtor, the secured creditors who have foreclosed on theircollateral may be required to deposit a portion or all of the proceedsobtained therefrom to cover the existing deficiency or to otherwisesecure payment thereof in full.


Generally, to prevent a diversion from the mass of assets, thebankruptcy declaration impedes all set-off related to reciprocalobligations between creditor and debtor, except for reciprocalobligations derived from the same contract among the parties.During the payment proceedings credits that have been acceptedbefore the Courts may be set-off, with the understanding that thesystem of priority claims is not adversely affected.In the case of judicial agreements, set-off will be allowed asforeseen in the terms of the proposed arrangement.



In the event of bankruptcy, the Syndicate assumes theadministration of the assets of the adjudged bankrupt, replacing thatperson who had possession or control of said assets. Therefore, thedirectors and shareholders are deprived of taking any decisionsrelated to the management of the company affairs and assets.In the case of judicial agreements the company continues to bemanaged by its shareholders, directors and officers, but will operatein accordance with that established in the agreement, that is to say,the debtor continues to be in control of its business; however, itsactions are limited in accordance with the terms of the agreement.The arrangement plan may foresee, and usually creditors request,that an intervener be appointed to oversee how the business isconducted and report to the creditors.


Bankruptcy expenses are paid primarily with a certain amount ofmoney that the petitioner of the bankruptcy must deliver at the timeof the bankruptcy petition.Once that money has been consumed, all expenses shall be paidwith the proceeds of the sale of assets or continuation of business,as the case may be, and to that extent, are granted with preferenceset forth in the law.In the case of judicial agreements, the expenses shall be assumed bythe debtor as part of the agreement that it must fulfil, unless agreedotherwise in the arrangement plan.


In case of bankruptcy, if the business of the company ceases,employment agreements are terminated and all amounts owed toemployees including remuneration, severance payments,compensation in lieu of notice, holiday pay, and other pursuant to thelaw, enjoy preference for their payment. If it is agreed that the debtorin bankruptcy should continue carrying on business, the employeesshall continue to be remunerated with the proceeds of the business.

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In the case of a judicial agreement, if it provides for thecontinuation of the business, employees will continue to exercisetheir functions and shall be remunerated as per usual. Otherwise, ifthe business is to cease, employees will be entitled to all statutorypayments with the same preference applicable in the case ofbankruptcy.


In the event of a bankruptcy declaration, the Syndicateadministrates the assets of the adjudged debtor, including contractswith the company. Generally, the bankruptcy declaration in itself isnot a legal cause for termination of agreements. Therefore, theSyndicate will define the termination or continuation of saidcontracts taking into account the objective of the bankruptcyprocedure and the best interests of the creditors.The same will occur with judicial agreements, where the debtorshall in accordance with that indicated in the agreement, continue,amend or otherwise terminate the contracts in force.Notwithstanding, it is common that contracts may contain clausesregarding termination in case of bankruptcy, reorganisation,moratorium and insolvency, in which case, such provisions shallprevail.

5 Claims


Upon the bankruptcy declaration, all creditors will be summoned topresent the documents evidencing their credits. Subsequently thejudge will establish which credits are accepted, their amounts andmanner in which credits shall be paid will depend upon thepreferences or privileges and upon the mass of assets available.In the case of judicial agreements, all credits will be acknowledgedby the Syndicate in its report to the Court, prior to the approval ofthe arrangement plan. The creditors or the debtor will establish themode as to how the credits will be paid depending upon the assetsand flows of funds that exist. If the debtor breaches the agreement,any creditor may request its termination and the debtor will beplaced in bankruptcy.


The Chilean Civil Code regulates in a detailed manner the priority ofclaims for all credits, regardless of the procedure that may be used. Allclaims are ranked as follows: (i) claims with statutory priority such asbankruptcy proceeding expenses, employee remuneration, taxes,amounts owed to pension funds, etc.; (2) statutory preferences, such asattachment of goods transported for payment of transportation fees, orthe preference that the pledgor has to be paid with the proceeds of thesale of the pledged asset; (3) mortgages, and if there are severalmortgages, the priority among them is by the date of registration; (4)other general claims; and, lastly, (5) unsecured creditors.


No special tax liabilities are incurred. General regulations would

apply as pertains the payment of income tax and value added tax, ifapplicable to the business.



If it is proposed in a bankruptcy proceeding to continue the debtor’sbusiness, either partially or fully, to obtain the quorum required bythe law, the creditors that are in favour of such motion may excludethe dissident creditors by paying their credits or securing theirpayment as determined by law. In the event of judicial agreements, to achieve the quorum requiredfor its approval, a creditor may exclude another from the vote bydelivering a bank cheque to said creditor for the sum owedcalculated in accordance with the law.


If a judicial agreement is fulfilled, the creditors are paid accordingto that agreed and according to the type of credit. For its part, thedebtor may continue with its activities without owing any amountto the creditors that accepted the agreement and the bankruptcyprocedure is withdrawn, notwithstanding the rights of the creditorsthat did not participate in the agreement. If the judicial agreementis not fulfilled, the debtor is declared bankrupt by the Court. The bankruptcy proceeding may be temporally suspended orterminated, depending on whether all creditors have been paid. Inspecial cases, creditors may be able to re-open the bankruptcyproceeding. The creditors that have not been reimbursed may alwayscontinue individually against the adjudged bankrupt so that they maybe paid to their satisfaction. For its part, the debtor may be freed fromthe bankruptcy in the event of paying all debt or upon termination ofthe proceeding when it has not acted in a culpable or fraudulentmanner, a condition that will permit it to be freed from all theconditions that were imposed in its condition as adjudged bankrupt.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Chile? In what circumstances might this bepossible?

Is it not common to achieve a restructuring outside a formalprocedure in Chile. Usually corporate recovery is achieved inaccordance with the procedures established in the law, either byway of judicial creditors’ agreements or, most recently as a result oflegal reforms, with the mediation of experts that propose the basisfor an arrangement and facilitate the approval thereof.Notwithstanding the aforementioned, it is possible to reach extra-judicial agreement pertaining to the payment of obligations or themanagement of the debtor’s assets, but said agreements are solelymandatory upon the creditors who have agreed upon the terms andconditions thereof. All other creditors are entitled to execute theirrights and pursue legal actions in the ordinary manner, withoutbeing bound by the terms of extra-judicial agreements.


It is feasible to reorganise a debtor by entering into a preventative

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José Francisco Sánchez

Grasty Quintana Majlis & Cía. Magdalena 140, 20th floorLas Condes, SantiagoChile

Tel: +56 2 499 0408Fax: +56 2 499 0460Email: [email protected] URL: www.gqmc.cl

José Francisco Sánchez is the managing partner of Grasty QuintanaMajlis & Cía. He has corporate advisory expertise in all aspects of business,including M&A, corporate structuring and financing, joint ventures,foreign investment, corporate bankruptcy and insolvency proceduresand other trade practice issues. Languages: English and Spanish. Education: LLB, University of Chile Law School, 1988Professional Activities: Member of Rocky Mountain Mineral LawFoundation and the Chilean Bar Association.

Eduardo Marchi

Grasty Quintana Majlis & Cía. Magdalena 140, 20th floorLas Condes, SantiagoChile

Tel: +56 2 499 0408Fax: +56 2 499 0460Email: [email protected] URL: www.gqmc.cl

Eduardo Marchi is a senior associate in Grasty Quintana Majlis &Cia.’s litigation and dispute resolution department. His practicefocuses on corporate restructuring, bankruptcy and civil litigation. Eduardo completed a LL.B. at the University of Chile in 1998.

Grasty Quintana Majlis & Cía. is a versatile law firm. With over 20 years’ experience in the Chilean market, we havedeveloped and maintained a strong corporate practice and litigation team. Each of our practice areas is highly regarded.

Through a select group of lawyers, we offer a high quality service to clients in a personalised, proactive and efficientmanner.

We are a diverse team that is in continuous contact with different actors in the national market. Our vision and analysisof the issues goes beyond the strictly legal, becoming strategic partners to our clients in the projects they develop.


judicial agreement as described in question 2.1 above.


The alternative of a “pre-packaged sale”, insofar as the term refersto an arrangement under which the sale of all or part of a company’sbusiness or assets is negotiated with a purchaser prior to theappointment of a Syndicate, and the Syndicate effects the saleimmediately on, or shortly after, its appointment, does not exist inChile, since any sale of the company immediately upon theSyndicate’s appointment would be deemed prejudicial to theinterests of the creditors. In Chile, we have the figure of declaración de unidad economica(“declaration of economic unit”), meaning that a Syndicate maypropose to a creditors’ meeting that all the assets of a company besold, without dismantling the company, in order to obtain a highervalue for them to the benefit of the creditors.

8 International

8.1 What would be the approach in Chile to recognising aprocedure started in another jurisdiction?

In Chile, the guiding principle over this matter is that thebankruptcy of a Chilean entity must be pursued before ChileanCourts and according to the laws of this jurisdiction.As a matter of Chilean law, property located in Chile is subjectexclusively to the jurisdiction of Chilean Courts, notwithstandingthat foreign awards may be enforced in Chile by the Supreme Courtthrough the Exequator procedure, by virtue of which creditors mayseize assets situated in Chile from a person who has been adjudgedbankrupt abroad.



ChapterChapter 9

Georgiades & Mylonas, Advocates & Legal Consultants

Cyprus


1.1 How does a creditor take security over assets in Cyprus?

A bona fide creditor may attempt to take one of the followingactions to enable them to take security over assets in Cyprus:1) Mortgage - the property under mortgage is transferred into

the creditor’s ownership with a right of redemption in thecase of default, the property will be worth a similar amountto or equal to the amount of the mortgage.

2) Pledge - gives the lender the right to sell the asset but doesn’tgive ownership of the asset.

3) Charge over immovable property - a fixed charge gives legalrights as security without any actual transfer of ownership.

4) Impose a floating charge on any immovable property - afloating charge ‘floats’ over all of the assets of the debtor, inthe event of a default the floating charge crystallises andbecomes a fixed charge over the asset.

5) A lien - gives the right to the debtor to possess the assets untilthe debtor pays its debts but does not give the right to thecreditor to sell the asset.


Duty of the Directors of the Company:The Directors of the company have a duty to the company to act inthe best interests of the company and its beneficiaries, not onlywhen the company is in financial difficulties but from the momentthat they are appointed as directors until the time that they resign.Cyprus Companies Law Caps 113:Section 301 of the Companies Law, Cap 113 states that ‘anyconveyance, mortgage, delivery of goods, payment, execution, orother act relating to property made or done by or against a company,within six months before the commencement of its winding up will,in the event of the company being wound up, be deemed asfraudulent preference of its creditors and be invalid accordingly’.The Court will look at the dominant or real intention and not at theresult in order to determine whether or not fraudulent preferencehas occurred. Section 303 of the Companies Law, Cap 113 states that where acompany is being wound up, a floating charge on the undertakingor property of the company created within 12 months of thecommencement of the winding up shall, unless it is proved that

immediately after the creation of the charge the company wassolvent, be invalid, except to the extent of any cash paid to thecompany at the time of or subsequent to the creation of and inconsideration for the charge.Introduction of Fraudulent Trading:Further to the above situations, Section 311 of the Companies Law,Cap 113 introduced the concept of fraudulent trading into theinsolvency proceedings in Cyprus. If a liquidator can prove thatfraudulent trading has occurred the court may find the personresponsible, for example the director or other such officer of thecompany, personally liable for the debt incurred. Transactions at an undervalue:Any transactions which can be proven to have been carried out atan undervalue, with the intention of putting the assets in a positionthat makes them unavailable or unreachable to the companies’creditors will be classed as transactions carried out with theintention to defraud the creditors and they are then vulnerable tobeing declared null and void by the court.Transactions which fall under the Fraudulent Transfers AvoidanceLaw:Under the Fraudulent Transfers Avoidance Law, Cap 62 Section 3,every pledge, mortgage, gift, sale or other transfer or disposal of amovable or immovable property made by any person with the intentto hinder or delay his creditors or any of them in recovering theirdebts from him will be deemed to be fraudulent and will be invalidagainst such creditors. In this situation, the property or asset purported to be transferred ordealt with in another manner but for the same reason may be seizedand sold to satisfy any judgment debt due from the person whomade the pledge, mortgage, gift, sale or other attempted or actualtransfer or disposal. This was shown in the case of Adamou vKitchiou (1978) 1 JSC 12 and Lymperopoulou v Christodoulou andOthers (1957) 22 CLR 184. A transaction which falls into the category of a fraudulent transferavoidance is one of the ways in which a party can proceed againstcompany directors, taking them to Court under the Common LawPrinciples and where the Court may lift or pierce the so-called‘Corporate Veil’ to protect the party’s interests.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Cyprus?

The concept of fraudulent trading was introduced into insolvencyproceedings in Cyprus by Section 311 of the Companies Law, Cap113, creating a civil liability for persons who can be shown to be

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abusing the status of limited liability and it also created a criminaloffence. The provision allows an action to be taken against personswho are knowingly parties to the carrying on of the business, but ifthe person cannot be shown to have been a knowing party, then theywill not be liable. Although the provision can apply to directors,and often does, it is not limited to directors only and can be broughtagainst other parties who knowingly take part in the carrying on ofthe business.As discussed above, a Director may face personal liability in theevent that it can be shown that they have continued to trade with theintent to defraud the company’s creditors, Sections 307-311 of theCompanies Law cover the situations where a company officer may beliable. These offences can carry a conviction; under Section 307 (m)(n) (o), the term of imprisonment for which can be up to five yearsand in the case of all other offences, it shall not exceed two years.The Companies Law states it shall be a good defence to some of thepossible charges if the accused director can prove that he had nointent to defraud. For some of the other offences, he must prove thathe had no intent to conceal the state of affairs of the company or todefeat the law (Section 307 (1)).

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Cyprus?

A company in financial difficulties in Cyprus may find itself facingone of several different formal procedures which are provided forunder the Cyprus Law. According to the Cyprus Companies Law, Cap 113, Section 203,there are two main methods of winding up a company, these being:a) compulsory winding up order which is made by the Courts;

or b) voluntary winding up which can be instigated either by the

members of the company or the creditors of the company. Winding up by the court:In this situation, the court may issue a liquidation order for thecompany. This may result from the presentation of a petition by acreditor, the company itself, the Official Receiver or the AttorneyGeneral. The Court will examine the petition for liquidation and ifit believes that the company is unable to pay its debts (this test isdiscussed in detail below), it will then issue a liquidation order.Voluntarily winding up:In this situation, the directors make a decision that the company hasno future and agree that that the company should be wound up andtherefore proceed to terminate the company’s existence. For this tohappen, a special or an extraordinary resolution will be passed bythe company in a general meeting, unless the articles of associationfor the company provide for another procedure, stating that thecompany is unable to continue business due to its liabilities (CyprusCompanies Law). This is governed by Section 261, Cap 113. Re-organisation Plan:A third option that a company in financial difficulties may decide totake is that of a reorganisation plan. Such a plan may involve themerger of two companies or it may involve the incorporation of atotally new company. This action is taken in order to improve thefuture possibilities of the company and to resolve the financialdifficulties. Once the directors have approved the measures, apetition to the court will be made for the approval of the plan andusually, an order will be issued to that effect. This method ofrestructuring a company is not always suitable and will dependupon the severity of the financial difficulties that the company

faces. It will be a decision for the directors to make as to whetherthis option would be suitable under the circumstances. This is themost flexible and informal option available to a company.The Process of being Under Management:Under Section 250 (1) Caps Law, where in any proceedings theofficial receiver becomes the liquidator of a company, whetherprovisionally or otherwise, he has the power , if he is satisfied thatthe nature of the business of the company or the interests of thecreditors require the appointment of a special manager of thebusiness of the company, other than himself, to make an applicationto the Court. The application by the official receiver shall besupported by a report by the Official Receiver, which shall beplaced in the file of the proceedings. The report shall either state theamount of the remuneration which, in the official receiver’sopinion, the special manager ought to be allowed or that the OfficialReceiver’s opinion is that it is desirable that the determination ofsuch remuneration should be deferred, Rule 50 (1) of TheCompanies (Winding-Up) Rules 1949. The Court, upon receivingsuch an application, may appoint a special manager of the businessto act during such a time as the Court may direct, with such powersas the Court believes necessary. The special manager will givesecurity and account in a manner as directed by the Court and shallreceive remuneration in a manner that the Court sees fit.

2.2 What are the tests for insolvency in Cyprus?

The test for insolvency in Cyprus is based on the company’s abilityto pay its debts. If the company is unable to pay its debts, then it islikely to go into insolvency through one of the procedures discussedbelow and become a formally insolvent company. The Cyprus Companies Law, Cap 113, Section 212 stipulates thesituations where a company will be considered under Cyprus law asbeing unable to pay its debts. These are as follows:a) The company owes more than 855 Euros to a creditor. The

creditor may claim the debt by sending a formal letter to theregistered office of the company and the company then has21 days in which to send the creditor his money. If thecompany does not send the creditor his money, then thecreditor may apply to the Court requesting that the Courtissue a liquidation order against the company.

b) If execution or any other process issued with regard to ajudgment, decree or order of any court in favour of a creditorof the company is returned unsatisfied in whole or in part.

c) The court will consider the company’s debts/liabilities, boththose that it presently has and those which it is likely to havein the future. If it is proven that the company is unable to payits debts, the company will be officially considered incapableof paying its debts and will officially enter the procedure ofinsolvency.


Winding up by the Court:The court will issue an order to wind up a company in the followingsituations:a) A special resolution is made resolving that the company be

wound up by the court.b) The company is unable to pay its debts (Cyprus Companies,

Section 212, Cap. 113).c) The court believes that it is just and equitable to wind up the

company (Cyprus Companies Law, Cap. 113, Section 211, asamended by Law 2 (1) of 2000).

d) The company does not commence business within one year

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of its incorporation or suspends its business for a yearwithout giving notice of this intention or submitting a planfor the business to be restored.

Voluntary winding up:This is a very common action taken by companies that may beencountering difficulties. It occurs because the directors decide thatthe company has no future and agree that it is in the best interestsof the company for it to be wound up. A resolution will be passedstating that the company is unable to continue conducting itsbusiness due to its liabilities and that it has been decided that it isbest to wind the company up, Cyprus Companies Law, Cap. 113,Section 261. The company should give notice of the passing of theresolution in the Official Gazette for the Republic of Cyprus within14 days of the passing of the said resolution. Re-organisation Plan:A reorganisation of the company will also begin with a meeting ofthe company, a resolution being passed and a petition being sent tothe court requesting that the relevant order be issued. This mustoccur before the reorganisation can take place.


This is discussed in the above answers to avoid repetition.


Winding up by the Court:The court will serve a liquidation order to the company and informthe Registrar and the Official Receiver that the company is in theprocess of being wound up. The company also has a duty, for everyinvoice, order for goods or business letter that it issues or that isissued by or on behalf of the company or a liquidator of thecompany, or by a receiver or manager of the property of thecompany, to include a statement informing the receiver that thecompany is being wound up. Failure to do so may incur a fine,Section 317 (1) and (2) Caps Law.Voluntarily winding up:If it takes place due to the members of the company, a declarationmust be given to the Registrar by the directors five weeks before thegeneral meeting of the company. During the meeting, a resolutionwill take place in which it will be resolved that the company shouldbe wound up and that an administrator should be appointed. If ittakes place due to the company’s creditors, a meeting of thecreditors will take place on the same day as the general meeting ofthe company. A notice of the creditors’ meeting must be publishedin the Official Gazette of the Republic of Cyprus and in twonewspapers in the town where the company’s registered office issituated. The same provisions apply regarding Section 317 (1) and(2) Caps Law to a voluntary winding up.Re-organisation Plan:With regard to the reorganisation of the company, a relevantdecision will be made at a general meeting and a resolution passedbased on the decision. A petition will need to be sent to courtrequesting that the relevant order be issued. Further provisions willdepend upon what decision the company makes, for example theprocedures with a merger will be very different from the disolutionof an old company and the incorporation of a new company. Legaladvice should be sought depending on the outcome of the meeting.

3 Creditors


The same principles apply to liquidation procedures and winding upas well as to reorganisation procedures.The Companies Law, Cap. 113, Section 300, as amended by Law198/86 and Law 19/1990, lays down the order for the distribution ofthe assets of a company in a compulsory winding up oradministration. Under the above section, unsecured creditors are ranked below thecosts of winding up, preferential debts and charges secured by afloating charge. An unsecured creditor has the lowest priority in therank of priorities for settlements. They will only be satisfied oncesecured creditors have been satisfied and can only be satisfied if anysurplus credit or assets remain. Accordingly, unsecured creditors have no real freedom to enforcetheir rights under liquidation and must therefore wait until theliquidator has made all other distributions before they will receiveanything towards the repayment of the debts owed to them.However, unsecured creditors are entitled to repossess assets whichare not owned by the company, for example goods which may bethe subject of a retention of title clause.A further point to make would be that an unsecured creditor whohad been awarded a judgment before the liquidation proceedingswere commenced is able to have the judgment served to theliquidator who must then execute the judgment and ensure it isenforced like any other civil judgment. In this sense, an unsecuredcreditor therefore becomes a secured creditor.


The general rule is that secured creditors may enforce their securityin a situation where the company is to be liquidated. The extent towhich secured creditors can enforce their security is dependentupon the value of their security in the first place. The question willbe: Does the value of the security cover the debt which is owed tothe creditor? If so, then they will be fully satisfied and anyremaining balance will be credited to the assets of the company andwill be used by the administrator to satisfy any other liabilities thatthe company has. If, however, the security does not cover the fullamount of the debt, then they will join the ranks of the unsecuredcreditors and have the remaining amount of the debt settled to theextent possible in such a way.


The procedure of setting off sums owed by the company’s creditorsagainst amounts owed by the company to the creditors is regulatedin Cyprus by Sections 198-200 Caps Law 113. Section 198 enables the creditors to achieve a set off with thecompany disregarding the fact that the company may be or is underthe process of liquidation. The company, creditor or theadministrator or shareholders may make an application to the courtwith the intention of convening a meeting for the class of creditorsthat would be participating in the set off. During the meeting, if ¾of the creditors present accept the proposal for the set off, the courtwill give its approval of the set off taking place. If approval is



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given, the proposal is binding on the company and all of thecreditors in the said class. Section 199 explains the procedures relating to the notices whichmust be given of the meeting and gives information regardingcompromises with the company’s creditors and members.Under Section 246 (3) Caps Law, when all creditors have been paidin full, any money which is due on any account whatsoever to acontributory, (contributories are defined by Section 205 Caps Lawas ‘every person liable to contribute to the assets of a company inthe event of its being wound up’) from the company may beallowed to be given to him by way of a set off against anysubsequent call.



In a situation where a liquidator has been appointed, they take thecontrol of the company. The ultimate aim is the completion of thetask for which he has been appointed. In this situation, the directorsare no longer in control of the company for the majority of matters.The shareholders are in the same situation as the directors and haveno exercise of their control powers over the company. All thepowers of control are taken over by the liquidator.If, however, the company decides to create a reorganisation plan inorder to attempt to solve the company’s financial issues, thedirectors remain in control of the company. The shareholders’rights are also unaffected as no third party has been appointed tohandle the situation that, for example, a liquidator, administrator ora receiver would control.


In a situation whereby liquidation is taking place, the costs of theliquidation process are covered by the liquidation of the assets ofthe company and are paid out as the first priority in the hierarchy ofcreditors, as set out in the Cyprus Companies Law, Cap 113,Section 300, as amended by Law 198/86 and Law 19/1990.If a company decides to undergo a process of reorganisation orrestructuring, it will find funds from lenders or current supportnetworks to fund any plans and procedures agreed upon. Thefunding of such measures will most likely be one of the factors thatare taken into consideration when the company’s directors aremaking a decision as to whether such a measure would be suitable.


When a company goes through the process of winding up, thecompany’s employees are automatically dismissed, though theliquidator can re-employ some of the staff to assist in the business,but this will only be the case until the winding up is fullycompleted. The purpose of their re-employment is to assist theliquidator in finalising the duties that he has been appointed tocomplete, Companies Law, Cap 113, Sections 219-221 and 264-265. In the case of a reorganisation, the effect on the employees isdifficult to determine and legal advice should be sought with regardto the effects in each individual situation.


Contracts entered into by a company that goes into liquidation arenot necessary terminated merely as a result of the company enteringinto the procedure. The liquidator has the right to cancelunilaterally an onerous contract in order to fulfil his duties andensure that the liquidation of the company goes ahead, which he hasbeen appointed to arrange.A company which is entering into a reorganisation plan orrestructuring does not necessarily directly have any impact oncontracts that company has already entered into. The directors ofthe company should ultimately take these pre-existing contracts intoconsideration when discussing and planning for the re-organisation.

5 Claims


In the case of a company reorganisation, the creditors will claimtheir debts in the way that is prescribed in the reorganisationagreement/order. There is no way to state definitively how this willoccur, as each case will be different.In a case whereby a liquidator is appointed, the creditors will sendthe company a formal claim in order to prove their debts. Thecreditors must send the liquidator proof of their claims. It is theliquidator’s job to consider each of these and decide which claims:a) he will accept; b) he will reject; and c) he is in a position to ask for more information about and

evidence of if he believes that he needs further informationbefore he will be in a position to decide whether or not toaccept or reject the claim. If a claim is rejected, theliquidator must give the reasons to the creditor in writingwhy he has rejected the claim. If the creditor is dissatisfiedwith the liquidator’s decision, he may apply to the court torequest that the court consider the situation with regard towhy the liquidator did not accept the proof of his claim andask them to reconsider his claim.


The Companies Law, Cap 113, Section 300, as amended by Law198/86 and Law 19/1990, lays down the order for the distribution ofthe assets of a company in a compulsory (court) winding up. In a compulsory winding up, the order is as follows:1) Costs of the winding up - this covers the costs of getting the

assets, the petition and drawing up the statements of affairsas well as the liquidator’s remuneration and the InspectionCommittee’s expenses.

2) Preferential debts - these debts are ranked equally so if thecompany’s property is not sufficient to make full paymentsfor each, they will have to be paid proportionally.

3) Charges secured by a floating charge.4) Unsecured ordinary creditors.5) Any deferred debts.Lastly, any remaining surplus will be distributed among themembers in proportions based on their rights under the articles.

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If the company has decided to enter into a voluntary arrangement ora reorganisation plan, the creditors will be paid according to theterms that have been agreed upon. The rights of secured andpreferential creditors remain and will not rank lower than those ofthe company’s unsecured creditors.


The main point to note here is that the company will not be liable topay tax for entering into each procedure; however, the companywill be liable to pay tax on any profits which are gained whilst thecompany is involved in any of the procedures.The area of tax in such proceedings is too detailed and complex for afull and sufficient discussion here, however, the Establishment andRecovery Tax Law, L4/78 as amended governs in part this topic herein Cyprus. In particular Section 8 of the Law states that the receiveris liable to arrange the tax liabilities of the company during each of theprocedures and should advise the company accordingly of the relevanttaxes and amounts due as an expense of the liquidation.Under Section 183 of the Companies (Winding up) Rules, 1949,every solicitor, manager, accountant, auctioneer, broker or otherperson employed by an official receiver or liquidator in a windingup by the Court shall, at the official receiver’s or liquidator’srequest, deliver his bill of costs or charges to the official receiver orliquidator for the purpose of taxation.Due to the depth and complexity of this area, we advise that allcompanies undergoing such procedures seek professional advice, inparticular regarding their potential tax liabilities.



The process of cramming down is a term that is used in BankruptcyLaw where individuals are concerned and in Insolvency Law wherecompanies are being considered when referring to the courts’enforcement of a procedure, for example, a reorganisation plan,despite objections which may be raised by some of the company’screditors. We can therefore say that the process of cramming down creditorsis only really relevant in voluntary arrangements and where areconstruction/re-organisation plan is being implemented, thereasons for this being that the approval of these arrangementsdepends on majority voting. During these procedures, thedissenting minority are obliged to accept the arrangement which hasbeen voted for by the majority and dissenting creditors are bound bythe vote as if they had indeed agreed to the terms themselves. It should, however, be borne in mind that the minority are oftenprotected by principles that are intended, through the CompaniesLaw, to protect the minority’s interests. Therefore, it must beappreciated that the scope of these procedures can be limited bysuch minority protections. It is always advisable for the parties to seek legal advice in suchcircumstances.


Winding up by the Court:If the Court has ordered liquidation, the liquidator, once he hascompleted the winding up, will request that a meeting be held for

all of the creditors so that he can produce his report on the windingup. The attendants at the meeting will consider the report and itscontents and whether or not it should be released. After themeeting, the liquidator must notify the court and the Registrar thatthe meeting did in fact take place and also what the outcome was.The Registrar will register the notice once he receives it and at theend of a three-month period after the registration, the company willbe officially dissolved.Voluntary winding up:The liquidator will send what is known as the final account andreturn to the Registrar. After this, a period of three months willfollow and after this period, after the registration of the finalaccount and return, the company will be considered to be dissolvedunless the court, by way of an application by the liquidators oranother interested party, orders the deferment of the dissolutiondate.Re-organisation plan:If the directors of the company decide to reorganise or restructurethe company, the outcome will be dependent upon the particulardecisions that have been taken. It may be that the result is that twocompanies merge or that they undertake a joint venture. Thedesired outcome of such procedures will ultimately be that thefinancial difficulties that the company was facing are solved or atthe very least, that a plan is implemented which sets out a timeframe for various steps to be taken to begin working on the financialdifficulties.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Cyprus? In what circumstances might this bepossible?

It may be possible to avoid liquidation if the company is still in aposition to be able to pay its debts. There are various ways in whicha company’s members can be advised regarding restructuring inorder to avoid a formal procedure for liquidation/winding up. Onesuch way to enter into a restructuring plan is to appoint a ReceiverManager. Any creditor of a company can request that a ReceiverManager be appointed. The appointment of a Receiver Manager isan alternative to the formal winding up procedures and is governedby the Companies Law, Cap 113 Part VI. It is also possible for thecompany and all of its creditors to enter into an unofficialrestructuring agreement, which involves all of the creditors of thecompany and the members meeting and discussing and coming toan agreement on a solution.In recent years, it has become noticeable that more attempts arebeing made to move away from formal insolvency proceedings andpreference is being shown for corporate recovery via therestructuring of the company’s finances by means of negotiationsbetween the company that is in difficulty and its creditors. Webelieve that there are numerous reasons for the shift in preference.However, it can be said that one of the main reasons may be theinflexibility of formal proceedings. A restructuring is not astatutory remedy and therefore gives an amount of flexibility,however, it does have some limitations. For example, there are nostatutory mechanisms in such a restructure which will compel adissenting creditor to participate. This may then lead to a formalprocedure being initiated.



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A full review of the ways in which alternative forms of restructuringand re-organisation can occur are outside the scope of this generalintroduction. However, it is possible to reorganise a debtor in astrategic manner rather than realise its assets and business. Such asolution requires in-depth legal advice due to the potential legalcomplexities involved.

7.3 Is it possible to achieve an expedited restructuring of thedebtor by means of a pre-packaged sale? How is such asale affected?

Please see the answer above.

8 International

8.1 What would be the approach in Cyprus to recognising aprocedure started in another jurisdiction?

In answering this question, it is highly relevant to note that Cyprusis a Member of the EU. If the procedure were started in anotherMember State, it would be recognised in Cyprus from the time thatthe judgment is effective in the issuing Member State, the reason forthis being that all judgments issued in one EU Member State mustbe recognisable in other Member States without any formality. Thisis noted in European Regulation 1346/2000, which governs suchmatters in all Member States.It is also worth noting that Cyprus is party to several bilateralagreements for the reciprocal enforcement of judgments.If, on the other hand, the judgment is given in a non-Member State,the judgment can only be recognised through a process ofvalidation, which can be obtained through an application beingmade to the Cyprus court.

Yiannos G. Georgiades

Georgiades & Mylonas2, Ayios Pavlos & Kadmos StreetWisdom Tower, 3rd Floor, P.O.Box 24144 1701 Nicosia Cyprus

Tel: +357 22 819292Fax: +357 22 778444Email: [email protected]: www.gmadvocates.com

Mr Yiannos G. Georgiades was born in Nicosia, Cyprus in 1965. Hewas educated at Ealing College of Higher Education (LLB Hons)1989, Inns of Court School of Law, Honourable Society of Gray’sInn, London (Barrister-at-Law) 1990. After his graduation, hegained hands- on experience working at a City of London solicitor’sfirm prior to moving to Cyprus. In 1995, he also worked as visitingattorney at Corboy & Demetrio in Chicago and at Baker & Hostetlerin Washington, DC in the United States. He founded the law firm Yiannos G. Georgiades & Co in 1992,which in 2006 merged with another firm to become Georgiades &Mylonas Advocates & Legal Consultants with Yiannos Georgiades asthe Managing Partner; he has also recently established a London-based solicitors’ practice in the UK. Specialisation: Corporate and commercial law, international trade,private international law, international tax planning, EU Law,medical negligence, personal injury, intellectual property, maritimelaw, litigation. Languages: Greek and English.

Rebecca E. Howarth

Georgiades & Mylonas2, Ayios Pavlos & Kadmos StreetWisdom Tower, 3rd Floor, P.O.Box 241441701 Nicosia Cyprus

Tel: +357 22 819292Fax: +357 22 778444Email: [email protected]: www.gmadvocates.com

Miss Rebecca E. Howarth was born in Manchester, United Kingdomin 1985. She was educated at Keele University (LLB Hons) 2006,BBP Professional Education Manchester 2007. During her studies,she gained experience via working at several local general practicefirms. After her graduation and practice course, she moved toCyprus in 2007, where she began working at Georgiades & MylonasAdvocates & Legal Consultants, focusing mainly on corporate andcommercial law. She continues to develop her knowledge throughcontinued professional development courses and is currentlyundertaking her masters through a UK University.Specialisation: Business law, corporate and commercial law, EUlaw, international trade, intellectual property, property and realestate law.Languages: English.

Managing Partner: Mr Yiannos G. GeorgiadesSenior Partner: Mr Anastasios Z. MylonasLegal and Administration Enquiries: Miss Rebecca E. HowarthOther Offices: Larnaca, London, UK

The firm was established in 1992 by Yiannos G. Georgiades. As of January 1, 2006, Yiannos G. Georgiades & Co.merged with the law firm of Anastasios Z. Mylonas, the result being the formation of Georgiades & Mylonas, Advocates& Legal Consultants. The Firm has recently established a solicitors’ firm in London, in the UK.

Over the last 16 years, the firm has grown and developed and now offers the diverse professional skills of qualifiedlawyers, legal consultants and legal assistants. These skills and attributes combine together to provide flexible andviable solutions to meet the needs and requirements of its clients both in Cyprus and worldwide.

The firm’s associates speak a number of different languages, all of whom speak English. Most also speak Greek andanother language covered is Russian so the firm therefore has the capacity to work with clients from abroad comfortablyand confidently, ensuring that the client’s language requirements can be met.



ChapterChapter 10

White & Case

Czech Republic


1.1 How does a creditor take security over assets in the CzechRepublic?

Czech law distinguishes between the creation and perfection ofsecurity. While security over assets is created when a securityagreement is concluded, for the perfection of security, it usuallyinvolves either registration in the respective registry and/or thehand-over of the secured assets. The fundamental types of security instruments include (i)mortgages over a real estate, (ii) pledges of movable assets andother kinds of assets, such as receivables, a functioning business inits entirety, securities or intellectual property rights, and (iii)security transfers of rights.A mortgage over real estate is perfected by means of its registrationin the Cadastral Register. Regional Cadastral Offices review boththe content and form of the mortgage agreement before decidingwhether to register it. The date of registration is decisive in termsof priority of satisfaction; the earlier in time, the higher the priority. The pledge of movable assets is perfected upon the transfer ofpossession of the property to the pledgee or a third party custodian.A pledge of movable assets may also be perfected by virtue of theregistration of the pledge in the Register of Pledges, subject to thepledge agreement being concluded in the form of a notarial deed.A contractual pledge over a business operating as a going concernrequires the execution of a pledge agreement in the form of anotarial deed. The pledge is perfected upon its registration in theRegister of Pledges.The pledge of receivables is not effective until the debtor is notifiedin writing by the pledgor, or until the pledgee proves the existenceof the pledge to the debtor. If the underlying agreement concerningthe pledged receivables restricts the assignment or pledge of suchreceivable, the consent of the respective debtor is required for thepledge of the account receivable. The pledge of securities in book-entry form is perfected uponregistration in the Securities Center. In the case of a certificatedsecurity, the pledgor must also endorse the pledge on the reverseside of the security certificate. The pledge is perfected upon thetransfer of the possession of the certificated security to the pledgeeor a third party custodian.Furthermore, financial claims may be secured by so-called financialcollateral. Directive 2002/47/EC of the European Parliament and ofthe Council on financial collateral arrangements has beenimplemented in the Czech Republic. To qualify for the regime of

financial collateral, the entity must exceed two of the followingcriteria: (i) assets over CZK 600,000,000 (approx. EUR20,000,000); (ii) net turnover exceeding CZK 1,200,000,000(approx. EUR 40,000,000); and (iii) net equity exceeding CZK60,000,000 (approx. EUR 2,000,000).


As a general rule, any action taken by a debtor may be declared“ineffective towards creditors” by an insolvency court, if it were toprejudice the creditors’ rights. The grounds for opposing a legal actarise in the event that:(a) a transaction is effected without respective consideration, i.e.

a transaction where the usual consideration in a similartransaction is significantly higher;

(b) a transaction results in preferential treatment, i.e. prematurerepayment of the obligations of only some creditors, etc.; or

(c) a transaction aims to deprive the creditors of certain benefits,provided that the debtor intended to do so and that thecounterparty to the transaction had or should have hadknowledge of this intention.

The types of transactions under Points (a) and (b) are vulnerable toattack if (i) they were undertaken during the one-year period priorto the commencement of insolvency proceedings, or a three-yearperiod if the transaction was made for the benefit of a personaffiliated with the debtor, or (ii) they were undertaken by the debtorwhen insolvent, or consisted of a legal act resulting in the debtor’sinsolvency. In respect of the transactions listed under Point (c)above, a five-year period applies. The insolvency trustee may commence proceedings against personswho benefited from such transactions within a year from thedeclaration of insolvency. Individual creditors are not allowed tocommence such proceedings, but the creditors’ committee maycommit the insolvency trustee to do so.Furthermore, as of the commencement of insolvency proceedings,the debtor, among other things, is not allowed to:(a) execute or enforce any security instrument which would be

covered by his assets; or(b) dispose of his assets by means of which the composition,

utilisation or determination thereof might be substantiallyaltered, or by which their value might be diminished to morethan a negligible degree, excluding exempt transactions,such as transactions pursued in the ordinary course ofbusiness or to avert impending damage.

Transactions contravening the above restrictions are deemed to beineffective vis-à-vis creditors.

Aleš Zídek

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White & Case Czech Republic

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in the Czech Republic?

Directors (members of the board of directors in a joint stockcompany or executives in a limited liability company) are obligedto commence insolvency proceedings with the respective courtwithout undue delay when they learn of the insolvency, or shouldhave learned of the insolvency had they exercised due care. If directors fail to comply with the above obligation, they are liablefor any loss suffered by the creditors. It is presumed that the loss isequal to the portion of the claims that were duly registered and werenot satisfied in the insolvency proceedings.A director may be exculpated if he proves that the breach of duty tofile the insolvency petition had no impact on the amount intendedfor satisfaction of the claim lodged by the creditors in theinsolvency proceeding, or that the duty was not fulfilled due to factsthat had occurred independently of his will and that could not havebeen averted, even if he had exerted his best efforts.A grave violation of a director’s duties may amount to a criminaloffence punishable by imprisonment.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in the Czech Republic?

The Insolvency Act provides for two types of proceedings, whichare liquidation-bankruptcy proceedings and reorganizationproceedings. Liquidation bankruptcy (konkurs) predominantly aims to sell-offthe property of the debtor and distribute the proceeds of the sale tocreditors. Liquidation bankruptcy ultimately ends with theliquidation of the insolvent company. Reorganisation (reorganizace) is a new form of insolvencyproceedings in which the debtor or creditors prepare, the creditorsapprove and the insolvency court confirms a reorganisation plan,pursuant to which the debtor is restructured and the creditors’claims are satisfied.

2.2 What are the tests for insolvency in the Czech Republic?

Insolvency is tested by means of balance sheet and liquidity tests.If the debtor passes either of them, it is deemed to be insolvent. The liquidity test requires the debtor:a) to have multiple creditors;b) to have due and payable monetary debts, which are overdue

for more than 30 days; and c) to be unable to satisfy such debts.For the purposes of the liquidity test, the debtor is deemed unableto satisfy its monetary obligations if the debtor: a) has suspended payments under a substantial portion of its

payment obligations; b) is in default in the payment of the same for more than 3

months past the due date; c) it is impossible to satisfy certain due and payable obligations

of the debtor by the enforcement of a decision or byexecution; or

d) the debtor failed to submit a list of assets and liabilitiesrequired by the insolvency court.

The balance sheet test requires the debtor:

a) to have multiple creditors; and b) the sum of its liabilities exceeds the value of its assets (the

further management of such assets, or the further operationof its business, is taken into account).

An amendment to the insolvency law has been approved by theGovernment and is being discussed in the Parliament. Theamendment would allow companies not to file for the insolvency ifthey do not meet the balance sheet test but else their liquiditysuffices.


Liquidation bankruptcy is the default procedure for businesscompanies, which do not qualify for reorganisation procedures oron which the creditors voted that liquidation bankruptcy proceduresshould apply.Debtors in the process of liquidation, securities traders orcommodities traders automatically do not qualify for reorganisationproceedings. Furthermore, unless the debtor applies for a pre-packaged reorganisation (pre-approved reorganisation plan by themajority of secured and unsecured creditors), the debtor onlyqualifies for reorganisation procedures if its total revenues in thelast accounting period preceding the insolvency petition reached aminimum of CZK 100,000,000, or it employs more than 100employees.


Insolvency proceedings are technically divided into two phases. In thefirst phase, the insolvency court decides whether the debtor isinsolvent or whether the debtor is under an imminent threat ofinsolvency. In the second phase, the insolvency court decides whetherliquidation bankruptcy or reorganisation procedures should apply. If insolvency is declared and the debtor does not qualify forreorganisation, the insolvency court automatically decides on theliquidation bankruptcy of the debtor. If the debtor files a duly pre-approved reorganisation plan with theinsolvency court, the insolvency court allows the reorganisation,unless other formal requirements have not been satisfied. In the case of large companies (see the revenue and employeethresholds in question 2.3 hereof), which apply for reorganisationand do not have a pre-approved reorganisation plan, the insolvencycourts call the creditors’ meeting, which may vote on whetherliquidation bankruptcy or reorganisation procedures should apply.If a sufficient number of creditors vote for liquidation bankruptcy,the insolvency court is, in principle, bound by the vote and decideson liquidation bankruptcy.


In general, all formal notices made in insolvency proceedings arepublished in an electronic online Insolvency Register. This includesnotices on the commencement of proceedings, the appointment ofthe insolvency trustee, the decision of the insolvency court onliquidation bankruptcy or reorganisation, and the dates of courthearings and creditors’ meetings, etc.In order to ascertain the creditors’ opinions during the insolvencyproceedings and to perform various rights of the creditors in thebankruptcy proceedings, the meetings of the creditors are convened.

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In principle, all creditors who duly lodged their claims, which werenot contested by the insolvency trustee, may vote at the creditors’meetings. The insolvency court may decide on a vote exemptionfor contested creditors. Creditors’ meeting are, among other things,allowed (i) to elect and revoke members of the creditors’ committee(the unsecured creditors elect half of the members, while the otherhalf is elected by the secured creditors), (ii) to replace theinsolvency trustee, and (iii) to decide on the method of insolvencyproceedings (i.e. liquidation bankruptcy or reorganisation). Thecreditors’ meetings may be convened by the insolvency trustee, bythe insolvency court, by the creditors’ committee or by creditorswhose voting rights represent more than 10% of all voting rights.Liquidation Bankruptcy ProceedingsAs discussed above, creditors are notified of the commencement ofliquidation bankruptcy proceedings through the InsolvencyRegister. Creditors may decide at the creditors’ meeting whetherthe debtor’s assets should be sold by the insolvency trustee perpartes or as a going concern. The trustee is bound by the creditors’decision.During liquidation bankruptcy, the insolvency trustee regularlyreports to the insolvency court and the creditors’ committee on thestatus of the sale of the debtor’s assets. Creditors may instruct theinsolvency trustee to prepare a special report on the status of thesale. At the end of the liquidation bankruptcy proceedings, theinsolvency trustee prepares a so-called Final Report, in which hesummarises what the proceeds of the sale are and how they are tobe distributed among creditors. The Final Report is reviewed by theinsolvency court and is published. Creditors are allowed tocomment on the Final Report, and their comments are heard by theinsolvency court.Reorganisation ProceedingsAs discussed above, creditors are notified of the commencement ofreorganisation proceedings through the Insolvency Register, and incertain cases are allowed to vote to terminate the reorganisation. The creditors’ committee actively participates in the operation ofthe debtor’s business by approving transactions that have asubstantial impact on operations. For those purposes, thecommittee is to be provided with the necessary information.Prior to the date of the creditors’ meeting at which thereorganisation plan is to be voted on, the creditors receive a copy ofthe reorganisation plan and a written disclosure statement approvedby the insolvency court as containing adequate information.

3 Creditors


As of filing the insolvency petition, the debtor loses the capacity tobe sued by third parties. All claims against the debtor must besubmitted to and registered by the insolvency court. Unsecured creditors:a) in liquidation bankruptcy proceedings are paid out from the

proceeds of the sale of the estate; andb) in reorganisation proceedings receive the amounts set forth

in the reorganisation plan. The reorganisation plan may alterthe rights of the unsecured creditors (i.e. reduce the claim,satisfy the claim in installments or by the issuance ofsecurities, etc.).

In general, unsecured creditors have the right to control half of themembers of the creditors’ committee in both proceedings.

Unsecured creditors also control whether the debtor should bereorganised or liquidated, since when the creditors vote, they aredivided into classes of secured and unsecured creditors. A majorityof both classes (by the nominal value of the claims) or a 90%majority of all creditors (by the nominal value of the claims) isrequired.


As discussed in question 1.2 hereof, as of filing the insolvencypetition, an automatic stay applies to the execution and enforcementof any security instrument in both proceedings, i.e. liquidationbankruptcy and reorganisation proceedings.The value of the assets that were provided as security may be set byan independent expert, upon which the secured creditors areassumed to be “secured” only up to the amount set by the expert inthe valuation. This procedure mainly affects voting at the creditors’meetings, the allocation of proceeds from the sale of debtor’s assetsby way of a “sale as a going concern” in liquidation bankruptcyproceedings, and interest payments. The expert valuation has noeffect on the allocation of proceeds from the sale of the debtor’sassets by way of per partes sale in liquidation bankruptcyproceedings.Liquidation Bankruptcy ProceedingsThe insolvency trustee administers the debtor’s assets that wereprovided as security to the secured creditors and arrange for theirsale. The insolvency trustee is, in principle, bound by theinstructions of the secured creditors in respect of the manner of theadministration and sale of the secured assets. The secured creditors are entitled to all proceeds of the sale of therespective secured assets after the deduction of up to 5% as the costfor the organisation of the sale, and up to 4% as the cost for theadministration of the assets. The secured creditors and theinsolvency trustee may agree on the payment of any costs over thecaps of 5% and 4%.Reorganisation ProceedingsFor the purposes of reorganisation proceedings, the securedcreditors are assumed to be “secured” only up the amount set by theexpert in the valuation of the debtor’s assets, while the remainingportion of their claim is treated as an unsecured claim.The secured creditor is entitled to receive an interest payment thataccrued on the secured portion of his claim after the declaration ofinsolvency in amount of the agreed pre-insolvency interest rate(excluding default interest). The interest is payable monthly as ofthe date of the expert valuation.The reorganisation plan may alter the rights of the secured creditors(i.e. reduce the claim, satisfy the claim in installments or by theissuance of securities, allocate to them a different security, etc.).


Prior to the declaration of insolvency, set-offs may be pursued freeof any insolvency constraints. After the declaration of insolvency, set-offs are also permitted, butare subject to constraints and requirements, such as:(a) a creditor is not allowed to set-off claims that have been

acquired through an ineffective legal act (see question 1.2hereof) or claims, which the creditor acquired with theknowledge of the debtor’s insolvency;



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(b) a claim must be registered prior to the set-off; and(c) a creditor must pay to the estate any sum which exceeds the

creditor’s claim qualifying for the set-off.The above set-off principles apply in liquidation bankruptcyproceedings, as well as in reorganisation proceedings.



Liquidation Bankruptcy ProceedingsAs of the date of the court decision on the commencement ofliquidation bankruptcy proceedings, the debtor is not allowed todispose of the assets of the estate. Only the insolvency trustee hascontrol over the estate and exercises all the rights pertaining to thedebtor’s assets. The insolvency trustee is supervised by thecreditors’ committee. Reorganisation ProceedingsIn reorganisation, the debtor remains in control of the business as“debtor in possession”, unless the insolvency court imposesrestrictions on the debtor’s in possession rights. The insolvencycourt may restrict the debtor’s in possession rights typically in casesof mismanagement or fraud. The creditors’ committee approvestransactions of the debtor in possession that have a substantialimpact on operations. Shareholders’ general meetings are suspended and the rights thereofmay be performed by the insolvency trustee. In principle, thedirectors of the debtor may only be superseded by a joint decisionof the shareholders and the creditors’ committee.


Liquidation Bankruptcy ProceedingsIn general, the company finances the costs of the proceedings out ofits remaining assets. In theory, the insolvency trustee may enter intonew loan agreements, but in practice this would be realistic only ifthere were a chance to sell the debtor’s business as a going concern.The insolvency court may order the person that initiated insolvencyproceedings to pay an advance for the costs.Reorganisation ProceedingsThe debtor in possession may conclude loan agreements, whichwould provide fresh financing, with the approval of the Creditors’Committee. Those transactions automatically have “super-priority”, i.e. a lien on encumbered property that is equal to existingliens, and a high priority over other unsecured creditors. Theoriginal secured creditors have the right of first refusal to provide“super-prioritised” financing.Securities issued under a confirmed reorganisation plan (for furtherinformation about the confirmation of the plan, see question 6.1hereof) are exempt from the securities law regulations on publicofferings.


In general, liabilities of the debtor as an employer towards itsemployees have the status of priority claims (for further informationon preferential claims, see question 5.2 hereof). Furthermore, somerestrictions provided for by labour laws either do not apply or areloosened. In liquidation bankruptcy proceedings, all rights to act on

behalf of the debtor in terms of employment relationships pass tothe insolvency trustee. In reorganisation proceedings, those rightsare exercised by the debtor in possession, unless the insolvencycourt imposes restrictions on the debtor’s in possession rights (forfurther information about the debtor’s in possession rights, seequestion 4.1 hereof).


Liquidation Bankruptcy ProceedingsThe regulation of liquidation bankruptcy proceedings allows for anumber of alterations of agreements concluded by the debtor priorto the declaration of the liquidation. Below is a summary of onlycertain of them. In principle, if the contract between the debtor and another party isnot fully discharged as of the declaration of liquidation bankruptcyby neither the debtor or the other party, the insolvency trustee mayeither fulfill the agreement for the benefit of the debtor and demandthat the other party fulfill the agreement as well, or may withdrawfrom the agreement. If the debtor entered into a contract on lending a particular item ofhis property, the insolvency trustee is entitled to request that theitem be returned even before the lapse of the agreed period.The insolvency trustee is entitled to rescind a lease contract or sub-lease contract to which the debtor is a party; the notice period shallnot exceed 3 months. On the other hand, if such a contract has beenconcluded by the debtor as a lessee or sub-lessee, the contractcannot be terminated or withdrawn from by the other party on thegrounds of the debtor defaulting on the payment prior to the rulingon insolvency or due to the deterioration of the debtor’s financialsituation.Reorgansation ProceedingsThe regulation of liquidation bankruptcy proceedings does notallow the debtor in possession or the insolvency trustee tounilaterally alter or terminate contracts. Therefore, forreorganisation proceedings, pre-insolvency standards apply withregard to the alteration and termination of contracts.

5 Claims


The statutory procedure for how creditors can claim those amountsowed to them is, in principle, the same in each proceeding, i.e. inliquidation bankruptcy proceedings and reorganisation proceedings.Each creditor must register its claim in a due and timely manner byvirtue of a statement of claims. The same holds true with respect tocontingent, as well as secured, debts. The statement of claims must be submitted to the insolvency courtby way of a prescribed form that has been filled in within the periodof time set forth by the court in the decision on the declaration ofinsolvency. The failure to meet the deadline cannot be remedied.Late registrations are disregarded by the insolvency court, and thoseclaims are not satisfied in the insolvency proceedings. The claimsmust be stated in Czech Crowns, and the statement of claims mustbe accompanied by relevant documents proving its legality. Theinsolvency trustee examines the claim submissions, drafts a list ofclaims, and contests disputable claims at the court review hearing.The debtor may also contest creditors’ claims. Creditors are not

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allowed to contest claims of other creditors. Contested claims arelitigated before the insolvency court.If it comes out that the real amount of a registered claim is less than50% of the amount submitted by the creditor, all such registeredclaim is disregarded for the purposes of the insolvency proceedings.The insolvency court may order the creditor who submitted suchclaim to pay in favor of the property of the estate the amount bywhich the registered claim exceeded the amount actuallyascertained.


The ranking of claims is in principle the same in each proceeding,i.e. in liquidation bankruptcy proceedings and reorganisationproceedings.Secured debts are satisfied from the proceeds of the sale of thedebtor’s assets that operated as the respective security (for furtherinformation on secured claims, see question 3.2 hereof). Theremaining debts are satisfied depending on their priority.Preferential claims are satisfied first, followed by any remainingunsecured claims, and finally by subordinated debts.Preferential claims include various administrative costs, taxes, fees,customs duties, social insurance, contributions to the stateemployment policy and public health insurance payments, claims ofcreditors stemming from agreements entered into by the debtor inpossession or the insolvency trustee, claims of the debtor’semployees stemming from their labour law relationship with thedebtor, provided such claims arose in the last 3 years preceding theruling on insolvency, or after the ruling on insolvency, claimsstemming from statutory alimony, etc.If the proceeds from the liquidation of the property of the estate donot suffice to satisfy all preferential claims, the remuneration andout-of-pocket expenses of the insolvency trustee shall be paid first,followed by preferential creditors’ claims (including debtor inpossession financing), then the costs of the maintenance andmanagement of the property of the estate, and then creditors’ claimsin respect of child support under the law. Other preferential claimsare satisfied pro rata.Remaining unsecured claims are satisfied pro rata. Subordinateddebts are satisfied according to the status and level of thesubordination.


Generally, during each procedure, the tax regime for companiesremains the same as if no insolvency proceedings were beingconducted, with the below mentioned exceptions.Corporate Income TaxIn reorganisation proceedings, income from the write-off ofpayables is exempt for the debtor, and any expense from the write-off of receivables is tax deductible for the creditor.In reorganisation proceedings, all income earned in the period inwhich the resolution on reorganisation proceedings was taken, andin the subsequent period (if the reorganisation proceedings were notterminated in this subsequent period) is exempt.Unlike in normal situations, the taxpayer in insolvency proceedingsis not obliged to increase its tax base by the value of outstandingpayables due more than 36 months ago.

Real Estate Transfer TaxThe real estate transfer tax liability is shifted from the seller to thebuyer. Unlike in normal situations, the buyer holds the real estatetransfer tax liability (at the rate of 3% of the price for real estateachieved in a public auction or in a separate sale).Where the real estate is sold by the seller in the reorganisationproceedings, there is an exemption from the real estate transfer taxapplied on transfers of real estate to creditors or a newlyincorporated company, in which creditors have shares.Certain real estate transfer tax exemptions can be preserved inreorganisation proceedings, even if conditions for such exemptionsare not fulfilled.Regime of Tax LiabilitiesTax liabilities arising since the effective day of the resolution oninsolvency until the end of the insolvency proceedings areconsidered as tax liabilities against assets subject to the insolvencyproceedings.Tax liabilities that arose before the effective day of the resolution oninsolvency are considered as tax liabilities with the entitlement tobe satisfied from a pledge or other tax liabilities.Tax overpayments arising since the effective day of the resolutionon insolvency cannot be offset against tax underpayments that arosein tax periods before this day.Tax underpayments claimed in the insolvency proceedings are notpenalised, and tax execution cannot be carried out.Tax and Accounting ComplianceA taxpayer is obliged to file corporate income tax and VAT returns:

as of the day on which the resolution on insolvency takeseffect for the (part of) taxable period preceding that day;as of the day of the transfer of the entitlement to dispose ofthe assets subject to the insolvency proceedings from theinsolvency trustee to the taxpayer and vice versa (forcorporate income tax purposes only) for the (part of) taxableperiod ending on this day; andas of the day on which the insolvency proceedings end forthe (part of) taxable period ending on this day.

Otherwise, the tax period for VAT purposes in insolvencyproceedings is always a calendar month.A company is obliged to close its accounting books and prepare thefinancial statements as of the day:

preceding the day on which the resolution on insolvency orthe resolution on a change of the reorganisation proceedingsinto bankruptcy proceedings takes effect;when the cancellation of bankruptcy proceedings takeseffect;preceding the day on which the approval of thereorganisation plan takes effect; andwhen the fulfillment of the reorganisation plan takes effect.

Unless the creditors’ committee decides otherwise, the financialstatements do not have to be audited (i) in the course of thebankruptcy proceedings (for 36 months starting on the dayfollowing the day on which the bankruptcy proceedings take effect)and (ii) as of the day preceding the day on which the approval of thereorganisation plan takes effect. Furthermore, the financialstatements do not have to be audited if the bankruptcy proceedingsare cancelled due to a lack of debtor’s assets.A company is obliged to prepare an opening balance sheet on thefollowing day.



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Liquidation Bankruptcy ProceedingsThere is no process of “cramming down” creditors in liquidationbankruptcy proceedings.Reorganisation proceedingsIn reorganisation proceedings, the creditors vote on thereorganisation plan. For those purposes, the reorganisation plandivides claims into classes. Each class of creditor accepts the planwhen more than half in number and those holding more than half ofthe amount of allowed claims approve the plan. The classes ofshareholders accept the plan when more than half in number andthose holding more than two-thirds of the amount of the allowedclaims approve the plan.It is possible for more than one plan to be filed and accepted,although only one plan may be confirmed by the insolvency court.Standards for the confirmation by the insolvency court vary if theplan is accepted by every class or by less than every class. If the plan is accepted by every class of creditor, the insolvencycourt confirms the plan if:a) the plan complies with the insolvency and other applicable

laws;b) the plan is proposed in good faith;c) each holder of a claim receives an amount under the plan that

is not less than the amount that such holder would receive ifthe debtor were liquidated in liquidation bankruptcyproceedings; and

d) all preferential claims are to be paid without undue delayafter the effective date of the plan.

If the plan is accepted by less than every class of creditor, theinsolvency court confirms the plan if the confirmation requirementsapplicable for the plan accepted by every class are satisfied and:a) the plan was accepted by at least one of the unimpaired class

of creditors;b) the plan is fair and equitable;c) the plan does not unfairly discriminate; ord) the confirmation of the plan is not likely to be followed by

the insolvency of the debtor.


Liquidation Bankruptcy ProceedingsThe court decides on the termination of liquidation bankruptcyproceedings upon a request of the trustee, once all proceeds fromthe sell-off of the debtor’s assets are distributed in accordance withthe Final Report. The decision of the court is published in theInsolvency Register. After the termination of the liquidationbankruptcy proceedings, the debtor-business company is liquidatedand deregistered from the Commercial Register.Reorganisation ProceedingsAfter confirmation of the reorganisation plan by the insolvencycourt (see question 6.1 hereof), the debtor’s performanceobligations are governed by the terms of the plan. The terms of theplan also commit the debtor’s creditors and shareholders. The

confirmation of the plan operates as a discharge. When allobligations or all substantial obligations of the debtor are satisfied,the insolvency court declares the reorganisation proceedingsterminated.The reorganisation proceedings may, however, also be terminatedand the proceedings converted into liquidation bankruptcyproceedings if, among others:a) the insolvency court does not confirm the plan and the period

for the submission of other plans has expired;b) the debtor does not pay the interest on the secured portion of

its debts; orc) the debtor after the confirmation of the plan does not meet a

substantial portion of its obligations.


7.1 Is it common to achieve a restructuring outside a formalprocedure in the Czech Republic? In what circumstancesmight this be possible?

Private workouts used to represent a significant alternative to perpartes sales for companies in financial distress, since the oldinsolvency laws did not allow for effective court supervisedreorganisation proceedings. In the past, a few large companies weresuccessfully restructured. As in other jurisdictions, the greater thevalue of a going concern as compared to the liquidation value of thebusiness, the involvement of experienced creditors and reasonableprospects for the sale of the business increase the chances of asuccessful restructuring.


Subject to conditions mentioned in question 2.3 above, a debtormay be reorganised. Large companies may be reorganised regardless when thereorganisation plan is negotiated. For small and mediumbusinesses, the prepackaged reorganisation (approved by majorityof secured and unsecured creditors in advance) is only way how toavoid liquidation bankruptcy.


A debtor may pre-negotiate a reorganisation plan with his creditorsand pursue the prepackaged reorganisation. If the reorganisationplan is approved by all creditors’ classes in advance, the insolvencylaw allows for shortened proceedings.

8 International

8.1 What would be the approach in the Czech Republic torecognising a procedure started in another jurisdiction?

The EC Regulation on Insolvency Proceedings applies in the CzechRepublic.

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Petr Kuhn

White & CaseNa Príkope 8Prague 1, 110 00Czech Republic

Tel: +420 255 771 236Fax: +420 255 771 122Email: [email protected]: www.whitecase.com

Petr Kuhn is a Czech advocate who specialises in restructuring,securities, and mergers & acquisitions. Since joining White & Casein 1997, he has been involved in many significant transactions inthe above-mentioned areas that have been handled by the Pragueand London offices of White & Case. As a member of the InsolvencyLaw Committee of the Czech Ministry of Justice, Mr. Kuhn wasresponsible for creating the concept and drafting the part of theinsolvency law related to business restructuring. In the past, he tookan active part in drafting amendments to the Czech CommercialCode, Securities Act, and Capital Markets Act.

Aleš Zídek

White & CaseNa Príkope 8Prague 1, 110 00Czech Republic


Aleš Zídek’s practice involves mergers and acquisitions,reorganisations, namely energy and telecommunication industryfocus, private equity, international tax, and general Czech corporateand personal tax consultancy. Among other things, Mr. Zídek hasadvised on the tax aspects of financial transactions involvingprimary issues of securities, inter-company financing structures withinternational, in particular Dutch, aspects, structuring, and licensingwithin international groups of companies. Mr. Zídek has beenproviding tax advisory services to clients in the Czech Republic aswell as abroad for more than 10 years. Prior to working in White &Case Mr. Zídek worked in Arthur Andersen. Mr. Zídek is a memberof the Chamber of Tax Advisors, Czech Republic as well as of theCorporate Tax Committee within the International Fiscal Associationin Czech Republic.

White & Case LLP is a leading global law firm with 34 offices in 23 countries in America, Europe, Asia and Africa. Ourclients value the breadth and depth of our US, English and local law capabilities and rely on us for their complex cross-border commercial and financial transactions and for international arbitration and litigation. As a recognized leader incomplex cross-border insolvencies and workouts in the Czech Republic, our financial restructuring and insolvency grouphas been involved in many of the largest cases in the Czech Republic representing clients in all aspects of restructurings,workouts and insolvency matters, in a wide range of industries.

In April 2009 White & Case was named the Eastern European Law Firm of the Year Acquisition Finance Magazine.International Financial Law Review named the Prague office if White & Case the Czech Law Firm of the Year 2009 inMarch.


58

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Chapter 11

Gorrissen Federspiel Kierkegaard

Denmark


1.1 How does a creditor take security over assets inDenmark?

Security over assets can be obtained by agreement between thecreditor and the debtor. Protection from third party claims calls foran act of perfection to be performed depending upon the nature ofthe asset involved. Security granted over real and personalproperty, including motor vehicles, must be recorded in the officialregistry system. Security in debts is achieved by notification to thedebtor. In certain instances, perfection may be accomplished bytaking possession of the asset.It is also possible to grant a floating charge in the form of acompany charge providing security over the various assets ownedby a company from time to time, including inventories. Moreover,a floating charge can be granted in the form of a receivables chargeproviding security in amounts owed to the company. Protectionagainst third party claims is obtained by recording in the registry.

1.2 In what circumstances might transactions entered intowhilst the company is in financial difficulties bevulnerable to attack?

Most rules governing avoidance are laid down in the DanishBankruptcy Act. During bankruptcy proceedings, transactionsmay be avoided if they impair the creditors’ general position orresult in some creditors obtaining a more favourable priorityranking to the detriment of other creditors. Most rules governingavoidance are objective in that transactions may be avoidedregardless of whether the debtor was insolvent and regardless ofwhether the creditors may have had any knowledge thereof.However, also a subjective rule governing avoidance exists to theeffect that transactions may be avoided if the debtor at the time ofthe transaction was or became insolvent, and the favoured creditorhad knowledge of both the debtor’s insolvency and the fraudulentpreference.The offering of gifts, payment of unreasonably high amounts forwork and extraordinary repayments of debts as well as provision ofsecurity without a new credit being granted may be avoided forobjective reasons. The transfer of assets that fraudulently givespreference to a creditor to the detriment of the other creditors orthat in general results in the other creditors’ position beingimpaired is subjectively avoidable. The ordinary limitation period for avoidance is three months.

However, as regards transactions carried out with connectedpersons, the limitation period is six or 24 months. For avoidanceunder the subjective rule, in principle no time limit applies.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilsta company is in financial difficulties in Denmark?

The Danish Companies Acts contain provisions concerning theliability of the board of directors and management in companiesthat operate a business in financial difficulties. These rules arefounded on the ordinary principles of Danish law governingliability for damages.A management board that intently or negligently causes financialinjury to a company or its creditors may incur liability fordamages. The management incurs liability if it continues to operate abusiness at a time where it should be evident that the company’soperations cannot possibly be continued without losses beingsuffered by the creditors. The management is usually allowedcertain latitude to test various reorganisation solutions in itsattempt to reconstruct a company.If a criminal offence is committed, the management may as a partof the punishment be disqualified from carrying on businessactivities requiring particular public authorisation or approval.Also, the members of the management board may be disqualifiedfrom acting as members of the management board or the board ofdirectors of a company.

2 Formal Procedures

2.1 What are the main types of formal procedures availablefor companies in financial difficulties in Denmark?

Bankruptcy is the main instrument within the insolvencyproceedings system in Denmark. The debtors’ assets are liquidatedand the proceeds distributed to the creditors pursuant to a priorityranking of claims.In connection with bankruptcy, an estate is established by order ofthe Bankruptcy Court. The Court also appoints a trustee that actsas management and gains full right of disposal of the company. The suspension of payments scheme is aimed at supportingattempts to avoid bankruptcy in favour of debt arrangements. Anotice of suspension of payments is a solution that may be used inorder to obtain a result which offers better prospects for both the

Lars Grøngaard

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Gorrissen Federspiel Kierkegaard Denmark

debtor and his creditors. The suspension of payments scheme doesnot, as such, involve administration of the debtors’ estate.However, a supervisor is appointed by the Bankruptcy Court.The Bankruptcy Act sets out particular rules governing compulsorycomposition arrangements with the company’s creditors.Compulsory compositions schemes are relatively rarely appliedand will not be described in further detail in this article.

2.2 What are the tests for insolvency in Denmark?

A debtor is regarded as insolvent if he is unable to meet hisobligations as they fall due for payment, unless the inability to paymust be considered to be of a temporary nature. The final decisionmust be based on an assessment of the debtor’s liquidity. The factthat a company’s liabilities exceed its assets is not necessarily ofimportance.


Bankruptcy is the creditors’ final resort to collect outstandingamounts. A petition for bankruptcy can therefore be presented byany creditor in a company. Moreover, the company itself may filefor bankruptcy. In order for the Court to pronounce a bankruptcyorder, the debtor must be insolvent.If a debtor finds himself unable to meet his obligations, he can filefor suspensions of payments. The suspension of payments musthave a purpose, e.g., to agree on a voluntary arrangement or acompulsory composition with the creditors or to sell the company’sactivities and subsequently liquidate the company through theformal bankruptcy procedure.


Bankruptcy proceedings are initiated by the creditor’s or thecompany’s filing of a petition for a bankruptcy order to be issuedagainst the company. The debtor’s petition for bankruptcy mustcontain a statement of its assets and liabilities as well as a list ofcreditors. The Bankruptcy Court decides whether to commencebankruptcy proceedings. The debtor must be insolvent.Suspension of payments proceedings are commenced by thecompany’s submission of an application to the Bankruptcy Court.The application must set out the debtor’s proposal for theappointment of a supervisor. The company is presumed to beinsolvent; however, the Bankruptcy Court conducts noinvestigations with a view to verifying if this is actually the case.

2.5 What notifications, meetings and publications arerequired after the company has been placed into eachprocedure?

Immediately after pronouncing the bankruptcy order, theBankruptcy Court appoints a trustee and inserts an announcementin the Danish Official Gazette. The trustee appointed immediatelysends a letter to the company’s creditors informing them of thesituation and encouraging them to file a claim with the estatewithin four weeks. The Bankruptcy Court may at its own initiativeor upon request from a creditor or the trustee decide to convene acreditors’ meeting with the purpose of electing another trustee or acreditors’ committee.After pronouncing a bankruptcy order, the Bankruptcy Court

inserts an advertisement announcing the bankruptcy in the DanishOfficial Gazette that is available on the internet.Three weeks after the bankruptcy order has been pronounced, thetrustee must distribute a preliminary statement of the estate’s assetsand liabilities to the creditors. The preliminary statement must befollowed - as soon as possible and not later than four months afterthe issue of the bankruptcy order - by a balance sheet and a reportdescribing the most important reasons for the bankruptcy,information on accounting figures and on the latest annualaccounts presented as well as a review of any differences betweenthe latest accounts and the balance sheet of the estate inbankruptcy. Meetings for the scrutiny of claims filed will be held by the trustee.If possible, a meeting for the scrutiny of claims should be heldwithin four weeks from the expiry of the four-week period duringwhich the creditors were invited to file their claims. Subsequently, the trustee must present semi-annual accounts on thestate of affairs of the estate. The Bankruptcy Court can convene acreditors’ meeting if deemed necessary. Once the administration ofthe bankrupt estate has been concluded, the trustee prepares thefinal accounts and a proposal for dividend.When a company has applied for suspension of payments, theBankruptcy Court immediately appoints a supervisor. Within oneweek of his appointment, the supervisor will send a letter to allknown creditors announcing the suspension of payments. Theletter must be accompanied by the debtor’s latest annual accounts.The letter must also contain information on the debtor’s mostimportant assets and liabilities, a list of creditors, information onthe debtor’s bookkeeping as well as a statement of the reasons andpurpose of the suspension of payments. A notice of suspension of payments will not be published in theOfficial Gazette. However, all known creditors will be notified ofthe situation. A meeting with the creditors must be held within three weeks fromreceipt of the notice of suspension of payments. At the creditors’meeting, the Bankruptcy Court decides whether to sustain thesuspension of payments scheme. The creditors must be informedof transactions of particular substance contemplated by thecompany with the supervisor’s approval, for instance sale of thecompany’s business activities. The period of suspension ofpayments is three months. The Bankruptcy Court may uponrequest from the company extend the suspension of payments withup to three months at a time. The creditors must be informed ofsuch extensions. The period of suspension of payments can lastone year at the most.The Bankruptcy Court submits a notice of bankruptcy andsuspension of payments to the Danish Commerce and CompaniesAgency and to other public authorities. Therefore, in publicregisters accessible from the internet the company will be recordedas a company in bankruptcy or suspension of payments.Moreover, during both bankruptcy and suspension of payments thecompany must in all written material add the words “inbankruptcy” or “in suspension of payments”, respectively, to itsname so as to signal to outsiders the company’s situation.

3 Creditors

3.1 Are unsecured creditors free to enforce their rights ineach procedure?

During a period of suspension of payments or following the issueof a bankruptcy order, unsecured creditors cannot levy execution



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on the company’s assets with a view to satisfying their claims.This applies to all claims, irrespective of whether they have arisenbefore or during the relevant procedure.


During bankruptcy, it is in principle possible for mortgagees andother secured creditors with a non-avoidable mortgage to enforcetheir security interest. If the claims are ordinary mortgage claims,realisation of the mortgaged assets cannot be effected without thecontribution of the estate in bankruptcy. However, if the estate hasnot within six months after the issue of the bankruptcy ordersubmitted a petition of a forced sale, any mortgagee with anoverdue claim may request that the estate effects a forced salewithout undue delay. Moreover, as regards secured claims, e.g., apledge or the like, the secured claim can be realised directlywithout the bankrupt estate’s cooperation. During suspension of payments, it is the general rule thatmortgagees must enforce their secured right following the normalprocedure. However, this general rule only applies to mortgageclaims that would not be vulnerable to avoidance in bankruptcy. Ifdeemed necessary in the light of the object of the suspension ofpayments, the Bankruptcy Court may decide that no executionshall be levied or satisfaction sought based on such mortgageclaims at the request of the debtor and the supervisor. In such case,the company must pay on a current basis any instalments due inrespect of the secured claims.


Claims incurred prior to the bankruptcy or the suspension ofpayments may be set off against claims also incurred prior to thebankruptcy or the suspension of payments. Similarly, claimsincurred after the bankruptcy or the suspension of payments maybe set off against claims also incurred after the bankruptcy or thesuspension of payments. In contrast, a creditor cannot set offclaims incurred prior to the company’s bankruptcy or suspensionof payments against the company’s claims incurred after thebankruptcy or the suspension of payments has been declared.However, there is access to effect set-off against connected claimsThe Bankruptcy Act contains provisions restricting the access toset off claims, e.g., where one of the company’s debtors acquires acounterclaim at a time where the bankruptcy was imminent.Equally, set-off is not possible in instances where a correspondingpayment would be voidable.



When a bankruptcy order is issued, the debtor loses the right todispose of its assets. Once bankruptcy proceedings have beencommenced, the trustee appointed is in charge of the company andtakes over the duties hitherto performed by the board of directorsand the management. The shareholders have no influence on thecompany as their claim is of no value. During the period of suspension of payments, the shareholders, the

board of directors and the management board retain their usualduties and responsibilities for the management of the company. Asthe company must be assumed to be insolvent, the management’saim in the continued business must be to safeguard the creditors’interests. The Bankruptcy Court appoints a supervisor to supervisethe transactions of the company and the management. Themanagement is not entitled to carry out material transactionswithout the approval of the supervisor.


Costs defrayed in connection with a bankruptcy, such as thetrustee’s fee, are paid from unencumbered cash and proceeds ofassets sales. Under a suspension of payments, the company may useunencumbered cash and proceeds for normal corporate activitiesand additional costs defrayed in connection with suspension ofpayments. Loans against security in the company’s assets may beraised in this respect. It is possible for the company to get a loanfrom the Danish Employees’ Guarantee Fund of up to net DKK55,000 per employee specifically for the payment of wages andsalaries.


The issue of a bankruptcy order or notice of suspension ofpayments has fundamentally no impact on the employees’employment with the company that will continue. During bankruptcy, the trustee decides immediately after the issueof a bankruptcy order whether the employment agreements enteredwith the company’s employees will be affirmed by the bankruptestate. If the bankrupt estate affirms an employment agreement,the estate will be bound by the terms of the agreement, includingthe provisions concerning notice, etc. However, particularprovisions allow a bankrupt estate to adjust very long periods ofnotice to the ordinary period of notice. If the bankrupt estatedecides not to affirm an employment agreement, the employee isentitled to cancel the employment.During a period of suspension of payments, the management andthe supervisor will have to consider whether to dismiss thecompany’s employees or some of the employees if deemedexpedient as a part of a reconstruction or in connection with thesale of the company to a third party. Employees whose wages arepaid in arrears are entitled to demand that the company providessecurity for the first remuneration due from time to time.

4.4 What effect does the commencement of any procedurehave on contracts with the company and can thecompany terminate contracts during each procedure?

A bankrupt estate is entitled to decide whether to affirm or rejectexecutory contracts. In the event that the estate decides to reject anagreement, the other party to the contract may cancel the contractand file a claim for consideration or damages as an ordinaryunsecured claim in the estate in bankruptcy. If the estate decidesto affirm an agreement, the estate will be bound by its terms, andclaims filed by the other party in respect of the agreement rank aspre-preferential claims in the bankrupt estate.If the debtor has entered contracts of a continuing nature withparticularly long notice periods, both the estate and the othercontracting party may cancel the agreement with ordinary orreasonable notice.

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During the period of suspension of payments, the rights andobligations arising out of agreements entered prior to thesuspension of payments continue to apply to the company. Oftenthe parties with whom the company has entered contracts may bein a position to demand that security be provided by the companyfor current payments.

5 Claims


During bankruptcy proceedings, claims held by creditors must befiled with the trustee, and the creditor must provide documentationsubstantiating the claim. In connection with the issue of abankruptcy order, the Bankruptcy Court inserts an advertisement inthe Danish Official Gazette encouraging the creditors to file theirclaims with the trustee within a period of three months. However,this does not prevent a creditor from subsequently filing a claim.The creditors need not file their claims during the period ofsuspension of payments. In order to obtain a satisfactoryfoundation for carrying through a potential reconstruction of thecompany, it is usual practice that the creditors are encouraged tofile their claims.


The ranking of claims is governed by the Danish Bankruptcy Act.The so-called pre-preferential claims, i.e., claims arisen during orin connection with the administration of the bankrupt company,will be met before all other claims according to an order of priority.Next, the secondary pre-preferential claims concerning costsincurred in an attempt to restructure the company and obligationsundertaken with the approval of the supervisor during suspensionof payments will be met. After that, all employee claims andconnected tax claims, etc. will be met as preferential claims. Afterthe employee claims, certain suppliers’ claims will also be met aspreferential claims, i.e., suppliers’ claims for duties on dutiablegoods that must be settled by the supplier regardless of the fact thatthe buyer is a bankrupt company. After the preferential claimslisted above, all other claims are met in equal proportions, i.e., theso-called unsecured claims. Claims secured by mortgage or inother ways will be fully covered to the extent that the securityprovided suffices. After the unsecured claims, deferred claimssuch as interest on unsecured claims will be satisfied in an order ofpriority. Only in rare cases will deferred claims be met. There may be different aims for suspending a company’spayments. One purpose may be to obtain a voluntary orcompulsory arrangement with the company’s creditors. In suchcases, claims will be satisfied in accordance with the specific termsgoverning the arrangement. In other instances, the object will be tosalvage the company and sell it to a third party, whereupon thecompany on its own initiative will be declared bankrupt. In suchcase, the creditors will be met in pursuance of the bankruptcy rules.


Companies in bankruptcy are taxed according to the DanishBankruptcy Tax Act. The taxable income is computed incompliance with the ordinary tax rules. However, the tax

authorities will determine to what extent a positive income issubject to tax. Often bankrupt companies will have sufferedsignificant losses during the years preceding the bankruptcy, andthey therefore rarely have a positive income. Commonly, the taxauthorities will decide that the estate is not to be liable to tax.During suspension of payments, the company is subject to theordinary tax rules.



In bankruptcy cases, creditor approval is not required fortransactions carried out by the trustee. The trustee has a free handto wind up the company’s activities in the best possible way.In a suspension of payments case, the company’s management willcontinue. The supervisor appointed by the Bankruptcy Court mustapprove all material transactions. As regards transactions ofparticular substance, for instance sale of the company’s businessactivities, the supervisor must also obtain creditor approval.Creditor approval is governed by special rules providing amongother things that transactions of particular substance can beeffected only if a majority of the creditors votes in the affirmative.The creditors are granted voting rights in proportion to the size oftheir claim.


Bankruptcy proceedings are normally concluded by the trusteepreparing a statement of affairs with accounts for the bankruptcyand proposal for distribution to the creditors. Once the statementof affairs has been approved and the creditors have receiveddividend of their claims, a request will be made to the DanishCommerce and Companies Agency and other registers to strike offthe company.The suspension of payments period runs for three months and maybe extended, however, not for more than one year from thecommencement of this procedure. If the reorganisation effortscarried out during the suspension of payments period aresuccessful, the suspension of payments regime will bediscontinued, and the company will continue to carry on itsactivities outside the framework of this procedure. However, if thereorganisation efforts are not successful, or if the company’sactivities are sold to a third party, bankruptcy proceedings willusually replace the suspension of payments regime.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Denmark? In what circumstances might thisbe possible?

Danish law allows ample opportunities for companies torestructure within the formal framework, in particular companiesin bankruptcy or suspension of payments. Thus, the scope ofrestructuring efforts outside the framework of the formalprocedures is limited, mainly because informal restructuring mayinvolve significant risks to both the management and to advisors.Informal restructuring may be opted for in connection with a so-called “quiet” suspension of payments that may be chosen because



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an ordinary suspension of payments usually results in significantcosts being incurred as well as publicity on the company’sfinancial difficulties.


It is possible to carry out a reorganisation without selling thedebtor’s assets and activities. This can, for instance, be effected byentering into an agreement involving debt for equity swaps and thedilution of existing shareholders along with further injection offunds.


The sale of a distressed business outside the framework of theformal procedures always involves a risk that creditors unable toobtain coverage may seek to set aside the sale. In order to avoidthis, the following procedure may be followed: (1) withoutsuspending payments or in other ways involving the public,negotiations are conducted with a potential buyer concerning thesale of a distressed business; (2) the company submits abankruptcy petition; and (3) the trustee approves on behalf of thecreditors the sale of the company that will then be effected. In thisway, a pre-packaged sale is combined with a relatively fast formalprocedure.

8 International

8.1 What would be the approach in Denmark to recognising aprocedure started in another jurisdiction?

The EU Bankruptcy Regulation that came into effect on 31 May2002 has not been implemented in Denmark. Moreover, Denmarkhas not imported the rules in UNCITRAL Model Law on Cross-Border Insolvency.Consequently, the ordinary national Danish rules will apply tointernational insolvency. In principle, bankruptcy proceedingsinitiated in another jurisdiction will not exclude a creditor fromlevying execution on the debtor’s assets in Denmark. This alsoapplies to another country’s insolvency procedures similar to theDanish suspension of payments regime. Also, provided that theDanish rules on venue are met, there should be nothing preventingthe implementation of independent bankruptcy proceedings over adebtor’s assets in Denmark, regardless of whether bankruptcyproceedings were initiated in another jurisdiction.As regards the Nordic countries, i.e., Denmark, Norway, Sweden,Finland and Iceland, Denmark has acceded the Nordic BankruptcyConvention that is only applied in rare cases. According to theconvention, a bankruptcy opened in one Nordic country comprisesall assets and liabilities belonging to the debtor in the other Nordiccountries.

Lars Grøngaard

Gorrissen Federspiel KierkegaardSilkeborgvej 2DK-8000 Aarhus CDenmark

Tel: +45 8620 7500Fax: +45 8620 7599Email: [email protected]: www.gfklaw.dk

Lars Grøngaard is a partner at Gorrissen Federspiel Kierkegaard andhead of the firm’s insolvency group. He acts as administrator ofestates in bankruptcy and supervisor of companies in suspension ofpayments. He is a member of the International Bar Association. Heis a 1984 graduate of University of Aarhus. Lars Grøngaard wasadmitted to the Danish Bar in 1987 and to the Danish SupremeCourt in 1992.

Gorrissen Federspiel Kierkegaard is among the leading Danish law firms with strong international relations. Werepresent major Danish and foreign businesses and financial institutions. Our aim is to provide advice at the highestprofessional and ethical level, tailored to the client’s individual situation and requirements. We are accessible wheneverour clients need our assistance. Our practice areas cover all branches of Danish and EU commercial law. We maintainclose relations with leading lawyers worldwide and, at short notice, are able to provide our clients with the professionalassistance wherever they need it. We are a fully integrated law firm that works internationally. We have offices inCopenhagen and Aarhus. More than half of our 320 employees are lawyers who possess both broad educations andexactly the competencies relevant to our clients.



ChapterChapter 12

Slaughter and May

England & Wales


1.1 How does a creditor take security over assets in Englandand Wales?

Under English law, there are four types of consensual security: thepledge; the contractual lien; the mortgage; and the charge.PledgeThe pledge involves the creditor taking actual or constructivedelivery or possession of the debtor’s assets as security until theloan is repaid. A creditor has a number of implied rights in respectof pledged assets, the most important of which is the right to sell theassets to meet a defaulted obligation. As the pledge depends onpossession, only assets that can be “possessed” can be pledged. Theconsequence of this is that only goods and “documentaryintangibles” are susceptible to the pledge. A documentaryintangible is a document which entitles its holder to ownership ofthe asset which the document represents; a good example of this isa negotiable security, such as a bearer bond.Contractual LienA lien is the right to retain possession of another person’s propertyuntil that other person performs a specific obligation. A lien istherefore similar to a pledge; however, the fundamental differencebetween the two is that, with a contractual lien, the goods in questionare initially deposited with the creditor not for the purposes of security,but for some other purpose (such as custody or repair).MortgageA mortgage involves the transfer of ownership of an asset by wayof security for a debt, on the condition that ownership will betransferred back to the debtor on discharge of the debt. A mortgagedoes not require the delivery of possession (unlike a pledge or lien)and therefore any kind of asset, tangible or intangible, is capable ofbeing mortgaged.ChargeA charge, in contrast to a mortgage, does not involve the transfer ofownership of an asset. It is simply the appropriation of an asset orclass of assets to the satisfaction of a debt. A charge creates anencumbrance or “weight” which hangs on the asset and travels withit into the hands of all third parties (except for certain good faithpurchasers). A charge can be either fixed or floating. Under a fixedcharge an asset which is ascertained and definite (or capable ofbeing ascertained and defined) is appropriated to the satisfaction ofa debt immediately or upon the borrower acquiring an interest in it.A floating charge, on the other hand, constitutes a deferred

“appropriation” in respect of a class of assets, including futureassets, where the assets constituting the class would by their naturebe changing from time to time (a good example of such a classwould be the inventory of a retailer) and where, until an eventoccurs which causes the floating charge to crystallise, the borroweris free to dispose of and add to the assets comprised in the class inthe ordinary course of business. When the floating chargecrystallises, it fastens on the assets then comprised in the class,effectively becoming a fixed charge. The borrower is then unableto deal in the assets comprised in the class.


If a company enters into certain types of transaction withinspecified periods before its insolvency, it is possible that theliquidator or administrator (for details of which, see below atquestion 2.1) may be able to challenge them.Transactions at an UndervalueA transaction is at an undervalue if a company makes a gift to a personor enters into a transaction on terms where the company receives noconsideration or one which has a value which is significantly less thanthe value of the consideration provided by the company. One defenceis that the transaction is entered into in good faith for the purpose ofcarrying on the company’s business and that there are reasonablegrounds for believing that it will benefit the company.To be vulnerable, a transaction at an undervalue must have beenentered into during the period of two years before the commencementof winding up or the commencement of administration and thecompany must have been insolvent on a cash flow or balance sheet test(for details of which, see below at question 2.2) at the time it enteredinto the transaction or became insolvent by entering into it. There is apresumption of insolvency if the parties to the transaction areconnected, for instance if it is an intra-group transaction or atransaction with a director.Transactions Defrauding CreditorsThe same undervalue definition applies in respect of transactionsdefrauding creditors, although there is no time limit between thetransaction being effected and the onset of insolvency for thetransaction to be attacked. However, the transaction must have beenentered into for the purpose of putting the assets beyond the reach ofa claimant or of otherwise prejudicing the interests of the claimant. PreferencesA preference is given if the company does anything or allowsanything to be done which has the effect of putting that person in a

Thomas Vickers

Sarah Paterson



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position which, if the company were to go into insolventliquidation, would be better than the position he would have been inif the thing had not been done. The repayment of an unsecured debtby a customer to its bank could be within this wide definition. Thecompany must have been influenced in deciding to give thepreference by a desire to produce the preferential effect, in order forthe preferential transaction to be vulnerable. There is a presumptionof such influence if the parties are connected.The period before the commencement of the winding up or theappointment of an administrator during which such transactions musthave been entered into for them to be vulnerable is six months for apreference to a non-connected person and two years to a connectedperson. Further, for the transaction to be upset, the company musthave been insolvent on a cash flow or balance sheet test at the time ofthe transaction or as a result of entering into the transaction. If atransaction is established as being at an undervalue or a preference, thecourt has very wide powers to put the parties back into the positionthey were in before the transaction was entered into.Floating ChargesA floating charge may be invalid if it is created within two years ofthe commencement of the winding up or the appointment of anadministrator if the parties are connected or one year if they are not.There is a defence that the company was solvent when the chargewas created (on a balance sheet and cash flow test) and did notbecome insolvent as a consequence of the transaction, but thissolvency test will not apply if the parties are connected.The charge will, however, be valid to the extent of the value of somuch of the consideration for the charge as consists of money paidor goods or services supplied to the company at the same time as orafter and in consideration of the creation of the charge, togetherwith interest, if any, payable under the relevant agreement.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in England and Wales?

Whilst a company is trading solvently, the Companies Act 2006provides that the primary duty of the directors is to act in a way thatthey consider, in good faith, would be most likely to promote thesuccess of the company for the benefit of its members as a whole.However, this duty is subject to any enactment or rule of lawrequiring directors, in certain circumstances, to consider or act inthe interests of creditors of the company. Whilst a company isclearly solvent there is no duty to consider creditors’ interests. Bycontrast, when a company is clearly insolvent, directors mustconsider creditors’ interests before those of shareholders. Betweenthese two points there is a grey area, and it is unclear precisely atwhat point, and to what extent, the directors’ duty to promote thesuccess of the company for the benefit of its members is displacedby a duty to act in the interests of creditors.Numerous duties are placed upon directors in these situations. Abreach of these duties can lead to personal liability and possibledisqualification from being able to act as a director or beinginvolved in the management of the company for a specified period.Common Law and Statutory DutiesThe common law duty of a director when a company is insolvent orof doubtful solvency is to act in the interests of creditors, with aview to minimising the loss to the creditors of the company.Under the Insolvency Act 1986, if in the course of a winding upanyone who has been involved with the promotion, formation ormanagement of the company is found to have misapplied, retainedor become accountable for any money or other property of the

company, or been guilty of misfeasance or breach of a fiduciary orother duty in relation to the company, a court may on an applicationby the official receiver, liquidator or a creditor compel him to:a) repay, restore or account for the money or property of the

company with interest; orb) contribute such sum to the company’s assets by way of

compensation in respect of the misfeasance or breach offiduciary duty or other duty as the court thinks just.

Breaches of duty which could be relevant here would include adirector’s involvement in the company granting a preference orentering into a transaction at an undervalue (which are explainedabove at question 1.2).Fraudulent TradingA court, on application by a liquidator in a winding up, can order thatany person who was knowingly a party to carrying on the business ofa company with intent to defraud creditors or any other person, or forany fraudulent purpose, be liable to make such contribution (if any)to the company’s assets as the court thinks proper. Liability mayattach to persons who are not directors of the company but have beeninvolved in the fraud, for example a company which assisted theinsolvent company in perpetrating the fraud.Fraudulent trading is also a criminal offence carrying with it thethreat of imprisonment, a fine or both. Such an offence may applywhether or not the company has been, or is in the course of being,wound up. Fraudulent trading can arise when directors of acompany allow it to incur credit when they know there is no goodreason for thinking that funds will be available to repay the relevantdebt when it becomes due or shortly thereafter.Wrongful TradingA court, on application by a liquidator in a winding up, can orderthat a director of a company which has gone into insolventliquidation is liable to make such contribution (if any) to thecompany’s assets as the court thinks proper if:a) before the commencement of the winding up, the director

knew or ought to have concluded that there was noreasonable prospect that the company would avoid going intoinsolvent liquidation; and

b) thereafter the director failed to take every step with a view tominimising the potential loss to the company’s creditorswhich he ought to have taken.

The standard required as to what a director ought to know, theconclusions he ought to reach and the steps he ought to take is thestandard of what would be known, reached or taken by a reasonablydiligent person with the general knowledge, skill and experience thatmay reasonably be expected of a person carrying out the samefunctions as those of the director in relation to the company and withthe general knowledge, skill and experience that the director has.DisqualificationApart from personal liability, where a director engages in fraudulent orwrongful trading or has been found guilty of other misconduct inconnection with a company and is held to be unfit by the court, he maybe disqualified by court order for a period of between two and fifteenyears from acting as a director or from having any involvement in thepromotion, formation or management of any company.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in England and Wales?

When a company is in financial difficulties there are five formalprocedures which may apply:

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a) a company voluntary arrangement (“CVA”) may be enteredinto between the company and its creditors;

b) a scheme of arrangement may be effected;c) an administrator may be appointed;d) an administrative receiver or receiver may be appointed; ore) the company may go into liquidation (otherwise known as

winding up). There are two types of liquidation: compulsoryand voluntary. In general terms, a compulsory liquidationapplies to insolvent companies, and a voluntary liquidationapplies to solvent companies.

In general terms voluntary arrangements and schemes ofarrangement are potential tools used in a reorganisation orrescheduling of debt. Receivership and liquidation are likely tosignal an acknowledgement that the company itself has no futureand all that can be sought is the maximisation of the proceeds of thesale of its assets or business. This may enable a purchaser toacquire at least part of its business as a going concern, therebypreserving the underlying business and employment. By contrast toreceivership and liquidation, one of the purposes of theadministration regime is to act as a rescue mechanism in respect ofthose companies which are capable of rescue.

2.2 What are the tests for insolvency in England and Wales?

English law does not use “insolvency” as a defined term. The relevanttest is “inability to pay debts”. Therefore, for the purposes of Englishlaw, a company is insolvent if it is unable to pay its debts. English lawdoes not have a single definition of inability to pay debts.The two principal tests are known as the ‘cash flow’ and the‘balance sheet’ tests. The cash flow test applies if a company isunable to pay its debts as they fall due. The balance sheet test issatisfied if the value of the company’s assets is less than the amountof its liabilities, taking into account its prospective and contingentliabilities.


Company Voluntary Arrangement / Scheme of ArrangementThere are no formal requirements that a company has to satisfy inorder to be placed in either of these procedures. There is thereforeno requirement that the company in question is unable to pay itsdebts before it can utilise either procedure.AdministrationA holder (“QFCH”) of a qualifying floating charge (“QFC”)(which is defined as being a floating charge over the whole orsubstantially the whole of the company’s property) is able to makean appointment of an administrator either in or out of court (fordetails of which, see below) at any time when an event has occurredwhich would allow him to enforce his charge (this will typically besome default under the loan agreement). This right of appointmentmay well arise when the company is not even insolvent. In all othercircumstances in which an administrator is appointed, it isnecessary to show that the company is or is likely to become unableto pay its debts. Administrative Receiver / ReceiverAn administrative receiver is a manager of the whole orsubstantially the whole of a company’s property. Theadministrative receiver can only be appointed by a QFCH. Thedebenture creating the floating charge will typically set out thegrounds upon which an administrative receiver can be appointed.The Enterprise Act 2002 introduced a prohibition on the

appointment of an administrative receiver except in limitedcircumstances. Where a charge is entered into on or after 15September 2003 it will only be possible to appoint an administrativereceiver where the company granting the charge falls into an exceptionto the prohibition. The exceptions cover, amongst others, capitalmarkets transactions (such as securitisations), companies which tradeon the financial markets, and companies involved in public-privatepartnership and utilities projects. Floating charges entered into before15 September 2003 are not subject to the prohibition.It may still be possible for a secured creditor to appoint a receiverunder a fixed charge. Such a receiver has limited powers in respectof the property over which he is appointed and pays the proceeds ofthe property to the holder of the fixed charge.LiquidationCompulsory LiquidationA compulsory winding up order is made by the court. The groundson which a court can make a winding up order include the companybeing unable to pay its debts and where the court believes it is justand equitable that the company be wound up. For the purposes ofliquidation, the company is unable to pay its debts if it fails eitherof the cash flow or the balance sheet tests. In addition, a companyis deemed to be unable to pay its debts if: (a) a creditor who is owedover £750 has served the company with a written demand forpayment and the company has for three weeks either not paid thesum, not secured the sum, or not compounded the sum to thereasonable satisfaction of the creditor; or (b) if an order of the courtrequiring the company to pay a certain sum to a creditor is notsatisfied.Voluntary LiquidationThere are two types of voluntary winding up: a “members’winding up” and a “creditors’ winding up”. A members’voluntary winding up is a liquidation which is under the control ofthe company’s shareholders (also known as its members), and isonly possible where the directors are able to make a declaration thatall the liabilities of the company will be met within a period notexceeding twelve months. If the directors cannot make thisdeclaration, then it will be a creditors’ winding up, and control ofthe liquidation will pass to the creditors.


Company Voluntary ArrangementThe directors (or, if the company is in administration or liquidation,the administrator or liquidator) may propose to the shareholders andunsecured creditors a composition in satisfaction of the company’sdebts or a scheme of arrangement of its affairs. A person authorisedto act as the “nominee”, currently a licensed insolvency practitioner(a professional with insolvency experience, normally anaccountant), reports to the court as to whether, in his opinion, theproposal should be put to shareholders and creditors. If he believesthe proposal should be put, meetings of shareholders and creditorsare called to approve the proposal. Approval requires a simplemajority at the shareholders’ meeting and a majority in excess ofthree-quarters (by value) at the creditors’ meeting (subject to theexclusion of secured creditors and certain other limitationsconcerning, for example, creditors who are connected with thecompany). A proposal, once approved, may be challenged on the grounds thatthere was some material irregularity in connection with the holdingof the meetings, or that it unfairly prejudices the interests of anycreditor.



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Scheme of ArrangementA company (or an administrator or liquidator) or any creditor orshareholder of a company may petition the court to summon ameeting of creditors or shareholders to agree to a compromise orarrangement between the company and its creditors or shareholders.If a simple majority in number of those voting and a three-quartersmajority in value is obtained at any meeting, and if the courtsanctions the compromise or arrangement, the compromise orarrangement will be binding on the company and the creditors orthe shareholders. To secure approval of a scheme, each separateclass of creditors must vote in favour.AdministrationAn administrator may be appointed either by application to thecourt or by filing papers with the court documenting an out of courtappointment. An appointment out of court may be made by aQFCH, the company or its directors. An application to court toappoint an administrator may be made by the company, its directorsor any creditor. The grounds upon which a company can be placedin administration are described in question 2.3 above.In all cases, an insolvency practitioner’s opinion that the purpose ofadministration is capable of being achieved must be provided. Alladministrations share the same purpose which is set out as a cascadeof objectives. The first objective is the rescue of the company as agoing concern. Only if this is not reasonably practicable or therewould be a better result for the creditors as a whole does the secondobjective apply. The second objective is to achieve a better resultfor the creditors as a whole than would be likely if the companywere wound up without first being in administration. Only if thesecond objective is not reasonably practicable does the thirdobjective of realising the company’s property for the benefit of oneor more secured or preferential creditors apply.Where an administrative receiver is in office, the appointment of anadministrator must be made by an application to the court. Thecourt will only make an appointment where the appointor of theadministrative receiver consents or where the court thinks that thesecurity under which the administrative receiver was appointed isliable to be released or discharged as a preference or a transactionat an undervalue or that the floating charge is avoidable for want ofnew consideration at the time of its creation. Where a secured creditor retains the right to appoint anadministrative receiver he may use this right to block theappointment of an administrator by appointing an administrativereceiver prior to the appointment of an administrator. A personappointing an administrator must give notice to any person whomay be entitled to appoint an administrative receiver oradministrator as the holder of a qualifying floating charge. Duringthe notice period, a secured creditor who retains the right to appointan administrative receiver may do so or may instead substitute hischoice of insolvency practitioner as administrator. A QFCH whodoes not have the power to appoint an administrative receiver maysubstitute his choice of insolvency practitioner as administratoreven though he cannot block the appointment of an administrator.Administrative ReceiverThere is no formal appointment procedure for an administrativereceiver. When the grounds upon which a receiver may beappointed arise, then the creditor may elect to make anappointment. LiquidationCompulsory LiquidationAs described above, a company enters into compulsory liquidationthrough an order made by the court. Proceedings are started by apetition that may be presented by any creditor, the company, the

directors or any contributory. Receivers and administrators are alsoable to present petitions. If the court is satisfied that the grounds aresatisfied, then it will make a winding up order. The OfficialReceiver (a civil servant in the Insolvency Service) thenautomatically assumes the role of the liquidator until anotherliquidator is appointed.Voluntary LiquidationVoluntary liquidation (whether creditors’ or members’) is initiatedby the company’s members passing a resolution (requiring a three-quarters majority vote) which must either state that they are infavour of a voluntary liquidation (in the case of a members’ windingup), or that the company cannot, by reason of its liabilities, continueits business and that it is advisable to wind it up (in the case of acreditors’ winding up). Either type of resolution has the effect ofstarting a voluntary liquidation at the date it is passed. In amembers’ voluntary liquidation, the shareholders appoint theliquidator, while in a creditors’ voluntary liquidation, the creditorsappoint.It may happen that, during the course of a members’ voluntarywinding up, the liquidator forms the opinion that the company willbe unable to pay its debts in full together with any interest. If so,the liquidation is converted from a members’ winding up to acreditors’ winding up.


Company Voluntary ArrangementThe chairman must prepare a report of the creditors’ meeting for thecourt, which must be filed within four days of the meeting being held. Notice of the result of the meeting must be given to all those who weresent notice of the meeting immediately after the report is filed in court.Notice must also be sent to the registrar of companies (a governmentalbody controlling the incorporation and administration of companiesoperating in England and Wales which maintains a register ofcompanies available for public inspection), but only if the decisionwas one to approve the voluntary arrangement.Scheme of ArrangementOnce a court order is made approving the scheme, it is drawn upand an original, together with an official copy, is obtained by thecompany. The official copy is then delivered to the registrar ofcompanies for registration and it is that filing process which makesthe scheme effective and binding.AdministrationAs soon as reasonably practicable after his appointment, theadministrator must obtain details of the company’s creditors andmust notify the company and all of its creditors of his or herappointment. The appointment must also be advertised in theLondon Gazette (which is the official newspaper of record inEngland and Wales) and in a newspaper. The administrator mustalso send a notice of his appointment to the registrar of companies. Following the appointment of the administrator, the directors arerequired to provide him with a statement of the company’s affairs,enabling the administrator to assess the current position of thecompany.The administrator must send a statement of his proposals to allcreditors and members of the company within eight weeks of hisappointment, and also file a copy of the proposals with the registrarof companies. An invitation to an initial creditors’ meeting, to beheld as soon as reasonably practicable, will be included with thecopy of the administrator’s proposals sent to each creditor.At the initial creditors’ meeting, the administrator presents his

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proposals and the creditors vote. The creditors can accept theproposals with or without modifications by way of a majority invalue of claims. If the creditors reject the administrator’s proposals,the administrator must report to court and seek directions. Furthercreditors’ meetings are required if the administrator revises hisproposals or if 10% of the creditors (in value) demand it.Otherwise, the administrator will implement the approvedproposals.Administrative ReceivershipOn appointment, the administrative receiver must immediately sendnotice of his appointment to the company, and to all knowncreditors within 28 days. The notice should be advertised in theLondon Gazette and in a local newspaper and every invoice, orderfor goods or business letter issued must also contain a statement thata receiver has been appointed.Following the appointment of the administrative receiver, thedirectors (together with any others involved in the company ifrequired by the administrative receiver) are required to prepare astatement of affairs of the company and give this to theadministrative receiver.Within three months of his appointment the administrative receiveris required to send a report to the registrar of companies and tocreditors, together with a summary of the directors’ statement andthe receiver’s comments on it. The administrative receiver mustthen call a meeting of the unsecured creditors to consider his report. LiquidationCompulsory LiquidationIn a compulsory liquidation, the Official Receiver is required toadvertise the liquidation in the London Gazette and a localnewspaper. He must also notify the Registrar of Companies and thecompany itself. From this point on, it is a requirement that allcompany papers state that the company is in liquidation.Within twelve weeks of the winding up order being made, theOfficial Receiver must decide whether to call a meeting of thecreditors and contributories to appoint a licensed insolvencypractitioner to act as liquidator. If he decides not to call meetings,he must give notice of his decision before the end of the twelve-week period to the court and the company’s creditors andcontributories. If he decides that meetings should be called, thosemeetings must be held not more than four months from the date ofthe winding up order, and 21 days’ notice must be given to allcreditors and contributories. Notice must be given byadvertisement in a local newspaper and the London Gazette. Inaddition, he must call a meeting if requested at any time by onequarter in value of the company’s creditors. Members’ Voluntary LiquidationThe directors’ statutory declaration of solvency and the specialresolution to wind up the company must be filed with the registrarof companies within 15 days of the resolution being passed.In addition, within 14 days of his appointment, the liquidator mustpublish a notice of his appointment in the Gazette along with theresolution to appoint him and register notice of his appointmentwith the registrar of companies in the prescribed form.If the liquidation continues for more than one year, the liquidatormust call a general meeting at the end of the first year and eachsuccessive year to keep the shareholders informed.A final meeting of the members is held prior to dissolution (atwhich point the company’s formal existence is terminated) wherethe liquidator lays before the shareholders an account of how theliquidation was conducted. This meeting is called by advertisementin the London Gazette one month before the meeting. Within oneweek of this final meeting, the liquidator is required to send a copy

of this account to the registrar of companies, and must file a finalreturn with the registrar of companies with respect to the holding ofthe final meeting and its date. Creditors’ Voluntary LiquidationA meeting of the creditors must be held within 14 days of the generalmeeting passing the resolution to wind up the company. At least sevendays’ notice of the creditors meeting must be given to the creditors bypost, and a notice advertising the creditors meeting must be placed inthe London Gazette and at least two local newspapers. Before the meeting is held, creditors are entitled to inspect a list ofnames and addresses of the company’s creditors.The directors must produce a full statement of the company’s affairs,which has to be presented at the creditors’ meeting. The statementshould include details of the company’s assets, debts and liabilities, thenames and addresses of the company’s creditors and details of thesecurity held by them.The details of the appointment, the shareholders’ resolution putting thecompany into liquidation, and the statement of affairs must be filedwith the registrar of companies. The shareholders’ resolution mustalso be published in the London Gazette.Similarly to a members’ winding up, if the course of the liquidationtakes more than one year, the liquidator must call a meeting of theshareholders and a meeting of the creditors at the end of the first yearand each successive year to keep the shareholders and creditorsinformed.The final meeting of a creditors’ voluntary liquidation follows thesame requirements and procedures as for a members’ voluntaryliquidation.

3 Creditors


Company Voluntary ArrangementIf a CVA is approved, it binds all creditors who would have beenentitled to vote, whether or not they had notice of the creditors’meeting. The arrangement can be challenged, however, if itunfairly prejudices the interests of a creditor or shareholder of thecompany or there has been a material irregularity at or in relation tothe meetings.Since January 2003, there has been provision for a moratorium onlegal processes, including the enforcement of security, of betweenone and three months for an eligible company contemplating avoluntary arrangement. This is known as the small companyvoluntary arrangement moratorium. Eligibility for the moratoriumis principally determined with reference to the definition of a smallcompany under the Companies Act 2006. A company will fallwithin the definition of being a small company if it satisfies two ormore of the following requirements:

A special purpose vehicle in a securitisation or other financialstructure may fall within the definition of small company.However, the statute contains exclusions from eligibility forcompanies involved in certain financial transactions.Scheme of ArrangementIf a scheme of arrangement is sanctioned by the court, it may alter

Turnover Not more than £6.5 million

Balance Sheet Total Not more than £3.26 million

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the rights of shareholders and creditors of the company, and may doso even if certain shareholders and creditors have not themselvesvoted in favour. As explained above, the voting procedure on ascheme of arrangement requires each ‘class’ of creditors to be givena separate vote. If any one class of creditors fails to vote in favourof the scheme, then the scheme will fail. However, as there is nomoratorium available with this procedure, there is nothing toprevent creditors taking enforcement action against the company upuntil the point at which the scheme of arrangement is sanctioned.AdministrationOnce an application to court to appoint an administrator has beenlodged, or notice of intention to make an appointment out of courthas been given, an interim moratorium automatically arises. Nosteps may be taken to enforce security or repossess goods subject toa hire purchase agreement, no landlord may exercise a right offorfeiture and no legal process may be commenced or continuedwithout the consent of the administrator or leave of the court. If anadministrator is appointed, this moratorium continues (unless theadministrator or the court agrees otherwise).Administrative ReceivershipUnlike in an administration, the appointment of an administrativereceiver does not create an automatic moratorium. This means thatcreditors may begin or continue legal actions against the company,including petitioning for its liquidation, whilst the company is inadministrative receivership. An important consequence of this isthat landlords may be able to exercise their rights to forfeit the leaseof the company’s premises.LiquidationThe main function of a liquidator is to collect in and distribute theassets of the company. The liquidator must distribute the assetsamongst the company’s creditors in accordance with a stricthierarchy of priorities (for further details of which see below atquestion 5.2). Unsecured creditors occupy the lowest position inthe hierarchy, ranking only above the shareholders of the company.Accordingly, unsecured creditors have no freedom to enforce theirrights under a liquidation, and are compelled to wait until theliquidator is in a position to make a distribution before receivinganything. However, unsecured creditors are entitled to repossessassets which are not actually owned by the company, such as goodssubject to a retention of title clause.


In respect of schemes of arrangement, administration andadministrative receivership, please refer to the answer to question 3.1. Company Voluntary ArrangementAn important limitation on the CVA mechanism is that a CVA maynot affect the right of a secured creditor of the company to enforcehis security, except with their consent.LiquidationIn a liquidation, secured creditors have several options in respect oftheir security. The first option is to enforce their security. If thevalue of the security exceeds the value of the debt which they areowed, then they will make a full recovery, and the balance will formpart of the assets of the company to be distributed by the liquidator.If the value of the security is less than the value of the debt, then thesecured creditor will recover the value of the security, and will rankas an unsecured creditor for the balance of the sum owed to him.The second option is for the secured creditor to value his security,and allow the liquidator to realise it for him. The final option is forthe secured creditor to surrender his security for the general benefit

of the creditors, and to rank as an unsecured creditor in respect ofthe debt owed to him.


A consideration of the application of “insolvency” set-off is notrelevant in the context of administrative receiverships, companyvoluntary arrangements and schemes of arrangement as insolvencylaw makes no special provisions in respect of the application ofsetoff in these circumstances.LiquidationUnder the Insolvency Rules, mandatory set-off applies incircumstances in which before a company goes into liquidationthere have been mutual credits, mutual debts or other mutualdealings between the company and any creditor of the companyproving or claiming to prove for a debt in the liquidation. In suchcircumstances, the sums due from one party are set-off against thesums due from the other party. Only the balance, if any, is provablein the liquidation or, as the case may be, payable to the liquidator.However, sums due from the company to another party shall not beincluded in the account if that party had notice at the time that theybecame due that: (i) a meeting of creditors had been summoned; (ii)a petition for the winding up of the company was pending; (iii) anapplication for an administration order was pending; or (iv) anyperson had given notice of intention to appoint an administrator. Inthis context, a sum is “due” if it is payable at present or in the future,the obligation by which it is payable is certain or contingent or itsamount is fixed or liquidated (or is capable of being ascertained byfixed rules or as a matter of opinion).AdministrationIn the event of an administration there are restrictions on themandatory application of set-off. Only on the giving of notice ofintention to distribute by an administrator will insolvency set-off inrespect of administration apply. Prior to the giving of such noticeby the administrator, normal rights of set-off can still be exercised.Once notice of an intention to distribute has been given by theadministrator, the Insolvency Rules provide that, at the date of thenotice, an account must be taken of what is due from each party tothe other in respect of their mutual dealings, and the sums due fromone party must be set off against the sums due from the other on asimilar basis as on a liquidation. This does not affect debts thathave already been validly set off before the notice was given.



Company Voluntary ArrangementIf a proposal for a CVA is approved, it is normally implementedunder the supervision of the nominee referred to above, who nowbecomes known as the “supervisor”. The supervisor’s role is to implement the arrangement. What thiswill entail will depend on what arrangement has, in fact, beenapproved. Whether or not the supervisor will hold the assets subjectto the arrangement will, again, depend ultimately on the terms ofthe arrangement itself. Once the arrangement is approved, thedirectors of the company are obliged to do everything possible toput the relevant assets of the company into the hands of the

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supervisor. The directors do, however, otherwise remain inposition. Similarly, unless the approved arrangement actuallyinvolves some alteration of the rights of shareholders (such as adebt-for-equity swap) then rights of the shareholders of thecompany are not otherwise affected by a CVA.Scheme of ArrangementA defining feature of a scheme of arrangement is the fact that theincumbent management remains in control of the company, and noreliance is placed upon an independent insolvency practitioner.Consequently, the directors of the company remain in controlthroughout. A scheme of arrangement does not, of necessity, affect the rights ofa shareholder. It will only do so to the extent that their rights aremodified in fact by the scheme itself. AdministrationUpon appointment, the administrator manages the affairs, businessand property of the company as its agent. The directors’ powers andduties of management cease, although the administrator may leavesome or all powers with the directors if he so chooses. The powerof the shareholders to control the company also ceases. The administrator is endowed with wide-ranging powers. Thesehave the effect of allowing him to, firstly, secure control of thecompany’s assets, secondly, prepare proposals for the approval ofthe creditors, and, thirdly, carry out those proposals. Administrative ReceivershipAn administrative receiver is a manager of the whole (orsubstantially the whole) of the company’s property. Accordingly,the company is under the control of the administrative receiver. Hisprimary duty is owed to the secured lender who appointed him toseek repayment of the secured debt.As an administrative receiver is the manager of the company’sproperty, his appointment leads to the suspension of the directors’powers of management. The powers and rights of the company’sshareholders are generally also suspended.LiquidationOn a winding up, the liquidator is conferred with wide-rangingpowers in order to allow him to collect in and distribute the assetsof the company. The appointment of a liquidator, whether on acompulsory or voluntary liquidation, leads to the termination of thepowers of the directors. The rights of the shareholders, for allintents and purposes, also lapse.


A full review of the ways in which the procedures are financed isoutside the scope of a general introduction. In general, to the extentofficeholders require further funding they will typically look to thecompany’s existing lenders to provide it.


Company Voluntary Arrangement / Scheme of ArrangementWhen a CVA is approved, or a scheme of arrangement issanctioned, there is no direct impact upon the employees of thecompany. It may well be that the consequence of theimplementation of an arrangement may have an effect upon thecompany’s employees; however, this effect would be a consequenceof the terms of the arrangement itself.AdministrationSince the main function of an administrator is to rescue the

company as a going concern, there is no automatic termination ofemployment contracts on appointment. Administrators do, though,have the power to dismiss employees if their employment contractsare inconsistent with the administrator running the business. Ifemployees are dismissed, this may give rise to an employmentclaim against the company.The onset of administration does not therefore necessarily affectemployees, unless their contracts are terminated or where thebusiness of the company is sold. In the latter case, the operation ofthe Transfer of Undertakings (Protection of Employment)Regulations 2006 (“TUPE”) may apply to protect the position ofthe employees. It should be noted that the interpretation of TUPEis not straightforward, and some difficult issues in relation to itsprecise scope remain to be resolved.Administrators are not personally responsible for liabilities arisingunder employment contracts. However, if employment contracts ofexisting employees have been “adopted” by the administrator, thencertain liabilities (principally salary - including holiday pay, sickpay and pension contributions) which arise under such contractsduring the administration are payable in priority to payment of theadministrator’s fees and expenses and any floating charge security.An administrator will have adopted a contract of employment if hecontinues to employ staff and pay them in accordance with theirprevious contracts for 14 days after his appointment.If the administrator sells the business of the company, then TUPEmay apply. If TUPE does apply, then the most important effect ofthis is that the purchaser of the business must take on the employeesof the business on the same terms as they were previouslyemployed; however, certain changes can be made to the contracts ofemployment of the effected employees if those changes are madewith the intention of safeguarding employment by ensuring thesurvival of the business. These variations must be agreed with anemployee representative. Administrative ReceivershipThe position of employees in an administrative receivership isgenerally the same as for an administration.LiquidationOn a compulsory liquidation and a creditors’ voluntary liquidation,the service contracts of employees are automatically terminated,and employment claims may arise against the company as a result.By contrast, the commencement of a members’ voluntary liquidationdoes not automatically terminate the service contracts of employees.It may therefore be open to the liquidator to carry on the business ofthe company until he can sell some or all of its undertaking. If thisdoes occur, then TUPE may apply, although the effects of itsapplication might differ from those on an administration.


Company Voluntary Arrangement / Scheme of ArrangementThe effects of a CVA or a scheme of arrangement depend entirelyupon its terms. The default position is that neither procedureautomatically interferes with the contracts of the company.AdministrationEntering into administration does not have any automatic effect oncompany contracts, which continue in effect. The administrator isgiven no power (unlike a liquidator) to disclaim “onerous” contracts.The administration moratorium does not prevent counterpartiescancelling contracts with the company. It is a typical term of many



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contracts that the contract in question may be terminated upon thecompany entering into an insolvency procedure, such asadministration. The administrator therefore may need to negotiatewith the key suppliers and customers of the company if he wishesto enable the company to continue trading. There is, however, acritical exception to the general principle: the moratorium preventslandlords from forfeiting company leases.Administrative ReceivershipThe treatment of company contracts during an administrativereceivership is broadly similar to their treatment under anadministration. The position is thus that the appointment of anadministrative receiver does not terminate or affect companycontracts, unless provided for in the contract itself.LiquidationThe onset of liquidation itself does not automatically terminatecompany contracts (although liquidation may be a ground fortermination under the terms of certain contracts). However, unlikein administration and administrative receivership, the liquidator isgiven the power to unilaterally terminate onerous contracts in orderto facilitate the winding up the affairs of the company. This poweris known as the right to disclaim onerous property.If the disclaimer is available, the effect of it is to terminate thecontract as at the date of the disclaimer, so that the respective rightsand obligations of the company and its counterparty are fixed as atthat date. The disclaimer therefore allows the company to avoidincurring future liabilities; however, it has no effect on liabilitiesthat have already been accrued. If the counterparty suffers loss asa result of a disclaimer, it may claim for such loss in the winding up.This loss will be calculated under the normal principles used toassess loss for breach of contract.

5 Claims


Company Voluntary Arrangement / Scheme of ArrangementThe operation of these procedures depends upon their actual terms.Accordingly, the mechanism by which creditors seek payment ofsums owed to them will vary according to the terms of eacharrangement.AdministrationThe Enterprise Act 2002 introduced provisions giving anadministrator power to make distributions. He may distribute tosecured and preferential creditors subject to the normal rules ofpriority and may make a distribution to unsecured creditors withcourt sanction. The process for “proving” for a debt is similar tothat described in respect of liquidation below. An administrator alsohas a general power to make payments to unsecured creditors wheresuch a payment is necessary or incidental to the performance of hisfunctions. This means that an unsecured creditor who is critical tothe administration may be able to press for payment of pre-administration debts as a condition of further supply.Administrative ReceivershipAs described above, the principal duty of the administrativereceiver is to secure the repayment of the debt owed by thecompany to the secured creditor who appointed him. This iscombined with a limited duty of care to the company, together witha statutory duty to preferential creditors (who are defined in moredetail below at question 5.2). The receiver does not owe anyseparate duty to the general body of unsecured creditors.

There is no method by which creditors, other than the securedcreditor, can claim amounts owed to them in an administrativereceivership. If the general body of creditors are to be paid, then itwill not be through administrative receivership. Their claims willeither be met by the company itself, if the company does emergewith a viable business after the receiver has repaid the appointingsecured creditor, or (and more likely) in a liquidation.LiquidationA creditor wishing to claim in a liquidation must “prove” his debt.To do so, the creditor must submit a formal claim to the liquidator,which is known as a proof of debt. The liquidator is obliged to sendforms of proof to every creditor of the company who is known tohim. Creditors are entitled to submit proofs in respect of any typeof claim, whether it is present or future, certain or contingent, orwhether it is liquidated or unascertained.The liquidator must then examine every proof he receives, andeither admit it, reject it in writing (giving his reasons in writing tothe person concerned), or require further information. As regardsdebts that are contingent or of an uncertain value, the liquidatorshould estimate a value - which may subsequently be revised asfurther information comes to light. Creditors unhappy with aliquidator’s decision may apply to court for a review of thedecision.It is only claims which have been proved which are entitled toparticipate in any payment (which is technically known as a“dividend”) made by the liquidator.


Company Voluntary Arrangement / Scheme of ArrangementWhere a distribution is made pursuant to a CVA or scheme ofarrangement, the terms on which it will be made will be governedby the arrangement itself, which the creditors will have voted onand approved by the requisite majorities. Accordingly, there is nogeneral rule which applies to the ranking of claims in theseprocedures. It is important to note that a CVA cannot affect therights of secured creditors or preferential creditors.AdministrationOn an administration, the order of priorities is broadly as follows: a) the administrator’s costs and expenses of realising fixed

charge assets;b) fixed charge holders (to the extent of their security);c) the obligations incurred under “new” contracts and the pay of

employees whose contracts have been adopted;d) the general expenses and costs of administration;e) preferential creditors (preferential debts now relate almost

exclusively to employees’ rights, including accrued pay andpension rights);

f) floating charge holders (subject to the “prescribed partprovision”, which is explained in more detail below);

g) unsecured creditors; andh) shareholders.The prescribed part provision was introduced by the Enterprise Act2002, and was intended to ensure a fairer distribution of the assetsof an insolvent company for the benefit of its unsecured creditors.Under the old regime, floating charge holders were paid in fullbefore any sums were payable to the unsecured creditors. Now, theadministrator is obliged to set aside a certain amount of money fromthe “net property” of the company to pay unsecured creditors. Netproperty is defined as all the property of the company remaining

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after the payment of fixed charge liabilities, preferential debts andthe administrator’s costs of realising assets. The prescribed part isthen calculated as being 50% of the first £10,000 in value of netproperty, and 20% of net property thereafter, up to a maximum of£600,000. Floating charge holders whose charges were createdbefore 15 September, 2003 are not subject to the prescribed partprovisions.Administrative ReceivershipAs described in question 5.1, an administrative receiver takespossession of the secured assets with a view to realising their valueand applying it to pay the amounts due to the secured creditor whichappointed him. Creditors with fixed charges and preferential debtswill be paid in priority to creditors with floating charge security.LiquidationThe order of priorities on liquidation is broadly the same as for anadministration.


Company Voluntary ArrangementThe entry of a company into a voluntary arrangement does not, ofitself, affect the corporation tax liabilities of the company (save tothe extent that previously accrued tax liabilities are compromisedby the arrangement itself). Tax arising on disposals of assets, or onincome earned during the course of the arrangement, will be aliability of the company in the normal way.On the release of a debt, whether a trade debt or a borrowing, acompany debtor will normally be taxed on the amount released. Itis an attractive feature of the CVA regime that the release of a debtpursuant to such an arrangement does not give rise to a receipt fortax purposes.Scheme of ArrangementThe tax treatment of a company entering into a scheme ofarrangement is fundamentally the same as on a CVA.Administrative ReceivershipThe appointment of an administrative receiver does not, of itself,affect the liability of a company to tax, which continues to becomputed on the same basis as before unless and until the companyceases to trade. In general terms, the administrative receiver is notliable to pay tax on profits made by the company after hisappointment, whether arising via trading income or on the disposalof assets. In relation to chargeable gains arising on such a disposalof assets, tax legislation expressly treats the receiver as a nomineeof the company.AdministrationA company entering into administration continues to be subject totax on profits which arise during the procedure. Whilst the liabilityfor tax arising during the administration remains with the company,it is the administrator who must account for any such tax as anexpense of the administration. To ensure that the extent of thisliability is clear, the legislation now requires a company tocommence a new accounting period for tax purposes upon the onsetof administration. LiquidationSimilar principles apply here: a company entering into winding upremains subject to tax on profits arising during the procedure; theliquidator is responsible for payment of any such tax which is due,as an expense of the liquidation; and the commencement ofliquidation causes the company’s current tax accounting period toend and a new one to begin.



The two procedures best suited to achieving a “cram down” arecompany voluntary arrangements and schemes of arrangement.This is because approval of the terms of these arrangementsdepends on majority voting, the outcome of which binds dissentingcreditors as if they had indeed agreed to the terms. However, itshould be appreciated that the scope of these procedures to achievea true cram down may be limited by minority protections.


Company Voluntary ArrangementOnce the terms of a CVA have been completed successfully, acompany reverts to its former status, and control returns to itsdirectors and shareholders. It is possible (and this occurs frequentlyin practice) that the arrangement may fail. If so, it is likely that thecompany may enter into another procedure, such as liquidation.Scheme of ArrangementOnce a scheme is approved, it is implemented under the supervisionof the company’s directors. Once the implementation is completed,the company reverts to its former status.AdministrationThere are numerous potential exit procedures for an administration.They range from the administration ending (and the companyreturning to the control of its directors) if the administratorconsiders that its purpose has been achieved, to the companymoving into winding up if the administrator considers that that willbe the most appropriate method to distribute the company’s assets.Provision is also made for the administrator to dissolve thecompany, thereby bringing its existence to an end, if he thinks thatthe company has no assets to distribute.LiquidationFollowing the final meeting of creditors, the company isautomatically dissolved three months later.


7.1 Is it common to achieve a restructuring outside a formalprocedure in England and Wales? In what circumstancesmight this be possible?

Restructuring in England and Wales can be achieved by adoptingone or a combination of non-formal processes in order to avoid theneed to realise a company’s assets. In recent years, lenders havebecome less hasty in pursuing formal insolvency routes byappointing an administrator, administrative receiver or liquidator torealise a debtor’s business, recognising that they may increase theirdebt recovery if the debtor’s business is reorganised rather thanrealised.Furthermore, formal insolvency proceedings may preclude debtor-in-possession restructuring. US based holders of UK corporatebonds are increasingly expecting restructuring outcomes which aresimilar to those achieved by a debtor-in-possession procedure underChapter 11 of the US Bankruptcy Code, typically involving debt forequity swaps and the dilution of existing shareholdings along witha further injection of funds. As a restructuring is a non-statutory



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remedy, however, it is subject to certain limitations: no moratorium(i.e., a temporary respite for the company from legal processes) willarise other than by agreement between the creditors and there is nostatutory mechanism by which to compel a dissenting creditor toparticipate in the restructuring. A number of variables will affect the ability of a company tonegotiate a restructuring, the most important of which will be (i) theviability of the underlying business of the company (including itsability to generate cash to service its debt), (ii) the terms of itsfinance documents (including their event of default provisions andthresholds for lenders’ consent) and, (iii) the identity of the lenders(and in particular whether they are the company’s relationshipbanks, or a number of distressed-debt investors). If a deal for a restructuring (such as a debt-for-equity swap) can bereached, then it may be implemented contractually. However, if therelevant finance documents impose a very high consent threshold(for instance, requiring 90 or 100 per cent of lenders to agree tosuch a transaction), then the company may propose a scheme ofarrangement or CVA to compel minority creditors to participate.


A debt for equity swap is one of the most common methods ofreorganising a struggling company. It involves the company’slenders converting the debt owed to them into one or more classesof the debtor’s share capital. This conversion is often undertaken inconjunction with other recapitalisation strategies by the company,such as issuing further shares or attracting a strategic investor.There is no prescribed format for a debt for equity swap and detailsof the rights and restrictions attached to the lenders’ shares willdepend on a large number of variables. Nonetheless, it is commonfor the shares issued to the lenders to be a mixture of ordinaryshares, and preference shares which will rank ahead in priority overthe company’s ordinary shareholders. However, as outlined in question 7.1, whether a debt for equityswap is possible will depend on the terms of the finance documentsand the level of consent required from lenders. In circumstanceswhere the requisite proportion of lenders do not agree to a debt forequity swap, a CVA or scheme or arrangement may be necessary toimplement the transaction.


In a pre-packaged sale (“pre-pack”), a company is put intoadministration and then immediately sold pursuant to a saleagreement which was arranged before the administrator wasappointed. Pre-packs are intended to salvage a company’s business where thecompany is insolvent but its business is viable. The company’sdirectors, assisted by an insolvency practitioner and, on occasion,an investment bank, first prepare a detailed assessment of thecompany, its financial condition and the marketplace. The aim ofthis exercise is to assist with valuation: insolvency practitionerswho are involved in pre-packs are typically highly concerned toensure that the valuation placed on the business that is sold isequivalent to the business’ market value. This is because, unlike thecourse of a typical administration, creditors are not given theopportunity to vote upon and approve a pre-packaged sale. Giventhis, the administrator is vulnerable to claims that he failed toachieve the best value possible for all the company’s creditors. The

valuation exercise for a pre-pack may be done by means of amarketing exercise. However, this is often avoided for the reasonthat it advertises that the company is in financial difficulty, whichcan be very destabilising. Accordingly, the valuation is often doneon a “desk-top” basis, in which the value of the business is assessedby use of a number of techniques (such as valuing its discountedcash flows or looking at the sale price of comparable businesses thathave been sold).The prospective purchaser may be an unconnected third party, ormay be a new company (“Newco”) which is specially incorporatedand capitalised so it may purchase the company’s assets. Newcomay be owned either by the company’s existing lenders (if they areseeking to convert their holding of the company’s debt intoownership of the company’s business) or may be owned by theexisting owners or directors of the company. Where the companyhas granted security over its assets, the consent of the creditors withthe benefit of such security may also be required in order to sellthose assets.Once a purchaser is found, the company is placed intoadministration through the appointment of an administrator (eitherby court application or through an out of court appointment).Immediately after the appointment, the administrator will executethe business sale agreement, and the sale will complete on the sameday. The proceeds of sale are then distributed to the company’screditors in accordance with normal principles. Pre-packs are not specifically provided for by English insolvencylegislation, but the Insolvency Service issued a Statement ofPractice in January 2009 (“SIP 16”) which contains guidance onbest practice for administrators involved in a pre-pack. SIP 16 aimsto improve the level of disclosure provided by the administrator tothe company’s creditors so that their interests may be betterprotected. A revised Insolvency Code of Ethics was also issued inJanuary 2009 and includes additional professional guidance foradministrators in the context of a pre-pack.

8 International

8.1 What would be the approach in England and Wales torecognising a procedure started in another jurisdiction?

There are four mains sources of cross-border insolvency law inEngland and Wales: the EC Regulation on Insolvency Proceedings(the “EC Regulation”), the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), the Insolvency Act 1986and case law.The EC Regulation Proceedings opened in an EU Member Stateunder the EC Regulation must be recognised without any formalityin all member states, including England and Wales, from the timethe judgment opening the proceedings becomes effective in themember state in which the proceedings are opened.The Model LawThe Cross-Border Insolvency Regulations 2006 (the “Regulations”)enacted the Model Law into the law of England and Wales on 4April 2006. The Regulations provide for the recognition of aforeign proceeding commenced in any foreign country whether ornot that foreign country has enacted a version of the Model Law.Insolvency Act 1986 (the “Act”)Section 426 of the Act provides for co-operation betweenjurisdictions within the United Kingdom and also co-operationbetween the United Kingdom and other designated jurisdictions,which mainly includes Commonwealth countries.Where Section 426 of the Act applies, it provides an alternative

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Sarah Paterson



Sarah Paterson specialises in financing, restructuring and insolvencywork. She has advised on a wide range of restructurings andinsolvencies in recent years, acting for debtors, creditors andinsolvency practitioners and on both international and domesticmatters.

Thomas Vickers



Thomas Vickers is an associate in the financing group of Slaughterand May, and has advised on a number of restructurings andinsolvencies.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice.It has offices in London, Paris, Brussels and Hong Kong, as well as close working relationships with leading independentlaw firms around the world, which enable it to provide clients with first class and seamless legal advice worldwide.Slaughter and May has extensive experience in international restructurings and insolvencies, frequently involvingcomplex cross-border issues, as well as advising on high profile domestic cases.


means of relief and assistance to the Model Law. It is likely that thecountries or territories that have the benefit of Section 426 of theAct will continue to use it until there is sufficient certainty about theoperation of the recognition proceedings under the Regulations andwhere it confers greater advantages than the Regulations.

Case lawIn circumstances where the EC Regulation, the Model Law andSection 426 of the Act are not applicable, recognition of foreignproceedings by the English courts will depend on common lawprinciples developed by the courts. The English courts have aninherent jurisdiction to co-operate with foreign insolvencyrepresentatives and recognise foreign proceedings.

74

Chapter


Chapter 13

Paul Varul Attorneys-at-Law

Estonia


1.1 How does a creditor take security over assets in Estonia?

Under Estonian law an asset may be encumbered with a pledge(right of security) such that the person for whose benefit the pledgeis established has the right to satisfaction of the claim secured bythe pledge out of the pledged property. A pledge is security overmovables or real security (mortgage). Under Estonian law securityover movables is divided into possessory pledge, registered securityover movables, commercial pledge and pledge of rights (seebelow). Proprietary rights may also be pledged. A claim securedby a pledge shall be preferred to all other claims with respect to thepledged property. Satisfaction of a claim of a pledgee is effected bythe sale of the pledged asset. Possessory pledgeA movable may be encumbered with a pledge such that the pledgedasset is transferred into the possession of the pledgee and theestablishment of a possessory pledge is agreed upon. An asset mayalso be encumbered by a pledge so that the asset is transferred to athird person and the pledgee obtains indirect possession of thepledged asset. It is important to note that a possessory pledgeextinguishes at the termination of the secured claim. Registered security over movablesA patent, trade mark, industrial design, utility model, variety,layout-design of an integrated circuit, motor vehicle or aircraftwhich is entered in a public register regulated by law may beencumbered with a registered security over movables. The personin whose benefit the registered security over movables isestablished has the right to satisfaction of the claim secured by thepledge out of the pledged object. Registered security overmovables can be regarded as an analogue to mortgage in regard tomovables, although the same level of guarantee as with a mortgageis not reached. A registered security over movables does notpresume the existence of a claim to be secured.Commercial pledgeA commercial pledge (floating charge) can be viewed as asubdivision of the registered security over movables. A commercialpledge is created with the making of an entry into the CommercialPledge registry. A commercial pledge encumbers all the movableproperty belonging to a company or a sole proprietor. Acommercial pledge does not encumber money, bonds, shares,intellectual property and also movables that have been encumberedwith a possessory pledge. The main problem with the commercialpledge is that, as a general pledge, it is not outwardly viewable,

which may entail problems regarding possible other pledges and theclaims of other creditors. Pledge of rightsA proprietary right may be the object of a pledge if it is transferable.Under the pledge of rights it is possible to pledge claims, sharecertificates and other rights. As a general rule, the regulation of apossessory pledge applies to the pledge. According to the Estonianlaw, the financial collateral is also regarded as a pledge of rights. MortgageAn immovable may be encumbered with a mortgage such that theperson for whose benefit the mortgage is established (mortgagee)has the right to satisfaction of a claim secured by the mortgage outof the pledged immovable. It can be said that a mortgage is themost important pledge, as it is widely used in commercial practiceto secure claims. Mortgages are entered into the Land Register. Without the LandRegistry entry a mortgage will not be set. A Land Registry entryshall set out the mortgagee and the monetary amount of themortgage (sum of mortgage). The data in the Land Registry ispublic.A mortgage secures a claim, the unpaid interest on the claim withinthree years before the sale of the immovable by compulsory auctionor declaration of bankruptcy, the fine for delay and expenses for thecollection of the debt, the insurance premiums paid by themortgagee on behalf of the owner of the immovable, and othercollateral claims.If a claim secured by a mortgage is not performed, the mortgageehas the right to demand compulsory execution. The claims aresatisfied from the money received from the compulsory executionof the immovable according to the ranking of the mortgages. Aclaim of a subsequent ranking secured by a mortgage is satisfiedafter satisfaction of the claim of the preceding ranking secured by amortgage.


The Bankruptcy Act gives a legal basis for recovery of transactions.This regulation makes transactions entered into whilst the companyis in financial difficulties vulnerable to recovery risk. In recovery,the court shall, on the bases provided in law, revoke transactionswhich were concluded by the debtor before the declaration ofbankruptcy and which damage the interests of the creditors. The Bankruptcy Act differentiates between general and specificgrounds of recovery. Applying the general bases, the court will

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Paul Varul

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declare all transactions executed from the initiation of thebankruptcy proceeding up to the declaration of bankruptcy null andvoid, as well as transactions executed before the initiation of thebankruptcy proceeding: (i) within one year, provided that the otherparty of the transaction knew or should have known that thetransaction would damage the creditors’ interests; (ii) within threeyears, provided that the debtor knowingly damaged the creditors’interests and the other party of the transaction knew or should haveknown that the debtor thereby damaged the creditors’ interests; or(iii) within five years, provided that the debtor knowingly damagedthe creditors’ interests with the transaction and the other party of thetransaction was a person connected with the debtor who knew orshould have known thereof.The purpose of specific bases of recovery is to provide rules that areexplicit and easier to apply for more typical cases when therecovery is justified. Unlike the general basis, the specific bases aregreatly based on proving objective circumstances, and not as muchon the existence and proving of subjective bad faith of the parties ofthe transaction. Furthermore, in the case of specific bases, the termslimiting the period of contesting the transactions made after theinitiation of the bankruptcy proceeding are, in general, significantlyshorter.The application of specific bases is justified under the followingcircumstances:(i) the debtor has granted property or sold it so cheaply that the

transaction has the character of a gift;(ii) the debtor has performed financial obligations, preferring

certain creditors to others;(iii) the debtor has placed certain creditors in a more favourable

situation than others, providing securities at a later point; or(iv) the debtor has divided joint property in a way that damages

the creditors’ interests. A precondition for recovery (both on general and specific bases) isthe identification of damage to the creditors’ interests.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Estonia?

According to Estonian law a permanently insolvent legal personcannot exist. Therefore the General Part of the Civil Code Act andthe Commercial Code stipulate that if a legal person is clearlypermanently insolvent, the members of a management board(executive directors) shall submit a bankruptcy petition. If thedirectors of a company fail to fulfil this obligation and the companycontinues to trade while insolvent, both civil and criminal liabilitymay follow. The Commercial Code specifies the obligation of themanagement board to submit a bankruptcy petition if the companyis insolvent and the insolvency is not temporary. The regulation ofthe Commercial Code obliges the directors to promptly, but not laterthan within twenty days after the date on which the insolvencybecame evident, submit the bankruptcy petition of the company toa court. After insolvency has become evident, the directors shall nolonger make payments on behalf of the company, except in the casewhere making the payments in the situation of insolvency conformsto the due diligence requirements. The directors shall jointlycompensate the private limited company any payments made by theprivate limited company after the insolvency of the companybecame evident which, under the circumstances in question, werenot made with due diligence. Criminal liability for the offences relating to bankruptcy isregulated in the Penal Code. As seen above, the directors of acompany are obliged to submit a bankruptcy petition when thecompany is insolvent. The Penal Code stipulates that failure to

perform the obligation to submit a petition is punishable by apecuniary punishment or up to one year’s imprisonment.Additionally it should be noted that the causing of insolvency isalso criminalised.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Estonia?

According to Estonian law, there are two main types of formalprocedures available for companies in financial difficulties.Depending on the financial state of the company it may want tosubmit a reorganisation application according to the ReorganisationAct, or it may be under the obligation to submit a bankruptcypetition. It must be noted that, in Estonia, reorganisation of acompany is possible outside bankruptcy proceedings if thecompany is not yet insolvent, but is likely to become insolvent inthe future. Reorganisation is also available during bankruptcyproceedings after a company has been declared bankrupt, but thisreorganisation is conducted according to the Bankruptcy Act.

2.2 What are the tests for insolvency in Estonia?

A debtor is insolvent if the debtor is unable to satisfy the claims ofthe creditors and such inability, due to the debtor’s financialsituation, is not temporary. A company is also insolvent in case theassets are insufficient for covering the obligations thereof and, dueto the debtor’s financial situation, such insufficiency is nottemporary. Either the debtor or the creditor may file a bankruptcypetition. The main matter verified by a court upon hearing a bankruptcypetition is insolvency. Upon finishing the hearing the courtbasically has three options. Firstly, the court may dismiss thebankruptcy petition if the debtor is solvent, and then the bankruptcyproceeding is terminated. Secondly, the court may terminate thebankruptcy proceeding by abatement. This means that the debtor isindeed insolvent, but the situation of the debtor is so bad that theirassets are insufficient for covering the costs of the bankruptcyproceeding, and there are no possibilities to recover or reclaimproperty. As a third option the court may declare bankruptcy bymaking a corresponding judgment; if the debtor is insolvent andthere are no grounds for terminating the bankruptcy proceeding byabatement.


Reorganisation proceedingsRehabilitation under the Rehabilitation Act presupposes that acompany is not yet insolvent in the meaning of the Bankruptcy Act,e.g. the company’s inability to satisfy its creditors is not permanentbut the likelihood for future insolvency is real. Also the companymust need rehabilitation and there is the potential of sustainableoperation of the company in the future. Bankruptcy proceedingsFor starting bankruptcy proceedings a company must be unable tosatisfy the claims of the creditors and such inability, due to thecompany’s financial situation is not temporary. In case of a debtor’spetition, the bankruptcy proceeding may also be initiated ifinsolvency is likely to occur in the future.



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Reorganisation proceedingsOnly private legal persons have the right to submit the rehabilitationpetition to the court. The proprietor submitting a rehabilitationpetition shall substantiate the likelihood of future insolvency, thecompany’s need for rehabilitation and the potential of sustainableoperation of the company in the future. When the proprietor hasreliably indicated the compliance to the abovementioned conditionsin the petition, the court will initiate a rehabilitation proceeding,issuing a corresponding ruling.Bankruptcy proceedingsEither the debtor or the creditor may file a bankruptcy petition.Under Estonian law, a bankruptcy petition, after it has arrived incourt, goes through so-called formal verification where the courtverifies that there are no formal grounds (for example incorrectjurisdiction etc.) to refuse the bankruptcy petition. If there are nohindrances, a court will separately decide whether to commence aproceeding or not. Attention must be paid here to differentverification procedures carried out by a court with regard to thedebtor’s bankruptcy petition and the creditor’s bankruptcy petition.While the debtor’s bankruptcy petition is only formally verified, theverification of the creditor’s bankruptcy petition is more thorough.For example the court verifies that the creditor’s claim is notentirely secured by a pledge or that the creditor’s claim complieswith the minimum amounts set forth by law. If any of thecircumstances stipulated in the Bankruptcy Act exist (listed insection 15 of the act), a court will not commence the bankruptcyproceeding. This should help to minimise the hearing ofunreasonable bankruptcy cases.If the company’s insolvency is verified after the commencement ofa bankruptcy proceeding and there are no grounds for abatement,the court will declare bankruptcy with a corresponding judgment.


Reorganisation proceedingsA reorganisation adviser shall promptly notify the creditors ofcommencement of reorganisation proceedings and the amount ofthe claims that they have against the undertaking according to thelist of debts.The creditors may hold a meeting for accepting a reorganisationplan, but it is not compulsory as the law provides an opportunity toaccept a reorganisation plan without holding a meeting.Bankruptcy proceedingsIf bankruptcy is declared, a court shall immediately publish a noticeconcerning a bankruptcy order in the official publication AmetlikudTeadaanded (bankruptcy notice). The notice shall be repeated ifnecessary. A trustee shall give written notice of the bankruptcyorder and the time and place of the first general meeting of creditorsto all creditors known to him or her. If the trustee is aware of anypersons who have obligations to the debtor, the trustee shall send anotice concerning declaration of the bankruptcy of the debtor alsoto such persons. If the total number of the creditors exceeds onehundred, it is sufficient to publish the bankruptcy notice. Creditorswho, pursuant to the land register, ship register, commercial pledgeregister or the Estonian Central Register of Securities, may havefinancial claims against the debtor, and other known creditorsholding rights of security with regard to the debtor’s assets shall benotified by the trustee by a written notice.

During the bankruptcy proceedings there are at least two meetingsof creditors - the general meeting of creditors and the meeting fordefence of claims.

3 Creditors


Reorganisation proceedingsThe unsecured creditors’ rights and specific terms for enforcingthese rights are governed by the reorganisation plan, which thecreditors will have voted on and approved by the requisitemajorities.Bankruptcy proceedingsThe main function of the trustee is to collect and distribute theassets of the company. The liquidator must distribute the assetsamong the creditors in accordance with a strict hierarchy ofpriorities (for further detail see question 5.2). Accordingly,unsecured creditors have no freedom to enforce their rights inbankruptcy proceedings and are compelled to wait until the trusteeis in the position to make a distribution.


Reorganisation proceedingsThe secured creditors’ rights and specific terms for enforcing therights are governed by the reorganisation plan, which the creditorswill have voted on and approved by the requisite majorities.Bankruptcy proceedingsThe bankruptcy act does not allow the secured creditor to enforcetheir security directly, but it stipulates special regulation for the saleencumbered with a pledge. Accordingly, if an object included in thebankruptcy estate is encumbered with a right of security or anyother real right which grants to a creditor the right to demand theforced sale of the encumbered object, the trustee shall sell theencumbered object within three months or, if the encumbered objectis an immovable, within four months as of the time when the trusteewas entitled to commence the sale of the bankruptcy estate. Also,approved claims secured by pledge and submitted within thespecified term have the first priority in claims satisfaction.


Reorganisation proceedingsThe Reorganisation Act does not limit the right of a creditor to set-off a claim against the company.Bankruptcy proceedingsThe Estonian Bankruptcy Act allows set-off of claims in bankruptcyproceedings. If a claim of a creditor could be set-off against a claimof the debtor before the declaration of bankruptcy, the creditor’sdefended claim can also be set-off after the declaration ofbankruptcy. Set-off of a claim acquired through assignment is alsoallowed. It is important to note that a claim acquired throughassignment can be set-off in a bankruptcy proceeding only if theassignment of the claim and written notification of the debtorthereof have not taken place later than three months prior to thedeclaration of bankruptcy. A claim acquired through assignment

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cannot be set-off if the claim against the debtor was assigned withinthe last three years before the initiation of the bankruptcyproceeding and the debtor was insolvent at that time and the personwho acquired the claim knew or should have known thereof at thetime of the assignment.



Reorganisation proceedingsControl over the company shall remain with the directors. Theappointed reorganisation adviser shall advise and assist theundertaking in the course of reorganisation proceedings and toverify the lawfulness of the claims of the creditors and thepurposefulness of the transactions of the undertaking.Bankruptcy proceedingsBy declaration of bankruptcy the right to administer the debtor’sassets and the right to be a participant in court proceedings onbehalf of the debtor with regard to a dispute relating to thebankruptcy estate or the assets which may be included in thebankruptcy estate is transferred to the trustee. A trustee is thedebtor’s legal representative in bankruptcy proceedings and entersinto transactions relating to the bankruptcy estate, performs otheracts on behalf of the debtor, and represents the debtor in court indisputes relating to the bankruptcy estate.


Reorganisation proceedingsUpon commencement of reorganisation proceedings, a court shalldesignate a term during which an undertaking must pay the initialremuneration of the reorganisation adviser and the amount ofmoney specified by the court into court in order to cover the initialexpenses. If the undertaking fails to pay the amount, the court shallterminate the reorganisation proceedings.Bankruptcy proceedingsBankruptcy proceedings are financed from the bankruptcy estate,which is comprised of the assets of the debtor.


Reorganisation proceedingsA reorganisation plan shall, inter alia, set out also the impact on theemployees of the enterprise. It must be noted that a reorganisationplan shall not transform a claim, which has arisen on the basis of anemployment contract.Bankruptcy proceedingsAfter the bankruptcy is declared, the employment contracts areusually terminated. The state guarantees employees’ gross earningsfor up to three months through the Unemployment Insurance Fund.


Reorganisation proceedingsThe commencement of a reorganisation procedure under the

Reorganisation Act in itself does not give the company specialgrounds to terminate contracts. Only the calculation of a fine fordelay or a contractual penalty which increases in time on claimsagainst the undertaking is suspended until approval of areorganisation plan.Bankruptcy proceedingsThe general rule is that the declaration of bankruptcy itself does notautomatically terminate contracts (although it may be a ground fortermination under the terms of certain contracts). A trustee has theright to perform an unperformed obligation arising from a contractentered into by the debtor and require the other party to perform theobligations thereof, or abandon performance of an obligationarising from a contract entered into by the debtor, unless otherwiseprovided by law. The trustee shall not abandon performance of anobligation arising from a contract entered into by the debtor if apreliminary notation entered in the land register secures theobligation.

5 Claims


Reorganisation proceedingsThe possibilities for the creditors to claim amounts owed to them inreorganisation proceedings depend on the terms of thereorganisation plan.Bankruptcy proceedingsAccording to the Bankruptcy Act, claims existing at the time of thedeclaration of bankruptcy are accepted for filing in a bankruptcyproceeding. Upon the declaration of bankruptcy all claims againstthe debtor become collectable. Creditors are obliged to notify thetrustee of all their claims against the debtor, arising before thedeclaration of bankruptcy. The trustee shall be notified of the claimby submitting a written petition (proof of claim) to the trustee.When the claims have been submitted to the trustee, the next stepwill be the defence of the claims. The defence of the claims isperformed at the meeting for defence of claims where they will beexamined in the order of their filing. A claim, its priority and theright of security to guarantee the claim are regarded as approved ifneither the trustee nor any creditor contests it at the meeting, or if acreditor or trustee, who has filed an objection, waives the objectionat the meeting. Should a creditor’s claim be disapproved, thecreditor is entitled to file an action for approval of the claim to acivil court.


Reorganisation proceedingsIn reorganisation proceedings the claims of the creditors aregoverned by the reorganisation plan, which the creditors will havevoted on and approved by the requisite majorities. It must be notedthat a reorganisation plan shall not transform a claim which hasarisen on the basis of an employment contract.Bankruptcy proceedingsWhen the payments related to the bankruptcy proceeding have beenmade, the creditors’ claims are satisfied according to the followingpriorities:1) approved claims secured by pledge and submitted in time;



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2) other approved claims submitted in time; and3) approved claims not submitted in time. Deriving from the above, an approved claim secured by a pledge isthe only priority claim in Estonia. The claims of the next priorityare satisfied after satisfaction of the preceding priority. Should thebankruptcy estate prove insufficient for satisfying all claims of onepriority, the claims of the same priority are satisfied in proportionwith the amounts of the claims.


Reorganisation proceedingsThe entry of a company into reorganisation proceedings does not,in itself, affect the tax liabilities of a company. In reorganisationproceedings the tax claims can be transformed so that the term forthe performance of obligations is extended or it is fulfilled ininstalments. It is not clear if a tax claim can be reduced in thereorganisation proceedings. Bankruptcy proceedingsThe entry of a company into bankruptcy proceedings does not, initself, affect the tax liabilities of a company.



The best possibilities for a “cram down” exist in the reorganisationproceedings carried out under the Reorganisation Act. This isbecause approval of the terms of reorganisation of a companydepends on majority voting, the outcome of which binds dissertingcreditors as if they had indeed agreed to the terms. It should benoted that a “cram down” may be limited by minority protection.


Reorganisation proceedingsAfter the reorganisation plan is approved by the creditors and thecourt, the legal consequences prescribed therein apply to anundertaking and a person whose rights are affected by thereorganisation plan. After the expiry of the term for theimplementation of a reorganisation plan, a creditor may invoke aclaim transformed by the reorganisation plan only to the extentwhich is agreed in the reorganisation plan and has not been fulfilledaccording to the reorganisation plan. After the reorganisation iscomplete, the company reverts to its former status. Uponrevocation of a reorganisation plan, the consequences of the

commencement of reorganisation proceedings retroactively cease toexist. The right of claim of a creditor whose claim is transformedby a reorganisation plan shall be restored against an undertaking inthe initial amount. In such case, all that the creditor has alreadyreceived in the course of implementation of the reorganisation planshall be taken into account.Bankruptcy proceedingsAt the end of bankruptcy proceedings the claims of the creditors aresatisfied in the amount allowed by the bankruptcy estate and thedebtor, who is a legal person, is usually terminated.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Estonia? In what circumstances might thisbe possible?

Restructuring outside a formal procedure in Estonia would meanthat a company and its creditors reach an agreement outside formalprocedures set out in the Reorganisation Act and Bankruptcy Act. Itcan be concluded that restructuring of a company outside theseprocedures is not common. Certain mergers and acquisitions ofcompanies may carry some aspects of restructuring but thesemergers and acquisitions are not initiated with that intent.


Reorganisation of a debtor is possible under the Reorganisation Actand also during bankruptcy proceedings under the Bankruptcy Act.


Estonian law does not contain specific regulation for pre-packagedsale but one must consider possible civil and criminal liability if apre-package sale is executed unlawfully.

8 International

8.1 What would be the approach in Estonia to recognising aprocedure started in another jurisdiction?

A procedure started in another jurisdiction will be recognised inEstonia in accordance with the Council regulation (EC) No1346/2000 (OJ L 160 30/60/2000 P. 1-18).

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Paul Varul

Paul Varul Attorneys-at-LawAhtri 6A10151 TallinnEstonia

Tel: +372 6264 300Fax: +372 6264 306Email: [email protected]: www.varul.ee

Paul Varul specialises in contract, commercial and bankruptcy law.He was the chairman of the main committee of the Estonian CivilCode from 1992 to 2002. Paul Varul was the Minister of Justice ofthe Republic of Estonia from 1995 to 1999.Since 1992 he has been a professor at the Faculty of Law inUniversity of Tartu. He is co-author of numerous draft Acts (Law ofProperty Act, Law of Obligations Act, Bankruptcy Act, theCommercial Code etc.) and co-writer of the Law of Obligations ActCommented editions.As an internationally renowned insolvency expert, Mr Varul has beenelected as a member of the International Insolvency Institute and isa member of INSOL-Europe and its Academic Forum. Paul Varul has been working as a member of the Study Group on theEuropean Civil Code since 2003.

Helmut Pikmets

Paul Varul Attorneys-at-LawAhtri 6A10151 TallinnEstonia

Tel: +372 6264 300Fax: +372 6264 306Email: [email protected]: www.varul.ee

Helmut Pikmets joined Paul Varul Attorneys-at-Law in 1994. Hespecialises in tax and rehabilitation law. He has publishednumerous articles and held lectures on the topics.Mr Pikmets was the liquidator of Tartu Kommertspank, the firstcommercial bank established in the Soviet Union, which can beconsidered the beginning of his career in insolvency practice. Sincethen he has been the bankruptcy trustee and advisor in some of themost substantial bankruptcy cases in the Estonian court practice.For instance the bankruptcy proceeding of a commercial bank EestiMaapank is so far the most complex case in Estonian legal practice,involving nearly 4,000 different execution-, bankruptcy-,liquidation- and criminal proceedings. Helmut Pikmets has also taken part in reorganising numerousinsolvent companies enabling the owners to overcome economicdifficulties and continue with the activities without the companybeing liquidated.

Paul Varul Attorneys-At-Law was founded in 1994 and has become one of the leading full service commercial law firmsin Estonia. The firm is well known for its strong dispute resolution practice and is increasingly active in transactionalwork.

While being an independent law firm we have well-established bilateral relations with premium law firms in theScandinavian and Baltic regions.

The firm has an outstanding insolvency and restructuring practice, particularly in the financial sector. Our attorneysrepresent clients in claiming debts and conduct reorganisation, liquidation and bankruptcy proceedings. We also adviseclients in insolvency related criminal proceedings, including matters involving the criminal liability of a board memberor offences committed against creditors.


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Chapter 14

Dittmar & Indrenius

Finland


1.1 How does a creditor take security over assets in Finland?

Finnish law recognises three forms of security interests: pledge;business mortgage; and real estate mortgage. All forms ofconsensual security require entering into a pledge/securityagreement and perfection of the security interest. Perfection of a pledge of receivables and bank accounts is carriedout by notice to the debtor or the bank. Pledge of movable assetsis perfected by transfer of possession of the pledged asset to thesecured creditor or an independent third party. Pledge ofdematerialised securities is perfected by registration of the pledgeon a respective book-entry account. Pledges of certain intellectualproperty rights are perfected by notifying the registrationauthority.Real estate mortgage and business mortgage are registered in theLand Register or Business Mortgage Register. After that therelevant registry delivers the mortgage deeds or promissory noteseither to the owner or to the secured creditor. The perfectionrequires delivery of the mortgage deed or the promissory note tothe secured lender.


The most common grounds for avoidance of transactions concern:(i) uncommon, premature and considerable payments of debt; (ii)granting of security interests; or (iii) the general preference rule.The suspect period for the general preference rule is five years fortransactions concluded with parties not affiliated with theinsolvent. There is no time limit for avoiding transactions withaffiliated parties. The suspect period for any other ground foravoidance is two years for transactions concluded with partiesaffiliated with the insolvent and three months for everyone else. An artificial transaction may be recharacterised under Finnish lawif the right of a third party is based on a financial arrangement theform of which does not correspond to the facts and the intentionhas been to avoid debt execution proceedings or to keep assetsoutside the reach of the creditors.PaymentsA payment is considered having been made with uncommonconsideration if the consideration is something else than money.

Payment with inventory, movable or fixed assets may beconsidered common if such payment has been agreed on whenconcluding the initial agreement.A payment is usually regarded considerable if it exceeds 15% ofthe assets of the bankruptcy estate. Payments that are made in duecourse of business or based on long-term practice are consideredcommon and not voidable. The avoidance rules applicable topayments apply also to set-off. Set-off may be avoided only if set-off would not have been available in bankruptcy.Security interestsGranting of security interests may be avoided, if the perfection ofthe security has not taken place without undue delay after havingagreed on the security, or the parties had not agreed on securitywhen the debt was incurred. A security is not considered as havingbeen granted on an ‘old debt’ if the company is refinanced andgranting the security is a precondition for the new financing.General grounds for avoidanceA transaction may be avoided under the general preference rule ifthe transaction: (i) inappropriately prefers a creditor; (ii) results intransfer of property outside the reach of the creditors; or (iii)increases debts at the expense of the other creditors.This rule may not be invoked unless the debtor was insolvent atthe time of the transaction or became insolvent due to thetransaction. The rule may apply also if the transaction is based onpressure by a creditor. However, normal credit collectionmeasures do not, as such, mean that the transaction would bevoidable. The party seeking avoidance will have to show therecipient was either aware or should have been aware of theinsolvency and inappropriateness of the transaction.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilsta company is in financial difficulties in Finland?

The civil liability of the company’s directors is regulated by theFinnish Companies Act and depends on whether the claimant is acreditor, the company or the insolvency estate. Liability of thedirectors based on any other ground than breach of the CompaniesAct may arise (e.g. if continuance of trading falls under criminallaw provisions), but this is considered exceptional under the caselaw. Civil liabilityThe directors owe a statutory duty of care to the company. Theymay also be held liable to the company, shareholders and any otherparty for breach of any other provision of the Companies Act orthe Articles of Association. For this purpose, insolvency estate is

Juha-Pekka Mutanen

Mika J. Lehtimäki

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Dittmar & Indrenius Finland

equated with the company. Liability in connection withcontinuing to trade while the company is in financial difficultieshas often arisen based on breach of the duty of care or failure tofile for insolvency. Damages liability cannot often be avoided when the companyenters into credit transactions when its ability to make therepayments can be seriously doubted or, when there is nocommercial rationale to continue the financing. Furthermore,omissions to take actions when the grounds of insolvency areapparent, increases the monetary liability of the directors. Liability for trading in financial difficulties is alleviated by the‘business judgement rule’ and if the directors’ decisions are based oncareful evaluation of the alternatives and diligent review of thesituation. Although shareholders’ meeting can resolve to release thedirectors from liability for the past financial year, such a decision doesnot bind the insolvency estate if the administrator sues the directorswithin two years of the relevant actions or negligence.Criminal liabilityThe mere continuance of trading without any alternate motives offraud, deception, unlawful distribution of corporate assets oraccounting related offences should not result in criminal lawliability. DisqualificationA director or a shadow director may be disqualified to act as adirector and to operate a business if he/she has materially breachedthe company’s statutory obligations or committed a criminaloffence in the company’s business. Disqualification may lastbetween three and seven years.

2 Formal Procedures

2.1 What are the main types of formal procedures availablefor companies in financial difficulties in Finland?

There are two main types of formal insolvency procedures inFinland, corporate bankruptcy (bankruptcy) and corporaterestructuring (restructuring). In practice, debt executionprocedure is also a very common way of enforcing a debt, but, asit is not a collective insolvency procedure, it is not discussed here.

2.2 What are the tests for insolvency in Finland?

The general test for insolvency in both statutory procedures iswhether the company is unable to pay its debts as they fall dueotherwise than on a temporary basis. In bankruptcy, the companymay also be insolvent if its assets are insufficient to cover itsindebtedness.


BankruptcyA company can be declared bankrupt if it is insolvent (see question2.2). It is assumed that a company is insolvent if: (i) the debtor hasstopped making its payments; (ii) the debtor’s assets have, duringthe last six months, been subject to an unsuccessful debtexecution; or (iii) the debtor has not paid the creditor’s clear andmatured receivable within one week from having received apayment notice from the creditor. If a creditor is adequatelyprotected by a security interest or a guarantee, the debtor cannot bedeclared bankrupt based on an application of such a creditor.

ReorganisationA company can be placed into reorganisation if:A. at least two creditors, unaffiliated with the debtor,

representing at least one fifth of the debts file a jointapplication with the debtor or notify the court that they willsupport the debtor’s application;

B. the debtor is threatening to become insolvent (it is requiredthat the procedure is necessary to secure the applicant’sconsiderable financial interest); or

C. the debtor is insolvent and none of the restrictions belowapply:a. the procedure would only have a temporary effect;b. the debtor’s assets are insufficient to cover the costs of

the procedure; c. the debtor will be unable to service its debts incurred

after commencement of the procedure;d. there are valid grounds to assume that the purpose of

the application is to invalidate creditors’ rights or there is no possibility for adoption of the restructuring plan; or

e. the accounts of the debtor are substantially deficient orfalse.

A reorganisation application will generally have to be dismissed ifthe debtor is suspected having committed or been sentenced forcertain types of debtor’s criminal offences or the debtor is subjectto a disqualification order.


BankruptcyEither the debtor company or its creditors can apply forcommencement of bankruptcy. A company is declared bankrupt byan order of the court. If the creditor applies for the bankruptcy, thedebtor is notified of the application and it will have a possibility togive a written statement by the date set by the bankruptcy court.Other creditors are not heard. If the debtor applies for its ownbankruptcy, there is no hearing of the creditors.ReorganisationEither the debtor company or its creditors can apply forcommencement of reorganisation. A reorganisation proceedingcommences by an order of the court.If the debtor and its creditors file a joint application, no hearing ofthe other creditors is normally needed. If the debtor files theapplication, the court will notify all known creditors of thecompany and they will be entitled to give written statementsconcerning the application. If a creditor files the application, thedebtor will always be entitled to be heard. The court may, andshould in most cases, give the other creditors a possibility to beheard in the matter.


BankruptcyThe court will post a statement of the commencement of thebankruptcy in the Official Gazette. The administrator posts notices innewspapers and informs the authorities. The administrator preparesthe inventory of the estate and the debtor statement within two monthsand sets a date for lodgement of proof. Information concerning theproving of claims is published in the Official Gazette and notified tothe debtor and the creditors. First call to the creditors’ meeting is sentat least two weeks before the final lodgement date for proof of claims.

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ReorganisationThe court will post a statement of the commencement of thereorganisation in the Official Gazette. The administrator postsnotices in newspapers and usually informs also the authorities. Theadministrator prepares a proposal for a reorganisation plan withinfour months. During this time the administrator is in contact withthe creditors. The administrator notifies the creditors after thereorganisation proposal has been submitted to the court of theirright to give written statements about the plan.

3 Creditors


Unsecured creditors are not free to enforce their rights whether inbankruptcy or in reorganisation. The collective procedure sets theframework for payment of claims and enforcement of rights. Thereare certain exceptions for minor claims and, notably, set-off.


BankruptcySecured creditors are generally free to enforce their rights inbankruptcy. However, as a general rule, the bankruptcy estate isentitled to sell assets used as security: A. with the consent of the secured creditor; orB. based on a court order if the estate has received a bid for the

assets and the creditor cannot show that another type of a salewould result in a higher price.

ReorganisationReorganisations result, among other things, in a freeze onenforcement of security interests. A court may grant an exceptionfrom the enforcement freeze if the assets are not required from theperspective of the reorganisation. In some cases, a court may grantto a new money provider similar or priority right to a securityinterest held by a secured creditor if that is necessary for obtainingfinancing during the procedure and does not significantly increasethe risk of the existing secured lenders.


BankruptcyFinnish law is favourable to insolvency set-off. Although set-off isnot automatic or mandatory, all types of cross-claims (e.g.conditional, uncertain and prospective) may be set-off. However, incase of uncertain and contingent claims, the liquidator is entitled tovalue the claims to their likely financial value. Certain types of claims, such as certain barred debts and debtssubordinated to all other debts, cannot be used for set-off.Furthermore, receivables acquired less than three months before thedate of the bankruptcy application cannot be used for set-off againstsuch debts that the creditor had to the debtor at the time of acquiringthe debt. The time limitation does not apply if the creditor hadreasonable grounds to suspect that the debtor was insolvent at the timeof acquisition of the receivable. Importantly, e.g. a bank cannot set-off its receivable against monies standing on the debtor’s bankaccount. There are also other rather complex set-off restrictions.

ReorganisationThe same set-off rules apply in reorganisation as in bankruptcy.However, as debts do not mature automatically, a receivable maynot be due and payable at the commencement of reorganisation. Inthis case, the creditor can withhold the prospective set-off amountcorresponding to the debtor’s receivable until the debt becomes dueand payable.



BankruptcyThe debtor loses the control of the assets upon commencement ofthe bankruptcy. The creditors ultimately control the bankruptcyestate except when a particular matter falls under theadministrator’s statutory obligations. In practice, the administratorcontrols the day-to-day management of the estate. Theadministrators and the creditors replace the directors andshareholders in the management of the company.ReorganisationsThe debtor usually retains the control of its assets even after thecommencement of reorganisation. In practice, the debtor is able tocontinue in the ordinary course of business. Therefore, the directorsor the shareholders are not replaced in the company’s management,but their actions are restricted to a substantial degree to facilitatepreparation of the reorganisation plan.


BankruptcyThe costs of the administrator are paid from the assets of thebankruptcy estate as are other costs incurred during bankruptcy. Ifthe bankruptcy is cancelled, the debtor is liable for these costs. Insome cases, a creditor may have to carry such costs ifcommencement or cancellation of the bankruptcy results from thecreditor’s omissions or incorrect information. Debts incurred aftercommencement of the bankruptcy will have to be paid as theymature.ReorganisationThe costs of the administrator are paid by the debtor. Cost andcompensation of the participants of the creditors’ committee arepaid by the relevant group of creditors. A party that wishes topresent its own reorganisation plan must prepare the plan at its owncost. The parties bear their own costs incurred in participating inthe procedure.Debts incurred during reorganisation procedure are not subject tothe restructuring plan and they will have to be paid as they mature.These debts have priority if the company is declared bankruptfollowing the reorganisation.


BankruptcyBankruptcy does not automatically affect the employees of theinsolvent company. However, the liquidator may terminate theemployment contracts without normal restrictions on terminationdue to the bankruptcy situation. The termination period is 14 days.

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ReorganisationReorganisation does not automatically affect the employees of theinsolvent company. Effects on the employment arrangements willhave to be included in the reorganisation plan. Termination beforeadoption of the reorganisation plan differs from termination duringthe operation of the reorganisation plan. In the first case,termination can be carried out if it is required to avoid bankruptcyand the work has actually reduced. In the latter case, thetermination can be carried out if it is required by the measuresincluded in the reorganisation plan. Termination cannot be carriedout if the employer is able to offer other work to the employee. Themaximum termination period is two months.


BankruptcyBankruptcy does not, as such, affect the continuance of the debtor’scontracts. If the debtor has not fulfilled its contractual obligationsbefore commencement of the bankruptcy, the other party mustinquire whether the bankruptcy estate will commit itself to thecontract. If the estate commits to the agreement and gives anacceptable security for the fulfilment of its obligations, theagreement cannot be terminated even if there is a bankruptcytermination clause. If the bankruptcy estate does not commit itselfto the contract and repudiates it, the resulting claim (e.g. damages)is considered a provable claim in bankruptcy. Bankruptcy estatecan terminate all of the company’s contracts.ReorganisationReorganisation has, as such, no effect on the continuance ofcontracts. There are two main exceptions to this rule. First, a leaseor a credit-lease agreement where the debtor is the lessee may beterminated by the debtor to end two months after the notice of thetermination. Secondly, the debtor company is, in practice, able toend contracts that can be regarded as unusual from the perspectiveof the debtor’s business. In such cases, the administrator must onrequest of the other party state whether or not the debtor will fulfilits part of the contract. If the answer is no, the other party has theright to terminate the contract.However, it is common that reorganisation is mentioned incommercial agreements as a ground for termination. There is norestriction under Finnish law for using such a provision.

5 Claims


BankruptcyA creditor must prove its receivable by submitting to theadministrator a relatively straight-forward document concerning itsclaim. The administrator sets the deadline for proving the debts. ReorganisationA creditor is not obliged to prove its claim in reorganisation. Thedebts are taken into consideration by the administrator without anyneed to prove the debts. However, if a particular claim is notincluded in the estate inventory, a creditor is obligated to notify theadministrator of its claim within a time period set by the court.


BankruptcyIn summary, the priorities in a bankruptcy are:1. claims of the pledgees and mortgagees (paid from the

security assets); 2. certain debts incurred by the business during a restructuring

preceding the bankruptcy;3. creditors secured by business mortgage (50% of the

enforcement proceeds is distributed to the mortgagee and theremainder is divided between unsecured creditors);

4. unsecured creditors, such as trade creditors and taxauthorities; and

5. creditors who have pre-agreed to subordination of theirclaims to all other debts and certain other last prioritycreditors.

Bankruptcy expenses are deducted before payment of the aboveclaims. RestructuringAn essential part of any restructuring is a reorganisation plan, whichsets forth, e.g. changes to the terms and conditions of thereorganisation debts, such as reductions of the amount of capital. Anotable exception to this is the restriction to cut the amount ofcapital of secured loans. The priority of creditors follows the rules that would be appliedbetween solvent parties. This means, among other things, thatsubordinated creditors are subordinated also for the purposes of theplan. The creditors belonging to various creditor groups will haveto be treated on a pari passu-basis. Interest accruing to other debtsthan secured debts is statutorily subordinated. Creditors holdingonly minor claims may be paid before other creditors. Furthermore,a credit received from the debtor company’s own pension fund canbe wholly repaid in the reorganisation plan.


Both a bankruptcy estate and a company subject to restructuring aresubject to the same corporate tax rules as solvent companies.



BankruptcyAny creditors’ decision requires a majority of votes in the creditors’meeting. The amount of votes that a creditor has is the monetaryamount of his claim. Naturally, no decision can be made tocircumvent the statutory distribution regime or other mandatoryinsolvency rules. ReorganisationUnless the creditors are unanimous on the contents and the approvalof the reorganisation plan, the creditors will vote in differentcreditor groups (secured creditors, creditors with businessmortgage, general creditors, etc.). Approval of the reorganisationplan requires majority approval (number of creditors and amount ofclaims) in each group. There are certain statutory exceptions to thisrule.

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BankruptcyAfter the obligations, receivables and other matters of thebankruptcy estate have been settled, and the assets have beenconverted into cash, the administrator prepares a final settlementof accounts, which is approved by the creditors’ meeting.Bankruptcy ends upon the approval of the creditors’ meeting.After that, the administrator notifies the Register of the Ministry ofJustice of the approval. ReorganisationThe approval of the reorganisation plan marks the end of theofficial reorganisation procedure. After that time the parties willfollow the reorganisation plan. Fulfilment of the plan is usuallysupervised by a specifically appointed supervisor. The operationalperiod of the plan may last for years.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Finland? In what circumstances might thisbe possible?

There is no established manner for carrying out restructuringoutside the formal procedures. The only statutory method forbinding hold-out creditors is through restructuring. Privatelyarranged restructurings are possible, but because privatearrangements with the creditors cannot bind non-accedingcreditors, successful restructuring requires in practice ca. 80-90%of creditor approval to prepay or control the hold-out creditors. Finnish law is rather favourable in terms of facilitating privatelyarranged restructurings - the management liability can becontrolled, debt conversions are relatively easy to carry out,divestments and creditor control can be arranged throughcontractual arrangements and lender liability risk is not too high.


Reorganisation of the debtor is not possible in bankruptcy but inreorganisation such arrangements can be carried out as a part ofthe reorganisation plan.

Reorganisation of debtors can also be carried out through aprivately arranged restructuring. However, creditors cannot takecontrol of the company merely based on an extensive securitypackage. In order to make sure the creditors have control of themanagement of the debtor, an equity participation in the debtor isoften required.


Pre-packaged sale is possible but not often used in restructuring.The sale plan should be included in the restructuring plan andapproved by the court. Although Finnish reorganisations haveconcentrated on debt restructuring, there are no legal restrictionsto effect various operational and structural reforms through theplan.

8 International

8.1 What would be the approach in Finland to recognising aprocedure started in another jurisdiction?

EU Member StatesProceedings opened in an EU Member State under the ECRegulation on Insolvency Proceedings are recognised without anyformality in Finland (as of the judgment opening the proceedingsbecoming effective in the relevant Member State).Other countriesIf the centre of the main interests of the debtor is not in an EUmember state, Finnish courts have jurisdiction if the debtor hasbusiness premises in Finland or holds such assets in Finland that itcan be deemed appropriate to have a Finnish bankruptcyprocedure. In practice, recognising a procedure started in anotherjurisdiction depends on the court’s discretion and internationalcomity. However, the Finnish courts have no jurisdiction if thedebtor has been declared bankrupt in Iceland, Norway or Denmarkand the debtor is domiciled in these countries.Although there are no statutory rules concerning recognition inrelation to restructuring, the above rules should apply by analogyalso in restructuring procedures.

WWW.ICLG.CO.UK85


Mika J. Lehtimäki

Dittmar & IndreniusPohjoisesplanadi 25 AFI-00100 HelsinkiFinland

Tel: +358 9 6817 0152Fax: +358 9 6524 06Email: [email protected]: www.dittmar.fi

Mr. Lehtimäki is a senior attorney in the firm’s Finance & CapitalMarkets practice. His work focuses on corporate finance and capitalmarket transactions, structured finance, corporate recoveryprocedures and mergers and acquisitions. He is also experienced incross-border transactions and has written about financial law bothin Finland and in the UK.

Juha-Pekka Mutanen

Dittmar & IndreniusPohjoisesplanadi 25 AFI-00100 HelsinkiFinland

Tel: +358 9 6817 0112Fax: +358 9 6524 06Email: [email protected]: www.dittmar.fi

Mr. Mutanen is a partner of the firm and heads the firm’s Finance &Capital Markets practice area. He advises banks, insurancecompanies, financial institutions, investment banks, private equityand venture capital houses in various finance and capital markettransactions including restructuring issues. He also advisescorporations in a range of financial law issues, including generalcorporate finance, acquisition finance and structured transactionssuch as securitisation and project finance. He has written andspoken widely on various financial and corporate law topics.

Dittmar & Indrenius, established in 1899, is an independent Finnish law firm focused on the quality of its services andthe satisfaction of its clients. Dittmar & Indrenius aims at providing the best legal services in complicated transactionsand complex dispute resolution in its jurisdiction. We also strive to be the best long-term law firm partner fordemanding corporate clients in Finland.


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Chapter 15

Bredin Prat

France


1.1 How does a creditor take security over assets in France?

In France, a creditor may take security in two ways:by agreement with the debtor, and, with respect to certainsecurity interests, registering the interest with the clerk of thecommercial court where the debtor’s headquarters is located;orwithout the agreement of the debtor, following courtauthorisation.

Where bankruptcy proceedings are opened, securities over assetsobtained by a creditor during the “suspect period” can be cancelledby the Court (see question 1.2).


Certain transactions entered into during the “suspect period” (aperiod extending backward in time from the judgment opening thebankruptcy case to the court-determined date on which the debtorwas in “cessation of payments” (insolvent), but in no event morethan 18 months prior to the judgment) may be avoided. Avoidabletransactions include:

certain transactions or acts for which the debtor receives lessthan the value of the item parted with, including: propertytransfers where no consideration is provided; contractswhere the consideration provided by the debtor unfairlyexceeds the value of the consideration received; payment ofdebts that are not due; payments outside of the ordinarycourse of business; providing security for antecedent debts,etc.; and payments of overdue debts and other transfers forconsideration with a creditor who was aware of the debtor’scessation of payments at the time of the transaction.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in France?

A director who is aware of the debtor’s cessation of payments mustfile a formal declaration to that effect with the clerk of thecommercial court having jurisdiction over the debtor. If such adeclaration is not made within 45 days of the debtor’s cessation ofpayments, the director may be subject to two types of sanctions:

an order prohibiting the director from managing anycompany for a maximum period of five years; ora judgment requiring the director to make up all or part of thedebtor’s liabilities, if it is evidenced that such directorabusively continued to trade in his personal interest althoughtrading could only lead to the cessation of payments of thecompany.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in France?

In addition to the less formal procedures of “mandat ad hoc” andconciliation (see question 7.1 below), there are three types of courtsupervised procedures for companies in financial difficulties:

Safeguard Procedure (“procédure de sauvegarde”).Recovery (“redressement judiciaire”).Liquidation (“liquidation judiciaire”).

The Safeguard Procedure and Recovery are both designed toprovide for the continuation of the business, maintainingemployment and settling of debts.Liquidation is intended to put an end to the business activity of thecompany and to sell the legal estate and effects of the debtor.

2.2 What are the tests for insolvency in France?

Cessation of payments (“état de cessation des paiements”), whichtriggers Recovery or Liquidation, is a state in which the company isunable to satisfy its current liabilities as soon as they become duewith its available assets.


The Safeguard Procedure is available to any company that isnot in a state of cessation of payments, but which is, oranticipates, suffering difficulties which it is not able toovercome, and which are likely to lead to cessation ofpayments.Recovery is only available for companies that are in acessation of payments but for which recovery is notobviously impossible.Liquidation is available for companies that are in a situationof cessation of payments and for which recovery is clearlyimpossible.

Nicolas Laurent

Tim Portwood

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Bredin Prat France


The Safeguard Procedure can only be opened at the request of thedebtor, while Recovery and Liquidation can be opened at therequest of the debtor, by writ of summons of a creditor, uponrequest of the public prosecutor or upon the sole initiative of therelevant court. Liquidation can be opened directly or upon conversion of a failedRecovery.


With the exception of secured creditors, who in principle arepersonally informed of the opening of a bankruptcy procedureagainst their debtor, there is no particular notification to creditorsregarding the opening of a bankruptcy proceeding, other than thepublication of the opening judgment in a legal publication and themention of such judgment in the debtor’s corporate register.

3 Creditors


Following the opening judgment in any of the three court-supervised procedures, there is a stay prohibiting the payment ofany claims that arose prior to the judgment. Payments made inbreach of this stay may be nullified and both the creditor and thedebtor may be subject to criminal sanctions.In the case of the Safeguard Procedure, this stay also benefitsguarantors of the debtor, where the guarantor is an individual; theproceedings against such individual guarantors are suspended untilthe judgment concluding the proceeding (i.e., the judgmentapproving the recovery plan or the sale plan, or a judgmentapproving the liquidation).There are two exceptions under which unsecured creditors whoseclaims arose prior to the opening judgment may be paid:

prior claims relating to salaries are paid immediately fromavailable monies or, in the absence of funds, by theAssurance Garantie des Salaires (“AGS”), within ten daysfrom the judgment opening the bankruptcy proceeding; oraccording to case law, set off payments may be authorised insome circumstances (see question 3.3).


Those creditors which hold a security interest and whose claimarose prior to the opening judgment are also subject to the rulestaying the payment of prior claims.However:

the court-appointed judge in charge of monitoringbankruptcy proceedings (juge commissaire) has the power toauthorise the debtor to pay prior creditors which hold apledge or an asset necessary to the business, in order to beable to withdraw such asset;the same applies to sellers who have reserved title withrespect to goods that have not been fully paid;debtors which hold a guarantee and the assets of which aresold within the observation period are entitled to provisionalpayment; and

secured creditors may also request the judicial award of thepledged asset or claim the proceeds realised from the sale ofthe pledged asset. In the latter case, the creditor is, however,subordinated to those creditors whose claims rank senior,which will be paid in priority from the proceeds of the sale.


Two reciprocal debts that arose prior to the judgment opening thebankruptcy proceedings are considered to offset each other by rightwhen all conditions for legal offsetting were met prior to thejudgment (both debts were certain, liquid and due prior to theopening judgment).A debt arising prior to the opening judgment and a debt arisingsubsequent to that judgment cannot, in principle, offset each other.As an exception, offsetting is permitted when the debts areconnected, i.e., arise from the same legal relationship, provided thatthe creditor has validly declared the existence of the prior claim inthe proceedings.As regards claims arising from the operation of the business duringthe course of the bankruptcy proceeding, the principle is that suchdebts must be paid when they become due. Therefore, when bothreciprocal debts arise subsequent to the opening judgment, theunpaid creditor is entitled to offset.



In the Safeguard Procedure and in most Recovery proceedings, thecompany continues to be managed by its legal representatives.However, in the Safeguard Procedure, the bankruptcy trustee(administrateur) may be empowered to supervise management, or toprovide assistance with respect to all or part of the debtor’s business.In addition, in Recovery, the trustee is at a minimum entrusted withassisting the debtor in the management of all or part of its business.Alternatively, the trustee may be entrusted with the solemanagement of all or part of the business.In liquidation, the trustee alone manages the debtor’s business butthe corporate bodies (i.e., the board of directors, etc.) stay in place.In each of the above cases, shareholders may continue to exercisetheir rights through shareholders’ meetings (e.g., capital increase).In Recovery, the court may, however, impose restrictions on theability of de jure and de facto managers of the company (includingmajority shareholders) to sell their equity interests.In Liquidation and in Recovery, when the trustee alone manages thebusiness, the information provided to shareholders may be limitedto the minimum disclosures required in advance of a shareholders’meeting.


The funding of the observation period (the period following theopening judgment through the final judgment) is ensured by thestay of all claims that arose prior to the opening judgment. Thoseclaims are not paid until the decision of the tribunal is adopted, andare paid out based on the remaining available funds according to aprioritisation scheme.

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With respect to claims arising subsequent to the opening judgment,it is the duty and responsibility of the trustee (“administrateur”) toensure that he holds funds in an amount sufficient to make thepayments as due. Should the company be unable to pay, it is thetrustee’s duty to terminate the contract. Thus, any sums lent by abank within the observation period are to be paid in priority toclaims arising prior to the opening judgment.The expenses and fees of the administrators, liquidator andbankruptcy court are also paid on a priority basis.


Amounts due to salaried employees under their employmentcontracts are paid out as follows:

Amounts corresponding to sums due to employees prior tothe judgment opening the bankruptcy proceedings are paidby the trustee within 10 days of such judgment or, if thedebtor does not have sufficient funds, then from the firstproceeds received by the debtor. Additionally, if funds aresufficient, an amount equal to one month of unpaid salary isto be paid to the employees. Subsequent to the opening judgment, such amounts are paidas they become due. Should they remain unpaid, they benefitfrom a guarantee from the AGS (“Assurance Garantie desSalaires”, a government fund) in the Safeguard Procedure aswell as in Recovery. When the AGS acts in lieu of thecompany, it becomes subrogated to the rights of the salariedemployees and is paid in priority at the end of the bankruptcyproceedings.

When unavoidable, layoffs are performed:in the Safeguard Procedure in compliance with general layoffprocedures; and/orin compliance with a simplified procedure which departsfrom general layoff procedures in a Recovery or Liquidation.

Additionally in Liquidation, layoffs must take place within 15 daysfrom the judgment ordering the Liquidation.Severance payments are guaranteed by the AGS in each of thesecases, provided that layoffs take place within the observation periodin the Safeguard Procedure and Recovery and within 15 days of thejudgment in a Liquidation.


The trustee has the exclusive right to enforce ongoing contractsregardless of any provision or ipso facto clause which purports toallow the termination of the contract upon the opening ofbankruptcy proceedings. Ongoing contracts are those contractswhich are in force, but have not been fully executed, at the openingof recovery proceedings. Contracting parties that do not fulfil theirobligations under such ongoing contracts may be subject to anaction for breach of the contract. A contracting party may send a formal notice to the trustee in orderto request that the trustee decide within one month whether toabandon or adopt a specific ongoing contract. Should the trusteenot provide an answer within such time-period, the contract isconsidered terminated. Until such time as the contract is rejectedby the trustee or the contract is otherwise considered terminated, thecontracting party must continue to perform its obligations under thecontract.If the trustee decides to continue an ongoing contract, he is requiredto pay amounts due under the contract. When confirming that he

wants ongoing contracts to be continued, the trustee must make surethat he has sufficient cash to pay those amounts as they come due. Ifan invoice is not paid when due, the contract will be immediatelyterminated, and the unpaid amount will be granted a payment priorityover those amounts due prior to the opening of bankruptcyproceedings. In addition, the trustee’s professional liability may beengaged in the event the company is unable to fulfil its obligations.This provides a significant incentive for the trustee to carefully reviewthe debtor’s cash flow forecasts before continuing ongoing contracts.

5 Claims


Creditors whose claims antedate the opening judgment are obligedto declare their claim within two months of the publication of thejudgment (four months for creditors domiciled abroad). Suchdeclaration of claim must be made in writing and sent via aregistered letter with acknowledgment of receipt to the creditor’srepresentative (mandataire judiciaire) in case of Recovery and tothe Liquidator in case of Liquidation.Creditors whose claims are subsequent to the opening judgment areexempt from the obligation to declare their claims and must be paid atmaturity. In the event of total assignment or transfer of the company,or where such claims are not paid at maturity following a continuationplan, they benefit from a payment privilege (see question 5.2).


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Creditor Priority in a SafeguardProcedure and in Recovery

Creditor Priority in LiquidationProcedure

“Super Priority of Employees” amounts due to employees as remuneration,or with respect to paid absences.

Court expenses, administrator’s and attorney’s fees, and certain otherexpenses (“frais de justice”).

“New money” contributions madeduring the course of a conciliationprocedure that preceded theSafeguard or Recovery Procedure.Shareholder capital contributions donot benefit from this priority.

New money contributions made duringthe course of a conciliation procedurethat preceded the Safeguard orRecovery Procedure. Shareholdercapital contributions do not benefitfrom this priority.Debts secured by real property ordebts secured by possessory securityinterests in personal property (“mobil-ière spéciale”).

Employee debts that were not advanced by the AGS.

Court expenses, administrator’s and attorney’s fees, and certain otherexpenses (“frais de justice”).

Debts resulting from loans or contractual obligations assumed subsequent tothe judgment opening the bankruptcy proceedings.

Sums advanced by the AGS.

Other post-judgment debts based on their relative ranking.

Other pre-judgment debts (unsecured debts).

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Tax debts are paid on a priority basis in all of the proceedings (seequestion 5.2).Public creditors (financial administrative authorities, social securitybodies, institutions administering unemployment insuranceprogrammes) may grant the debtor full or partial debt remission ordecide to transfer or waive their senior ranking.



Creditors must be consulted on debt remissions and extensions ofpayment dates in a plan. They may be consulted either individuallyor as committees.When a company undergoing bankruptcy proceedings employsmore than 150 salaried employees or generates a turnover of €20M,two creditor committees must be formed: the first committeeencompasses all credit institutions which are creditors of thecompany; and the second committee is composed of its mainsuppliers (the claim of which exceeds 5% of the aggregate amountof all suppliers’ claims). Below these thresholds, the formation ofthese committees is optional.The debtor must present each of these committees with a draft planwithin two months from the committees’ formation. This periodmay be extended for two months. Each of the committees mustvote on whether to accept the plan within thirty days, in compliancewith the rule of the “double majority”: the adoption of a draft planis conditional upon its acceptance by the absolute majority of thecreditors representing at least two-thirds of the total amount of theclaims, exclusive of tax.If the draft plan is adopted by both committees, the proposals fordebt cram down and extension of payment dates contained in theplan become binding upon all members of the committees, eventhose committee members who voted against the plan.Those creditors which are not members of a committee areconsulted individually. They must individually consent to anyproposal of debt cram down or extension of the payment date whichrelates to them.During the adoption process, the court may impose extension ofpayment dates upon certain creditors. However, the court cannotimpose any cram down or increase the commitments alreadyundertaken by the creditors in connection with the plan proposal.


The Safeguard Procedure comes to an end either with the adoptionof a safeguard plan to be implemented by the debtor; or, in case ofa cessation of payments which intervenes during the SafeguardProcedure, with the opening of a Recovery or Liquidation. Theopening of Liquidation proceedings is, however, mandatory ifcessation of payments intervenes during the implementation of theSafeguard Plan. The Safeguard Procedure may also be closed whenthe difficulties which caused its opening cease to exist.Recovery comes to an end either: with the adoption of acontinuation plan, to be implemented by the debtor under thesupervision of a court-appointed trustee (“commissaire àl’exécution du plan”); with the adoption of a sale plan under which

all or part of the business of the debtor is to be sold to a buyer; orwith the conversion of the Recovery into a Liquidation. Theproceeding may also be closed when the cessation of payments nolonger exists.Liquidation comes to an end once all of the debtor’s assets are sold,whether through the sale of the business or through an asset sale. If,following the closure of a Liquidation proceeding, the debtor isunable to pay all outstanding debts, the debtor’s former executives(and under certain circumstances, de facto managers), may bepursued for the shortfall. In the event a court determines that theformer executives mismanaged the debtor, and that thatmismanagement contributed to the debtor’s shortfall, the executivesmay be held personally liable for all or part of the shortfall.


7.1 Is it common to achieve a restructuring outside a formalprocedure in France? In what circumstances might this bepossible?

Outside of informal workouts, which are not uncommon, twofrequently-used procedures are the “mandat ad hoc” andconciliation, both of which proceed under the aegis of a third-partyappointed by the court. These procedures may only be employed ifthe company is either not in cessation of payments, or, with respectto conciliation, if the company has not been in cessation ofpayments for more than 45 days. These procedures are notcompletely out of court procedures to the extent that the“mandataire ad hoc” and conciliator are appointed by and report tothe court and may, in the case of a conciliation, result in anagreement between the parties that is homologated (officiallyrecognised) by the court.


It is possible to reorganise a debtor rather than realise its assets andbusiness. The Safeguard procedure is specifically designed toachieve a reorganisation so as to avoid formal insolvencyproceedings. Once formal insolvency proceedings havecommenced, the availability of a reorganisation depends upon thecourts assessment of the prospects of the reorganisation succeeding.


Until the beginning of 2009, there had been no precedents of a pre-packaged sale being implemented to restructure a debtor’s liabilitiesvia a debt to equity swap before the commencement of Safeguard(or other formal insolvency) proceedings. The first true example ofthis practice is the Akerys-Autodistribution restructuring. TheSafeguard Law permits debt to equity swaps but does not providefor an accelerated procedure during which the creditors must agreeto the pre-packaged consensual deal before formal proceedings arecommenced removing the flexibility of a pre-package negotiationfrom the creditors. The pressure of time before the debtor decidesto file for Safeguard proceedings can, however, provide sufficientincentive on willing creditors to persuade their recalcitrantcounterparts to toe the consensual line.

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8 International

8.1 What would be the approach in France to recognising aprocedure started in another jurisdiction?

With respect to a procedure in a Member State of the EUIn applying EU regulation n° 1346/2000 on bankruptcy, Frenchcourts recognise as fully binding a decision of a court in anotherMember State opening an insolvency proceeding with respect to adebtor located in a Member State. The only exception to thisrecognition is if the decision is contrary to the public order ofFrance (this exception is strictly interpreted).A French court that is requested to open a “main” bankruptcyproceeding that would compete with a “main” proceeding alreadyinstituted in another Member State would refuse the request. Applying EU jurisprudence (European Court of Justice, Eurofoods,May 2, 2006, No. C-341/04), French courts would conclude thatthey lack jurisdiction to review the analysis of the debtor’s “centreof main interests” made by the court having originally instituted themain procedure in another Member State. Accordingly, the solemeans to seek review of a decision instituting the main procedure inanother Member State is through the appeal or other review processprovided for in that Member State (Cass. com. Daisytek, June 27,2006, n° 03-19.863).A French court may, however, open a secondary procedure, whenthe debtor has a secondary establishment in France. This proceduremay only be instituted as a liquidation proceeding and would begoverned by French law.

With respect to procedures opened outside of the European Union:A decision opening bankruptcy proceedings in a country outside theEuropean Union would have no effect in France, except throughobtaining an “exequatur” (a special decision by a French courtproviding for the execution of a foreign judgment) or by virtue ofan international treaty. Absent an exequatur, the foreign judgment will nevertheless havean evidentiary value: it permits the debtor to establish, in theabsence of a parallel insolvency proceeding in France, the powersof the trustee or other foreign representative of the debtor. Theforeign trustee will be permitted to request actions to conserve thedebtor’s assets in France and to seek an exequatur procedure inFrance of the foreign decision. However, without an exequatur, the trustee may not liquidate thedebtor’s French assets or dissolve the debtor’s French corporatestructure. Moreover, creditors may continue to pursue the debtor inFrance, and obtain payment based on the debtor’s French assets. The exequatur of the foreign judgment may be requested by anyinterested person, unless a bankruptcy proceeding has already beenopened in France with respect to the debtor. Once the exequatur hasbeen granted, claim preclusion applies to the foreign judgment. AnExequatur does not, however, transform a foreign bankruptcyproceeding into a French proceeding. The French court should takecare to be guided by the applicable foreign law with respect to anydecisions it makes based on the foreign judgment.

WWW.ICLG.CO.UK91


FranceBredin Prat

Tim Portwood

Cabinet Bredin Prat130, rue du Faubourg Saint-Honoré75008 ParisFrance

Tel: +33 1 4435 3535Fax: +33 1 4289 1073Email: [email protected]: www.bredinprat.com

Mr. Tim Portwood is a partner at Bredin Prat, and a French qualifiedEnglish barrister. He specialises in international arbitration andinternational litigation. Originally trained as a litigator/arbitrator, Mr.Portwood was involved in a number of major bankruptcy cases inFrance where he used expertise in litigation combined with hisknowledge of bankruptcy law. He is the author of the Frenchsections of the comparative law manual “Directors in the TwilightZone II” published by Insol International.Born in the United Kingdom, Mr. Portwood graduated fromCambridge University. He was the co-editor of European HumanRights Reports (1991-1994) as well as the author of “Mergers inEuropean Community Law” (Athlone Press, 1995), and of“Competition Law and the Environment” (Cameron May, 1995). Heis the co-author (with Louis-Christophe Delanoy) of “LaResponsabilité de l’Etat pour Déni de Justice dans l’Arbitraged’Investissement” Rev. Arb. 2005, p. 603. Mr. Portwood is a nativeEnglish speaker and is also fluent in French, Italian and German.

Nicolas Laurent

Cabinet Bredin Prat130, rue du Faubourg Saint-Honoré75008 ParisFrance

Tel: +33 1 4435 3535Fax: +33 1 5856 2308Email: [email protected]: www.bredinprat.com

Mr. Nicolas Laurent is a partner at Bredin Prat, whose primary areasof practice include mergers and acquisitions andbankruptcy/restructuring. Originally trained as an M&A lawyer, Mr.Laurent was involved in a number of major bankruptcy cases inFrance where he used his expertise in M&A combined with hisknowledge of bankruptcy law.A member of the Paris Bar since 1998, Mr. Laurent received his lawdegree from the University of Paris, Sorbonne (“DEA de droit desaffaires et de droit économique”) and taught bankruptcy law atUniversity of Paris, Sorbonne. Before joining Bredin Prat in 2001 asan associate, he worked as an associate at an American firm in Parisand Beijing offices. Born in France, Mr. Laurent is also fluent inEnglish and has a working knowledge of Spanish.

Drawing on its M&A, Litigation and Financing practices, Bredin Prat has a strong restructuring and bankruptcy practicewith extensive experience in managing high profile, domestic and cross-border, financial restructurings and bankruptcysituations.

Bredin Prat has acted as counsel (for debtors, creditors or parent companies) on a number of the largest restructuringsin the French market.

Bredin Prat has also acted as counsel (for debtors, parent companies or potential acquirers) in connection with thebankruptcy proceedings of major French public and private companies.

Recent Restructurings/Bankruptcy cases handled by Bredin Prat include:

Autodistribution pre-packaged sale (the first in France).

Teksid’s restructuring.

Eurotunnel’s pending restructuring.

DMC’s pending restructuring.

Rhodia’s restructuring.

Vivendi Universal’s restructuring, together with Slaughter and May.

Crédit Lyonnais’s restructuring.

The bankruptcy of Metaleurop Nord and Metaleurop SA.

The bankruptcy of Péronne Industrie (Flodor) and Geladour.

The bankruptcy of AOM.

The bankruptcy of the French daily newspaper France Soir.

The bankruptcy of Cadence Innovation France (ex-Péguform).

The lawsuits initiated against managers in the context of the Moulinex-Brandt bankruptcy.

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Chapter 16

Hengeler Mueller

Germany


1.1 How does a creditor take security over assets in Germany?

Generally, a Creditor needs an agreement with the Company to takesecurity over the assets of the Company. Depending on the asset andthe security, additional requirements may need to be met to validlyestablish a security: a mortgage or land charge needs to be registeredwith the land register and a pledge over tangible assets - other than realestate - requires that the Creditor holds possession of such assets. Nopossession, however, is required if title to the respective asset istransferred to the Creditor for security purposes. Intangible assets aswell as claims may be assigned for security purposes to the Creditor.Only a landlord with respect to his tenant’s assets on the premisesand a contractor with respect to assets of the Company held by thecontractor, by law take security over such assets.There is no general register for securities granted over assets otherthan for charges on real estate, ships and aircrafts.


Transactions, including the granting of securities, prior to theopening of an insolvency proceeding are voidable if they have adetrimental effect on other Creditors - which generally has to beassumed unless specific circumstances apply - and provided that: (a) the transaction was effected within three months prior to the

filing of the application for an insolvency proceeding orthereafter if the Company was already insolvent and theCreditor was aware thereof or the fact that an application hadbeen filed; or

(b) a security was granted or a claim was settled, which were notdue for granting or settlement at that time, and such grantingor settlement was effected either during the month precedingthe filing for insolvency or during the second or third monthprior to the filing, in such case, however, only if theCompany was insolvent already or if the Creditor knew thatthe transaction would be to the detriment of other Creditors.

Furthermore, detrimental transactions implemented even more thanone year prior to the filing for insolvency may be voided if: (i) theCompany acted in bad faith with the intent to discriminate otherCreditors; or (ii) no consideration was granted. In addition, anyrepayment of shareholder loans within one year prior to the filing ofthe application for opening insolvency proceedings can be voidedand the monies so paid have to be returned. The same applies to

comparable transactions having the same economic effect, e.g. anypayments by the Company to a third party in order to settle aliability secured by the shareholder. In this case the third party hasto return the monies and may then foreclose on the security initiallyprovided by the shareholder.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Germany?

A managing director (Geschäftsführer) of a GmbH or a member ofthe executive board (Vorstandsmitglied) of an AG (both hereinafterreferred to as “directors”) is obliged to file a petition to openinsolvency proceedings without undue delay, at the latest withinthree weeks, if and when the Company is: (i) insolvent, i.e. not ableto pay its debts as they fall due; or (ii) overindebted, i.e. itsliabilities exceed its assets (for details please see question 2.2). Once the Company is insolvent or overindebted, a director is liable tothe Company for all payments effected thereafter by the Company,unless the director can demonstrate the payments were made with thediligence of a prudent businessman in such a situation. If a director fails to file for insolvency and the Company continuestrading, he may, in addition, be liable towards the Creditors as wellas the shareholders for any damages resulting therefrom. Creditorswho entered into a contract prior to the Company being insolventare entitled to claim damage equal to the amount they lose due tothe fact that - as trading had continued - now more Creditors exist;whereas Creditors who enter into a contract with the Company at atime when it is already insolvent may claim the damage theysustained by entering into a contract with an insolvent Company.If the Company has no directors, the obligation to file forinsolvency is imposed upon each shareholder (Gesellschafter) of aGmbH and in an AG on each member of the supervisory board(Mitglied des Ausichtsrats).Failure to file for insolvency and the granting of preferences toindividual Creditors, even though the Company is insolvent and thedirector is aware thereof, constitute a criminal offence. Any suchoffence may lead to disqualification from certain positions in thefuture.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Germany?

If a Company is insolvent, only the statutory insolvency proceeding

Dr. Ulrich Blech

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Hengeler Mueller Germany

(Insolvenzverfahren) under the Insolvency Act (Insolvenzordnung)is available. Under the Insolvency Act the Insolvency Administrator(Insolvenzverwalter) may pursue the standard procedure(Regelverfahren) and decide to liquidate the Company either bylaying off the personnel and selling the assets or by selling theoperations including its personnel to a new entity. Alternatively, the Administrator and the Creditors may develop andimplement an Insolvency Plan (Insolvenzplan). The concept of anInsolvency Plan is similar to the Chapter 11 procedure under theUnited States Bankruptcy Code - with a number of differences. In anInsolvency Plan, defined Creditor groups may resolve to structure theinsolvency proceedings differently in order to provide more flexibilityfor a special liquidation, a disposal or a financial restructuring (seequestion 6.1). Unlike the procedure available under Chapter 11,however, any reduction of the rights of the existing shareholder, i.e.any capital reduction or dilution affecting the existing shareholders,will require their consent. Insolvency Plans have been rarely used inthe past, and only lately have become a more often used instrument.

2.2 What are the tests for insolvency in Germany?

A Company has to be put into insolvency proceedings if it is (i)either insolvent or (ii) overindebted; it may be put into proceedingsexclusively upon application of the Company itself - if insolvencyis imminent in the future:

A Company is insolvent if it is not able within the next twoto four weeks to pay the debt which falls due in such period.Minor delays in paying outstanding debt not exceeding 10 %of the debt due do not necessarily mean insolvency,depending on the circumstances. Insolvency is imminent ifthe possibility not to be able to pay its debts is greater thanthe chance to get such debt paid within the foreseeablefuture. In principle, the Company is overindebted if its liabilitiesexceed its assets. To mitigate the effects of the worldwidefinancial crisis, the German legislator has amended theInsolvency Act so that the test to be applied foroverindebtedness has been changed for a limited period oftime (until 31 December 2010) to avoid that major booklosses force companies into insolvency.

Until 31 December 2010, therefore, the following temporary regimeapplies:The Company is overindebted if, based on liquidation values, itsliabilities exceed its assets, unless the continuation of the businessof the Company is more likely than not. This means that,effectively, the Company is not considered overindebted whencontinuation of the business, based on a reasonable and carefulassessment, is more likely than not, regardless of whether theliabilities exceed the assets.Until the amendment came into force on 18 October 2008, however,the following test comprising of three elements applied and willagain apply as of 1 January 2011: first, the assets are valued at theirliquidation value. If the liabilities exceed the assets so valued, it -secondly - has to be decided whether the continuation of thebusiness of the Company is more likely than not. If it seems morelikely - based on a reasonable and careful assessment - that thebusiness cannot be continued (for example, as the business modelcannot be sustained), then the Company is overindebted and has tobe put into insolvency. If, however, it seems more likely that thebusiness can be continued, then - in a third test - the assets have tobe valued on a going concern basis. If the assets so valued still fallshort of the liabilities, the Company is overindebted and has to beput into insolvency.


If the Company is insolvent or overindebted (see question 2.2), thedirectors have to file without undue delay, at the latest within threeweeks, a petition to open insolvency proceedings at the competentcourt. Such a petition may also be filed by a Creditor or, if theCompany is a limited partnership (KG), by any of its partners. Ifinsolvency is imminent in the future, only the directors may decideto file for insolvency, however, without being obliged to do so.The insolvency proceeding under the Insolvency Act is mandatoryprovided there are sufficient assets available to cover the costs forsuch proceedings. If the funds do not suffice to cover the costs, noproceeding will be opened and Creditors will be free to individuallypursue their claims. Upon insolvency proceedings being opened, the InsolvencyAdministrator, the Creditors’ Committee (Gläubigerausschuss) andmajor Creditors in practice will decide whether a regularproceeding or an Insolvency Plan is pursued. Whether a fullliquidation, a sale of the enterprise by means of an asset deal or arestructuring by means of an Insolvency Plan is implemented,therefore depends on the circumstances.


A petition to open insolvency proceedings has to be filed at theinsolvency court (Insolvenzgericht) at the local court (Amtsgericht)where the Company has its official seat. The court will eitherdecide itself whether the Company is insolvent and has sufficientassets to finance the proceeding (see question 2.3) or - most likely- will appoint an expert or a Preliminary Insolvency Administrator(vorläufiger Insolvenzverwalter) to determine the relevant facts andsubmit a report thereon. In order to protect the assets of the Company the court - as it deemsnecessary - may grant the Preliminary Insolvency Administratorextensive rights to control and supervise the transactions of theCompany and to block attempts by Creditors to individually enforcetheir claims. The preliminary proceedings may last up to severalmonths depending in particular on the financing available. Veryoften, such preliminary proceedings are used to explore the chancesof restructuring the Company. Once the expert or Preliminary Insolvency Administrator hassubmitted its report on the Company, the court will decide as towhether the official insolvency proceedings are opened and anofficial Insolvency Administrator (Insolvenzverwalter) isappointed. Generally, the Preliminary Insolvency Administratorsubsequently becomes the Insolvency Administrator. WhileCreditors or the Company may submit to the court their proposalson the Administrator, it remains in the sole discretion of the court,whom it appoints. Furthermore, the insolvency court will - at least in major insolvencies- appoint a Creditors’ Committee (Gläubigerausschuss), which shallcomprise all major Creditor groups, i.e. the secured and unsecuredCreditors as well as large and small amount Creditors. The Creditors’Committee supports and supervises the Administrator, who requiresthe consent of the Creditors’ Committee for major transactions, inparticular, the disposal of the operations as a whole or in parts, thetaking-up of new loans and major litigation.The Creditors’ Meeting (see question 2.5) may replace theAdministrator as well as the Creditors’ Committee.

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The opening of proceedings (and other publications relating to theinsolvency proceedings) are published in a central publication onthe internet (www.insolvenzbekanntmachungen.de). In addition,known Creditors are generally informed by the Administrator or thecourt of the opening of insolvency proceedings. Furthermore, anotification is entered into the relevant public registers in which theCompany or certain of its assets (land register, aircraft and shipregister) are registered.The court order stating the opening of the insolvency proceedingsalso sets the dates for mandatory Creditors’ Meetings(Gläubigerversammlungen). Generally, in the first Creditors’ Meeting the Administrator reportsto the Creditors on the options of continuing or disposing of theoperations of the Company. The Creditors’ meeting may, inparticular, resolve that the Administrator is required to prepare anInsolvency Plan. In a further Creditors’ Meeting the Administrator will report on theclaims raised by Creditors and whether he accepts such claims (seequestion 5.1). Additional meetings of the Creditors’ may be called by theAdministrator, the court, the Creditors’ Committee or certain groupsof Creditors.Any resolution by the Creditors’ Meeting requires the consent ofCreditors holding at least 50% of the claim amount owed to theCreditors present in such meetings.

3 Creditors


Once a petition for opening insolvency proceedings has been filed,the court may - in order to protect the assets of the Company -resolve that unsecured Creditors must not enforce their rights.Upon the final insolvency proceedings being opened, by law noindividual enforcement of the rights of unsecured Creditors ispossible. Instead, the Creditors must file their claims with theInsolvency Administrator (see question 5.1).


As for the unsecured Creditors, the insolvency court may also orderfor the secured Creditors that all measures to enforce such securitiesare blocked during preliminary insolvency proceedings. Once insolvency proceedings have been opened, however, theenforcement of such securities depends on the nature of the securitygranted:

If the Creditor has full title to the asset, such asset has to bereturned to the Creditor. This applies, in particular, to assetssold to the Company, subject to retention of title by theCreditor. Most securities, however, only grant a right to receiveproceeds from their realisation. Hence, the secured Creditorhas to file his claim with the Administrator. It depends on thekind of security, whether the security is then realised by theInsolvency Administrator himself or in special proceedingsoutside the insolvency proceedings. Generally, assets whichhave been transferred to the Creditor only for securitypurposes or rights and claims pledged remain under the

control of the Insolvency Administrator, who realises suchassets, rights and claims and forwards the proceeds to theCreditor. The Insolvency Administrator may charge a certainamount for such realisation - generally around 5%. He mayeven block or delay realisation for a certain period, however,only against a defined compensation. Securities held by the Creditor in his possession andmortgages or land charges are realised in separateproceedings, which the Creditor can initiate but - withrespect to land charges or mortgages - may also be initiatedby the Administrator. The Administrator may - to a limitedextent - delay a foreclosure, inter alia, in order to gain timefor the implementation of an Insolvency Plan or if suchforeclosure would hinder a more successful realisation of theassets of the Company.

If - with the consent of the major creditor groups (see question 6.1)- an Insolvency Plan is agreed and implemented, such plan maylimit the rights of secured creditors.


Creditors may set off sums against amounts owed by the Companyto them during an insolvency proceeding if both amounts had beenowed and were either both already due prior to the opening ofinsolvency proceedings or were owed before but became due onlythereafter, in such case provided, however, that Creditors’ claimsdid not become due after the sums owed to the Company.No set off is possible, inter alia, if the Creditor acquired his claimonly after the insolvency proceedings had been opened. A set off isalso not possible if the Creditor acquired the ability to set off onlyby a voidable transaction (see question 1.2).



During the preliminary insolvency proceedings the Companygenerally continues to be run by the directors. The insolvency courtmay, however, forbid the Company to enter into any transactions(Allgemeines Verfügungsverbot) and may vest the power to controland administrate the Company to the Preliminary InsolvencyAdministrator. Any liabilities incurred by such a “strong”Preliminary Insolvency Administrator are privileged in thesubsequent insolvency proceedings (see question 5.2). In mostcases Preliminary Insolvency Administrators, however, do not havesuch extensive rights - liabilities incurred with such normal or“weak” Preliminary Insolvency Administrators are therefore notprivileged.During the preliminary insolvency proceedings shareholders’ rightsremain unaffected - except for the right to instruct the management,which becomes ineffective. The shareholders however remainentitled, for example, to resolve on a capital injection in order torestructure the Company.Once insolvency proceedings are opened, by law only theInsolvency Administrator may enter into contracts on behalf of theCompany and dispose of Company’s assets. Instead of appointingan Insolvency Administrator the court may, however, provide for aso-called “self-administration” of the Company (Eigenverwaltung),by which the management continues to manage the Company, butunder the supervision of an Administrator. Lately, such self-

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administration has been used more often, however, not with theincumbent management, but with a newly appointed managementoften comprising restructuring experts. Shareholders’ rights during the insolvency proceeding in theoryremain unaffected, unless they refer to the management of theCompany and the disposal of its assets by the InsolvencyAdministrator. This means that any structural decision on theequity of the Company, for example any capital increase or issuanceof new shares, still requires the consent of the shareholders.


During the preliminary insolvency proceedings the operations ofthe Company are generally financed out of the available funds.In addition, funds required for the wages of the employees may resultfrom a pre-financing of the so-called “insolvency protectionpayments” (Insolvenzgelder): if and to the extent the Companyduring the three-month period preceding the opening of insolvencyproceedings fails to pay wages, the employees are entitled to receiveinsolvency protection payments from the labour administration. Theinsolvency protection payments only become due upon the openingof insolvency proceedings. Rather than paying the wages to theemployees prior to the opening of the insolvency proceedings, thePreliminary Insolvency Administrator often provides that theemployees sell - with the consent of the labour administration - theirclaims to receive the insolvency protection payments for such periodto a bank who pays out the corresponding cash to the employees.Upon the opening of the Insolvency Proceeding, the Banks are thenreimbursed by the labour administration.Once the insolvency proceedings have been opened any claims ofthe employees for wages for the period as of the opening of suchproceedings are privileged (see question 5.2).


The opening of insolvency proceedings does not automaticallyterminate existing employment agreements. Clauses providing foran automatic termination are invalid. The Insolvency Administrator, however, may terminate theemployment contracts with a three-month notice period, even if alonger notice period would otherwise apply. If not all employeesare laid off simultaneously, but consecutively, as, for example, isrequired for winding down the operations, the EmploymentProtection Act (Kündigungsschutzgesetz) applies, and eachtermination has to be socially justified. Often, the issues resultingtherefrom or from other restructuring measures affecting employeesare settled in a “social plan” which provides for compensation ofthe employees. Such “social plan”, if agreed after the opening ofthe insolvency proceedings, is - within defined limits - a privilegedclaim (see question 5.2).


If neither the Creditor nor the Company has performed entirelyunder a contract prior to the opening of the insolvency proceedings,the Insolvency Administrator may opt whether to execute suchagreement or not. If he opts for execution - generally because suchagreement is favourable for the Company - then Creditors’ claimsunder such agreement are privileged (see question 5.2). OtherwiseCreditors may only claim damages for non-performance, suchdamage claims being unsecured ordinary claims. Contractual

arrangements to avoid the option right of the Administrator aregenerally considered to be void. For certain contracts however special rules may apply:

No option right exists if the Company has sold real estate tothe Creditor and a priority notice (Vormerkung) has alreadybeen registered with the land register in favour of theCreditor. With such notice the Creditor’s claim to get the realestate transferred is then not affected by the insolvency.Lease agreements to which the Company is a party as atenant are not automatically terminated - but may beterminated by the Administrator. A Creditor is not entitled toterminate such tenancy agreements after the opening of theinsolvency proceedings with the argument that the Companydefaulted on the rent payments prior to the opening of theinsolvency proceedings.So-called “unilateral” agreements, like agency agreements orpowers of attorney, automatically terminate upon theopening of the insolvency proceedings. Certain financial transaction agreements (such as financialcollateral arrangements and close-out netting agreements)are settled by operation of law if the statutory conditions arefulfilled and only the balance can be claimed by a Creditor.

5 Claims


Creditors - whether secured or unsecured - must file their claims inwriting with the Insolvency Administrator, who will verify suchclaims and decide whether to accept them. The filing has tostipulate the legal basis and the amount of the claim. If a claim isnot accepted, the Creditor may try to obtain a court ruling toestablish the validity of his claim.


Generally four groups of Creditors exist in insolvency proceedings:Privileged Creditors are Creditors (i) who became Creditorsupon an agreement with or certain actions by the InsolvencyAdministrator after the opening of the insolvencyproceedings (inter alia, the employees with respect to wagesas of the opening); (ii) under an agreement for which theInsolvency Administrator exercised the option to have suchagreement executed (see question 4.4 above); or (iii) underan agreement with a so-called “strong” PreliminaryInsolvency Administrator (see question 4.1). TheAdministrator has to procure that such privileged Creditorsare fully settled - otherwise he might be subject to a personalliability.Secured Creditors are entitled to satisfaction out of thesecurities granted to them (see question 3.1).Ordinary Creditors are satisfied out of the proceeds of theinsolvency proceedings. Subordinated Creditors are Creditors entitled to interest,penalties or (in principle) all shareholder loans or alikeliabilities towards a shareholder. Such claims are junior tothe claims of Ordinary Creditors.

Generally the claims within each group are treated equally.However, certain limitations may apply for specific claims.In an Insolvency Plan different structures may be agreed for variousCreditor groups. For example, minor Creditors may be privileged

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vs. major Creditors. An Insolvency Plan, however, requires theconsent of all Creditor groups (see question 6.1).


The opening of insolvency proceedings does not change the taxregime. The insolvent Company may therefore be obliged to payincome tax, corporate income tax, wage taxes, trade tax, or VAT.Generally, tax claims relating to periods prior to insolvency are notper se privileged.



There is no general concept of “cramming down” Creditors or theshareholders in the Company if they refuse to consent to certainresolutions. Exceptions may apply when establishing anInsolvency Plan.Generally, no Creditors’ consent is required for the regularproceedings. The Insolvency Administrator may, however, requirethe consent of the Creditor’s Committee for certain transactions(see question 2.4). The implementation of an Insolvency Plan on the other hand requiresthe consent of both the court and all Creditor Groups: Creditor Groupsmay be defined by the nature, size and ranking of their claims, or thetype of security they hold. A Creditor Group has consented to a plan,if (i) the majority of Creditors in such a group has approved the planand (ii) such majority holds more than 50% of the claim amount ofsuch Creditor Group. Provided the majority of Creditor Groups hasconsented to an Insolvency Plan, a group which has not consented isdeemed to have approved the plan if the Creditors of such group arelikely not to be worse off by the Insolvency Plan than without suchplan, and if such Creditors are adequately participating in the proceedsfrom the implementation of the plan.Even if an Insolvency Plan has been approved by the variousCreditor Groups, a court may refuse to approve the Insolvency Plan,if a Creditor has objected to the plan and if such Creditor is likelyto be worse off than without a plan.


Upon disposal of all assets and the final distribution of the proceedsto the Creditors, the Company is deleted from the various registersand ceases to exist. Simultaneously, the insolvency proceeding isterminated. Once an Insolvency Plan has been approved by the various CreditorGroups and the court, it becomes effective and the insolvencyproceedings are terminated.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Germany? In what circumstances might thisbe possible?

Prior to a Company actually being insolvent (see question 2.2), avoluntary pre-insolvency restructuring is possible. In order to allowfor sufficient time for such a restructuring, the directors are obligedby law to call a shareholder meeting if and when, due to losses

incurred, the actual equity of the Company is reduced to less than50% of its registered share capital. Failure to call a shareholdermeeting may (i) entitle shareholders to compensation if theCompany could otherwise have been saved and (ii) constitute acriminal offence. A pre-insolvency restructuring is most likely to be successfullyimplemented if: (i) there is only a limited number of experiencedCreditors - primarily banks, major suppliers or customers; (ii) theshareholders are cooperative; and (iii) if formal insolvencyproceedings are likely to result in a considerable loss of value. Insuch cases a refinancing of the Company or debt-for-equity-swaps- subject to shareholders’ consent - may be possible and isfrequently implemented, often in close cooperation with thefinancing banks and other secured creditors who need to consent toany release of their security.Rather than refinancing the Company, a restructuring may also beeffected by transferring the operations by means of an asset deal toa new legal entity and using the proceeds to pay off major Creditors.Such asset deals are not without risk for the acquirer, as by law hemay be held liable for certain liabilities of the insolvent entity,without - generally - having a valid indemnification claim.Furthermore, there may be a risk that such a transaction issubsequently challenged if the selling entity should file forinsolvency (see question 1.2). In addition, an overall restructuringmay be frustrated by non-cooperative Creditors, who generallycannot be forced to agree to a pre-insolvency restructuring.


The statutory insolvency proceeding (Insolvenzverfahren) providesfor a reorganisation by means of an Insolvency Plan (see questions2.1, 2.3 and 6.1). As the contents of an Insolvency Plan are at thediscretion of the parties involved, it can envisage a reorganisationof the debtor instead of a realisation of the assets and business. Inaddition, a voluntary pre-insolvency reorganisation is possible (seequestion 7.1).


To avoid the risks and problems of pre-insolvency asset deals orrestructurings (see question 7.1), the sale of the operations is oftenpre-arranged prior to the opening of insolvency proceedings andonly becomes effective upon such proceedings being formallyopened. Depending on circumstances, a pre-packaged sale maythereby be part of a regular proceeding or an Insolvency Plan.Generally, a pre-packaged sale is negotiated with all or at least themajor Creditors and the Preliminary Insolvency Administrator priorto the formal opening of the proceedings to ensure a successfulimplementation during the insolvency proceedings. Once theproceeding is opened and - as the case may be - the Insolvency Planis implemented (see question 6.1), the sale of the assets or transferof the business and distribution of the proceeds takes place inaccordance with the Insolvency Plan.

8 International

8.1 What would be the approach in Germany to recognising aprocedure started in another jurisdiction?

With respect to insolvency proceedings relating to a Company

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based and active within the EU, EU Regulation no. 1346/2000applies. Consequently:

if the company has its centre of main interest in Germany,German courts will open main proceedings in Germany;a court decision in another Member State to open maininsolvency proceedings in such other Member State willautomatically be recognised by German courts unless suchproceedings are contrary to public order. Furthermore, theacts and/or measures of the Insolvency Administrator of suchother jurisdiction will generally be recognised; andif the Company has a branch in Germany, German courtsmay, upon application, open secondary proceedingsexclusively for the assets located in Germany. Suchsecondary proceedings need to be coordinated with the mainproceedings.

With regard to cross-border insolvency proceedings for debtorsoutside the EU or for debtors to which the EU Regulation does notapply (like credit institutions and insurance undertakings), thegeneral provisions on international insolvency proceedings applywhich, in substance, correspond to the provisions of the EURegulation. Under such rules foreign insolvency proceedings arerecognised, provided that under German law the foreign court wascompetent and such proceedings are not contrary to the public orderin Germany.

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Dr. Ulrich Blech

Hengeler MuellerBehrenstr. 4210117 BerlinGermany

Tel: +49 30 20374 195Fax: +49 30 20374 333Email: [email protected]: www.hengeler.com

Ulrich Blech has been a partner with Hengeler Mueller since 1995.From 2000 to 2003 he was resident in London. His activities are focussed on advising German as well as foreignclients on transactions in Germany. Recent transactions include thesale of the Berliner Bank by Landesbank Berlin to Deutsche Bankand various portfolio transactions for real estate investors. Mr. Blech is, in particular, experienced in transactions relating tocompanies being in need of restructuring. He, inter alia, advisedinvestors in connection with the insolvency of the Kirch Media Groupand the subsequent disposal of various entities of such Group.Furthermore, he advised Palamon Capital Partners on theacquisition of Omnibus Systems Ltd and D.A.V.I.D. GmbH from theirinsolvent parent in a pre-arranged transaction with theAdministrator.

Hengeler Mueller is universally recognised to be one of Europe’s pre-eminent law firms. It is dedicated to absolutequality of legal advice, the highest standards of service, and to delivering the most creative and efficient solutionsdesigned to optimise clients’ business objectives. The prerequisite: an independent partnership of professionals,entrepreneurial both in thinking and practice, international both in education and training.

Hengeler Mueller’s M & A Team has sixty partners located in Düsseldorf, Frankfurt, Berlin, Munich and London. A groupof six partners, comprising partners from the M&A Team as well as partners with a financing background, have specialfocus on restructuring measures in and outside of insolvency proceedings.

The firm advises on all major M&A transactions for financial as well as strategic investors.

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Chapter 17

Alexiou & Kosmopoulos Law Firm

Greece


1.1 How does a creditor take security over assets in Greece?

Securities over assets under Greek law may be briefly presented onthe basis of the underlying asset as follows:A. Security over land and buildings:1. Mortgage: It affords its beneficiary the right to collect proceedsof liquidation (forced sale) of mortgaged assets by way of priorityover other creditors. A mortgage may be registered on the basis ofany of the following: (i) an agreement between the security-takerand the owner of the property; (ii) a court judgment; and (iii) byoperation of law, under the limited circumstances set forth in Article1262 of the Greek Civil Code (GCC) (none of which is typicallyrelevant to commercial transactions). A mortgage is perfected byregistration in the public books kept at local Land Registries. 2. Prenotation of mortgage: It is registered in the same public booksas a mortgage, by virtue of either a court judgment, issued ininjunction proceedings, or a “payment order”, i.e. an order of acompetent judge, issued in summary proceedings with respect topayment of a fixed sum of money. It is widely used, because,although it costs less than a mortgage, it offers the same security tothe creditor upon its conversion into mortgage. The conversion isconditional upon the secured claim being validated by a final courtjudgment and has retroactive effect: the mortgage is deemed to havebeen registered on the date of the initial registration of theprenotation. B. Security over movables:1. Pledge: It affords the creditor the same security on movableassets as a mortgage on land and buildings. It is established bymeans of an agreement having a date certain, and by the physicaldelivery of the assets into the creditor’s or a custodian’s possession.However, Law 2844/2000 permits the creation of a pledge onmovable property without requiring the debtor to release theproperty from its possession (“notional pledge”), under specificrequirements, including registration in a public register. 2. Other types: Floating charge and fiduciary transfer are alsocommon in the security commercial practice, although the latter isstill contested in civil theory. C. Security over receivables:1. Assignment: It is a contract, by means of which the assignortransfers to the assignee a claim it has towards a third party. Theassignment becomes effective towards the debtor of the claimassigned through a relevant notification by either the assignor or theassignee.

2. Pledge: See above B.1. A notional pledge on receivables ispossible to register, to the extent that these exclude claims vis-à-visconsumers.D. Guarantees:Under Greek law, a guarantee is an obligation ancillary to theobligation of the prime obligor and, therefore, valid to the extentthat the primary obligation has been validly assumed. However,depending on the contractual terms of the guarantee, such linkbetween the primary obligation and the guarantee may be loosened.E. Special rules on security arrangements:Special rules on security arrangements include those set forth in theLegislative Decree of 17.7/14.8.1923, Law 3156/2003 on bondloans and securitisation transactions, Law 3oo1/2004 on financialcollateral, etc.


If a company is declared bankrupt, its acts during the “suspectperiod” may be rescinded by the decision of the bankruptcy court. The suspect period is a period determined by the bankruptcy court,commencing on the date of actual “cessation of payments” andending on the date of issuance of the bankruptcy decision. Suchperiod may not exceed two years. (i) Acts subject to “compulsory” rescission include:

i. Transfers of assets without receipt of consideration.ii. Payments of debts prior to their agreed maturity.iii. Payments of debts which have fallen due, effected not

by cash payments, but by other means, e.g. byissuance of promissory notes or bills of exchange.

iv. Creation of any kind of security, including mortgages,prenotations of mortgage and pledges, securing pre-existing obligations.

(ii) Acts subject to “potential” rescission (voidable acts) includeany other transactions or acts, whether for or withoutconsideration, effected by the insolvent debtor during thesuspect period with parties who were aware of the cessationof payments.

In addition to rescission, third parties may be entitled to recoverassets from the bankruptcy estate, including goods sold on retentionof title.Even if a company is not declared bankrupt, a transfer of its assetsmay be invalidated by a court decision, if: (a) such transfer waseffected with the intent to cause damage to its creditors; (b) itsremaining estate is not sufficient to satisfy its creditors; and (c) the

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Alexiou & Kosmopoulos Law Firm Greece

transferee was aware of the above intent of the company (Article939 ff GCC).

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Greece?

Directors may sustain personal civil liability: (a) for damagescaused to creditors as a result of failing to make a timely filing tohave the company declared bankrupt; and/or (b) for fraudulent orgrossly negligent acts or omissions leading to bankruptcy.Articles 171 and 172 of Law 3588/2007 (hereinafter the “Code”)introduce various relevant criminal offences.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Greece?

The Code establishes a single system of insolvency procedure,which may comprise one or more interdependent alternatives orstages: (a) A conciliation procedure may precede the bankruptcy

process stricto sensu.(b) Failure of the conciliation procedure entails the declaration

of bankruptcy.(c) Declaration of bankruptcy activates the reorganisation plan

procedure. (d) Failure to complete successfully the reorganisation plan

stage leads to the formation of the creditor group, whichinvolves the liquidation of either the company’s business asa whole, or assets (or groups of assets) within the bankruptcyestate, for distribution of the proceeds to the creditors.

2.2 What are the tests for insolvency in Greece?

According to the Code, the event triggering bankruptcy is the“cessation of payments” to creditors in general. Although a defaultsituation towards several creditors is generally required to justifybankruptcy, failure to make payment to a single creditor who has amaterial claim has occasionally been held by courts to constitutesufficient grounds.


Issuance of a relevant decision of the bankruptcy court that declaresbankruptcy is a formal requirement.Declaration of bankruptcy automatically initiates the reorganisationplan stage as described below. If the reorganisation plan process fails to complete, subsequentinvalidation or failure to apply the reorganisation plan entails thestage of the formation of the group of creditors.


(i) Declaration of bankruptcy:If a company (or, more generally, a debtor qualifying as a“merchant”) stops its payments to its creditors generally, thecompany must (and its creditors may) apply for the issuance of the

bankruptcy decision. Furthermore, a debtor may itself request to bedeclared bankrupt prior to ceasing its payments, if its failure tomake payments is foreseeable and highly probable.(ii) Reorganisation plan:Within 4 months as of the issuance of the bankruptcy decision, thecompany is required to compile and propose a draft reorganisationplan. If the company fails to do so, the court-appointed bankruptcyofficer may propose such a plan. The draft reorganisation plan must, at a minimum, provide for thesatisfaction of at least 20% of the aggregate amount of claimswithin a period not exceeding one year. A draft reorganisation plan is subject to review by the bankruptcycourt, within 20 days as of its submission; the court reviewswhether the conditions set forth in Article 114 of the Code are met.Acceptance of the reorganisation plan is then subject to creditorapproval, requiring a double and mixed majority vote of creditors,namely:

more than half of all creditors (50% + one) must vote infavour of acceptance; andcreditors voting for acceptance must represent at least 60%of the total amount of claims (by value), as well as at least40% of secured claims (by value).

If approved by creditors, the draft reorganisation plan is subject tocourt ratification, within 20 days as of the date of the relevantmeeting of creditors; if granted, ratification renders the plan bindingand enforceable vis-à-vis all creditors, without any exception. The ratification decision is subject to appeal, but the appeal itselfdoes not suspend the effects of ratification. The court may refuse to ratify a reorganisation plan on grounds ofreduced protection of creditors, violation of procedure, reasons ofpublic interest, fraudulent extraction of the approval, etc. A plan may be invalidated by the bankruptcy court in case ofmaterial breach of its provisions, evidence relating to its fraudulentapproval, or evidence of fraudulent incurrence of insolvency.(iii) Formation of the creditor group:The procedure advances automatically to this stage upon failure tohave approved or implemented a reorganisation plan.The liquidation process is initiated by the bankruptcy officer andsupervised by the bankruptcy judge and the bankruptcy court;specific rules, notification requirements and formalities apply inrespect of each category of assets (see below, particularly questions5.1 and 5.2).


(i) Bankruptcy:The bankruptcy decision is published on the Bulletin ofJudicial Publications of the Jurists’ Fund (the “Bulletin”) andis registered in the public books kept at the Land Registrieswhere the company owns real property, as well as in theGeneral Commercial Register.Summaries of notices of creditor meetings issued by thebankruptcy judge are published on the Bulletin.

(ii) Reorganisation:The decision of the bankruptcy court which reviews thereorganisation plan and invites a special meeting of creditorsto have such plan approved, is notified by the bankruptcycourt secretary to the creditors, the bankruptcy officer andthe company.The decision of the bankruptcy court which approves orrejects the reorganisation plan is published on the Bulletin.

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(iii) Creditor Group:If the company’s business is to be sold as a whole, thebankruptcy officer publishes a public tender on the Bulletinand in the newspapers specified in Article 138 § 2 of theCode.If company’s assets are liquidated, the public tender ispublished in the Bulletin and, at the bankruptcy’s officerdiscretion, in newspapers.A notification of the completion of the allocation list of theliquidation proceeds is published on the Bulletin and in thenewspapers specified in Article 153 § 2 of the Code.

3 Creditors


Upon bankruptcy being declared, unsecured creditors may nolonger exercise any remedies individually, but need to follow thecollective satisfaction procedures applicable to bankruptcy andprescribed by the Code (see below question 5.1).


Secured creditors may initiate or continue individual enforcementmeasures (subject to the exceptions provided in Article 26 §§ 3 and5 of the Code), but only in respect of their security interests onparticular encumbered assets (see also below question 5.1).


Set off is permitted, if the conditions specified in the GCC had beenmet before the declaration of the bankruptcy.Rules on set-off do not affect rules regarding the netting of claimsunder eligible derivatives contracts and financial collateralarrangements.



Bankruptcy does not per se affect the designation of an entity’smanagement, but deprives it of its powers to manage and disposethe bankruptcy estate, with the exception provided for in Article18.1 of the Code. Such power is conferred upon the bankruptcyofficer, who is a lawyer appointed by the bankruptcy court. A judgeof such court the (“bankruptcy judge”) is also appointed tosupervise the insolvency process.


Financing of the procedure is funded either out of the proceeds ofthe insolvency estate or financing raised on the market. Creditorswho finance the conciliation procedure or the reorganisation planare treated preferentially for moneys advanced to the process.


Declaration of the bankruptcy does not automatically terminateemployment contracts, but constitutes grounds for valid terminationthereof by the insolvency officer. Successful implementation of a reorganisation plan permitscontinued employment of employees specified in the plan.If the creditor group is formed, employees’ claims are treatedpreferentially (see below question 5.2).


In principle, declaration of bankruptcy does not affect existingreciprocal contracts or permanent contracts, which remain in force,unless otherwise specified by their terms. The insolvency officer may choose to perform obligations of thecompany arising from reciprocal contracts. In such cases, thecounterparty of the company is considered as a creditor of thebankruptcy procedure and is treated preferentially in anydistribution of proceeds. If the bankruptcy officer does not exercisehis above right, despite a relevant invitation of the counterparty, thelatter is entitled to withdraw from the contract.

5 Claims


The bankruptcy officer invites the identifiable creditors (on thebasis of a list provided by the company) to notify in writing theirclaims to the secretary of the bankruptcy court. Such notificationmust be effected within a 3-month period, starting from thepublication in the Bulletin of the decision declaring the bankruptcy. The bankruptcy officer verifies the claims before the bankruptcyjudge, who draws up a list affirming their existence and quantum. Objections to the procedure of verification, as well as requests to haveadditional claims verified may be submitted to the bankruptcy court.


Distribution of proceeds (after liquidation within the creditor groupstage) is made in the following sequence: (i) First, towards bankruptcy costs, court-approved fees of the

bankruptcy officer and claims arising out of the bankruptcyprocedure, i.e. incurred by the bankruptcy officer.

(ii) Then, to generally preferred claims, i.e. those categories ofclaims that have a privilege under Article 154 of the Code, inthe following order:(a) claims in respect of financing extended to the

company to permit it to continue its activity; (b) claims of employees and salaried legal counsels of the

company for their salaries of the last two years beforethe bankruptcy declaration and for their severancepayments;

(c) claims of non-salaried legal counsels for servicesrendered during the last six months before thebankruptcy declaration;

(d) claims of the State for taxes of the year of liquidation

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and the immediately preceding year, provided theywere determined by reference to the income generatedby or the nature of the liquidated assets; and

(e) claims of social security organisations forcontributions (excluding surcharges) of the last twoyears before the bankruptcy declaration.

(iii) Then, to specially preferred (i.e. secured) creditors(including interest accrued during the last two years), to theextent that the liquidation proceeds originate from thespecific assets on which their respective security interest wasregistered and are within the registered secured amount.

(iv) If claims of generally preferred creditors and speciallypreferred creditors exist in respect of an asset (i.e. the assethas been encumbered), proceeds distributed in respect ofsuch asset are allocated to each of the two categories ofcreditors in the manner specified in Article 977 of the GreekCode of Civil Procedure (“GCCP”).

(v) Any balance remaining is distributed to unsecured creditors,including preferred creditors, to the extent of their balancesremaining unpaid following the application of the above.

(vi) In each of the following cases, distribution of proceedswithin each of the generally preferred and specially preferredcategories of creditors is made to the various sub-groupswithin such categories in the order specified in Articles 154and 155 of the Code and pro rata within each such sub-group.

(vii) Lastly, to subordinated creditors in a bankruptcy of a creditinstitution or insurance company.

Rules of distribution constitute strict law and cannot be modifiedcontractually.


(i) A transfer of the company as a whole as well as transactionsdependent on or incidental to such transfer are exempt fromtax other than VAT.

(ii) Transfers of assets of the company are validly effectedwithout the requirement for the bankruptcy officer to procuretax and social security certificates of good standing.



In the conciliation procedure (if company’s agreement with itscreditors is ratified by the court), claims of dissenting creditors aresuspended for the term of the agreement, but remain otherwiseunaffected and not subject to the agreement so ratified.A reorganisation plan approved by a qualifying majority ofcreditors is binding upon all creditors.A decision as to whether to continue the company’s activity for aparticular period of time, or to lease or sell its business as a whole,or to liquidate its assets (Article 84 of the Code) requires theconsent of the majority of creditors, representing the majority ofclaims, but binds all creditors.


If a reorganisation plan is approved by creditors and ratified by thecompetent court, the bankruptcy procedure ends and the debtorresumes management of its business.If all assets of the debtor are liquidated, the bankruptcy procedureends, but the consequences of declaration of the bankruptcy on the

debtor remain effective.Upon satisfaction in full of all claims of the debtor, the debtor is “re-instated”, i.e. the consequences of the declaration of bankruptcy arelifted.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Greece? In what circumstances might this bepossible?

A restructuring outside a formal procedure is not common inGreece, as the reorganisation plan process assumes prior insolvencyof the debtor. The Code foresees a procedure of conciliation, which aims atpreventing the declaration of bankruptcy; such procedure isavailable to companies which have not yet devolved to a “cessationof payments”.As part of the conciliation process, a mediator is appointed by thebankruptcy court, to facilitate the conclusion of an agreementbetween the company and its creditors. If such agreement is achieved, the bankruptcy court is called toratify it within a period of 10 days. The court may refuse to ratifysuch an agreement on grounds of prior “cessation of payments”,lack of assurances of business continuation, material prejudice tothe interests of non participating creditors or the agreementinvolving a term that exceeds 2 years as of the date of proposedratification. Ratification renders the agreement enforceable and suspends anyother process or remedy relating to individual satisfaction of acreditor. Claims of creditors who do not participate in theagreement are suspended for the term of the agreement, but remainotherwise unaffected. The conciliation agreement terminates upon the expiry of its term,upon the advent of bankruptcy or upon being invalidated by thebankruptcy court.


The Code indicates a clear preference to reorganisation aspirationsrather than liquidation and distribution of assets, as evidenced bythe central role of the reorganisation plan and the flexible ways inwhich it may be tailored.


A sale of the business as a whole, within the framework of abankruptcy procedure, may be decided by the meeting of creditorswithin 20 days from the verification of the claims and must beapproved by the bankruptcy judge. The bankruptcy court decidesabout the value of the debtor’s estate, the price of the first offer aswell as the terms of the sale upon detailed proposition of thebankruptcy officer. The latter, within 10 days from the publicationof the court decision, proclaims public tender under specificrequirements of publicity and draws up a list of evaluation of theoffers proposing the successful bidder. Approval or refusal of theoffers is submitted by the bankruptcy judge to the bankruptcy court,which ratifies the award and approves the contract of transfer. The relevant notarial agreement includes transfer of any relevant

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Dr. Constantine Alexiou

Alexiou & Kosmopoulos Law Firm23A, Vas. Sofias Ave.Athens 10674 Greece

Tel: +30 210 339 2600Fax: +30 210 362 8320Email: [email protected] URL: www.aklawfirm.gr

Dr. Constantine Alexiou is the managing and founding partner ofAlexiou & Kosmopoulos Law Firm. He holds a PhD from the Facultyof Law of the University of Freiburg, Germany. He specialises ininsolvency, recovery and reconstruction, public works and litigation.He has advised major domestic clients on a wide range ofinsolvencies in recent years. He is fluent in English, French andGerman.

Sotiris Foteas

Alexiou & Kosmopoulos Law Firm23A, Vas. Sofias Ave.Athens 10674 Greece

Tel: +30 210 339 2600Fax: +30 210 362 8320Email: [email protected]: www.aklawfirm.gr

Sotiris Foteas joined the firm in 2006. He holds a PostgraduateDiploma (LLM) in Civil Law from the Athens University Law Schooland a DEA in European Union Law from the Strasbourg III LawSchool. His legal expertise mainly focuses on European law,insolvency and civil law. He is fluent in English and French.

ALEXIOU & KOSMOPOULOS LAW FIRM builds on the foundation of over a century and four consecutive generations ofpractitioners to provide modern full-service capabilities to international and domestic clients across diverse industries.The Firm has earnt prominence in Greece, through its consistent quality legal advisory and consultancy and is respectedfor its efficiency. The Firm’s expansion in recent years has permitted a growing circle of loyal clients to benefit fromintegrated services for their full range of activities. In 2007, the Firm enhanced its capabilities, by adding a strongbanking & finance practice and strengthening its M&A, commercial and IT practices. A team of select professionals ina variety of fields, with solid experience and business awareness, work seamlessly to realise the firm’s vision ofexcellence in today’s increasingly complex business environment.


licence of administrative nature. Potential partnership of the Stateis also envisaged. Failure to award results in the repetition of thepublic proclamation procedure within 15 days.

8 International

8.1 What would be the approach in Greece to recognising aprocedure started in another jurisdiction?

Recognition of an insolvency procedure completed abroad issubjected to the conditions generally required by the GCCP inrespect of the recognition by Greek Courts of decisions of foreignvoluntary jurisdiction:

(i) The foreign decision applies the substantial law which isapplicable according to Greek private international law.

(ii) The foreign decision is issued by a court establishingjurisdiction according to the laws of the State of which thesubstantial law has been applied (lex causae).

(iii) The content of the judgment is not contrary to acceptedprinciples of morality and public order.

Concerning the scope of application of EC legislation, the issue istreated by Regulation 1346/2000/EC which establishes a set ofconflict rules giving priority in principal to the application of the lexfori concursus. To the extent that the Regulation would apply,primary proceedings commenced in another European Unionjurisdiction in respect of an entity that has its centre of maininterests in that jurisdiction, would be directly recognised.



ChapterChapter 18

Ozannes

Guernsey


1.1 How does a creditor take security over assets in Guernsey?

There is a distinction between immovable assets (real property) andmovable assets (all other property, tangible and intangible).A charge can be taken over real property by an agreement of theparties entered into before the Royal Court, which is thensubsequently registered on the property title. It is also possible fora Claimant to register proceedings against real property, with theleave of the Court, in order that security is obtained for theenforcement of any judgment.There is a distinction between movable assets depending onwhether they are tangible or intangible.For tangible movables the following are recognised:

pledges;liens;a landlord’s right to priority for unpaid rent secured bymovable property on the demised premises (tacitehypothèque);mortagages over ships; andreservation of title clauses.

For intangible movables the following are recognised:A security interest may be created, under the SecurityInterests (Guernsey) Law, 1993, in any intangible movableproperty (including the contents of a bank account) otherthan a lease. A security interest in securities and in policiesof life insurance can be created when the certificates of titleor policies of assurance are held by the secured partypursuant to a security agreement. A security interest in abank account can be created when a bank holds and takescontrol of a customer’s account pursuant to a securityagreement. A security interest over all other intangiblemovables (except a lease) can be created where the collateralis assigned to the secured party pursuant to a securityagreement, subject to the requirement to give notice to theperson from whom the asset would be claimed if not subjectto security.Set-off agreements and assignments with provisos forreassignment are recognised under the Law of Property(Miscellaneous Provisions) (Guernsey) Law, 1979.Foreign security over movables sited outside of Guernseywill be recognised even though the form of security is notrecognised under Guernsey law: see s10 Security Interests(Guernsey) Law, 1993.

1.2 In what circumstances might transactions entered into whilstthe company is in financial difficulties be vulnerable toattack?

Where a company has granted a preference to any person six monthsprior to a resolution being passed to wind the company up or sixmonths prior to an application for the compulsory winding up of thecompany the liquidator may, in certain circumstances, apply to theRoyal Court for an order placing the company in the position had thepreference not been granted. Where the person who received thepreference is connected to the Company the period is extended to twoyears from the relevant date.A transaction defrauding creditors can be challenged within six years,subject to certain rules of limitation.Only a liquidator may seek to set aside a preference whereas thecreditors may challenge a transaction intended to defraud them.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Guernsey?

Where a director has permitted a company to trade wrongfully (whenhe ought to have concluded that there was no prospect of the companyavoiding going into insolvent liquidation), the Court may make thedirector personally liable to make such contribution to the company’sassets as it thinks proper.Where any business appears to have been carried on with an intent todefraud the creditors of a company, the Court may require any personswho were knowingly parties to the carrying on of such business tomake such contributions to the company’s assets as it thinks proper.Where the Court considers a person is unfit to be concerned in themanagement of a company, it may make an order disqualifying himfrom being a director or other officer of any company or fromparticipating in the management, formation or promotion of anycompany for a period of up to 15 years.In such circumstances it is also possible that a director could also befound to have committed a criminal offence for certain actions, suchas obtaining property or services by deception.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Guernsey?

A Guernsey company can be put into voluntary liquidation,compulsory liquidation or administration.

Jeremy Le Tissier

Jeremy Wessels



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Voluntary liquidation will usually commence by the passing of aspecial resolution to wind the company up. A voluntary winding upcommences upon the passing of the resolution for voluntary windingup.Compulsory liquidation can only be ordered by the Court. It willoccur most frequently on an application by a creditor(s) of thecompany.A Guernsey company may be placed into administration by an orderof the Royal Court. An administration order would be initiated by anapplication to the Royal Court by a person with the requisite standingto do so, such as creditors or shareholders.

2.2 What are the tests for insolvency in Guernsey?

Insolvency will occur where a company is unable to pay its debts. A company will be deemed as unable to pay its debts where astatutory demand for over £750 has been served upon the companyand that sum remains outstanding for 21 days after the demand hasbeen made, or if the Court is satisfied that the company is otherwiseunable to pay its debts.A company is also deemed to be unable to pay its debts where it failsto satisfy the solvency test. The solvency test is detailed and is set outat length in s527 The Companies (Guernsey) Law, 2008 as amended.However, in general, a company will fail to pass the solvency testwhere (without prejudice to the above provisions):(i) the value of the company’s liabilities is greater than the

company’s assets or is unable to pay its debts; or(ii) in the case of any company designated as a ‘supervised’

company under Guernsey’s regulatory laws, that company isunable to satisfy a requirement as to solvency imposed bythose regulatory laws.


There are no required grounds for a company to be placed intovoluntary liquidation. A creditor may apply to the Royal Court for a company to becompulsorily wound up where, for example, the company is unableto pay its debts and certain other grounds. An administration order may be granted either where the Court issatisfied that the Company is or is likely to become unable to pay itsdebts, or where the Court considers that the making of such an ordermay assist in the survival of the Company as a going concern and/ormay achieve a more advantageous realisation of the Company’sassets than would be effected on a winding up.


For voluntary liquidation see question 2.1.For compulsory liquidation, an application, supported by affidavit,will need to be made to the Royal Court seeking an order that theCompany be wound up and setting out the reason(s) why theCompany should be wound up. A similar process must be followedwhen making an application to place a company into administration.


The Registrar of Companies publicises the fact that a company has

been placed into liquidation. It will also be good practice for theliquidator to contact all known creditors. Where the company hasnot been wound up within one year of the commencement of thewinding up, the liquidator must convene a general meeting of thecompany. Where the company’s affairs are fully wound up, theliquidator must convene a general meeting of the company.Where a company has been placed in compulsory liquidation andthe liquidator has realised the company’s assets, the liquidator shallapply for the appointment of a commissioner of the court toexamine his accounts and distribute the funds derived from thecompany’s assets. The Commissioner must arrange a creditors’meeting in order to examine and verify the financial statements andthe creditors’ claims and preferences. Where a company has been placed into administration, everyinvoice, letter and other document issued by the company must alsostate that the company is in administration and the name of theadministrator. The Registrar of Companies also publicises the factthat a company has been placed into administration.

3 Creditors


Yes, although in a liquidation, payment to unsecured creditors willonly occur once all claims have been proved and the final dividenddeclared. In an administration there is a statutory moratoriumpreventing creditors pursuing their claims subject to the leave of theCourt.


Yes, secured creditors can enforce their security in each procedure.


Yes, creditors can set off sums owed by them to the companyagainst amounts owed by the company to them in each procedure.



As soon as a liquidator is appointed he controls the company. Anyperson who purports to exercise any powers of a director of thecompany after the liquidator has been appointed commits a criminaloffence except where such power has been sanctioned. In anadministration, the administrator controls the business.Any transfer of shares after the resolution to wind a company upvoluntarily is void, save where sanctioned by the liquidator.


A liquidator or administrator’s remuneration is to be paid from thecompany’s assets in preference to all other claims.

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Neither liquidation nor administration has any statutory effect uponcontracts of employment. A liquidator will, most likely, terminate employment contracts aspart of the winding up of the company. Payments due to employeesmay attract priority.


Commencement of the winding up or administration of a companydoes not automatically terminate contracts.

5 Claims


Creditors claim amounts owed to them by notification of the claimto the liquidator or administrator.


Certain claims will attract priority. Other than secured creditors andclaims which have been set off, the claim with highest priority is theliquidator’s remuneration followed by other claims with prioritysuch as rent due to a landlord, salaries, unpaid income tax andunpaid social security contributions. Claims without priority rankpari-passu.


A company will continue to incur tax liability as it would have hadit not been wound up.



The Court can approve a scheme of arrangement giving effect to acompromise or arrangement between the creditors, or a class ofthem, and the Company, subject to obtaining the approval of 75%in value of the creditors.


The company is dissolved at the end of a liquidation. At the end ofan administration the Company may either be released from anyprocedure or placed into liquidation.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Guernsey? In what circumstances might thisbe possible?

This may be possible particularly where there is a certain class ofcreditors who are all able to agree on the proposals without theassistance of a formal procedure.


Yes, within an administration where a scheme of arrangement maybe used.


Yes, subject to obtaining the approval of the Court.

8 International

8.1 What would be the approach in Guernsey to recognising aprocedure started in another jurisdiction?

The Royal Court is likely to agree to suitable cross-borderinsolvency protocols or other arrangements to coordinateproceedings with courts in other countries on the basis of comity.



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Jeremy Wessels

Ozannes1 Le Marchant StreetSt Peter PortGuernsey, GY1 4HP

Tel: +44 1481 731439Fax: +44 1481 710487Email: [email protected]: www.ozannes.com

Jeremy specialises in commercial litigation generally, particularlycases involving contentious trust disputes and financial servicesbusinesses, along with asset tracing and freezing orders. He alsoadvises on insolvency related matters and money laundering issues.He acted for Westminster City Council in relation to the proceedingsagainst Dame Shirley Porter and was also involved in the FlightleaseGroup liquidation.

Jeremy Le Tissier

Ozannes1 Le Marchant StreetSt Peter PortGuernsey, GY1 4HP

Tel: +44 1481 739322Fax: +44 1481 710487Email: [email protected]: www.ozannes.com

Jeremy practices in matters of commercial litigation and specialisesin issues involving fraud, money laundering, regulatory andassociated matters. Much of his work involves multi-jurisdictionaldisputes. His clients are generally banks and fiduciaries. Jeremywas rated as an ‘associate to watch’ in the 2008 edition ofChambers and Partners.

Ozannes is the only Guernsey law firm rated in the top tier of all categories by the Legal 500.

Ozannes’ Litigation is widely regarded as offering the best litigation service on the Island. It has been involved in all theleading litigation cases in recent years, and stands alone at the top of this field of expertise. The team is recognisedas having great strength and depth and is well resourced with 11 advocates, some of which are amongst the mostsenior and experienced in the Island.

Ozannes is one of the only firms in Guernsey with any experience in complex insolvency matters, both contentious andnon-contentious. In particular, the firm was instructed on behalf of the liquidators of the Flightlease group, in the lastmajor contentious insolvency proceedings in the island.

Ozannes Guernsey



ChapterChapter 19

Ferenczy / Gide Loyrette Nouel

Hungary


1.1 How does a creditor take security over assets in Hungary?

In Hungary common types of security include mortgages overmoveable assets (fixed charge) and immoveable assets (real estatemortgages), pledge, floating charge, pledge over rights andreceivables, and cash and security deposit. Bank lenders also usesecurity assignment. In case of a real estate mortgage, floatingcharge, fixed charge and pledge over certain rights (e.g.: pledgeover quotas of a limited liability company) the security needs to beregistered in the corresponding public record (i.e.: Land Registry,Chattel Register of the Notaries, or the Firm Registry) for validestablishment. There are various quasi security interests, such as banker’s rights ofset off, account debit order, and right of purchase. A right ofpurchase is usually registered in the Land Registry. This is notrequired for the valid establishment of this collateral. Otherwise securities are established in written (and in certain cases,notarised) contracts.


Voidable preference. Based on Act no. XLIX of 1991 onbankruptcy and liquidation (“Act on Liquidation” or the “Act”),upon the insolvency of an obligor, any creditor or the liquidatormay, within 90, but a maximum of 365, days from the date ofliquidation, challenge the validity of: (i) contracts or the obligor’s other commitments concluded

within 5 years prior to the date of the liquidation petition, ifsuch transactions were intended to conceal the debtor’sassets or to defraud any creditors, and the other party had orshould have had knowledge of such intent; and/or

(ii) contracts or other commitments of the obligor concludedwithin 90 days prior to the date of liquidation petition orthereafter, if intended to grant preference and privileges toany creditors, such as the amendment of an existing contractto the benefit of a creditor, or to provide financial collateralto a creditor that does not have any.

Transaction at an Undervalue. Also, based on the Act, anycreditor or the liquidator may challenge the validity of contracts (orother commitments) concluded in the 2-year period preceding thedate when the court received the liquidation petition, if it is intendedto transfer the obligor’s assets without any compensation or to

undertake any commitment for the encumbrance of any part of theobligor’s assets, or if the stipulated consideration constitutesunreasonable and extensive benefits to a third party. Undue services. The liquidator, on behalf of the obligor, is alsoentitled to reclaim (within a certain limited time period), anyservice the obligor has provided within 60 days prior to the date ofpetition for liquidation, if it had the effect of giving a preference toany of the creditors and if such service is not usually provided undernormal circumstances.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Hungary?

Solvent Company. Whilst the company is solvent, board members(in case of a company limited by shares), or a managing director (incase of limited liability companies, together: “executive officers”)shall act with a professional (higher than standard) liability basisand will - provided the law does not set otherwise - serve at theirbest the overall commercial interests of the company. Also, acompany must, in the normal course of business, benefit from theunderlying transaction. Constitutive documents may limit, ordivide the right of representation among executive officers,however, these limitations shall not be valid vis-á-vis third parties.(Act no IV of 2006 on Economic Companies (“Companies Act”)).Financial Difficulties. When circumstances threaten the companywith insolvency, executive officers shall - pursuant to theCompanies Act - perform their duties with primary regard to theinterests of the creditors (instead of the company). As a result, theAct on Liquidation entitles creditors to file a claim againstexecutive officers (taking this office for a period of 3 years prior tothe Liquidation) in order to establish their liability for not observingthe creditor’s interest during the financial difficulties. Civil law liability. Executive officers may be liable for damagescaused to the company as a result of breaching the law, themembers’ resolutions, or their tasks deriving from executive duties(specified by law), under the damage liability rules of theHungarian Civil Code. Criminal law liability. An executive officer commits criminalbankruptcy, if, actually or fictitiously, he diminishes the company’sassets by way of, for example, concealing, disguising, damaging,destroying assets, or by making unusable any property that may beused to cover the company’s debts. Criminal bankruptcy is afelony, and is punishable (in the base case scenario) byimprisonment of up to 5 years. Criminal law and civil law liabilitycan be asserted against executive officers simultaneously.

Dr. Tibor Nagy

Dr. Balázs József Ferenczy



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2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Hungary?

The main types of formal procedures in Hungary are bankruptcyand liquidation procedures.In bankruptcy the debtor asks for a moratorium (lasting from 60 to120 days) in order to be able to reorganise its obligations towardsthe creditors. Under moratorium, the debtor has compositiondiscussions in order to reorganise its debts and, if agreed by acertain qualified majority of creditors (see the definition in question5.1) and approved by the administrator, enters into a compositionagreement with creditors, setting forth the terms and conditions ofthe debt reorganisation (“Bankruptcy”). The purpose of liquidation is to satisfy the company’s creditors byapplying a formalised process to alienate the company’s assets, andthereafter, terminate the company from the company registerwithout legal successor (“Liquidation”).

2.2 What are the tests for insolvency in Hungary?

The Court shall declare the company insolvent:(i) upon its failure to settle or contest its previously undisputed

and acknowledged contractual debt within 15 days of the duedate, and failure to satisfy such debt upon receipt of thecreditors written payment notice;

(ii) upon its failure to settle its debt within the deadline specifiedin an enforceable Court decision;

(iii) if the enforcement procedure against it was unsuccessful; or(iv) if it did not fulfil its payment obligation as stipulated in the

settlement agreement entered into with its creditors as aresult of a Bankruptcy procedure.


Bankruptcy can be filed with the Court only by the company, thus,by nature, it is used as the last defense before Liquidation. Thepurpose of it is to reorganise the debts under the protection of themoratorium. Bankruptcy procedure, when failed, is almost certainly (though notnecessarily) followed by Liquidation. A claim for Liquidation maybe filed with the Court by the debtor, the creditors, theadministrator, or the Criminal Court. It is usually done when thecompany is insolvent, and no petition for Bankruptcy had been fileda priori with the Court (‘No parallel proceedings’ principle).


No filing of a Bankruptcy claim shall be valid without thepreliminary consent of the share/quota-holders of the debtor. Thefiling shall also be communicated to the employees, the tradeunions and the workers’ council. A document evidencing theseprior approvals, a balance sheet not older than 3 months to date andthe tax number, as well as the list of creditors, the amounts of debtsand their due dates, plus the document in proof of payment of thepublication fee shall be attached to the petition. The starting date ofthe Bankruptcy shall be the date when the claim is filed with theCourt (i.e.: no formal decision on the launching of the process isbrought by the Court).

If Liquidation is filed by a creditor, the petition shall describe thedebts, their due date and a summary of reasons why the debtor isdeemed insolvent. The documents in proof of the allegations, anda copy of the written notice sent to the debtor shall also be attached.The Court investigates the debtor’s insolvency based on theevidence. If it finds the debtor insolvent, it orders the Liquidationby decree, within 60 days of receipt of the petition. The startingdate of the liquidation shall be the date when the decree ispublished.


In Bankruptcy, the debtor shall hold a meeting within 30 days fromthe procedure’s starting date in order for the creditors to approve themoratorium. Known creditors shall be invited directly, meanwhileunknown creditors shall be invited through public announcement,published in two daily newspapers of national circulation (within 3days from the starting date). The debtor shall notify the Court of theoutcome of the meeting within 3 days. The Court shall decidewhether to terminate the proceeding, or to confirm the moratorium.Its decision will be published in the Company Gazette within 15days. The Court shall appoint an administrator in the decree for theperiod of the moratorium. During the moratorium the debtor shall draw up a programme torestore its solvency and will arrange a meeting for thereorganisation negotiation. The administrator and all knowncreditors shall be invited at least 15 days prior to the meeting. Thevenue and the date shall be published in two daily papers withnational circulation at least 15 days in advance. Additionalnegotiations may be held during the moratorium. The moratoriummay be extended by not more than 60 days at the request of thedebtor and the qualified majority of creditors.In Liquidation, if proceedings were requested by a creditor, theCourt shall notify the debtor forthwith by sending a copy of thepetition. The debtor shall, within 8 days of receipt, declare whetherit acknowledges its insolvency. If accepted, the company shalldeclare if any respite for the settlement of debts is requested.Failure to respond within the deadline shall result in the insolvencybeing presumed. Upon request, the Court may allow a maximumperiod of 30 days for the debtor to settle its debt. If the Court findsthe debtor insolvent, it shall, in the decree, appoint a liquidator (whowill, consequently, appoint its receiver). The liquidation decreeshall be published in the Company Gazette. The Court shall notify,inter alia, the competent tax and customs authorities, the healthinsurance administration agency, the pension insuranceadministration agency and all financial institutions where the debtorhas bank accounts, of the insolvency.

3 Creditors


There is no difference between secured and unsecured creditors ina Bankruptcy. All creditors are entitled to take part in thecomposition discussions in order to reach settlement with the debtorto reorganise the debts. In Liquidation secured and unsecured creditors shall also take partin the procedure by announcing their claims to the liquidator withina set period of time. Nevertheless secured creditors (by pledge,mortgage and/or security deposit) shall fall in a better position in

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ranking than those whose claim is not secured by any of the abovesecurity interests (see questions 5.1 and 5.2 for more details).


Save for statutory duties and payments for the State and variousauthorities, no enforcement procedures can be started against thedebtor (by any of its creditors) during the Bankruptcy procedure. In Liquidation, ongoing foreclosure procedures shall be terminatedand seized assets (if any) shall be handed over to the liquidator.Following the starting date, claims against the debtor may only beenforced in the framework of the Liquidation procedure itself.Notwithstanding, litigations and non-litigious procedurescommenced prior to the starting date of the Liquidation shall becontinued before the Court. Subject to one exemption (see question 5.2 (A)(a)), no enforcementof security can be made in either proceeding by the securedcreditors themselves. Instead, subject to the type of the specificsecurities, they might obtain preferential satisfaction from theproceeds of the sale of the respective assets even before the closingof the Liquidation, or have the benefit of priority ranking at the finalsharing from the liquidated assets.


In Bankruptcy, creditors are free to set-off their claims against thedebtor in the framework of the composition agreement. In Liquidation only those claims can be set-off, which have beenregistered by the liquidator as acknowledged, and have not beenassigned subsequent to the starting date of the Liquidation, or, if theclaim has occurred at a later date, subsequent to its occurrence.Also a creditor - in a court case filed by the debtor - may set-off itsclaim existing on the starting date of the Liquidation against thedebtor, provided that the beneficiary thereof was the same creditoron the starting date of the process. The creditor may not set-off itsclaims against the debtor if it exercises its right of purchase orrepurchase right through its unilateral action following the startingdate of the Liquidation.If the debtor provides financial collateral (caution) before thestarting, the creditor shall be able to realise it within 3 months fromthe publication of the Liquidation, irrespective of whether theLiquidation has been started or not.



In a Bankruptcy the company shall be represented by its executiveofficers. The rights of the share/quota-holders, apart from their dutyto approve the bankruptcy petition prior to its filing, are notimpacted. The Court shall, however, appoint an administrator for the period ofthe Bankruptcy. The actions of the executives cannot violate thepowers of the administrator. The administrator’s primary duty is toprotect the creditors’ interests. The administrator shall participatein the settlement negotiations, and it must approve the compositionagreement.

In the Liquidation decree the Court shall appoint a liquidator (whoappoints a receiver). From this date on, only the liquidator shall beauthorised to dispose of the debtor’s assets. It may also enter intocontracts with third parties in case of services/works, whichrequires particular knowledge or expertise. The rights of the debtor’s share/quote-holders shall cease to exist onthe Liquidation’s starting date. The executive officer shallcollaborate with the liquidator, the receiver and the Court during theprocess and will prepare the closing inventory, the annual report,and other documents required by law, etc. The debtor’s name shallbe appended by the words “Under Liquidation” (“FelszámolásAlatt”) or “U.L.” (“F.A.”).


The costs and fees associated with the Bankruptcy, including thedebt reorganisation negotiations, as well as the fees and the justifiedexpenses of the administrator shall be paid by the debtor. Thesefees shall be one per cent of the book value of the assets shown inthe simplified balance sheet, filed to the Court with the bankruptcypetition. The debtor may seek also for additional funds forfinancing the above from its bankers. The terms of such fundingshall be provided for in the composition agreement. In Liquidation, the liquidator’s fees shall be paid by the debtor.The liquidator’s fee (in the base case scenario) shall be 5 per cent ofthe total amount of the proceeds from the assets sold in the courseof liquidation, and the proceeds from claims received, subject to theminimum HUF 100,000 (approximately EUR 333), VAT excluded.


The executive officer or the Liquidator shall inform the debtor’semployees and the trade unions (or the competent workers’councils, or employee representatives) on the filing of theBankruptcy or the opening of the Liquidation procedure. The priorconsent of the employee representation organs is not required butthese organs must be informed on any measures of the employeraffecting a large number of employees. It is recommended,therefore, to inform these organs 15 days before filing thebankruptcy petition or the starting date of the Liquidation.In Liquidation, the liquidator must register the claims that becomedue at the time of completing the liquidation proceedings. In thisregister the employees’ average wages, the severance payments,and other payments payable to employees upon the dissolution ofthe debtor in connection with their employment relationships mustbe indicated separately among other creditors’ claims. This must bedone even if no notice for such claims had been filed. Theliquidator must settle these claims according to the general rules onthe order of satisfaction of the Act.In Liquidation the liquidator shall be entitled to exercise theemployer’s rights towards the employees and he/she will beresponsible for fulfilling the debtor’s duties towards employees andemployee representation organs. Otherwise, during bothprocedures, the rules of the Hungarian Labour Code, especially therules relating to collective redundancies, are applicable.


The main impact of Bankruptcy on the existing contracts is thepayment moratorium. During the moratorium, legal consequencesassociated with late (or non-) performance of money payments shall



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not apply; the enforcement of money claims shall be suspended;creditors’ claims, unless otherwise prescribed in the agreement,shall earn interest; and the debtor (save for certain exceptions)cannot effect any payment for claims existing on the starting date ofthe bankruptcy proceedings. During Bankruptcy the company mayterminate contracts under their general conditions, or, if the contractis involved in the composition agreement, with mutual consent ofthe concerned parties.In Liquidation, all debts of the debtor shall become ipso iure, dueand payable on the starting date. Also the liquidator is entitled toterminate, with immediate effect (save for certain agreements), anycontracts concluded by the debtor; or if none of the parties renderedany services, may rescind from them. The claim due to the otherparty as a result of the termination/rescission can be enforcedagainst the debtor by notifying the liquidator within 40 days fromthe date of termination/rescission was notified to the concernedparty.

5 Claims


In Bankruptcy the debtor shall invite known creditors to thecomposition discussions. Creditors shall claim the amounts owedto them during these discussions. The composition agreement thenfinally contains all known claims; its terms cannot be moredisadvantageous for the Dissenting Creditors than to the ConsentingCreditors (see questions 6.1 and 6.2 for more information). Thecomposition agreement shall be valid if (i) more than half of thecreditors, whose claims were due on the starting date, and (ii) morethan one-fourth of the creditors with outstanding claims agree to it,provided that the combined claims of these two group of creditorsamount to two-thirds of all creditors’ claims shown in the debtor’sbalance sheet (“qualified majority of creditors”). In Liquidation both secured and unsecured creditors shallannounce their claim to the liquidator within 40 days from thestarting date of the procedure (and during the procedure, within 40days from the maturity date of their actual claim).


In Bankruptcy, claims do not have any preferential status vis-á-viseach other by law. The parties are free to agree on the ranking (andlevel) of satisfaction their claims, respectively, in the compositionagreement.In Liquidation: (A) there are certain special types of securitieswhich entitle the beneficiary thereof to preferential satisfactionduring the course of Liquidation (see (A) below); and (B) there is aset order of the claims, which, subject to provisions in (A), needs tobe followed by the liquidator when satisfying creditors (see (B)below): (A) Preferential (prior) satisfaction:

(a) beneficiaries of (cash or security) deposits maydirectly enforce their claims (even after the startingdate of Liquidation, within 3 months thereafter)against the securities they hold;

(b) beneficiaries of mortgages, fixed charges and pledgeswill be entitled to obtain 100% of sale proceeds (afterdeducting certain fees and costs) arising from the saleof any such charged assets; and

(c) beneficiaries of floating charges will be entitled toobtain 50% of sale proceeds (after deducting certainfees and costs) arising from the sale of any assets(from the charged pool of assets).

(B) Order of (other) claims:(a) liquidation expenses;(b) claims (remaining after satisfaction under (A) (c)

above) secured by a floating charge prior to thestarting date;

(c) alimony and life-annuity payments, compensationbenefits, income supplement to miners, certainlifetime monetary aids etc.;

(d) exception for claims based on bonds, other claims ofprivate individuals not originating from economicactivities, claims of small and micro companies aswell as small-scale agricultural producers;

(e) social insurance and overdue private pension fundmembership dues, taxes and public debts, as well aswater and sewage utility charges;

(f) other liabilities;(g) irrespective of the time and grounds of occurrence,

default interests and late charges, as well as surchargesand penalty and similar debts; and finally

(h) claims held by any executive officer or executiveemployee of the company.

These claims shall be satisfied if there are sufficient funds byalienation of the debtor’s assets/business. Composition/settlementbetween the debtor and creditors during liquidation is also possible,in which case the creditors are free to agree upon the order (andlevel) of satisfaction their claims. Creditors not registered in theliquidation procedure cannot enforce their claim against the debtorfollowing such settlement. If, as a result of the settlement, theinsolvency is resolved, the Court approves it, and terminates theprocedure.


A Bankruptcy or Liquidation does not entail adverse Hungarian taxconsequences or significant tax burdens. Corporate Taxation. A company under Liquidation does not fallwithin the scope of corporate income tax during the procedure. Apractical consequence is, for instance, that any depreciationincurred during the procedure is not tax-deductible. Primarily, thecorporate income tax base (to be generally subjected to 16% tax)has to be modified (increased or decreased, as applicable) by thedifference between the taxation value and the book value oftangible and intangible assets. In addition, the deferral of corporateincome tax becomes due in certain cases. Furthermore, if the company continues to exist after Liquidation, (ifit was not eventually liquidated), any increase in its equity capital istaxable, while any decrease is tax-deductible.Value Added Tax. In case of sale of tangible assets worth morethan HUF 100,000 (approximately EUR 330) by a company underliquidation, the VAT is payable - i.e. is to be self-charged - by theHungarian taxpayer recipient, thus saving the company from apotential cash-flow exposure. Also moratorium in the Bankruptcyshall not apply to VAT.Procedural Duties. A stamp duty ranging from HUF 20,000 toHUF 50,000 (approximately EUR 60 to EUR 170) is payable for theBankruptcy or Liquidation procedure, as fees for Courts.Accounting. The period starting the day before the commencementof the Liquidation qualifies as one single business year until the endof the procedure, regardless of its duration, therefore the entire

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period shall be covered by one sole “annual” report.Tax Procedures. From the starting date of the Liquidation, theliquidator will exercise the overall taxation rights and obligations ofthe company, resulting in tax sanctions maybe being imposed on theliquidator for non-compliance with taxation rules. Any historic taxoverpayment is credited against the outstanding tax liabilities by thetax authority ex officio. The tax authority qualifies as a creditor ofthe debtor during the procedure. It is compulsory for the taxauthority to carry out a tax audit of the debtor, except if it waives itsrights as a creditor.Within 45 days following the starting date of the Liquidation, allapplicable tax returns shall be filed with the tax authority. Once theLiquidation has been completed, the closing tax returns shall besubmitted the day after the closing accounting report has beenprepared.Tax Effects on creditors and shareholders of the debtor.Cancellation of receivables against the company shall be exemptfrom corporate income tax for creditors; nevertheless the 4%solidarity surtax would still apply. The capital gains accrued by theshareholder as a result of the cancellation of its shares in the debtorwould be exempt from corporate income tax, but they will remainsubject to the 4% solidarity surtax.



In general, there is no concept of specifically “cramming down”creditors not consenting to the reorganisation proposals(“Dissenting Creditors”) in Bankruptcy, nevertheless “crammingdown” Dissenting Creditors is possible to the extent the ConsentingCreditors (“Consenting Creditors”) are similarly crammed down.If Consenting Creditors represent a qualified majority of creditors,the composition agreement will also bind Dissenting Creditors,provided that the terms of such an agreement are not less favourablefor Dissenting than for Consenting Creditors. It is not permitted,therefore, to cram down one group of creditors or any memberthereof, against the other group of creditors. In general, there is no concept of “cramming down” DissentingCreditors against Consenting Creditors in a Liquidation. IfConsenting Creditors represent a certain majority percentage of allcreditors and total outstanding credit exposures, thesettlement/composition agreement reached by them in theLiquidation will also bind Dissenting Creditors. Majoritypercentage, by contrast to the qualified majority concept ofBankruptcy, is reached in case if (1) at least one half of theregistered creditors in each group of the priority ranking tier votefor the agreement, provided that (2) claims held by such ConsentingCreditors represent at least two thirds of the amount of the totalclaims against the debtor.The composition agreement must be approved by the Court. Inaddition, the Court shall, by law, decide on the amount payable toDissenting Creditors for satisfying (a part of) their respectiveclaims. Pursuant to this, Hungarian Courts would probably refuseto approve any composition agreement if the satisfaction of claimsof Dissenting Creditors and Consenting Creditors would beunbalanced.Otherwise, in Liquidation, pay-outs are made in accordance with aspecific priority ranking set out by the Act. Settlements of claimsare to be made group by group, cascading downwards in thatpriority ranking grid so that creditors in one particular group aresatisfied pro rata to their outstanding claims.


Bankruptcy proceedings end by the Court ruling on the officialclosing thereof, if Consenting Creditors reach an agreement; theagreement is approved by the administrator; and the court regards itto be in accordance with the laws. Bankruptcy proceedings also endif no agreement is reached by a sufficient number of creditors, theagreement is not approved by the administrator, or the Courtregards it not to be in accordance with the laws. If Bankruptcy hasbeen started by simultaneous suspension of a Liquidation, the Courtshall order then continuance of the suspended Liquidation. In anyother cases, any creditor or the debtor itself may submit petition forthe liquidation.In Liquidation, upon disposal of all assets and the final distributionof the proceeds thereof to the creditors (and the shareholders, as thecase may be), the Court decides on the closing of the Liquidationand also the termination of the debtor without legal successor, uponwhich the debtor shall be terminated and de-registered from thecompany register.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Hungary? In what circumstances might thisbe possible?

There is a tendency in Hungary to agree with creditors outside theformalised procedures (i.e. a work out). When the company showssigns of financial difficulties, the executive officer convenes themanagement body, the supervisory board and/or the shareholders’meeting, in order to discuss the situation and any potentialreorganisation plans. Non-formal restructuring can be successfulwhen the company’s assets cover the debts, there are not too many,but educated creditors, shareholders are cooperative and there is awillingness on all sides to restate the company’s good financialstatus. Restructuring discussions are often started with bankers inorder to reorganise short, medium or long term debts. Once it issuccessful (or in parallel), other undertakings are renegotiatedthrough individual negotiations with the concerned parties. The non-formalised discussion, however, has its drawbacks:unknown creditors cannot be invited to the discussions, there is nomoratorium and during the renegotiations the company shall pay itscreditors in due time (unless the individual agreement with thecreditor specifies otherwise).


The Act on Liquidation does not support the corporatereorganisation of a debtor once petition for Bankruptcy orLiquidation has been filed. In the non-formalised procedure, however, the debtor can always bereorganised. This may include merging subsidiaries, droppingbusiness/product lines, downsizing employees, as well as sellingassets or business sites of the company (always in harmony with theapplicable law). The success of these actions, however, is largelydependent on the willingness of all creditors to agree on the variouselements and timing of the reorganisation. The Companies Act provides for an out-of-Court reorganisationprocess when, according to the annual report, the company does nothave sufficient equity to cover the statutory registered capitalduring two consecutive years, and the shareholders fail to providethe missing equity, the company shall decide on its transformation



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into another company form where the registered capital can besatisfied, or, provided the assets are covering the debts, its solventliquidation.


The composition agreement in a Bankruptcy may provide that thirdparties or creditors shall purchase (entirely or partly) assets as aresult of the debt reorganisation. Though the Act does not providefor it expressis verbis this structure, in merit, appears to be similarto the pre-packaged sale concept, known in other jurisdictions. TheAct, nevertheless, remains short in explaining how a pre-packagedsale should be implemented. Therefore the elements of a pre-packaged sale will have to be negotiated thoroughly between thecreditors and the debtors during the composition discussions.

8 International

8.1 What would be the approach in Hungary to recognising aprocedure started in another jurisdiction?

For insolvency proceedings of a company having its centre of maininterest within the European Union, EC Regulation no. 1346/2000 onInsolvency Proceedings (“EC Regulation”) shall apply. Insolvencyproceedings opened in an EU Member State under the EC Regulationshould be recognised in all Member States, including Hungary, oncethe ruling on the commencement of the proceedings becomeseffective under the laws of the Member State in which theproceedings were commenced, except if recognition of suchproceedings would be obviously contrary to Hungarian public order.Other than as expressly provided for in the EC Regulation (forcompanies in Member States), Hungarian law does not recogniseinsolvency proceedings against companies registered in Hungarycommenced before any foreign court or authority (e.g. those of anynon-EU country).

NotePlease note that the Hungarian Parliament is currently discussing aproposal, amending certain provisions of the Act on Liquidation.The amendment is targeted to enter into force in Autumn, 2009.

Dr. Balázs József Ferenczy

Ferenczy / Gide Loyrette Nouel Rákóczi út 42. IX. floorBudapestHungary, H-1072

Tel: +36 1 411 7400Fax: +36 1 411 7440Email: [email protected]: www.gide.com

Dr. Balázs József Ferenczy, a local partner in the Budapest office ofGide Loyrette Nouel since 2002, is the head of the Banking &Finance Team. He obtained an MBA in Finance and Managementat Budapest Technical University in 2006, accredited by the StateUniversity of New York at Buffalo and the Rochester Institute ofTechnology. His practice concentrates mainly on banking law,capital markets, and investment matters in Hungary. He hasextensive experience in corporate and project finance, mergers andacquisitions, PPP structures, debt and debtor reorganisationtransactions.

Dr. Tibor Nagy

Ferenczy / Gide Loyrette NouelRákóczi út 42. IX. floorBudapestHungary, H-1072

Tel: +36 1 411 7400Fax: +36 1 411 7440Email: [email protected]: www.gide.com

Dr. Tibor Nagy is a senior associate in the Budapest office of GideLoyrette Nouel and a member of the Banking & Finance team. Hehas unique experience in providing various legal services instructured finance and corporate banking transactions for majorfinancial institutions and corporate borrowers. He worked as an in-house legal counsel at ING Bank and ING Barings between 1995and 1999. He advised a major international telephone company inits international merger and acquisition matters, as well as variousHungarian banks and several other international financiers on theircross border lending and security taking transactions.

Founded in Paris in 1920, Gide Loyrette Nouel is one of the premium international law firms worldwide, with morethan 700 lawyers, including 106 partners, drawn from over 30 different nationalities. It is one of the few internationallaw firms to have originated in continental Europe rather than the UK or North America. Operating out of 24 offices,Gide Loyrette Nouel offers some of the most respected specialists in each of the various sectors of national andinternational finance and business law.

The Budapest office of Gide Loyrette Nouel was established in 1993. The legal teams comprise national andinternational lawyers and legal consultants with years of hands-on experience in Hungary. The Banking and Financepractice within the Budapest Office is ranked as one of the leading providers of legal advice on banking & finance andproject finance transactions by the legal guides of Chambers and European Legal 500.



ChapterChapter 20

DSK Legal

India


1.1 How does a creditor take security over assets in India?

As per Indian laws, a creditor can take security over the assets in thefollowing five ways:(a) Mortgage: A mortgage is the transfer of an interest in

specific immoveable property in favour of the creditor for thepurpose of securing the payment of money advanced or to beadvanced by way of a loan, an existing or future debt, or theperformance of an engagement which may give rise to apecuniary liability.Under the Transfer of Property Act, 1882, there are six typesof mortgages namely:(i) Simple Mortgage;(ii) Mortgage by Conditional Sale;(iii) Usufructuary Mortgage;(iv) English Mortgage;(v) Mortgage by way of deposit of title deeds / Equitable

Mortgage; and(vi) Anomalous Mortgage.Generally in India, the most common forms of mortgage arethe English Mortgage and Mortgage by way of deposit oftitle deeds. It is mandatory to register a mortgage deed. However, incase of an Equitable Mortgage where the title deeds are onlydeposited and no mortgage deed is executed, registration isnot compulsory.

(b) Charge: Where the immoveable property of one person is bythe act of the parties or by operation of law made security forthe payment of money to another and the transaction does notamount to a mortgage, the latter person is said to have acharge on the property. A charge does not create an interestin the immovable property.A charge, in contrast to a mortgage, does not involve thetransfer of interest in the immovable property, but simplycreates an encumbrance thereon.It is mandatory to register a charge.

(c) Pledge: The bailment of goods as security for payment of adebt or performance of a promise is called a ‘pledge’. Theessential ingredient of a pledge is the delivery of goods upona contract that they shall, when the purpose is accomplished,be returned or otherwise disposed off according to thedirections of the person delivering them.

(d) Lien: Lien is an active right of retainer, which arises by lawand not contract, possessed by a person who has custody of

the goods on which some skill or labour has been employedby him. A lien is therefore similar to a pledge, the only differencebeing that under a lien, the goods in question are initiallydeposited with the creditor not for the purposes of security.In other words, at the time of depositing the goods, a debtor-creditor relationship does not exist.

(e) Hypothecation: means a charge in or upon any movableproperty, existing or future, created by a borrower in favourof a secured creditor without delivery of possession of themovable property to such creditor, as a security for financialassistance, and includes a floating charge and crystallisationinto a fixed charge on movable property.Under the Companies Act, 1956 (“Act”), where the debtor isa company, necessary filings have to be made with theRegistrar of Companies (“Registrar”) within the prescribedtime period for recording the creation of such security,failing which the security so created in favour of the creditorshall be void against the liquidator (so appointed where thedebtor company is wound up).


Under the Act, if a company enters into certain types of transactions(as listed below) within specified periods before winding up orduring the winding up, the same are susceptible to challenge by theliquidator:(a) Fraudulent Preference: Any contract entered into by a

company within six months before the commencement of itswinding up, for transferring its property (movable orimmovable), delivery of goods, payment, execution or anyother act relating to its property, which is made with a viewof giving a creditor preference over other creditors shall ifthe company is wound up be deemed to be invalid.

(b) Voluntary Transfer: Any transaction entered into by acompany within one year before the commencement of itswinding up for transferring its property (movable orimmovable) or delivery of goods, not being (i) a contractentered into in the ordinary course of its business or (ii) infavour of a purchaser or encumbrancer in good faith and forvaluable consideration shall be void as against the liquidator.

(c) Transfers for benefit of all creditors: Any transfer orassignment by a company of all its property to trustees forthe benefit of all its creditors shall be void. The object of thisprovision is to prevent evasion of the winding up procedure.

(d) Floating Charge: A floating charge created by a companymay be invalid if it is created within twelve monthsimmediately preceding the commencement of its winding up,

Sajit Suvarna

Raksha Kothari



Indi

a

DSK Legal India

unless it is proved that the same was created when thecompany was solvent.

(e) Disclaimer of onerous property: The liquidator may at anytime within twelve months after the commencement of itswinding up, or such extended period as may be allowed bythe Court, disclaim any property acquired by such company,which is onerous in nature.

(f) Avoidance of transfers: In the case of a company underwinding up, any transfer of shares in the company or anydisposition of property (including actionable claim) or anyalteration to the status of the members made after thecommencement of the winding up without the sanction of theliquidator shall be void.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in India?

The Act casts several duties and liabilities upon directors, when thecompany is solvent. Similarly, numerous liabilities are cast upondirectors of the company, during the winding up process. Several duties are cast upon directors during the process of windingup in order to assist the liquidator in completing the winding upprocess of the company, including but not limited to delivering tothe liquidator necessary documents in his possession, disclosing allinformation in respect of the company in his possession, etc. Apart from the above, the following liabilities are cast upon all theofficers of the company, which term includes every director,manager, secretary and every person at whose direction thedirectors are accustomed to act. Moreover, these liabilities arepersonal in nature. If a director is found guilty of any of thefollowing offences, such director would be disqualified to beappointed as a director.I. Falsification of books: If any officer of the company with an

intent to defraud or deceive any person, destroys, mutilatesor falsifies any books, papers or securities or makes any falseor fraudulent entry in any register, book of accounts ordocument belonging to the company, such person shall bepunishable with imprisonment and a fine.

II. Fraud: If any officer: (i) has by false pretences or by fraud,induced any person to give credit to the company; or (ii) withan intent to defraud creditors of the company, has gifted ortransferred a property of the company, such person shall bepunishable with imprisonment and fine.

III. Maintenance of Proper Accounts: Where it is proved thatproper accounts of a company in winding up have not beenmaintained throughout a period of two years immediatelypreceding the commencement of winding up, then everyofficer of a company liable to maintain the accounts shall bepunishable with imprisonment.

IV. Fraudulent conduct of business: If during the course ofwinding up, it appears that any business of the company hasbeen carried on, with an intent to defraud creditors of thecompany or any other person, then every person / party tosuch business shall be personally responsible and shall bepunishable with imprisonment and / or fine.

V. Misfeasance: If during the course of winding up, it appearsthat any person (including the promoter or director of acompany): (i) has misapplied any money or property of thecompany; or (ii) is guilty of any misfeasance or breach oftrust, shall be compelled by the Court (upon an applicationfiled in that behalf) to repay or restore the money or propertyor any part thereof respectively, with interest at such rate asthe Court thinks just.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in India?

When a company is in financial difficulties, the following formalprocedures may be applicable:(a) The board of directors (“Board”) may file an application

before the Board for Industrial and Financial Reconstruction(“BIFR”) for registering the company as a sick companyunder the provisions of the Sick Industrial Companies(Special Provisions) Act, 1985 (“SICA”) in order to reviveand rehabilitate the company.

(b) The members or the creditors may draw up a scheme ofcompromise or arrangement under the provisions of the Actfor reorganisation / restructuring / revival of the company.

(c) The company or the creditors can also initiate proceedingsfor the liquidation of the company, wherein the assets of thecompany are sold and the proceeds appropriated by theliquidator in accordance with the priority of claims, as set outin question 5.2 below.

There are two modes of liquidation namely: (i) compulsory windingup; and (ii) voluntary winding up.

(d) The secured creditors can also initiate proceedings under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (“SARFAESI”)either to sell the secured asset(s) or to take over themanagement of the company.

2.2 What are the tests for insolvency in India?

The tests for insolvency under various legislations are as under:I. The Act does not use the term “Insolvency”. The relevant

term used by the Act with respect to liquidation is “inabilityto pay its debts”. Inability to pay its debts is one of theseveral grounds for compulsory winding up. A company shall be deemed to be unable to pay its debts:(a) if a creditor, to whom the company is indebted in a

sum exceeding Rs.500 (amended as Rs.1,00,000, butthe amendment has not yet come into force) has notbeen paid or secured by the company despite a noticefor the same in accordance with the Act; or

(b) if execution or other process issued on a decree ororder of any Court in favour of a creditor is returnedunsatisfied in whole or in part.

II. SICA provides that a company (being registered for not lessthan five years) has at the end of any financial yearaccumulated losses equal to or exceeding its net worth, shallbe eligible to be declared as a sick company.

III. SARFAESI provides that proceedings can be initiated by asecured creditor against a company, when such company hasbeen classified as a non-performing / sub-standard asset by abank or financial institution under the various guidelinesissued in that behalf by the Reserve Bank of India (“RBI”).


I. Registration as a sick industrial company: Where acompany (being registered for not less than five years) has, atthe end of any financial year, accumulated losses equal to orexceeding its net worth (as per SICA), such a company canregister itself with the BIFR, under the provisions of SICA.

II. Scheme of compromise or arrangement: There is noformal requirement that a company has to satisfy for filing a

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scheme of compromise or arrangement. Whenever acompany proposes a compromise or arrangement with its: (i)creditors or any class of them; or (ii) members or any classof them, a scheme to that effect has to be filed with thecompetent court.

III. Compulsory winding up: Amongst the several groundsprovided under the Act, under which a company can bewound up, a company can also be wound up if it is unable topay its debts, as aforesaid.

IV. SARFAESI: Where a borrower has defaulted in repaymentof a secured debt or any instalment thereof, and its account isclassified by the secured creditor as a non-performing asset,then, the secured creditor can initiate necessary proceedingsunder SARFAESI.


I. Registration as a sick industrial company: A companyeligible under SICA may be declared a sick company if areference is filed:(a) by the Board within the prescribed time limit; or(b) by bodies such as the RBI or the Central Government

or a public financial institution or a scheduled bank. Upon receipt of a reference, the BIFR may appoint anoperating agency to make an inquiry for determining whetherindustrial company in question has become a sick industrialcompany. The operating agency shall formulate a scheme torevive/restructure the company and publish the same forinviting objections from the creditors, members, employees,etc. After considering the objections and suggestions the BIFRshall decide whether it is practicable to revive the company bypassing the necessary scheme, which may be for: (i) financialreconstruction of the sick company; (ii) change or takeover ofmanagement of the sick company; (iii) amalgamation of thesick company; (iv) sale or lease of any part or whole of anyindustrial undertaking of the sick company; (v) rationalisationof managerial personnel, supervisory staff and workmen; and(vi) any other preventive or remedial measures as may beappropriate. But, where the BIFR comes to the conclusion thatit is not possible to revive the company and that it is just andequitable that the company should be wound up, it may recordand forward its opinion to the concerned Court, which mayorder winding up of the sick company in accordance with theprovisions of the Act.

II. Scheme of compromise or arrangement: The company orits members or its creditor(s) may draw up a scheme ofcompromise or arrangement between the company and (i) itscreditors or any class of them; or (ii) its members or any classof them for the purposes of restructuring/reorganising/reviving the company and apply to the Court to approve suchscheme.If a majority in number representing three-fourths in value ofthe: (i) creditors or class of them; or (ii) members or class ofthem, as the case may be, present at the meeting, approve thescheme, such scheme shall be forwarded by the Court torelevant authorities, for their consent. Upon obtaining theconsent from the relevant authorities indicating that theproposed scheme is in the public interest, the Court shall passan order sanctioning the scheme.The order so passed by the Court becomes effective onlyupon the same being filed with the Registrar.

III. Winding up:A. Compulsory winding up

Upon an application for winding up being presented before aCourt inter alia by a creditor, the Court may appoint a

provisional liquidator/administrator/receiver, who may takecustody of the affairs of the company. Upon the Courtdirecting winding up, the official liquidator shall beappointed as the liquidator of the company, who takesnecessary steps to liquidate the company by conducting thesale of the company’s assets and appropriating the saleproceeds towards the dues in accordance with the priority ofclaims. Thereafter, the company stands dissolved.

B. Members voluntary winding upThe process of members voluntary winding up begins withthe members passing a special resolution in a shareholders’meeting for voluntary winding up of the company. A noticeof such resolution shall be published in accordance with theAct.Immediately upon passing such a resolution the companyshall cease to carry on its business. However, the corporatestate and corporate powers of the company shall continueuntil it is dissolved.The Board shall deliver to the Registrar a declaration ofsolvency stating that the company has no debts, or that it willbe able to pay its debts in full within such period notexceeding three years from the commencement of thewinding up.The company in its shareholders’ meeting shall appoint aliquidator. The powers of the Board will cease on the date ofappointment of the liquidator. The liquidator shall takenecessary steps to liquidate the company by conducting thesale of the company’s assets and appropriating the saleproceeds of the same towards the dues in accordance with thepriority of claims.After the winding up is completed, the liquidator is requiredto make a report to the Official liquidator who will in turnreport to the Court. The Court, if it comes to the conclusionthat the winding up has been properly effected, will orderthat the company stands dissolved.

C. Creditors voluntary winding upThe company shall convene a meeting of its creditors to passa resolution for appointing a liquidator for winding up thecompany based on the statement of the financial position ofthe company’s affairs, as submitted by the Board and suchresolution shall be filed with the Registrar.The company shall also hold its shareholders’ meeting andpass a resolution of creditors voluntary winding up.On the appointment of a liquidator, all the powers of theBoard shall cease.As soon as the affairs of the company are fully wound up, theliquidator shall make up an account of the winding up, andcall a shareholders meeting and creditors meeting.Within one week after the date of the meeting, the liquidatorshall send a copy of the account to the Registrar and theOfficial Liquidator, which shall be registered by theRegistrar.The Official Liquidator, on receiving the account shall makea scrutiny of the books and papers of the company and if inits opinion the affairs of the company have not beenconducted in a manner prejudicial to the interests of itsmembers or to public interest, then, from the date of thesubmission of the report to the Court, who may order that thecompany stands dissolved.


Refer to question 2.4.



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3 Creditors


I. Registration as a sick industrial company: Since theintention of the legislature for enacting SICA was torestructure and revive a sick company, there is no provisionin the act, allowing creditors to enforce or claim amounts dueto them through the process before the BIFR. Upon beingregistered as a sick industrial company, a company getsrespite from all sorts of litigation, since the provisions ofSICA lay down that no proceedings as set out in SICA shalllie or be proceeded with further except with the consent ofthe BIFR or the Appellate authority. Therefore, the creditors can enforce their rights eitherthrough the restructuring scheme, if so drawn up by the BIFRor by instituting a civil suit or arbitration for recovery or anyproceeding for execution against the company but only afterobtaining the consent from the BIFR or the Appellateauthority.

II. Scheme of compromise or arrangement: Unsecuredcreditors are considered as a separate class of creditors. If ascheme is drawn up between the company and the unsecuredcreditors and the same is approved by requisite majority ofthree-fourths, of unsecured creditors, such scheme uponbeing sanctioned by the Court shall be binding on all theunsecured creditors. If the scheme does not pertain to unsecured creditors, theunsecured creditors can institute a civil suit or arbitration forrecovery against the company.

III. Winding up: A creditor may institute a winding up petitionagainst the company. Upon a company being wound up, anunsecured creditor can enforce his rights by filing his proofof debt with the liquidator. Upon filing of the proof of debt,the creditor is entitled to receive the sale proceeds of theassets of the company, when sold by the liquidator on thebasis of their priority of claims (as set out in question 5.2below).


I. Registration as a sick industrial company: The process forenforcing the rights by a secured creditor is similar to theprocess set out above for an unsecured creditor, except thatin the event the secured creditors representing three-fourthsin value of the amount outstanding against financialassistance disbursed to the company, have initiatedproceedings under SARFAESI, the process under SICAabates. Accordingly, the protection under SICA also standswithdrawn.

II. Scheme of compromise or arrangement: The process forenforcing the rights by a secured creditor is similar to theprocess set out above for an unsecured creditor.

III. Winding up: The process for enforcing the rights by asecured creditor is similar to the process set out about for anunsecured creditor, except that a secured creditor can chooseto remain outside the winding up process. In such an event,it is entitled to the exclusive charge over the asset secured inits favour by the company but at the same time, such creditorwill not be entitled to receive any share from the saleproceeds of the other assets sold by the liquidator.

IV. SARFAESI: Where a borrower, classified as a non-performing asset fails to discharge his liabilities within sixtydays from receipt of notice issued in that behalf by a securedcreditor, the secured creditor shall inter alia be entitled to:

(a) take possession of the secured assets of the borrowerincluding the right to transfer the same; and

(b) take over the management of the borrower.


In each procedure, where there have been mutual dealings betweenthe company and a creditor, and upon proving the debts due fromeither side, the parties shall be entitled to a set off.



I. Registration as a sick industrial company: During theprocess before the BIFR, the company continues to begoverned by the Board of the company unless the BIFR orthe Appellate authority passes a scheme wherein there is achange or takeover of management of the sick company.

II. Scheme of compromise or arrangement: The company isgoverned by its own management.

III. Winding up: From the date of filing of the winding uppetition till the Court passing an order for winding up, thecompany is governed either by the Board or the provisionalliquidator/administrator/receiver, as may be appointed by theCourt. Once the Court passes an order directing a companyto be wound up, the official liquidator is appointed in respectof the affairs of the company.

IV. SARFAESI: The company is governed by its own Board,unless the secured creditor takes over the management of thecompany.


Generally the company finances all the three procedures out of thevarious sources available to the company.


I. Registration as a sick industrial company: There is nochange in the status of the employment. The employees arealso entitled to participate in the scheme by putting forththeir objections and suggestions.

II. Scheme of compromise or arrangement: Under thisprocedure, the effect on employees shall be as per the schemeproposed. The employees are also entitled to participate inthe scheme by putting forth their objections and suggestions.

III. Winding up: During the winding up of the company, theemployment continues. However, once the court passes theorder for liquidation, the employment of the employeesautomatically stands terminated.


The contracts continue to operate in each of the procedures, unlessheld otherwise by the BIFR under SICA, the liquidator in case ofwinding up.

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5 Claims


Refer to questions 3.1 and 3.2 above.


I. Registration as a sick industrial company: In the event theBIFR directs that the company be wound up, the priority ofclaims as applicable to a company under winding up areapplicable.

II. Winding up: In the winding up of the company, priorityamongst creditors is classified as follows:(a) workers’ claims and secured creditors, who rank pari

passu along with certain crown debts, which in theirlegislation specifically provide that the same can berecovered in priority to other dues;

(b) preferential payments to government claims, claims ofemployees up to Rs.20,000 per person; employees’terminal benefits; employer’s liability to contributeemployees’ benefit funds; workmen’s compensation;sums due to employees from pensions, gratuity andother welfare funds; investigation expenses;

(c) unsecured creditors;(d) preference shareholders; and(e) equity shareholders.


The entry of a company into any procedure does not in itself affectthe corporation tax liabilities of the company. Tax arising ondisposal of assets, or on income earned during the course of eachprocedure shall be a liability of the company in the normal way.



I. Registration as a sick industrial company: Once a schemeis passed by the BIFR/Appellate authority, such scheme isbinding on the sick industrial company, its shareholders,creditors, guarantors and employees.

II. Scheme of compromise or arrangement: A scheme uponbeing sanctioned by the Court and being filed with theRegistrar is binding on all the creditors or class of them.

III. Winding up: In case of compulsory winding up, since thewinding up is pursuant to the order of the Court, the same isbinding on all the creditors. However, the secured creditorshave an option either to participate in the winding up bysurrendering their security, or staying outside winding upthereby retaining their security as set out in question 3.2above.

In case of voluntary winding up, as soon as the special resolution ispassed by the members of the company, voluntary winding up isdeemed to have commenced. Therefore, the creditors are bound bythe decision taken by the members of the company.


I. Registration as a sick industrial company: If theBIFR/Appellate authority decides that it is practicable torevive/restructure the company, the BIFR/Appellateauthority may order for implementation of the sanctionedscheme. On the other hand where the BIFR/Appellateauthority decides that it is not possible to revive the companyand that it is just and equitable that the company should bewound up, it may record and forward its opinion to theconcerned Court. The Court may order winding up of thesick company in accordance with the provisions of the Act.

II. Scheme of compromise or arrangement: Upon the order ofthe Court sanctioning the scheme being filed with theRegistrar, the scheme becomes effective.

III. Winding up: Upon the company’s assets being sold andappropriating the sale proceeds towards the dues inaccordance with the priority of claims, the company standsdissolved.


7.1 Is it common to achieve a restructuring outside a formalprocedure in India? In what circumstances might this bepossible?

For the purposes of putting in place an institutional mechanism forrestructuring of corporate debt, a Corporate Debt RestructuringSystem was evolved and detailed guidelines were issued by RBI forimplementation by financial institutions and banks.The Corporate Debt Restructuring (“CDR”) Mechanism is avoluntary non-statutory system based on Debtor-CreditorAgreement (DCA) and Inter-Creditor Agreement (ICA) and theprinciple of approvals by super-majority of 75% creditors (byvalue) which makes it binding on the remaining 25% to fall in linewith the majority decision. The CDR Mechanism covers onlymultiple banking accounts, syndication/consortium accounts, whereall banks and institutions together have an outstanding aggregateexposure of Rs.20,00,00,000 and above.


Yes, as mentioned in our response above, under the schemessanctioned by the BIFR and the scheme of compromise orarrangement sanctioned by the Court, it is possible to reorganise adebtor rather than realise its assets and business.


Yes, by and under the scheme sanctioned by the BIFR, the schemeof compromise or arrangement sanctioned by the Court and theproceedings initiated under SARFAESI, it is possible to sell theassets of the company with a view to achieve expeditedrestructuring of the debtor.

8 International

8.1 What would be the approach in India to recognising aprocedure started in another jurisdiction?

In case of scheme of compromise or arrangement involving a cross-



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border merger, where a transferor company is a foreign companyand the transferee company is an Indian company, proceedings haveto be instituted before the Foreign Court within whose jurisdictionthe registered office of the transferor company is situated and anorder passed in such Foreign Court shall be used before the Courtwithin whose jurisdiction the registered office of the transfereecompany is situated to give effect to such cross-border merger.

An Indian company can be wound up only by an order passed by anIndian Court. An order for recovery passed by a Foreign Court can be executed inIndia, provided that such foreign judgment is proved to beconclusive in accordance with the provisions of the Code of CivilProcedure, 1908.

Raksha Kothari

DSK Legal4th floor Express Towers, Nariman PointMumbai - 400 021India

Tel: +91 22 6658 8000Fax: +91 22 6658 8001Email: [email protected]: www.dsklegal.com

Joined firm: 2001.Partner since: 2004.Practice areas: Corporate and Commercial, Restructuring andStrategic Investments and Financing.Raksha has vast experience in handling a variety of mattersincluding transaction support, restructuring, strategic investments,private equity, distressed assets, and financing transactions.

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DSK Legal4th floor Express Towers, Nariman PointMumbai - 400 021India

Tel: +91 22 6658 8000Fax: +91 22 6658 8001Email: [email protected]: www.dsklegal.com

Joined firm: 2001.Partner since: 2007.Practice areas: Corporate Real Estate/Real Estate, DisputeResolution and Commercial Contracts.Sajit is a Solicitor by qualification and specialises in Real Estateincluding Foreign Direct Investment in the Real Estate Sector. Sajit also has vast experience in handling variety of matters relatingto Corporate Advisory, Litigation and Arbitration.

DSK Legal, a full service law firm, was established in Mumbai in April 2001. DSK Legal has expanded rapidly, andcurrently has 10 full times partners with 50 practicing advocates operating from its offices in Mumbai and Delhi.

DSK Legal offers legal services to a host of transnational and domestic clients in areas including amongst others,Corporate and Commercial laws, Real Estate, Banking and Financial Services, Capital Markets, Employment Laws,Insurance, Intellectual Property, Telecommunications, Information Technology, Infrastructure and Project Finance,Commercial Litigation and Arbitration.

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For further information, please visit www.dsklegal.com



ChapterChapter 21

Ali Budiardjo, Nugroho, Reksodiputro

Indonesia


1.1 How does a creditor take security over assets inIndonesia?

Under Indonesian Law, there are, in general, three types of in remsecurity.1. MortgageA mortgage is used to encumber fixed property as security for thepayment of a debt. Delivery of possession from the company to thecreditor is not required.A land mortgage, which is subject to Mortgage Law, represents acharge on the land itself and on all buildings and other fixturesattached to it, including machinery affixed thereto. A mortgagecannot be created on land that is to be acquired in the future. Thesecurity right follows the mortgaged property, the transfer of theproperty notwithstanding, until the respective debt has been paid. Amortgage only secures the payment of a debt up to the amountspecified in the mortgage deed. In the event of additional loans bythe same or another creditor to the company, a lower rankingmortgage can be imposed.Registered vessels with a gross weight of 20 cubic meters or moreand registered aircraft can also be secured by way of a mortgage. 2. PledgeA pledge can be vested in movables and shares and requires thedelivery of the pledged goods from the debtor to the creditor. Theconsequence of this is that a pledge can only be created uponmovable property. A pledge can also be made upon intangibleassets by way of declaring the assets in a document “documentaryintangible assets”.3. Fiduciary Transfer of Ownership and Fiduciary Assignment

of RightsA fiduciary transfer of ownership for security purposes may beexercised upon movable property, intangibles and untitled land(provided they are not bound under a mortgage). Unlike the pledge,a fiduciary transfer of ownership does not require the physicaldelivery of the goods.


A transaction that is entered into within a specific period before thedeclaration of its bankruptcy may be nullified by a claim of the

receiver by issuing an extrajudicial declaration. If the counterpartyrefuses to accept the nullification, the receiver must commenceproceedings. Nullification of a transaction made by the debtor may be invoked ifthe following conditions are met:(i) a legal act was performed by the debtor company before it

was declared bankrupt; legal acts are acts that are intended tohave a legal effect, such as a sale and purchase agreement, agift or a waiver. Legal acts are either reciprocal (a sale andpurchase agreement) or unilateral (a gift or a waiver) in theirnature;

(ii) the debtor company was not obligated by contract or by lawto perform the legal act, or in other words the legalact/transaction was voluntarily conducted by the debtorcompany. Some examples of transactions voluntarily made:

payment of a debt which is not yet due and payable;granting of security for a debt when the debtor was notobligated to do so;sale of goods by a debtor to his creditor followed by aset-off of the purchase price; andpayment of a debt in kind instead of in cash;

(iii) the legal act/transaction prejudiced the creditors’ interests;e.g., a sale of goods below their fair market value or theirdisposal as a gift; and/or

(iv) the debtor and the other party in the transaction hadknowledge that the legal act/transaction prejudiced thecreditors’ interests. There is a statutory presumption ofknowledge that all transactions performed within one year ofa declaration of bankruptcy to be prejudicial to thecompany’s creditors by law, provided that it can beestablished that such a transaction falls into one of thefollowing categories:(i) transactions in which the consideration that the debtor

company received was substantially less than theestimated value of the consideration given;

(ii) payments or granting of security for debts which arenot yet due; and

(iii) transactions entered into by the debtor with certainrelatives or related parties of the debtor or thedirectors of the debtor company.

The annulment of a payment, even one that is due and payable, ispossible in cases where a payment was made to a creditor whoknew that a petition for bankruptcy has been registered. The sameapplies to the payment of a debt based on conspiracy between thecompany and its creditor with the intention of preferring thatcreditor over other creditors.

Herry N. Kurniawan

Theodoor Bakker



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Ali Budiardjo, Nugroho, Reksodiputro Indonesia

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Indonesia?

Directors are personally liable for the losses suffered by thecompany where (i) the company is declared bankrupt and thebankruptcy has been the result of the fault or negligence of thedirectors and (ii) the assets of the company are not sufficient tocover the obligation of the company. The only way to avoid suchliability is timely resigning.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Indonesia?

The Bankruptcy Law provides for two main organisationalprocedures for companies having financial difficulties: (i) bankruptcy; and (ii) suspension of payments.Each can be initiated by either the debtor company or by itscreditors. A bankruptcy petition may also be filed by the public prosecutor ifthe public interest so requires. Specifically for banks, securityhouses, insurance and reinsurance companies and state-ownedcompanies engaged in the public interest business, the bankruptcypetition can only be filed by the Central Bank, Capital MarketSupervisory Board and the Minister of Finance respectively.The suspension of payments procedure is provided for a companythat faces temporary liquidity problems and is unable to pay itsdebts but may be able to pay them some time in the future. It givesthe company temporary relief in order for it to reorganise andcontinue its business, and ultimately to satisfy its creditors’ claims.The company is required to submit a composition plan for theapproval of the creditors and for ratification by the court. Therejection of the composition plan by the creditors or its non-ratification by the court or a failure to implement it will result in thebankruptcy declaration of the company.

2.2 What are the tests for insolvency in Indonesia?

Indonesian Bankruptcy Law distinguishes between “insolvency”and “bankruptcy”. Bankruptcy: Under Indonesian Bankruptcy Law, a company’sbankruptcy proceedings (or suspension of payments proceedings) ispronounced by the court if it fulfils the following tests: (i) thecompany has at least two creditors (plurality of creditors); and (ii)at least one of the two debts is currently due and payable.Insolvency: Under Indonesian Bankruptcy Law, a company isinsolvent if following its bankruptcy declaration by the court, (i) nocomposition plan is submitted by the company to the creditors, (ii)a composition plan is submitted but subsequently rejected by thecreditors, or (iii) a composition plan is submitted and subsequentlyapproved by the creditors but is not ratified by the court.


A company is placed into either procedure if it passes the respectivetests discussed in question 2.2 above.


Bankruptcy procedureThe petitioner must file a bankruptcy petition with the CommercialCourt. The court summons the company and its creditor to ahearing to be held, where the petitioner must prove that thetests/conditions referred to in question 2.2 are met. If successful,the court declares the company bankrupt and appoints a receiver tomanage the bankruptcy estate and a supervisory judge to supervisethe bankruptcy.Suspension of Payments procedureThe company (or its creditors) must file a suspension of paymentspetition with the Commercial Court. Upon receipt the court must(i) forthwith grant a temporary suspension of payments for a periodof ninety days, (ii) appoint an administrator who, together with thedirectors of the company, will manage the assets of the company,and (iii) appoint a supervisory judge to supervise the suspension ofpayments. The purpose of the suspension of payments is to givetime to the company to propose a composition plan to the creditorsfor their approval. The ninety-day period extension can be furtherextended to a period of 270 days as of the date of the petition, ifsuch extension is approved by (i) the unsecured creditors that fulfila quorum of one half in number and two thirds in amount of thetotal unsecured claims; and by (ii) the secured creditors that fulfil aquorum of one half in number and two thirds in amount of the totalsecured claims.


Bankruptcy procedureAfter the declaration of the bankruptcy of the company, the court-appointed receiver must (i) send a notification of the bankruptcy tothe known creditors, (ii) invite the creditors to submit their claims,(iii) attend the creditors’ meeting on a date specified by the court,and (iv) announce the invitation in the newspapers.Suspension of payments procedureSubstantially the same sequence takes place as in bankruptcy.

3 Creditors


Bankruptcy procedureThe enforcement of all rights by unsecured creditors of a bankruptcompany is halted and the assets of the bankrupt company are putunder general attachment, to be subsequently liquidated and used topay the claims of the creditors unless a composition plan becomeseffective. The power to dispose of the assets of the company lieswith the Receiver. The unsecured creditors are entitled to paymentof their unsecured claim on a pro rata basis in proportion to theamount of the claim.Suspension of payments procedureThe unsecured creditors of a company that is under a suspension ofpayments procedure are also not free to enforce their rights. All ofthe unsecured creditors of such a company are bound by thesuspension of payments procedure that calls for a stay of amaximum period of 270 days. The power to manage the assets ofthe company is in the hands of the administrator, together with the

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management of the company. If a composition plan is approved bythe creditors and ratified by the court, the agreed composition planwill replace the terms and conditions of the individual debts. If thecomposition plan is rejected by the creditors or not ratified by thecourt, the company will immediately be declared bankrupt.


Bankruptcy procedureThe secured creditors may enforce their security right as if therewere no bankruptcy, subject to a stay of 90 days. The stay does notapply to cash collateral and does not affect the right of the creditorsto a set off.Any party whose rights are stayed may file a petition to the receiverfor the lifting of the stay or otherwise for varied terms of the stay.If the stay does not serve any purpose, the stay should be liftedvoluntarily by the Receiver. If a petition regarding a stay is rejectedby the Receiver, the stayed party may submit a petition to theSupervisory Judge. In deciding on the petition the SupervisoryJudge is obliged to take into account, inter alia:

the duration of the stay as from the filing of the petition;the protection of the (financial) interests of the stayed parties; the likelihood that a composition will be reached; andthe impact of the stay on the business, the management of thebusiness of the debtor and the settlement of the bankruptcyestate.

A decision of the Supervisory Judge can be appealed to theCommercial Court, as regards which the Court must make itsdecision on short notice. There is no legal remedy against thedecision of the Court.Suspension of payments procedureThe secured creditors are not free to enforce their rights. Theobligations of the company to pay its debt are suspended during thesuspension of payments proceeding. If a composition plan isapproved by the creditors and ratified by the court, the agreedcomposition plan will replace the terms and conditions of therepayment of the debt. If, on the other hand, the composition planis rejected by the creditors or not ratified by the court, the companywill immediately be declared bankrupt.


In both the bankruptcy and the suspension of payments procedures,creditors can set off sums owed by them to the company againstamounts owed by the company to them. In the bankruptcyprocedure, however, to do so the following requirements must bemet:

the claim and the debt already existed prior to the declarationof bankruptcy; orthe claim and the debt exist as a result of transactions carriedout with the bankrupt company before the bankruptcy wasdeclared.

These rules make a creditor’s set off right in an event of bankruptcymore favourable than its set off right outside of a bankruptcy event.There is no requirement for the debts to be currently due andpayable. On the other hand there is uncertainty whether or not thereceiver or administrator must approve an intended set off.



Bankruptcy procedureUpon the declaration of the company’s bankruptcy, the directors ofthe company lose the power to manage the company. The power istransferred to the Receiver, who now manages the bankruptcy estateand the settlement of the company’s debts. The Bankruptcy Law does not specifically discuss the powers of theshareholders, but it is understood that the shareholders are stillentitled to pass resolutions with respect to the company’s mattersexcept those which pertain to assets and management.Suspension of payments procedureDuring a suspension of payments proceeding, the directors of thecompany, together with a court-appointed administrator andsupervised by a supervisory judge, jointly run the management ofthe company. Shareholders are restricted in the same manner as in bankruptcy.


If for the purpose of rescuing itself as a going concern the companyneeds new financing, the Receiver (in the case of bankruptcy) isauthorised to take a new loan, and if the new loan requires security,the Receiver may, with the supervisory judge’s approval, pledge thecompany’s assets as security.


Neither the bankruptcy procedure nor the suspension of paymentsprocedure have a direct impact on employees. Employees fall intothe classification of estate creditors, and as such they are entitled topayments in full of their claim on the basis of the employmentcontract. In the case of bankruptcy, the Receiver may terminateemployment contracts taking into account the entitlement of theemployees to receive severance payment in accordance with theLabor Law.


Bankruptcy procedureThe bankruptcy of a company does not change the validity or theterms of a contract the company has entered into. The rights andobligations of the parties to such contracts remain unchanged.However, the Receiver does not have the obligation to perform thecontract. If the Receiver confirms performance he must guaranteeperformance; if he confirms cancellation the other party will haveto submit a claim as an unsecured creditor.Suspension of payments procedureThe granting of a suspension of payments to a company does notchange the validity of a contract the company has entered into; itonly stays the obligations of both parties for a maximum period of270 days.



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5 Claims


Bankruptcy procedureCreditors must submit their claim in writing to the receiver with allunderlying documentation. The receiver adjudicates claims duringa so-called verification meeting. The receiver’s adjudication issubject to appeal to the Supervisor Judge and then to the Court.Secured claims need not be adjudicated. Unsecured creditors areentitled to a pro-rata portion of their claim. Secured creditors areentitled to receive payments from the proceeds of the sale of theassets serving as security, and to claim for the remaining balance asunsecured creditors.Suspension of payments procedureCreditors must submit their claims in the same manner as inbankruptcy. The claims of the creditors are subject to the terms ofthe composition plan that may have been agreed to by the creditorsand ratified by the court.


There is no unified provision on the ranking of creditors’ claims.The provisions on the ranking of claims are spread out in severallegislations. In general, the shareholders of the company rank behind all of thecreditors in the distribution of the proceeds of the bankruptcy estate.Any distribution they receive is in proportion to the percentage ofthe shares that they hold in the company, if there are remainingassets after distribution to the creditors.The general rule for the distribution of the proceeds of a bankruptcyestate to unsecured creditors is one of equality, subject to thestatutory priority rights of certain categories of creditors. The creditors’ ranking is as follows:

Tax Claims, which priority right lasts only 2 (two) years asof incurrence.Post-bankruptcy creditors (who have claims on the bankruptcyestate), which are entitled to receive payments in full: (i) salary of the receiver; (ii) costs in the liquidation of the bankruptcy estate

(appraiser’s fee, accountant’s fee, etc.); (iii) post bankruptcy financing; (iv) lease of the bankrupt’s house or offices; and (v) wages of the employees of the bankrupt company.Secured Creditors. Unsecured creditors:1. Specific statutorily preferred creditors whose

preference relates only to specific assets. Specificstatutory preferred creditors prevail over generalstatutory priority rights.

2. General statutory priority rights.3. Non-preferred unsecured creditors.


Tax liabilities are ordinarily incurred during each of the proceduresif the business is continued during each procedure. The written-off

amounts in haircuts and debt write-offs are subject to income tax onthe part of the company.



Bankruptcy procedureUnsecured creditors who voted against the composition arecrammed down if the composition is approved by unsecuredcreditors by a specified majority and ratified by the court. Securedcreditors are not entitled to take the vote and are not affected by theresult of the votes.Suspension of payments procedureUnsecured creditors who voted against the composition arecrammed down if the composition is approved by unsecuredcreditors and ratified by the court. Secured creditors have a voteand those who voted against the composition are entitled to becompensated for the amount of the outstanding claim or the valueof the security, whichever the lower.


Bankruptcy procedureThe bankruptcy is lifted if there are insufficient assets to pay theReceiver and otherwise if a composition plan is agreed by thecreditors and ratified by the court; or if the claims of the creditorshave been fully satisfied by the bankruptcy estate. If the companybecomes insolvent (please refer to the term “insolvency” inquestion 2.2), the bankruptcy procedure is concluded with theliquidation of the company. Suspension of payments procedureIf the composition plan proposed by the company is approved bythe creditors and ratified by the court, the suspension of paymentsproceedings end upon such approval and ratification. Otherwise,the bankruptcy procedure will commence.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Indonesia? In what circumstances might thisbe possible?

Yes, a significant number of creditors and borrowers achieve arestructuring outside a formal procedure. As a matter of fact, thecreditors’ preferred route is negotiation on a private basis withcooperative debtors. Prominent international accounting firms,international and domestic law firms and investment bankingadvisers have frequently advised on, documented and generallyassisted and supported these private processes.Indonesia has in the past facilitated private restructuringnegotiations. In 1998 the Jakarta Initiative Tasks Force (JITF), theFinancial Sector Policy Committee and the Oversight Committeewere established. The JITF mediated in debt restructuringnegotiations among Indonesian debtors and their creditors by usingthe London Approach, and gave tax concessions to the debtsrestructured. The JITF closed in December 2003 at thegovernment’s consideration that its work had been largelycompleted by then.

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7.2 Is it possible to reorganize a debtor rather than realise itsassets and business?

Yes, but it is to be noted that informal reorganisation will require theagreement of the respective debtor. There is no procedure forprivately appointed administrators to reorganise the debtorcompany.


Yes, it is. Provided that the sale agreed by the debtor, it may beconducted privately or otherwise by way of an auction. Theprocedure involves the Receiver and the Commercial Court whowill agree on a composition plan that contains the pre-packagedcram down and sale of asset

8 International

8.1 What would be the approach in Indonesia to recognising aprocedure started in another jurisdiction?

The Bankruptcy Law adopts the principle of territoriality. Abankruptcy procedure initiated in another jurisdiction has, inprinciple, no effect in Indonesia. Assets located in Indonesiabelonging to a company which has been declared bankrupt outsideIndonesia are not considered part of the bankruptcy estate.

Theodoor Bakker

Ali Budiardjo, Nugroho, ReksodiputroGraha Niaga, 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190Indonesia

Tel: +62 21 250 5125/5136Fax: +62 21 250 5001/5121Email: [email protected] URL: www.abnrlaw.com

Mr. Theodoor Bakker is admitted to the Amsterdam bar. He hasworked in Southeast Asia since 1984. He has considerableexperience in: direct foreign investment; project finance work,including private power and petrochemical projects; andinfrastructure development. During the first Asian financial crisis,he was involved in many aspects of restructuring and insolvency,and has advised on foreign law issues of bankruptcy reform inIndonesia. He has published various articles on insolvency andcross-border investment issues and teaches at the Faculty of Law ofUniversity of Indonesia and at the Department of Law and HumanRights. He speaks Dutch English, French and Indonesian. He is notadmitted to the Indonesian courts.

Herry N. Kurniawan

Ali Budiardjo, Nugroho, ReksodiputroGraha Niaga, 24th FloorJl. Jend. Sudirman Kav. 58Jakarta 12190Indonesia

Tel: +62 21 250 5125/5136Fax: +62 21 250 5001/5121Email: [email protected] URL: www.abnrlaw.com

Mr. Herry Nuryanto Kurniawan joined ABNR as an associate inFebruary 1999 after having completed several months of internshipwith ABNR and has been a Senior Associate since 2005. Hegraduated from the Faculty of Law, University of Indonesia, majoringin Economic Law. He has been involved in corporate matters,foreign investment, capital market, project finance and corporatefinance, restructuring and bankruptcy projects, and has regulatoryknowledge in these areas. He was involved in project of monitoringthe implementation of the bankruptcy law in 1999 and thus hasregulatory knowledge in bankruptcy and suspension of payments.He is a co-writer for various articles and publications concerningbankruptcy, merger and acquisition. He also participated as speakerin seminars and workshops on bankruptcy and suspension ofpayments, investment, merger and acquisition. In his currentpractice, he has also intensively involved in numerousbankruptcy/suspension of payments and commerciallitigation/arbitration.

Ali Budiardjo, Nugroho, Reksodiputro (ABNR), is one of the oldest, largest and most prominent law firms in Indonesia.The firm was founded in 1967 by professionals with a deep respect for the law and a keen interest in assisting clients,both foreign and domestic, to achieve their commercial goals within the Indonesian legal environment.

The firm, now supported by almost 80 lawyers, has wide area of practice, including Corporate Law, Banking andFinance, Capital Markets, Investment Law, Restructuring, Privatisation, Merger & Acquisitions, Telecommunication, Oil,Gas and General Mining, Environmental Law, Intellectual Property, Maritime Law, Aviation Law, Real Property,Bankruptcy Law, Labour Law, Project Finance.

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Chapter 22

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Ireland


1.1 How does a creditor take security over assets in Ireland?

Security can be taken by way of the following:Equitable Mortgage

An equitable mortgage is a mortgage that passes only an equitableestate or interest; either because the form of transfer or conveyanceis an equitable one or because the mortgagor’s estate or interest isequitable only.

Legal MortgageA legal mortgage is a transfer of the legal estate or interest in landor other property. The borrower retains the right to redeem the legaltitle to the property charged on repayment of the debt. A legalmortgage of property of which physical possession cannot be taken(e.g., contractual rights under a life assurance policy) is effected bya security assignment. The assignment is subject to the repaymentof the secured obligation.

Fixed chargeA fixed charge is a charge over specifically identifiable assets whichhave been offered as security but does not operate to transfer title inthe secured assets to the creditor. On default by the borrower (andin accordance with the terms of the charge documentation) itprovides the creditor with the right to receive payment from theproceeds on the realisation of the specific property. The borrowercan generally only deal with the charged asset(s) with the lender’sconsent or following repayment of the secured obligation.

Floating ChargeA floating charge generally consists in a charge over all the assetsof a borrower company as are acquired from time to time. Thecompany remains free to deal with such assets in the normal courseof its business. It does not attach to the assets charged untilcrystallisation, i.e., on the appointment of a receiver or the windingup of a company.

LienA lien is the right to hold the property of another as security for theperformance of an obligation. A particular lien exists only assecurity for the particular debt incurred.

PledgeA pledge arises where a pledgor transfers possession but notownership of certain goods or documents of title to a pledgee assecurity for the discharge of a debt or discharge of some otherobligation.


Fraudulent PreferenceAny wrongful favouring of one creditor over others by a companywhich is unable to pay its debts is a fraudulent preference and isinvalid. Where a company is put into liquidation, any preference ofa creditor in the six months prior to winding up can be set aside asa fraudulent preference. Demonstrating an intention to preferhowever is crucial and this can be difficult.Where the creditor is a director of the company or a personconnected with a director, any payment made to such persons in thetwo years prior to the winding up can be considered and set aside ifdeemed a fraudulent preference. Fraudulent DispositionOn the winding up of a company, if shown that there has been adisposal of company property the effect of which was to perpetratea fraud on the company, the court may order the return of suchproperty or payment of a sum to the liquidator by the recipient ofthe proceeds on any transfer of the property.Invalid Floating ChargesWhere a company is being wound up, a floating charge createdwithin 12 months before the commencement of the winding up shallbe invalid unless proved that immediately after the creation of thecharge the company was solvent. The charge remains valid inrespect of money actually advanced or paid at the time of orsubsequent to the creation of and in consideration for the charge.The relevant period is 24 months in respect of any charge created infavour of a director or a person connected with a director on theundertaking or property of the company.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Ireland?

Continuing to trade in times of financial difficulties does not of itselfautomatically give rise to directors’ liability. However certain conductin times of insolvency will give rise to directors’ liability on a windingup of the company. Moreover, where an insolvent company is notbeing wound up and the principal reason is the insufficiency of itsassets, certain provisions of company law that impose personalliability on directors will apply in the absence of a winding up. Personal liability or other sanction will be imposed in the followingsituations:

Adrian Benson

Lorcan Tiernan

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Dillon Eustace Ireland

Fraudulent tradingIf in the course of a winding up of a company or an examinership,or where an insolvent company is not being wound up, any personthat was knowingly a party to the carrying on of the business of acompany with intent to defraud company creditors, or for anyfraudulent purpose may be guilty of fraudulent trading. Irishcompany law provides for a maximum penalty of imprisonment fora term not exceeding seven years or a fine not exceeding €63,487 orboth. In addition, any person may be held personally responsible,without limitation of liability for all or any of the liabilities of thecompany as the Court may direct. Reckless tradingIn the course of the winding up of a company or in the course ofexaminership proceedings or where an insolvent company is notbeing wound up, any officer of the company shown to haveknowingly carried on any business of the company in a recklessmanner may be personally liable for all or any part of the debts orother liabilities of the company.An officer shall be deemed to be knowingly a party to the carryingon of any business of the company in a reckless manner if havingregard to the general knowledge, skill and experience reasonablyexpected of such a person he ought to have known that his actionsor those of the company would cause loss to the company’screditors, or he was a party to the contracting of debt by thecompany without honestly believing on reasonable grounds that thecompany would be able to pay its debt as they fall due. It is a defence to show that a director acted in an honest andresponsible manner.Restriction orderIf an insolvent company is wound up then, unless the Director ofCorporate Enforcement relieves the liquidator from doing so, theliquidator must apply to the High Court for an order restricting each ofthe directors of the company from acting as a director or the secretaryof any other company for a period of five years unless such othercompany is capitalised to the requisite level. The High Court mustmake such an order unless satisfied that the director has acted honestlyand responsibly and that there is no other reason making it just andequitable that such an order should be made against him. The burdenof proof is on the director. Although the Irish Supreme Court hasrecently described this regime as “draconian”; and in the relevant case,lifted a restriction order imposed by the Irish High Court, the statutoryprovisions in this regard are unchanged as yet. DisqualificationA person convicted on indictment of any indictable offence inrelation to a company or involving fraud or dishonesty may duringthe five year period from date of conviction or such other period asthe court may order, be disqualified from acting as a Director orbeing directly or indirectly involved in the promotion, formation ormanagement of any company. The onus is on the liquidator or otherapplicant to show that the director has committed conduct thatwould justify a disqualification order.MisfeasanceWhere in the course of a winding up, it can be shown that companymoney or property has been misapplied or wrongfully received bya director or other officer, such a director (or officer) may becompelled to repay or restore all or part of such money or propertypursuant to misfeasance proceedings. Damages may also bepayable in respect of some other breach of duty or misfeasance bya director or other officer.Care should also be taken when making statutory declarations ofsolvency in connection with financial assistance for the purchase ofshares in a company or with certain transactions involving

directors. If the company is wound up within twelve months aftermaking the required statutory declaration of solvency and its debtsare not paid or provided for in full within the period of twelvemonths after the commencement of the winding up it is presumedthat the directors did not have reasonable grounds for making sucha declaration and such directors can be made personally liable forthe company’s debts in full as they become due. The High Courtcan also consider whether any relevant arrangement with a directorcontributed materially to the company’s inability to pay its debts, inwhich case, it may, on the application of the liquidator or anycreditor or contributory of the company, declare that the beneficiaryof the arrangement shall be personally liable for all or part of thedebts and other liabilities of the company.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Ireland?

ExaminershipExaminership provides for a period of court supervised protection(a maximum of 100 days) during which a company is protectedfrom creditors pursuing legal actions or remedies against it, therebyenabling the company and an appointed examiner to formulate andpresent proposals for a restructuring of the company.Compulsory (Court) LiquidationOn application to the High Court, a liquidator, acting under thesupervision of the court, is appointed to wind-up the company. Creditors’ Voluntary LiquidationA procedure whereby the members of an insolvent company(usually on the recommendation of the board of directors) resolveto wind-up the company and appoint a liquidator for that purpose.ReceivershipA receiver is appointed to a company by either a debenture-holderor the High Court to take control of the assets of a company toachieve the repayment of the debt owing to the debenture-holder,either through receiving income or realising the value of thecharged asset. Receivership is technically a method of enforcing asecurity but is often regarded as a form of insolvency procedure. Statutory Scheme of ArrangementThis is a court supervised procedure which provides for theformulation and implementation of a compromise or arrangementbetween a company and its members or creditors. The compromiseor arrangement with creditors is usually proposed when thecompany is in financial difficulties.

2.2 What are the tests for insolvency in Ireland?

There are two tests for establishing insolvency in Ireland, asfollows:(i) the ‘cash flow test’ - is the company able to pay its debts as

they fall due for payment?(ii) the ‘balance sheet test’ - do the value of a company’s assets

exceed its liabilities?


ExaminershipBefore the court will appoint an examiner, the petitioner must

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satisfy the court that:(i) there is a reasonable prospect of the survival of the company

and the whole or any part of its undertaking as a goingconcern;

(ii) the company is unable to pay its debts or is likely to beunable to pay its debts as they fall due; and

(iii) no resolution subsists and no order has been made for thewinding-up of the company.

Compulsory (Court) LiquidationThe court has a discretionary power to order the winding-up of acompany on a number of grounds, including:(i) the company resolves by special resolution to be wound-up

in this way;(ii) the company is unable to pay its debts;(iii) the court is of the opinion that it is just and equitable; and(iv) the affairs are being conducted, or the powers of the directors

are being exercised, in a manner oppressive to any memberor in disregard of his interests as a member.

Creditors’ Voluntary LiquidationThe members of the company can pass an ordinary resolution forthe company to be wound-up on the grounds that it cannot byreason of its liabilities continue its business.ReceivershipThe grounds on which a debenture-holder will be entitled to appointa receiver to a company will be set out in the debenture documentwhich provides for the appointment of the receiver. Statutory Scheme of ArrangementThe court will supervise a scheme of arrangement on application tothe court by the company or any member or creditor.


ExaminershipA petition for the appointment of an examiner is presented by:(i) the company;(ii) the company’s directors;(iii) any of the company’s creditors (including an employee); or(iv) members of the company holding at the date of the

presentation of the petition at least one tenth of the paid-upvoting capital of the company.

The petition must be accompanied by a grounding affidavit; and anindependent accountant’s report containing an opinion as to thecompany’s prospects of survival as a going concern and a statementof the conditions necessary to ensure its survival. At the hearing tohave the examiner appointed every creditor of the company isentitled to be heard on the application.Compulsory (Court) LiquidationA petition for an order of the court to wind-up the company andappoint a liquidator (together with a verifying affidavit) is presentedby:(i) the company itself;(ii) any creditor (this is the most common petitioner);(iii) any member;(iv) any contributory;(v) the Director of Corporate Enforcement; or(vi) the Registrar of Companies.The petition must be served on the company at the registered officeof the company and must be advertised in newspapers. A statement

of the company’s affairs verified by one of the company’s officersmust be filed in court. The statement must set out certaininformation including a statement of the company’s assets, debtsand liabilities, details of the company’s creditors and assets held bythem. Every creditor, interested party and the company is entitledto be heard on the petition at the petition hearing.Creditors’ Voluntary LiquidationThe directors of the company convene a meeting of the membersand a meeting of the creditors. At the members’ meeting anordinary resolution is passed to wind-up the company. Thecreditors’ meeting is held on the same day as or the day followingthe members’ meeting. At the creditors’ meeting (which is presidedat by one of the directors of the company) the creditors approve themembers’ choice of liquidator or propose their own. The creditorsalso consider the statement of affairs in respect of the company andappoint a committee of inspection.ReceivershipThe debenture document itself will usually authorise the debenture-holder to appoint a receiver upon the occurrence of an event ofdefault (as set out in the debenture document). The debenture-holder can designate a receiver once the conditions of exercisingthat power are satisfied. Alternatively, the High Court has the power to appoint a receiver onapplication in certain circumstances.Statutory Scheme of ArrangementOne of the following may apply to the High Court to propose ascheme of arrangement:(i) the company;(ii) any creditor of the company;(iii) any member of the company; and(iv) in the case of a company being wound up, the liquidator.Following such application, the High Court will order meetings ofthe creditors and members to vote in respect of the scheme ofarrangement.


ExaminershipThe petitioner must deliver to the CRO a copy of the orderappointing the examiner; and the examiner must advertise notice ofhis appointment in two daily newspapers and in an Irish officialpublication.Once the examiner has formulated proposals for the scheme ofarrangement for the company, he must convene meetings of themembers and creditors of the company to vote on the proposals.Compulsory (Court) LiquidationThe petition presented to the High Court must be advertised in anIrish official publication and two daily newspapers.The petition must be served on the company and any creditor orcontributory that requests a copy. Notice of the winding-up order must be filed in the CRO and alsoadvertised in an Irish official publication and two daily newspapers.Creditors’ Voluntary LiquidationCreditors must be given at least 10 days’ notice of the proposedcreditors’ meeting and the notice must be published in two dailynewspapers.Notice of the resolution to wind up the company must be publishedin the Gazette and a copy of the resolution must be given to theCRO.

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See question 2.4 above for meetings of members and creditors.ReceivershipNo meetings are required. The appointment of a receiver must bepublished by the debenture-holder in the Gazette and in one dailynewspaper. Notice must also be given to the CRO.A receiver appointed under a floating charge must notify thecompany of his appointment.Statutory Scheme of ArrangementSee question 2.4 above as to meetings of members and creditors.The order of the court sanctioning the scheme of arrangement mustbe filed in the CRO.

3 Creditors


ExaminershipDuring the period of an examinership, the company enjoys a “stay”during which creditors may not exercise their rights against thecompany. In addition no proceedings of any nature can becommenced against the company without prior leave of the HighCourt and subject to certain limited exceptions; any pendingproceedings may be stayed. Certain specific procedures must befollowed vis-à-vis guarantors and the enforcement of guarantees bycreditors.Compulsory (Court Liquidation)No action or proceedings against a company which is the subject ofa compulsory liquidation may be proceeded with or commencedwithout the permission of the High Court. Creditors’ Voluntary LiquidationProceedings and actions against a company are generally not stayedin a voluntary liquidation and unsecured creditors remain free toexercise their rights in this regard. However, the liquidator of thecompany in voluntary liquidation may apply to the High Court foran order effecting such a stay. ReceivershipThe appointment of a receiver to a company does not precludeunsecured creditors from enforcing their rights in respect of the debtowed to them.Statutory Scheme of ArrangementOn application to the High Court to put in place a scheme ofarrangement, that Court may stay all proceedings or restrain furtherproceedings against the company for a certain period. During suchperiod, the rights of unsecured creditors against the company willbe restrained.


ExaminershipOnce a petition for the appointment of an examiner had beenpresented, the rights of creditors to enforce their security areseverely restricted: no action may be taken to realise the whole orany part of a creditor’s security except with the consent of theexaminer (although regard should be had to the provisions of theFinancial Collateral Arrangements Directive 2002/47/EC).Furthermore, the examiner has the right to use and dispose of acreditor’s security.

Statutory Scheme of ArrangementThe court is empowered by statute to stay all proceedings or restrainfurther proceedings against the company however this will notprevent the appointment of a receiver by a secured creditor duringthe process.Compulsory (Court Liquidation) / Voluntary LiquidationCommencement of a court or voluntary liquidation does not preventa secured creditor from appointing a receiver. ReceivershipThe appointment of a receiver to a company does not prevent othersecured creditors from enforcing their security.


Generally, yes, where there is mutuality of debts. A company inliquidation cannot set off against its liabilities to a secured creditorunless he elects to prove in the liquidation.



ExaminershipThe directors continue to manage the affairs of the company subjectto the examiner’s ability to convene, set the agenda for and attendboard meetings. The court may order that only the examiner mayexercise the powers of the directors; but in general, the directors andthe examiner work together.Shareholders may continue to attend and vote at general meetingshowever, the examiner also has the power to override any decisionwhich is likely to be to the detriment of the company or anyinterested party. Existing shareholders’ interests will likely bediminished as part of the proposals in any event.Compulsory (Court) Liquidation) / Creditor’s VoluntaryLiquidation In both compulsory and voluntary liquidations the liquidator takescontrol of the company. On the appointment of the liquidator thedirectors’ powers cease. Shareholders similarly have no involvement beyond the initialapproval of the liquidator’s appointment other than payment of anyunpaid amounts on their shares or receipt of any distributions on asolvent liquidation.ReceivershipThe directors will cease to have power over the assets which aresecured by the debenture, under which the receiver is appointed andthe debenture may authorise the receiver to manage the company’sbusiness.The appointment of a receiver has little effect on the shareholdersas they remain entitled to the same voting powers as prior to theappointment; although shareholder value will have diminished.Statutory Scheme of ArrangementThe directors continue to control the company and any effect on theshareholders will be dictated by the terms of the scheme.

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ExaminershipIf the scheme proposed by the examiner is approved by the HighCourt it will usually make provision for the examiner’s fees, costsand expenses from the company’s revenue or assets or from newinvestment.The examiner’s costs must be approved by the court and onceapproved must be paid before any other claim against the company. Compulsory (Court) Liquidation) / Creditor’s VoluntaryLiquidationThe liquidator’s remuneration and costs will generally be paid fromthe realisation of company’s assets in priority to all creditors otherthan those secured by a fixed charge and an examiner’s costs. ReceivershipThe receiver’s costs and expenses are funded from the realisation ofthe secured assets. Statutory Scheme of ArrangementGenerally funded from the company’s assets or revenue.


Compulsory (Court) LiquidationA winding up order effectively terminates employee contracts. Creditors’ Voluntary LiquidationA resolution to wind up a company voluntarily does notautomatically terminate employee contracts although in practice aliquidator will often proceed to make most if not all of theemployees redundant. Examinership & Statutory Scheme of ArrangementThe appointment of an examiner does not immediately affectemployees. The proposals put forward by the examiner or applicantin a statutory scheme may in practice affect employees particularlyif the scheme for the survival of the company involvesredundancies.ReceivershipWhere a receiver is appointed, the company's employees are notautomatically dismissed; however, in practice, the appointment of areceiver manager often results in redundancies. If the business ofthe company is sold the European Communities (Protection ofEmployees on Transfer of Undertakings) Regulations 2003 usuallyapplies. This will be the case for any transfer of a business otherthan as part of a court liquidation.


ExaminershipThe commencement of the examinership procedure does not affectthe contracts subsisting at the date of such commencement, unlessexpress or implied provision to the contrary is made in the contract. The general rule is that an examiner may not repudiate a contractentered into by company prior to the period during which thecompany is under protection except that the examiner may avoidcertain provisions of a contract entered into by the company, inparticular, ‘negative pledge’ clauses if the examiner is of theopinion that the provision would be likely to prejudice the survivalof the company or the whole or any part of its undertaking as agoing concern if enforced; and the company itself may apply to the

court to affirm or repudiate any contract under which an obligationother than payment remains to be performed.Court Liquidation / Voluntary LiquidationThe terms of the contract may dictate the effect which theliquidation will have on the contract. Often a contract will providethat the appointment of a liquidator to the company will constitutea breach of the contract or trigger a forfeiture provision (where thecontract is a lease). Onerous contracts may be disclaimed by the liquidator withpermission of the court and the other party to the contract or thirdparties suffering damage as a result will be entitled to becompensated for such damage and can prove the amount as a debtin the winding up.ReceivershipThose contracts entered into by a company prior to the appointmentof a receiver to that company will generally remain enforceable byand against the company following the appointment of a receiver(unless the contract expressly or impliedly provides otherwise) andare not enforceable directly against the receiver. Statutory Scheme of ArrangementThis will not result in automatic termination of contracts. However,contracts often provide that the occurrence of such an event willconstitute a breach of the contract or trigger a forfeiture provision(where the contract is a lease).

5 Claims


Court LiquidationIn compulsory liquidations the creditors must prove their debts.The liquidator or the court may fix a time by which written proof ofdebts must be lodged. Voluntary LiquidationsFormal proof of debts is not essential in voluntary liquidationshowever submission of claims in writing may be required by theliquidator.ExaminershipClaims should be submitted in writing to the examiner. ReceivershipThe receiver’s main duty is to ensure the repayment of the debt ofthe secured creditor who appointed him. Preferential creditorsshould, nonetheless notify the company and the receiver of theirclaims in writing. Statutory Scheme of ArrangementCreditors should notify the company/applicant of their claims inwriting.


LiquidationsAny amount due to the holder of a fixed charge will be made out ofthe proceeds of sale of the charged asset and fall outside thestatutory ranking of claims.Outside of those claims secured by fixed charges the ranking ofclaims is as follows:

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fees, costs and charges of an examiner;costs, charges and expenses of the liquidation;certain social insurance contributions;preferential creditors (such as Revenue and employees);payment due to the holder of any floating charge; andunsecured creditors.

Examinership and Scheme of ArrangementThere are no legal rules governing ranking of claims in anexaminership or a scheme of arrangement.ReceivershipWhere a receiver is appointed under a fixed charge the holder’s debtwill be repaid to him and the receiver’s costs and expenses rankwith the debenture holder’s debt. Scheme of ArrangementThere is no general rule on ranking of claims and the arrangementitself will set out the terms of payment.


Tax liabilities are for the most part incurred as normal under eachprocedure. For example corporation tax will accrue to the extentthat any trading continues as will VAT. Capital gains tax will ariseon all ‘chargeable gains’ on the disposal of assets and gains ondistributions to shareholders as part of a liquidation will be taxablebut as capital as opposed to income.



‘Cramming down’ is possible in examinership and schemes ofarrangement bearing in mind the level of approval necessary forsuch schemes.‘Cramming down’ does not arise in liquidations or receiverships.


Court LiquidationsHaving passed his final account with the Examiner, the officialliquidator usually applies to court for directions regarding how thebalance should be disposed of. Once disposed as directed, theliquidator will obtain an Order dissolving the company.A compulsory liquidation ends when the Order dissolving thecompany has been notified to the Registrar of the CRO.Voluntary LiquidationsAs soon as the affairs of the company are fully wound up theliquidator prepares an account of the winding up and calls a generalmeeting. The liquidator must file a copy of the account with theCRO and on the expiration of three months from the registrationthereof the company shall be deemed to be dissolved. ExaminershipThe court protection afforded to the company during theexaminership process ceases when the examiner’s proposals comeinto effect and the examiner is discharged. The High Court maydirect that the process cease at an earlier date e.g. if the court refusesto confirm the examiner’s proposals.

ReceivershipThe receiver will be discharged once he has realised the assets overwhich he has been appointed and the secured creditor (and anypreferential creditors if appropriate) has been paid.Scheme of ArrangementThis procedure will come to an end once the scheme comes intoeffect. The scheme takes effect once a copy of the High Court’ssanction is filed with the CRO.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Ireland? In what circumstances might thisbe possible?

Informal schemes of arrangement are being considered more inrecent times due to the perceived advantages of lower cost, the levelof control which the board retains, the relative speed of the processand the privacy it affords. In such schemes corporate recovery issought by the restructuring of the troubled company’s finances byapproaching the company’s creditors to negotiate a privateagreement.The disadvantages which accompany such informal schemes arethat they do not import the immediate protection which more formalschemes enjoy and there is a risk from those creditors who do notsign up to the informal arrangement as there is no mechanism bywhich to compel them to participate.


In theory it is possible to reorganise a debtor if the requisite consentand co-operation is received from shareholders and creditors (ifreorganising debts) or in the case of shareholders if the requisitecontrol can be exercised e.g. by virtue of powers of attorney orother forms of security in place. In practice, the reorganisation ofdebt would require the consent of all creditors and the concernwould be that approaching the creditors would result in insolvencyproceedings being commenced by concerned creditors.


The pre-pack process is a process which is experiencing increaseduse in the United Kingdom however it has not to date achieved thesame level of notoriety in Ireland. A ‘pre-pack’ is where a companyis put into receivership/administration and then its business and/orassets are immediately sold under a sale which was arranged priorto the appointment of the receiver/administrator. Prior to the appointment of the insolvency practitioner a range ofactivities are undertaken to prepare for an immediate sale onappointment. These include sourcing potential purchasers, seekinginitial offers, undertaking due diligence and negotiating a contract,the contract is not completed until the insolvency practitioner isappointed.

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Lorcan Tiernan

Dillon Eustace33 Sir John Rogerson’s QuayDublin 2Ireland

Tel: +353 1 667 0022Fax: +353 1 667 0042Email: [email protected] URL: www.dilloneustace.ie

TITLE: Head of Corporate and Mergers & Acquisitions.PRACTICE AREA: Corporate and M&A, Insolvency and CorporateRecovery, Banking and Capital Markets, and Financial Services.EDUCATION: University College Dublin, University of London andthe Law Society of Ireland.PROFILE: Lorcan became a partner of Dillon Eustace in 2000 andHead of its Corporate and Commercial Department in 2004.Between 2007 and 2009 he ran a boutique private equityinvestment firm. His main areas of practice are corporate finance,corporate insolvency and mergers and acquisitions. He is a memberof the International Bar Association and is a past-Chairman of theIFIA’s Alternative Investment Committee as well as a past memberof FEFSI’s Hedge Funds Working Group. He is a director of a numberof well known hedge funds and funds of funds.

Adrian Benson

Dillon Eustace33 Sir John Rogerson’s QuayDublin 2Ireland

Tel: +353 1 667 0022Fax: +353 1 667 0042Email: [email protected] URL: www.dilloneustace.ie

TITLE: Partner.PRACTICE AREA: Corporate and M&A, Insolvency and CorporateRecovery.EDUCATION: University College Dublin and the Law Society ofIreland.PROFILE: Adrian joined Dillon Eustace in January 2005 and wasappointed a partner in 2006. Adrian has extensive experience inmergers and acquisitions across a wide range of industries includingIT, Energy, Food, Financial Services and Recruitment. Additionalareas of expertise include corporate recovery and insolvency,shareholders’ agreements and disputes, joint ventures, inwardinvestment, equity fundraising and venture capital, corporatefinance and corporate governance.Adrian is a member of the Business & Commercial law committeeof the Dublin Solicitors' Bar Association.

Dillon Eustace is one of Ireland’s leading law firms focusing on financial services, banking and capital markets,corporate and M&A, litigation and dispute resolution, real estate and taxation.

Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000) andBoston (2003) as well as a strategic alliance with Arendt & Medernach, a leading Luxembourg law firm. Most recently,the firm has also opened an office in Cork (2007).

In tandem with Ireland’s development as a leading international financial services centre, Dillon Eustace has developeda dynamic team of lawyers representing international and domestic asset managers, investment fund promoters,insurers, banks, corporates, TPAs and custodians, prime brokers, government and supranational bodies as well asnewspapers , wind energy companies, aviation and maritime industry participants and real estate developers.

We strive to develop our teams, to provide a sophisticated proactive service to clients and to deepen our understandingof each client’s business and needs. We hope that the information provided on this site assists you firstly, as well asintroduces us and our services to you.

Firm and individual partner endorsements appear over the following pages.

Contact DetailsMark Thorne (Managing Partner)Dillon Eustace 33 Sir John Rogerson’s Quay, Dublin 2Phone: 353 1 6670022 / Fax: 353 1 6670042


8 International

8.1 What would be the approach in Ireland to recognising aprocedure started in another jurisdiction?

Cross-border insolvency proceedings within EU Member States aregoverned by the EU Insolvency Regulation, Council Regulation

(EC) 1346/2000 (the “Insolvency Regulation”). This was adoptedin Ireland in May 2002 and has the effect that irrespective of thejurisdiction of incorporation of the company, once insolvencyproceedings have been commenced in one Member State, they mustbe recognised as having effect throughout the EU. Similarregulations have been brought into effect for banking and insuranceundertakings.



ChapterChapter 23

Meitar Liquornik Geva & Leshem Brandwein

Israel


1.1 How does a creditor take security over assets in Israel?

Under Israeli law, there are several customary types of chargessecuring debts of creditors of a company:

Fixed Charge. The charge of a certain asset as a securityuntil the debt of the asset’s owner or of a third party is settled.Unless otherwise agreed, the company may pledge the sameasset by a second ranking charge and even transfer the rightsin the asset to a third party, although, the rights of the thirdparty will remain subject to the rights of the initialcreditor(s). An additional type of a fixed charge is a fixedcharge securing a debt utilised to acquire the pledged asset.The latter type of fixed charge enjoys a preferentialdistribution, even over earlier floating charges containing anegative pledge provision.Floating Charge. A charge over all or a part of unspecifiedassets of the company, including its future assets, which iscreated by a debenture registered with the CompaniesRegistrar. Unless otherwise specifically stated, a floatingcharge would include the real property of the pledgingcompany, as well as all of its assets that by their nature maychange from time to time in accordance with the company’sbusiness and the nature of its operations. Generally andunless otherwise restricted pursuant to the debenture underwhich it is created, a floating charge does not restrict thecompany’s conduct in its ordinary course, the sale of thecharged assets in the ordinary course of business, or theimposition of additional charges and liens on the company’sassets. When the floating charge crystallises, it becomes, ineffect, a fixed charge over all the company’s assets at thetime of crystallisation. Lien. A contractual or a statutory lien is a right to retainpossession of a third party’s property until that other partysettles its debt. However, the asset may not be sold by thecreditor. In a statutory lien the assets in question are initiallydeposited with the creditor not for the purpose of security,but for some other purpose, typically, the performance of aservice. The circumstances may vary in a contractual lien.Israeli case law has recognised the proprietary nature of alien. See question 5.2 below for a discussion of thepreferential treatment of a creditor holding a lien.Charges - Creation, Validity and Rights of the Creditor. Thecharge of an asset or assets of a company is a proprietaryright which is created by an agreement between the companyand the creditor. The charge is valid against third partiessolely if registered with the Companies Registrar within 21days of its creation; however, certain charges may be

perfected by the possession of the asset by the creditor or itsagent. A charge over real-estate of a company (a.k.a., a“mortgage”) must also be registered with the Land RegistryBureau. Charges over vessels, patents, trade-marks and otherassets subject to separate government registrars may be alsoregistered with such registrars. Certain laws create statutorypledges, such as a maritime pledge and a pledge to secure thepayment of certain taxes due in connection with real-estate.See question 5.2 below. A creditor has several rights in respect of the charged assets,the most important of which, is the right of the creditor tosettle its debt by the sale of the pledged asset. The sale of thepledged asset may be solely effected by the court (or anofficial on its behalf) or the Office of Execution ofJudgments, save for several specific exceptions which allowfor self-help. Such procedures are more fully described inSection 2 below.Certain scholars also relate to a right to set-off in insolvencyas an additional type of security. See question 3.3 below.


Fraudulent Preferences. One of the key principles of theIsraeli insolvency rules is the rule of equality amongst pari-passu creditors. In order to avoid illicit preferentialpayments to creditors, Israeli law stipulates that certain typesof transactions, entered into within specified periods prior tothe commencement of formal insolvency proceedings, maybe deemed to comprise fraudulent preferences and shalltherefore have no force and effect.The following transactions may be challenged:

Any transfer, mortgage delivery of goods, payment orany act in relation to the assets of the company,effected during the three-month period preceding thecommencement of a company’s liquidationproceedings, will be void as a fraudulent preference ifthe following conditions are met: (a) the company hasbeen declared insolvent; (b) upon the execution of thetransaction, the company was unable to pay its debtswhen due; and (c) the transaction was executed inorder to give a preference to certain creditor(s). Therequirement that the transaction in question wasexecuted in order to give a preference to certaincreditor(s) requires that the party seeking to void atransaction as a fraudulent preference prove that thedominant purpose of the debtor effecting thetransaction in question was in fact to give a preferenceto specific creditor(s). The foregoing would notderogate from the rights of a person who purchased

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Meitar Liquornik Geva & Leshem Brandwein Israel

property in good faith and for valuable considerationfrom the creditor of a bankrupt company.A transfer by a company of all its assets to a trustee forthe benefit of all its creditors is void. Furthermore, ageneral assignment or endorsement of existing orfuture rights to another, if effected by a company thatis declared insolvent in a later stage, shall not be validunless duly registered. Current law does not stipulatea time limit between such transfer or assignment andthe commencement of the insolvency proceedings. A floating charge on the company’s assets, createdwithin six months before the beginning of theliquidation proceedings, shall not be valid, except inrespect of the amount paid to the company in cash inconsequence of the charge, plus interest on thatamount unless it is proven that the company wassolvent immediately after creation of the charge. Thegeneral effect of this is that a floating charge for “newmoney” (that is, a new extension of credit at the timethe floating charge is entered into) is not invalidated tothe extent of the “new money” (or extension of credit)provided, but may be invalidated if granted for pre-existing debt if the requirements stated above aresatisfied.

The repudiation of an onerous asset. A receiver may requestthe court presiding over an insolvency to repudiate thefollowing assets/agreements of the insolvent company: (i) atransaction for the purchase of a real estate, containingburdensome conditions; (ii) shares of other companies whichare not fully paid; (iii) a non-profitable contract; and (iv) anyasset that cannot be sold by the liquidator at all or readily, asit requires the performance of a burdensome act or thepayment of an amount. From the day of repudiation andonwards, all the company’s rights to and liabilities from therepudiated asset shall cease, provided that the foregoingrepudiation shall not prejudice any third party’s rights exceptto the extent required to release the company from theonerous asset. Any party affected by such repudiation maydemand any amount due to it under a repudiated agreementand may request damages as legitimate debt in theinsolvency proceeding in accordance with the processoutlined below. It is potentially possible to attack the validity of a contract onthe basis of the general principles of good faith and pubicpolicy.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Israel?

The Companies Law codifies the fiduciary duties that an “officeholder” (including directors and executive officers, regardless oftheir title) owes to a company and its shareholders (taken as whole),and more specifically, the fiduciary duty (or duty of loyalty) and theduty of care. Such duties essentially create potential civil liabilitiesof the office holders. Furthermore, we note that pursuant to Israelilaw, officeholders are subject to additional duties, such as the dutyof good faith by virtue of the Contracts Law and the duty not tocommit tortious acts pursuant to the Israeli Torts Ordinance. Aslong as a company is solvent, the creditors of the company are notentitled to interfere with the conduct of the company’s business,with the exception of prohibited distributions. By virtue of theforegoing, the company or its shareholders (by a derivative action),may enforce the officeholders’ duties towards a company. Whilst a company is in financial difficulties, the fiduciary duties forthe benefit of the company remain in place. However, the weightof the creditors’ interests increases once a company enters intofinancial difficulties, as any proceeds from the distribution of the

company’s assets will be allocated among them in preference to anyshareholder. The Companies Ordinance imposes additionalpotential personal liability on officeholders of the company uponthe issuance of a liquidation order. A breach of these fiduciaryduties in the context of insolvency (including prior to the issuanceof the liquidation order) exposes the directors to unlimited personalliability for all the company’s debts, criminal liability and possibledisqualification to continue to act as a director of the company (ifpublic) and of other public companies for a specified period, asfollows:

In the liquidation of a company, the liquidator, the officialreceiver or a “participant” (a shareholder or a person whowas a shareholder the year prior to day of liquidation) mayrequest the court to order that any director (including pastdirectors and persons instructing the directors) who wasknowingly a party to carrying on the business of a companywith intent to defraud creditors or any other person, or forany fraudulent purpose, be liable for the company’sliabilities, in an unlimited amount. Where the court holdsthat the above conditions are met, the court may also imposecivil or criminal personal liability on the director. Since theOrdinance also allows the imposition of criminal liability, ahigh level of proof is required for the purpose of theapplication of the foregoing liability. Based on the existingcase law, the incurrence of additional debt where there is noreasonable likelihood that such debt will be repaid when dueconstitutes fraudulent trading, whereas, the “rolling” of thecompany’s credit with the belief that the company is able topay its debts when due does not qualify as such. The liabilityunder this provision is not conditioned upon the proof of acausal relation between the fraud and the damages to thecompany. In the liquidation of a company, all the abovementionedapplicants may request the court to order that any of thecompany’s founders, officeholders, receivers and liquidators(temporary or permanent), who are found to have misused orretained any of the company’s money or assets, be heldaccountable for them. Alternatively, if they have committedmisfeasance or an unlawful act in any negotiations relating tothe company, they may be compelled to repay, return oraccount for the money or property of the company withinterest or compensate the company as the court deems just.Breaches of duty which could be relevant here, wouldinclude a breach of the fiduciary duties, fraudulent transfers,unlawful payments to directors and founders and the like.The application of this section is broader than that of thepreceding one and only civil liability may be imposed onsuch a defendant, up to the amount of the damages caused tothe company. A person shall be unfit to serve as a director in a publiccompany for a period of five years following his/herconviction in a final judgment of offences by managers of acorporate body if so determined by the court, based on thegravity or circumstances of such offences.

In certain recent precedents the Israeli courts have applied criminaland unlimited personal liability imposed to Schemes ofArrangement even in the absence of a liquidation process.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Israel?

There are four formal procedures which may apply to a company infinancial difficulties:

A non-voluntary liquidation by the court. A voluntary liquidation by creditors and voluntary

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liquidation under the supervision of the court (collectively,unless otherwise specified, a “voluntary liquidation”).The appointment by the court of a permanent or temporaryreceiver over all or a part of the company’s assets at therequest of a secured creditor.A scheme of arrangement between the company and itscreditors or shareholders or any particular class of theforegoing. As detailed in question 7.1 below, thesearrangements are often utilised to allow the creation of arecovery plan and are combined with a negotiatedreorganisation of the company in question. This proceduremay include the appointment of an administrator or trustee.

We note that a solvent company may initiate a voluntary liquidationwithout the supervision of the court but as such a liquidation appliesto solvent companies we will not address it in this questionnaire.

2.2 What are the tests for insolvency in Israel?

Under the Israeli law, a company is deemed insolvent if: (a) anundisputed debt of NIS 5 or more of the company is due and wasnot paid, provided that a demand was made and has remainedoutstanding for three weeks; (b) if the company does not fulfil anorder in favour of a debtor; or (c) if the court determines that thecompany is unable to pay its debts when due, taking intoconsideration its future and conditional debts. Typically, Israelicourts have applied either the cash flow test or the balance sheet testto determine whether a company is insolvent. The cash flow testexamines whether the company is unable to pay its debts as they falldue, taking into account such cash resources as it can obtainthroughout the sale of its assets. The balance sheet test is satisfiedif the value of the company’s assets is less than the amount of itsliabilities, taking into account its prospective and contingentliabilities. The appointment of a receiver or the company’sadmission of its inability to pay its debts may also indicate thecompany’s insolvency.


Liquidation by court. The court may liquidate a company oneach of the following grounds:

The company adopted a special resolution underwhich it resolved to be liquidated by the court. The company did not commence its operations withinone year of its inception or has ceased to operate for ayear. Liquidation on these grounds may be alsorequested by the Attorney General.The company has become insolvent.The court finds that it is just and equitable to liquidatethe company. Liquidation on these grounds may bealso requested by the Attorney General. Thesegrounds have been typically used in instances of fraudor illegality, when the company could not fulfil thepurpose of its incorporation, deadlock, or deprivationof minority rights. The company was not properly registered.Liquidation on this basis may be requested solely bythe Attorney General.If within a period of three years the company did notpay when due more than two fines imposed upon it bythe Companies Registrar. Liquidation on this basismay be requested solely by the Companies Registrar.

Voluntary Liquidation. A voluntary liquidation is controlledby the shareholders without the supervision of the court andis typically utilised with respect to solvent companies. Such

process may be initiated upon the following occurrences: (a)upon the end of the company’s duration or a ‘terminatingevent’ to the extent defined in the company’s articles ofassociation) and the adoption of a subsequent resolution bythe majority of the shareholders in each case; and (b) by theadoption of a resolution of the shareholders by a three-quarters majority vote and the filing of a declaration ofsolvency by the directors of the company. If the directors areunable to declare that the company is able to pay its debts infull within 12 months, the liquidation will be controlled bythe creditors. To the extent a court deems fit, the court maydecide that such liquidation shall continue under itssupervision and it may stipulate the manner in which thecompany shall be liquidated.Scheme of arrangement. There are no formal requirementsthat a company has to satisfy in order to be placed in suchprocedure. The initiation of such proceeding is notconditioned upon the company’s insolvency.Receiver. At the request of the creditor, based on theconditions of the security agreement.


See also our response to questions 2.1 and 2.3 above. Liquidation by the court. As described above, a companyenters into a compulsory liquidation through a liquidationorder issued by the court. Generally, an application for suchliquidation of a company may be filed by the company, acreditor (including a conditional or a future creditor, subjectto the deposit of security), a participant (as defined above,subject to certain limitations) and/or in certain of thesituations specified above also by the Attorney General andthe Companies Registrar. A copy of the application must befiled with the company (if not filed by it) and the OfficialReceiver together with a bond as an advance for its expenses.The applicant must publish a notice in a daily paper and theOfficial Gazette (a publication of the Israeli government) atleast 14 days prior to the date of the hearing on the filing.Any person wishing to participate in the hearing may do soby notifying the applicant and may object to the procedure atleast seven days prior to the hearing. At the hearing, thecourt may elect to issue a liquidation order and may appointa temporary receiver or special administrator until theissuance of the liquidation order.Voluntary Liquidation. Concurrently with the calling of theshareholders meeting or a day after, the company has to calla creditors’ meeting by giving notice to the creditors and bypublishing notice of the meeting in the Official Gazette andin one widely circulated local newspaper. Receiver. Generally, the enforcement of rights under adebenture or charge agreement does not require a courtapproval, however, the realisation of a charged asset may bemade solely by application to a court or to the Office ofExecution of Judgments (except for limited exceptionsapplicable mostly to banks). The enforcement of rightsunder a floating charge or of a charge over uncalled capitaland goodwill requires the approval of the court. The courtmay provide any remedy, including the appointment of areceiver and it may stipulate the rights and authorities of suchreceiver. Scheme of Arrangement. A company (or an administrator orliquidator) or any creditor or shareholder of a company mayrequest the court to summon a meeting of creditors orshareholders to agree to a compromise or arrangementbetween the company and its creditors or shareholders.



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See also our response to question 2.4 above.Liquidation by court. In the event that the court decided toappoint a temporary liquidator, the task of the liquidator shallbe to collect and safeguard the assets of the company untilthe appointment of a permanent liquidator. The temporaryliquidator shall file with the court a final report of his actionsas well as a financial report. The court that issued theliquidation order will provide the Official Receiver withthree (3) copies of the order. The Official Receiver thenautomatically assumes the role of the liquidator until anotherliquidator is appointed, if any. The Official Receiver mustpublish a notice of issuance of the liquidation order and thetime of gathering of the creditors and participants in theOfficial Gazette as well as in a daily newspaper.Notifications of the order shall be also registered in thecompany’s public records (including the land registrar etc.).The Official Receiver must then convene a meeting of thecompany’s creditors, the function of which is to elect theliquidator and the audit committee. The appointment of theliquidator must be specified on every invoice, order forgoods or business letter issued by the company, the receiveror on their behalf. The liquidator is an “officer of the court”and its principal duty is the management of the liquidationproceedings in accordance with the court’s instructions. TheOfficial Receiver or the liquidator must send the court a copyof each and every decisions made by the assembly ofcreditors and it has various authorities and responsibilities. Voluntary Liquidation. The applicant must publish a noticeof issuance of the order in the Official Gazette, or otherwiseas instructed by the court. After the decision to liquidate ismade, a meeting of creditors will be assembled, to which theboard of directors must provide a report of the company’saffairs and provide the full list of the company’s creditorsand debts. In the creditors’ meeting, the creditors may electa liquidator and/or an audit committee comprised of up tofive members. The appointment of the liquidator must bespecified on every invoice, order for goods or business letterissued by the company, the receiver or on their behalf. Avoluntary liquidation of this sort is controlled by thecreditors, although a court may determine to conduct part ofthe liquidation under its supervision. The liquidation wouldbe managed by a liquidator appointed by the company,unless the creditors have elected a different liquidator. Theliquidator may generally utilise its authorities without theapproval of the court (subject to specified exclusions). Thecourt may appoint an additional liquidator having similarauthorities. The Official Receiver or any other personentitled to apply for liquidation under the supervision of thecourt may request that the voluntary liquidation shall beconverted into a standard liquidation if the rights of thecreditors and/or participants may be compromised in theabsence of the court’s more stringent supervision. If thecourse of the liquidation takes more than one year, theliquidator must: (a) call a meeting of the shareholders and ameeting of the creditors at the end of the first year and eachsuccessive year to keep the shareholders and creditorsinformed of the progress in the liquidation; and (b) providethe Companies Registrar with reports on the progress of theliquidation and its current state. A final meeting of theshareholders is held prior to dissolution where the liquidatorpresents to the shareholders an account of how theliquidation was conducted. This meeting is called bypublication of notice in the Official Gazette at least onemonth before the meeting. Within one week of this finalmeeting, the liquidator is required to file a final report withthe Companies Registrar with respect to the outcome of thefinal meeting. We note that in contrast to the liquidator in aninvoluntary liquidation, the liquidator in a voluntary

liquidation is not an officer of the court, is not obligated toreport to the Official Receiver and it is not obligated to notifythe Companies Registrar of its appointment or to deposit asecurity.Receiver. Within seven days following its appointment, areceiver must notify the Official Receiver and the CompaniesRegistrar of its appointment, and the Companies Registrar issupposed to register the appointment in the company’s publicrecords. The appointment of the receiver must be specifiedon every invoice, order for goods or business letter issued bythe company, the receiver or on their behalf. Within onemonth (or later if so instructed by the Companies Registrar)and six months of its appointment and six month intervalsthereafter, the receiver is required to send a report to theCompanies Registrar, together with a summary of its actions,and a final report within one month following completion ofthe process. During this period the court may stipulate thatthe performance of certain actions by the receiver shall besubject to the approval and/or instructions of the court. Scheme of Arrangement. To secure the approval of ascheme, the shareholders and each separate class of creditorsmust vote in favour of the scheme, by a majority of thenumber of those voting and a three-quarters majority ininterest at each meeting. If the court approves the scheme ofarrangement, the compromise or arrangement will be bindingon the company and all the creditors or shareholders.Following approval, an official copy of the scheme ofarrangement is delivered to the Companies Registrar forregistration and it is that filing process which makes thescheme effective and binding.

2.6 How does somebody establish whether the company hasbeen placed into one of these procedures?

Please refer to response to question 2.5.

3 Creditors


Liquidation by the court. Once a temporary receiver hasbeen appointed, upon the issuance of an order for liquidation,a stay of proceeding automatically arises. As long as the stayis in effect, the continuance or commencement of anyproceeding against the company is prohibited, includingunder the Execution of Judgments Law other than (a) withrespect to any proceeding the implementation of which wascompleted before the stay was issued even if money wasreceived later, or (b) proceedings allowed to proceed orcommence with the permission of the court or (c) realisationby secured creditors as explained below or (d) criminalproceedings against the company. As unsecured creditorsoccupy the lowest position in the hierarchy of creditors,ranking only above the shareholders, such creditors have nofreedom to enforce their rights under a liquidation, and arecompelled to prove their debt to the liquidator and receivethe distribution pari passu with all other unsecured creditors(if available). The above description would also apply to aliquidation under the supervision of the court. Voluntary Liquidation. Unlike in the event of a liquidationby the court, no automatic stay of proceeding order is issuedupon the issuance of an order for a voluntary liquidation bythe creditors. The liquidator may request the court to issuesuch an order and the similar limitations described in thepreceding paragraph would apply in the event such stay wasissued. Appointment of a Receiver. The appointment of a receiver

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does not create an automatic stay of proceedings andcreditors may begin or continue legal actions against thecompany, including petitioning for its liquidation, whilst thecompany is under receivership. Scheme of Arrangement. If a scheme of arrangement isapproved by the applicable majorities of the shareholders andthe creditors and the court, it binds the company, itsshareholders and all its creditors who would have beenentitled to vote even if they did not actually vote for thescheme. Any objection may be heard solely in theframework of the approval of the arrangement by the court.Until the approval of the arrangement, the court may, if it issatisfied that doing so will assist the formulation andapproval of the scheme, issue an order for a stay ofproceedings of up nine months. During the pendency of anysuch stay, it would not be possible to continue or to initiateany proceeding against the company (including under theExecution of Judgments Law other than (a) with respect toany proceeding the implementation of which was completedbefore the stay was issued even if money was received later,or (b) proceedings allowed to proceed or commence with thepermission of the court, including, a request by a securedcreditor to realise its security. Such order may be issued exparte, provided that its issuance has been made public or theaffected party has been notified as per the instructions of thecourt. Any person injured by the order may apply for itscancellation within 30 days following the issuance of theorder or during a longer period if circumstances havechanged substantially.


Liquidation by the court & voluntary liquidation. In eachsuch liquidation and regardless of whether a stay ofproceedings is in effect, secured creditors may enforce theirsecurity to recover up to the amount of their secured debt.Any balance from such realisation exceeding the secureddebt will form part of the assets of the company to bedistributed by the liquidator. If the value of the security isless than the value of the debt, then, the secured creditor mayrecover the balance of the sum owed to him (exceeding suchvalue) pari passu with the unsecured creditors. The creditormay allow the liquidator to realise the security and receivepayment from the liquidator based on an estimate. Thecreditor may also surrender its security for the generalbenefit of the creditors, and agree to rank as an unsecuredcreditor in respect of the debt owed to it.No limitations apply on the enforcement upon theappointment of a receiver, as explained above. Scheme of arrangement. In such case, the secured creditors(as well as creditors seeking to crystallise a floating charge)may enforce their security solely with approval of the court.


The application of “insolvency” set-off is not relevant in the contextof receiverships. As to schemes of arrangement, insolvency lawsmake no special provisions in respect of the application of setoff inthese circumstances, however, courts have limited contractualsetoff in certain circumstances. In a liquidation of a company, prior to and following the issuance ofa liquidation order, the following shall apply:

Prior to the issuance of a liquidation order, the IsraeliContracts Law allows one party to a contract to set-offobligations arising under another contract with the same

counterparty, subject to the conditions specified in the law,unless otherwise agreed between the parties. Current case law in Israel provides that set-off under theBankruptcy Ordinance shall apply as of the issuance of aliquidation order. The Bankruptcy Ordinance provides thatwhere there have been mutual credits, mutual debts or othermutual dealings between a debtor whose assets are subject toliquidation, a set-off of the amount due from one party to theother in respect of such mutual dealings is permissible to theextent provable and the balance of the account shall beclaimed or paid respectively. No set-off against the propertyof the debtor is allowed, if, at the time of giving credit to thedebtor, the creditor had notice of an act of insolvency, whichterm is not clearly defined under Israeli law. Thetransactions and obligations subject to set-off under thisSection shall be determined according to the status of thedealings between the parties at the date of appointment of theliquidator. These provisions of the Bankruptcy Ordinanceare applicable as a matter of law, and as such they overrideany contrary contractual agreement and cannot be expandedby contractual agreement.



Liquidation by court. The commencement of the liquidationdoes not affect the existence of the company’s separate legalcapacity. However, the entry into liquidation revokes andterminates the authorities of the management andofficeholders of the company, although the liquidator mayrequest, at the court’s discretion, that the officers of thecompany continue to manage the company for a limitedperiod of time. In the period between the filing of thepetition and the liquidation order, the court may appoint atemporary liquidator. Generally, a request for theappointment of a temporary liquidator would be submitted inaddition to the liquidation petition; this is usually due eitherto the urgent nature of the need for confiscation of propertyin order to maintain the assets of the company or due to theneed for the continuing operation of the company. Upon theissuance of a liquidation order, the liquidator is empoweredwith wide-ranging authority in order to allow him to collectand distribute the assets of the company, including theauthority to mange the company’s affairs to the extentnecessary for an expedient liquidation, subject to theinstructions of the court and subject to law. After thecommencement of the liquidation all share transfers aredeemed void as is any alteration in the standing of theshareholders, unless otherwise instructed by the court. Oncethe liquidator is appointed, the shareholders may not file anyderivate claim or a claim on behalf of the company.Voluntary liquidation by creditors and under courtsupervision. Upon the appointment of a liquidator, thecompany must cease its operations, apart from those that arerequired for an efficient liquidation. Nonetheless, thecompany’s corporate existence continues until the companyhas been finally dissolved. The liquidator is obliged toperform its duties solely for the purpose of an efficientliquidation and once a liquidator is appointed, the directorscease to have the authority to act on behalf of the company,unless such authority is specifically granted by the auditcommittee or by the creditors. The creditors of the companycontrol the insolvency proceeding throughout the liquidation.As an integral element of the continuation of the businessoperation, all share transfers, apart from those transferred tothe liquidator (or approved by him), are deemed void as is



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any alteration in the standing of the shareholders after theinitiation of liquidation. Liquidation under court supervisionis legally identical to liquidation by the court apart fromseveral exceptions which are not relevant to this question. A receiver is a manager of the whole (or substantially thewhole) of the company’s property, however, its particularauthority is stipulated by the court upon its appointment. Incertain cases, the company is under the control of theadministrative receiver and its appointment leads to thesuspension of the directors’ powers of management. Thereceiver’s primary duty is owed to the secured lender whoappointed him to seek repayment of the secured debt.Similarly, in certain cases, the powers and rights of thecompany’s shareholders are also suspended.Scheme of Arrangement. In a scheme of arrangement themanagement remains in control of the company, and noreliance is placed upon an independent insolvency officer. Ascheme of arrangement does not necessarily affect the rightsof a shareholder. We note however that shareholder rightsmay be modified by the scheme itself.


Liquidation by court or Voluntary Liquidation. Generally, inthe absence of additional funding sources which may beprocured (subject to the applicable procedures andapprovals), the liquidation expenses are payable out of thecompany’s assets available for distribution in the liquidationand are considered as preferred debts in liquidation. Seefurther information in our response to question 5.2 below.The financing of such expenses in a scheme of arrangementis made by the company pursuant to the particulars of thescheme. In the case of an appointment of a receiver, the partiestypically contract that the expenses shall be borne by thecompany and payable from its assets.


A scheme of arrangement or a receivership procedure do not have adirect effect on employees, however, the content of anyarrangement may by itself refer to employees and their rights andset specific arrangements pending upon the merits of the matter.

Liquidation by court. As soon as the liquidation order ispublished, all the employees (including the general manager)are deemed to have been automatically discharged and theemployees will be entitled to claim severance pay from theSocial Security Institute, up to a certain limit andemployment claims may arise against the company as aresult. Voluntary liquidation. Under Israeli case law, in the event ofvoluntary liquidation, if the liquidator does not require all ofthe employees in order to perform an efficient liquidation, itmay discharge any employee which is not required and suchemployee shall be compensated in accordance with law.Accordingly, the courts have ruled that an employeeterminating his employment at will, shall not be entitled toseverance payment.

Note that certain amounts of employees’ wages are deemed aspreferential payment. See question 5.2 below.


Voluntary and non-voluntary liquidation. The liquidation byitself does not automatically terminate company contracts,

although and based on the terms and conditions of theapplicable contract, the liquidation may be a ground fortermination. The liquidator may request the court torepudiate an onerous asset of the company as described inquestion 1.2 above. In the event that both parties stated in acontract have not executed their contractual obligations, thecompany under liquidation proceedings will remaincommitted to perform its obligations under the agreement.The Israeli court determined that a liquidator is notauthorised to demand the counterparty to execute a contract,in the event that the company is not capable of executing itspart of the agreement. Contracts entered by a company orshare transfers effected following the filing of the liquidationapplication are void unless the contracts were carried out orapproved by the liquidator, and approved by the court.Scheme of Arrangement. Generally, a scheme ofarrangement does not inherently have an effect on thecompany’s contracts; any effect depends entirely upon theterms of such arrangement. The stay of proceeding orderwhich may be issued does not prevent counterparties fromcancelling contracts with the company, if permitted under theapplicable agreement. The company will potentially need tonegotiate with its key suppliers and customers if it wishes tocontinue its business in the ordinary course.The appointment of a receiver does not terminate or affectcompany contracts, unless provided for in the contract itself.

5 Claims


In order to ascertain the debts of the company, the CompaniesOrdinance has established a process for the claiming of debts in aliquidation. The Ordinance provides that the liquidator shall receiveall the provable claims and decide upon their acceptance. Anyexisting, future, certain or contingent, fixed or unfixed debt may beclaimed in a liquidation. A creditor wishing to claim in a liquidationmust submit a formal claim, known as a proof of debt, to the liquidatorwithin six months following the commencement of an involuntaryliquidation. In a voluntary liquidation or a liquidation under thesupervision of court, a creditor who wishes to claim his debt, can alsoelect to claim its debt in court. Once the creditor elected an applicationto the liquidator, it cannot claim its debt in court. If the creditor is notsatisfied with the liquidator’s decision it may appeal to the court. Inthe event of a claim for wages, a unified claim may be filed on behalfof all affected employees. There are no similar procedures applicable to a scheme ofarrangement and/or receivership. The mechanism by whichcreditors seek payment of sums owed to them will vary accordingto the terms of each arrangement. For information relating tosecured creditors - see question 3.2 above.


Generally, the priority of claims on the company’s assets will bedetermined in the following order:1. Secured Creditors - including: (a) statutory pledges: (i)

outstanding tax debts subject to a statutory pledge over theland in question which pledge overrides pledges registeredup to the amount of the tax due; or (ii) with respect tomaritime vessels - holders of statutory maritime pledges withrespect to certain debts; (b) certain costs related to executionof judgments; and (c) secured creditors with valid security

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interests including fixed equitable charge, legal mortgageand floating charges which crystallise prior to the liquidationprocess and holders of a lien in the framework of acontractor’s services.

2. Liquidation expenses.3. Preferential creditors - specifically certain employee wages

(to a limited extent), and different payments or taxes to taxauthorities.

4. Pledgees under floating charges which crystallised with theliquidation of the company.

5. Unsecured creditors. 6. Surplus assets are distributed between the members

(shareholders) in accordance with their entitlements.The costs and expenses of the liquidator that are to be paid from theproceeds of the liquidation estate are usually ranked after thesecured creditors (number 1 above) and before the preferentialcreditors (number 2 above), unless the expenses are forsafeguarding the integrity of the assets of the company or theirrealisation, in which case they will be ranked prior to the securedcreditors (number 1 above). However, not every debt created afterthe liquidation process should be regarded as “liquidationexpenses” and given priority. The rule stipulates that the expensesmust have been spent for the benefit of the creditors.


A company entering into each of the procedures remains subject tothe same tax regime applicable to it prior to any such proceeding.If appointed, the liquidator is responsible for payment of any taxdue from the liquidation estate and its actions.



See question 3.1 above under the title “scheme of arrangement”.


Liquidation by court. Following the dissolution of thecompany, the court will issue an order by which the companywill be liquidated from the date of issuance of the finaldissolution order. The liquidator must inform the CompaniesRegistrar of the issuance of order within 14 days from itsdate of issuance and the Companies Registrar will record theliquidation in his records.Voluntary Liquidation. Following the dissolution of thecompany, the liquidator shall prepare a report regarding thedissolution process, to be presented to and approved by theshareholders and creditors at the final shareholder andcreditors’ meetings, called by at least one month notice. Theliquidator is thereafter required to file with the CompaniesRegistrar a copy of the report and a notification of the callingof the shareholder and creditors’ meetings within one weekfrom the date on which the meetings were held. Upon theexpiration of three months from such notification, thecompany is deemed liquidated, unless the court haspostponed such dissolution upon an application by theliquidator or any interested party.

In each of the above proceedings, a company may be revived withintwo years following its liquidation upon the application of theliquidator or an interested party.

Scheme of Arrangement. Once a scheme is approved, it is

implemented under the supervision of the company’sdirectors. Once the implementation is completed, thecompany reverts to its former status. Receiver. The outcome of such proceeding varies and isgenerally stipulated by the court.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Israel? In what circumstances might this bepossible?

While there is no specific statutory arrangement similar to Chapter11 of the US Bankruptcy Code under Israeli law, there are variousarrangements and procedures which allow for the achievement of arestructuring outside formal insolvency proceedings. As there is nostatutory source for such arrangements, the courts have, whereappropriate in their discretion and after taking into account theparticular circumstances of the company in question, utilised theavailable insolvency proceedings to the same end. Sucharrangements have created hybrid proceedings of a negotiatedarrangement under the supervision of the court. In these cases, thecompany remained in the state of temporary liquidation until itsrecovery and only then did the temporary liquidation cease. Theprimary and most utilised proceeding in that respect is an order fora stay of proceedings issued for a maximum period of nine months.During that stay period any new or continuing proceedings againstthe company may not be conducted (including executions ofjudgments and the realisation of a fixed or a floating charge, savewith the approval of the court). In addition, companies often utilisea scheme of arrangement or the appointment of an administrator,trustee, special manager or a receiver over the company’s assets, asdetailed above, when combined with a stay of proceeding.


As outlined in question 7.1, there is no prescribed format for areorganisation of a debtor; however, in response to the arising needfor creative and more flexible solutions, courts have, whereappropriate in their discretion, utilised the available insolvencyproceedings to the same end.


Although there is no mechanism for the independent sale of assetsother than a Liquidation by court or voluntary liquidation and ascheme which require the consent of the creditors, courts havepermitted a package sale of all of a company’s assets to one buyerin instances where, the courts determined, such sale was for thebenefit of the company’s creditors.

8 International

8.1 What would be the approach in Israel to recognising aprocedure started in another jurisdiction?

We note that under Israeli law, Israeli courts possess the authority towind up an insolvent foreign company which has a branch in Israelor which has assets in Israel. The Israeli proceedings would be



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ancillary to or in cooperation with the foreign proceedings and theIsraeli courts have an inherent jurisdiction to co-operate withforeign insolvency representatives and recognise foreignproceedings. The Israeli court stated that the enforcement andrecognition of a foreign judgment in connection with insolvency ispossible under Israeli law, pursuant to the provisions of the IsraeliEnforcement of Foreign Judgments Law, even in the absence of aspecific agreement between Israel and the country of origin of thejudgment, subject to certain limitations. In the consideration of theenforcement of the foreign judgment, the court takes into accountpublic policy concerns stemming from the effect that enforcementwould have over preferred debtors in an Israeli insolvencyproceeding (employees and the like). The court stated that an

Israeli court is obligated and is authorised to secure the interests andsovereignty of the State of Israel, and must therefore ensure that theposition of the Israeli tax authorities, Israeli employees and othercreditors having priority under Israeli law would not be impaireddue to the overall proceeding being conducted abroad. Therefore,it may authorise the initiation of an “ancillary local insolvencyproceeding” over the assets and activities in Israel which shall begoverned by the Israeli insolvency laws. The courts stressed thatwith respect to the assets and operations in Israel the localproceeding is the primary proceeding, overriding the “internationalproceeding” in the home country. The foreign country liquidatorwould receive from the Israeli liquidator any surplus assetsremaining after the completion of the Israeli ancillary proceedings.

Dan Geva

Meitar Liquornik Geva & Leshem Brandwein16 Abba Hillel Silver RoadRamat Gan 52506Israel

Tel: +972 3 610 3100Fax: +972 3 610 3766Email: [email protected]: www.meitar.com

Dan Geva, a partner in the Corporate and Securities Group, advisesIsraeli and international corporations in planning and structuringcomplex transactions involving acquisitions, divestitures,restructurings and associated corporate finance matters. Dan alsohas significant experience advising emerging growth companies inall stages of their development. Dan represents Israeli andinternational issuers and investment banks in a variety of financingmatters, and has worked on numerous initial public offerings andother offerings registered with the US Securities and ExchangeCommission, as well as offerings exempt from SEC registrationpursuant to Rule 144A and Regulation S. Prior to joining MLG&LB,Dan was an associate at Skadden, Arps, Slate, Meagher & Flom inNew York.Education: Tel-Aviv University (LL.B., 1983); New York University(LL.M., 1990).Member: The Israel & New York Bar Associations.Admitted: 1989 Israel, 1992 New York.Languages: Hebrew and English. Born: Israel.

Debbie Kahila

Meitar Liquornik Geva & Leshem Brandwein16 Abba Hillel Silver RoadRamat Gan 52506Israel

Tel: +972 3 610 3100Fax: +972 3 610 3766Email: [email protected]: www.meitar.com

Debbie Kahila, a partner in the Corporate and Securities Group,represents corporations in a wide range of international anddomestic corporate and commercial transactions, including mergersand acquisitions, venture capital investments, venture lending,public and private debt and equity financings, joint ventures andstrategic collaborations, technology licensing and distribution andmarketing arrangements. Debbie also provides to both public andprivately held companies ongoing legal advice on corporate andcommercial issues.Education: Tel-Aviv University, Israel (LL.B. 1999).Member: The Israel Bar Association.Admitted: 2000 Israel.Languages: Hebrew and English.Born: Tel-Aviv, Israel.

Meitar Liquornik Geva & Leshem Brandwein is one of Israel’s largest law firms, and is Israel’s leading practice ininternational corporate transactions. The firm has over 100 lawyers and is highly ranked by Chambers Global and theEuropean Legal 500. The firm handles domestic and international matters, including mergers and acquisitions, publicofferings, private equity, banking, litigation and other matters. The firm represents clients from both the internationaland domestic Israeli business communities, and offers clients hands-on international legal practice. Many of the firm’spartners are U.S. natives or Israelis who practiced in the U.S., and the firm focuses particularly on introducing foreignclients to the Israeli business community and legal environment.



ChapterChapter 24

Bonelli Erede Pappalardo

Italy


1.1 How does a creditor take security over assets in Italy?

A credit may be secured by:(a) pledge over (i) movables; (ii) receivables; and (iii) other

rights in movables; (b) mortgage over: (i) vessels; (ii) aircraft; (iii) motor vehicles;

and (iv) real estate; and(c) privilege over movables, stock and real estate assets, granted

in accordance with the law, depending on the source of thecredit.


1. Certain transactions may be clawed-back if they are enteredinto during a specific period before the bankruptcydeclaration (“suspect period”):

(a) transactions entered into for no consideration (suspectperiod: two years);

(b) payment of debt, whose date of expiry is simultaneous orsubsequent to the date of declaration of bankruptcy (suspectperiod: two years);

(c) anomalous transactions: transactions which may be clawed-back unless the third party proves that at the time of thetransaction it was unaware of the insolvency of the debtor:

transactions in which the value received by the thirdparty is at least 25% higher than (A) the considerationactually paid to the debtor, or (B) the value of the benefitactually received by the debtor (suspect period: one year);

anomalous payments, i.e., not in cash or by other normalmeans of payment (suspect period: one year);

the granting of security interests to secure pre-existingunexpired debts (suspect period: one year); and

the granting of security interests to secure pre-existingexpired debts (suspect period: six months);

(d) normal transactions: transactions which may be clawed-backprovided that the official receiver proves that the third partywas aware of the insolvency of the debtor at the time of thetransaction (suspect period: six months):

transactions for adequate consideration;normal payments of expired debts; andthe granting of a priority right for the payment of a debt

(including third party’s debt) simultaneously created; and

(e) transactions expressly excluded from bankruptcy claw-back: payments for goods and services in the normal course of

business on standard terms;payment on a bank account, not substantially and

permanently reducing the exposure of the debtor towards thebank;

sales and preliminary contracts of sale of real estate foradequate consideration (to be used as the residence of thepurchaser, relatives and persons connected by affinity withinthe third degree) that have been transcribed pursuant to art.2645 bis of the Italian Civil Code and whose effects are stillin force;

acts, payments and securities made or granted on thedebtor’s assets on the basis of a restructuring plan “certified”by an independent expert that has to be: (i) enrolled in theauditor’s register; and (ii) a lawyer or a professionalaccountant or an association of professional practices or aprofessional partnership whose associates are lawyers orprofessional accountants;

acts, payments and securities made or granted inconnection with the implementation of a pre-bankruptcyagreement or an in-court debt restructuring agreement;

payments of salaries/compensation to the employees ofthe debtor; and

payments of expired debts relating to the considerationfor services necessary for the debtor’s admittance to pre-bankruptcy agreement and in-court debt restructuringagreement.

2. Transactions entered into whilst the company is in financialdifficulties may be also clawed-back under the rulesgoverning the ordinary claw-back actions (art. 2901 ItalianCivil Code), which, for their successful conclusion, call formore rigorous requirements and that, therefore, are rarelybrought about.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Italy?

1. Civil liability: (a) vis-à-vis the company for the non-fulfilment of their

respective duties with the diligence required and for the non-fulfilment of their duties to prevent prejudicial acts that thedirectors were previously aware existed;

(b) vis-à-vis the company’s creditors for the non-observance oftheir respective duties concerning the preservation of thecompany’s assets;

(c) vis-à-vis the company, the shareholders, the company’screditors and third parties, in case of delay or omission in

Andrea De Tomas

Vittorio Lupoli



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ascertaining an event that causes the dissolution of thecompany; and

(d) vis-à-vis shareholders and/or third persons who have beendirectly damaged as a result of the directors’ malice, fraud ornegligence.

2. Criminal liability in case of:(a) non-disclosure or destruction of all or part of the assets and

in the case of disclosure of non-existing debts;(b) destruction of accounts with the intent of causing prejudice

to the creditors; (c) irregular bookkeeping and consequent impossibility to

ascertain the company’s assets; (d) the director does not commence the insolvency proceeding

and such delay causing losses; (e) the company raises further indebtedness and the directors’

failure to disclose that the company was insolvent to therelevant creditors; and

(f) payments made to some creditors, in order to offer benefit tothem but damaging other creditors, being that the company isalready insolvent.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Italy?

Bankruptcy (fallimento); compulsory administrative liquidation(liquidazione coatta amministrativa); bankruptcy agreement(concordato fallimentare); pre-bankruptcy agreement (concordatopreventivo); Prodi’s extraordinary administration proceeding(amministrazione straordinaria); and Marzano’s extraordinaryadministration proceeding (amministrazione straordinariaMarzano).

2.2 What are the tests for insolvency in Italy?

Insolvency is the debtor’s incapacity to regularly fulfil itsobligations. This might occur not only when a debtor is unable toregularly perform its obligations or to pay its debts, but also when: (a) a debtor sells all or part of its assets for a price well below

their fair market value in order to obtain cash; and/or (b) a debtor pays its creditors through means different from

those regularly employed (e.g., payments in kind). Therefore, the status of insolvency does not even require that thedebts of the debtor exceed the assets of the business. In fact, if thedebtor needs to sell its assets in order to meet its obligations, thecommencement of a bankruptcy proceeding should nonethelessoccur.


1. Bankruptcy: a company is placed into a bankruptcy procedurewhen it is insolvent and when any of the following thresholds ispassed:(a) more than Euro 300,000 of annual asset (attivo patrimoniale

annuo) in each of the last three financial years prior to thedate on which the petition for bankruptcy was filed or, if lessthan three financial years elapsed, in the financial years priorto the date on which the business of the company was started;

(b) more than Euro 200,000 of annual revenue in each of the lastthree financial years prior to the date on which the petition

for bankruptcy was filed or, if less than three years elapsed,in the financial years prior to the date on which the businessof the company was started; or

(c) more than Euro 500,000 of debts (including no overduedebts).

A company cannot be placed into a bankruptcy procedure when allof the above mentioned thresholds are not met.In any case a company cannot be placed into a bankruptcyprocedure when the amount of the debts overdue and not paid is lessthan Euro 30,000 irrespective of the above mentioned thresholds.2. Compulsory administrative liquidation: a company is placed intothis procedure when (i) it is insolvent and (ii) it is a company which,in accordance to Italian law, may be placed into a compulsoryadministrative liquidation procedure (i.e., banks, insurancecompanies).3. Pre-bankruptcy agreement: the debtor is placed into thisprocedure when: (a) it is in a state of crisis; and (b) it proposes to its creditors a plan which may provide for the

following: the restructuring of debts and the payment of credits to be

carried out by any possible means, including the sale ofassets, assumption of obligations (accollo) or the assignmentof shares, quotas, bonds - also convertible into shares - orother securities in favour of the creditors or companiesparticipated by the creditors;

the assignment of the debtor’s assets in favour of anassignee (assuntore);

the subdivision of the creditors into different classescategorised according to their similar legal status (i.e.,seniority) and economic interests; or

the different treatment for creditors belonging todifferent classes.

However, the debtor cannot be placed into a pre-bankruptcyagreement when all of the thresholds sub question 2.3 paragraph 1are not passed.The plan may also provide for creditors whose claims are securedby pledge, mortgage or privilege not to be paid in whole if theamount they receive is not less than the amount they would havereceived from the proceedings from the sale of the secured assets.The different treatment for creditors who belong to different classesshall not affect the priority of payment of the priority claims.The plan sub (b) below must be supported by a report on itsviability made by an expert. Such expert has to be (i) enrolled inthe auditor’s register; and (ii) a lawyer or a professional accountantor an association of professional practices or a professionalpartnership whose associates are lawyers or professionalaccountants.4. Bankruptcy agreement: the debtor is placed into this procedurewhen, during a bankruptcy proceeding, one or more creditors, athird party or the debtor itself propose a plan, which may providefor the following: (a) the restructuring of debts and the payment of credits to be

carried out by any possible means (see point 3 (i) above); (b) the assignment of the debtor’s assets in favour of an assignee

(assuntore); (c) the subdivision of the creditors into different classes

categorised according to their similar legal status (i.e.,seniority) and economic interests; or

(d) the different treatment for creditors belonging to differentclasses.

Please note that the debtor may propose a plan only after one year

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from the declaration of bankruptcy and within two years from thedecree that has closed the list of liabilities of the bank proceeding(stato passivo).5. Prodi’s extraordinary administration proceeding: a company isplaced into this procedure when it has more than 200 employeesand a total indebtedness of not less than two-thirds of the aggregateof the total assets and the revenues of the preceding financial yearand its business may be preserved through: (a) the sale of its business according to a plan which provides for

the continuance of the business for a maximum of one year;or

(b) the economic and financial restructuring of the debtoraccording to a restructuring plan lasting a maximum of twoyears.

6. Marzano’s extraordinary administration proceeding: a companymay be placed into this procedure when it alone, or on a groupbasis, has more than 500 employees and a total indebtedness of notless than 300 million and its business may be preserved through: (a) the sale of its business according to a plan which provides for

the continuance of the business for a maximum of one year; or(b) the economic and financial restructuring of the debtor

according to a restructuring plan lasting a maximum of twoyears (the Prodi extraordinary administration proceedingsupplements the Marzano extraordinary administrationproceeding unless the latter specifies otherwise or expresslyderogates to the Prodi extraordinary administrationproceeding).


1. The bankruptcy proceeding may be initiated by:(a) petition of the debtor; (b) petition of one or more creditors; or(c) initiative of the public prosecutor (in specific circumstances).After the filing of the petition, and prior to the judgment, the Courthas to convene for an “ad hoc” hearing the debtor and thecreditor(s) who filed the application with the competent Court; ifthe proceeding is initiated by the public prosecutor, the latter shallparticipate in the proceeding. The Court has the duty to assess theinsolvency status of the company and, after this test, it may eitherreject the petition or declare bankruptcy.2. The compulsory administrative liquidation procedure may beinitiated by:(a) petition of the debtor; (b) petition of one or more creditors; or (c) initiative of the public authority entrusted by law with the

task of monitoring the activity of the debtor. After the filing of the petition and prior to the judgment, the Courthas to convene the debtor and the public authority entrusted withthe task to monitor its activity. The Court has to proceed in thesame ways envisaged sub-paragraph 1. 3. Pre-bankruptcy agreement: the procedure is commenced by thedebtor, who files a plan (see question 2.3 above) with the competentCourt. Together with this plan, the debtor has to present:(a) a report drawn up by an expert (who complies with the

requirements specified sub question 2.3, point 3 above) onthe viability of the plan and on its current economic andfinancial situation; and

(b) a list of its creditors.The filing of the request shall be communicated to the publicprosecutor.

The Court may grant to the debtor a 15-day period from the filingof the plan to amend the application and deposit additionaldocumentation. The plan may not be amended after the creditorsstart voting.Upon the file of the request, the Court - after briefly evaluating theconditions of admissibility of the procedure - appoints, inter alia, ajudicial commissioner, who has the task to communicate to allcreditors the substance of the debtor’s proposal and the date of thehearing in which the creditors shall be required to vote on thedebtor’s plan. Such plan has to be approved by the majority of thecreditors (where different classes of creditors are envisaged, theplan is deemed approved when the majority of creditors in themajority of classes has voted in its favour). The plan may alsoprovide for creditors whose claims are secured by pledge, mortgageor privilege not to be paid in full if the amount they receive is notless than the amount they would have received from theproceedings from the sale of the secured assets. The differenttreatment for creditors who belong to different classes shall notaffect the priority of payment of the priority claims.Priority claims to be paid in full (credits secured by pledge,mortgage or privilege) do not carry voting rights unless thecreditors waive in whole or in part their right of priority. Uponapproval of the pre-bankruptcy agreement by the creditors, theBankruptcy Court has to approve the agreement within six monthsas from the date on which the debtor has filed the petition. If thedebtor’s proposal is not approved, the Bankruptcy Court maydeclare bankruptcy upon request of the public prosecutor or of theofficial receiver. 4. Bankruptcy agreement: upon the lodge of the plan (see question2.3 above), the Bankruptcy Judge requires the opinion of both theofficial receiver on the viability of the proposal and the securitiesthat have been offered and the creditors’ committee on the samematter. The opinion of the Bankruptcy Judge is limited to thecompliance of the bankruptcy agreement with the relevant rules ofthe procedure. If the plan meets the favour of the official receiverand the creditors’ committee, it has to be communicated to thecreditors by the official receiver, together with the opinions of theofficial receiver and the creditors’ committee and with theindication of the hearing in which the creditors shall be required toexpress their opinion on the proposal. Such proposal has to beapproved by the majority of the creditors (where different classes ofcreditors are envisaged: see sub-paragraph 3 above). The creditorsare informed that in case express remarks on the plan are not madewithin a specific time, the approval of each creditor to the plan willbe deemed to be granted. After the approval of the bankruptcycomposition agreement by the creditors, the Bankruptcy Judge setsa deadline for (i) opposition by any third party to the composition,and (ii) the deposit of a final opinion by the creditors’ committee.In case the creditors’ committee does not file a final opinion, thisshall be filed by the official receiver at the expiry of the deadline theBankruptcy Court issues. 5. Prodi’s extraordinary administration proceeding: this proceduremay begin following:(a) a petition by the creditors or by the debtor itself;(b) a motion of the public prosecutor; or (c) ex officio. After having declared the insolvency of the company, the Court,based on the report submitted by the judicial commissioner(s) andconsidering also the opinion of the Ministry of Industry, approvesthe extraordinary administration procedure in the event that there isa real possibility of the redressing of the economic balance of thedebtor. If the court deems that there is not such possibility, itdeclares the bankruptcy of the debtor.



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6. Marzano’s extraordinary administration proceeding: thisprocedure begins only by way of a voluntary debtor’s petition to theMinistry of Economic Development and a concomitant petition tothe competent Court to be declared insolvent. The Ministryimmediately admits the debtor to the procedure and appoints anextraordinary commissioner. The extraordinary commissionerconducts the business and drafts two acts: a programme specifyingwhether the restructuring is possible by means of the sale of thebusiness or by means of economic and financial restructuring; areport on the reasons of insolvency accompanied by a list of thecompany’s assets and by a list of all creditors. The former has to beapproved by the Ministry; in the event that the programme is notapproved, this procedure is turned into a bankruptcy procedure.

2.5 What notifications and meetings are required after thecompany has been placed into each procedure?

1. Bankruptcy: the official receiver appointed by the BankruptcyCourt has to notify to all creditors the date of the hearing in whichthe Bankruptcy Judge shall assess the bankruptcy estate, settingthem a deadline for the filing of their claims. At this hearing theBankruptcy Judge, with the assistance of the official receiver,decides on each claim filed by creditors. The decision may beappealed by creditors within 30 days as of its communication.2. Compulsory administrative liquidation: within one month fromits appointment, the commissioner has to communicate to allcreditors the amount of their credits towards the debtor. Not laterthan 15 days of the receipt of this communication, creditors maynotify the commissioner their observations and claims. Within 90days of the date of the public order declaring the opening of theprocedure, the commissioner lodges the list of the credits admittedto the procedure with the competent Court. Such list is notified toall creditors and may be appealed within 15 days of the date of itsreceipt. 3. Pre-Bankruptcy agreement: the decree, which approves thecomposition agreement, is notified to the debtor and to the judicialcommissioner, who has to communicate it to all creditors. Then theagreement is carried out in accordance with the indications set outby the Court in its decree, under the supervision of the judicialcommissioner.4. Bankruptcy agreement: after the approval by the creditors andthe Court, the agreement is carried out in accordance with theindications set out by the Court in the decree, under the supervisionof the Court itself, the official receiver and the creditors’ committee.5. Prodi’s and Marzano’s extraordinary administrationproceedings: the commissioner(s) has(ve) to communicate to allcreditors the amount of their credits towards the debtor. Theadmittance of credits to the procedure estate is decided inaccordance with rules laid down for the bankruptcy procedure (seesub-paragraph 1 above).

3 Creditors


Once the competent authority has decided to place the debtor in anyof the formal procedures described above, the creditors, whoserights accrued prior to the date of such decision, cannot take legalaction against the debtor in order to enforce their claims.


1. Pledge: a creditor whose claim is secured by pledge can sell thepledged asset if: (a) he has previously filed a petition for the admission to the

bankruptcy estate; (b) he has been admitted as secured creditor; and (c) the judge has authorised the sale of the pledged asset. Alternatively, the judge can order the official receiver to redeem thepledged asset against payment to the creditor of the full amount ofits claim. 2. Mortgage: the secured creditor cannot continue the foreclosureproceeding pending at the time the debtor is declared bankrupt, andthe official receiver will intervene in the pending foreclosureproceeding and exercise any related right in the interest of all thecreditors.3. Fondiario Mortgage: in case of a “fondiario” loan (i.e., a loangranted for the purchase or the development of real estate assets),the secured creditor can begin and/or continue the enforcementproceeding against a bankrupt borrower over the mortgagedproperties.4. Privileges (including floating charge): the creditor does not haveany right to foreclose and can only obtain recognition of hisprivileged (senior) status at the time of distribution of thebankruptcy estate.


Bankruptcy, compulsory administrative liquidation, Prodi’s andMarzano’s extraordinary administration proceedings allowcreditors to set off sums owed to the insolvent company againstamounts owed by the company to them, though their credits are notoverdue before the opening of the procedure. Nevertheless, in case of credits, which are not yet overdue, set-offoperations are not allowed where the credit has been assigned tocreditors by means of an inter vivos act executed after the debtorhas been placed into the concerned procedure or during the previousyear before the beginning of the said procedure.



1. Bankruptcy: the Bankruptcy Court appoints the judge in chargeof the procedure and the official receiver. The judge directs thewhole procedure and authorises the extraordinary administrationacts proposed by the official receiver. The official receiver is incharge of the management and administration of the bankruptcompany and its relevant assets. The directors no longer have theright to dispose of them.2. Compulsory administrative liquidation: the Public Authoritywith the task to monitor the activity of the debtor directs the wholeprocedure and authorises the extraordinary administration actsproposed by the commissioner. The commissioner is in charge ofthe management and administration of the bankrupt company andits relevant assets. The directors no longer have the right to disposeof them.

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3. Bankruptcy Agreement: the debtor has to carry out theagreement. The Bankruptcy Judge, the official receiver and thecreditors’ committee supervise the procedure.4. Pre-bankruptcy Agreement: the judge directs the procedure. Thejudicial commissioner has to analyse, inter alia, the debtor’s assets,the creditor’s claims and the proposed pre-bankruptcy agreementand has to submit a detailed report to the judge. The directorsmaintain the management of the business and of its assets, under theCourt’s supervision and the direction of the judicial commissioner.5. Prodi’s extraordinary administration proceeding: the judgedirects the procedure. The judicial commissioner(s) has(ve) to:(a) supervise the management of the company (upon the issue of

the relevant decree by the Bankruptcy Court, the judicialcommissioner(s) may also be in charge of the management ofthe company until the approval of the extraordinaryadministration procedure by the Bankruptcy Court); and

(b) express its opinion on the existence of the conditions for theapproval of such procedure. The Ministry of Industry appointsthe extraordinary commissioner(s) and the surveillancecommittee and supervises the procedure. The extraordinarycommissioner(s) only is in charge of the management andadministration of the company and its relevant assets.

6. Marzano’s extraordinary administrative proceeding: theextraordinary commissioner is in charge of the management of thecompany and directors cease their functions. The extraordinarycommissioner can ask the judge, since the very beginning of theproceeding, to authorise the payment of pre-proceeding creditswhen this is necessary to avoid a detriment to the prosecution of thebusiness or to the assets.In the program specifying whether the restructuring is possible bymeans of the sale of the business or by means of economic andfinancial restructuring (see question 2.4 above) the extraordinarycommissioner has to consider the position of the small savershaving subscribed a bond issued by the company.


Costs of procedures are as follows: (a) fees for the official receiver/commissioner; (b) administration costs of the procedures; and (c) fees for professionals who act on behalf of the procedures,

such as lawyers, accountants and experts.Costs of the procedures are paid on a pre-deducted basis (seequestion 5.2 below) by means of the sale of the asset.


1. Pre-bankruptcy agreements do not have formal effects onemployment contracts.2. As to bankruptcy and compulsory administrative liquidation , theopening of an insolvency proceeding does not constitute a cause fordismissal, but the execution of employment contracts is suspendedtill the official receiver or the commissioner - upon approval of thecreditor’s committee or of the surveillance committee - decides infavour of their performance or to terminate them. In case of companies with more than 15 employees placed inbankruptcy, compulsory administrative and extraordinaryadministration procedures, employees have the right to benefit froma treatment of employees’ salary integration. When the on-going business of the activity cannot be achieved, theofficial receiver and the commissioner(s) are empowered to putemployees into mobility.

3. Italian law on Prodi’s extraordinary administration proceeding(applicable also to the Marzano’s proceeding) specifies that, as aconsequence of its beginning, employment contracts are notterminated.


1. Pre-bankruptcy agreements do not affect pending contracts. 2. In case of bankruptcy and compulsory administrative liquidationprocedures the general rule is that in case of unexecuted or non-completely executed contracts by both parties, the commencementof the procedure suspends the execution of the contract, till theofficial receiver (or the commissioner) - upon the approval of thecreditors’ committee (or of the surveillance committee) - decides infavour of their performance or to terminate them. This rule does not find application with regard to some contracts,which are deemed terminated by law as a consequence of thecommencement of any procedure.3. The general rule envisaged for bankruptcy and compulsoryadministrative liquidation procedure finds application also in caseof extraordinary administrative procedures, with the exception ofemployment contracts and of leases on real estate (when the debtoris the lessor), which is deemed not terminated by law or evensuspended.

5 Claims


1. Creditors have to file a petition to the Bankruptcy Court or thecommissioner(s), indicating: (a) the amount of its claim or the indication of movables or

immovables which the creditor intends to re-obtain; (b) the exposition of the facts and reasons supporting the claim

and the relevant documents; and(c) the indication whether the claim is secured or unsecured. 2. The competent Court or the commissioner(s) have the task toassess each claim and to decide on its admittance to the procedureestate. The Court’s decision may be appealed by the creditor.


The ranking depends on the fact that the relevant proceeds arisefrom the sale of (a) real estate assets or (b) movable assets.As to point (a) the order of priority is the following:1) claims that are pre-deducted vis-à-vis all other claims (except

for claims granted by a mortgage, unless the pre-deducibleclaim is connected with expenses suffered in relation to themortgaged asset) in accordance with article 111 of ItalianBankruptcy Law: sum of payment of expenses and sum dueto the bankruptcy administration (including officialreceiver’s fees) or to be paid for the temporary managementof the business (if authorised);

2) privileged claims arising in connection with the relevant realestate asset: (i) judicial costs incurred to preserve the asset orto proceed with enforcement against such asset in favour of allmortgaged creditors; (ii) sums due in respect of various claims



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for taxes on real estate assets, contributions, waterconcessions, indirect taxes, local taxes on the increment ofimmovable assets; (iii) claims against the relevant promissoryfor failure to perform a preliminary contract (if certainconditions, laid down by law, are met); and (iv) all otherprivileged claims, the priority of which is not set by law;

3) claims secured by the mortgage rank;4) other privileged claims, in the order of priority provided by

law; and5) unsecured claims (paid pro-rata in compliance with the

principle of equal treatment of creditors [par condiciocreditorum]).

As to point (b) above, the order of priority is the following:1) claims that are pre-deducted vis-à-vis all other claims (except

for claims granted by pledge, unless the pre-deducible claim isconnected with expenses suffered in relation to the pledgedasset) in accordance with article 111 of Italian BankruptcyLaw: sums for payment of expenses and sums due to thebankruptcy administration (including official receiver’s fees)or to be paid for the temporary management of the business (ifauthorised);

2) other privileged and secured claims, in the order of priorityprovided by law; and

3) unsecured claims (paid pro-rata in compliance with theprinciples of equal treatment of creditors [par condiciocreditorum]).


From a direct tax standpoint, companies placed in bankruptcy,compulsory administrative Liquidation, bankruptcy agreement,Prodi’s and Marzano’s extraordinary administration proceedings aresubject to specific rules regarding the calculation of the taxableincome and the filing of the income tax return. In particular, a firsttax period ranges from the beginning of the ordinary tax period of thecompany and the declaration of the beginning of the procedures.During such period the company shall determine its taxable incomeaccording to the ordinary rules provided by the Italian Tax Code.Starting from the beginning of the procedure, the company shalldetermine a single taxable period for the entire procedure period,even if it lasts more than 12 months. During such period, thecompany is not subject to corporate income tax. However, if - at theend of the procedure period - a positive difference between: (a) theremaining equity; and (b) the company’s net equity at the beginningof the procedure arises, such difference is subject to taxation in thehand of the company according to ordinary rules. In case of a pre-bankruptcy agreement, companies are subject to theordinary rules provided by the Italian Tax Code. From an indirect tax standpoint, ordinary rules apply.



Pre-bankruptcy and bankruptcy agreement procedures (which requirethe approval of creditors) expressly provide that, in case one or moreclasses of creditors has(ve) voted against the agreement, the Courtmay nevertheless approve it.Two scenarios may arise:(a) in case a creditor belonging to the dissenting class expressly

raises an objection to the proposal, the Court may approve thecomposition agreement if: (i) the majority of creditors in the

majority of classes has approved the agreement; and (ii) theCourt holds that the agreement is more favourable towards thecreditor that raised the objection than any other feasiblealternative; or

(b) in case no objection to the agreement is expressly raised theCourt may approve the composition agreement if the majorityof creditors in the majority of classes has approved theagreement. Once approved, the composition agreement isbinding over all creditors whose credits were existent beforethe opening of the procedure.


1. Bankruptcy: as a consequence of the end of the procedure:(a) the effects of the Bankruptcy procedure on the debtor’s assets

expire;(b) the bankruptcy bodies cease their functions;(c) actions brought by the official receiver cannot continue;(d) creditors re-acquire the right to freely enforce their credits

towards debtor; and(e) in case of individuals and if certain conditions provided by law

are met, creditors, who have not been completely satisfied bythe debtor’s assets, definitively lose the right to enforce theirclaims against the debtor (esdebitazione).

2. Compulsory administrative liquidation: the Public Authoritymonitoring the procedure approves the definitive balance relating tothe procedure, together with the plan relating to the distribution of thedebtor’s asset to the creditors and a report drawn up by thesurveillance committee. Upon the approval, these documents arepublished by the Official Journal and by the newspapers indicated bythe same Authority. Within 20 days of the publication, creditors andany person interested in the proceeding may challenge suchdocuments before the competent Court. If such deadline expireswithout any challenge, the balance of the procedure is deemedapproved and the commissioner may proceed to the final distributionof the debtor’s assets to the creditors. The Public Authoritymonitoring the liquidation can authorise one or more creditors, thecompany or a third party to propose a bankruptcy agreement (subquestion 2.3, point 4). 3. Bankruptcy agreement: the Bankruptcy Judge verifies theconclusion of the procedure and its decree is made public with thesame modalities envisaged for the decision declaring bankruptcy.4. Prodi’s and Marzano’s extraordinary administrationproceedings: the Authority monitoring the procedure approves thebalance relating to the procedure, together with a report drawn upby the surveillance committee. Such documents are published bythe Official Journal and by the newspapers indicated by the sameAuthority. Within 20 days of the publication, creditors and personsinterested in the proceeding may contest before the competentCourt. If such deadline expires without any contestation, thebalance of the procedure is deemed approved. The conclusion ofthe procedure is declared by the Court by way of decree uponpetition of the commissioner(s) or of the debtor itself.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Italy? In what circumstances might this bepossible?

The Italian Bankruptcy Law has been reformed in the last threeyears, with the aim of favouring the restructuring of distressedcompanies outside formal procedures or, at least, with a limited

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involvement of the Bankruptcy Court. As a consequence thereof,the debtor, who is in a state of crisis, may pursue its restructuring -other than by means of the typical formal procedures (see question2.3) - also by means of: (a) a “restructuring plan” able to allow the recovery of the

debtor: the plan has the main effect of avoiding the risk ofclaw-back actions with relation to acts and payments made inaccordance with such plan, when its viability has been“certified” by an independent expert. The plan may alsoconsist of an agreement entered into by the debtor and itscreditors, whose terms and conditions are freely negotiable(e.g., such agreements usually provide for (i) moratoriumand postponement of claims, (ii) partial or total waiver ofclaims, (iii) debt refinancing, and (iv) undertaking from thecreditors to refrain from requesting the beginning of anyinsolvency proceeding of the debtor). In this case, while actsand payments made in accordance with the plan cannot beclawed-back, the plan itself is binding only on creditors whohave entered into it;

(b) a “debt restructuring agreement” entered into by the debtorand at least 60% of its creditors, whose viability to ensure thepayment of all the credits pertaining to creditors, who havenot entered into the said agreement, has to be assessed by anindependent expert. Such independent expert has to be: (i)enrolled in the auditor’s register; and (ii) a lawyer or aprofessional accountant or an association of professionalpractices or a professional partnership whose associates arelawyers or professional accountants. The agreement, whoseterms and conditions are freely negotiable (such agreementsgenerally provide for conditions outlined above in sub-paragraph [a]), calls for a limited intervention by theBankruptcy Court, to whom the agreement has to besubmitted. The Bankruptcy Court has to approve theagreement; such approval avoids the risk of claw-backactions for payments made in accordance with the plan but,in any case, the plan is binding only on creditors who haveentered into it; and

(c) agreements entered into by and between the debtor and itscreditors different from the agreements above outlined sub-paragraphs (a) and (b). Such agreements: (i) are freelynegotiable; (ii) are binding only on creditors who haveentered into them; and (iii) in any case does not prevent actsor payment, made during their execution, from claw-backactions.

7.2 Is it possible to reorganize a debtor rather than realise itsassets and business?

1. The “outside formal procedures” foreseen by the bankruptcy law(“restructuring plan” and “debt restructuring agreement”) can becarried out either by means of reorganisation or by means of sale ofthe assets and of the business (see question 7.1 above); in thecurrent practice, the most common means is the “restructuringplan”.2. The debtor’s reorganisation can be made also in “formal”procedures and specifically:(i) pre-bankruptcy agreement: when the debtor files the

application to be admitted to the procedure, he must submita plan which may provide for the restructuring of debts andthe payment of credits to be carried out by any possiblemeans; such restructuring can be made also by areorganisation not providing for a sale of assets (although inthe current practice the restructuring in the pre-bankruptcyagreement is made by means of the assignment of assets):

(ii) Prodi’s extraordinary administration proceeding andMarzano’s extraordinary administration proceeding: suchformal procedures specifically foresee that the “redressing ofthe economic balance of the debtor” (see question 2.4, para.5

above) can be achieved (as an alternative to the sale ofbusiness) by means of the economic and financialrestructuring of the debtor according to a restructuring planlasting a maximum of two years.


Pre-packaged business sales in Italy are not specifically providedfor under law. In practice however, they are usually achieved priorto the admission of the debtor to an insolvency proceedingproviding for its liquidation (usually a pre-bankruptcy agreement orbankruptcy proceeding) through the following alternativestructures:(i) the debtor enters into a lease of its going concern (affitto di

azienda) with a lessee, which provides for a call/put optionfor the purchase/sale of such going concern to be exercisedafter the admission of the debtor to the pre-bankruptcyagreement or the bankruptcy proceeding; or

(ii) the debtor enters into a sale and purchase agreement for itsgoing concern with a third party purchaser, the execution ofwhich is subject to the approval of the Court presiding overthe pre bankruptcy agreement or the approval of the court-appointed bankruptcy receiver.

The appraisal of the value of the going concern is of paramountimportance because the third party lessee/purchaser shall pay to thedebtor admitted to the pre bankruptcy agreement or the receiver ofthe bankrupt debtor a market value rent first and/or a market valueprice afterwards in order to avoid the risk of the unwinding of theagreement.

8 International

8.1 What would be the approach in Itay to recognising aprocedure started in another jurisdiction?

1. With regard to procedures opened in a Member State of theEuropean Union, EC Regulation 1346/2000 provides that theopening of an insolvency proceeding in an EU Member State shallbe recognised in all other Member States from the time it becomeseffective in the State of opening of the proceedings. In any case, therecognition of the procedure shall not preclude the opening of aninsolvency proceeding in another Member State concerning onlythe assets of the debtor situated in the territory of this MemberState. A Member State may refuse to recognise insolvency proceedingsopened in another Member State or to enforce a judgment handeddown in the context of such proceeding where the effects of suchrecognition or enforcement would be manifestly contrary to thatState’s public policy. 2. As to procedures opened in States outside of EU Italian law n.218/1995 applies: the competent court of appeal will declare theforeign judgment enforceable in Italy provided that: (a) the foreign court was competent to issue the judgment

according to Italian law on jurisdiction;(b) the defendant received adequate notice and was afforded

sufficient time to appear in accordance with the law of theforeign tribunal;

(c) the parties in the foreign action actually appeared or theabsence of either party was properly taken into account inaccordance with the law of the foreign tribunal;

(d) the foreign judgment was final (i.e., not subject to appeal);



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Bonelli Erede PappalardoViale Padre Santo, 5/816122 GenovaItaly

Tel: +39 0108 4621Fax: +39 0108 13849Email: [email protected]: www.beplex.com

Vittorio Lupoli is a partner in the Firm’s Genoa office and focuses oncommercial law issues and financial markets law. He has extensiveexperience in corporate consultation, restructuring of companies incrisis, management of extraordinary corporate finance transactions,public purchase offers and bid requests.Mr Lupoli joined Bonelli e Associati in Genoa in 1990 and becamea partner at Bonelli Erede Pappalardo in 2000.Mr Lupoli graduated from the University of Genoa in 1990 and wasadmitted to the Italian Bar in 1993.

Andrea De Tomas

Bonelli Erede Pappalardo LLP30 Cannon StreetLondon EC4M 6XHUnited Kingdom

Tel: +44 20 7653 6888Fax: +44 20 7653 6888Email: [email protected]: www.beplex.com

Andrea De Tomas is a partner in the firm’s London office andfocuses on banking and finance, real estate finance and insolvencyand restructurings. He advises both lenders and borrowers inrelation to LBOs and real estate finance and investors in insolvencyand restructuring deals, both domestic and international.Before joining Bonelli Erede Pappalardo in 2003, Mr De Tomasworked for a specialised law firm and then for Allen & Overy inLondon. He became a partner in 2006.Mr De Tomas graduated with honours from the University of Turin in1994 and went on to complete a Masters in International Trade Lawfrom the University Institute of European Studies of Turin. He wasadmitted to the Italian Bar in 1997.

Bonelli Erede Pappalardo enjoys a distinguished reputation as one of Italy’s finest law firms and is one of the few Italianfirms capable of offering comprehensive legal advice in all sectors of business law.

Bonelli Erede Pappalardo is a multidisciplinary law firm comprised of over 300 lawyers located in our offices in Milan,Genoa, Rome, Brussels and London.

Our firm offers a full range of legal services, focusing on various areas of law, including among others, corporate,restructuring, bankruptcy, banking, tax, EU, competition, litigation, real estate, administrative, intellectual property, andlaw relating to power and energy sectors, to serve our clients’ interests in Italy and worldwide.


(e) the foreign judgment is not in conflict with a final judgmenthanded down by an Italian Court;

(f) the parties are not litigating the same matter before an Italiancourt in a proceeding started before the beginning of theforeign proceeding; and

(g) the foreign judgment is not contrary to Italian rules of publicpolicy and public order.



ChapterChapter 25

Anderson Mori & Tomotsune

Japan


1.1 How does a creditor take security over assets in Japan?

Mortgage (teito-ken) and Floating Mortgage (ne-teito-ken) on realestateMortgages and floating mortgages on real estate may be granted assecurity for a debt. Ownership of the underlying asset is nottransferred, but rather its transfer is restricted by the possibleenforcement of the mortgage through judicial foreclosure. Pledge on Real Estate, Movables (including securities) and MonetaryObligationsA pledge is a security interest on ownership of the underlying asset ortitle for a debt. A pledge on real estate or movables is created by anagreement between the owner of real estate or movables (pledgor)and the pledge-holder (pledgee). A pledge on a monetary obligationis created by agreement between an obligee (pledgor) and the pledge-holder (pledgee). Note that, as listed securities are subject to electronic registration withJapan Securities Depository Center, Inc. (JASDEC), pledges shouldbe created and perfected on the listed securities by registration of thepledge with JASDEC. Transfer pledges (Joto Tampo) on Real Estate, Movables (includingsecurities) and Monetary ObligationsA transfer pledge is a security interest created by agreement betweenthe transfer-pledgee and either the owner of the real estate/movablesor the obligor of the monetary obligation (pledgor).


As explained in section 2, there are Civil Rehabilitation Proceedings,Corporate Reorganisation Proceedings, Bankruptcy Proceedings andSpecial Liquidation Proceedings. The following explains avoidanceby a trustee in Bankruptcy Proceedings, a supervisor in CivilRehabilitation Proceedings and an administrator of CorporateReorganisation Proceedings. Note there are other avoidance actionsavailable as well. A. Avoidance of Fraudulent Transfers Any transaction by the company (excluding a transaction forproviding collateral by the company or discharging an obligation ofthe company) can be avoided if:(i) the company knows that the transaction is detrimental to

creditors; however, the transaction will not be avoided if aperson who is subject to avoidance action and receives a benefitfrom the transaction (the “Beneficiary”) proves that it had noknowledge of such fact at the time of the transaction; or

(ii) the transaction is detrimental to creditors and executed afterthe company suspends payment or a petition for CivilRehabilitation Proceedings, Corporate ReorganisationProceedings or Bankruptcy Proceedings is filed; however, thetransaction will not be avoided if the Beneficiary proves that ithad no knowledge of such facts at the time of the transaction.

B. Avoidance of PreferencesAny transaction by the company which provides collateral to acreditor for an existing obligation of the company or discharges anexisting obligation of the company is avoidable if:(a) the transaction is executed after (i) the company becomes

unable to pay its debts when due or (ii) a petition for CivilRehabilitation Proceedings, Corporate ReorganisationProceedings or Bankruptcy Proceedings is filed; and

(b) the creditor knows that: (i) the company becomes unable topay its debts when due or suspends payments in case of (a)(i);or, (ii) a petition for Civil Rehabilitation Proceedings,Corporate Reorganisation Proceedings or BankruptcyProceedings is filed in case of (a)(ii).

In addition, if the above transaction is taken within 30 days before thecompany becomes unable to pay, and (i) the company is not obligatedto perform the transaction or (ii) the transaction constitutes theperformance of an obligation by the company that is not then due, thetransaction can be avoided. However, the transaction cannot beavoided if the creditor proves that he does not know that thetransaction is detrimental to other creditors. C. Avoidance of Transaction in Exchange of Reasonably EquivalentValue Disposition of asset by the company in exchange of reasonablyequivalent value can be avoided only if all of the below requirementsare met:(a) the disposition results in changing the form of asset, such as,

by way of example, disposition of real estate for cash, andcreates a present danger that the company will take furtheraction which would be detrimental to creditors (“MaliciousAction”), such as, by way of example, hiding the asset,providing the asset for no consideration to specific creditors ortaking other action;

(b) the company has an intent to take Malicious Action at the timeof the disposition; and

(c) the counterparty to the disposition knows that the company hasthe intent above at the time of the disposition.

D. Avoidance of Perfection of CollateralPerfection of collateral can be avoided if the act of perfection:

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Tomoaki Ikenaga



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(a) occurs after the company suspends payments or a petition forCivil Rehabilitation Proceedings, Corporate ReorganisationProceedings or Bankruptcy Proceedings is filed;

(b) is taken after 15 days from creation, transfer or change insecurity interest in the collateral; and

(c) is taken with knowledge of the company’s suspension ofpayments to creditors or the filing of a petition for CivilRehabilitation Proceedings, Corporate ReorganisationProceedings or Bankruptcy Proceedings.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Japan?

There are no specific statutes imposing civil or criminal liability ondirectors under the circumstances described above. However, if adirector of the company knows, or reasonably should know, thatpayment for an obligation will not be made at the time of thetransaction, then such director may be liable for damages incurred bythe counterparty to the transaction.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Japan?

A. Civil Rehabilitation ProceedingsCivil Rehabilitation Proceedings are debtor-in-possession (“DIP”)proceedings, where incumbent management remains in place andproposes a rehabilitation plan to creditors. DIP proceedings aresubject to the supervision of a supervisor appointed by the court. TheDIP’s rehabilitation plan must be approved by the creditors. Securedcreditors are excluded from the proceedings and are free to enforcetheir collateral.B. Corporate Reorganisation ProceedingsCorporate Reorganisation Proceedings are the most powerfulinsolvency proceedings, whereby all secured creditors and unsecuredcreditors are subject to the proceeding. After the petition forcommencement, the court issues: (i) an Administration Order, whichdivests the authority of the incumbent management and appoints anInterim Administrator; and (ii) a Protection Order, which prohibits thecompany from paying any debt (with certain exceptions). The courtmay also issue a Comprehensive Protection Order prohibiting anysecured creditor from enforcing its rights in collateral. After theInterim Administrator’s review and investigation, the court mayappoint an Administrator who has full responsibility to manage thecompany and create a reorganisation plan, which is subject toapproval of the creditors and the court. Recently, the Tokyo District Court started DIP-type CorporateReorganisation Proceedings, where the court does not issue anAdministration Order and the incumbent management remains inpower. In such proceedings, the court issues (i) a Protection Orderprohibiting the company from paying any debt (with certainexceptions) and (ii) a Supervision and Investigation Order, pursuant towhich the court appoints a Supervisor/Investigator to carry out aninitial review of whether the DIP proceeding is appropriate for the case.C. Bankruptcy ProceedingsBankruptcy Proceedings are liquidation proceedings administered bya court-appointed trustee. Secured creditors are not subject to theproceeding and are free to enforce their collateral. The company isliquidated and there may be a distribution at the end of the proceedingto creditors.

D. Special Liquidation ProceedingsSpecial Liquidation Proceedings concern the voluntary dissolution ofa company outside of other insolvency proceedings. When acompany voluntarily starts liquidation in accordance with provisionsof the Company Act and the liquidator finds that the company may beinsolvent, the liquidator has a duty to file a petition for SpecialLiquidation Proceedings. Creditors, the liquidator, the statutoryauditor, or shareholders may file a petition. Certain actions by theliquidator are subject to the approval of the creditors, the court-appointed supervisor, or the court. The company may make aproposal with respect to changes in the rights of secured creditors, therelease and discharge of certain obligations, the postponement of duedates, etc., which are subject to a vote by the creditors and theapproval of the court.

2.2 What are the tests for insolvency in Japan?

The test is whether the total liabilities of the company exceed the totalassets of the company. If so, then the company is regarded as“insolvent” under the Company Act. However, as described below,the grounds for commencing insolvency proceedings are notnecessarily triggered by insolvency alone.


A. Bankruptcy ProceedingsIf a company is unable to pay its debts when due, BankruptcyProceedings may be commenced. As a matter of law, a company ispresumed to be unable to pay its debts if (i) the company fails to paya promissory note or important debt such as the principal of acorporate bond or bank loans, or other obligations in general, or (ii)the company is “insolvent”. B. Civil Rehabilitation Proceedings and Corporate ReorganisationProceedingsA company may file a petition to commence the proceedings if (i)there is a possibility that the grounds for commencing BankruptcyProceedings occur, or (ii) the company is unable to pay its obligationswithout creating a significant burden for continuing its business.C. Special Liquidation ProceedingsPlease see question 2.1.


Voluntary PetitionA voluntary petition is generally commenced by evaluating thefinancial status of the company and the selection of the appropriateproceedings with the assistance of attorneys and accountants. Theboard then adopts a resolution to file a petition for one of theproceedings. Involuntary PetitionThe proceedings may also be commenced by an involuntary petition,although such practice is uncommon. Only creditors having claims inexcess of a minimum threshold are entitled to file involuntarypetitions. Requirements for commencing involuntary cases includethe petitioner’s proof that the company has grounds for thecommencement of the proceedings, which are the same as those forcommencing voluntary Bankruptcy Proceedings.With respect to Special Liquidation Proceedings, please refer toquestion 2.1.

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With respect to Civil Rehabilitation Proceedings, CorporateReorganisation Proceedings or Bankruptcy Proceedings, no actualnotice to creditors is required with respect to commencement of thecase, the filing deadline for a proof of claim (bar date), etc. Instead,the law provides that any notice shall be publicly posted inGovernment Official Gazettes. There are some exceptions where theactual notice by the court is necessary. With respect to Special Liquidation Proceedings, notice of thecreditors’ meeting as well as notice of the distribution to creditorsshall be sent by the company.

3 Creditors


Unsecured creditors are prohibited from enforcing their unsecuredclaims outside of each proceeding. However, the followingexceptions are applicable to unsecured claims:A. Civil Rehabilitation ProceedingsWith respect to unsecured claims, “Common Benefit Claims” and“General Priority Claims” can be enforced outside the proceeding.“Common Benefit Claims”, as a rule, include:(i) a claim for expenses necessary for execution of the

proceeding (e.g., remuneration of a supervisor); and(ii) a claim arising from the business operations of the company

after the commencement of the proceeding.“General Priority Claims” include:(i) a claim for wages or salary of an employee; and(ii) a tax claim.B. Corporate Reorganisation ProceedingsWith respect to unsecured claims, only “Common Benefit Claims”can be enforced outside the proceeding. “Common Benefit Claims”in Corporate Reorganisation Proceedings, as a rule, include thefollowing:(i) a claim for expenses necessary for execution of the

proceeding (e.g., remuneration of a trustee of theproceeding);

(ii) a claim arising from the business operations of the companyafter the commencement of the proceeding; and

(iii) a claim for the wages or salary of an employee.C. Bankruptcy ProceedingsWith respect to unsecured claims, “Estate Claims” can be enforcedoutside a bankruptcy procedure. “Estate Claims” in bankruptcyproceeding, as a rule, include:(i) a claim for expenses necessary for execution of the

proceeding (e.g., remuneration for a trustee of theprocedure); and

(ii) a claim for the wages or salary of an employee.D. Special Liquidation ProceedingsWith respect to unsecured claims, a claim for expenses necessaryfor execution of the proceeding and “General Priority Claims” canbe enforced outside Special Liquidation Proceedings. “GeneralPriority Claims” are the same as defined in question 3.1 A above.


A. Civil Rehabilitation Proceedings, Bankruptcy Proceedings, andSpecial Liquidation ProceedingsSecured creditors can generally enforce their security outside of theproceedings. However, under certain conditions in CivilRehabilitation Proceedings and Corporate ReorganisationProceedings, the security will be cancelled by the court or itsenforcement by the creditor will be stayed.B. Corporate Reorganisation ProceedingsSecured creditors can only enforce their securities within theproceeding as a “Creditor with Security in CorporateReorganisation Proceedings”. Thus, claims of secured creditorswill be paid pursuant to the reorganisation plan. However, claimsof secured creditors are entitled to priority in CorporateReorganisation Proceedings. Further, under certain conditions, asecured creditor can enforce its security outside the proceeding withthe approval of the court.


A. General RuleGenerally speaking, creditors can exercise the right of set off.B. ExceptionsIn a typical set off, it is necessary for the obligations of each partyto be due and owing. However, upon the commencement of aBankruptcy Proceeding, the obligations of the debtor becomeimmediately due. In Civil Rehabilitation, CorporateReorganisation, and Special Liquidation Proceedings, creditorscannot set off obligations owed by the debtor until the due date ofsuch obligations. Further, in Civil Rehabilitation Proceedings andCorporate Reorganisation Proceedings, creditors can only exercisethe right of set off within the period for the filing of their claimsspecified by the court.



A. Civil Rehabilitation ProceedingsIn Civil Rehabilitation Proceedings, directors of the companymaintain authority to control the company and administer anddispose of its assets. However, where the company will conductmaterial actions including disposition of assets, the approval of thesupervisor appointed by the court is necessary.When a Civil Rehabilitation Proceeding is commenced, directorsand shareholders of the company do not automatically lose theirpositions or interests. B. Corporate Reorganisation ProceedingsIn Corporate Reorganisation Proceedings, a trustee appointed bythe court is authorised to control the debtor and to administer anddispose of its property. Directors are removed from the boardunless reappointed through the reorganisation plan. When a Corporate Reorganisation Proceeding is commenced,shareholders of the company do not automatically lose theirownership interests. However, when the reorganisation plan is



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approved by the court, the shareholders forfeit their ownershipinterests unless they are otherwise provided for by thereorganisation plan.C. Bankruptcy ProceedingsIn Bankruptcy Proceedings, a trustee appointed by the court isauthorised to administer and dispose of the debtor’s property. Thedirectors are divested of such authority when a BankruptcyProceeding is commenced. When the Bankruptcy Proceeding is completed, the debtor becomes adefunct entity, the directors lose their positions as a result thereof, thecompany is dissolved, and any remaining assets after administration ofthe debtor’s estate are distributed to the shareholders.D. Special Liquidation ProceedingsIn Special Liquidation Proceedings, a liquidator is authorised tocontrol and dispose of the property of the debtor.A Special Liquidation Proceeding is commenced after a resolutionto wind-up the company is passed at a shareholders’ meeting, andthe directors of the company will lose their positions at the timesuch resolution is passed.When a Special Liquidation Proceeding is completed, the companyis dissolved and any remaining assets after administration of thedebtor’s estate are distributed to the shareholders.


A. Bankruptcy Proceedings/Special Liquidation ProceedingsThese proceedings are for liquidation of the company and financingis, therefore, not necessary.B. Civil Rehabilitation ProceedingsAfter the petition for commencement of Civil RehabilitationProceedings has been filed, but before any further steps are taken insuch proceedings, the company can obtain financing with approvalof the supervisor. A claim for such financing is one type ofCommon Benefit Claim (see question 3.1), which is accordedpriority over other claims.C. Corporate Reorganisation ProceedingsFinancing is obtained in the same manner as with CivilRehabilitation Proceedings described above.


A. Contracts with employeesi. Civil Rehabilitation Proceedings/Corporate ReorganisationProceedingsContracts with employees continue even if Civil Rehabilitation orCorporate Reorganisation Proceedings are commenced.It is often the case that a reduction in force is implemented as partof the restructuring of the company’s organisation, which is carriedout in accordance with labour regulations.ii. Bankruptcy Proceedings/Special Liquidation ProceedingsContracts with employees are not terminated only becauseBankruptcy or Special Liquidation Proceedings are commenced.However, as Bankruptcy Proceedings and Special LiquidationProceedings are proceedings to carry out the liquidation of thecompany, all employees will be laid off by the end of theproceedings. B. Claims of employeesIn all of the proceedings, the employees’ rights to wages andsalaries are accorded priority (see question 3.1).


Generally speaking, a debtor cannot terminate the contracts for thesole reason that it has commenced one of the proceedings.Nevertheless, in Civil Rehabilitation, Corporate Reorganisation,and Bankruptcy Proceedings, if both the obligation of the debtorand its counterparty under a bilateral contract is executory at thetime of commencement of the proceeding, the debtor (or thetrustee) may (i) terminate the contract, or (ii) perform the contractand request the counterparty to perform.

5 Claims


Broadly, except where a creditor is permitted to enforce its claimoutside the proceeding (see question 3.1 and question 3.2), creditorscan enforce their claims through the following steps:A. Filing of a ClaimA creditor who intends to participate in the proceeding shall file itsclaim with the court within the period established by the court. B. InvestigationA claim which was filed with the court (“Filed Claim”) will beinvestigated by the company in Civil Rehabilitation or SpecialLiquidation Proceedings and by the trustee in CorporateReorganisation or Bankruptcy Proceedings. Creditors can alsoinvestigate the claim. C. Fixing of a ClaimIf there are no objections to the Filed Claim, then the claim will befixed.If there are objections, the Filed Clam will be decided through aclaims fixing procedure and ordinary litigation.D. Payment/DistributionIn Civil Rehabilitation and Corporate Reorganisation Proceedings,a Filed Claim that has been fixed will be changed and paid on a prorata basis with other filed claims pursuant to the relevant plan,which is voted on by the creditors and approved by the court. In Bankruptcy Proceedings, the distribution will be made tocreditors depending on the fixed amount of their Filed Claims.In Special Liquidation Proceedings, a Filed Claim that has beenfixed will be changed and paid on a pro rata basis with other filedclaims pursuant to the arrangement, which is voted on by thecreditors and approved by the court.


A. Civil Rehabilitation ProceedingsSecured claims, Common Benefit Claims and General PriorityClaims can be enforced outside the proceedings and accordedpriority (see question 3.1 and question 3.2).B. Corporate Reorganisation ProceedingsCommon Benefit Claims can be enforced outside the proceedingsand accorded priority (see question 3.1).Also, secured claims and “General Priority Claims” are accordedpriority and include:

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(i) a claim of an employee of the company; and(ii) a tax claim.C. Bankruptcy ProceedingsSecured claim and Estate Claim can be enforced outside theproceedings and accorded priority (see question 3.1 and question3.2).Also, “General Priority Claims” are accorded priority and include: (i) a claim of an employee of the company; and(ii) tax claim.D. Special Liquidation ProceedingsSecured claims, claims for expenses necessary for the execution ofthe proceedings, and General Priority Claims can be enforcedoutside the proceeding and accorded priority (see question 3.1 andquestion 3.2 above).


A. Tax liabilities after commencement of ProceedingsIn Civil Rehabilitation, Corporate Reorganisation, and SpecialLiquidation Proceedings, tax liabilities arising after commencementof the proceedings are paid outside the procedure and entitled tosuper-priority. In contrast, in Bankruptcy Proceedings, tax liabilities arising aftercommencement of the proceedings are subordinate to prepetitionclaims in the bankruptcy case.B. Taxation on Income from discharge of indebtednessIn Bankruptcy Proceedings and Special Liquidation Proceedings,the discharge of the debtor’s indebtedness is not deemed income.On the other hand, in Civil Rehabilitation Proceedings andCorporate Reorganisation Proceedings, the debtor will continue tooperate as a going concern, so the discharge of the debtor’sindebtedness does result a taxable event.



A. Civil Rehabilitation, Corporate Reorganisation, and SpecialLiquidation ProceedingsPlans of rehabilitation/reorganisation are voted on by certaincreditors. If a majority of eligible creditors votes in favour of a planand the plan is approved by the court, then dissenting creditors arebound by the plan.B. Bankruptcy ProceedingsIn Bankruptcy Proceedings, there is no cramdown. Rather, assetsare simply converted into money, which is distributed to creditorson a pro rata basis.


A. Civil Rehabilitation Proceedings/Corporate ReorganisationProceedingsThe plan voted on by the creditors and approved by the court isimplemented by paying creditors’ claims in accordance with theplan.B. Bankruptcy ProceedingsThe company will be dissolved.

C. Special Liquidation ProceedingsClaims are paid according to the plan. After payment of suchclaims, the company will be dissolved.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Japan? In what circumstances might this bepossible?

There are cases where the company is restructured out of court byagreement between the creditors and the debtor (“privaterestructuring”). One of the benefits of a private restructuring is its privacy. Whereasother types of restructuring could seriously affect a debtor’sgoodwill, image and ability to recover, private restructurings are notnecessarily disclosed to the public Private restructurings do, however, have certain drawbacks. Forexample, the debtor cannot bind any creditors who do not agree tothe private restructuring plan.


It depends on the case. Without realising its assets and business, adebtor can be reorganised by an equity injection from a new sponsoror by a loan from a new lender under Civil Rehabilitation orCorporate Reorganisation Proceedings.


Pre-packaged sales are possible and Civil RehabilitationProceedings are often used for pre-packaged sales. Before filing apetition for the commencement of the proceedings, the debtor mustlocate a buyer and obtain the consent of the largest creditors for anysuch sale. After the petition is filed, such sale is carried outfollowing court approval and may involve a competitive biddingprocess among other potential buyers.

8 International

8.1 What would be the approach in Japan to recognising aprocedure started in another jurisdiction?

Although a Proceeding started in another jurisdiction may berecognised by a Japanese court, a Japanese court cannot recognisesuch Proceeding in the following circumstances:1. where it is clear that the procedure in foreign jurisdiction will

not have any effects outside the jurisdiction;2. where it is against public policy to support the procedure; and3. where it is clear that the support is not necessary.

AcknowledgmentThe authors would like to acknowledge the assistance of theircolleagues Daiki Akimoto and Michael Sjuggerud in the preparationof this chapter.



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Tomoaki Ikenaga

Anderson Mori & TomotsuneIzumi Garden Tower, 6-1, Roppongi 1-chomeMinato-ku, Tokyo, 106-6036 Japan

Tel: +81 3 6888 1070Fax: +81 3 6888 3070Email: [email protected]: www.andersonmoritomotsune.com

Tomoaki Ikenaga has been practicing in numerous practice areas formore than 27 years in Japan and the US. His experience includesvarious corporate transactions, finance, derivatives, securitisation,regulatory issues and insolvency matters. For more than eight yearsas Chief Regional Counsel of JPMorgan Chase for Japan and Koreaand General Counsel of Deutsche Bank for Japan, he obtainedextensive experience in sophisticated finance transactions,compliance and regulatory issues, and involved in legal issuesarising from insolvency proceedings such as public administration ofLong Term Credit Bank, Chiyoda Life Insurance and other financialinstitutions. He has also served as a trustee in many bankruptcycases and frequently advises clients with respect to civilrehabilitation and corporate reorganisation issues.

Nobuyuki Maeyama

Anderson Mori & TomotsuneIzumi Garden Tower, 6-1, Roppongi 1-chomeMinato-ku, Tokyo, 106-6036 Japan

Tel: +81 3 6888 1071Fax: +81 3 6888 3071Email: [email protected]: www.andersonmoritomotsune.com

Joined firm: 1998.Partner since: 2008.Practice areas: Nobuyuki Maeyama has been engaged in anextensive range of legal practice at Anderson Mori & Tomotsune. Mr.Maeyama acts as a trustee in bankruptcy appointed by the court inthe corporate liquidation process, assisting clients in civilrehabilitation and corporate reorganisation related issues. He hasalso been involved with various financial transactions, includingsecuritisation of real property and receivables, Acquisition Finance,CMBS (Commercial Mortgage-Backed Securities), Project Financeand PFI (Private Finance Initiatives). Further, he has also provideda wide range of advice to domestic and overseas clients in M&Atransactions (including Management Buy Out).

Anderson Mori & Tomotsune was formed on January 1, 2005 as a result of the merger of two leading Japanese lawfirms, Anderson Mori and Tomotsune & Kimura. The firm is one of the largest, full service corporate law firms in Japan,with approximately 260 Japanese lawyers (bengoshi) and over 10 lawyers qualified in foreign jurisdictions. AmongJapanese international law firms today, Anderson Mori & Tomotsune has one of the longest histories of serving theinternational business and legal community in Japan.


Tokyo Office

Anderson Mori & Tomotsune Tokyo OfficeIzumi Garden Tower6-1, Roppongi 1-chomeMinato-ku, Tokyo 106-6036Japan

Tel: +81 3 6888 1000Email: [email protected]

Beijing Office:

Anderson Mori & Tomotsune Beijing OfficeBeijing Fortune Bldg., Room 809No.5, Dong San Huan BeiluChao Yang Qu, Beijing 100004China

Tel: +86 10 6590 9060Fax: +86 10 6590 9062Email: [email protected]



ChapterChapter 26

Ozannes

Jersey


1.1 How does a creditor take security over assets in Jersey?

There is a distinction between security over immovable propertyand movable property, both tangible and intangible.Security can be taken over Jersey immovable property and certainmovable property.Immovable property can only be hypothecated under the PropriétéFoncière Law or the Loi (1996) sur l’hypothèque des biens-fondsincorporels.Movable property (other than in respect of a mortgage over a ship)can only be hypothecated under the Security Interests (Jersey) Law1983, as amended (the “Security Interests Law”).There is a distinction between movable property that is tangible andthat which is intangible. The most common securities taken in Jersey over tangible movablesare:1. pledges;2. liens;3. non-judicial - landlord’s right to distrain (a landlord of

demised property situate in Jersey has a common-law right toseize all goods belonging to his tenant and located on thepremises to satisfy a claim for unpaid or future rental);

4. mortgages over ships; and5. reservation of title clauses.In respect of intangible movables, the most common security takenin Jersey is security interests pursuant to the Security Interests Law.The Security Interests Law permits a security interest to be taken ina number of ways, such as possession, control or title.


A “preference” may, in certain circumstances, be set aside by theRoyal Court of Jersey in the event of the giver thereof becomingformally bankrupt in Jersey (in a désastre) within 12 months ofgiving the preference. A “preference” is defined by statute, but in summary it is anythingdone or suffered to be done by a party that has the effect of puttinga creditor or guarantor of that party into a position which, in theevent of the formal bankruptcy of that party in Jersey, would be

better than the position the creditor or guarantor would have been inif that thing had not been done. In order for the preference to be set aside, the giver must (a) havebeen influenced in deciding to give the preference by a desire to putthe creditor or guarantor into the position referred to above and (b)have been either insolvent at the time of giving the preference orrendered insolvent as a result of it. Conditions (a) and (b) are presumed to be the case, unless otherwiseproved, where the preferred party is connected with, or an associateof, the giver of the preference.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Jersey?

Under the Companies (Jersey) Law 1991, as amended, if in thecourse of a creditors’ winding up or under the Bankruptcy(Désastre) (Jersey) Law 1990 in respect of the désastre of a Jerseycompany it is proved that there was an intention to defraudcreditors, the Royal Court of Jersey may make a person who wasknowingly party to the carrying on of such business liable tocontribute to the company’s assets and such a person may be subjectto criminal sanction.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Jersey?

The most common insolvency procedures are, for an individual, adésastre and for a company, a désastre or a winding up.There are other procedures available, such as amalgamation andschemes of arrangement, but these are rarely used in insolvencyproceedings.

2.2 What are the tests for insolvency in Jersey?

Insolvency is established by applying the cashflow test, whichmeans that insolvency will occur when a company is unable to payits debts as they fall due.


An application for a declaration en désastre may be made to the

Johannes H. Botha

Marcus K. Stone



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Royal Court of Jersey by a creditor of the debtor, having aliquidated claim exceeding £3,000. A liquidated claim means acertain debt to which there is no reasonably arguable defence.An individual or corporate debtor may apply for self-declaration endésastre.


It is necessary to give the Viscount in Jersey, who is the ChiefExecutive Officer of the Jersey courts and of the States of Jersey, atleast 48 hours’ notice of an intention to make an application for adésastre. There is no formal procedure for such a notification.An application for a désastre will be commenced by representationsetting out all relevant facts to satisfy the requirements. Subject tocertain limited exceptions, an application for a declaration endésastre must be accompanied by an affidavit containing certainconfirmations.In respect of a creditor’s winding up, all creditors of a debtor mustbe notified by post of a meeting of creditors which, usually, willimmediately follow the meeting of members, at least fourteen daysbefore the holding of the meeting to pass a special resolution towind up a company. The company must also give at least ten days’public notice of the meeting in the Jersey Gazette. The directors must make a statement regarding the company’saffairs, which must be verified by affidavit and laid before thecreditors’ meeting.A creditors’ winding up is deemed to commence when theresolution for winding up is passed or when a summary winding upbecomes a creditors’ winding up on the directors’ conclusion thatthe company will not be able to discharge its liabilities in full withinsix months of the commencement of the winding up or if there areliabilities arising more than six months after its commencement thatthey will not be able to be discharged as they fall due.


Under the Bankruptcy (Désastre) (Jersey) Law 1990, the Viscountis not required to convene any meeting of creditors. In practice,however, meetings of creditors are sometimes convened forpurposes of considering the funding of a désastre or the desirabilityof the Viscount pursuing different alternatives in the conduct of adésastre. The Viscount must provide all creditors with a report and accountsrelating to a désastre on its completion.Whether or not any creditors’ meetings have been held, theViscount can, at any time, apply to the Royal Court of Jersey fordirections on any issue, or to endorse any course of action, proposedby him in a désastre.In a creditor’s winding up, a meeting of creditors follows themeeting of shareholders held to resolve to put the company into acreditors’ winding up.If a creditors’ winding up continues for more than twelve months,the liquidator must call a general meeting of the company and ameeting of the creditors, both to be held at the first convenient datewithin three months after the end of the first twelve months fromthe commencement of the winding up. Such meetings must also becalled at the end of each succeeding twelve-month period or suchlonger period as the Jersey Financial Services Commission mayallow.

As soon as the affairs of a company in a creditors’ winding up arefully wound up, the liquidator must make up an account of thewinding up showing how it has been conducted and how thecompany’s property has been disposed of. Thereafter, the liquidator must call a general meeting of thecompany and a meeting of the creditors for the purposes of layingthe accounts before the meetings and giving an explanation of theaccounts.The liquidator is further required to make a return to the Registrarof Companies confirming that the meetings had been held and thedates on which the meetings were held. The Registrar ofCompanies would then register this return received from theliquidator, and at the end of three months from the registration ofthe return the company is deemed to be dissolved, subject to thepower of the Royal Court of Jersey to defer the dissolution.

3 Creditors


Yes, although, in a liquidation, payment to unsecured creditors willonly occur once all claims have been proved and the final dividenddeclared, following payment to secured creditors.


Yes, secured creditors can enforce their security.


Yes, creditors can set off sums owed to the company againstamounts owed to them by the company.



In the case of a désastre, the powers that the debtor may have overhis or its affairs, along with the capacity to exercise and to takeproceedings for exercising all such powers, shall vest in theViscount. In the event of a désastre of a Jersey company, thepowers of the directors of such company shall vest in the Viscount.In the case of a creditors’ winding up, a company must immediatelycease to carry on business, except in so far as may be required forits beneficial winding up. The corporate state and capacity of thecompany continue until the company is dissolved. As soon as aliquidator is appointed, he controls the company.


A liquidator’s remuneration and the costs of the insolvencyproceedings are to be paid from the company’s assets in preferenceto all other claims.

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The declaration of a company en désastre has no legal effect on thecontracts of employment of the employees of the company.It is likely that the liquidator will, as part of the winding up of thecompany, terminate the employment contracts. It should be notedthat payments due to employees may attract priority over otherclaims.


It will not have any legal effect on any contracts to which thecompany is a party.

5 Claims


Creditors should claim amounts due to them by sending notificationof the claim, together with supporting documentation in respectthereof, to the liquidator.


Certain claims will attract priority, such as claims by securedcreditors and claims that have been set off. The claim with thehighest priority is the liquidator’s remuneration, followed by otherclaims, such as, inter alia, payments due to employees and incometax payments.


A company will continue to incur tax liability as it would have hadit not been wound up.



There is no specific “cramming down” procedure, but as statedabove, the liquidator of a Jersey company may at any time apply tothe Royal Court of Jersey for directions in relation to any matterwhich arises and the Royal Court of Jersey may make such an orderas it thinks fit.


In a creditor’s winding up, the Registrar of Companies wouldregister the return received from the liquidator, and at the end ofthree months from the registration of the return the company isdeemed to be dissolved, subject to the power of the Royal Court ofJersey to defer the dissolution.If a Jersey company has been declared en désastre, and after theViscount has realised all the debtor’s property, or as much of it as in

the Viscount’s opinion can be realised without needlesslyprotracting the désastre, the Viscount must:(a) supply all the creditors of the debtor with a report and

accounts relating to the désastre; and(b) pay whatever final dividend is due.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Jersey? In what circumstances might this bepossible?

This may be possible where there are a small number of creditorsand shareholders who are willing and able to agree on such matters.In practice, it is common to achieve a restructuring outside a formalprocedure.


A Jersey company has the power to compromise with its creditorsand members. If such an arrangement is proposed, an applicationmust be made to the Royal Court of Jersey by either the company(or its liquidator if it is being wound up), its creditors or itsmembers for the Royal Court of Jersey to order a meeting of thecreditors or members and give directions for the manner in which itis to be held. If a majority in number representing three-quarters in value of thecreditors or class of creditors or members or class of memberspresent and voting agree to the proposed scheme, then, if thescheme is sanctioned by the Royal Court of Jersey, it shall bebinding on all of them and the company (and on the liquidator of acompany being wound up).


Generally, the Viscount may sell the whole or any part of theproperty (both movable and immovable) of the debtor by publicauction or public tender on such terms and conditions as theViscount thinks fit, with power to buy in at any auction or to rescindor vary any contract for sale on such terms as the Viscount thinksfit, and with power also to sell the whole thereof to any person or tosell the same in parcels and in any order. However, except in thecase of perishable property, none of the property of the debtor shallbe sold until after the specified date, which is the date by whichclaims are to be filed as published in the Jersey Gazette, being adate that is not less than 40 and not more than 60 days after the dateof the declaration.

8 International

8.1 What would be the approach in Jersey to recognising aprocedure started in another jurisdiction?

The Royal Court of Jersey is likely to recognise the appointment ofa foreign insolvency office holder administering a bankruptcywhich has arisen in a foreign jurisdiction where there is a validconnection between the debtor and the law under which theinsolvency occurred. Generally speaking, the Royal Court in Jersey



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is likely to assist such office holder in such circumstances. In order for foreign insolvency officials to have authority to act inJersey, an application to the Royal Court of Jersey is, usually, made.

Historically, foreign officials have been recognised and grantedlocus standi.

Marcus K. Stone

Ozannes29 EsplanadeSt Helier, JE4 0ZSJersey, Channel Islands

Tel: +44 1534 784 055Fax: +44 1534 723 465Email: [email protected]: www.ozannes.com

Marcus has 13 years’ experience in Jersey law and has advised oncorporate restructuring and mergers and acquisitions. He is apartner of Ozannes in Jersey and regularly advises corporateconglomerates on various legal issues.

Johannes H. Botha

Ozannes29 EsplanadeSt Helier, JE4 0ZSJersey, Channel Islands

Tel: +44 1534 784 003Fax: +44 1534 723 465Email: [email protected]: www.ozannes.com

Johannes specialises in corporate restructuring and mergers andacquisitions. He joined the Jersey office of Ozannes in February2008 as an associate in the corporate department and has recentlyadvised on a number of noteworthy restructurings and distressedacquisitions.

Ozannes, a law firm with an established history and a modern, dynamic approach, has an international reputation forprofessionalism and excellence. We take great pride in being at the forefront of the legal profession in the ChannelIslands and, with a presence in both Guernsey and Jersey, we are in an ideal position to provide our corporate & privateclients with first-class, integrated legal services across all practice areas.



ChapterChapter 27

Lee & Ko

Korea


1.1 How does a creditor take security over assets in Korea?

Under the Civil Code, the debtor may grant security interest overreal property, personal property, claims and other rights (such asstocks and bonds) in favour of the creditor by agreement. The mostcommon form of security is mortgage in case of real property, andpledge in case of personal property, claims and other rights. Asecurity interest created by agreement under the Civil Code isperfected through the procedures prescribed thereunder, namelyrecordation in the property register in case of mortgage, andpossession in case of pledge over personal property (for pledge overa claim or right, the procedure for transfer of the relevant type ofclaim or right applies).Further, a security interest under the Civil Code can validly existonly if there is a debt being secured. However, in case of kunmortgage and kun pledge, which are predicated on a fluctuatingamount of underlying debt (revolving credit), the security interestremains effective even if the amount of underlying debt temporarilybecomes zero. It is also possible to obtain certain rights that are not provided foras security interests under the Civil Code but serve that function. Acommonly used method, for instance, is transfer of title to theproperty to the creditor for security purposes.


Transactions entered into whilst the company is in financialdifficulties may be subject to cancellation or avoidance, asdiscussed below.(1) Right of CancellationUnder the Civil Code, where the company engages in a legal act(including contracts) that prejudices its creditors (i.e. companyassets are decreased due to the act, and company liabilities exceedcompany assets prior to or as a result of such act), and the companyand the beneficiary of such act are aware of the prejudice to thecreditors, the creditors have a right to seek cancellation of such actand return of the benefit to the company.This right can be exercised by the creditors where the company is notin a rehabilitation or bankruptcy procedure, and is not available oncesuch procedure is commenced (whereupon the rehabilitation receiveror bankruptcy trustee has a right of avoidance as discussed below).

(2) Right of AvoidanceUnder the Debtor Rehabilitation and Bankruptcy Act (“Act”), thetrustee in a bankruptcy procedure or receiver in a rehabilitationprocedure may avoid the following acts, among others:(a) Any act of the company with the knowledge that it would

prejudice creditors (unless the creditor benefiting from theact did not know at the relevant time that such act isprejudicial to other creditors). In case of avoidance,prejudice includes not only a reduction of assets but also apreferential treatment.

(b) Any act of the company taking place after a “suspension ofpayment” (which term is explained in question 2.2 below) ora petition for commencement of bankruptcy or rehabilitationprocedure (collectively “Triggering Event”) that: (i) createsa security interest in the debtor; (ii) discharges any obligationof the debtor; or (iii) is otherwise prejudicial to creditors;provided that the person benefiting from the act knew at therelevant time that there had been a Triggering Event.

(c) Any creation of security interest in the debtor or discharge ofobligation of the debtor, that takes place after or within 60days prior to a Triggering Event, which was not an obligationof the debtor, provided that the creditor benefiting from theact knew at the time of the act that such act is prejudicial tocreditors and that there had been a Triggering Event (if any).

(d) Any gratuitous act taking place after or within six monthsprior to a Triggering Event.

If the transaction was with a person having a certain specialrelationship with the debtor as defined by the Act, e.g. itsshareholder, then a more relaxed standard for avoidance applies.For instance, in respect of (b) above, the specially related person ispresumed to have known that there was a suspension of payment.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Korea?

A director does not become liable simply for continuing to tradewhilst the company is in financial difficulties, unless he or she hasviolated his fiduciary duty in relation to a particular transaction. Incase of a violation of fiduciary duty, the director may be held liablefor civil damages and/or subject to a criminal charge. The directormay also be subject to a shareholders’ derivative suit, but not aftercommencement of a rehabilitation or bankruptcy procedure. Thecourt overseeing the rehabilitation or bankruptcy procedure may, inits own discretion or upon request of the trustee/receiver, render aruling on the liability of a director.

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2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Korea?

The Act provides for a debtor rehabilitation procedure, the purposeof which is to assist the company’s rehabilitation, and a bankruptcyprocedure for liquidation of the company.

2.2 What are the tests for insolvency in Korea?

The common test for insolvency in Korea is the inability to payliabilities when due. When a debtor suspends payments tocreditors, it is presumed to be unable to make payments as theybecome due. A prime example of a suspension of payment issuspension of transactions by a clearing house, where the companyissues a note, which is presented to the clearing house forsettlement, but fails to make the payment of the note. If the debtor is a company rather than an individual, another basisfor insolvency is excess of liability over assets. However, this is nottrue in case of a Hapmyung Hoesa or Hapja Hoesa (which aresimilar to a partnership).


A petition for rehabilitation under the Act may be filed by acompany (or by certain specified creditors as explained in question2.4 below) if (i) it is unable to pay its debts as they become duewithout causing a significant impediment to the continuation of itsbusiness, or (ii) there is a danger that the company will becomeinsolvent. A petition for bankruptcy can be filed if the company is insolvent.


A petition for rehabilitation procedure may be brought by thecompany, and, if the company is a corporation or limited liabilitycompany, by (i) creditors with claims equivalent to 10% or more ofthe paid-in capital or (ii) shareholders/equity holders with 10% ormore of the total shares/equity. In general, it takes around onemonth for the court to review the evidence submitted (with orwithout hearing) and decide whether or not to commence therehabilitation procedure. A bankruptcy petition may be filed by the company, its director orliquidator, or a creditor. The court will review the evidencesubmitted (with or without hearing) and decide whether or not todeclare bankruptcy of the company. A bankruptcy procedure maybe terminated upon declaration of bankruptcy if the company’sassets cannot cover even the expenses of the procedure.


In both a bankruptcy procedure and rehabilitation procedure, thefact that the petition is filed is not published or notified, except thatit is notified to the company representative for the purpose of aninterview by the court. In the event that the court takes provisionalmeasures to protect the company’s assets prior to thecommencement of either proceeding, such measures are notified torelevant persons and/or published.

In an order for commencement of rehabilitation procedure, thename of the receiver and a schedule for certain events (period forpreparation of creditors’ list, period for reporting of claims, periodfor investigation of claims, and date of the first meeting ofinterested parties) are included and published. Thereafter, majorevents (such as date and agenda of meeting of interested parties,court approval of rehabilitation plan, termination of therehabilitation procedure, etc.) are notified and/or published. In a rehabilitation procedure, there should be at least 3 meetings ofinterested parties which include the receiver, the investigationcommittee, the company, creditors and shareholders/equity holders.The main agenda for the first meeting is a report on the financialstatus of the company by the receiver and the investigationcommittee. At the second meeting, the main agenda is review of therehabilitation plan. At the third meeting, the main agenda isresolution on the rehabilitation plan. Upon the declaration of bankruptcy, the name of the trustee, periodfor reporting of claims, date of first meeting of creditors, andhearing date for investigation of claims are published. Also majorevents (such as date and agenda of meeting of creditors, specialhearing date for investigation of claims, distribution, termination ofthe bankruptcy procedure) are notified and/or published. In abankruptcy procedure, there is no mandatory agenda to bediscussed at the first meeting of creditors.

3 Creditors


Unsecured creditors are free to participate in a rehabilitation orbankruptcy procedure, although their rate of recovery is usuallymuch lower than that of secured creditors. Unsecured creditorscannot enforce their rights against the company except byparticipating in the rehabilitation or bankruptcy proceeding.


In a rehabilitation procedure, even secured creditors can obtainsatisfaction of their claims only in accordance with therehabilitation plan, as in the case of unsecured creditors.In a bankruptcy procedure on the other hand, secured creditors mayenforce their rights regardless of the bankruptcy procedure.


In general, creditors may set off their claims against theirobligations toward the company without court approval, in both abankruptcy proceeding and rehabilitation proceeding, except thatset off in a rehabilitation procedure is permitted only within theperiod for reporting of claims, while there is no such time limitationin a bankruptcy procedure. In general, a right of set off is notavailable in the following cases:(a) where the creditor’s obligation is accrued after

commencement of the bankruptcy or rehabilitationprocedure;

(b) where the creditor’s obligation is accrued with knowledgethat a Triggering Event has occurred, provided that exceptionis granted where the obligation is founded on a cause: (i) that

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is provided by law; (ii) that occurred before the creditorbecame aware of the Triggering Event; or (iii) that occurredone year or longer before the commencement ofrehabilitation procedure or declaration of bankruptcy;

(c) where the creditor is an obligor of the company, whoacquired a third party’s claim against the company after thecommencement of rehabilitation or bankruptcy procedure; or

(d) where the creditor is an obligor of the company, whoacquired the claim after a Triggering Event has occurred,provided that exception is granted where the claim isfounded on a cause: (i) that is provided by law; (ii) thatoccurred before the creditor became aware of the TriggeringEvent; or (iii) that occurred one year or longer before thecommencement of rehabilitation procedure or declaration ofbankruptcy.



In case of a rehabilitation procedure, the receiver has full controlover all affairs and assets of the company, while the directors andshareholders cannot exercise their rights. The receiver is closelysupervised by the court and all material decisions are subject tocourt approval. Unless and until otherwise required by therehabilitation plan, directors and shareholders do maintain theirstatus and may exercise rights that are not related to the businessand assets of the company. Such rights, however, are furtherrestricted by the Act. The Act provides for the existing representative of the company(usually the representative director) to serve as the receiver absentspecial circumstances, namely where the representative himself hasengaged in acts that caused the financial distress, where the creditorcommittee requests appointment of a different person withreasonable basis, or where appointment of a different person isotherwise necessary for company rehabilitation.In case of a bankruptcy procedure, all assets of the company belongto the bankruptcy estate and the trustee has full control over theestate. Similarly, the trustee is subject to close supervision andapproval of the court. The directors and shareholders do not haveany right with respect to the bankruptcy estate, but they have certainlimited rights as to matters unrelated to company assets.


In a rehabilitation procedure, all costs and obligations incurred bythe receiver in operating the company are paid as a matter ofpriority as common interest claims, without regard to therehabilitation plan. Any amount borrowed by the receiver becomesa common interest claim, although a company undergoingrehabilitation is unlikely to be able to obtain a loan in reality.Usually, the court requires advance payment of the rehabilitationcosts to be incurred by the court, upon filing of the petition. Likewise, all costs and obligations incurred by the bankruptcytrustee in operating the bankruptcy estate are paid as a matter ofpriority as estate claims, without regard to the distributionprocedure. Usually, the court requires advance payment of the costsof bankruptcy procedure to be incurred by the court, upon filing ofthe petition.


A company may not terminate an employee on grounds ofcommencement of a rehabilitation procedure. A company underrehabilitation is subject to all labour laws and regulations.Moreover, any wage, severance allowance and certain othermonetary obligations of the company toward employees arecommon interest claims, regardless of whether such obligationaccrued before or after commencement of the rehabilitationprocedure.In case of a bankruptcy procedure, on the other hand, the trusteeterminates all employees immediately upon commencement of theprocedure. The trustee may separately hire the necessary personnelto assist him/her, usually from among the terminated employees.As is the case for rehabilitation, any wage, severance allowance andcertain other monetary obligations of the company towardemployees are estate claims, regardless of whether such obligationaccrued before or after commencement of the bankruptcyprocedure.


In case of a rehabilitation procedure, if there is any contract enteredinto by the company but not performed before commencement ofthe procedure, and if the unperformed obligations are in arelationship of mutual consideration, then the receiver may inhis/her option perform or terminate the contract. This option mustbe exercised before close of the meeting of interested parties forreview of the rehabilitation plan (or in case the rehabilitation plan isto be voted upon in writing without meeting, before the court’sdecision for such voting). The counterparty to the contract may send a notice to the receiverdemanding a decision whether to perform or terminate the contract,and the receiver is deemed to have elected to perform if suchdecision is not made within 30 days following receipt of suchnotice. If the receiver elects to perform, then the company’sobligations under the contract become common interest claims. Iftermination is elected, then the claim arising out of the terminationbecomes a rehabilitation claim. There are certain exceptions to thisrule in case of some types of contracts (financial contracts, leasesand utility supply, etc.).In case of bankruptcy, the trustee has a similar option as therehabilitation receiver. The difference is that the trustee is notsubject to any time limit for the exercise of the option, and also thetrustee is only required to respond to the counterparty’s demand fora decision within a reasonable period. Unlike the case ofrehabilitation, failure to respond is deemed to be an election toterminate.

5 Claims


In a rehabilitation procedure, the receiver prepares a creditors’ listfor review by the interested parties. If a creditor believes that itsclaim is omitted or understated, it must report its full claim withinthe prescribed period. In practice, this reporting period is extendeduntil the second meeting of interested parties.In a bankruptcy procedure on the other hand, there is a prescribedreporting period but the Act does not provide for any limitation on



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the period for reporting of claims and therefore claims may bereported at any time before the final distribution. However,reporting within the prescribed period assists in avoiding proceduraldifficulties and unnecessary costs.


In a rehabilitation procedure, claims rank in the order of (i) commoninterest claims, (ii) rehabilitation secured claims, (iii) rehabilitation(unsecured) claims, and (iv) other claims arising aftercommencement. Rehabilitation secured claims and rehabilitationclaims are claims arising before commencement, while claimsarsing after commencement are classified as either (i) or (iv). Common interest claims are paid without any restriction under therehabilitation procedure. In principle, rehabilitation secured claimsand rehabilitation claims are paid only through the rehabilitationplan. Other claims arsing after commencement cannot be paid untillapse of the prescribed payment period or completion of allpayments to creditors provided in the rehabilitation plan, whicheveris earlier. In a bankruptcy procedure, the claims are in the order of(i) estate claims, (ii) bankruptcy claims with priority (priorityprovided in laws other than the Act), (iii) ordinary bankruptcyclaims, and (iv) subordinated bankruptcy claims. Secured claims(which are not included among the foregoing claims) are not subjectto the bankruptcy procedure. Meanwhile, estate claims, likecommon interest claims, are paid without any restriction under thebankruptcy procedure. In principle, all three types of bankruptcyclaims listed above are claims arising before commencement.


In a rehabilitation procedure, taxes assessed on activities of thecompany after commencement of the procedure are paid as a matterof priority as common interest claims. Tax liabilities incurred priorto commencement of the procedure are rehabilitation claims, and inorder to apply any change to tax liabilities in a rehabilitation plan,consultation with and/or consent of the relevant authorities isnecessary, unlike other types of claims. Withholding tax and othersimilar taxes that the company pays with funds received from theactual taxpayer are common interest claims, even if they areassessed on activities prior to commencement of the procedure.



A similar process is available in case of rehabilitation procedure. Incase where one class of creditors consents to the rehabilitation planwhile other class(es) do not, the court may in its discretion approvethe plan by including provisions in the rehabilitation plan forprotection of the opposing class(es).


(1) RehabilitationOnce the rehabilitation plan is approved by the court, paymentsstart to be made in accordance with the plan. Once the court issatisfied that the plan can be implemented without difficulty, theprocedure may be terminated. In principle, such a finding is

premised on a determination that the company can operate normallywith a financial structure comparable to other companies, but suchdetermination is of course not always easy to make. Upontermination of the rehabilitation procedure, the company is releasedfrom the restrictions imposed by the Act. On the other hand, if itbecomes clear that the company cannot implement therehabilitation plan, the procedure is terminated and a bankruptcyprocedure is commenced with respect to the company.(2) BankruptcyUpon completion of distribution to creditors from the bankruptcyestate, so that there is no remaining asset of the company, theprocedure is concluded and the company is legally extinguished.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Korea? In what circumstances might this bepossible?

An informal restructuring where all creditors participate is notcommonly achieved. However, an informal restructuring of adistressed company, through agreement among financialinstitutions, is frequently achieved. Korean banks have in place an agreement for restructuring offinancially distressed companies, pursuant to which a CreditorBanks Standing Council is established and operated. In 2008,banks and other financial institutions entered into a separateagreement for liquidity support of construction companies, in thewake of a downturn in construction business. Also in 2008, the Corporate Restructuring Promotion Act came intoforce, to encourage debt restructuring of companies that have acertain threshold amount of loans and other credits and are infinancial distress, through agreement among banks and otherfinancial institutions. This law is in effect only until the end of2010, and serves as a system for voluntary debt restructuring, muchlike the agreement among banks.


Reorganisation of a debtor is possible through merger, spinoff,share exchange, and business transfer, pursuant to the CommercialCode. In case of a merger, a creditor protection procedure isrequired to be taken as a precondition, whereby creditors objectingto the merger can obtain satisfaction of their claims or adequatesecurity. The creditor protection procedure is sometimes notrequired in case of a spinoff.


The Act does not specifically provide for a pre-packaged sale.However, in case of rehabilitation, such sale can be achievedthrough an early submission of a rehabilitation plan. Specifically,creditors holding 50% or more of the claims against the companyare entitled to submit a rehabilitation plan at any time aftercommencement of the procedure. An early submission of arehabilitation proposal does not otherwise materially affect therehabilitation procedure, but has the effect of abridging discussionson the plan. In fact, the company and/or creditors sometimes arrange a sale of

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Eunjai Lee

Lee & Ko 18th Fl., Hanjin Main Building118, 2-ka, Namdaemun-ro, Chung-kuSeoulKorea

Tel: +82 2 772 4342Fax: +82 2 772 4001Email: [email protected]: www.leeko.com

Mr. Eunjai Lee graduated from Seoul National University, College ofLaw in 1983, and Seoul National University, Graduate School ofLaw in 1989. Mr. Lee also obtained his LL.M. degree from theUniversity of Chicago Law School (1990) as well as the Universityof Pennsylvania Law School (1991), as well as a Juris Doctor degreefrom the University of Iowa College of Law (1994). Mr. Lee wasadmitted to the Korean Bar in 1985 and the New York Bar in 1992.Mr. Lee has numerous publications in the area of insolvency law,including “M&A in Korean Bankruptcy Proceedings”, Asialaw M&AReview, October 2005.

Wan Shik Lee

Lee & Ko18th Fl., Hanjin Main Building118, 2-ka, Namdaemun-ro, Chung-kuSeoulKorea

Tel: +82 2 772 3106Fax: +82 2 772 4001Email: [email protected]: www.leeko.com

Mr. Wan Shik Lee obtained his Bachelor of Laws degree from SeoulNational University in 1988, and was admitted to the Korean Bar in1990. Mr. Lee then served as a judge in Seoul, Inchon and Taejonin 1990-2002, including the Bankruptcy Division of the SeoulDistrict Court in 2000-2001. Mr. Lee joined Lee & Ko in 2002. In2006-2007, Mr. Lee was a visiting scholar at the University ofWashington Law School. Mr. Lee’s publications include CorporateRestructuring Practice (published by the Seoul District Court,2000).

Lee & Ko is one of the largest and most prominent law firms in Korea, with over 250 professionals. Lee & Ko’sInsolvency Team is headed by a former Supreme Court justice with expertise in insolvency matters, and members whohave vast experience in all types of insolvency matters including debtor rehabilitation, bankruptcy and debtrestructuring. In particular, during the financial crisis in 1997-1999, Lee & Ko’s insolvency lawyers have accumulateda great wealth of expertise and know-how in insolvency-related issues through participation in many of the largestinsolvency proceedings in Korean history, including the restructuring, acquisition and dissolution of some of the leadingfinancial institutions and multinational corporations based in Korea, and are poised to exploit that experience to the fullextent in the current economic crisis.

Lee & Ko Korea

the company prior to commencement of the procedure, and thensubmit a rehabilitation plan reflecting the arrangement. The sale ofthe company is in principle effectuated through an approvedrehabilitation plan (the buyer usually acquires shares of thecompany pursuant to the plan), but also may be effectuated prior tosuch approval, if the court deems appropriate (for example, uponcourt approval, the receiver sells, and the buyer acquires, theassets/business of the company).

8 International

8.1 What would be the approach in Korea to recognising aprocedure started in another jurisdiction?

In order for a foreign insolvency procedure to be recognised inKorea, the foreign company must have a place of business oraddress in the country where the foreign procedure is pending.Only the representative appointed in the foreign insolvencyprocedure may apply for the recognition, and in order to berecognised, such recognition of the foreign procedure must not bein violation of Korean public policy.Recognition of the foreign procedure does not by itself meanrecognition of the effectiveness of such procedure. Rather, theKorean court may render specific decisions to support the foreignprocedures. For instance, the court may suspend enforcement ofclaims by creditors, or order preservation of the debtor’s assets.The court may also appoint an international receiver with authorityto manage and dispose of the debtor’s assets in Korea. Theregulations on international insolvency procedure came into effectin 2006, and there are not yet many significant precedents involvingthose regulations.

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Luxembourg


1.1 How does a creditor take security over assets inLuxembourg?

Security may be given by way of (i) a sûreté réelle or (ii) a sûretépersonelle. In case of a sûreté réelle, specified assets, which may be theproperty of the debtor himself or of a third party (in which case suchthird party obviously needs to concur to the constitution of thesecurity), guarantee the due fulfilment, by the debtor, of hisobligations. In case of a sûreté personelle, a third party ispersonally guaranteeing the due fulfilment, by the debtor, of hisobligations. Within the first category (sûreté réelle), the kind ofsecurity will depend on the nature of the asset given as security.Movable things (biens mobiliers) whether tangible (such as certaingoods) or intangible (such as a bank deposit in cash or a securitiesdeposit), will be granted as security by way of pledge (gage) and/or,where claims and financial instruments form the subject matter ofthe security, by way of transfer of property for security purposes.Real estate will be granted as security by way of a mortgage(hypothèque). A sûreté personelle will take the form of a personal guarantee(caution). Where a sûreté réelle is granted on assets owned by aperson different from the principal debtor, it will qualify ascautionnement réel, even though this concept is the matter of adebate in legal writing.Security in the broader sense of the term can however also beobtained via certain other contractual mechanisms or arrangements,such as repurchase transactions (repos), set-off and nettingarrangements and property reservation clauses.Luxembourg legislation with regard to security over assets whichqualify as “claims” or “financial instruments” has undergonesignificant changes as a result of a law of 5 August 2005 onfinancial collateral arrangements (to be referred to hereafter as “thefinancial collateral law”) which transposes Directive 2002/47 ofJune 6, 2002 on financial collateral arrangements into Luxembourglaw. The financial collateral law in particular aims at makingfinancial collateral arrangements “bankruptcy proof”. It is worthnoting that the Luxembourg legislator has chosen to broaden thescope of application of the new legal provisions as per what wasrequired for the purpose of properly transposing the EU Directive.The Luxembourg law indeed applies irrespective the quality of theparties to an agreement qualifying as a financial collateralarrangement pursuant to the law.


The most common insolvency procedure provided for by Luxembourglaw is the faillite (to be referred to hereafter as “bankruptcy” or“faillite”) which is governed by articles 440 ff of the LuxembourgCode de Commerce. While Luxembourg law provides for other typesof insolvency proceedings and while faillite strictly speaking is notapplicable to companies engaging in certain specified activities, suchas in particular banks and insurance companies (see below underquestion 2.1), many (but not all) of the main substantive provisionsapplicable in case of faillite, will, or rather may, also be madeapplicable in other kinds of insolvency proceedings.Article 444 of the Code de Commerce provides that in case offaillite, the insolvent debtor (“le failli”) is deprived from theadministration of his assets as from the date on which he is declaredin bankruptcy by the competent court (being the District Courtsitting in commercial matters (to be referred to, hereafter, as “theCourt”)). The bankruptcy judgment sets a date prior to thebankruptcy decision as from which the company will be deemed tohave been insolvent (“en cessation de paiements”). Such date ofcessation de paiements can be set to a date up to 6 months prior tothe bankruptcy judgment and, in fact, is systematically and withoutfurther scrutiny fixed at such earliest possible date. The periodfrom the date so determined until the bankruptcy decision isreferred to as the “preference period” (période suspecte). Theconcept of preference period is among the most central concepts ofLuxembourg insolvency law because transactions made during thatperiod are particularly vulnerable to attack.In particular, certain transactions and acts defined in article 445 ofthe Code de Commerce, if made during the preference period (andup to 10 days before), are void by operation of law and shall thus beannulled by the Court upon application of the curateur (“thebankruptcy administrator”). The transactions and acts referred to inarticle 445 are: (i) transactions transmitting property without any orwithout reasonable counterpart; (ii) payments, made by whatevermeans, of debts which were not yet due; (iii) payments of debtsmade otherwise than in cash (or by cheque and similar paymentinstruments); and (iv) security granted for debts previouslyincurred. An important exception to the rule in (iv) arises from thepreviously mentioned financial collateral law. Article 446 of the Code de Commerce further provides that all otherpayments and transactions made by the failli during the preferenceperiod may be annulled by the Court if they have been made orentered into while the other interested party (beneficiary of thepayment; co-contractant…) was aware of the cessation de paiements.

Philippe Prussen

Marc Elvinger

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Article 447 of the Code de Commerce provides that mortgagesconstituted during the preference period (and up to ten days before)may be declared void by the Court if there have been more than 15days between the day on which the mortgage has been created andthe day on which it has been duly registered.Finally, article 448 of the Code de Commerce provides that alltransactions and payments made fraudulently against the othercreditors’ interests are null and void, whatever be the date on whichthey have been made.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Luxembourg?

Article 440 of the Code de Commerce obliges the directors of acompany which is incapable to meet its payment obligations to,within a month’s time from such cessation des paiements, declarethe same at the greffe (secretariat) of the Court. If directors do not comply with this obligation, different types ofsanctions may apply. A possible sanction is the prohibition tofurther engage in a commercial activity. In certain circumstances,the directors may also be condemned as “banqueroutier simple” oras “banqueroutier frauduleux”, each of these a criminal offencesubject to a fine and, at least in theory, to imprisonment. The civil liability of directors continuing to trade where a companyis in financial difficulties remains in principle subject to the ordinaryrules of directors’ liability but continuing to trade while the companyhas ceased to meet its payment obligations will, so to say, bydefinition amount to faultive behaviour on the part of the directors.Without prejudice to the application of the ordinary rules ofdirector’s liabilities, article 495-1 of the Code de Commerce inaddition, provides that where directors’ gross negligence has causedor contributed to the occurrence of bankruptcy, the Court may decidethat they will have to bear part of the debts of the bankruptcy.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Luxembourg?

The applicable procedure depends on (i) the nature of thedifficulties a company is facing and (ii) the activity pursued by thecompany.The following types of procedures are provided for by Luxembourglaw for general corporates which are domiciled in Luxembourg andare not governed by a special legislation as mentioned hereafter:

Faillite (bankruptcy) (articles 437 ff of the Code deCommerce).Gestion contrôlée (controlled management) (grand-ducaldecree of 24 May 1935).Sursis de paiement (suspension of paiements) (articles 593 ffof the Code de Commerce).Concordat préventif de faillite (composition with creditors,law of 14 April 1886).

Article 203 of the Luxembourg law on commercial companies of 10August 1915 further provides for a procedure of compulsorywinding up (liquidation judiciaire) but rather than to companies infinancial difficulties, this procedure applies to companies which donot comply with certain requirements of company law such as therequirement to file annual accounts in due time, in fact a company,subject to liquidation judiciaire can later on, if insolvent, bedeclared bankrupt.

The procedures of sursis de paiement as provided for by the Codede Commerce and concordat préventif de faillite are hardly used atall in present times, and will therefore not be discussed furtherhereafter, being noted that the sursis de paiement provided for bythe Code de Commerce is not to be mixed up with sursis depaiement proceedings provided for by financial sector laws as setout below. Faillite is, as mentioned earlier, the most common insolvencyprocedure applicable to companies which appear unable to meettheir obligations towards their creditors.Controlled management (gestion contrôlée) is available incircumstances where there is a perspective for the business of acompany, which is momentaneously unable to face its obligationsto be redressed or where such procedure might enhance an orderlyrealisation of the company’s assets in the best interest of allcreditors. This procedure is applied from time to time but is rarelysuccessful and is often followed by faillite proceedings. It is worthnoting that gestion contrôlée is occasionally applied for bycompanies, and in particular holding or finance companies, whichform part of an international group and whose inability to meet theirobligations is the result of a default at the overall group level. A significant amount of uncertainty as to whether a Luxembourgincorporated company will, at the end of the day, be subject to theinsolvency proceedings provided for by Luxembourg law, arisesfrom the (often somehow erratic and unpredictable) application ofthe “centre of main interest” (COMI) criteria provided for by ECregulation n° 1346/2000 on insolvency proceedings of 29 May2000. Another, somewhat similar, uncertainty may arise from thefact that Luxembourg company law applies the so called “real seat”system, meaning that a company will be considered to have itsdomicile at the place where its central administration is located,which does not necessarily coincide with its place of incorporation.For the sake of good order, it should be mentioned that both theCOMI and the real seat criteria may also result in foreignincorporated companies becoming subject to Luxembourginsolvency laws. The uncertainty so arising is particularly criticalwhere and to the extent that it results in uncertainty as to theeffectiveness (and enforceability) of certain contractualarrangements such as, typically, pledges or set off clauses. Certain types of companies, mainly of the financial sector, such asbanks and all other professionals of the financial sector whichmanage third party funds, insurance companies, undertakings forcollective investments (FCPs, SICAVs or SICAFs), investmentcompanies in risk capital (SICARs) or securitisation vehicles aresubject to special winding up and/or insolvency proceedings. Thesespecial proceedings make a distinction between (i) anobservation/preliminary period during which the company benefitsfrom a suspension of its payment obligations and is managed underthe supervision of court appointed administrators (commissaires)(such procedure to be referred to hereafter as “sursis de paiement”(suspension of payment)) and (ii) a liquidation phase if it appearsthat the business cannot be redressed and/or pursued (suchprocedure to be referred to hereafter as “liquidation” (liquidation)).These proceedings provide the Court with a great amount offlexibility as to the rules to be applied, particularly, when it comesto liquidation. Typically, indeed, the relevant legal provisionsprovide that when opening sursis de paiement or liquidationproceedings, the court will determine the rules according to whichthese proceedings will take place.The limited space available for this contribution makes itimpossible to provide information regarding the insolvencyproceedings relating to each of the types of companies mentionedabove. Therefore, and because the provisions applicable to banksand other professionals of the financial sector managing third party



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funds have inspired most of the provisions applicable to the varioustypes of companies enumerated above, we shall, hereafter, onlyrefer to the insolvency proceedings provisions contained in the lawof 5th April 1993 on the financial sector (hereafter “the financialsector law”). It needs however to be noted that while the entitiesfalling within the scope of the special insolvency proceedingsprovided by the financial sector law and the insurance company laware “exempted” from the ordinary insolvency proceedingsprovisions, this is not the case for undertakings for collectiveinvestments to which, depending on the circumstances, the ordinaryinsolvency proceedings may apply notwithstanding the existence ofspecial proceedings.

2.2 What are the tests for insolvency in Luxembourg?

Article 437 of the Code de Commerce retains two criteria whichhave to be met cumulatively: (i) the inability to pay one’s debts asthey fall due; and (ii) the inability to raise credit.


Where the ordinary rules on faillite apply, a company will bedeclared bankrupt by the Court if the two conditions contemplatedunder question 2.2 above are met. A single unpaid debt might besufficient for that purpose if the inability to raise credit criteria isalso met.As indicated earlier, a company in financial difficulties can applyfor gestion contrôlée in view of either (i) reorganising its affairs or(ii) realising its assets in better conditions. Courts have ruled thatin order for a company to be admissible to gestion contrôlée, thereneeds to be a real “reorganisation” or “ordered liquidation”prospect. Otherwise gestion contrôlée should be refused andordinary bankruptcy instituted.Sursis de paiement and liquidation as provided for by the financialsector law can be instituted including in circumstances other thaninsolvency and in particular where, for whatever reason, thecompany’s licence has been withdrawn by the regulator. Article 60-2 of the financial sector law indeed provides that sursisde paiement may occur where (i) the creditworthiness of thecompany is undermined or it finds itself in a liquidity crisis,whether or not there is a cessation of payments; (ii) the ability of thecompany to meet its commitments is compromised; or (iii) thecompany’s licence has been withdrawn but such decision is not yetlegally final. And article 60-8 of the same law in substanceprovides that liquidation may occur where (i) suspension ofpayment has not allowed a redress of the company’s situation; (ii)the financial situation of the company is undermined to an extentsuch that it can no longer meet its commitments; or (iii) thewithdrawal of its licence has become final.


Faillite may be instituted by the Court (i) upon a declaration madeby the directors of the company; (ii) upon proceedings instituted byan unpaid creditor; or (iii) by the Court acting on its own initiativeupon having received information from various sources on thecompany’s financial difficulties. In the latter case, therepresentatives of the company have in principle to be previouslyconvened and heard by the Court.It is for the directors of the company to file an application forcontrolled management with the Court. If the application is not

rejected in the first place, one of the judges composing the Court isappointed to make a report on the business situation of theapplicant. It is in the light of this report, always prepared with theassistance of an expert, that the Court decides whether or not toretain the application and, where the application is accepted,appoint one or more administrators (commissaires) who shallsupervise the management of the company while elaborating a planin order to reorganise its business. An application to the Court for sursis de paiement as provided forby the financial sector law can only be made by the company itselfor by the CSSF, i.e. the regulator of the financial sector. An application to the Court for liquidation as provided for by thesame law can only be made by the CSSF or the Procureur d’Etat(public prosecutor).


While, depending on the type of proceedings, certain meetingsand/or notifications may be held/required to be held as theproceedings progress, the limited space available in thiscontribution does not enable us to enter into further detail.

3 Creditors


Whatever be the type of insolvency proceedings, unsecuredcreditors will not be in a position to enforce their rights once suchproceedings are under way. In ordinary faillite proceedings, it is as from the day of thebankruptcy decision that claims can no longer be enforced. Ingestion contrôlée proceedings, the relevant date is the date onwhich the Court decides to appoint one of its judges to investigateand make a report on the business of the applicant. In sursis depaiement proceedings as provided for by the financial sector law,the relevant date is the one on which the request is filed with theCourt. In liquidation proceedings as provided for by the same law,it is for the Court to determine the rules according to which theliquidation will be operated. No doubt, however, unsecuredcreditors will, in practice, be precluded from enforcing their claimsindividually. Creditors benefiting from some type of “general preference right”(privileges généraux) which does not qualify as a security strictlyspeaking are, in this respect, treated like unsecured creditors.


In faillite proceedings, beneficiaries of security strictly speaking,such as pledges and mortgages, which have been validly instituted,are entitled to enforce their secured claims notwithstanding thebankruptcy. Article 546 of the Code de Commerce on the contrary imposescertain restrictions on the enforceability of certain specialpreference rights normally benefiting to the seller of movablegoods. On the other hand, article 567-1 of the same Code nowconfirms the validity and enforceability, subject to certainconditions, of express “property reservation clauses” (clause deréserve de propriété) in sales agreements of movable goods. It follows from the provisions of the grand-ducal decree of 1935

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that in gestion contrôlée proceedings, even the beneficiaries ofpledges and mortgages are, in principle, precluded from enforcingtheir secured claims. However, as a result of the provisions of thefinancial collateral law, security falling within the ambit of such lawwill be enforceable notwithstanding gestion contrôlée proceedings. In case of sursis de paiement as provided for by the financial sectorlaw, collateralised claims also appear to be unenforceable except“with the permission of (the regulator) or where the law providesotherwise”. The major “exception” in existence is, again, collateralfalling within the ambit of the financial collateral law. In case of liquidation as provided for by the financial sector law,secured claims should, in principle, be enforceable just as inordinary faillite proceedings. It should be mentioned that when certain assets located outsideLuxembourg have been made the subject matter of a securitymechanism which is not similar to security mechanisms known andrecognised by Luxembourg law, the recognition and effectivenessof such security in Luxembourg insolvency proceedings may beproblematic. This issue is however addressed to a certain extent bythe EC insolvency regulation no 1346/2000 and, where insurancecompanies or credit institutions are at issue, by EC directives no2001/17 of 19th March 2001 and n° 2001/24 of 4th April 2001.


Pursuant to article 445 of the Code de Commerce, set off, includingas a result of a set off/netting agreement, is prohibited as of the dateof the faillite. The courts have ruled that this principle also applies tocompanies in gestion contrôlée. As to whether the post-bankruptcyset off prohibition would apply in sursis de paiement and liquidationproceedings as provided for by the financial sector law, would dependupon the decision of the Court determining the rules according towhich the sursis de paiement or liquidation should proceed. It mayhowever be assumed that the Court will normally make the traditionalpost-bankruptcy set off prohibition applicable in such proceedings(subject always to the exceptions set out herebelow).Case law has however decided, although in a restrictive way, thatpost-bankruptcy set off is admissible if there is connexity betweenthe mutual claims to be set off, meaning that such claims need tohave a common “cause” and, therefore, be indivisible.At any rate however, the financial collateral law now provides thatset off between mutually owed “claims” and “financialinstruments” (as further defined by the law) is validnotwithstanding the existence of any type of insolvency proceedingsif it is the result of transactions which are the subject matter ofbilateral or multilateral set off arrangements or clauses. Thetraditional post-bankruptcy set off prohibition is thus nowneutralised to a very large extent. Where the assets subject to a set off clause are located abroad, setoff may further be secured as a result of the provisions of theCouncil Regulation and EC Directives referred to in question 3.2herebefore.



A company in faillite is, as indicated under question 1.2 above,

disseised of the administration of its assets. It is thus for thebankruptcy administrator to act on behalf of the company under thesupervision of a juge-commissaire appointed by the Court amongits members. The mission of the bankruptcy administrator is torealise the assets of the company and to pay off its debts to thelargest extent possible. The directors of the company have noactive role to play in the administration of the bankruptcy (but theyhave an obligation to, whenever necessary, assist the bankruptcyadministrator). Nor have the shareholders of the failli. A special decision from the Court is required, pursuant to article475 of the Code de Commerce, in order for the bankruptcyadministrator to continue the business of the bankrupt company. A company in gestion contrôlée is managed under the supervisionof the court appointed commissaires who will be in charge ofauthorising all acts of some importance to be performed by thedirectors and management who continue to be in charge of thecompany’s affairs. If the plan prepared by the commissaires hasbeen approved by the Court and the creditors, the company inprinciple regains control over its affairs.The regime of sursis de paiement as provided for by the financialsector law is in this respect somewhat similar to the controlledmanagement proceedings while the regime of liquidation providedfor by the same law is in this respect rather similar to failliteproceedings.


In principle, the cost of the insolvency proceedings are to be borne bythe company itself and such cost are to be paid prior to pre-bankruptcycreditors’ unsecured claims. If the company has insufficient assets tocover such cost, then the state authorities will bear them.


Article L.125-1 of the Code du travail (labour code) states thatemployment contracts are terminated with immediate effect and byoperation of law when a company is declared en faillite. Any amounts due to the employees for the last six months areguaranteed by the Fonds pour l’emploi within the limit of six timesthe amount of the minimum salary. The other types of insolvency proceedings do not automaticallyaffect the continuation of labour contracts.


Save for employment contracts in case of faillite (see underquestion 4.3 above), contracts are not, in principle, affected bybankruptcy proceedings. Where the bankruptcy administrator,commissaire or liquidator will wish to terminate a contractotherwise than in accordance with its terms or the law, the insolventestate may incur liability towards the co-contacting party.

5 Claims


In case of faillite, creditors have to make a declaration of theirclaims with the secretariat (greffe) of the Court. Broadly speaking,



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the procedure will in practice be the same in the case of liquidationas provided for by the financial sector law, but it is for the Court tofix the rules to be followed. The same is true in sursis de paiementproceedings but there the issue appears to be less relevant becauseof the essentially temporary nature of these proceedings, to befollowed by liquidation, except where the company recovers itsindependence.The 1935 grand-ducal decree on gestion contrôlée does not providefor a special procedure according to which claims are to be made.


All creditors whose claims compete in the faillite constitute the“mass of creditors” (“masse des créanciers”). Courts haveadmitted that this concept of mass of creditors is also applicable inthe gestion contrôlée procedure. Creditors who benefit from a first ranking mortgage or pledge areconsidered “out of the mass” as they may enforce such security andtherefore do not compete with the other creditors. Apart from that, certain claims shall have preferential status, suchas: (i) the preferential right of employees as mentioned underquestion 4.3 above; (ii) certain social security claims; or (iii) claimsby the tax authorities. Generally speaking the above will equally apply in other types ofinsolvency proceedings.Where the estate elects to maintain certain contacts or to enter intonew contacts after the opening and for the benefit of the insolvencyproceedings (such as a lease contract or an employment contract),the claims arising therefrom will rank before any other claims andqualify as “debts of the estate” (dettes de la masse) as opposed to“debts in the estate” (dettes dans la masse).


During insolvency proceedings, the company remains an ordinarytax payer. In particular, any profits realised during that period arein principle subject to tax. In practice, however, a bankruptcompany should have tax losses available!



The reorganisation plan prepared by the commissaires in gestioncontrôlée proceedings may provide for the waiver of part of theunsecured creditors’ claims. If approved by the creditors accordingto certain majority rules and by the Court, the plan becomescompulsory for all creditors, whether in agreement or not. For the sake of good order, it should be mentioned that a similarprocedure - called “concordat” - is incidentally provided for inordinary faillite proceedings. In practice however, it appears to behardly applied, if at all. We shall therefore not elaborate furtherthereon.


Faillite results in the liquidation and dissolution of the company.Where gestion contrôlée proceedings succeed, the company willcontinue to exist and be able to pursue its business. Otherwise,faillite proceedings will normally be instituted. Sursis de paiement proceedings, as provided for by the financialsector law, cannot be instituted for a period exceeding six monthsthough it has been decided that in exceptional circumstances, it canbe prolonged by the Court. Thereafter, the company will eitherrecover its autonomy or liquidation proceedings be instituted.Liquidation proceedings will result in the company being dissolvedand in ceasing to exist once the liquidation is closed.


7.1. Is it common to achieve a restructuring outside a formalprocedure in Luxembourg? In what circumstances mightthis be possible?

It is not common in Luxembourg to achieve a restructuring outsidea formal procedure. If a company faces difficulties without theconditions requiring the directors to declare bankruptcy being met,the parties are free to contractually restructure the debt. But nocreditor can, in such circumstances, be forced to accept and concurto such restructuring. Informal restructuring is thus a difficultexercise if there is a plurality of creditors. It should, for the sake ofgood order, be mentioned that articles 1265 ff of the Code Civilenvisage this type of agreed restructuring but seem hardly, if at all,to be applied in practice.

7.2. Is it possible to reorganise a debtor rather than realise itsassets and business?

As is apparent from the answers to previous questions and inparticular to question 2.1, gestion contrôlee (and sursis depaiement) offer a legal framework within which generalcorporations and certain financial sector entities may be reorganisedrather than just having their assets and business realised.

7.3. Is it possible to achieve an expedited restructuring of thedebtor by means of a pre-packaged sale? How is such asale effected?

This type of procedure is not provided for by Luxembourg law.

8 International

8.1 What would be the approach in Luxembourg torecognising a procedure started in another jurisdiction?

Luxembourg law is based on the so-called principle of the“universality” of insolvency proceedings. Accordingly, insolvencyproceedings started in another competent jurisdiction will, as ageneral rule, be automatically recognised in Luxembourg without,in particular, exequatur being required.With regard to proceedings opened in another Member State of theEuropean Union, EC regulation 1346/2000 confirms this traditionalapproach of Luxembourg law.

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Marc Elvinger

Elvinger, Hoss & Prussen2, Place Winston Churchill BP 425, L-2014 Luxembourg

Tel: +352 4466 440 Fax: +352 4422 55 Email: [email protected] URL: www.ehp.lu

Marc Elvinger, born 1960, is a partner with Elvinger, Hoss &Prussen since January 2000, when he joined the firm after havingconducted an individual practice during ten years. He is a memberof the Luxembourg Bar since 1985. “Maître en droit”, he furtherholds a post-university degree (DEA) in international conflict law(Strasbourg) and one in international development law (Paris). He has extended experience in commercial and civil litigation(including as bankruptcy administrator and in bankruptcy matters)as well as in international arbitration. He also has a wide practicein administrative law and litigation, including matters such as publicprocurement, immigration law, urbanism and environment. Apart from litigation, he practices contract, company and bankinglaw on a regular basis. He has published on a large variety ofmatters relating to, among others, human rights, administrative law,banking law and construction law, etc. He has been a member of the “Council of the Luxembourg Bar” andchairman of the “Young Bar Association”. He is fluent in Luxembourgish, French, English and German.

Philippe Prussen

Elvinger, Hoss & Prussen2, Place Winston Churchill B.P. 425, L- 2014 Luxembourg

Tel: +352 4466 44 2332 Fax: +352 4422 55 Email: [email protected]: www.ehp.lu

Philippe Prussen became a member of the Luxembourg Bar in 2004and joined Elvinger, Hoss & Prussen the same year. He is “maître en droit” from the “Université d’Aix-Marseille III” andholds an LL.M in Innovation, Technology and the Law of theUniversity of Edinburgh. He is fluent in English, French, German and Luxembourgish.

Elvinger, Hoss & Prussen is a leading Luxembourg law firm with strong practices in corporate law, corporate finance,mergers and acquisitions, banking and general commercial law, insurance, investment and pension funds, SICARs,asset management, private equity structures, European law, securitisation, intellectual property, administrative law andtax law. The firm provides high level legal services, both in terms of legal advice and litigation as well as arbitration tolocal and international financial and industrial groups and financial institutions, Luxembourg investment funds and theirservice providers.

Partners of the firm participate at industry and governmental level in the development of the legal and regulatoryenvironment of the financial services sector in Luxembourg. The firm has a long standing experience and a strong trackrecord in advising on cross border transactions such as concurrent multi-jurisdictional public exchange offers, securedand unsecured financing transactions, mergers and acquisitions, corporate restructurings as well as in national andinternational litigation and arbitration. The firm assists clients in relation to all other legal matters they are faced withincluding, among others, issues pertaining to administrative law and labour law.

The firm advises and represents a large number of international clients on all aspects of Luxembourg law and is workingclosely and on a daily basis with other leading law firms worldwide.

168

Chapter


Chapter 29

Cervantes, Aguilar-Alvarez y Sainz, S.C.

Mexico


1.1 How does a creditor take security over assets in Mexico?

Under Mexican law there are different types of securities fordifferent types of assets. For example, the most common securitiesfor movable and/or intangible assets are the guaranty trust and thefloating lien pledges. For real estate assets the most commonsecurity is the mortgage. Guaranty trust and floating lien pledgesare governed by federal law whilst mortgages are governed by statelaw. Securities require a publicity principle by means ofregistration before public record offices so that they may beopposed to third parties. However, there are some cases where thesecurity does not require registration before public record officesand a direct notification to debtor of the collector’s rights issufficient; also there are some cases in which an additionalregistration is required (i.e., Federal Telecommunication Registry).


It may be considered that transactions related with creditors’collections rights that have not been segregated are more vulnerableto be attacked.Additionally, according to the Mexican Insolvency Law (Ley deConcursos Mercantiles, “Concurso Law”), any of the followingtransactions may be invalidated if entered during the period startingon the day which is 270 calendar days before the declaration ofinsolvency by a competent Court: (i) transactions made by a Debtorbefore the declaration of insolvency with the intention to defraudcreditors (knowledge of the counterparty is not required if the actwas gratuitous); (ii) gratuitous transactions; (iii) transactions at anundervalue; (iv) transactions not made at an arms’ length basis; (v)waivers of debts made by a Debtor; (vi) payments of obligationsbefore their maturity date; and (vii) discounts made by a Debtor.Additionally, there is a presumption that the following transactionsare made in fraud of creditors, unless the debtor proves good faith:(i) to create new security interests or to increase any existingsecurity interests if the original obligation did not contemplate theforegoing; (ii) payments made with assets other than money if suchform of payment was not originally agreed; and (iii) transactionsmade by a debtor with related persons, such as its spouse, relatives,members of the board or decision-making persons within thebusiness, or with companies where at least 51% of their capitalstock is owned or voted by any of the foregoing persons.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Mexico?

Directors of a company declared insolvent by a competent Court,who engages in any malicious act or conduct that causes the non-performance of the Company’s payment obligations, is liable tocivil actions and/or criminal prosecution. However, if the companyhas not been declared insolvent by a competent Court the directorsmay not be liable for continuing to trade in financial difficulties.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Mexico?

Under the Concursos Law there is a single insolvency proceedingknown as “Concurso Mercantil” (“Concurso Procedure”). TheConcurso Procedure consists of two main stages, conciliation stageand bankruptcy stage, each of them supervised by the FederalInstitute of Specialists in Mercantile Insolvency and BankruptcyProcedures (Instituto Federal de Especialistas de ConcursosMercantiles) (“IFECOM”).The Concursos Law forms part of the Federal commerciallegislation of the United Mexican States (“Mexico”). Pursuant toArticle 17 of the Concursos Law, jurisdiction over a commercialbankruptcy case lies in the Federal District Court of debtor’s(“Debtor”) corporate domicile, or its principal place of business, asthe case may be (“Court”). The Concursos Law further providesthat all claims against a Debtor must be brought before the Courthearing the case, in order to avoid different courts hearing claimsagainst the estate in a “piecemeal” fashion.The Concursos Law is based upon certain general principles, asfollows: (i) all creditors of the same class shall be treated the same,without regard to nationality, domicile or capacity; (ii) all creditorsof the Debtor, whether domestic or foreign, shall have access to theConcurso Procedure, and shall collect in equal proportion(according to the class) from the assets located within the territorialjurisdiction of the Court; (iii) the Debtor’s operations should bepreserved where possible for the benefit of the general economy ofMexico. This principle seeks to avoid the phenomenon of “chainbankruptcies”, where the commercial bankruptcy of one companyand its cessation of operations causes the commercial bankruptcy ofits creditors; and (iv) all assets of the Debtor shall be consolidatedand liabilities determined. This principle is the basis for actionstaken to eliminate dubious credits, such as the commencement oflegal proceedings to collect debts due in favour of the Debtor, or

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Alejandro Sainz

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actions to invalidate fraudulent conveyances or other transferscontrary to the Concursos Law taken by the Debtor in violation ofthe principle that all creditors of the same class should be treated thesame. Also, in furthering the goals of this principle, third parties arepermitted to recover assets in the Debtor’s possession that are notowned by the Debtor.

2.2 What are the tests for insolvency in Mexico?

A Debtor may be declared insolvent if it has generally failed tocomply with its obligations. For purposes of the Concursos Law,an individual or entity has generally failed to comply with itsobligations if: (i) it has failed to repay its due obligations to two ormore different creditors, and (ii) the obligations of the Debtor whichhave been due for at least 30 days represent at least 35% or more ofall the Debtor’s obligations on the date on which the demand orinsolvency petition is filed; and/or (iii) the Debtor does not have onhand any of the following assets in an amount sufficient to repay atleast 80% of its obligations due on the date on which the demand orinsolvency petition is filed: (a) cash and demand deposits; (b) termdeposits and investments becoming due within 90 calendar daysfollowing the date on which the demand or insolvency petition isaccepted by the Court; (c) customer receivables with a maturity datenot exceeding 90 calendar days after the date on which the demandor insolvency petition is accepted by the Court; or (d) securitiesavailable at the relevant markets which may be sold within a termof 30 business days, with a known value on the date on which thedemand or insolvency petition is filed at the Court.


According to the Concursos Law, it is assumed that a Debtor hasgenerally failed its payment obligations if such Debtor: (i) does nothave enough assets for attachment to secure satisfaction of ajudgment; (ii) fails to pay its due obligations to two or moredifferent creditors; (iii) hides or disappears without leaving a personin charge of its business; (iv) shuts down its business establishmentwithout leaving a person in charge; (v) has carried out fraudulentacts to avoid fulfillment of its obligations; (vi) Fails to comply withany Creditors’ Agreement; or (vii) is involved in any situationsimilar to the above.


As a first step, a creditor is required to establish a valid claim forpayment of an obligation against the Debtor. If appropriate, thecreditor would proceed to serve official notice to the Debtorthrough a notary public or court officer, requesting payment of adebt. At such stage, the creditor would request the notary public orcourt officer to attest to the inactivity of the Debtor and/or itsinability to perform its payment obligations. The purpose of thisrequest would be to establish that the Debtor is in a condition whereit can no longer perform its obligations, giving rise to a valid causefor commencing a Concurso Procedure. Having established a validcause, a creditor could then file a petition with the Court requestingthe Concurso of the Debtor. The Debtor itself, any creditor, thedistrict attorney, a court (if the situation ever actually arises), andtax authorities in their capacity as creditors, may file insolvencyclaims.The Court will sentence the creditor that filed the demand, or thecompany that filed the insolvency claim, to pay attorney’s fees and

expenses (gastos y costas, the amount is regulated by statue),including the Examiner’s fees, if any judgment is issued declaringno insolvency of the company.The filing of an insolvency petition of a company does not haveeffect over the subsidiaries or affiliates of the Debtor.Immediately after the insolvency petition is accepted by the Court,the Court must request the IFECOM for the appointment of anexaminer (visitador) (“Examiner”). Once the Examiner has beenappointed and he/she has accepted such appointment, the Examinermust report to the Court, within the following 15 to 30 days,whether the Debtor is in fact insolvent (according to the measuresprovided for in the Concursos Law) and, thus, is in one or more ofthe hypothesis contemplated by the Concursos Law to be declaredin Concurso. The Debtor and, in cases where the insolvencypetition is filed by creditors (involuntary procedure), such creditors,may challenge the Examiner’s report. The Court must resolve as tothe solvency or insolvency of the Debtor within 15 days followingthe date of its receipt of the Examiner’s report. If the Court resolvesthat the Debtor is solvent, the Concurso Procedure ends. If theCourt resolves that the Debtor is in fact legally insolvent, it must sodeclare (the “Declaration of Insolvency”) and the Conciliation stageshall begin.The Declaration of Insolvency must establish that the Debtor hasincurred in a general default of its payment obligations, and mustinclude a provisional list of creditors identified in the Debtor’saccounting records. This list does not exhaust the proceeding forrecognition, ranking and determination of the priority of creditors’claims. Pursuant to the Concursos Law, the Declaratory of Insolvency willinclude the date of retroactivity (i.e., the date to which the effects ofthe Concurso Procedure will be applied retroactively) (hardeningperiod); a declaration that the conciliation stage has commenced;instructions to the IFECOM to appoint a professional conciliator(Conciliador) (“Conciliator”); and an order to the Debtor toimmediately provide to the Conciliator Debtor’s books, records andall other documents, and allow the Conciliator and interveners, ifany, to carry out the activities necessary to accomplish their duties,and to suspend the payment of debts.The first stage of a Concurso Procedure is the “Conciliation” stage,which is purported to encourage a binding reorganisation agreementamong the Debtor and its creditors and, thus, avoid the Debtor’sbankruptcy or liquidation (“Creditors’ Agreement”). TheConciliation stage may not last more than 185 calendar days unlessextended for up to two additional consecutive periods of 90calendar days each, provided, however, that in no event theConciliation stage could last more than 365 calendar days.Once the commercial insolvency of the Debtor has been declared,the conciliation stage will initiate and attempts to find a formula toallow the Debtor and creditors to come to an agreement will begin.A Conciliator, who initially acts as an intermediary between thecompany and its creditors, must direct this attempt. The roll of theExaminer and of the Conciliator may be performed by the sameperson. Pursuant to the purposes of the Concursos Law, the idea is for theConciliator to act as an amicable intermediary between the parties.One of the functions or powers of Conciliator is to recognise claimsbased on the Debtor’s accounting records in order to make the claimrecognition process faster. The Conciliator will also collaborate inthe decision on whether the business will continue to be operated byDebtor’s restructuring the debt, or whether it is necessary to removeexisting management from the operation of the company.The objective of the Conciliation stage is to preserve the operationof the Debtor’s business. The Conciliator is responsible for, inter

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alia, publishing the deadline for creditors to submit proofs ofclaims, processing proofs of claims, serving as a mediator amongthe Debtor and creditors, and proposing to the Court a plan ofreorganisation (Creditors’ Agreement).The second stage of a Concurso Procedure is the bankruptcy stage.The Debtor may be declared bankrupt if: (i) the Conciliation stagefinishes without having reached a Creditors’ Agreement; (ii) theDebtor fails to comply with the Creditors’ Agreement; or (iii) theDebtor requests its bankruptcy, or the Conciliator requests theDebtor’s bankruptcy and the Court agrees to grant it.In addition to the effects attributed to the Declaration of Insolvency,the bankruptcy judgment: (i) suspends the ability of the Debtor toperform legal acts, which disability affects its business and assets;(ii) causes the appointment of a Receiver, with full authority, toreplace the Debtor and/or the Conciliator in the management of theDebtor’s business; (iii) orders the Debtor and any third party havingpossession of the Debtors’ assets to deliver all such assets to theReceiver; (iv) requires that payments to the Debtor only be madewith the Receiver’s authorisation (failure to obtain suchauthorisation causes double payment); (v) invalidates any actsperformed by the Debtor or its representatives after the bankruptcyjudgment without the Receiver’s authorisation; and (vi) invalidatesany payments made by the Debtor after the bankruptcy judgment.


Creditors may request the acknowledgment or recognition of theircredits since the date of publication of the Declaration ofInsolvency. Notwithstanding the foregoing, the Conciliator shallprovide the Court with a provisional list of the Debtor’s liabilitieswithin 30 days following the last publication of the Declaration ofInsolvency in the Federal Official Gazette. The Court will providecreditors a short term for the approval of such list and shall issue thejudgment for acknowledgment or recognition and preference ofcredits within the following 15 days.The Creditors’ Agreement must be approved by the acknowledgedcreditors whose debts represent at least 51% of the total amountacknowledged to the unsecured creditors, the secured creditors andcreditors with a special privilege. The approved Creditors’Agreement must be filed with the Court, who shall give anadditional term to the creditors for objections. If a simple majorityof unsecured creditors or any number of creditors representingjointly at least 50% of the total amount of acknowledged debtoppose the Agreement, the Creditors’ Agreement shall not bedeemed approved.

3 Creditors


With the insolvency declaration by the competent court a stay isimposed in automatic over enforcement of the unsecured creditors’rights and remains in force through the conciliation stage.


In principle, secured creditors must be paid in full according to theterms of their credits or agree to a lesser treatment, or else securedcreditors retain their pre-concurso liens and other rights.


Set off is permitted under the law; however, it is advisable to obtaina court order modifying the automatic stay.



During the Conciliation stage, the Debtor may continue its ordinarycourse of business with a Conciliator reviewing the Debtor’soperations and accounting. In principle, the Debtor keepsmanagement of its business, unless the Conciliator requests fromthe Court the removal of the Debtor in order to protect the pool ofassets. If the Debtor keeps the management, the Conciliator shall:(i) supervise the accounting and all transactions performed by theDebtor; (ii) decide if any existing agreements binding on the Debtormust be terminated; (iii) approve, with the prior opinion of theinterveners appointed by the creditors, new credits in favour of theDebtor, the creation of new security interests, the substitution of anyexisting security interests or the sale of any assets not involved inthe ordinary course of business of the Debtor; and (iv) call the boardor any other decision-making committee of the Debtor to discussand approve any kind of matters relating to the Debtor’s business.In the event the Debtor is removed from the management of itsbusiness, the Conciliator will become the administrator and will begranted full authority to conduct the business, on the understandingthat the authorities of the Debtor and its decision-makingcommittees shall cease. The Conciliator may also request from theCourt to suspend the Debtor’s operations if the pool of assets or anincrease in the Debtor’s liabilities is at risk. The Court may adoptmeasures to safeguard assets of the Debtor for the benefit of thecreditors, and assure that no actions are taken outside the ordinarycourse of business.


In principle, the company finances the abovementioned procedureswith its own resources.


The abovementioned procedures have no direct effects over thecompany employees.


Pursuant to the Concursos Law an intervener (interventor) mayrepresent the interests of creditors in the Concurso Procedure andmay be assigned the responsibility of overseeing actions of theConciliator and of the Receiver, as well as the actions of the Debtorin relation with the operation of its business (the “Intervener”).Any creditor or group of creditors that represent, at least, 10 percentof the value of the credits owed by the Debtor, pursuant to theprovisional list of credits, has the right to request the Court toappoint an Intervener in the Concurso Procedure. The fees of the

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Intervener shall be paid by the creditor(s) requesting such anappointment. The Intervener does not have to be a creditor. Anycreditor or group of creditors may file before the Court requests for theappointment of an Intervener. The Intervener may be substituted orremoved by those who requested his/her appointment.Interveners have the following powers: (a) deal with the service andpublication of the Declaration of Insolvency; (b) request that theconciliator or trustee examine books, documents or any other meansof storing information belonging to the Debtor subject to theDeclaration of Insolvency, with regards to the issues that, in hisjudgment, may affect the interest of the creditors; (c) request that theconciliator or trustee provide information in writing with regard toquestions related to the administration of the Estate that, in his/herjudgment, may affect the interest of the creditors, as well as request thereports the trustee and the conciliator shall provide to the judgebimonthly on the activities they have undertaken in Debtor; (d) requestthe Court an order requiring Debtor to allow the conciliators andInterveners to conduct the activities required of their posts; (e)challenge before the Court the acts and omissions of the Examiner,Conciliator or Receiver that do not follow the provisions of theConcursos Law, so the Court orders the coercive measures deemedappropriate and, if applicable, may request that the IFECOM replacethe Examiner, Conciliator or Receiver in order to avoid endangeringthe estate; (f) oppose the complaint to reclaim the property when thelegal requirements are not satisfied; (g) he/she shall make decisionsconcerning pending contracts and shall approve, after considering theopinion of the Intervener, new obligations, the creation or substitutionof guarantees and the sale of assets if they are not related to theordinary operation of the Debtor, providing the Court with a report ofsuch decisions; (h) he/she shall consider the advisability of continuingto operate as the Debtor, and after considering the opinion of theIntervener, if any, may request that the Court order the total, partial,temporary or definitive closing of the Debtor for purposes of avoidingan increase in debt or the deterioration of the Estate; (i) request theCourt to establish a retroactive date prior to the 270 calendar daysbefore the Declaration of Insolvency is declared, provided that suchrequests are filed prior to the decision acknowledging, grading andestablishing preference of credits; (j) he/she shall be notified on theday after the decision acknowledging, grading and giving preferenceof the credits issued; and, (k) he/she may appeal the decisionacknowledging, grading and giving preference to the credits.

5 Claims


In order for a creditor to file a claim, it must first submit a petition forthe recognition of its credit (proof of claim). Once such claim isadmitted, the Court will call upon the Conciliator or the Examiner, asthe case may be, and the Debtor to submit a response indicating theirviews of the claim. One permitted response is to request the Court torequire additional evidence of the validity, legality or amount of theclaim. The Court will then issue a judgment and divide credits intothree categories: (i) those recognised; (ii) those excluded; or (iii) thosestill pending upon their status is sufficiently clarified.


The Concursos Law classifies creditors into five categories: (i)singularly privileged creditors; (ii) secured creditors (with mortgages

and pledges); (iii) creditors with special privilege; (iv) commoncreditors in commercial transactions; and (v) common creditors inother transactions.Satisfaction of credits must be made in the following manner:secured creditors (with mortgages and/or pledges) are paid firstwith proceeds from the sale of mortgaged or pledged items. If theitems have a value or a price in excess of the debt, any such excessis directed to cover subsequent debt payments to other creditors. Ifthe price does not cover the debt, mortgage or pledge creditor mayparticipate, pro-rata, as a common creditor, to collect the remainingamount. This procedure is the same for other creditors withpreemptive rights. Common commercial creditors collect pro-ratafrom the balance after the initial sale of assets to satisfy all priordebts. The balance thereof will then be apportioned among non-commercial creditors.Labour credits and tax credits shall be paid after payment of thesingularly privileged credits and the secured creditors, but prior tothe payment of credits with special privilege.However, in addition to these categories, there are other types ofcredits that have priority over all other categories: (i) pendingwages for the last two working years, prior to the date ofDeclaration of Insolvency; and (ii) expenses incurred in theadministration of the secured assets.


Yes, the debtor is subject to the tax laws regulating its business.



Not as provided under other foreign jurisdiction. It is possible toreach a plan of reorganisation without the vote of all the creditors ifcertain mandatory conditions and percentages of votes are met.


During the Conciliation stage, the Debtor must work with itscreditors to reach a Creditors’ Agreement. If a Creditors’Agreement is reached and approved by the Court, the ConcursoProcedure ends.If the Conciliation stage expires without the Debtor having reacheda Creditors’ Agreement with its creditors whose claims have beenrecognised in the proceeding, then the Court shall declare thebankruptcy of Debtor. However, the Court may declare thebankruptcy prior to the moment that the Debtor or the Conciliatorproves to the Court that a Creditors’Agreement is unfeasible. Oncein bankruptcy, the administration of the Debtor’s assets is turnedover to the Receiver, who may elect to continue or discontinue theDebtor’s business pending final liquidation. During the Bankruptcystage, as in the Conciliation stage, the Court may adopt measuresseeking to safeguard the Debtor’s assets for the benefit of thecreditors and insure that no actions are taken outside the ordinarycourse of business. The Bankruptcy stage ends with the liquidationof the Debtor’s assets for the benefit of its creditors in accordancewith their respective rankings and privileges. This stage does nothave a specific term. The Receiver must provide a status report tothe Court every two months. Liquidation continues until no assetsare left, and may be re-started by any creditor every time the Debtorreceives new assets.

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7.1 Is it common to achieve a restructuring outside a formalprocedure in Mexico? In what circumstances might thisbe possible?

Pursuant to the December 2007 amendments to the MexicanConcurso Law a new chapter was included governing a procedureof “pre-package plan”. Under such chapter now it is possible forthe company to agree on a restructuring plan out of the Concursoprocedure, and subsequently proceed to file it within a summaryprocedure. In such case, there is no controversy with respect to therecognition, graduation and degree of the credits. However, if thecompany is subject to an insolvency procedure, it is more commonto achieve a restructuring within the formal procedure throughentering into an agreement between the company and its creditorsnamed “Convenio Concursal” (reorganisation plan).


Yes, it is possible to reorganise a debtor rather than realise its assetsand business.


Now, it is indeed feasible for the debtor and its creditors to agree inadvance on a restructuring plan out of the Concurso Procedure, andsubsequently proceed to file it through a voluntary insolvencyprocedure, Concurso, but within a summary procedure. In suchcase, there will not be controversy or disagreement with respect tothe recognition, graduation and degree of the credits, which meansthat the procedure will be simplified.A Concurso Procedure filing with a pre-package plan should beadmitted by the competent judge, provided that: (i) it complies withthe insolvent test under the Concursos Law for a debtor to bedeclared insolvent; (ii) it is signed by the debtor with the creditorsthat represent, at least, 40% of debtor’s credits; (iii) the debtordeclares under oath that: a) it is in a condition where it can nolonger perform its payment obligations; or, b) it is imminent, in aperiod no longer than 30 days, to be in a condition where it can nolonger perform its payments obligations, explaining the causes ofsuch insolvency; and (iv) it contains a restructuring plan of thedebtor’s credits signed by the creditors which represent, at least,40% of the debtor’s credits or claims.

8 International

8.1 What would be the approach in Mexico to recognising aprocedure started in another jurisdiction?

According to the Concursos Law, a foreign proceeding is defined asa collective or universal proceeding, whether judicial oradministrative, including provisional proceedings, followed in aforeign state pursuant to a law governing bankruptcy, liquidation, orinsolvency matters of the Debtor; as a result of these proceedings,the property and businesses of the merchant may result subject tothe control or supervision of a foreign court, for purposes ofreorganisation or liquidation.When the Concursos Law recognises foreign proceedings in

bankruptcy, insolvency and reorganisation matters, it recognisesforeign representative appointed through a recognition request. Inthis subject, the Concursos Law recognises foreign proceedingswhen legally held in a foreign country in accordance withbankruptcy or insolvency laws applicable to the Debtor due to itsactivities, the location of assets or other similar causes.Under the Concursos Law a ‘Foreign Representative’ is the person orentity, even the one designated as provisional, who (i) has beenempowered under a foreign bankruptcy procedure to administrate thereorganisation or settlement of the business, or (ii) has been designatedas the representative of such foreign bankruptcy procedure.The Concursos Law states that any representative of a foreignbankruptcy procedure may request the presiding Mexican Court therecognition of the foreign bankruptcy procedure in the ConcursoProcedure.Pursuant to the Concursos Law any Foreign Representative islegitimated to appear directly before the presiding Mexican court inall procedures brought under the Concursos Law. Such filingshould be made by means of an interlocutory procedure before thecivil federal court knowing of the ‘Concurso’ principal proceeding.The recognition interlocutory procedures shall follow the followingstages: (i) delivery of a copy of the recognition request to thecreditors who have appeared to the procedure abroad, so that withinthe term of five days, they state to what their interest corresponds.The foreign representative allegations will be taken as certain incase the creditors do not reply in the specified term; (ii) evidencewill be offered in the interlocutory claim and in the interlocutoryreply; (iii) once the term of the five days has elapsed, the MexicanCourt will summon to a hearing of proves and pleas that will becelebrated within the ten following days; (iv) when offering expertor testimonial tests, at the time of offering the test, one copy of theinterrogations shall be exhibited to each one of the parties so thatthey can formulate verbally or written questions when verifying thehearing. Three witnesses are allowed for each fact. The MexicanCourt may designate an expert or those that he considers necessary,in order to render joint opinions with the parties’ experts orseparately. With the purpose that the parties produce their proof inthe hearing, the authorities or civil employees have the obligation todispatch them promptly; and (v) once the hearing is concluded,within the term of three days and without summon, the MexicanCourt will pronounce the interlocutory judgment relative to therecognition of a foreign procedure.In terms of the Concursos Law, there are two manners under whicha Mexican Court can recognise a foreign bankruptcy procedure: (i)as a Principal Procedure, when the foreign procedure is brought toa court with jurisdiction in the place where the business has its mainplace of interests; and (ii) as Non-Principal Procedure, when theforeign procedure is brought to a court with jurisdiction in the placewhere the business has an establishment.The main difference between the recognition of a foreignbankruptcy procedure as a Principal Procedure or as a Non-Principal Procedure strives in the direct effect of such recognitionover business’ assets located in Mexico.Pursuant to the Concursos Law, if a foreign bankruptcy procedureis recognised as a Principal Procedure, (i) any and all foreclosureover business’ assets; and (ii) any and all rights to transfer or grantany lien over business’ assets, shall be suspended. A Mexican Court shall recognise the foreign bankruptcy procedureas a Non-Principal Procedure if the Debtor has a permanent placeof business outside Mexican territory, but not as a Principal foreignbankruptcy procedure.The recognition effects of a Non-Principal foreign bankruptcyprocedure are:

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(A) The granting of appropriate injunctions that concede a MexicanCourt to protect the business’ assets or the creditors’ interests whomay request through the Foreign Representative, that the Receiver(síndico), Conciliator (conciliador) or Examiner (visitador): (i)suspends all execution injunctions against the business assets; (ii)suspends the rights exercised to transmit or to mortgage thebusiness’ assets, as well as to dispose of such assets in any otherway; (iii) orders the delivery of proof or the provision ofinformation regarding the business’ assets, activities, rights, orliabilities of the business; (iv) entrusts the Foreign Representative,the Receiver, Conciliator or Examiner, the administration orforeclosure of all or part of the business’ assets located in Mexicanterritory; (v) extends every granted injunction granted by theforeign recognition procedure request; and (vi) grants any otherinjunction that under Mexican law may be grantable to a Receiver,Conciliator or Examiner.Since the recognition of a foreign procedure, the ForeignRepresentative will be able to urge the Receiver, Conciliator or

Examiner, so that they entrust through a Foreign Representative, thedistribution of all the bussines’ assets located in Mexican territory.The Mexican Court must make sure that the creditors’ interestsdomiciled in Mexico are sufficiently protected so that he maydecree the injunctions briefed above.(B) The foreign representative’s powers and capacity to ask that theExaminer, the Conciliator or the Receiver, initiates the recoveryassets’ actions that belong to the entirety of a property and of nullityacts celebrated in fraud of creditors.(C) The authorisation to the foreign representative to take part inthe procedures promoted against the businessman that are inproceeding and that have a patrimonial content.The injunctions that may arise from the recognition of a foreignbankruptcy procedure under a Concurso Procedure depend on theprocedural phase that is: (i) since the filing of the recognitionrequest throughout the corresponding resolution; and (ii) as fromthe issuance of the recognition resolution.

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Alejandro Sainz

Cervantes, Aguilar-Alvarez y Sainz, S.C.Blvd. Manuel Avila Camacho 24-Piso 6Lomas de ChapultepecC.P.11000, Distrito FederalMéxico

Tel: +52 55 9178 5046Fax: +52 55 5540 3433Email: [email protected]: www.caays.com

He represents national and multinational clients in transactionalmatters, providing legal advice in corporate, banking, finance andcommercial law, reorganisations, restructurings and work-outs,bankruptcy and insolvency procedures, project & corporate finance,mergers & acquisitions, foreign investment, joint ventures, andinfrastructure, real estate, and telecommunications transactions.Selected by Latin Lawyer as one of Mexico’s top 40 lawyers underthe age of 40 (“Forty under 40”). Author of articles in corporate,real estate, and insolvency matters. Languages: Spanish andEnglish. Background: Cervantes, Aguilar-Alvarez & Sainz,(Founder), Partner; Jáuregui, Navarrete y Nader, Partner;Santamarina y Steta, Senior Associate; Wilmer Cutler Pickering Haleand Dorr (Boston, Massachusetts). Degrees: Harvard University,Postgraduate Studies in U.S. Law and Business Transactions, 1996;Escuela Libre de Derecho, Postgraduate Studies in Corporate,Banking and Finance Law, 1994-1995; Universidad Panamericana,Diploma Program in North American Legal System, 1993;Universidad Panamericana, Licenciado en Derecho (J.D.equivalent), 1993. Harvard Business School, Executive Education,Diploma Program in Negotiation, October 2004. Memberships:Mexican Bar Association, International Bar Association andAmerican Bar Association; Professor at Universidad Iberoamericana;Certified Mediator of the Instituto Mexicano de la Mediación, A.C.Board member of public and private corporations.

Manuel Ruiz-de-Chávez

Cervantes, Aguilar-Alvarez y Sainz, S.C.Blvd. Manuel Avila Camacho 24-Piso 6Lomas de ChapultepecC.P.11000, Distrito FederalMéxico

Tel: +52 55 9178 5089Fax: +52 55 5540 3433Email: [email protected]: www.caays.com

He is an experienced litigation lawyer in the fields of commerciallitigation, bankruptcy and creditors rights, commercial fraud,shareholder suits and general business litigation, with significantexperience in alternative dispute resolutions. His practice hasincluded representation of clients at all levels of the local and federalcourt system, at national and international arbitral tribunals, and atlocal and federal administrative agencies. Languages: Spanish andEnglish. Background: Cervantes, Aguilar-Alvarez & Sainz, Partner;Jáuregui, Navarrete y Nader, Associate. Degrees: InstitutoTecnológico Autonomo de México, Licenciado en Derecho (J.D.equivalent), 1998; Master in Science and Course in Regulation,London School of Economics and Political Science, 2000, LondonSchool of Economics and Political Science, 2000. UniversidadPanamericana, Postgraduate Studies in Amparo Law (ConstitutionalLaw), 2001. Memberships: Mexican Bar Association, CharteredInstitute of Arbitrators, United Kingdom. Part-time Professor,Instituto Tecnológico Autónomo de México.

CERVANTES, AGUILAR-ALVAREZ & SAINZ is a full service law firm with an extensive array of creative problem-solvingtechniques for optimum, lasting outcomes. The Firm was founded by, and is composed of prestigious lawyersaccumulating many years of experience, who ventured to form and achieve an innovative style of organisation. Its rapidgrowth reflects the dynamic nature of a vital and healthy developing law firm.

We represent clients in a broad spectrum of transactional and litigious matters. Our clients range from some of theworld’s largest companies to individuals and small businesses. The client and practice variety is matched by thediversity of our lawyers.

As lawyers of lawyers, we handle complex litigation for Mexican firms’ clients, and have worked with most of therespected international law firms in various types of cross-border transactions.

CERVANTES, AGUILAR-ALVAREZ & SAINZ offers services in a variety of areas of the law, which overlap andcomplement a mixture of client industries.



ChapterChapter 30

De Brauw Blackstone Westbroek

Netherlands


1.1 How does a creditor take security over assets in theNetherlands?

Dutch law provides for two types of security over assets of adebtor: (i) a right of mortgage (hypotheek); and(ii) a right of pledge (pandrecht). Also, a creditor can obtain security by means of instruments likeretention of ownership and financial lease. Dutch law does notrecognise fiduciary transfer of ownership. MortgageA mortgage can only be granted on registered property, such asreal estate, “registered” vessels and aircraft, and on limited rights(beperkte rechten) vested therein. A right of mortgage is createdby means of a notarial deed and subsequent registration thereof. PledgeAll other assets, whether tangible (such as moveable property) orintangible (such as claims and shares), can generally be subject toa pledge. In order to achieve a valid security right on property,that property object must be transferable or assignable.Pledge on moveable property and bearer instrumentsA pledge on moveable property and bearer instruments can beeither a “disclosed” pledge (vuistpand) or an “undisclosed”pledge (stil or bezitloos pand). To create a disclosed pledge, thecollateral must be effectively placed with the pledgee or a thirdparty mutually agreed upon by pledgor and pledgee. Should thepledgor regain control over the collateral, the disclosed pledgewill be terminated by law. If the collateral is subject to anundisclosed pledge, the pledgor remains in control of thecollateral. An undisclosed pledge is created by means of anotarial deed or a registered private deed.Pledge on (non-bearer) claimsA claim against a third party can either be pledged withnotification to the debtor (openbaar pand or disclosed pledge) orpledged without notification (undisclosed pledge). A disclosedpledge is created by a deed and notification to the debtor of theclaim. An undisclosed pledge is created by an authentic deed,generally a notarial deed, or the registration of a (non-authentic)deed with the tax authorities. The debtor need not be notified.The pledgee is authorised to notify the debtor about the pledge ifthe pledgor is in breach of contract or if the pledgee has goodreason to believe that such a breach will occur. Once the debtor

has been notified, the debtor is precluded from paying thepledgor as its creditor. Should the debtor nevertheless makepayments to the pledgor, his obligation to pay the pledgee willremain in effect.


The Bankruptcy Act provides for an invalidation of legal acts thata company performed prior to the adjudication of bankruptcy andthat are detrimental to its creditors (Actio Pauliana). In a bankruptcy, the receiver may invoke the nullity of a legal actperformed by the company if (i) the company did not have a legalobligation to perform the act, (ii) as a consequence of the act thecreditors of the company were prejudiced, and (iii) at the momentof the performance of the legal act the company and itscounterparty knew or should have known that one or morecreditors (present or future) would be prejudiced. The latterrequirement of knowledge does not apply if the legal act isperformed for no consideration.In the event that a transaction is entered into by a company withina period of one year preceding the declaration of bankruptcy, andthe company did not oblige itself to carry out such transactionpreviously, the knowledge that the transaction would prejudiceone or more (present or future) creditors is assumed for both thecompany and its counterparty (proof to the contrary beingallowed) in case, inter alia, the transaction regards:(i) an agreement in which the value of the performance by the

company considerably exceeds the value of theperformance by its counterparty (not “at arms length”); or

(ii) the company paying a debt or giving security for a debtwhich is not yet due; or

(iii) a legal act between certain “related” parties, such as groupcompanies.

The Civil Code has largely similar provisions for creditors tochallenge legal acts of the company outside bankruptcy.In addition, the receiver may invoke the nullity of a legal actperformed by the company even if the company did have a legalobligation to perform the act in case:(i) the counterparty knew that a request for bankruptcy had

been filed; or(ii) the performance of the obligation was the result of

consultation between the company and the counterpartywith a view to give preference to the latter over thecompany’s other creditors.

Lucas Kortmann

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1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in the Netherlands?

Managing directors can be held liable both in civil law and criminallaw. Dutch law does not have the concept of disqualification.Civil liabilityBy statute each managing director has a duty towards the company toproperly perform the duties assigned to him. There is only a failureunder that duty if it is established that the director has failed in theperformance which could be reasonably expected under the specificcircumstances. Failure does not automatically lead to liability.Liability is only incurred in the case of serious culpability (ernstigeverwijtbaarheid). Whether serious culpability is involved isdetermined on a case by case basis taking into account all relevantcircumstances. All managing directors are, in principle, jointly and severally liable.An individual director may be discharged if he can prove that (i) hecannot be held responsible for the failure and (ii) he has not been -actively - negligent in preventing the consequences thereof. A director may be held liable in tort (onrechtmatige daad) by acreditor on the grounds that he entered into a transaction on behalf ofthe legal entity, while at the time he knew or should have reasonablyknown that the company would not be able to meet the obligations,and would not have sufficient assets from which the debt could berecovered. It is not sufficient that there was a more than negligible risk that thelegal entity would not be able to meet its obligations. The directorshould have anticipated that the risk would actually materialise. Ifthe managing director has not taken an irresponsible risk when heentered into the transaction, the managing director cannot be heldliable if in retrospect it appears that the company nevertheless doesnot fulfil its obligations and it was foreseeable from the start that thelegal entity would not provide for recourse. A managing director can also be held liable in tort if he has allowedor effectuated that the legal entity does not meet its obligations underan earlier commitment and consequently causes damage to the otherparty. Such claim in tort can also be brought by the receiver in bankruptcy,on behalf of the joint creditors of the company.If the legal entity does not provide sufficient resources to pay allcreditors in the case of bankruptcy of the legal entity, the directorsshall be jointly and severally liable for the deficit in the bankruptcyif (a) it is apparent that the management has not discharged its dutiesproperly and (b) it is likely that the bankruptcy was caused by themismanagement of the board. This is referred to as manifestlyimproper performance of duties (kennelijk onbehoorlijketaakvervulling).Only manifestly improper performance of duties during the threeyears preceding the bankruptcy is taken into account. Manifestlyimproper performance of duties means that no reasonably actingentrepreneur would have acted similarly, in equivalent circumstancesand with the knowledge the director had (or should have had) at thetime.If manifestly improper performance of duties by the board isestablished, all managing directors are, in principle, jointly andseverally liable for the entire deficit of the bankrupt estate (althoughthe court can mitigate damages). If the management has failed to keep its books properly or has failedto timely publish the annual accounts with the Chamber ofCommerce, improper performance is (irrefutably) deemed to haveoccurred and improper performance is (refutably) presumed to have

been an important cause of the bankruptcy. An individual directorcan exculpate himself if he can prove that other factors were animportant cause of the bankruptcy. However, the burden of proof lieswith the director. Similar liability rules apply for supervising directors and factualdirectors.Criminal liabilityUnder particular circumstances, (factual) directors can beprosecuted, inter alia, for violating statutory obligations underCorporate Law, the non-compliance of which constitutes a criminaloffence.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in the Netherlands?

(i) Suspension of payments (formal corporate restructuringprocedure).

(ii) Bankruptcy (formal corporate liquidation procedure).

2.2 What are the tests for insolvency in the Netherlands?

Suspension of paymentsThe debtor who foresees that he will not be able to continue to payhis debts as and when they become due and payable, can apply forsuspension of payments by filing a petition with the District Court.An application for suspension of payments cannot be made bycreditors or other third parties.BankruptcyIf a debtor has ceased to pay his debts, the District Court will declarehim bankrupt, either on his own request or on request of one or morecreditors. To have ceased to pay its debts, there must be at least twocreditors, one of whom has a claim that is due and payable and whichthe debtor cannot pay or refuses to pay. If the petitioner is a creditor,the petition must also contain prima facie evidence of the petitioner’sclaim against the debtor. Both insolvency procedures can only be commenced if the Dutchcourt has jurisdiction, based on the fact that the company has (had)its corporate seat of place of business in the Netherlands or, if theEuropean Insolvency Regulation is applicable, has its centre of maininterest in the Netherlands or has an establishment in theNetherlands.


See question 2.2.


Suspension of PaymentsUpon receipt of the request, the court will immediately grant aprovisional suspension of payments and appoint an administrator(bewindvoerder; usually an insolvency lawyer) and usually amember of the Court as supervisory judge (rechter-commissaris).The provisional suspension of payments may only be converted intoa definitive suspension of payments, if a meeting of creditors hasbeen held and the required majority has consented (see question 2.5below).

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BankruptcyThe request for bankruptcy must be handled expediently by theCourt. The Court usually will allow the debtor to be heard. TheCourt will appoint a judge in charge of the supervision of thebankruptcy (rechter-commissaris) and one or more receivers(curatoren) who are entrusted with the administration of thebankruptcy. Generally, only lawyers specialised in insolvency laware appointed.


All insolvency procedures are published in a central public register,which is accessible on the internet and an announcement is made inthe Government Gazette.Suspension of paymentAll known creditors of the company will be informed in writing ofa date on which they will be heard by the court in respect to therequest for suspension of payment. After they have been heard thecourt will decide whether a final suspension of payments is granted. BankruptcyAll known creditors will be informed in writing of a date beforewhich they must file their claims (for verification) with the receiverand on which date a verification meeting will be held at which allclaims will be verified. In general no verification meeting will beheld if there is no prospect that ordinary pre-bankruptcy creditorswill receive any dividend.

3 Creditors


Unsecured ordinary creditors cannot enforce their rights duringinsolvency proceedings to the extent that they can take recourseagainst assets of the estate. In suspension of payment legal proceedings are continued as if nosuspension of payments has been granted. Also new proceedingscan be commenced. During a bankruptcy unsecured creditors cannot commence orcontinue legal proceedings against the company; they must file theirclaims for verification.


Principally, secured creditors can foreclose on their collateral, as ifno insolvency procedure exists. In insolvency procedures theadministrator/receiver (or an interested party) may request the courtto grant a temporary stay (afkoelingsperiode) during which norecourse may be taken against assets of the estate without thepermission of the supervisory judge. During such temporary stay,third parties (such as parties with a retention of title or financiallessors) cannot claim any assets which are in the control of thedebtor or the receiver either.A temporary stay can only be granted for a maximum of twomonths with a maximum extension of another two months.


Creditors who have a right of set-off are not adversely affected bythe insolvency proceedings, but possibilities for set-off areincreased. The creditor may set off where the debt and the claim (i)have arisen before the insolvency procedure was declared, or (ii)result from acts entered into with the insolvent party prior to theadjudication of the insolvency procedure. A claim against the insolvent debtor which has been acquired priorto the adjudication of the insolvency procedure may only be set offby the assignee if he acted in good faith at the time of theassignment, i.e. if the assignee had no reasons to believe that aninsolvency was forthcoming. Claims acquired after theadjudication of the bankruptcy may not be set off.



During suspension of payments the debtor is not entitled toadminister and dispose of its assets without the consent, co-operation or assistance of the administrator. In bankruptcy the receiver is entrusted with the administration ofthe bankruptcy and thus in control of the assets of the company.Directors maintain their corporate authorities, but they can nolonger control, administer or dispose of the assets of the company.The position of shareholders does not change in insolvencyprocedures. The receiver requires the approval of the supervisoryjudge if he wants to continue the business as a going concern.


The costs of insolvency proceedings are paid out of the estate withpriority over all other claims. It is not unusual that (major) creditorsprovide money to the trustee for proceedings. Repayment of suchfunds can have priority over the other (estate) claims. Also, thereceiver may obtain a guarantee from the State in case he needs tofinance proceedings for directors’ liability.


In insolvency proceedings employment contracts remain existent,but termination periods (for employer and employee) are limited, inbankruptcy to six weeks, in suspension of payments to a period upto four months for the employer. In case of suspension ofpayments, permission from the Centre for Work and Income mustbe obtained (as usual outside insolvency) for the employer toterminate unilaterally.


In principle and unless contracted for otherwise, a bankruptcy altersneither the validity nor the contents of an agreement. However, ifan agreement contains rights and obligations for both the debtor andits counterparty and neither party has completely fulfilled itsobligations, the counterparty is entitled to request the receiver in

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writing to declare within a reasonable period of time that it willperform the agreement. If the receiver fails to reply or if the answeris in the negative, he loses his right to claim performance. Only inrespect of certain specific types of agreements, includingemployment agreements, lease agreements, hire purchaseagreements (huurkoop) and future trades (termijnhandel), theBankruptcy Act provides for (maximum) termination provisions.Similar provisions apply to suspension of payments. According to the Supreme Court, if the receiver/administrator(actively) terminates the contract, claims arising from that legal actconstitute estate claims.

5 Claims


Secured creditors can foreclose on collateral. Any amountsexceeding proceeds of the foreclosure can be claimed as unsecuredcreditor. During suspension of payments, unsecured ordinary creditors filetheir claims with the administrator (after the debtor has submitteda composition plan). A meeting will be held to verify the claims. In bankruptcy unsecured creditors file their claims with the receiverfor verification. Creditors of estate claims (see the answer to question 5.2) have adirect claim against the estate and are paid immediately, unlessthere are no assets available to pay all estate claims.


Broadly speaking, the following types of claims can bedistinguished in a Dutch bankruptcy:a. estate claims (boedelschulden): claims which arise by virtue

of law (e.g. lease costs and employee wages during thebankruptcy) and claims that have come into existencethrough actions of the receiver (e.g. claims pursuant to anagreement with the receiver). Estate creditors have a directclaim on the estate and, consequently, get paid in(accordance with their ranking if any) before any non-estatecreditor gets paid;

b. pre-bankruptcy preferred claims (preferentefaillissementsvorderingen): claims of preferred creditorssuch as tax authorities, social security administrations andemployees, as far as they have come into existence prior tothe adjudication of the bankruptcy. These claims fall outsidethe scope of a suspension of payment;

c. pre-bankruptcy ordinary claims (concurrentefaillissementsvorderingen): claims that have come intoexistence before the suspension of payment/bankruptcyadjudication (and that are eligible for verification). Inbankruptcy these claims must be filed for verification withthe receiver. The holders thereof share pro rata parte in theamount of the proceeds that results from the liquidation ofthe estate after the secured creditors have executed theirsecurity rights and all creditors with a general right ofpreference have been paid in full; and

d. claims that are not eligible for verification: particularlyclaims that have come into existence after the bankruptcyadjudication and which do not qualify as estate claims. Theholders hereof will not receive any distribution from theestate.


In principle, tax liabilities may be incurred during insolvencyproceedings.



Suspension of paymentsSimultaneously with or after the request for suspension ofpayments, the debtor is entitled to submit a composition plan to thecourt. The composition plan must be approved by a certainmajority of ordinary creditors. If the court confirms the plan itbecomes binding on all ordinary creditors. Thus, opposingcreditors may be “crammed down”. BankruptcyAs creditors have very little influence in a bankruptcy, there are noparticular procedures to “cram them down” outside an approvedand court-confirmed composition plan.


Suspension of paymentsFinal suspension of payments is not granted, if (i) either (a)ordinary creditors holding 1/4 of the total amount of the claimsrepresented at the meeting or (b) more than 1/3 of the number ofcreditors holding such claims, oppose a final suspension ofpayments; (ii) there is no prospect that the debtor will be able - indue course - to satisfy its creditors (through a composition orotherwise); or (iii) there are good grounds for suspecting that thedebtor will try to prejudice its creditors during the suspension ofpayments. In such cases the suspension of payments is withdrawnand the court may (and most often will) declare the companybankrupt. If (i) a final suspension is granted, (ii) the creditors approve thecomposition plan offered by the debtor and (iii) the court hasconfirmed the plan, distribution will take place in accordance withthe composition plan (usually cash pro rata parte). As soon as thecourt’s confirmation (homologatie) has become final, thesuspension of payments ends. If the debtor does not pay inaccordance with the plan, a creditor may have the plan dissolvedand the company will be declared bankrupt.The suspension of payments can also end, if at a certain moment intime, the debtor is able to pay (100%) its debts.BankruptcyAfter all assets are sold and after all legal proceedings initiated bythe receiver are completed, the bankruptcy can be terminated in thefollowing ways:Liquidation without a verification meeting If the proceeds of the estate only allow for payment of the fees andcosts of the receiver and the estate claims, a bankruptcy terminatesby way of liquidation without a verification meeting for creditors. A simplified liquidation (vereenvoudigde afwikkeling) without afull verification meeting occurs in bankruptcies where the estateclaims can be paid in full but the assets of the estate are insufficientto expect that a distribution can be made - in whole or in part - tothe ordinary creditors (i.e. only (certain) preferred creditors willreceive partial payment on their claim).

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Liquidation after a verification meetingIn practice, only if distribution to ordinary creditors is expected, averification meeting is held. The purpose of a verification meetingis to list, verify, and classify all ordinary claims. If a claim isdisputed, the supervisory judge will refer the parties to legalproceedings to determine whether the claim can be admitted. Afterthe verification meeting and after the list of admitted creditors isfinalised, the receiver prepares a(n) (interim) plan of distribution.The plan of distribution must be approved by the supervisory judge.Upon approval, the plan is filed with the court for inspection bycreditors during a ten-day period. If the plan of distribution is notopposed, the bankruptcy - in the case of a final distribution -terminates after the plan has become irrevocable and the creditorsare paid in accordance with the plan.Composition planIn a bankruptcy, a composition plan may be offered. The rulesgoverning a composition in bankruptcy essentially follow the ruleson a composition in suspension of payments. Termination of a bankruptcy will automatically lead to thedissolution (ontbinding) of the legal entity. In contrast, acomposition in bankruptcy will be aimed at preventing dissolution(and curing the financial position of the debtor).


7.1 Is it common to achieve a restructuring outside a formalprocedure in the Netherlands? In what circumstancesmight this be possible?

Despite the absence of a statutory basis, informal restructuring bymeans of out-of-court composition plans commonly exists in theNetherlands and can be useful if all creditors involved approve theplan. In essence, an out-of-court composition plan is an amendment toexisting agreements between each creditor and the debtor. Suchplan does not affect debt collection measures and/or enforcement ofa validly established security right over an asset of the debtor. TheSupreme Court is very hesitant to rule that such plan should bebinding on non co-operating creditors. In general, the effectivenessof an out-of-court composition plan is limited unless (practically)all (critical) creditors involved approve.Companies which have a limited amount of relatively largecreditors are more likely to successfully restructure outside a formalprocedure than companies with a large number of relatively smallcreditors.


Yes; the suspension of payments is aimed at reorganisation ratherthan liquidation of the debtor.


If an out-of-court restructuring as described under question 7.1 isnot feasible, due to non-cooperation of certain creditors, therestructuring can be pre-arranged prior to the opening of insolvencyproceedings and only becomes effective upon such proceedingsbeing opened. Such pre-packed sale increases the chances of a

successful implementation and execution of a composition plan. Apre-pack sale in line with the statutory requirements for acomposition plan is prepared prior to the insolvency proceedings.The plan is negotiated with all major creditors to ensure asuccessful implementation during the insolvency proceedings.Subsequently the company files for insolvency, immediatelypresenting its composition plan. Once approved, the sale of theassets or transfer of the business and distribution of the proceedstakes place in accordance with the composition plan.Another way a pre-packaged sale can be structured is that thecompany seeks a buyer/investor for (part of) the business prior tothe opening of insolvency proceedings. The directors may agree asale, subject to the approval of the insolvency administrator.Subsequently, the company files for suspension of payments or forbankruptcy and presents the administrator/receiver with theproposed sale. If it is considered in the interest of the creditors as awhole, the receiver will usually agree to the sale and the sale can beexecuted within days after the opening of the insolvencyproceedings.

8 International

8.1 What would be the approach in the Netherlands torecognising a procedure started in another jurisdiction?

According to Dutch private international law, foreign insolvencyproceedings (outside the EU) as such will generally not berecognised in the Netherlands. For example, a general seizure ofassets pursuant to a foreign bankruptcy does not affect the assets ofthe (bankrupt) debtor in respect of those assets located in theNetherlands. However, it is generally thought that rules of authority over acompany and its assets as a result of the insolvency proceedings arerecognised (such as the authority of a foreign trustee to act onbehalf of the estate).European Insolvency RegulationForeign insolvency proceedings within the EU are recognisedpursuant to the European Community Regulation on InsolvencyProceedings of 29 May 2000. Thus, insolvency proceedingsadjudicated by other EU Member States are recognised in theNetherlands.

Note: New Insolvency ActIn November 2007 a first draft for the new Dutch insolvency act,prepared by a special Government Committee on Insolvency law(Commissie Insolventierecht), was presented to the Ministry ofJustice. Although it is expected to take a few years before the newbankruptcy act will come into force, such act will certainly have aneffect on how insolvencies are treated under Dutch law. The mainchange suggested in the proposal is to have one insolvencyproceeding, suited to either restructure or liquidate the company.



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Sijmen de Ranitz

De Brauw Blackstone Westbroek N.V.TripolisBurgerweeshuispad 3011076 HR AmsterdamThe Netherlands

Tel: +31 88 888 1744Fax: +31 88 888 1775Email: [email protected]: www.debrauw.com

Sijmen de Ranitz is a specialist in insolvency and corporate recovery.Building upon his extensive accumulated international expertise,Sijmen’s practice currently has a dual focus. He advises and assistsbanks in their clients’ reorganisation activities, as well as nationaland multinational companies in financial distress. He also advisescourt-appointed trustees in bankruptcy. Recent work includes advising:

the IMF on insolvency and restructuring issues in variousjurisdictions;

Philips on miscellaneous issues relating to the insolvencyand disentanglement of LG Philips LPD;

Vos Logistics, one of the major European logisticscompanies, based in the Netherlands, with subsidiariesworldwide, in relation to the restructuring of its business andactivities worldwide;

the restructuring of a US - German - Dutch corporation,acting for the lenders;

Enron/Prisma, in our capacity as special counsel, onmiscellaneous issues relating to the worldwide Enronrestructuring; anda major Dutch franchise group in the Netherlands, onrestructuring its activities by way of sale of assets, alsoinvolving private equity participation.

Sijmen has been and is part of many international teams working onrestructuring matters both in Europe and the US. Sijmen is theformer president of INSOL International.

Lucas Kortmann

De Brauw Blackstone Westbroek N.V.TripolisBurgerweeshuispad 3011076 HR AmsterdamThe Netherlands

Tel: +31 88 888 1539Fax: +31 88 888 1775Email: [email protected]: www.debrauw.com

Lucas Kortmann is an associate of De Brauw Blackstone since2003. Lucas specialises in insolvency law and corporaterestructuring. His practice includes advising and litigating for banks,(multinational) companies, management and court-appointedadministrators on all insolvency or restructuring related issues.Recent experience includes advising:

Vos Logistics, a major European logistics company, withsubsidiaries worldwide, in relation to the restructuring of itsbusiness and activities worldwide, including debt for equityswaps;

major financial institutions on a regular basis in (cross-border) insolvencies and distress situations;

advising institutions and companies on bankruptcy issuesand bankruptcy remote structures in setting up carbon creditfunds; and

a major listed company in the energy sector on its contractswith major chemical companies in distress.

Lucas recently spent nine months on secondment with HengelerMueller in Berlin. He regularly acts as a guest-lecturer on insolvencylaw. Lucas is a member of the Core Committee of the INSOLYounger Practitioners Committee. Lucas holds both a degree inEnglish law (University of Southampton, 1998), and a degree inDutch law (University of Groningen, 2003). He speaks Dutch,English, German and French.

De Brauw’s Corporate Recovery and Insolvency practice advises and assists banks, (multinational) companies andmanagement on all insolvency- or restructuring-related issues. Our lawyers have been involved in almost every majorDutch restructuring or insolvency in the last 30 years, as well as many international and multi-jurisdictional cases. DeBrauw works closely with the top tier firms in other jurisdictions.

We consistently strive to maintain our reputation as leading experts in the area of security rights, moratorium of paymentissues and bankruptcy law. In addition to our technical expertise, our experience in this field enables us to provide ourclients with practical legal solutions.

De Brauw designed many of the measures taken by the Dutch authorities to stabilise the financial markets during thecredit crunch and was involved in all of them, either advising the Dutch State or major financial institutions (like Fortis,ING Group and SNS REAAL), including the establishment of a EUR 200 billion interbank lending guarantee and theEUR 20 billion emergency funding plan for Dutch financial institutions.

De Brauw is the only Dutch law firm that is a member of the Insol Group of 36, an Insol International related body.Sijmen De Ranitz is past President of Insol International.




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Nigeria


1.1 How does a creditor take security over assets in Nigeria?

A creditor can secure payment or performance of an obligationunder a contract or transaction by way of a mortgage or charge, acontractual lien or a pledge.MortgageIn those States in Nigeria which have retained the received Englishland law as at 1900, a mortgage can be created over a company’slanded property. Although in theory the ownership of the propertypasses to the creditor, with title to be re-conveyed if the mortgagedebt is liquidated, physical control of the property does not usuallypass to the creditor, as the immovability of the security affords thecreditor sufficient comfort. In States which have aligned their landlaws with that of England as at 1925, a mortgage cannot be created;rather the creditor will obtain a charge over the landed assets of thecompany. In such States, different creditors can take consecutivecharges over the same landed property.The ChargeA charge does not involve a transfer of ownership, but is anagreement between debtor and creditor that upon the happening ofcertain events, charged assets will be appropriated towards thesettlement of a debt. While a fixed charge is in respect of ascertained or ascertainableand definite or definable assets and immediately attaches to theassets charged, a floating charge typically covers present and futureassets, such that until some future occurrence/action takes place thecompany may continue to use the assets in the ordinary course ofbusiness. As a general rule a fixed charge has priority over a floating chargeon the same property (§179 of Companies and Allied Matters Act‘CAMA’). Contractual lienA contractual lien is a possessory security, whereby the creditor hasa right to detain certain property until money owed to it has beenpaid off. A deposit of share certificates as collateral for bankborrowings is a common form of such lien. It does not howeverconstitute a transmissible interest nor does it confer a right of saleon the creditor, unless agreed under the contract.PledgeA pledge is a form of promissory security that merely requires thetransfer of possession of an asset, with the intention that it shouldbe held as security.


A floating charge created over the undertaking or property of thecompany within three months prior to the commencement of awinding up petition is invalid unless the party affected thereby canprove that the company immediately after the creation of the chargewas solvent. Any dealing in its property which would constitute a fraudulentpreference in bankruptcy proceedings would also amount to acompany’s fraudulent preference of its creditors and would beinvalidated. Similarly any conveyance or assignment by a companyof all its property to trustees for the benefit of all its creditors willbe void (§495 of CAMA).Any transaction relating to the shares of the company may besubject to attack if the transfer of the shares is made after thecommencement of a voluntary winding up without the sanction ofthe liquidator.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Nigeria?

Every director in default may be personally liable for a refund ofmoney or property received from a party as advance payment forthe execution of a project and with intent to defraud the companyfails to apply money for the purpose for which it was received[§290 CAMA].A director who carries on company business in a reckless manner orwith intent to defraud creditors of the company whilst the company isin the process of winding up may be made personally responsible forall or any of the debts or liabilities. A director who is found to havetraded with fraudulent intent shall also be guilty of an offence andliable to imprisonment for two years or to a fine of N2,500.00 or both.If in the course of a winding up a director who has taken part in theformation or promotion of the company, is found to havemisapplied, retained or become accountable for any money orproperty of the company, or been guilty of any misfeasance orbreach of duty in relation to the company, he may be compelled torepay or restore the money or property with interest at such rates asthe court thinks fit. The court may also order him to contribute tothe assets of the company by way of compensation.Any director who has been found guilty of fraudulent trading maybe disqualified from acting as a director of any other company. Where it appears to the court in the course of a winding up, that anypast or present director of the company has been found criminally

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‘Funke Adekoya SAN



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liable for an offence, it may direct the liquidator to refer the matterto the Attorney-General of the Federation who may institutecriminal proceedings.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Nigeria?

The three formal procedures available for companies in financialdifficulties in Nigeria are:1. Receivership.2. Winding up.3. Schemes of Arrangement and compromise.

2.2 What are the tests for insolvency in Nigeria?

The tests for insolvency recognised by the Company and AlliedMatters Act are:a) A company’s inability to pay a debt exceeding N2,000.00

[approximately US $15] within three weeks after a demandfor payment has been made.

b) A wholly or partially unsatisfied court process issued inrespect of a judgment debt.

c) A court’s determination after taking into account anycontingent or prospective liability of the company that thecompany is unable to pay its debts.

d) Where the company’s liabilities exceed its assets.


ReceivershipDepending on the terms of the agreement between the company andits debenture holder, a company can be placed into receivership where:a. the principal sum borrowed by the company or the interest is

in arrears;b. the security or property of the company is in jeopardy. The

security of the debenture holder shall be in jeopardy if thecourt is satisfied that events have occurred or are about tooccur which render it unreasonable in the interest of thedebenture holder that the company should retain power todispose of its assets;

c. the company fails to fulfil any of the obligations imposed onit by the debentures or debentures trust deed;

d. any circumstances occur which by the terms of thedebentures or debentures trust deed entitled the holder of thedebenture to realise his security;

e. the company is being wound up;f. any creditor of the company issues a process of execution

against any of its assets;g. the company ceases to carry on business; orh. the company’s assets lose value amounting to more than one-

half of the total amount owing in respect of a class ofoutstanding debentures.

Winding upA company in financial difficulties may be wound up if it is unableto pay its debts.Schemes of Arrangement and CompromiseThere are no grounds specified by statute before a company canutilise this procedure.


ReceivershipWhenever a fixed and floating charge has become enforceable,creditors can either by deed if applicable or by application to thecourt appoint a receiver and/or manager of the assets of the charge.Where a company is being wound up, a creditor may apply for theappointment of an official receiver. Winding upOnly a solvent company can be wound up voluntarily. Anapplication to the court for the winding up of a company is made bypetition presented by any of the following persons:(a) the company;(b) a creditor including a contingent or prospective creditor of

the company;(c) the official receiver;(d) a contributory;(e) a trustee in bankruptcy or a personal representative of a

creditor or contributory;(f) the Corporate Affairs Commission under §323 of the Act; or(g) a receiver if authorised by the instrument under which he was

appointed.The grounds upon which a winding up petition can be presented arestated in question 2.3 above. Schemes of Arrangement and CompromiseArrangementA special resolution is required resolving that the company be putinto members’ voluntary winding up and that the liquidator beauthorised to sell the whole or part of its undertaking or assets toanother body corporate.CompromiseWhere a compromise is proposed between a company and itscreditors, the court may order that a meeting of the creditors or aclass of creditors, or of the members of the company, be summoned.If a majority representing not less than three-quarters in value of theshares of members or class of members or class of creditors vote insupport, the compromise or arrangement may be referred by thecourt to the Securities and Exchange Commission which thenappoints an inspector to investigate the terms of the saidcompromise or arrangement and make a written report thereonwithin a time specified by the court.If the court is satisfied as to the fairness of the compromise orarrangement it will be sanctioned and shall thereafter be binding onall the creditors or class of creditors or on the members.


ReceivershipA court appointed receiver or manager must advertise hisappointment in the gazette and in two daily newspapers. He mustalso, within seven days of his appointment, give notice of hisappointment to the Corporate Affairs Commission which will enterthe appointment in the register of charges. Where a receiver or manager has been appointed out of court by thedebenture holders, notice must be given to the Commission within14 days indicating the terms of appointment and remuneration.Thereafter every invoice, order for goods or business letter by or onbehalf of the company shall contain a statement that a receiver hasbeen appointed. The receiver also upon his appointment must send

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notice forthwith to the company.Winding upWhere the order for the winding up of a company has been made bythe court, §416 of CAMA requires the company to forward a copyof the order to the Commission which is then noted in its recordbooks relating to the company. Arrangement and CompromiseIf a compromise has been sanctioned by the court, a certified truecopy of the order must be delivered by the company to theCommission for registration and a copy of every such order shall beannexed to every copy of the memorandum of the company issuedafter the order has been made.

3 Creditors


ReceivershipThere is no law that prohibits an unsecured creditor from enforcingits rights outside of the receivership. Accordingly, an unsecuredcreditor can commence a recovery action against the company andif judgment is given in his favour, he may cause execution to beissued against the assets in the hands of the receiver or manager. Winding upOnce winding up proceedings have commenced, an action by anunsecured creditor commenced during the pendency of theproceedings can be stayed by the court. Where a company is beingwound up by the court, any attachment, sequestration, distress orexecution by an unsecured creditor against the assets of thecompany shall be void.Scheme of Arrangement and CompromiseOnce the scheme of arrangement is sanctioned by the court, it isbinding on all the creditors even if the secured or secured creditorsdid not vote in favour of it. Consequently, once the scheme issanctioned, an unsecured creditor is bound by the terms of thescheme and will not be able to enforce its rights against thecompany other than as modified by the scheme.


A secured creditor can enforce his security outside of eachprocedure, unless he elects or is required by the liquidator in awinding up to surrender his security [Rule 125 Companies WindingUp Rules].


ReceivershipThere is no statutory provision for the exercise of such right againstthe company in receivership. In the absence of any contractualagreement, the creditor will not be able to exercise a right of set off. Winding upThere is no statutory provision for the exercise of a right of set offby a creditor against a company in liquidation. A contractualagreement for the creditor to exercise a right of set off ceases to beenforceable once a company has been wound up.

Scheme of Arrangement and CompromiseThe same position as in receivership above applies.



ReceivershipOnce a receiver has been appointed the power of the directors andshareholders to deal with the assets over which the receiver wasappointed ceases and same is vested in the receiver. If a receiver isalso appointed manager, he has power in law to carry on andmanage the business of the company although the directors remainin office. Shareholders are unaffected.Winding upThe liquidator takes over the company and all the powers of thedirectors cease except the company at general meeting or theCommittee of Inspection in case of creditors’ voluntary winding upor the court or the liquidator sanctions the continuance thereof.Scheme of Arrangement and CompromiseThe directors under a scheme of arrangement or compromiseremain in control of the company. The powers of the shareholdersare not affected under this scheme.


A receiver of the whole of a company’s undertakings has the powerto borrow money and may do so if finance is required. The lendersor creditors invoking these insolvency procedures may also providerequired finance.


A receiver or liquidator appointed under these procedures has noobligation to retain the employees of an insolvent company. Wherethe employees are disengaged, he has a duty under the Act to settleall their wages and salaries in respect of the services rendered to thecompany in priority to all other debts. The status of employees’ contracts under a scheme of arrangementwould depend on the terms of the scheme document.


ReceivershipThe commencement of the receivership exercise does not in anyway affect the contracts of the company. The power of the companyto continue to deal with the contracts relating to the undertaking orproperty over which receiver or manager has been appointed ceasesfrom the date of his appointment. He may decide to either carry onwith the contract or terminate it. Winding upThe commencement of winding up does not affect the contracts ofthe company unless the contract itself makes insolvency orliquidation a basis for its termination. Once a company has beenwound up, such contracts stand terminated. A liquidator appointedhas no power to carry on with the contracts.

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Scheme of Arrangement and CompromiseThe effect on contracts would depend on the terms of both thecontract and the scheme of arrangement or compromise, as areorganisation may be an act that determines a contract.

5 Claims


ReceivershipSecured creditors, if not the appointer, will file their claims with thereceiver. Unsecured creditors may commence an action against thereceiver for the recovery of debt. Where the creditors haverecovered judgments, they may levy execution on the assets of thecompany. Winding upCreditors must submit proof of their debts to the liquidator, who haspower to reject the claims. Once the claims are accepted afterproof, the liquidator has power to settle the claims which shall rankequally unless the assets are insufficient to meet the claims. No recovery action can lie against a company after thecommencement of a winding up petition as the court would readilygrant stay of proceedings of such action in favour of a winding uppetition. Any execution levied by the judgment creditor on theassets of a company in the process of winding up is rendered voidin law.This position is also applicable to schemes of arrangement.


ReceivershipThe law does not make provision for the ranking of claims inreceivership. The duty of a receiver is to realise the security for thebenefit of those on whose behalf he is appointed. If there is asurplus, he is empowered to rank other claims for the purpose ofliquidation.Winding upIn winding up the ranking of claims are as follows:(a) All local rates and charges due from the company at the

relevant date, and having become due and payable within 12months before that date, and all Pay-As-You-Earn taxdeductions, assessed taxes, land tax, property or income taxassessed on or due from the company up to the annual day ofassessment next before the relevant date, and in the case ofPay-As-You-Earn tax deductions.

(b) Deductions under the National Provident Fund Act (Cap No.88).

(c) All wages or salary of any clerk or servant in respect ofservices rendered to the company.

(d) All wages of any workman or labourer whether payable fortime or for piece work, in respect of services rendered to thecompany.

(e) All accrued holiday remuneration becoming payable to anyother servant, workman or labourer (or in the case of hisdeath to any other person in his rights) on the termination ofhis employment before or by the effect of the winding uporder or resolution.

(f) Compensation due under the Workmen Compensation Act.(g) Claims of General Creditors.

Scheme of ArrangementThe above ranking of claims in a scheme of arrangement willdepend upon the terms agreed by the creditors.


In receivership, winding up and a scheme of arrangement, thereceiver or liquidator appointed have an obligation to pay taxessuch as ground rent, tenement rates, Value Added Tax and taxesarising on disposal of assets or income earned during the exerciseand other taxes owed by the company prior to the exercise.



There are no processes under the Act for cramming down dissentingcreditors.


ReceivershipOnce a receiver/manager is discharged, the control andmanagement of the company revert to the owners. Every receiveror manager of a company must within one month after he ceases toact deliver to the Corporate Affairs Commission for registration astatement in the prescribed form showing his receipts and hispayments during all the preceding periods since his appointment. Winding upOnce a company has been wound up and the liquidator hasdistributed the assets among the members and creditors insatisfaction of its liabilities, the company can no longer exist in law. The liquidator prepares his final accounts to be considered by thecompany’s general meeting and within seven (7) days thereafter tobe filed at the Corporate Affairs Commission. The Commissionwill register it and on the expiration of 3 months from theregistration of the return, the company shall be deemed dissolved.The powers of the directors and the members of the company thenfinally cease.Scheme of Arrangement and CompromiseIf the scheme requires the company to be wound up by specialresolution, once the liquidator has sold all its assets to another bodycorporate and distributes the proceeds to members and creditors, thecompany no longer exists in law. The powers of the directors andmembers will also cease. A scheme of compromise with creditors’ documents may bereferred to the Securities and Exchange Commission for approvaland thereafter must be filed with the Corporate Affairs Commission.Under the scheme of compromise, the company still exists and thepowers of the directors are not affected.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Nigeria? In what circumstances might thisbe possible?

The increasing resort to court by debtors to thwart the liquidationprocess has resulted in heightened interest in using turnaround

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management to promote corporate recovery. This can only happenhowever where a receiver/manager is appointed over the whole or asubstantial part of the company’s undertaking, the business is viableand the creditors cooperative.


A receiver who is also appointed as manager has a statutory dutynot only to realise the assets of the company but to manage theaffairs of the company in the best interest of the company so as topreserve its assets, further its business and promote the purposes forwhich it was formed. A debt/equity swap may achieve this.


A pre-packaged sale is not provided for under either the Companiesand Allied Matters Act or the Companies Winding Up Rules, and sois an unknown procedure. It may be liable to attack as a fraudulentpreference of creditors.

8 International

8.1 What would be the approach in Nigeria to recognising aprocedure started in another jurisdiction?

There is no statutory provision on cross-border insolvency inNigeria. Also, Nigeria has not as yet adopted the UNCITRALModel Law on Cross-Border Insolvency although moves are afootto enact insolvency legislation based on the Model Law. Thereforeany procedure started in another country may not be recognised inNigeria and foreign creditors will not be treated differently fromlocal creditors. However foreign insolvency judgments and orders may be enforcedin Nigeria if they comply with the terms of the Foreign Judgment(Reciprocal Enforcement) Act Cap. F35, Laws of the Federation ofNigeria, 2004 which requires the existence of a wholly or partlyunsatisfied foreign judgment debt. The law is based on reciprocityof treatment of similar judgments in the originating country.

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‘Funke Adekoya SAN

ÆLEX Legal Practitioners and Arbitrators7th Floor Marble House1 Kingsway Road, IkoyiLagosNigeria

Tel: +234 1 463 0580Fax: +234 1 461 7092Email: [email protected]: www.aelex.com

‘Funke has over 30 years’ experience in conducting litigation andcorporate dispute resolution within the corporate, commercial andenergy sectors. Apart from acting as a commercial litigator, she alsorepresents parties as counsel in arbitration proceedings and hasbeen appointed as either party appointed Arbitrator, Sole Arbitratoror Presiding Arbitrator in several disputes. She also advises clients on legal issues regarding businessinsolvency, receivership, corporate liquidations and businessturnaround issues. She authored the chapter on Nigeria in ColliersInternational Business Insolvency Guide.‘Funke is a member of the Law Society of England and Wales and aLife Bencher of the Body of Benchers (Nigeria). She is also amember of the International Bar Association’s (IBA) Legal PracticeDivision.She was appointed Notary Public in 1986 and was elevated to therank of Senior Advocate of Nigeria (SAN) in 2001. ‘Funke holds an LL.M from Harvard Law School (1977).

Olanipekun Orewale

ÆLEX Legal Practitioners and Arbitrators7th Floor Marble House1 Kingsway Road, IkoyiLagosNigeria

Tel: +234 1 461 7321 - 3Fax: +234 1 461 7092Email: [email protected]: www.aelex.com

Ola is a Senior Associate in the Firm. He handlestelecommunications, corporate/commercial and taxation disputes inthe High Court and Appellate Courts in Nigeria. He has successfullyhandled and is currently handling several Insolvency mattersincluding a multi million Nigerian naira suit instituted by aconsortium of Nigerian Banks.Ola is a member of the Chartered Institute of Arbitrators, UK andNigeria as well as an active member of the Nigerian Bar Association.

ÆLEX is a full service commercial and litigation law firm. It is one of the largest law firms in West Africa with officesin Lagos, Port Harcourt and Abuja in Nigeria and Accra, Ghana.

ÆLEX is the only law firm in West Africa that can provide seamless and integrated legal service in several commercialcentres within the region.

We merge local legal expertise and presence, political and industry wide connections with an appreciation of globalstandards and demands.

In today’s highly competitive and rapidly changing business environment it is survival of the fittest, the strongest andthe smartest. We are interested in your business - we want to know more about it, to help you plan, maximise rewards,mitigate and possibly eliminate risk, help you identify options; solve problems, overcome obstacles - achieve your goals.We want to serve you better so that you survive when others fail, prosper when others falter.

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Poland


1.1 How does a creditor take security over assets in Poland?

There are various types of security interests available for lenders tocompanies in Poland, the most common of which are: a mortgageover real property; a registered pledge over movables and/or theenterprise of the Borrower; registered pledge over shares; a civilcode or “ordinary” pledge; a financial pledge; a security transfer oftitle to movables; and a security assignment of rights.A mortgage over real property must be executed in the form of anotarial deed or, in the case of a bank or credit institution, by wayof a simple declaration. It is then registered in the appropriate Landand Mortgage Register (ksiega wieczysta). There is currently nocentral register of mortgages in Poland and therefore the Land andMortgage Registers are maintained by regional courts around thecountry. There is a centralisation process underway from aninformation point of view involving electronic Warsaw based data.The registered pledge over an enterprise is governed by the Law onRegistered Pledges. A registered pledge can be taken over thewhole business of the borrower except for real property and non-transferable rights. This type of pledge will also cover moveableand transferable property rights which the pledgor/borroweracquires in the future and which will be included in its business.A registered pledge can be taken over shares. The pledge wouldhave to be entered into between the creditor and each of theborrower’s shareholders.The financial pledge is a form of pledge ever monetary claims orfinancial instruments, such as shares. It is governed by provisionsof the Act on Specific Financial Collateral. There is no form ofregistration; however, such a pledge should be disclosed in thecompany’s share register. Each time, following registration of achange in shareholding, the management board of a limited liabilitycompany must file with the registry court a new list of shareholderssigned by all members of the board together with the notice of thecreation of a pledge. There are certain restrictions over who cantake such a pledge.


There are a number of circumstances when legal transactions enteredinto by the insolvent debtor may be set aside, i.e., considered legallyineffective. Transactions involving the disposal of assets concluded

gratuitously or for inadequate consideration during the year prior tothe filing of the bankruptcy petition are ineffective.In addition, transactions involving the provision of security or therepayment of a debt which is not yet due are ineffective if they takeplace within two months prior to the filing of the bankruptcypetition. There are other transactions which are ineffective whenmade between related parties. The relevant period here is sixmonths prior to the filing of the bankruptcy petition. In the case oflegal entities the transactions include those between the bankruptentity and its shareholders, their representatives or spouses, andrelated companies or partnerships.These provisions are contained in the Law and Bankruptcy andRehabilitation, as amended (the Bankruptcy Law). There are alsothe provisions of the Civil Code dealing with the claim of actiopauliana (fraudulent treatment of creditors). These provisionsprovide that acts undertaken by the debtor which provide a benefitto a third party to the detriment of the creditors may be declaredineffective. The debtor must have acted deliberately and the thirdparty must have known or should have known that the act was to thedetriment of the creditors.There are other provisions in the Bankruptcy Law whereby thejudge-commissioner (sedzia-komisarz) may declare actsineffective. These include: a) encumbrances established over theassets of the bankrupt within one year prior to the date of the filingof the bankruptcy petition in circumstances where the bankrupt didnot receive any benefits from the establishment of theencumbrance, or the benefit received was substantially less than thevalue of the security granted; and b) remuneration of the debtor’srepresentatives determined in an employment contract or in acontract on performance of services which flagrantly exceed theaverage amount of compensation given for similar work or servicesperformed and is not justified by the work.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Poland?

The management board members are jointly and severally liable,unless the board member can show that a petition for bankruptcy orcomposition proceedings was initiated in good time, or the failureto apply for bankruptcy or composition was not his/her fault, orcreditors suffered no damage even though no bankruptcy orcomposition proceedings were commenced. This only applies tolimited liability companies.A member of the management board, who fails to file an applicationfor bankruptcy where circumstances exist justifying bankruptcy, issubject to a fine or imprisonment. The Bankruptcy Law provides

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further sanctions on members of the management board who fail tofile for bankruptcy: they may be deprived of the right to carry outan economic activity on their own account or to be members ofmanagement boards, supervisory boards, representatives, attorneysor proxies in companies and cooperatives, foundations, associationsetc., for a period from 3 to 10 years.The same sanction may be imposed on members of the managementboard who interfere with the bankruptcy proceedings by hiding,destroying, disposing of or encumbering the assets comprising thebankruptcy estate, or otherwise fail to perform duties andobligations to be performed under the Bankruptcy Law.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Poland?

There are essentially three types of procedures available when acompany is in financial difficulty. These are the following:a bankruptcy proceedings leading to the liquidation of the

debtor;b bankruptcy proceeding leading to a composition with

creditors; andc the rehabilitation proceeding, which also leads to a

composition with creditors.

2.2 What are the tests for insolvency in Poland?

The tests of insolvency of a debtor, being a legal entity, are twofold:a it has ceased to perform its pecuniary obligations as they fall

due; andb the value of its liabilities exceeds that of its assets (even if it

is performing its obligations as they fall due).


Bankruptcy proceedings either with the aim of liquidation or ofcomposition with creditors are declared if the debtor has becomeinsolvent. If it can be demonstrated that the creditors would besatisfied to a greater extent than through liquidation, the debtor’sbankruptcy will be declared with the aim of reaching a compositionwith creditors.If, on the other hand, the basis for a composition with creditors doesnot exist, the declaration of bankruptcy will be declared with theaim of liquidation.In the case of either proceeding, the court may change the methodof carrying out the bankruptcy proceeding to the other if thegrounds for such change appear after declaration of bankruptcy.The above change of the method of carrying out the bankruptcyproceeding needs to be announced in the official gazette, MonitorSadowy i Gospodarczy.


A debtor is obliged to file a bankruptcy petition if it is insolvent.Likewise a creditor has the right to file such a petition. The courtdismisses the petition if the assets are insufficient to cover the costof the proceedings or if they are sufficient but encumbered and thefree assets do not cover the costs.

The court may dismiss a petition if the delay in performance of theobligations does not exceeds three months and the total amount ofthe non-performed obligations does not exceeds 10% of the balancesheet value of the debtor’s enterprise. In addition, the delay inperformance of the obligations should not be permanent incharacter and the dismissal of the petition must not be detrimentalto the creditors.If the court is satisfied that the debtor is insolvent and that theconditions for a composition with creditors are not satisfied, it willissue an order which will declare the debtor bankrupt and subject tothe liquidation proceeding.The contents of the debtor application must comply with theprovisions of the Bankruptcy Law and should indicate which formof bankruptcy proceeding the debtor is applying for - compositionof creditors or liquidation of assets. The application should containas attachments various documents including a current list of assetsplus estimated values, balance sheet, declaration of claims or debtspaid in the last six months, list of creditors, and information onsecurity. If the debtor is filing a petition which includes thepossibility of a composition of creditors, he should also provideproposals for such composition.If a creditor is filing for the bankruptcy, he should demonstrate thebasis of his claim and if he is including the possibility of acomposition of creditors, he should submit an initial proposal forthe composition.


Once the declaration of bankruptcy has been issued, it is publishedin the official gazette, Monitor Sadowy i Gospodarczy, and in alocal paper. Various other notifications also take place: the court ruling is deliveredto the trustee (syndyk) court supervisor (nadzorcy sadowemu) orreceiver (zarzadca), and to the creditor who petitioned for bankruptcy.Tax chambers and social insurance authorities are informed. Theruling itself will summon creditors to submit their claims within afixed time, not less than one month and no longer than three.The court may summon an initial meeting of creditors in order toadopt a resolution on whether to proceed on the basis of a compositionwith creditors or liquidation; select the creditors’ committee; or toenter into the composition with creditors. It may decide not to call thecreditors meeting if it considers it will be too costly or if the total sumof the contested claims exceeds 15% of the total value of the claims.The initial meeting of creditors is empowered to do the following: passa resolution on whether to proceed on the basis of a composition withcreditors or liquidation; select the creditors’ committee; or express itsopinion on the selection of the trustee or court supervisor. Themeeting may decide on a composition with creditors if at least ½ of thecreditors holding ¾ of the total sum of debt (uncontested, supportedby execution titles or where there is probable cause) are present.

3 Creditors


Unsecured creditors may not enforce their rights in normal courtproceedings following the declaration of bankruptcy of the debtor.This applies both in the case of a bankruptcy where there is acomposition with creditors proceeding and where there is aliquidation of assets. Their rights must be enforced in the course of



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the relevant bankruptcy proceeding.Unsecured creditors will, in the case of a liquidation of assets, belisted in the list of creditors and are paid in accordance with thepriority established by law (see question 5.2 below).The general rule is that unsecured creditors take part in thecomposition with creditors.


Creditors secured over a particular asset will have priority overunsecured creditors with respect to that asset.In the case of a bankruptcy aimed at a liquidation of assets, the claimof a secured creditor where the security is a mortgage, civil lawpledge, registered pledge, statutory pledge or ship mortgage will besatisfied from the proceeds of the liquidation of the secured asset. Inthe event that these proceeds are not sufficient to satisfy the claim inquestion, the outstanding claim will be satisfied in accordance with thepriority applicable to the claims of unsecured creditors.The position is different in the case of a bankruptcy aimed at acomposition with creditors. Secured creditors are not covered bythe composition unless they give their consent to have their claimincluded in the composition. If a secured creditor consents to havehis claim included his security remains in place but upon theconditions as determined by the composition.


The position is different depending on the two types of bankruptcyproceeding. In the case of the bankruptcy aimed at a compositionwith creditors a set-off of claims can take place. However, this isnot permitted where the creditor becomes the debtor of the bankruptafter the declaration of bankruptcy or where the debtor of thebankrupt becomes a creditor after the declaration of bankruptcy bythe acquisition of claims which existed before the declaration ofbankruptcy.In the case of a bankruptcy aimed at a liquidation, the claims of thebankrupt can be set-off against those of a creditor provided bothparties’ claims existed at the date of declaration of bankruptcy.However, the claim of the bankrupt can be set-off in the full amountwhereas the claim of the creditor is only set-off as to principal andinterest accrued until the date of the declaration of bankruptcy. Set-off is not permitted if the creditor acquired his claim by transfer orendorsement after the date of declaration of bankruptcy or even ifhe acquired it during the one year prior to the declaration, if heknew about the grounds for bankruptcy. There are some exceptionsto this rule.



In the case of bankruptcy proceedings aimed at liquidation, thedebtor will, upon the declaration of bankruptcy, lose its right toadminister, use or dispose of its assets, constituting the bankruptestate. Upon the declaration of bankruptcy, the court will appointthe trustee (syndyk) who will take over control and management ofthe assets and proceed to the liquidation of the assets.

Where the court has issued an order for bankruptcy aimed at acomposition with creditors, the bankrupt administers the estateconstituting the bankrupt estate unless the court appoints thereceiver (zarzadca). The court appoints the receiver in case thebankrupt does not satisfy the court that the administration will beperformed properly. Administration by the bankrupt is undertakenunder the supervision of the court supervisor (nadzorca sadowy).As a general rule, the bankrupt can, in these circumstances, carryout acts in the ordinary course of business. Acts outside theordinary course need the approval of the court supervisor unless theBankruptcy Law requires the consent of the creditors’ committee.As far as the shareholders are concerned, their position with respectto their corporate rights remains unchanged during the bankruptcyproceedings.


Where the bankruptcy proceeding is being carried out with a viewto a composition with creditors, the business of the bankruptcompany will most commonly be continued. Indeed the receiver isunder an obligation to preserve the bankrupt estate so that it doesnot deteriorate. In the event the business requires further financingfor its continuation, creditors who provide such financing may begranted favourable conditions to be covered by the composition.In the case of bankruptcy proceedings aim at liquidation, thebusiness of the bankrupt may be continued if the committee ofcreditors approve. In such circumstances the income generated willform part of the bankrupt estate.


In the case of bankruptcy proceedings which are aimed atliquidation, the claims of the employees rank as preferred creditors,in some cases over certain secured claims. The bankrupt companymay terminate its contacts of employment upon the declaration ofbankruptcy. Where there is a composition of creditors, employee claims are notcovered by the composition unless the employee agrees otherwise.


An important point which should be noted at the outset is that anyprovisions contained in a contract which provide that the legalrelationship between the parties is terminated or changed upon adeclaration of bankruptcy are invalid. The provisions of a contractto which the bankrupt is a party which make impossible or impedethe aim of the bankruptcy proceeding are ineffective in relation tothe bankrupt estate.There are certain exceptions to the above rule involving financetransactions. In the case of master agreements for derivatives orrepurchase contracts, claims arising may be settled by way ofnetting, outside of the bankruptcy proceedings.A contract of transfer of an asset, claim or other right concluded asa security of claim is effective in relation to the bankrupt estate ifconcluded in written form with a certified date.In the case of a declaration of bankruptcy which is aimed atliquidation, the following applies to monetary claims and contracts:a all monetary claims against the bankrupt which have not yet

become payable, become due and payable upon the date ofdeclaration of bankruptcy;

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b non-monetary obligations are converted into monetaryclaims and become payable upon the date of declaration ofbankruptcy, regardless of whether the term for performanceof the obligation has matured;

c obligations arising from mutual contracts which are notperformed or are only partially performed may be performedby the trustee; alternatively, the trustee may withdraw fromthe contracts. If the trustee does withdraw from the contract,the other party is not entitled to the return of the performanceprovided. He can, however, claim for compensation from thebankruptcy estate;

d the trustee is not permitted to withdraw from agreementssuch as master agreements for derivatives but all parties mayrescind the master agreement in compliance with termsagreed upon in the agreement dealing with the means ofcalculating the parties close-out amount in the event of thetermination of the agreement;

e loan agreements expire if the loan has not been advanced;f bank account agreements, agreements for mandatory

property insurance, and lease agreements for real propertyowned by the bankrupt (where the real property has beenhanded over to the lessee prior to the declaration ofbankruptcy) remain in force; and

g if the bankrupt is a lessee, the trustee may terminate the leaseupon the statutory term of notice (unless the lease providesfor shorter period), whether or not such termination ispermitted by the lease; in the case of a lease of real propertyfrom where the enterprise of the bankrupt is being carriedout, the notice period is six months.

In the case of bankruptcy aimed at a composition of creditors,different rules apply:a once the declaration of bankruptcy has taken place with the

aim of concluding a composition with creditors, neither thebankrupt debtor nor the receiver may perform obligationsarising out of the claims which are the subject of thecomposition; and

b a lessor may not, without the consent of the creditors’committee, terminate a lease contract where the enterprise ofthe bankrupt operates. This applies equally to other forms ofleasing contracts, certain insurance contracts, bank accountcontracts, suretyship contracts, bank guarantees, letters ofcredit and licensing agreements where the bankrupt is thelicensee.

5 Claims


Creditors must submit their claims providing full details andevidence proving the existence of the claim. In addition the creditorshould state the category in which the claim is to be ranked.The claims are presented to the trustee (syndyk) in the case ofbankruptcy with the aim of liquidation and to the court supervisor(nadzorca sadowy) in the case of a bankruptcy with the aim of acomposition with creditors. The trustee or court supervisor willverify the claims submitted and will then prepare a list of claimswhich is delivered to the judge commissioner (sedzia komisarz).The list of the creditors and claim is published in the Court andEconomic Monitor (Monitor Sadowy i Gospodarczy). There is aprocedure for creditors to file objections within two weeks withrespect to those claims which have been recognised and thosewhich have not.


The claims of unsecured creditors where the proceeding involved isthat aimed at liquidation are ranked by division into five categoriesas follows:1. the costs of the bankrupt proceedings, claims arising out of

the undue performance of bankrupt estate, claims fromcontracts concluded by the bankrupt prior to the declarationof bankruptcy, whose performance was required by thetrustee, claims arising from acts of the trustee or receiver,claims arising from acts performed by the bankrupt after thedeclaration of bankruptcy, which were not subject to theapproval of the court supervisor or which were performedwith his approval;

2. claims for employee’s earnings due for the period prior to thedeclaration of bankruptcy, allotments for social insurancedue for two years prior to the declaration of bankruptcytogether with interest due and costs of execution;

3. taxes and other public levies as well as social securitypayments which are not included in category 2, together withinterest and the costs of execution;

4. other claims if are not subject to satisfaction in the fifthcategory together with interest for the last year prior to thedate of declaration of bankruptcy, plus contractual damagesand costs for proceedings and execution; and

5. interest not included in any of the above categories, courtfees and administrative penalties, claims from donations orinheritance.

The basic principle is that claims in a higher category must besatisfied before claims in a lower category. If the bankrupt estate isnot adequate to satisfy all the claims in the same category, they willbe satisfied on a proportional basis.As far as secured claims are concerned, the general position is thatthe secured creditor is satisfied out of the liquidation of the asset inquestion after payment of the costs of the liquidation and other costsof the bankruptcy proceeding in the amount defined in theBankruptcy Law. However, in the case of mortgaged real propertyor a mortgaged ship, certain claims will rank in priority to thesecured creditor. These are alimony and pension claims andemployee remuneration claims where the employees have workedon the real property or the ship. The remuneration claims in thesecircumstances is limited to three months at three times theminimum wage for such work.The claims of secured creditors are satisfied based on their prioritywhich means that the timing of the security will determinate thepriority of the claims. If the secured asset is not sufficient to satisfythe claim of the secured creditor, the outstanding amount will besatisfied as a claim according to the ranking of unsecured creditors.In the case of a bankruptcy where a composition with creditors isinvolved, the judge-commissioner may, after the confirmation ofthe list of claims, decide that voting on the compositionarrangement will be carried out by way of a vote in separatecategories of creditors. In such case, the judge commissioner drawsup separate lists of creditors entitled to vote. The lists may containthe following categories of creditors:a creditors entitled to claims based on an employment

relationship and they gave their consent to have their claimincluded in the composition;

b farmers entitled to claims based on a contract to supply theirfarm products;

c creditors secured over assets by mortgage, pledge, registeredpledge, statutory pledge or ship mortgage as well as bysecurity transfer of title to movables; and a security



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assignment of rights;d creditors being shareholders, holding shares giving at least

5% of votes at the shareholders’ meeting even if they areentitled to claims listed in points a - c above; and

e other creditors.The basic rule is that the conditions for the restructuring of theliabilities of the bankrupt should be identical with respect to allcreditors, or if the judge commissioner decided that voting on thecomposition arrangement will be carried out by way of a vote inseparate categories of creditors - with respect to the creditors of thesame category unless a creditor has explicitly approved lessfavourable conditions for itself. However, more favourableconditions can be granted to creditors having small claims, and tothose creditors who, after the declaration of bankruptcy, haveprovided or will provide finance essential for the execution of thereorganisation.


There are no particular taxes incurred as a result of the bankruptcy.There is also no particular relief. The bankrupt entity is obliged topay its taxes, and the tax authorities with outstanding claims aretreated as unsecured creditors ranking in the third category ofcreditors (see question 5.2 above). In certain circumstances, astatutory mortgage can come into force with respect to tax claimswhich would make the tax authority a secured creditor.



Secured creditors cannot have their rights affected by a compositionproceeding without their consent. In a bankruptcy with the aim ofa composition proceeding, the reorganisation is subject toacceptance by the creditors and to the approval of the court in orderto become binding. Once it is binding, all unsecured creditors arecovered by the reorganisation, even those who objected to it. Thereorganisation arrangement is deemed to be accepted if the majorityof creditors entitled to vote having together not less than two thirdsof the total amount of claims entitling participants to vote, expresstheir approval. In case the judge-commissioner decides that votingon the reorganisation arrangement will be carried out by way of avote in separate categories of creditors, the reorganisationarrangement is deemed to be accepted if the majority of creditors ineach category of creditors votes in favour and these creditors holdnot less than two thirds of the total amount of the claims includedin the separate category of creditors entitled to vote.Notwithstanding these creditor approval processes, the court isrequired to refuse to confirm the reorganisation if:a it violates the law; orb it is obvious that it cannot be performed.The court may refuse to confirm the reorganisation if the conditionsare flagrantly detrimental to the creditors who voted against it andwho filed objections.


The trustee is required to draw up a distribution plan for the fundsof the bankrupt estate and subject it to the judge-commissioner for

his approval or amendment. A separate plan is prepared for thefunds arising for the sale of property or rights, which are secured.The plan is then published and there is a two-week period forobjections to be filed. If there are no objections filed, the judge-commissioner confirms the plan and it is then immediatelyimplemented. After implementation of the plan, the court will issuea ruling declaring the bankruptcy proceedings completed. Thecompany is then dissolved and deleted from the National CourtRegister.In the case of a composition with creditors, the court will:a approve the composition (see question 5.1 above); andb issue a final ruling confirming the performance of the

reorganisation whereupon the bankrupt regains the right ofadministration of his estate.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Poland? In what circumstances might this bepossible?

Bankruptcy proceedings will always involve the court in some way.It is possible for restructuring to take place where the debtor isthreatened with insolvency (i.e., when the assets of the debtor stillexceed his liabilities and the debtor still meets his obligations but itis apparent he will become insolvent within a short period of time).This is a form of rehabilitation proceeding and is outside thebankruptcy proceeding but it must be carried out under thesupervision of the court appointed supervisor. Once anarrangement is reached with the creditors, it must be approved bythe court.


It is possible for restructuring to take place where the debtor isthreatened with insolvency (i.e., when the assets of the debtor stillexceed its liabilities and the debtor still performs its obligations butaccording to a reasonable assessment of its economic situation, itapparently will become insolvent within a short time). This is aform of rehabilitation proceeding and is outside the bankruptcyproceeding but it must be carried out under the supervision of thecourt appointed supervisor. Once an arrangement is reached withthe creditors, it must be approved by the court. The aim of thisprocedure is to ensure that the entrepreneur, after the rehabilitationproceeding, will be able to compete in the market


After commencement of the rehabilitation proceeding to the day thecourt issues a legally valid decision on the confirmation of areorganisation arrangement with creditors or the discontinuance ofproceedings, an entrepreneur may not transfer or encumber itsassets. This does not apply to assets transferred within the scope ofentrepreneur’s ordinary business activity. Proposals for therestructuring of the entrepreneur’s estate should indicate whichparts of the estate are to be transferred, leased or rented out,determine the means of transfer and how acquired funds shall beassigned.

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Michael Davies

Siemiatkowski & DaviesAl. Róz 10/900-556 WarsawPoland

Tel: +48 22 529 3782Fax: +48 22 529 3799Email: [email protected]: www.sdlaw.eu

Michael Davies is one of the two founding partners of Siemiatkowski& Davies. He is an English solicitor and has lived and worked inPoland since 1991. He specialises in commercial, real estate,energy and finance transactions and has extensive experience ofacting for both domestic and international clients in high-profiletransactions. He has advised on numerous joint ventures,privatisations, merger & acquisition transactions and project financedeals in a variety of sectors (including the energy, food, telecoms,real estate, human resources, petrochemicals and defence sectors).He lectures at the University of Warsaw and at the InternationalDevelopment Law Organisation (Rome, Italy) on aspects of financiallaw and practice. He is also a Senior Fellow with the United NationsInstitute for Training and Research where he provides training onaspects of international finance law. Michael Davies has published various texts on subjects such assovereign debt management, foreign investment in Poland, theimpact of the European Union on the energy markets in EasternEurope, liberalisation in the power sector, the financing of powerprojects and energy emission trading.

Magdalena Witek

Siemiatkowski & DaviesAl. Róz 10/900-556 WarsawPoland

Tel: +48 22 529 3780Fax: +48 22 529 3799Email: [email protected]: www.sdlaw.eu

Magdalena Witek obtained a Master of Laws degree from theDepartment of Law and Administration at the Warsaw University in2001. She has work with Siemiatkowski & Davies since 2005;before that she worked in-house with a Swedish ConstructionCompany. Her practice areas include general corporate work,finance transactions and real estate acquisitions and disposals. Shealso advises on company liquidations and dissolutions.

Siemiatkowski & Davies was founded in 2005 by two highly experienced lawyers, one Polish and one English, who formany years were partners at a major international law firm. Siemiatkowski & Davies has been established to focus onfive specific areas: corporate transactions; finance transactions; real estate; private equity; and projects. Both foundingpartners have been involved in many high-profile transactions in these areas in Poland over the last 18 years. Theyhave recently co-authored a book entitled “Joint Ventures in Poland: a Legal Guide”.


8 International

8.1 What would be the approach in Poland to recognising aprocedure started in another jurisdiction?

The Bankruptcy Law contains provisions dealing with cross-borderbankruptcy. Those provisions are based upon the regulationscontained in the 1997 UNCITRAL Model Code, and cover therecognition of cross-border bankruptcy proceedings and the settingaside of such proceedings.The Bankruptcy Law provisions on cross-border bankruptcies donot, however, apply to bankruptcies in other EU Member States. Insuch cases the EC Council Regulation dated 29 May 2000 (No1346/2000) on insolvency proceedings applies.

AcknowledgmentThe authors would like to acknowledge the assistance of AndrzejSiemiatkowski, one of the two founding partners of Siemiatkowski& Davies, in the preparation of this chapter.

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Chapter 33

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Portugal


1.1 How does a creditor take security over assets in Portugal?

Under Portuguese law, there are five types of consensual security:the pledge; the contractual lien; the mortgage; the assignment ofincome; and the financial collateral arrangements.Pledge (“Penhor”)There are two types of pledges: the general pledge involves thecreditor taking actual possession of the debtor’s assets as security.The commercial and banking pledge may not involve the transfer ofpossession to the creditor.A creditor has a preferential right to be paid with the proceeds of thejudicial sale of the pledged assets.All assets that cannot be mortgaged can be pledged. Credits canalso be pledged, as well as negotiable securities.Contractual Lien (“Direito de retenção”)A lien is the right to retain possession of another person’s propertyuntil that other person performs a specific obligation related to thatspecific asset.The creditor may maintain possession of an asset that he iscontractually obliged to deliver to the debtor, until the debtor fulfilsits obligation related to such specific asset (for example, if the assetwas delivered to the creditor for custody or repair).A lien is only applicable to assets, not to credits.Mortgage (“Hipoteca”)A mortgage is a security that does not involve the transfer ofownership nor possession of an asset.It creates an encumbrance which hangs on the asset and isenforceable before any third parties (including purchasers of suchassets).A mortgage is valid only upon registration. Thus, it only applies toimmovable assets or movable assets which are subject to a publicregistration, such as automobiles, ships or airplanes).Assignment of income (“Consignação de rendimentos”)This is a type of security where the debtor assigns to the creditor, inguarantee of a certain debt, all income originated by a specific asset.In order to be enforceable before any third parties, this securitymust be registered. It can only be created in relation to an assetsubject to public registration (e.g. immovable assets).Financial collateral arrangements (“Garantias financeiras”)Subsequently to Directive 2002/47/EC of the European Parliament

and of the Council of 6 June 2002 on financial collateralarrangements, Portuguese law also implements these types ofguarantees, namely the title transfer financial collateralarrangement (“alienação fiduciária”) and the security financialcollateral arrangement (“penhor financeiro”).These collateral arrangements may apply to cash or financialinstruments.Further to all these, there are legally created securities (“privilégioscreditórios”) in benefit of specific creditors (mainly employees andpublic entities, like Social Security or Tax Administration). Theseare created regardless of any voluntary act by the parties and grantthe respective creditors a right to be paid prior to other creditors.


Transactions entered into in the four years prior to the judicialdeclaration of insolvency might be vulnerable to attack.In general, such transactions may only be attacked if proof is madethey were prejudicial to the insolvency creditors and that the thirdparties acted in bad faith (this means the third party involved hadknowledge that the company was insolvent or that the transactionwas prejudicial to the company’s creditors).Some types of transactions can always be challenged,independently of any proof of bad faith of the third party involved.These include, for example:

Gratuitous acts made in the two years prior to thecommencement of the insolvency process.Transactions on terms where the company receives aconsideration which has a value which is significantly lessthan the value of the consideration provided by the insolventcompany.Securities over the insolvent company’s assets granted in the6 months prior to the commencement of the insolvencyprocess, in guarantee of pre-existent debts.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Portugal?

A director of a company which is insolvent is obliged to file forinsolvency within 60 days.If the directors do not comply with such obligation, they may beconsidered responsible for the insolvency of the company.If they are considered responsible for the insolvency, they may be

Rui Simões

Carlos Pereira da Costa

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subject to:Disqualification from administration of its own assets for aperiod of 2 to 10 years.Disqualification from any type of commercial activity(including appointment for any type of office in anycompanies) for a period of 2 to 10 years.Civil liability (compensation to the company for the damagessuffered in consequence of their actions).Criminal liability (fraudulent bankruptcy is a crime, whichmay be punished up to 5 years’ imprisonment).

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Portugal?

Portugal has only one type of formal procedure, the insolvencyprocess.There is also an informal procedure, called extrajudicialconciliatory procedure, which is conducted by a State agency(IAPMEI), which will try to arrange for a plan for recovery of thecompany, which is approved by its creditors.

2.2 What are the tests for insolvency in Portugal?

A company is insolvent if it is unable to pay its debts as they falldue (cash flow test) or if the value of the company’s assets issignificantly less than the amount of its liabilities (balance sheettest).


A company can be placed into an insolvency process if it isinsolvent or in the imminence of insolvency. In this last case(imminent insolvency), only the company can file for insolvency,not its creditors.


A company may file for insolvency before the Court.Any creditor, the District Attorney or any third party legallyresponsible for the company’s debts can also request the Court todeclare the insolvency of a company, based on facts that show thecompany is insolvent.When the company files for insolvency, the court will declare theinsolvency within 3 weekdays (unless there is any formalinsufficiency of the filing).When the insolvency is requested by a creditor, the company issummoned and may present its defence. The Court will decide,based on the evidences submitted by the parties, if the company isdeclared insolvent.In the insolvency declaration, the judge will appoint an insolvencyadministrator, which will be responsible for the liquidation of thecompany’s assets, unless an insolvency plan is approved thatprovides for the recovery of the company.Once the insolvency is declared, the creditor that requested itcannot cancel its request. If the Court considers the request waspurposely filed despite the absence of any grounds, the requestor isliable for the damages caused to the company and its creditors.

Prior to the insolvency declaration, a creditor may request theappointment of a provisional administrator, in order to prevent anyprejudicial acts to the company’s assets.The extrajudicial conciliatory procedure will only commence upona request by the company. The state agency competent for thisprocedure (IAPMEI) may refuse the request if it considers thecompany cannot be recovered, that the approval by its creditors isunlikely or that the company is not insolvent (or in the imminenceof insolvency).


When the company is declared insolvent, the following entities willbe notified: the directors of the company; the Salaries GuaranteeFund; the District Attorney; the entity that requested the insolvencyprocess; the company itself; the workers commission; the fivebiggest creditors (those who are known at the time); and publiccreditors (Social Security and Tax Administration).The insolvency declaration is published in the official gazette(Diário da República), in the Court, in the company’s head officeand also in the Court’s website (the unknown creditors will besummoned through these publications).The insolvency will be registered in the Commercial RegistryOffice, in the centralised enforcement proceedings database and inthe Central Bank database (credit risks database).The Court judgment declaring the company insolvent will convenea creditors meeting to be held between 45 to 75 days after thejudgment. In this meeting, the creditors will decide whether thecompany’s assets shall be liquidated or if the insolvencyadministrator shall prepare an insolvency plan.

3 Creditors


If an insolvency process is in place, unsecured creditors cannotenforce their rights outside of this procedure.On the contrary, the extrajudicial conciliatory proceeding does notsuspend any enforcement rights of the creditors.


If an insolvency process is in place, secured creditors cannotenforce their rights outside of this procedure. Nevertheless, thesecreditors may be entitled to a compensation for damages suffered ifthe sale of the secured assets is unjustifiably delayed.


Yes, under certain circumstances.In general, such set off is only accepted if the requisites of the setoff already occurred before the insolvency declaration or if thecredit held by the insolvency creditor was already susceptible of setoff before the credit held by the insolvent company.In some cases, the set off is never accepted, like for example whenthe credit over the insolvent company is a subordinated credit (see



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the ranking of claims below) or if the credit was acquired from adifferent creditor after the insolvency declaration.



In the insolvency process, the company is controlled by theinsolvency administrator, unless the company requests to the Courtto be maintained in possession of its assets. In this last case, thecompany’s directors maintain their powers and the insolvencyadministrator will only supervise the administration.Unless this last option is accepted by the Court, the company’sdirectors will lose all their powers to administer or sell any of thecompany’s assets.


The insolvency process expenses shall be financed by the insolventcompany’s assets. If the value of the company’s assets is insufficient to finance theinsolvency process, the process shall be immediately closed(liquidation will proceed outside the insolvency process).In any case, the Court will advance an initial amount to theinsolvency administrator in order to pay for the publications andother expenses related to the initial stages of the process.Any expenses related to the insolvency process (such as theinsolvency administrator remuneration) or related to the continuingof the company’s activity are ranked prior to any other claims overthe insolvent company.The process can also be financed by new financing obtained by theinsolvency administrator if he/she considers it necessary in order topreserve the value of the company’s assets and the creditors’committee approves it. Further to the priority ranking abovementioned, these new loans can be granted preferential rights infuture insolvency processes.


The declaration of insolvency does not automatically terminate theemployment contracts.Only if and when the creditors or the insolvency administratordecide to close down the company’s activities, the respectiveemployment contracts will be terminated.


Upon the declaration of insolvency, the general principle is that theinsolvency administrator can choose whether to continueperforming or terminate any contract.

5 Claims


In an insolvency process, creditors claim amounts owed to them bysending a claim to the insolvency administrator within 30 days afterthe insolvency declaration.The insolvency administrator will then prepare a list of all claimedcredits, organised according to the respective ranking.


The ranking is the following:1. Insolvency process expenses (including, for example,

insolvency administrator remuneration, court fees and debtsincurred after the insolvency declaration).

2. Specific preferential credits (only those preferential creditswhich are specific to an asset; for example, employees’credits have a prevailing security over the immovable wherethey work.

3. Secured creditors.4. General preferential credits (these are preferential credits

which are not specific to an asset; for example, SocialSecurity credits).

5. Unsecured creditors.6. Subordinated creditors.7. Shareholders.


Yes, they are. A company entering into an insolvency processremains subject to taxes (tax on profits, VAT or others) arisingduring the procedure.



Yes, there is. In the insolvency process, the approval of aninsolvency plan is decided by a majority of 2/3 of the issued votes(and a majority of non subordinated credits).The creditors which are affected by the plan and do not approve it,are obliged to accept it unless they prove that such plan produces aworse result for them than the liquidation of the insolvent’s assets.


In the insolvency process, there are three possibilities:1. The insolvency process is ended because it is considered that

the assets of the insolvent company are insufficient to coverfor the process costs. In this case, not even the liquidation ismade in the process (it will be made outside the Court).

2. If no insolvency plan is approved, the assets are liquidatedand, at the end of the procedure, the company is extinct.

3. If an insolvency plan is approved and such plan includesmeasures to maintain the company operating, the end of theprocedure will see the company restart its normal activity.

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7.1 Is it common to achieve a restructuring outside a formalprocedure in Portugal? In what circumstances might thisbe possible?

It is not common to achieve a restructuring outside a formalprocedure.In very few cases, the extra-judicial conciliatory procedure achievesa restructuring agreement; the success is limited to few cases, giventhe fact that there is no process for “cramming-down” creditors whodo not approve of such restructuring plan.Private agreements between the debtor and its creditors occur inlimited cases, usually when dealing with large companies, but arenot, in any way, common.


Yes, reorganisation is possible within the insolvency process.The insolvency process can either be conducted with the objectiveof liquidating the debtor’s assets or with the objective ofreorganising the debtor.In order to achieve a reorganisation, the debtor or any creditor orgroup of creditors which own more than 20% of the credits canpresent a proposal of an insolvency plan. Such plan can provide forthe continuance of the debtor’s business, as long as the debtoraccepts it.The plan can, at the same time, provide for debt for equity swaps,the dilution of existing shareholdings (or even extinction) alongwith a further injection of funds, as well as changes to the by-lawsof the company or changes as to the members of corporate bodies.


In the insolvency process, priority is conferred, by law, to the saleof the business as a going concern.

As a general rule, such sale will only occur after the Court hasissued a final decision on the insolvency and the creditors meetinghas occurred.However, the law provides that the insolvency administrator cansell assets prior to those events if that sale is necessary in order topreserve the value of such assets.In consequence, it is possible that the sale is prepared prior to theinsolvency being declared and to perform that sale shortly after thebeginning of the insolvency process. Such sale shall be approvedby the creditors’ committee.

8 International

8.1 What would be the approach in Portugal to recognising aprocedure started in another jurisdiction?

The Council regulation (EC) No 1346/2000 of 29 May 2000 oninsolvency proceedings is applicable in Portugal. Therefore,proceedings opened in an EU Member State must be recognisedwithout any formality.In what concerns procedures started in jurisdictions outside of theEuropean Union, the recognition of such procedures depends on theprior publication of the decision of the foreign court by aPortuguese court.The insolvency administrator of the foreign court shall request suchpublication to the competent Portuguese court, which will acceptthe request unless such recognition breaches fundamental principlesof the Portuguese law or if the foreign court, according to thecriteria of the Portuguese law, would not have jurisdiction to take adecision on the insolvency of such debtor. The recognition of theforeign decision will allow the insolvency administrator to act inPortugal; however, in order to enforce any decisions taken by theforeign Court, a previous review and confirmation by Portuguesecourts is necessary.



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PortugalSérvulo & Associados

Carlos Pereira da Costa

Sérvulo & AssociadosRua Garrett, 641200-204 LisbonPortugal

Tel: +351 210 933 000Fax: +351 210 933 001Email: [email protected] URL: www.servulo.com

Carlos Pereira da Costa joined the firm* in 1999.He has extensive experience in litigation and banking matters, givenhis prior work for the Litigation Department of Crédit LyonnaisPortugal 1990 and 1999. He was also a lecturer at the BankingTraining Institute between 1997 and 2002.He has been advising on a wide range of restructuring andliquidation in recent years.* Ferreira Pinto & Associados merged with Sérvulo Correia &Associados in 2008, creating the firm Sérvulo & Associados.

Rui Simões

Sérvulo & AssociadosRua Garrett, 641200-204 LisbonPortugal

Tel: +351 210 933 000Fax: +351 210 933 001Email: [email protected] URL: www.servulo.com

Rui Simões joined the firm* in 1997, specialising in litigation,dispute resolution, corporate and commercial matters.In 2003, he was appointed as Deputy Director of the Legal Planningunit of the Portuguese Ministry of Justice. In such capacity, he wasthe coordinator of the project of the new Insolvency Code andrelated legislation, in force since September 2004.He returned to the firm in 2008, advising on insolvency andcorporate recovery matters, both on domestic and internationalmatters.* Ferreira Pinto & Associados merged with Sérvulo Correia &Associados in 2008, creating the firm Sérvulo & Associados.

Sérvulo is a multidisciplinary boutique providing legal services in the main areas of the current legal market, inaccordance with three essential principles: full service capacity; synchronisation with EU law; and taking theinternational perspective.

For each practice area, Sérvulo provides legal services through the issue of legal opinions and legal advice with thehighest degree of rigor, actively participating in procedures and negotiations and providing representation in cross-jurisdictional dispute resolution procedures including arbitration. As a full service firm, Sérvulo is able to provide abespoke service to its clients, with a thorough understanding of their business and objectives and always acting in thebest interests of the client.

Sérvulo has extensive experience in the area of liquidation and corporate recovery. Considering the complexity thatfrequently surrounds these operations, Sérvulo is well placed to provide a fully integrated service with the interventionof multidisciplinary teams, encompassing specialists in corporate, tax, employment, administrative, finance andcriminal law.



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Pachiu & Associates

Romania


1.1 How does a creditor take security over assets in Romania?

The Romanian law provides the right of creditors to secure theirclaims against debtors, by conclusion of securities agreements.Therefore, creditors are entitled to execute mortgage agreements,pledge agreements as well as security agreements regarding otherrights in rem. Mortgage agreements require notarisation by a notarypublic in order to be valid and the registration with the competentReal Estate Register for the purpose of its enforceability towardsthird parties. Furthermore, the object of the pledge agreements canreside in movable tangible or intangible assets. The pledgeagreements become legally binding upon signing by all parties. Inorder to be enforceable, pledge agreements as well as all other rightsin rem are to be registered with the Electronic Archive for Securityin Real Property.


According to Law No. 85/2006 regarding the insolvency procedures(the “Insolvency Law”), the judicial administrator or the liquidatoris entitled to file with the syndic judge cancellation actionspertaining to deeds concluded by the debtor against the interest of itscreditors within three years before the opening of the insolvencyprocedures. In this regard, the judicial administrator or theliquidator may demand cancellation of deeds regarding theestablishment or the transfer of patrimonial rights in favour of thirdparties. Provided that the syndic judge rules for cancellation of suchtransactions, the third parties shall return the transferred assets or theamount representing the value of the performed services.Nevertheless, the Insolvency Law limits the deeds that can bechallenged as mentioned above to operations that are basicallydetrimental to the Company’s patrimony, such as:

free transfers of property, during a three-year period prior toopening of insolvency procedures whereas humanitariansponsorships are excluded; transactions performed during a three-year period prior toopening of insolvency procedures in which the value of theservices performed by the debtor exceeds the receivedbenefit; agreements concluded during the three-year period prior tothe opening of procedures with the intention of all partiesinvolved to circumvent assets from the pursuit of creditors of

the debtor or to affect the creditors’ rights in any mannerwhatsoever; andtransactions involving transfer of ownership for the payment ofa previous debt, performed during a 120-day period prior toOpening of Proceedings, if the amount the creditor wouldobtain in case of winding-up of the Local Company would belower than the value of the ownership transfer, etc.

Furthermore, transactions performed with a holder of at least 20% ofthe share capital of the debtor, with a director of the debtor, with anaffiliate company, or with a co-owner of an asset shall be revoked.After the restitution of the asset or the value of the asset by the thirdparty to the debtor, the third party, acting in good faith, shall have acorresponding claim against the patrimony of the debtor.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Romania?

In this regard, upon request of the judicial administrator/the liquidator,the syndic judge may rule that the supervising or the managing bodiesof the company (including the director), may be held liable for a partof the debtor’s liabilities if such persons: (i) have used the assets or thecredits of the company for their own use or for the use of a third party;(ii) have performed commercial acts in their own interest, under thecover of the company; (iii) have decided, for their own interest, thecontinuation of an activity which obviously led the company topayment cessation; (iv) have caused unlawful keeping of theaccountancy; (v) have unlawfully taken or concealed a part of thecompany’s assets or have fictively increased its liabilities; (vi) haveused unsuitable means in order to obtain funds in order to delay thepayment cessation; or (vii) have performed preferential payments to acertain debtor in the last month prior to the payment cessation. Jointliability may be held in case several persons performed such actions,provided that the cause of insolvency occurred prior or during theexercise of their duties. Furthermore, criminal liability may beengaged against the director, provided that it refuses to remit to thesyndic judge the documents necessary for the course of the insolvencyprocedures or does not initiate the insolvency procedures within themandatory terms provided by the Insolvency Law.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Romania?

The Insolvency Law provides: (i) a common insolvency procedure;and (ii) a simplified insolvency procedure. Under the common

Silviu Predescu

Dr. Ciprian Paun, Ph.D.



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insolvency procedure, the debtor, provided that a 60-daysurveillance period is observed, enters successively in both judicialreorganisation and in bankruptcy procedures or either of the judicialreorganisation or bankruptcy procedure. In order to facilitate thedissolution of certain legal entities, if insolvent, the Insolvency Lawprovides for a simplified procedure. Such procedure allows certaindebtors to go bankrupt simultaneously with the opening of theinsolvency procedure. Such is applicable only to the insolventdebtor listed hereunder:

individual merchants; family associations; companies, provided that: (i) their patrimony comprises noassets; (ii) their constitutive or financial documents or thedirector cannot be found; and (iii) the premises cease to existor to correspond to the address registered with the TradeRegistry; companies which failed to provide in due time: (i) thecomplete list of their assets, including bank accounts; (ii) alist comprising details from public registers regardingsecured assets; (iii) the list of creditors comprising the dueamount and the preferred claims; and (iv) the list of currentactivities to continue during the surveillance period; companies liquidated prior to application of the insolvencyprocedure; and debtors demanding to be subjected directly to the bankruptcyprocedure or debtors not entitled to a judicial reorganisationprocedure.

The judicial reorganisation applies to a debtor for the purpose ofensuring the payment of the debtor’s debts, according to a plan.Therefore the reorganisation procedure implies the approval,implementation and compliance with a reorganisation plan. Thereorganisation plan may individually or separately refer to the: (i)operational and/or financial restructuring of the debtor; (ii) thecorporate restructuring by way of changing the share capitalstructure of the debtor; or (iii) the decrease of the activity of thedebtor by liquidation of assets included in the debtor’s patrimony.In case of non-compliance with the reorganisation plan, the judicialadministrator, the creditor’s committee, a creditor, or the specialadministrator appointed within the reorganisation procedure, mayapply with the syndic judge for the opening of the bankruptcyprocedure. Bankruptcy is defined as the procedure to which adebtor is subject for liquidation of its patrimony and payment of itsdebts. Such liquidation is followed by the deletion of the debtorfrom the relevant register where it is recorded.

2.2 What are the tests for insolvency in Romania?

According to the Insolvency Law, insolvency represents thecondition of a debtor’s patrimony, characterised by insufficientfunds to pay due debts. Such condition is presumed if several debtswere not paid in 30 days as of the due date. Insolvency is“imminent” if proof is provided that the debtor will not be able topay its debts upon their due date. Moreover, a creditor is entitled tofile an insolvency petition, in case that the value of its claimamounts to RON 10,000 (approximately EUR 3,000), save for theclaims arising from labour relationships which have to meet thethreshold of at least six average salaries per national economy.


According to the Insolvency Law, companies will be placed underinsolvency procedures on grounds of the petitions filed with thecompetent Court by the debtor itself, by creditors or by any other

persons or institutions, as determined by law, within 30 days fromthe date of occurrence of the debtor’s insolvency. Moreover, in caseof pending insolvency, debtors may also request commencement ofthe insolvency procedure. The petitions regarding the opening ofinsolvency procedures shall be signed by the person empowered torepresent the company, based on the corporate statutes of the debtor.In the case of entities controlled and monitored by the NationalSecurities Commission, such public institution is entitled to requestcommencement of the insolvency procedure for such companies. Furthermore, documents related to the patrimony of the debtor, itsbalance sheet, the debtor’s creditors, the current activitiesperformed by the debtor, etc., shall be deposited with the Court asannexes to the insolvency petition. In case of non-delivery of all theaforementioned within 10 days from the filing of the insolvencypetition with the competent Court, the syndic judge shall render adecision regarding the opening of a simplified insolvencyprocedure. The debtor shall bear patrimonial liability for the premature filingof insolvency petitions. The debtors who have been subject to areorganisation procedure within the previous five years are notentitled to be subjected again to such procedure.


According to the Insolvency Law, if the insolvency petition meetsthe aforementioned conditions, the syndic judge shall issue adecision regarding the commencement of the common insolvencyprocedure. In case of failure to provide the Court with theinformation required by the Insolvency Law to open the generalprocedure, as well as if the debtor states its intent to perform asimplified procedure, the Court shall issue a decision regarding thecommencement of a simplified insolvency procedure. In the caseof a common procedure, the syndic judge shall appoint a judicialadministrator, whereas a temporary liquidator shall be appointed inthe case of a simplified procedure. Furthermore, the judicialadministrator or the liquidator shall ensure the notification of thedebtor’s creditors. After the opening of the insolvency procedure,all deeds and correspondence of the debtor, of the judicialadministrator or the liquidator shall contain the annotation: “ininsolvency”, in English, Romanian and French (Rom: “ininsolventa”, French: “en procedure collective”).


Upon the commencement of the insolvency procedures, the judicialadministrator shall send a notification to the creditors mentioned inthe list filed by the debtor when depositing the insolvency petition.In case of opposition by the creditors, the judicial administratorshall notice the debtor and the Trade Registry in this regard.Furthermore, if the debtor owns assets that require a special recordwith the competent authorities, the judicial administrator or theliquidator shall send a copy of the decision regarding thecommencement of the insolvency procedure to the court and toother relevant authorities providing for performance of suchregistration. After receiving the abovementioned notice, thecreditors shall deposit the petition for the approval of their claims.Such claims shall be recorded with a register maintained with theCourt. The aforementioned claims shall be subject to examinationas provided by the Insolvency Law and performed by the judicialadministrator, except for the claims ascertained with anenforcement title. All claims recorded with the aforementioned

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register are presumed to be correct and valid, unless such arechallenged by the debtor, the judicial administrator or by thecreditors. After all claims are verified, the judicial administrator orthe liquidator shall establish a preliminary panel with all the claimsagainst the debtor’s patrimony. Such panel may be subject to thechallenge of creditors, debtors and other interested third parties.

3 Creditors


According to Article 36 of the Insolvency Law, the opening of theinsolvency procedure, as regards a debtor, triggers an automaticstay affecting all the judiciary and extra judiciary actions againstsuch debtor or its assets, filed before the opening of the procedure,in order to recover the accounts receivable of the creditors. In orderto render effective such provision, the court ruling initiating theinsolvency procedure must be communicated to the courts havingjurisdiction where the debtor has its registered office and to all thebanks where the debtors hold bank accounts. As of the initiation ofany insolvency procedure, the creditors are compelled to enforcetheir claims only within the frame of the respective insolvencyprocedure.


The automatic stay which occurs when an insolvency procedure isopened against a debtor also affects the petitions filed by securedcreditors which are prevented to enforce their rights after thecompetent court approves a filing pertaining to the opening of aninsolvency procedure. However, a creditor that has a claim securedby a mortgage, pledge or other right in rem may request that thecourt lift such stay. In order to lift the stay, where the value of thecollateral of the right in rem has been appraised to be covered by thevalue of the claim secured by such object, the court must find that:

the object of the right in rem is not vital to the success of theproposed reorganisation plan; and if the object of the right in rem is part of an operationalprocess, its detachment and separate realisation will notdevalue the remaining assets.

The court may also lift the stay if it finds that the secured claim isnot satisfactorily protected due to any of the following:

the value of the object of the right in rem is under threat todepreciate; the claim may not be realised due to accrual of interest andpenalties in relation to a higher-ranked claim; or the object of the right in rem is not insured againstdestruction or deterioration.

Moreover, the debtor, the judicial administrator or the liquidatormay not dispose in any way whatsoever of the collateral asset,insofar as the creditor’s account receivable is not entirely paid.


The Insolvency Law expressly provides in Article 52 that theopening of the insolvency procedure does not hinder the creditor’srights to invoke set off of their accounts receivables against thesums owned by them to the company subject to the insolvency

procedure, provided that all the legal requirements relating to set offoperations are being met. Nevertheless, the creditor must havesubmitted, in accordance with the requirements of the notificationreceived from the judicial administrator or liquidator, its request foradmittance of its account receivable with the table of accountsreceivable.



In compliance with Article 47 of the Insolvency Law, the openingof the insolvency procedure lifts the debtor’s right to administrateits business, meaning the debtor is no longer able to manage itsactivity and to manage or dispose of its assets. Such lifting extendsover the assets that could be obtained by the debtor after the date ofthe opening of the procedure. However, the debtor’s administrationright is not lifted provided that he opts to enter into the judicialreorganisation procedure, according to Article 28 paragraph 1, letterh) or Article 33, paragraph 6. Nonetheless, absent a viablereorganisation plan and subject to continuous losses, the creditors,the creditors’ committee or the judicial administrator may file apetition with the syndic judge demanding the lifting of the debtor’sadministration right. The Insolvency Law provides for asupervision period, between the opening of the judicialreorganisation procedure and either the confirmation of thereorganisation plan or the initiation of bankruptcy. Within suchperiod, the debtor is allowed to continue the current activity and toperform payments to usual customers. In any case, the debtor’sadministration right is lifted de jure, once the bankruptcy procedureis opened. In such case, only winding-up necessary activities areallowed to be performed by the debtor. The banks where the debtorhas accounts are notified not to dispose of available funds absentorder from the judicial administrator or the liquidator.


According to the Insolvency Law, all the procedures mentionedthereto, including the notification and communication of theprocedural deed made by the judicial administrator/liquidator, arefinanced out of the debtor’s patrimony. The available funds aredeposited into a special bank account. Such amounts are deemed asliquidation expenses and are included in the creditors’ disbursementplan. Provided that no funds of the debtor are available for the legalinsolvency procedures, the necessary payments shall be forwardedout of a special liquidation fund. According to the Insolvency Law,such liquidation fund shall be supplied out of the registration taxesowed to the Trade Registry Offices and by other public registries(such as the registries for agricultural companies and/orassociations/foundations).


Provided that the simplified procedure or the bankruptcy procedureis initiated against a company, the liquidator shall immediatelyproceed to the termination of the individual labour agreement of thecompany’s personnel. In such case there is no need to follow thecollective dismissal procedure provided by the Romanian LabourCode. However, the legal 15 days prior notice must be granted tosuch personnel.

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In order to comply with the European Union legislation, Romaniahas adopted on May 25, 2006 Law No. 200/2006 on the guaranteefund for the payment of salary receivables. Such law entered intoforce on January 1, 2007 and implements into the domestic law theCouncil’s Decision No. 80/98/EEC regarding the approximation oflaws of Member States relating to the protection of the employeesin case of insolvency of their employer. Accordingly, the employershave the obligation to contribute monthly to the guarantee fund withan amount equal to 0.25% of the total fund of the gross monthlysalaries of their employees. The purpose of the guarantee fund is toprotect the employees against losses they may incur in case theiremployers are subject to an insolvency procedure. However, LawNo. 200/2006 provides for a limitation of the amount of the salaryreceivables that may be paid from such fund, which may not exceedthree average gross salaries per economy for each employee. If theactivity of the employer returns to normal and the insolvencyprocedure is closed, the employers have to reimburse the amountspaid from the guarantee fund within a term of six months as of theissuance of the ruling attesting to the closing of such procedure.The guarantee fund provides for the payment of the followingoutstanding amounts to the employees, upon the request of theadministrator/liquidator of the insolvent employer: (i) outstandingsalaries; (ii) compensations due by employers for the leave that wasnot taken by employees, but only for a maximum of one year ofwork; (iii) compensatory payments, in case of termination of thelabour agreement, in the amount established by the collectiveand/or individual labour agreement; (iv) compensations due byemployers in case of work accidents or professional diseases; and(v) indemnities due by employers for the temporary cessation oftheir activity. However, such amounts shall be paid only for a termof three months.


Pursuant to Article 86 of the Insolvency Law, in order to maximisethe level of the debtor’s patrimony, the judicial administrator or theliquidator may maintain or terminate any contract, ongoing leases,or other long-term contracts, provided that such contracts have notbeen totally or substantially performed. For such purposes, thecontractors shall notify the judicial administrator or the liquidator asregards its intent. The answer is to be granted in 30 days. Shouldthis term be exceeded, the judicial administrator/liquidator may nolonger maintain the contract, which in this case is consideredterminated. However, any contractor which incurred damage uponsuch termination may file a legal action for damages, against thedebtor. Provided that a seller of an immovable asset has withheldthe ownership right until the performance of the entire payment,once the insolvency procedure is being opened, the sale is deemedas effective and the provisions from the above paragraph as notapplicable. In case of movable assets sold to the debtor, if suchassets are not in the debtor’s possession and have not yet been paidby the debtor when the insolvency procedure is commenced, theseller is free to retrieve the assets. However, if the seller agrees theassets to be delivered, it must register its claim on the panel. In casethe judicial administrator or the liquidator maintains a contract thatis performed by periodical payments, it will not have to perform anyoutstanding payments. For such amounts, the contractor shall turnagainst the debtor.

5 Claims


According to the Insolvency Law, the judicial administrator mustgive notice to all the creditors as regards the opening of theinsolvency proceedings, the last day of filing claims and theprocedure which has to be followed for filing the claims. Suchnotice is also published with the Bulletin of Insolvency Procedures.The creditors must file a petition regarding the acceptance of theclaims against the debtor respecting the time bar set forth in thecourt ruling which opened the insolvency procedure. Such petitionbroadly comprises the name of the creditor, the domicile/registeredoffice, the claimed amount, the grounds of the claim as well as thecollateral securing the claims, if any. Justifying documents for theaccount receivables for the securities must also be filed. The claimsin connection with salary rights are enlisted according to theavailable payrolls. The claims not yet matured or under conditionat the procedure opening date shall be temporarily enlisted at thecreditors’ claims panel. Save for unchallenged budgetary accountsreceivable, all the other accounts receivable are subject to averifying procedure. As a rule, all the forwarded accountsreceivable are presumed to be valid and accurate absent a challengeby the debtor, the judicial administrator or the creditors. All theaccounts receivable expressed in foreign currency are conversedand registered in RON at the exchange rate available at the date ofopening of the procedure. Upon termination of the claims verifyingprocedures, the judicial administrator or the liquidator shall registerwith the competent court, a preliminary panel comprising all theclaims against the debtor’s patrimony. Such panel also indicates thenature of each claim: unsecured; secured; under condition, etc.Such preliminary panel is subject to challenging originating fromthe debtor, the creditors or any other interested party. Once all suchchallenges are solved by the syndic judge, the judicialadministrator/liquidator draws up the final panel.


Secured claims have in any case priority in relation with theircollateral asset. Under Article 121 paragraph 1 of the InsolvencyLaw, the funds obtained from the sale of any collateral assets shallbe first distributed to the respective secured creditors. Moreover,according to Article 121 paragraph 3, a secured creditor is entitledto participate at any disbursements performed prior to the sale of itscollateral asset. Such amounts shall be deduced from the priceobtained from the subsequent sale of the collateral asset, ifnecessary to prevent the creditor to collect more than its accountreceivable. Article 123 of the Insolvency Law institutes the followingdistribution priority, in case of a debtor winding-up: (i) taxes andany other procedural expenses; (ii) accounts receivable derivedfrom labour relationships; (iii) accounts receivable derived fromcredits, including interests and related expenses, granted by creditinstitutions after the opening of the insolvency procedure, as well asderiving from the activity of the debtor further to the opening of theinsolvency procedure; (iv) budgetary accounts receivable; (v)accounts receivable deriving out of life support obligations, childsupport or any other amounts necessary for subsistence means; (vi)amounts necessary for support of the individual debtor and his/herfamily; (vii) accounts receivable deriving from a) banking credit,

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including interest and afferent expenses, b) product delivery and c)rent; (viii) other unsecured accounts receivable; and (ix)subordinated accounts receivable, respecting the following order: a)amounts borrowed to the debtor by a shareholder holding at least10% of the share capital; and b) accounts receivable deriving fromfree of charge deeds.


Regardless of the insolvency procedures being initiated, all debtorsare subject to the laws applicable to their business enterprises,including the tax laws. In any case, the tax and levies may bemitigated by taking advantage of the wide operational losses.



The cramming down of creditors appears when a class of creditorsaccepts a reorganisation plan. Each claim gives the right to onevote, within the class where the claim belongs. According to theInsolvency Law, there are four classes of claims: (i) secured claims;(ii) budgetary claims; (iii) unsecured claims of the essentialcreditors for the activity of the debtor; and (iv) other unsecuredclaims. A plan is deemed as accepted by a class of claims once theplan is voted with an absolute majority by the creditors holdingclaims in such class. A plan is confirmed by the delegate judge ifthree out of the four classes previously mentioned have accepted theplan, provided that at least one disfavoured class votes the plan.However, in order for the delegate judge to confirm the plan, eachdisfavoured class must be subjected to an equitable and correcttreatment, comprising, inter alia that: (i) none of the classes/claimsrejecting the plan receives less than they would in case ofliquidation; and (ii) none of the classes/claims receives more thanthe total value of the account receivable.


In each stage of each procedure provided by the Insolvency Law,the syndic judge may pass a ruling ending the procedure anddeleting the debtor from the registry where it is registered, providedthat there are insufficient assets or no assets at all to cover theexpenses incurred during each procedure, and no creditor forwardssuch amounts. The reorganisation procedure or liquidationprocedure according to a plan may be closed by a ruling of thesyndic judge based on fulfilment of the entire payment obligationsundertaken in the plan. A bankruptcy procedure is closed by the syndic judge uponapproval of the final report provided that all the available fund andassets have been distributed to the creditors and the unclaimed fundhave been deposited in a bank account.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Romania? In what circumstances might thisbe possible?

According to the Romanian legislation Judicial reorganisation isthe procedure applied to the debtor as legal person, in order to pay

his debts according to the payment schedule of claims. Thereorganisation procedure implies the preparation, approval,implementation and observance of a plan, called reorganisationplan, which may provide, as a whole or separately, for:a) operational and/or financial restructuring of the debtor;b) corporate restructuring by modification of the structure of the

share capital; and/orc) limitation of activity by liquidation of certain assets from the

debtor’s estate.The conventional restructuring of the activity is defined only indirect connection with the labour legal provisions. The law doesnot indicate specific conditions in order to enter in this procedure.


The Reorganisation process is part of the insolvency procedurebeing a first step towards the intention to save the economicactivity. The Romanian Law allows the debtor, or the syndic judgeto propose a reorganisation plan in order to increase the chances ofsaving the company.


The Romanian law does not allow a pre-packaged sale. Such aprocedure could be considered to be used in the fraud of thecreditors.

8 International

8.1 What would be the approach in Romania to recognising aprocedure started in another jurisdiction?

Such matter is currently regulated by Law No. 637/2002 regardingthe regulation of private international law relationships in the fieldof insolvency. The Law is structured by two titles. The first titlerepresents the enactment of the UNCITRAL Model Law on CrossBorder Insolvency, applicable to the relationships with all foreignstates, except for the Member States of the European Union.According to such title, a representative of a foreign procedure hasactive capacity to stand trial in order to apply to the Romaniancourts for recognition of the foreign procedure in which it has beenappointed. The foreign representative must provide a statementregarding all the foreign procedures opened as to its knowledgeagainst the debtor. The court needs to be aware of all the otherforeign procedures in order to render the recognition decision and,particularly, for any type of relief that it has been requested torender. Such relief has to be consistent with other simultaneousinsolvency procedures regarding the same debtor. The court mayresolve upon the recognition of the foreign procedure only if thesummoning procedure is legally fulfilled. Such recognitioncomprises mandatory relief measures and even triggers anautomatic stay. However, in those situations where the recognitionof a foreign procedure would run counter to Romanian principles ofpublic order, the petition for recognition may be dismissed. Thesecond title of the Law is transposing European Council RegulationNo. 1346/2000 on insolvency procedures in the frame of domesticlegislation, and applies only to the relationships with EU MemberStates. However, considering Romania’s accession to the EU, theRegulation is currently directly applicable to Romania. The

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Dr. Ciprian Paun

Pachiu & Associates 15 Emil Isac Street, Suite No. 5 400023, Cluj-Napoca, Cluj CountyRomania

Tel/Fax: +40 364 100 762Email: [email protected] URL: www.pachiu.com

Ciprian graduated the Law School of Babes-Bolyai University fromCluj-Napoca in 2001. He is a graduate of the LLM programme ofthe Law School of the Westfälische Wilhelms-Universität, Münster,Germany and is a Ph.D in Comparative Civil Law at the Law Schoolof Babes-Bolyai University. Ciprian also served as a teacher with theFaculty of Economics and Business Administration of Cluj-NapocaUniversity. Ciprian is a senior member of the Cluj Bar Associationand a member of the National Romanian Bars Association. Ciprianhas extensive experience in assisting Austrian and German investorsin Romania. His expertise covers government and regulatory law,corporate law, commercial law, and real estate matters. He is alsoa regular contributor to several reviews and legal publications.Ciprian is fluent in Romanian, English and German and conversantin French.

Silviu Predescu

Pachiu & Associates 15 Emil Isac Street, Suite No. 5 400023, Cluj-Napoca, Cluj CountyRomania

Tel/Fax: +40 364 100 762Email: [email protected] URL: www.pachiu.com

Silviu graduated the Law School of Babes-Bolyai University fromCluj-Napoca in 2001. He is also a postgraduate in criminal law ofthe Law School of Babes-Bolyai University. Silviu is a seniormember of the Cluj Bar Association and a member of the NationalRomanian Bars Association. Silviu currently heads our Cluj-Napocabranch office and provides legal advice in matters related tocorporate law, real estate law, and commercial contracts. Silviu isfluent in Romanian, English and German.

Pachiu & Associates is a Bucharest-based business law firm established by Romanian attorneys. The firm currentlyconsists of 24 lawyers plus additional staff comprising paralegals, authorised translators and supportive staff. Thelawyers of the firm are all graduates of leading universities in Romania or abroad. More than half of the lawyers aresenior members of the Bucharest Bar Association. All lawyers are fluent in Romanian and English, and some are fluentin German, French, Spanish or Hungarian. The Firm provides for a full range of commercial and corporate legal advicefrom its main office in Bucharest and its secondary office in Cluj-Napoca (west of Romania).

The Firm has extensive expertise in matters related to corporate governance, corporate disputes, securities, mergers andacquisitions, insolvency, commercial contracts, offshore and tax structures, labour law, real estate, anti-trust law,intellectual property, banking and project financing, secured transactions, cross-border transactions, public acquisitions,procurement, and litigation. Apart from its consistent mergers & acquisitions and cross-border transactions practice,the firm has developed a strong practice in tax, securitisation and real estate, construction, labour and intellectualproperty. Any type of transaction is always duly considered from a tax point of view.

The firm maintains a close relationship with some leading multinational law firms and other small and medium-sizedlaw firms from abroad, so as to ensure efficient liaison with important foreign business centers and jurisdictions.


principle that stands at the basis of the intra European Unioninsolvency relationships is that any court resolution for thecommencement of an insolvency procedure rendered by thecompetent court of an EU Member State is directly recognised in allthe other Member States if the resolution becomes effective in the

state where it was rendered. Moreover, the court ruling whichopens an insolvency procedure in an EU Member State producesthe same effects in any other Member State as if under the law ofthe state of commencement, without any prior formalities.



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Russia


1.1 How does a creditor take security over assets in Russia?

There are five types of security expressly referred to in the RussianCivil Code: (i) bank guarantee; (ii) suretyship; (iii) pledge or mortgage; (iv) possessory lien; (v) security deposit; and(vi) financing against assignment of a monetary claim

(factoring).Of the listed types of security, only the pledge or mortgage allowsthe creation of a security interest in an asset, and affords a lender thestatus of a secured creditor in the insolvency of the pledgor.Possessory liens and security deposits are not generally used forcross-border deals. Russian security (save for the bank guarantee) is accessory innature, meaning that its existence depends upon the existence of thesecured obligation. If the secured obligation terminates, or isinvalid, the security is ineffective.Pledge or MortgageA pledge (“zalog”) can be created by contract over almost any asset,incl. property and contractual rights. Certain property (e.g., goodsof strategic importance, child support payments) and rights whichmay not be assigned as a matter of law (e.g., rights granted under alicence) cannot be the subject of a pledge. A mortgage (“ipoteka”)is a type of pledge creating security over real estate, aircraft andships. A pledge is not possessory, unless the pledge agreement statesotherwise. A creditor has certain rights in respect of the pledgedassets, the most important of which is the right to sell the asset oracquire such assets and set-of the purchase price to meet a defaultedobligation. It can be granted by the debtor of the secured obligationor by a third party to secure the debtor’s obligations.A mortgage (and pledge of inventories) is not possesory due to itsnature. A mortgage can be created by contract or by operation oflaw. A building or construction must be mortgaged with the landplot (or the mortgagor’s lease rights to the land plot) underneath it. Guarantee and SuretyshipOnly banks can provide guarantees. A guarantee is independentfrom the underlying contract and may not be revoked unless

otherwise provided in the guarantee. The bank gets its fee for theguarantee. Companies or individuals (as well as banks) can enter intosuretyship agreements. A suretyship must be executed in writing byboth parties and must contain a description of the underlyingobligation. If the secured obligation is amended without theconsent of the surety and such amendments increase the liability orcreate other unfavourable consequences for the surety, thesuretyship terminates. A suretyship can also terminate if, during the term stipulated in thesuretyship, the creditor does not bring an action in court against thesurety. If a term is not provided in the suretyship, it terminates ifthe creditor fails to bring an action against the surety within oneyear from the date when the secured obligations become due.FactoringAs a form of security, only an assignment by way of factoringarrangements (financing against assignment of a monetary claim) isexpressly recognised. Such assignment allows the assignee toreceive the proceeds under the assigned claim straight from thedebtor under the claim. However, it can only be used in ratherlimited cases.It is not clear whether a general assignment can be used as security.Only outright assignment is expressly permitted by law. There arealso issues with assignability of rights in general.


The administrator or liquidator (and in certain cases a creditor) maychallenge certain types of transactions of the company entered intowithin specified periods before or during its insolvency. Inparticular the administrator or liquidator may: (i) petition the court to declare certain transactions invalid

(voidable transactions); or (ii) order the application of the rules on void transactions

(including those in breach of the Insolvency Law).Voidable transactions may be challenged within one year from thedate on which a claimant knew or should have known of thecircumstances underlying the grounds for invalidation. Thelimitation period for void transactions is three years from the datethat performance started. There is also a number of specificgrounds on which an external administrator or liquidator maychallenge transactions entered into before or after commencementof bankruptcy proceedings. The following transactions can be set aside under Russian

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Insolvency Law:Transactions with “interested” persons. The court may declare invalid a transaction entered into by acompany with an interested person if following the performance ofthat transaction the company’s creditors or the company itselfsuffered or could suffer losses. There is no vulnerable period forsuch transactions. Transactions may be challenged within the one-year limitation period applicable to voidable transactions.The following persons are considered as “interested”:(i) a company’s parent or subsidiary company (based on criteria

provided by law);(ii) a company’s senior officers (including those relieved from

their duties within three years before commencement ofbankruptcy proceedings) and employees;

(iii) other persons defined as “interested” by other RussianFederal Laws; and

(iv) relatives of the above individuals.Transactions entailing preferences. The court may declare a transaction invalid if the entry into orperformance of it results in the preferential satisfaction of claims ofa creditor (creditors) over those of other creditors. A creditor mayalso challenge such transaction. The vulnerable period is sixmonths before the filing of a bankruptcy petition. Transactionsentered into or performed after the acceptance by the court of abankruptcy petition are also vulnerable. Transactions may bechallenged within the one-year limitation period applicable tovoidable transactions.Withdrawal from the company.A transaction of a participant withdrawing from a limited liabilitycompany involving payment to it of its “participation” may bedeclared invalid by a court on request of an administrator, liquidatoror a creditor, if the performance of that transaction breaches therights and legal interests of creditors. The vulnerable period is sixmonths before the filing of a bankruptcy petition. Similartransactions performed after the acceptance by the court of abankruptcy petition are void.Amendments.On 28 April 2009 the Russian President signed into law the FederalLaw No. 73-FZ “On Making Amendments to Certain LegislativeActs of the Russian Federation” (the “Amendments”) according towhich, among other things, certain amendments to the RussianInsolvency Law concerning (x) challenging transactions in acompany’s bankruptcy and (y) further development of a concept ofliability of “controlling persons” were introduced. TheAmendments will become effective within 30 days of the date oftheir official publication, i.e. on 4 June 2009, and the newprovisions on challenging transactions will apply to bankruptcyproceedings initiated before the date the Amendments have comeinto effect, but in relation to the transactions concluded after suchdate. As a result, both old and new provisions on challengingtransactions in a company’s bankruptcy may apply during a certaintransition period that may create practical issues to be resolvedwhen they come for consideration before the courts. The challenge of transactions effectuated after the Amendmentshave come into force will be facilitated by the following new rules:(1) A concept of transactions entailing preferential satisfaction is

developed by introduction of detailed criteria to determinewhether a transaction gives preferences (among suchtransactions is granting a security for debtor’s or third party’sobligations to certain creditors when such obligations havearisen before granting of such security or a transaction whichresults or may result in the change of the order of priority forsatisfaction of those creditors’ claims which have arisen

before such transaction is concluded); vulnerability periodsdiffer according to the criteria on the basis of which atransaction is challenged.

(2) A concept of suspicious transactions is introduced providingthe following grounds for challenge: (i) inadequate consideration (that is, transactions at an

undervalue or transactions under the terms andconditions substantially unfavorable for the debtorcompared to similar transactions concluded under thenormal business terms); transactions concluded oneyear before or any time after the acceptance by thecourt of a bankruptcy petition are vulnerable; and

(ii) intent to prejudice the property rights of creditors;transactions concluded three years before or any timeafter the acceptance of a bankruptcy petition arevulnerable.

(3) The criteria for determining the following are revised: (i) an “interested” person for the purposes of challenging

(x) suspicious transactions with an intent to prejudicethe property rights of creditors and (y) transactionsentailing preferential satisfaction; and

(ii) a controlling person for the purposes of vicariousliability of the debtor’s shareholders, directors andother persons that can give mandatory instructions tothe debtor.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Russia?

Liabilities of “controlling persons” (incl. directors), shareholdersand parent companies of a company (including in the case of thatcompany’s insolvency) are regulated by a number of Russian laws.Depending on the type of action and its gravity a director may besubject to civil, administrative or criminal liability as well asdisqualification. Civil LiabilityAs a general principle directors must act in good faith andreasonably in the best interests of the company. Unless otherwiseprovided by law or by specific agreement directors have anobligation to compensate in full the losses caused by them to thecompany including in the case of the breach of the Insolvency Law. Directors are jointly and severally liable to the company fordamages incurred by the company due to their improper actions orinaction for which they are at fault (with the exception of thosemembers of the board of directors who voted against the resolutionthat caused damages to the company). For a director to be liable, damages must be incurred by thecompany as a result of the director’s failure to act reasonably and ingood faith.At the same time, Russian law does not provide for direct liabilityof directors for undervalue transactions and preferences. However,certain transactions entailing preferences and suspicioustransactions introduced by the Amendments may be challenged andaccording to the Amendments directors may arguably bear liabilityas a “controlling person” subject to satisfaction of relevant tests.With respect to bankruptcy proceedings initiated before theAmendments have come into force, in the event of the company’sbankruptcy, resulting from the actions of a “controlling person”,such persons can bear subsidiary liability for the obligations of thatcompany in the event such company has insufficient assets. TheAmendments further develop the principles of vicarious liability of“controlling persons” by replacing a test referring to the company’sbankruptcy resulting from controlling persons’ actions by a new one

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referring to the injury inflicted upon the property rights of creditors,resulting from the performance by a company of instructions of a“controlling person”. The Amendments have also extendeddefinition of “controlling persons” to cover any persons that withintwo years prior to the acceptance by the court of a bankruptcypetition can or could give mandatory instructions to, or otherwisedetermine the actions of, an insolvent company, and the actions ofdirectors arguably may also fall within such definition. The newliability provisions will apply in bankruptcy proceedings initiatedafter the Amendments have come into effect. Directors in a jointstock company are liable only if they have used their controllingrights with intent that the company takes an action, knowing inadvance that such action would result in its bankruptcy. In addition, the chief executive officer is obliged in certain cases tofile for the company’s bankruptcy. Failure to do so may result insecondary liability of the chief executive officer for new debtsarising after the date when the petition should have been filed andpotentially for all unsatisfied financial obligations. According tothe Amendments the director will bear vicarious liability for thecompany’s obligations if on the date of commencement ofsupervision or declaring a company bankrupt, certain obligatoryaccounting reports or documents are absent or lack certaincompulsory information or contain misstatements. Criminal LiabilityAs a general rule, a director of a company who uses his/her positionin violation of the law and against the interests of the company andcauses damage to the company faces liability ranging from a fine toan imprisonment. If such actions damaged only the interests of thatcompany (and the company is not a state-owned enterprise), onlythat company may initiate prosecution of that director.The Criminal Code imposes criminal liability for the actions inanticipation of bankruptcy as well as for the actions taken duringbankruptcy of a company, this includes: (a) deliberate bankruptcy;(b) fraudulent bankruptcy; and (c) unlawful actions duringbankruptcy.In relation to unlawful actions during bankruptcy, a director of thecompany can be criminally liable if there is: (i) unlawfulsatisfaction of a claim; (ii) detriment to other creditors in the formof substantial damage; and (iii) presence of signs of the debtor’sbankruptcy. The above criminal offences are subject to a fine, public orcorrectional works, retention or imprisonment and a fine.For such actions to constitute a crime substantial damage must becaused and in certain cases there must be a direct intent incommitting such offence. Where no substantial damage is caused,the director is subject to certain administrative fines.DisqualificationApart from personal liability a court may disqualify a director.Disqualification includes depriving an individual of the right tooccupy any management position in the executive body of a legalentity, to sit on the board of directors or management (supervisory)board and to engage in any business activity involving themanagement of a legal entity. At the moment, the term ofdisqualification varies from six months to three years. Notes on alldisqualified persons are entered in a special register. Legal entitiesare obliged, before hiring a director, to verify with the bodyresponsible for keeping that register that the candidate has not beendisqualified.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Russia?

Before any insolvency proceedings are commenced there may be arestoration of debtor’s solvency - measures taken by shareholders,third parties and, in certain cases, creditors to restore the company’ssolvency, including provision of additional funds.When the company is in financial difficulties there are five formalprocedures which may apply:(i) Supervision - aimed at conducting a financial audit of a

company to determine whether the company is likely tobecome solvent and preserving the company’s assets,restricted capacity of directors.

(ii) Financial rehabilitation - aimed at restoring the company’ssolvency and satisfaction of creditors’ claims according to adebt repayment schedule drawn, significantly restricteddirectors’ capacity.

(iii) External administration - aimed at restoring the company’ssolvency, management power is vested in the externaladministrator.

(iv) Liquidation - there are two types of liquidation: compulsoryand voluntary, in general terms, the former applies toinsolvent companies, and the latter - to solvent companies.

(v) Voluntary arrangement - aimed at terminating the bankruptcyproceedings; an amicable settlement between the companyand its creditors, may be entered at any stage.

2.2 What are the tests for insolvency in Russia?

Russian law does not have a sole test for “insolvency”. Generally,to commence proceedings, the unpaid debt should in aggregateequal or exceed 100,000 roubles and be overdue by at least 3months.


SupervisionThis is an obligatory initial bankruptcy procedure commenced bythe court upon bankruptcy petition after it determines such petitionto be well founded. It can last up to 7 months, at which pointgenerally either no bankruptcy procedures are commenced or thecourt takes a decision, generally on the recommendation of theinitial creditors’ meeting, to commence one of the other stagesdescribed below.Financial rehabilitationThis procedure commenced by the court on the basis of a decision ofthe initial creditors’ meeting held during supervision as a result of aproposal from the company or a third party or, in the absence of suchdecision, on the company’s shareholders’ or third parties’ request tothe bankruptcy court subject to certain conditions. It can last nolonger than 2 years. It may terminate early, and the court willcommence external administration or liquidation (if there are nogrounds for instituting financial rehabilitation and there is evidence ofbankruptcy) on the petition of the creditors’ meeting following:

a failure to provide the required security for financialrehabilitation within 15 days after commencement offinancial rehabilitation; orrepeated or material default in scheduled payments (for morethan 15 days).

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External administrationExternal administration commences if there is a real possibility ofrestoring the company’s solvency within the set time limits,provided that not more than 18 months have passed since thecommencement of financial rehabilitation. It can be extended by afurther 6-month period on the petition of the majority creditor’svoting. It may be terminated early if all registered creditors’ claimsare settled. Where the creditors’ meeting fails to take certain stepswith respect to the report prepared by the external administrator orrejects the report and petitions for liquidation the company shallenter into liquidation.LiquidationLiquidation commences by the court on declaring the companybankrupt where substantive tests are met. Liquidation lasts for sixmonths, subject to a potential extension for up to six months. Itmay be terminated if, prior to its conclusion, all creditors’ claimsare satisfied by the debtor’s shareholders or third parties, or thecourt approves a voluntary arrangement.Voluntary arrangementThe creditors’ meeting can petition for voluntary arrangement atany bankruptcy stage. This requires the unanimous consent of thosecreditors whose claims are secured by pledge or mortgage. It mustbe approved by the bankruptcy court. The court may approve itonly on unsecured claims of the first and second priority creditorsand current claims being satisfied.


SupervisionThe company, its chief executive officer (CEO), an authorisedgovernment agency or a creditor can (and in certain cases, must) filea bankruptcy petition to the court. The court may commencesupervision if the claim is well-founded. After the commencementof supervision the court appoints an interim administrator whoseprimary aim is to preserve the company’s assets while assessing itsfinancial condition, including initial registration of creditor claims.During supervision, the company’s management remains in place(with restricted capacity). The initial creditors’ meeting isconducted, that should take a decision (amongst other things) onwhat would be the next step for the company.Financial rehabilitationThe financial rehabilitation is commenced by the court ruling on thebasis of a decision of the initial creditors’ meeting as a result of aproposal from the company or a third party or on the shareholders’or third parties’ request to the court. A repayment schedule is drawnup providing for satisfaction of all registered claims. A financialrehabilitation plan is also drawn if no security is provided for theperformance of the debtor’s obligations in accordance with therepayment schedule. If successful, the company emerges from theinsolvency proceedings and if not, the court will move toliquidation unless there are grounds to move to externaladministration. A temporary administrator supervises theimplementation of the plan but again, the company’s managementremains in place (although their capacity is more restricted than atthe supervision stage).External administrationThe court commences the external administration and on the basisof a decision of the creditors’ meeting and appoints an externaladministrator. Such administrator collects in debt, inventors’ assetsand prepares a plan for restoring solvency. The company’smanagement is removed and management power is vested in the

administrator. After the external administration, the companyenters into liquidation.LiquidationLiquidation is commenced by a court ruling when substantive testsare met and involves the appointment by the court of a liquidator torealise the company’s assets and satisfy its debts in accordance withthe statutory order of priority. Voluntary arrangementA voluntary arrangement may be initiated during any bankruptcyprocedure by a company’s directors (during supervision and financialrehabilitation) or, if the company is under external administration orliquidation, by the company’s external administrator or liquidator. Itmay be also commenced by the creditors’ meeting. If new bankruptcy proceedings are subsequently brought against thecompany, the creditors that entered into the amicable settlementwill have the right to claim only in the amount provided for underthe settlement.


NotificationsAs a general rule:

prior to filing a bankruptcy petition, the CEO of the companyshould notify the shareholders of the financial difficulties.Other persons that may file for the company’s bankruptcy arenot obliged to notify third parties and the company;the relevant administrator should notify publicly of thecommencement of each bankruptcy procedure. the CEO should notify the employees and shareholders of thecommencement of supervision and other procedures and creditors should copy their claims filed with the court and therelevant administrator to the company.

MeetingsTo become a registered creditor upon the implementation ofsupervision the creditor has 30 days to file its claim. Those creditorswho have filed their claims during supervision period participate inthe initial creditors’ meeting that takes place during supervision andall subsequent creditors’ meetings. A creditor that has filed itsclaims thereafter may participate in the creditors’ meetings takingplace within the relevant bankruptcy procedure succeeding theprocedure during which that creditor filed its claim. If the number of creditors is more than 50, a creditors’ committeerepresenting interests of the creditors may be elected.For the voluntary arrangement a unanimous consent of allregistered secured creditors is required at a relevant creditors’meeting.PublicationsThe relevant administrator publishes notifications onimplementation of each bankruptcy procedure in the officialRussian publication (currently, Kommersant newspaper) and onsuch publication’s web page.

3 Creditors


The enforcement of unsecured creditors’ rights is subject to thefollowing limitations:

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SupervisionOn commencement of supervision creditor’s claims which havebeen or are due on or before the date of supervision are dealt within accordance with the procedure prescribed by the InsolvencyLaw; enforcement against the company’s assets are suspended(except where enforcement is sought under enforcement orders onemployment claims, claims for harm inflicted to health or life,claims for moral damages and some other claims) as are debtrecovery proceedings against the company, the latter upon acreditor’s petition. In addition, set-off that breaks the statutoryorder of priority is prohibited and payment of dividends and otherdistribution of profit is prohibited and these prohibitions areextended to all other stages of bankruptcy.Discharge of current claims is allowed during each procedure.Financial rehabilitationOn commencement of financial rehabilitation the limitationsindicated above remain. In addition, settlement arrangements andother discharge of the company’s monetary obligations in breach ofthe statutory order of priority or if such discharge results inpreferential satisfaction are prohibited and any measures takenpreviously during the bankruptcy procedures to secure claimsagainst the company are revoked.External administrationDuring the external administration certain of the above limitationsare retained. In addition, a moratorium is imposed on the settlementof creditors’ claims; any restrictions on the disposal by the debtor ofits property can only be imposed within the ambit of the bankruptcyprocedures (save for restriction imposed on the debtor’s propertyfor the satisfaction of current claims); no penalty shall be accruedfor a default on or improper performance of monetary obligationsand mandatory payments (except for current claims).LiquidationUpon liquidation all monetary obligations and mandatory paymentsincurred by the company before liquidation become due(automatically accelerated) and certain limitations previouslyapplied remain. In addition, creditors’ claims (except for certaincurrent claims) may be presented only in the course of liquidationand are performed in accordance with the statutory order of priority. Voluntary arrangementA voluntary arrangement binds the company, the creditors(irrespective of whether they voted against such arrangement or didnot vote) and third parties that intend to discharge the company’sdebts (which may also be parties to such arrangement and acquire therights and assume obligations hereunder). From the date of itsapproval, the company or third parties start settlements with creditors.


There is a general moratorium on enforcement at the supervisionstage. During financial rehabilitation and external administrationsecured creditors can enforce their pledges or mortgages over thecompany’s property through the bankruptcy court, unless thecompany proves that such enforcement will make it impossible torestore the company’s ability to pay its debts. Otherwise thesecurity is enforced during liquidation.


Although set-off is expressly prohibited where it breaches the

statutory order of priority of satisfaction of creditors’ claims, inpractice no set-off is possible against the company’s obligations atany bankruptcy stage.



SupervisionCommencement of supervision does not entail replacement ofmanagement of a company, but the exercise of its powers is subjectto the interim administrator’s consent with respect to certaintransactions. The management cannot take decisions associatedwith corporate reorganisation. Any distribution of profit toshareholders, payment of dividends under any securities or othersecurity interest is prohibited. This prohibition extends to all otherstages.An interim administrator (and in certain cases other third parties)may petition the court to remove the CEO for breach of theInsolvency Law at any stage.Financial rehabilitationOnce financial rehabilitation commences, the company’smanagement (including the CEO) continue to run the company,subject to consent of a creditors’ meeting for certain transactions.External administrationOn commencement of external administration, the powers of thedebtor’s CEO are terminated and his management power is vestedin the external administrator. The debtor’s directors may continueto make decisions in relation to limited matters specified by law,including increasing capital and entry into agreements with thirdparties on provision of funds to fulfil company’s obligations.LiquidationOn commencement of liquidation, the remaining powers of thecompany’s management bodies are terminated (with fewexceptions), and assumed by the liquidator. Claims of shareholdersare satisfied upon all claims of the creditors are discharged as aresult of liquidation of the company.Voluntary arrangementOnce the court approves an amicable settlement, the powers of anadministrator or liquidator end. The person acting as anadministrator or liquidator continues to act as the CEO of thecompany until the appointment of a new one.


The Insolvency Law does not provide a specific description of theways the bankruptcy procedures may be financed. A full review ofthe ways in which the procedures are financed are outside the scopeof a general overview. Such financing is subject to generallimitations established by the Insolvency Law with respect todebtor’s transactions.


The implementation of the initial bankruptcy procedures does notnecessarily affect the company’s employees.If the bankruptcy petition is filed by CEO of the debtor it shouldcontain, amongst other things, the figure indicating the amount of

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debts owed as wages/salaries and severance benefits payable to thedebtor’s employees.Upon implementation of supervision steps to enforce against thedebtor’s property are suspended except where enforcement issought under enforcement orders on employment claims, claims forharm inflicted to health or life, claims for moral damages and someother claims. The same rule applies during financial rehabilitationand external administration. At the liquidation stage the liquidator has the right to dismiss thecompany’s employees and all employees’ claims are satisfied in thesecond order of statutory priority of satisfaction of claims. The sumspayable to the employees at liquidation should include a defaultinterest and other payments specified by the labour legislation.Administration fees allocated for wages of the employees that areinvolved by the administrator for the purposes of each bankruptcyprocedure are regarded as current claims and should be dischargedahead of the statutory order of priority during the procedure withinwhich they have been incurred.


As a general rule the commencement of a particular bankruptcyprocedure is not itself grounds for terminating company’stransactions or suspending its business. However the administratorhas the right to petition the court to invalidate any transaction at anybankruptcy stage. The company may also and in certain cases mustrefrain from entering into certain transactions.SupervisionIn addition to having the power to consent to or veto thetransactions described below, the interim administrator may,amongst other things:

petition the court to declare any transactions invalid; andseek injunctions to preserve the debtor’s assets.

During supervision directors may enter into transactions subject tothe supervision of the interim administrator (for transactions over aspecified value or related to granting or receiving loans, guaranteesor similar instruments). In addition, the management has noauthority to take decisions in relation to matters such as corporatereorganisation and paying dividends.Financial rehabilitationDuring financial rehabilitation restrictions similar to thoseintroduced during supervision apply. In addition, consent of acreditors’ meeting or in certain cases the administrator, is requiredfor the transactions, amongst other things:

involving the company’s interest;exceeding a specified value (including company’sindebtedness increase for more than 5% of the amount of theregistered creditors’ claims);involving granting or receiving loans, guarantees or similarinstruments;assuming new obligations, if the amount of obligationsincurred by the company after commencement of financialrehabilitation exceeds 20% of the aggregate amount of theregistered creditors’ claims; andon assignment of rights or transfer of debts.

External administrationOnce the external administration is commenced the abovelimitations are retained. In addition, the external administrator can(amongst other things):

dispose of the debtor’s assets in accordance with the externaladministration plan; andduring the three-month period after commencement ofexternal administration, rescind executory contracts if theirperformance impedes restoration of the debtor’s solvency orresults in losses when compared to similar transactions.

Furthermore (i) transactions significant in size or benefiting aninterested person (such as a shareholder or director) and thereforerequiring general corporate approval are subject to creditors’meeting (committee) approval and (ii) transactions entailing thedisposal or acquisition of shares in other companies or settlement oftrust which fall outside an external administration plan must beagreed with the creditors’ meeting (committee).LiquidationIn liquidation the liquidator’s has the right to rescind executorycontracts if their performance impedes restoration of the debtor’ssolvency or results in losses when compared to similar transactions,unless circumstances exist that prevent the debtor being restored tosolvency.Voluntary arrangementIf the voluntary arrangement is approved, it terminates the relevantstage of bankruptcy proceedings and the company starts settlementswith creditors pursuant to the term of the arrangement. Nocontracts are terminated at this stage unless the new bankruptcyproceedings are initiated.

5 Claims


On commencement of supervision all monetary obligations andmandatory payments incurred by the company before acceptance ofa bankruptcy petition become due and all creditors’ claims thatbecame due may be presented only under the Insolvency Law.Thereafter claims of all creditors should be presented under theInsolvency Law. Any creditors’ claims should be registered withthe administrator and the court (and copied to the debtor).Upon the implementation of supervision the creditors have 30 daysto file their claims with administrator and the court. Those creditorswho have filed their claims during this period may participate in theinitial creditors’ meeting that takes place during supervision.Creditors that have filed their claims thereafter may participate inthe creditors’ meetings taking place within the relevant bankruptcyprocedure succeeding the procedure during which the creditor filedits claim. For the voluntary arrangement that can be entered into at any stage,a unanimous consent of all registered secured creditors is requiredat a relevant creditors’ meeting.Upon commencement of liquidation all monetary obligations andmandatory payments of the debtor incurred prior to commencementof liquidation are deemed due (automatically accelerated) and aresatisfied in accordance with the Insolvency Law. Claims submittedafter the closing of the register of creditors are satisfied only afterdischarge of all registered creditors’ claims.


Current claims creditorsAs noted in other places of this overview, current claims rank ahead

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of claims of other creditors and are settled in accordance with theorder of priority established for current claims (generally these canbe settled at any stage of bankruptcy procedure). Current claims constitute monetary obligations and mandatorypayments, which have arisen after the date a bankruptcy petition isaccepted and includes:

court and bankruptcy costs;insolvency administrator’s fees; payments to employees and other persons retained by anadministrator; utilities and operational costs for running the company’sbusiness; andcreditors’ claims for goods, services, performance of worksand so on.

(Mandatory payments include taxes, other payments to the statebudget or otherwise to the Russian Federation. Registeredmandatory payments can be paid in full by a shareholder (owner) ofthe company or any other third party at any stage of bankruptcy.)The current claims creditors have no right to vote at the creditors’meetings.Secured creditorsAs a general rule claims of secured creditors are satisfied in thethird order of statutory priority referred to below from the proceedsof sale of the secured property. However, secured creditors mayenforce their security during financial rehabilitation or externaladministration. Arguably they can apply the proceeds ofenforcement (up to 80% for claims under credit agreements and70% for claims under other agreements of the proceeds of sale ofthe secured property to discharge their secured claims (but notexceeding the aggregate amount of principal and interest)) ahead ofall other unsecured creditors and creditors under current claimsduring these stages. The balance of the proceeds is channelled through a special accountto satisfy unsecured claims of registered first and second prioritycreditors (if unencumbered property is insufficient to satisfy theirclaims) and certain kinds of current claims. Anything remainingafter satisfaction of the first and second priority claims istransferred to the secured creditors.Unsecured creditorsClaims of unsecured creditors are satisfied in the followingstatutory order of priorities:

first, claims for personal injury and non-pecuniary damage;second, employment claims and royalty claims undercopyright agreements; andthird, all other claims, including claims of secured creditorsthat were not discharged out of the proceeds of sale ofsecured property and mandatory payments.

Non-registered claimsClaims submitted after the closing of the register of creditors aresatisfied only after discharge of all registered creditors’ claims.Shareholders’ claimsGenerally, shareholders are treated as creditors. However, theequity claims of shareholders are not subject to satisfaction inbankruptcy proceedings and may be satisfied only on liquidation ofa company if any assets remain after all the creditors have been paidin full. Any subordination arrangements with a company are notrecognised in company bankruptcy. Any transactions of a companywith its shareholders may be set-aside during insolvencyproceedings as transactions with an interested person.Voluntary arrangementThere is no general rule which applies to the ranking of claims in

this procedure. The agreement on voluntary arrangement cancontain different ways of discharge of obligations by the debtor ora third party provided they do not contradict Russian law. Howevervoluntary arrangement could not (amongst other things):

create preferences of creditors whose claims are dischargedin non-monetary form over those whose claims are dischargein monetary form; ordeteriorate rights of those creditors who voted against sucharrangement or did not vote.


General tax-related issuesAs noted in question 5.2 above, taxes (including any fines andpenalties for underpayment or late payment of taxes) are includedinto the mandatory payments and rules applicable to such paymentsapply to taxes. The tax authorities act as a creditor in connectionwith taxes-related claims which together with other claims may beeither included into the current claims or satisfied as unsecuredclaims of the third order of priority. Registered mandatory payments can be paid in full by a shareholder(owner) and even third parties for the debtor. As a result, an entity(as well as a person) or a state/municipal body that repaid 100% ofmandatory payments included into the claims’ register may replacethe tax authority and become a new creditor.Bearing in mind that tax-related claims may constitute a significantamount as compared to other debts included into the register, theseprovisions may become a useful tool for the owners to save theirbusiness or for third parties to acquire it by, literally, buying the debtfrom the state. However currently it is not clear as to how the aboveprovisions would apply without necessary amendments into the taxlegislation and new Government’s resolutions that are yet to beadopted.Discharge of tax liabilitiesDuring all the procedures, a company discharges its current taxobligations (i.e. tax obligations crystallised in connection withevents after commencement of bankruptcy) either by itself as amatter of routine or via an administrator or liquidator, which wouldrepresent a company during the respective procedures. There is a possibility to defer payment of taxes based on voluntaryarrangement approved by the bankruptcy court or based on the debtrepayment schedule during the financial rehabilitation procedure.Please note that proportional payment rule for the financialrehabilitation procedure set by the bankruptcy law would beapplicable to mandatory payments only after respective changes areincluded into the Russian Tax and/or Budget legislation.



The Insolvency Law does not provide for a true “cramming down”of creditors. To a certain extent voluntary arrangement may beregarded as “cram down” as it requires a unanimous consent of allsecured creditors and on the other hand if new bankruptcyproceedings are subsequently brought against the debtor, thecreditors that entered into the voluntary arrangement will have theright to claim only for the amount agreed under the voluntaryarrangement.

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SupervisionSupervision may result in a court:

commencing financial rehabilitation or externalmanagement;declaring the company bankrupt and commencingliquidation;refusing to declare the company bankrupt;terminating the bankruptcy proceedings; orleaving the bankruptcy petition without consideration.

Financial rehabilitationFinancial rehabilitation may result in a court:

terminating bankruptcy proceedings if all creditors’ claimsare satisfied according to the schedule;declaring the debtor bankrupt and commencing liquidation;orcommencing external administration.

External administrationExternal administration may result in:

restoration of the company’s solvency and settlement ofcreditors’ claims (or a decision to transfer to suchsettlement); ora court declaring the company bankrupt and commencingliquidation.

LiquidationLiquidation may result in return to external administration (if a realpossibility of restoration of the company’s solvency emerges).Otherwise on satisfaction of all creditors’ claims, the company issubject to liquidation. If the company’s assets are insufficient tosatisfy all creditors’ claims, such claims are considered discharged.Voluntary arrangementA voluntary arrangement terminates once its terms have beenimplemented.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Russia? In what circumstances might this bepossible?

The Insolvency Law provides that the shareholders’ of a debtormust take measures to restore company’s solvency if a companyencounters signs of bankruptcy, however it does not specify anymeasures save for rehabilitation (“sanatsiya”) and does not providefor any details of such rehabilitation. Creditors can takerehabilitation measures under an agreement with the company.Arguably such rehabilitation may include the restructuring. Thepossibility of restructuring were the company has financialdifficulties should be carefully consider on a case-by-case basis.


The Insolvency Law does not provide for a possibility to reorganisea debtor rather than realise its assets during the bankruptcyproceedings. It is arguable that such arrangement would beavailable should the petition for the company’s bankruptcy is filedwith the court and considered well founded, unless the courtrecognises such arrangements as the rehabilitation measures of thecompany’s shareholders mention in question 7.1. This should beconsidered on a case-by-case basis.


Such arrangements are not specified by the Insolvency Law andshould be considered on the case-by-case basis.

8 International

8.1 What would be the approach in Russia to recognising aprocedure started in another jurisdiction?

According to the Russian Insolvency Law judgments rendered inthe course of bankruptcy proceedings by foreign courts arerecognised in Russia according to the relevant international treatyor convention between Russia and the state where the judgment wasmade. Without such applicable treaty or convention, a judgment of aforeign state court may be recognised and enforced in Russia on thegrounds of reciprocity. We are aware of the court practice whereRussian courts recognised judgments rendered in the course ofbankruptcy proceedings in foreign states on the basis of thisprinciple.

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RussiaClifford Chance CIS Limited

Logan Wright

Clifford Chance CIS Limited ul. Gasheka 6125047 MoscowRussian Federation

Tel: +7 495 258 5050Fax: +7 495 258 5051Email: [email protected]: www.cliffordchance.com

Logan Wright is a partner with Clifford Chance and heads theBanking and Finance practice in the firm’s Moscow office, whereLogan has been resident for the past 9 years. Logan primarilyadvises major Western financial institutions on loans to Russiancorporates and banks, but also advises a select number of localborrowers. Logan has broad experience in all areas of cross-borderlending, including pre-export/import financings, trade finance andproject finance, syndicated lending, asset finance, acquisitionfinance and real estate finance. His industry experience includesenergy, oil and gas, metals and mining, telecommunications, andreal estate. In the current market Logan’s practice focusesincreasingly on advising lenders and borrowers on financialrestructuring and insolvency with a cross-border element, includingadvising a Russian FMCG group on restructuring their internationaland local indebtedness and advising the co-ordinating committee onthe restructuring of UC Rusal’s international indebtedness. Logan isrecommended by Chambers Europe 2009, Legal 500 2009 andIFLR 1000 2009.

Ivan Marisin

Clifford Chance CIS Limitedul. Gasheka 6125047 MoscowRussian Federation

Tel: +7 495 258 5050Fax: +7 495 258 5051Email: [email protected]: www.cliffordchance.com

Ivan Marisin is Senior Partner and Head of the Litigation andDispute Resolution Practice at Clifford Chance’s Moscow office. Hespecialises in all aspects of litigation and arbitration, domesticallyand internationally. Acted in some of the most high-profile disputesinvolving construction, tax, banking, contractual and commercialissues, share buyout offers, recovery of debts and assets,restructuring, bankruptcy and repossession. Mr. Marisin is amember of the Moscow Advocates Association and also an arbitratorat the ICAC (International Commercial Arbitration Court at theChamber of Commerce and Industry of the Russian Federation),VIAC (Vienna International Arbitral Center of the Austrian FederalEconomic Chamber) and other institutions. Recommended by Legal500 2009, Chambers Global 2009, and PLC Which Lawyer 2008.Mr. Marisin is a frequent speaker at seminars and conferences andan author of numerous publications. He is also an editor of theRussian journal “Arbitration”.

Clifford Chance is a leading international law firm that has been advising domestic and international clients on allaspects of corporate and financial activity in Russia since 1991.

With integrated teams of lawyers qualified under Russian, English, German and U.S. law, the team in Moscow worksclosely with experts across the firm’s global network of offices to provide commercially sound legal advice.

Areas of expertise include Litigation & Dispute Resolution, Banking & Finance, Capital Markets, Corporate / M&A, RealEstate and Tax, as well as sector specialisation in Consumer Goods and Retail, Energy and Natural Resources, HealthCare, Infrastructure and PPP, Manufacturing, Mining and Telecommunications.

Clifford Chance has 30 offices in 21 countries worldwide. The firm has a highly impressive track record and adviseson the most challenging deals.

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Chapter


Chapter 36

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Slovakia


1.1 How does a creditor take security over assets in Slovakia?

In the Slovak Republic, creditors commonly secure theirreceivables by creating a pledge over various assets of a debtor. Apledge can secure both existing monetary and non-monetary claims,including the claims whose value is to be determined in the future,as well as future claims. General provisions governing the pledgecan be found in Act No. 40/1964 Coll. the Civil Code as amended(the “Civil Code”). The Civil Code distinguishes between thecreation of a pledge and its perfection. The pledge is usuallycreated under a written agreement. (Movable assets are anexemption if the assets are handed-over to the pledgee or a thirdparty custodian.) A pledge can be created over various types ofassets such as movable assets, real property, intellectual propertyrights, receivables, groups of assets, enterprises or an enterpriseunit, as well as future assets, provided that the assets aretransferable and the pledge is not prohibited by law. A pledgor canbe the debtor itself or a third party. The agreement must specify thepledged asset, the secured claim and the claim value or maximumamount of the principal up to which the claim is secured, if theclaim value is missing. Generally, unless the creation of a “secondranking” pledge is prohibited by law, e.g., in case of shares, severalpledges can be created over the same asset. The moment ofregistration of a pledge determines its priority. In order to beeffective and perfect, the pledge must be registered in the respectivepledge registry. A pledge over general movable assets can beperfected either upon the transfer of possession of the property tothe pledgee/a third party custodian or by virtue of the registration ofthe pledge in the Central Notary Register of Pledges. Pledges overreceivables are perfected upon registration in the Central NotaryRegister of Pledges. Pledges over real property must be entered inthe Real Property Cadastre; trade mark, patent and design pledgesare entered in a register kept by the Intellectual Property Office;securities pledges are registered with the Central Depository ofSecurities; pledges over ownership interests are entered in theCommercial Register; pledges over an enterprise, which consists ofseveral types of assets, requires registration in even more than oneregister. Furthermore, aircrafts and ships have special registers.Unless an exemption is provided for by law, the transfer of pledgedassets does not have an impact on the existence of the perfectedpledge. The sale of movable assets in the normal course of businessis an example of such exemption. In addition to pledges, othertypes of security are guarantees of third parties, securityassignments of receivables and security transfers of rights.


General provisions stipulating the conditions for attacking the legalacts of a company can be found in the Civil Code. More stringentand specific rules are contained in Act No. 7/2005 Coll., theBankruptcy and Restructuring Act, as amended (“BRA”) forcompanies that are declared bankrupt. The general rule under theBRA is that any legal acts involving the assets of a debtor are noteffective towards creditors if they are contested by a trustee orrespective creditor, in case the trustee rejected creditor’s request tocontest, within six months from the declaration of bankruptcy. Alegal act can be attacked if:a) a transaction is effected without adequate consideration, i.e.

a transaction where the usual consideration in a similartransaction is significantly higher;

b) a transaction results in the preferential treatment of onlysome creditors;

c) a transaction is aimed to deprive the creditors of somebenefits, provided that the debtor intended to do so and thatthe counterparty to the transaction had or should have hadknowledge of this intention; or

d) a transaction which was executed after the cancellation of thebankruptcy proceedings, is commenced again within thefollowing six months.

The transactions listed under (a) and (b) above are vulnerable toattack if made during a one-year period prior to the commencementof the bankruptcy proceedings. If the transactions were concludedwith a person affiliated to the debtor, a three-year period applies. Inrespect of the transactions listed under (c) above, a five-year periodapplies. In addition, these legal acts must have been the cause ofthe debtor’s bankruptcy or effected during the bankruptcyproceedings. The petition can be addressed to the court or theobligor but to the obligor only if he agrees with the right tochallenge.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Slovakia?

Under the BRA, a debtor represented by its statutory representative(directors) is obliged to file a petition for the declaration ofbankruptcy within 30 days from the time when the debtor becameaware that it is bankrupt or it should have become aware of itsbankruptcy if it had exercised due care. If the directors fail to filethe petition, they are jointly and severally liable for damagessuffered by the creditors, unless they can prove that they acted with

Tomáš Cibul’a

Silvia Belovicováv

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due care. Unless the damage is determined otherwise, there is apresumption that the damage is equal to the portion of claims whichwere not satisfied in the bankruptcy proceedings. Moreover, thefailure of the directors to file for bankruptcy can, under certaincircumstances, result in criminal liability. The director can be evendisqualified from acting as a director in another company.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Slovakia?

The BRA provides for two types of formal procedures:a) bankruptcy proceedings that are predominantly aimed to

sell-off the property of the debtor and to use the proceeds tosatisfy the creditors; and

b) restructuring proceedings that are aimed to rescue theindebted debtor and agree on a certain plan, pursuant towhich the debtor is restructured and the claims of thecreditors taking part in the plan are fully or partially satisfied.

In addition, any debtor in financial difficulties, but still solvent, maychoose liquidation proceedings governed by Act No. 513/1991Coll. the Commercial Code as amended (the “Commercial Code”).The purpose of liquidation proceedings is to distribute the assets ofa solvent company that was voluntarily/involuntary liquidated.However, if during the liquidation proceedings the insolvency testis met, then the liquidator is obliged to file a petition for bankruptcy.

2.2 What are the tests for insolvency in Slovakia?

A debtor is considered bankrupt in the following situations:a) Insolvency of the debtor - when the debtor has more than one

creditor and is not able to satisfy more than one of itspecuniary liabilities within 30 days following their due dates.(When assessing the debtor’s ability to pay due claims, allclaims that belonged to one creditor during the 90 days priorto filing the petition for bankruptcy, are considered as oneclaim.) The proposed amendment to the BRA provides foradditional condition i.e. to take into consideration thepossibility of future operation of the business of the debtor.

b) Excessive indebtedness of the debtor - when an entity,obliged to maintain bookkeeping, has more than one creditorand the overall value of its liabilities exceeds the value of itsassets.

If a debtor files a petition for bankruptcy, the bankruptcy isassumed.


Bankruptcy proceedingThe debtor is obliged to file a petition for bankruptcy within 30days from the time when it learned or should have learned of itsinability to meet its financial obligations, had it exercised due care.A liquidator (when a company is in liquidation pursuant to theCommercial Code) is obliged to file a petition without undue delayif he/she becomes aware of the indebtedness of the liquidatedcompany.A creditor can file a petition for bankruptcy if:a) the debtor is in delay with the payment of a creditor’s claim

for more than 30 days;b) the claim is of a pecuniary nature; and

c) there is a justified presumption of the debtor’s insolvency.Under the BRA, if the debtor, despite being served with a writtennotice requesting the payment of the claims, is still in delay formore than 30 days with the payment of at least two pecuniaryclaims of two different creditors that can be enforced or that wereacknowledged by the debtor, the presumption of insolvency isjustified. Restructuring proceedingsIf the debtor is bankrupt or a bankruptcy is threatening, the debtoror the creditor can request a trustee it chooses to prepare arestructuring opinion. In its opinion, the trustee considers thefinancial condition of the debtor and the feasibility of therestructuring proceedings as well as the expected satisfaction of thecreditors’ claims which must be higher than the possible satisfactionof the claims in the bankruptcy proceedings. If the trusteerecommends in his report the commencement of the restructuringproceedings, a petition for restructuring can be filed by the debtoror a creditor.Creditors may file a petition under the same conditions but, inaddition, the prior consent of the debtor must be obtained.


Bankruptcy proceedingsBankruptcy proceedings have two phases: (i) commencement ofbankruptcy; and (ii) declaration of bankruptcy; each phase has itsown legal consequences for the debtor.1. Commencement of bankruptcy proceedings: Once the

petition for bankruptcy proceedings is duly filed, the courtshall decide on commencement within 15 days of the receiptof the petition. The petition has to be signed before a notarypublic. Foreign entities are required to have a proxy in theSlovak Republic. The bankruptcy proceedings are deemedcommenced once the ruling on the declaration of thebankruptcy is published in the Commercial Journal(Obchodný Vestník). (In fact, the date following the date ofpublication is deemed to be the date of publication.) If thereare doubts about the sufficiency of the assets of the debtor,the court can appoint a temporary trustee within the sameperiod.

Upon the commencement of the bankruptcy proceedings:a) the debtor is allowed to execute only ordinary legal acts

(defined as acts necessary to ensure the proper performanceof business activities. The BRA expressly stipulates what isnot considered as ordinary legal acts, e.g., the establishmentof a company, transfer of real estate properties, transfer of anownership interests in the company etc.);

b) any enforcement proceedings of the debtor’s assets areprohibited and pending enforcement proceedings areinterrupted; and

c) any enforcement of any security rights is prohibited.The court may refuse to declare the commencement of bankruptcyproceedings if: (i) the debtor has insufficient assets to cover thebankruptcy’s procedural costs and none of the bankruptcy creditorspays an advance to ensure the settlement of these costs; or (ii) apetition is not justified. The proceedings may be terminated if thedebtor repays all its due debt before the ruling on the declaration ofbankruptcy is issued.2. Declaration of bankruptcy: After the commencement of the

bankruptcy proceedings initiated by the debtor, the courtshall, within five days, declare the bankruptcy or appoint apreliminary trustee, if there are doubts as to the sufficiencyof the debtor’s assets.



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If the petition is filed by a creditor, the court shall, within five daysfrom receipt of the petition, deliver a copy of the petition to thedebtor, who has 10 days from its receipt to respond to the petitionand prove its solvency. If the debtor fails to prove its solvency, thecourt declares bankruptcy or appoints a preliminary trustee.The declaration of bankruptcy has a number of legal consequencesfor the debtor and its directors. For example, only the trusteeappointed by the court can dispose of the assets of the debtor, nosecurity enforcement over the debtor’s assets is allowed, no pledgemay be created, no enforcement may be commenced or continued,etc. Some of the legal consequences are discussed in the followingsections.Restructuring proceedingsRestructuring proceedings also have two phases:1. Commencement of the restructuring proceedings: The court

decides on the commencement of restructuring proceedingswithin 15 days from its receipt of the petition filed either bythe debtor or creditor. The ruling is published in theCommercial Journal and the effects of the commencementarise on the day following the date of publication.As a result of the commencement of restructuringproceedings:

a) the debtor is allowed to conduct only legal acts in theordinary course of business;

b) enforcement proceedings of the debtor’s asset are prohibitedand pending enforcement proceedings are interrupted;

c) the enforcement of any security rights is prohibited;d) a contracting party cannot terminate a contract due to the

debtor’s delay with payment;e) receivables covered by the proceedings cannot be set-off;

andf) any contractual provision which entitles the other contractual

party to terminate the agreement due to the commencementof restructuring or bankruptcy proceedings are not effective.

2. Approval of the restructuring: Within 30 days from thecommencement of the restructuring proceedings, the courtdecides whether restructuring will be allowed or rejected.The court shall allow the restructuring if:

a) the trustee’s report meets the requirements stipulated by law;b) the content of the trustee’s appraisal report is clear and

understandable;c) the appraisal report has been prepared by a trustee registered

in the list of trustees and having its office is located in thedistrict of the respective court;

d) the appraisal is not older than 30 days from the day of thefiling of the petition; and

e) the trustee recommends the debtor’s restructuring.


In general, all formal notices made in insolvency or restructuringproceedings are published in the Commercial Journal. Thisincludes notices on the commencement of proceedings, theappointment of the trustees, the decision of the insolvency court onbankruptcy or restructuring, the dates of court hearings andcreditors’ meetings, etc.Bankruptcy proceedingsIn its decision on the declaration of bankruptcy, the court appointsa trustee and invites all creditors to lodge their claims with both thecourt and the trustee within 45 days from the date of the declarationof bankruptcy. The creditors cannot choose the first trustee.Within 40 days after the declaration of bankruptcy, the trustee

convenes the first creditors’ meeting which must take place notearlier than on the first day and not later than on the fifth day afterthe expiry of the period for the rejection of the claims. All creditorswho have duly lodged their claims can participate in such meeting.The creditors’ meeting has the right: (i) to elect and revokemembers of the creditors’ committee (the unsecured creditors electthe members to exercise their rights during the bankruptcyproceedings); and (ii) to replace the trustee. The first members ofthe creditors’ committee are elected at the first creditors’ meeting.The creditors’ committee can have three or five members.Subsequent meetings are convened by the trustee upon his/her owninitiative, upon the request of the court, the creditors’ committee orcreditors whose voting rights represent more than 10% of all votingrights. The creditors’ meeting is convened by announcing the dateof the meeting in the Commercial Journal.During bankruptcy, the insolvency trustee regularly reports to theinsolvency court and the creditors’ committee on the status of thesale of the debtor’s assets. Creditors may instruct the insolvencytrustee to prepare a special report on the status of the sale.In the course of the proceedings, after the sale of ¼ of the securityassets as well as general assets, the trustee prepares separatedistribution schedules for the secured creditors and unsecuredcreditors.In addition, at the end of the bankruptcy proceedings, theinsolvency trustee prepares a final distribution schedule for theunsecured creditors, in which he summarises what the proceeds ofthe sale are and how they are to be distributed among unsecuredcreditors. The Final Report is reviewed by the insolvency court andis published. Creditors are allowed to comment on the FinalReport, and their comments are heard by the insolvency court.Restructuring proceedingsSimilar to bankruptcy proceedings, when approving restructuringproceedings, the court appoints a trustee, invites all creditors tolodge their claims and, in addition, determines the scope of thedebtor’s legal acts, which are subject to the trustee’s approval. Thedecision is announced in the Commercial Journal. Creditors’ bodiesconsist of the creditors’ meeting and creditors’ committee (bothsecured and unsecured creditors can be elected) that are organisedin the same way as in the bankruptcy proceedings but their mainpurpose is to vote on a restructuring plan.

3 Creditors


Bankruptcy proceedingsUnder the BRA, unsecured creditors create a creditors’ committeewhich consists of 3 or 5 members elected by the unsecuredcreditors. In respect of the satisfaction of unsecured creditors’claims, their position is rather limited owing to the ranking of theirclaims. As a rule, the claims of secured creditors and special claimssuch as the trustee remuneration, fees, salaries, etc., are satisfiedfirst. Claims of the unsecured creditors are paid out from theproceeds of the sale of the general estate but only after deduction ofthe claims having higher priority.As regards the enforcement of claims, no enforcement involvingdebtor’s assets is allowed after declaration of bankruptcy.Restructuring proceedingsThe position of the unsecured creditors in restructuring proceedingsis slightly different. This is due to the entire concept and purpose

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of the restructuring proceedings which is to maintain the businessof the company and to draw up a plan to repay the debtor’sliabilities. They receive the amounts set forth in the restructuringplan which may alter the rights of the unsecured creditors (i.e.reduce the claim, satisfy the claim in installments or by the issuanceof securities, etc.). When approving the restructuring plan, thesecured and unsecured debtors are placed in separate groups; inorder to approve the restructuring plan, each group must approve itby a majority pursuant to the BRA.Similar to bankruptcy proceedings, no enforcement involvingdebtor’s assets is allowed during the restructuring proceedings.


Generally, once the bankruptcy/restructuring proceedings arecommenced, no commencement or continuation of securityenforcement proceedings involving the debtor’s assets is allowedand all pending security enforcement procedures must besuspended. Security enforcement involving assets of third parties isgenerally allowed as it does not involve the debtor’s assets.In bankruptcy proceedings, in the period between thecommencement and declaration of bankruptcy, the enforcement ofpledges over cash funds, receivables from a bank account ortransferable securities, or in respect of the continuance of theenforcement of a pledge in the form of a voluntary auction isallowed. No such exemption exists in the restructuringproceedings. The insolvency trustee administers the debtor’s assetsthat were provided as security to the secured creditors and arrangefor their sale. The insolvency trustee is, in principle, bound by theinstructions of the secured creditors in respect of the manner of theadministration and sale of the secured assets.


Bankruptcy proceedingsAs a general rule, set-offs are permitted. However, set-offs areprohibited in the event of: (i) a creditor’s claim that arose prior tothe declaration of bankruptcy and a debtor’s claim that arose afterthe declaration of bankruptcy; (ii) a creditor’s contingent claimsthat, in the course of the bankruptcy proceedings, must be lodged;(iii) not registered claims; (iv) a lodged claim acquired by virtue ofa transfer after the declaration of bankruptcy; and (v) a claimacquired on the basis of a legal action that may be contested.Restructuring proceedingsAs of the date of the commencement of the restructuringproceedings, set-off of any creditor’s claim lodged in theproceedings against the debtor’s claim against the creditor isprohibited.



Bankruptcy proceedingsUpon the commencement of bankruptcy proceedings, businessoperations are normally terminated and the legal acts of the debtorare restricted to ordinary legal acts. All other legal acts, especially

those concerning the disposal of the debtor’s assets, are executed bythe appointed trustee who is supervised by the court. The trusteeacts on behalf of the debtor and in its name. The trustee may onlycontinue in the business operation if certain special conditionsunder the BRA are met; basically if the proceeds from the sale ofthe business as a going concern can be higher than that of the saleof the assets by some other means.The debtor and its directors are obliged to co-operate with thetrustee, to provide required explanations in the form and within thedeadline determined by the trustee. The rights of the shareholdersare limited to those not involving the disposal of assets.The creditors’ meeting and secured creditors with respect to thesecured assets have a right to give the trustee binding instructionsor recommendations in certain cases with respect to the sale ofassets, asset management, business operations, etc.Restructuring proceedingsDuring restructuring proceedings, the debtor continues its operationunder the supervision of the trustee. The debtor is allowed toexecute ordinary legal acts but certain acts enumerated in thecourt’s decision require approval of the trustee. Lack of suchapproval, however, does not invalidate the act. If the debtor’sfinancial or business situation deteriorates so that the restructuringplan is no longer viable, the trustee shall without undue delayrequest the court to declare the bankruptcy of the debtor.Furthermore, the same applies, in the event of the debtor’s repeatedor serious breach of its duties. A limitation of shareholders’ rights can be implied from limitationsimposed on the legal acts of the company.


In general, the company finances the costs of the proceedings out ofits remaining assets.Bankruptcy proceedingsIn theory, the insolvency trustee may enter into new loanagreements, but in practice this would be realistic only if there werea chance to sell the debtor’s business as a going concern. Theinsolvency court may order the person that initiated insolvencyproceedings to pay an advance for the costs.Restructuring proceedingsThe debtor in possession may conclude loan agreements, whichwould provide fresh financing, with the approval of the trustee.New loans can also be foreseen in the plan which is subject toapproval. If the liquidation bankruptcy proceedings are laterdeclared, the unsecured part of the new loans would have priorityover other unsecured assets.


Upon the declaration of bankruptcy, the trustee exercises alldebtor’s rights vis-à-vis the debtor’s employees. The paymentliabilities of the debtor towards its employees arising after thedeclaration of bankruptcy have the status of priority claims.Furthermore, some restrictions provided for by Act No. 311/2001Coll., the Labour Code, as amended, regarding mass dismissals,e.g., the duty to discuss the plan of mass dismissals with therespective authority, etc., do not apply.Because in the restructuring proceedings the debtor’s continues tooperate its business, it is assumed that salaries are paid in duecourse. No exemptions with respect to dismissals apply in therestructuring.



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Bankruptcy proceedingsThe trustee may withdraw from a contract if:a) the agreement was concluded prior to the declaration of the

bankruptcy and the other party has not yet fulfilled itsobligations; or

b) the other party has partly fulfilled its obligation; this rightremains in respect to the non-fulfilled part of the obligation.

If the counterparty that has fully or partly fulfilled its obligationwithdraws from the agreement, it can only claim its receivables byregistering its claims as contingent/conditional receivables andrequesting their satisfaction in the bankruptcy proceedings. Thesame applies if both parties have not fully fulfilled their obligationsunder the contract, and one of them withdraws from the contract inrespect of the unfulfilled part.In the case of a contract whereunder a repeated or permanentperformance is delivered (e.g. a long-term supply contract) orparties are obliged to abstain from or tolerate certain activities, thetrustee is entitled to terminate such contract with a two-monthnotice period (unless the agreement or law provides for a shorterperiod). The trustee may also terminate such agreement if it wasagreed for a definite period (this does not apply to apartment leaseagreements or employment contracts).If the debtor’s counterparty is obliged to fulfill its obligation, suchparty is required to do so only if a consideration to be paid is alreadypaid or secured.Finally, as of the day of the declaration of bankruptcy, all debtor’sreceivables and liabilities arising prior to the declaration ofbankruptcy and related to the bankruptcy assets are deemed to bedue and payable until the termination of the bankruptcyproceedings. The same applies to the contingent receivables lodgedin the bankruptcy proceedings.Restructuring proceedingsAfter commencement of the restructuring proceedings, a contractcannot be terminated due to debtor’s delay in the fulfillment of itsobligations, provided that the delay arose prior to thecommencement of the restructuring proceedings. In addition, anycontractual provisions which entitle the debtor’s counterparty toterminate the agreement due to the commencement of therestructuring or bankruptcy proceedings are ineffective.

5 Claims


Bankruptcy proceedingsEach claim arising prior to the declaration of bankruptcy must beduly and timely registered with the court and the trustee within 45days following the declaration of bankruptcy. Non-registeredclaims and late registrations are not taken into consideration. Theproof of claims must contain the information set forth in the BRA.The failure to meet the deadline can not be remedied and such claimis excluded from the process. Each claim must be lodged separatelyand in addition, multiple claims must be summarised in a summaryof claims. The claims must be denominated in Euro and the proofof claims must be accompanied with relevant documents provingthe authenticity of the respective claim. A statement of a non-pecuniary claim must be accompanied with an expert appraisal in

order to determine the exact value of the claim. The exchange rateto be used for the conversion of foreign currency claims into Eurois the exchange rate of the European Central Bank or the NationalBank of Slovakia as of the date of declaration of bankruptcy.Within 10 days of the expiry of the registration period, the trusteeprepares the final list of receivables. It is the trustee’s duty to verifyeach claim, in particular with the bookkeeping of the debtor.Restructuring proceedingsThe procedure of registering the claims in the restructuringproceedings is almost identical to that of bankruptcy proceedings.The time period for lodging claims is 30 days following theapproval of the restructuring. The failure to meet the deadline cannot be remedied and the creditor will be not able to enforce its claimin the restructuring proceedings. The exchange rate to be used forthe conversion of foreign currency claims into the Slovak Crown isnot clearly set in the BRA; however, in practice the exchange rateof the European Central Bank or the National Bank of Slovakia asof the date of commencement of restructuring proceedings prevails.


Bankruptcy proceedingsThe claims are divided into the following groups:a) claims against the bankruptcy estate (pohl’adávky proti

podstate) such as taxes, customs duties, health and socialinsurance contributions, wages, the trustee’s fees, the costs ofthe bankruptcy proceedings which arose after the declarationof bankruptcy and other fees arising in relation to theadministration and sale of the assets; such claims aresatisfied first;

b) claims arising from the operation of the business(pohl’adávky z prevádzkovania podniku) which are satisfiedfrom the proceeds gained from the operation of the business;

c) secured claims which are satisfied from the proceeds fromthe sale of the secured assets securing such claim. Prior tothe payment of the sale proceeds to the secured creditor, aproportional part of the claims against the bankruptcy estateattributable to such assets (e.g. fees associated with the saleand administration of the assets) are deducted. If more thanone pledge had been created over the pledged assets, theranking of the pledges determines the priority of claims to besatisfied. If the first ranking secured claim exceeds theproceeds from the sale of the security assets, the unsatisfiedportion of such claim is classified as an unsecured claim andis satisfied from the proceeds from the sale of the generalbankruptcy estate, if any;

d) unsecured claims are satisfied from the proceeds of the saleof the general estate that remain available after thesatisfaction of the above creditors’ claims having higherpriority;

e) subordinated claims; andf) any proceeds that remain after the satisfaction of the above

claims are transferred to the debtor.The claims such as: (i) accessories of the claims arising after thedeclaration of the bankruptcy; (ii) court and legal fees incurred bythe creditor in connection with the bankruptcy proceedings, unlessthe law stipulates otherwise; (iii) claims arising from legal actswithout consideration; (iv) contractual penalties arising after thedeclaration of the bankruptcy; (v) penalties imposed in criminalproceedings; and (vi) creditor’s claims for damages arising from thefailure of the debtor to file a petition for bankruptcy, can not besatisfied in the bankruptcy proceedings.

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Restructuring proceedingsClaims that arise after the commencement of the restructuringproceedings are so-called priority claims (“prednostnépohl’adávky”) which are not included in the restructuring plan andare settled in the course of the restructuring proceedings, unless thecreditor of such receivable agrees that the claim will be included inthe plan and thus, satisfied together with other claims which hadarisen prior to the commencement of the restructuring proceedings.All other claims which arise prior to the commencement of therestructuring proceedings are satisfied in accordance with the approvedplan. However, in the event of the approval of the restructuring plan,the subordinated claims, claims from legal acts without considerationand accessories of the claim are deemed to be waived.


Any tax liability which arises prior to the declaration of bankruptcyand/or restructuring must be lodged by the tax authority. Taxliabilities that arise following the declaration of the bankruptcy, ifany, are to be treated in the bankruptcy proceedings as any otherclaims against the bankruptcy estate or as priority claims, in case ofthe restructuring proceedings.One day prior to the date of the declaration of the bankruptcy, therespective tax period ends and as of the declaration of thebankruptcy, a new tax period commences and ends on the date ofthe termination of the bankruptcy proceedings. If the proceedingsare still pending as of December 31st of the second year followingthe date of the declaration of the bankruptcy, the respective taxperiod ends on December 31st and new period starts on January 1st.In the last year of the proceedings, the period ends on the date of thetermination of the bankruptcy proceedings.Once the restructuring plan is approved, all tax liabilities whosepayments are not foreseen by the plan, cease to exist and the taxauthority is not entitled to enforce them after the termination of therestructuring proceedings.



Bankruptcy proceedingsThere is no process of “cramming down” creditors in bankruptcyproceedings.Restructuring proceedingsIn restructuring proceedings, the creditors vote on the plan. Forthose purposes, the restructuring plan divides claims into classes.Each class of creditors accepts the plan when more than half innumber and those holding more than half of the value of the claimsin the respective class, exceeding 1% of all claims in the class,approve the plan. The classes of shareholders accept the plan whenmore than half in number approve the plan.Under the BRA, if the required majority has not been reached in anyof the classes, the petitioner can request the court to replace themissing class’s consent by a decision of the court if:a) the majority of all the classes determined in the plan voted

for its adoption;b) the majority of the creditors calculated according to the total

value of their claims votes for the adoption of the plan; andc) the approved plan would not worsen the satisfaction of the

disagreeing creditors.


Bankruptcy proceedingsOnce all proceeds from the sale of the debtor’s assets are distributedin accordance with the final distribution schedule, the courtterminates the bankruptcy proceedings upon the request of thetrustee. The court decision becomes effective on the next dayfollowing the date of its notification in the Commercial Journal. Asof this day, all the effects of the commencing and declaration of thebankruptcy proceedings cease to exist, the trustee closes theaccounting books and if any assets are left, these are handed-over tothe debtor or liquidator. The debtor continues to exist or can beliquidated. The outstanding claims not satisfied in the bankruptcysurvive.Restructuring proceedingsIf there are no reasons to refuse the plan approved by the creditors,the court confirms the plan within 15 days from delivery of thepetition for confirmation and at the same time decides on thetermination of the restructuring proceedings. Any effects of thecommencement of the restructuring proceedings cease to exist as ofthe next day following the date of notification of the decision in theCommercial Journal which means that all suspended proceedingscontinue, the debtor has a right to dispose of its assets withouttrustee’s approval, if any remain, etc. After this date, the creditorswho failed to lodge their claims lose their right to enforce theclaims. The debtor continues its business operation unless the planforesees otherwise, e.g., that all the assets are to be sold in whichcase liquidation usually follows. Usually, the plan foresees thatclaims not to be satisfied under the plan are waived by the creditors.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Slovakia? In what circumstances might thisbe possible?

Private workouts used to represent a significant alternative to perpartes sales for companies in financial distress, since the oldinsolvency laws did not allow for effective court supervisedreorganisation proceedings. In the past, only a few companies weresuccessfully restructured. As in other jurisdictions, the greater thevalue of a going concern as compared to the liquidation value of thebusiness, the involvement of experienced creditors and reasonableprospects for the sale of the business increase the chances of asuccessful restructuring. At the same time, the directors of thecompany have to be comfortable that by agreeing to restructureinformally, they are still acting with due care.


It is possible to reorganise a debtor rather than realise its assets andbusiness under the restructuring proceedings. The restructuringproceedings are generally available if the expected satisfaction ofthe creditors’ claims is higher than the possible satisfaction of theclaims in the bankruptcy proceedings. The entire concept andpurpose of the restructuring proceedings is to maintain the businessof a debtor and to draw up a plan to repay the debtor’s liabilities.During restructuring proceedings, the debtor continues its operationunder the supervision of the trustee. The court will commence therestructuring proceedings within 15 days from the receipt of thepetition filed either by the debtor or creditor. Within 30 days fromthe commencement of the restructuring proceedings, the court



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decides whether restructuring will be allowed or rejected. Theparticulars of restructuring proceedings are described in previouscomments.


The expedited restructuring of the debtor by means of a pre-packaged sale is not possible in Slovakia.

8 International

8.1 What would be the approach in Slovakia to recognising aprocedure started in another jurisdiction?

Since the Slovak Republic is a Member State of the EU/EEA,proceedings commenced before foreign authorities in the EU/EEAcountries are recognised by Slovak courts. With respect to non-EU/EEA countries, the reciprocity principle applies, unless theinternational agreement regarding satisfaction of the creditorsstipulates otherwise.If cross-border bankruptcy proceedings are commenced abroad andthe foreign trustee proves its legal interest in its recognition in theSlovak Republic, the proceedings are recognised. Such recognitionis not allowed if the debtor is already subject to another pendingforeign or domestic proceeding.

Silvia Belovicová

White & CaseHlavné námestie 5811 01 BratislavaSlovakia


Silvia Belovicová graduated from Comenius University Law Schoolin Bratislava in 1997 and went on to obtain her InternationalBusiness Law LL.M. degree from Utrecht University in theNetherlands. Before joining White & Case in 2003, she spent sixyears at the Prague office of Hogan & Hartson, one of the largest lawfirms in Washington D.C. Her major areas of specialisation are realestate and bankruptcy. Silvia has recently been involved as anadvisor to a major London bank in formal restructuring proceedingstaking place in Slovakia. In addition to bankruptcy, her practiceincludes mergers and acquisitions, energy law and corporate law.Silvia is a member of the Slovak Chamber of Advocates.

Tomáš Cibul’a

White & CaseHlavné námestie 5811 01 BratislavaSlovakia


Tomáš Cibul’a received his master’s degrees from the Faculty of Lawand the Faculty of Economics in Banská Bystrica in 2006 and iscurrently pursuing an LL.M. degree from the University of London.He joined White & Case in 2008. Prior to this, he worked at Ernst& Young in Bratislava for more than two years. He works primarilyin the area of taxation, where he focuses mainly on tax structuringand optimisation, tax due diligences and ad-hoc tax advisory. Healso deals with commercial restructurings, such as mergers ordemergers, and various corporate law issues. Tomáš is a memberof the Slovak Chamber of Tax Advisors and the Slovak Chamber ofAdvocates.

White & Case LLP is a leading global law firm with lawyers in 34 offices in 23 countries. As one of the first US-basedlaw firms to establish a truly global presence, we provide counsel and representation in virtually every area of law thataffects cross-border business. In 2007, White & Case was awarded the title “Law Firm of the Year in Central andEastern Europe” by the independent publication, Chambers & Partners.

The Bratislava office of White & Case, established in 1991, is perennially acknowledged by the independentbenchmarking publications as one of the leading international law firms in the Slovak Republic. It offers multi-jurisdictional advice and provides legal services to major domestic and international corporations. Our office with 20lawyers and tax advisors has acted as a legal advisor on some of the largest corporate and commercial, financial, taxand real estate projects, including bankruptcy advice, in the Slovak Republic.

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1.1 How does a creditor take security over assets in Slovenia?

There are three types of security over assets: pledge; land charge;and title transfer. Security interest is not possible over a fluctuatingpool of assets, except for stock. PledgeA pledge is a right of the creditor to repay a defaulted obligationfrom the pledged assets. A pledge is classified into different sub-types. PledgeThe pledge involves concluding an agreement and taking actualpossession over movable tangible assets as security for the debt.The creditor has the right to sell the assets when the debtor defaults,or under certain circumstances and, with certain restrictions,appropriate the assets and apply their value in discharge of the debt.Similar principles apply for pledge over receivables or securities.Non-possessory pledgeCertain tangible movable assets, specified by regulations, can bepledged without the creditor taking actual or constructivepossession over assets. In this case, in addition to the securityagreement, registration of pledges with the special register isrequired for perfection of security. When a debtor defaults, thecreditor has the right to take actual possession of the assets.MortgageA mortgage is pledge over real property. It is obtained with theentry of a security agreement in the land register.LienA lien is a statutory right to retain possession of tangible movableassets until a debt is repaid. Assets have not been obtained initiallyby a creditor by way of security but for other purposes; the creditorhas obtained them from the debtor in the course of certaintransactions with the debtor.Land chargeA land charge is the right to repay defaulted debt from real property.It is different from a mortgage because it is established by a deed ofa land owner. When the deed is registered, the court issues a landcharge letter which is a negotiable instrument. The land charge isthus incorporated in and transferable with the land charge letter.Title transferA title transfer involves the transfer of ownership of a tangiblemovable asset or receivables by way of security for a debt. It is

established with the conclusion of a security agreement, with thepossession over movable tangible assets remaining with the debtor.The title transfer is made on the condition that ownership will betransferred back to the debtor on the discharge of the debt, unlessotherwise agreed. The creditor may sell the assets once he takespossession over them when the debtor defaults, or appropriate theassets and apply their value in discharge of the debt.


Certain types of transactions entered into within twelve monthsprior to an application for bankruptcy being filed may be subject tochallenge in bankruptcy proceedings. The first group oftransactions are transactions that reduce the net worth of debtor.Typically these transactions include a gift donation or selling ortransferring an asset at undervalue. The other group is preferentialtreatments. These include any transaction that has the effect ofputting a creditor in a better position in the bankruptcy proceedingthan he would have enjoyed if the transaction had not been made. The above-described characteristics of transactions form objectivecriteria for determining whether a transaction is avoidable.Additionally to the objective criteria, in principle a transaction mustsatisfy also subjective criterion to be avoidable in bankruptcyproceedings. The subjective criterion is that the counterparty knewor must have known of the debtor’s insolvency at the time oftransaction. It is presumed that any transaction (satisfying objectivecriteria), made in three months prior to an application forbankruptcy being filed, is avoidable. Certain transactions need notsatisfy subjective criterion; gratuitous transactions and transactionswhere the value of consideration of a counterparty is insignificantare avoidable regardless of knowledge of the counterparty on thecompany’s insolvency.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Slovenia?

Statutory liabilitiesOnce the board ascertains that the company is insolvent, it has astatutory duty to observe the creditors’ interests. Creditors’ interestsare protected by limits on the trading activity of the company. Thecompany may not pay or assume any liability after it becomesinsolvent other than discharging or assuming new liabilities whichare necessary in its ordinary course of business. It may also not doanything which would upset the equality of treatment of creditors.

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The board must also prepare a plan of financial restructuring whichincludes an analysis of causes for insolvency and an opinionwhether it is probable that the company can become solvent throughfinancial restructuring. If the opinion on probability of thecompany becoming solvent is positive, the board must proposemeasures, including corporate actions (e.g. capital increase), thatneed to be undertaken to suppress the insolvency of the company.If the opinion is negative, the board must file an application forbankruptcy. Failure to act in accordance with above-described statutory dutiesonce the company is insolvent, results in liability of themanagement board (and members of supervisory board) to thecreditors for any damage the creditors suffer in bankruptcyproceedings as a result of their failure. The damage creditors sufferis set by the statute; it is the difference between the nominal valueof their claims and the amount paid in the bankruptcy proceedings;however, the damages paid under this rule are limited for anindividual person who is found liable. The liability of themanagement and supervisory board’s members is limited to thedouble amount of a person’s remuneration received in the year ofthe wrongful omission, but not less than a certain minimum amount.Defences available to these persons are also limited by statute. Thecreditors, on behalf of the bankruptcy estate, and the administratorof the bankruptcy estate have the right to file an action for thisdamage. The person who pays such damages has the right to claimrecourse of the paid damages in the bankruptcy proceedings; hisclaim is subordinated. This statutory liability for damage pursuantto the Financial Business, Insolvency Proceedings and CompulsoryWinding-up Act (Zakon o financnem poslovanju, postopkih zaradiinsolventnosti in prisilnem prenehanju - ZFPPIPP) is withoutprejudice to the liability of the members of the management andsupervisory boards for any damage caused to the company forbreach of fiduciary duties under rules of corporate laws.Criminal liabilityConducting business after insolvency in such a manner that assetsare disposed at undervalue, disproportionate liabilities are assumedor contracts are made with insolvent third parties, or evidence ofother reckless management of a company’s assets and business,which results in bankruptcy and large damage for creditors, is acriminal offence, punishable with imprisonment. Any preferentialtreatment of a creditor or fraudulent trading, after the company isinsolvent, which results in large damage for creditors, is also acriminal offence punishable with imprisonment.DisqualificationA person who has been: (i) convicted for certain criminal offences,cannot be a member of a management or supervisory board of acompany for five years after the conviction and two years afterserving the prison term; (ii) prohibited by court in criminalproceedings to carry on a profession, cannot be a member of amanagement or supervisory board of a company until theprohibition expires; or (iii) ordered by court to pay damages tocreditors under statutory rules on liability of members ofmanagement and supervisory boards in insolvency, cannot be amember of a management or supervisory board of a company fortwo years after a final judgment has been delivered.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Slovenia?

Two procedures apply for insolvent companies: bankruptcy; andcompulsory settlement. Both are governed by ZFPPIPP. A solvent

company may go into liquidation if shareholders decide it has nofuture. Liquidation is governed by the Companies’ Act (Zakon ogospodarskih dru�bah - ZGD-1).

2.2 What are the tests for insolvency in Slovenia?

Insolvency is defined as a situation of “illiquidity” or “long termpayment inability”. Illiquidity is the inability to pay debts and it ispresumed to occur when a company is in arrears for two monthswith the payment of debt exceeding 20% of its liabilities as shownin the company’s latest annual financial statements. Long-termpayment inability occurs when the value of a company’s assets isless than the amount of its liabilities or if loss in a financial yearexceeds half of the share capital and cannot be covered by profitbrought forward or reserves. When either of the alternativesituations occurs, a company becomes insolvent.


The ground for bankruptcy proceedings and compulsory settlementproceedings is insolvency. Compulsory settlement proceedings may be initiated only if theboard of the debtor is of the opinion that the insolvent debtor maybecome solvent through financial restructuring. For this purpose,the board must prepare a report on the financial position of thedebtor with an auditor’s opinion and a plan of financialrestructuring with the opinion of a certified company’s valuer andsubmit them to the court. Liquidation is commenced by the general meeting of shareholderspassing a resolution on the company’s winding up by a specialmajority (three quarters of votes present).


The bankruptcy proceedings are commenced through an order bythe court. The petition for bankruptcy may be filed by the debtor,any creditor, or a personally liable shareholder of the debtor. Acreditor applying for bankruptcy must substantiate its claimincluding the fact that the claim is overdue by two months. The compulsory settlement may be initiated by the debtor or apersonally liable shareholder of the debtor. The court orderscommencement of the compulsory settlement proceedings if it issatisfied that the petition is complete and satisfies all statutoryrequirements as to its content.Once the general meeting of shareholders passes the resolution onthe company’s winding up, the resolution is registered with theregister of companies held by the court.


The court order placing the debtor in bankruptcy or compulsorysettlement is published online, on the internet page of the Agency ofthe Republic of Slovenia for Public Records and Services (AJPES),www.ajpes.si. On this page other relevant court orders,administrator’s and debtor’s reports and minutes of meetings,submitted or adopted during the proceedings, are also published.A liquidation administrator, appointed with the resolution onwinding up, manages the affairs and business of the company withthe purpose of its winding up. After his appointment, he has to

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publish a call to all creditors to prove their claims to him. He hasto prepare a report on liquidation proceedings and a proposal fordistribution of assets for approval of the general meeting ofshareholders.

3 Creditors


Once bankruptcy or compulsory proceedings have beencommenced, no creditor may enforce its claim in executionproceedings. All pending execution proceedings against the debtorare suspended and no new execution orders may be issued. Liquidation proceedings do not affect the right of unsecuredcreditors to enforce its claim in judicial proceedings if theliquidation administrator disputes its claim.


The rights of secured creditors are not affected by bankruptcy orcompulsory settlement proceedings, provided that, in bankruptcyproceedings, the secured creditors file their claims and collateralwithin the prescribed time limit. A lien obtained in executionproceedings within the last two months before proceedings wereopened is not enforceable. Secured creditors’ claims are satisfiedfrom proceeds of the sale of relevant assets - i.e. collateral.Collateral is realised in bankruptcy proceedings by an administratorunless the creditor has the right to realise collateral extra judicially. Liquidation proceedings do not affect the rights of a securedcreditor to enforce its security.


Claims that can be offset against the claims of the debtor at the timeof the commencement of bankruptcy or compulsory settlementproceedings are automatically set off. The creditor does not provesuch claim in bankruptcy proceedings, but notifies the administratorabout the set off. Claims that have been assigned to a creditorwithin the last six months before bankruptcy proceedings wereopened are ineligible for set off in bankruptcy proceedings,provided that the creditor knew or should have known of thedebtor’s insolvency at the time of assignment.In liquidation proceedings no special set off rules apply. Set off ispossible in accordance with general rules.



A court appoints an administrator in its order on commencement ofbankruptcy and compulsory settlement proceedings respectively. Once the bankruptcy proceedings are commenced, the debtor’sboard’s powers cease. The bankruptcy administrator assumes theduties of the board and control over the debtor.Differently from bankruptcy, an incumbent board in a compulsory

settlement is not deprived of its rights. It remains in control of thecompany, albeit its authority is limited. Consent of the administratoris required for operating debtor’s accounts. The board may not incurliabilities and dispose of assets except in the ordinary course ofbusiness; for any activity outside the ordinary course of business, theboard must obtain approval from the court, provided that suchactivity is part of the financial restructuring. The rights ofshareholders are affected by compulsory settlement procedure insofaras their rights are modified (e.g. diluted due to debt to equity swap)in accordance with the terms of the compulsory settlement. Inbankruptcy proceedings shareholders’ rights lapse. In liquidation proceedings, the liquidation manager appointed byshareholders manages the affairs and business of the company. Theshareholders’ rights lapse only with deletion of the company fromthe register at the end of proceedings and by that company’scessation as a legal entity. Until then the general meeting ofshareholders retains all its powers including with the right toreverse the decision to liquidate the company until the assets aredistributed among the shareholders.


In general the petitioner must fund the initial costs of bankruptcyand compulsory settlement proceedings. This initial cost is treatedin bankruptcy proceedings as a preferential claim in case apetitioner is creditor and if there are sufficient assets, a petitioner’sadvance funding costs are satisfied.To the extent the business of the debtor continues after proceedingsare commenced, the revenues must be sufficient to cover the cost ofbusiness. Cost of liquidation proceedings are borne by the company as itsoperating costs.


The commencement of bankruptcy proceedings does notautomatically terminate employment contracts. The bankruptcyadministrator terminates employment contracts with thoseemployees, whose employment becomes redundant. In compulsory settlement, employees may be dismissed, if this isenvisaged as part of financial restructuring.In liquidation proceedings, the employees are dismissed in duecourse, once their employment is not required any longer forcollecting the debts and realising the assets of the company. If the business or part of the business is sold in any proceedings, theemployees’ right to employment is protected pursuant to labourregulations on protection of employees in case of the transfer of theundertaking.


Contracts, which have been entered into before commencement ofbankruptcy or compulsory settlement proceedings and which havenot been performed by either party, remain in force. But the debtormay, with leave of the court, rescind the contract in one month afterthe commencement of the compulsory settlement proceedings and inthree months after the commencement of the bankruptcyproceedings. The court in compulsory settlement proceedings grantsleave if rescission is in accordance with the terms of financialrestructuring, and in bankruptcy proceedings if rescission contributes

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to more favourable terms of satisfaction of the creditors’ claims. The liquidation proceedings do not interfere with the contracts ofthe company.

5 Claims


Creditors must file their claims with the court within one monthafter commencement of compulsory settlement proceedings and inthree months after commencement of bankruptcy proceedings. Theclaims are examined by the administrator and other creditors. Theadministrator may object to the claim on its initiative or on themotion of a creditor. The court decides whether objected claims areproven in the proceedings. If the court in bankruptcy proceedingsdoes not prove a claim, the creditor must file an action to prove itsclaim in litigation proceedings. If a creditor does not file its claimin time in compulsory settlement proceedings he is not able to voteon compulsory settlement. In bankruptcy proceedings, a creditorwho fails to file a claim in time loses the right to satisfy his claimout of the estate. The secured creditors do not have to file their secured claims incompulsory settlement proceedings. In bankruptcy proceedingssecured creditors who may not realise collateral extra judicially,have to file their claims and collateral. Failures to file suchcollateral in time, results in that collateral lapsing. Collateral mayalso be contested by the administrator or other creditors. In liquidation proceedings, creditors file their claims within thetime limit announced in the call for filing the claims. If theliquidation manager contests any claim, the dispute is resolved inlitigation proceedings. The liquidation manager is required tosecure sufficient funds for claims which have not been filed, but areknown to him.


In general the ranking of the unsecured claims is the following:A. cost of proceedings, including the administrator’s cost and

expenses, wages of employees who continue to work for thedebtor, other costs of running the business of the debtorincluding certain taxes (VAT and tax on income fromdisposal of real estate);

B. preferential claims (employees’ redundancy payments andother accrued employees’ pay and, in bankruptcyproceedings, also debtor’s taxes accrued within the last yearbefore commencement of bankruptcy proceedings);

C. ordinary claims;D. subordinated claims; andE. shareholders’ claims.These claims are satisfied from the debtor’s general estateexcluding assets which are collateral of secured creditors.The secured claims are satisfied from collateral as segregated assetsof debtor’s estate. Any excess of assets, once secured claims aresatisfied, are transferred to the general debtor’s estate.Compulsory settlement affects only ordinary and subordinatedclaims, existing at the commencement of the proceedings. Otherclaims have to be satisfied in full. In liquidation proceedings the order of priorities is broadly the sameas in insolvency proceedings.


The commencement of proceedings does not affect corporation taxliabilities of the company. The general tax regime applies.



This process applies in compulsory settlement. The terms ofcompulsory settlement are approved by a majority of votes (60%)of creditors with the right to vote (broadly, those creditors who filedtheir claims in time and the claims have been proved). Claims carrydifferent votes, depending on the type of the claim (ordinary,subordinated) and if it was subject to debt to equity swap. Theapproved settlement is binding upon the dissenting creditors also.


The proposal for compulsory settlement is put to the vote. Theproposal includes extension of the payment term, reduction ofprincipal or interest (haircut), share capital increase with debt toequity swap, or any combination of these measures of restructuring.If the majority of creditors approve it, the court confirms thecompulsory settlement. The confirmed compulsory settlement maybe challenged by any creditor whose claim has been affected by thecompulsory settlement on the grounds that the debtor is able to payits debts in full. During the term of compulsory settlement, theboard must regularly report to the court on implementation ofrestructuring measures required for satisfaction of the terms ofcompulsory settlement. Once the bankruptcy manager has realised all assets of the debtor’sestate, the assets are distributed among creditors. After finaldistribution is made, the court upon report of the bankruptcyadministrator orders end of bankruptcy proceedings and the debtoris deleted from the register and by that ceases as a legal entity. Once the assets are distributed in the liquidation proceedings, theadministrator files the report and proposal on distribution adoptedby the shareholders, together with his statement on the assetsdistribution with the register of companies held by the court andapplies for deletion of the company from the register. With thedeletion from the register, the company ceases to exist as a legalentity.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Slovenia? In what circumstances might thisbe possible?

No, restructurings outside formal procedures are not common.Such restructuring can be initiated whilst a company is still solventand is feasible in cases with few creditors which can align theirinterest with the interest of shareholders.


Reorganisation of a solvent company is possible, in accordancewith corporate law rules. Once a company is insolvent,reorganisation may be one of the measures of financial restructuring

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proposed by the debtor and is subject to approval by creditors in thecompulsory settlement.


Such restructuring is not practised in Slovenia.

8 International

8.1 What would be the approach in Slovenia to recognising aprocedure started in another jurisdiction?

The approach to cross-border insolvency issues, includingrecognition of foreign proceedings, depends on the jurisdictionwhere the insolvency procedure is started. Recognition ofinsolvency proceedings opened in another EU Member State isregulated with the Council Regulation (EC) No. 1346/2000 of 29May 2000 on insolvency proceedings. With regards to insolvencyproceedings opened in other jurisdictions, the Insolvency Act hasimplemented rules provided in the UNCITRAL Model Law onCross-Border Insolvency.

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Simon Gabrijelcic

Jadek & Pensa d.n.o.-o.p.Tavcarjeva 61000 LjubljanaSlovenia

Tel: +386 1 234 2520Fax: +386 1 234 2532Email: [email protected] URL: www.jadek-pensa.si

Simon Gabrijelcic has been a partner at Jadek & Pensa since 2002.His practice is in banking & finance, capital markets, corporate andcompetition. He has recently advised on a high profile restructuringcase.

Jadek & Pensa provides its clients with a professional service in the areas of banking & finance, capital markets,competition, corporate, dispute resolution, employment, intellectual property, project finance, restructuring/insolvencyand tax. The firm’s reputation of a combination of technical ability and commercial awareness has been widelyrecognised. Various legal publications continuously rank the firm in the top-tier. It collaborates with most of the topinternational law firms. Jadek & Pensa has extensive experience in insolvencies and restructurings and has advised onseveral high profile cases.

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Chapter 38

Edward Nathan Sonnenbergs

South Africa


1.1 How does a creditor take security over assets in SouthAfrica?

Security in respect of corporeal movable property (i.e. tangibleproperty) can be taken in the following manner:1.1.1 A special notarial bond which lists the assets over which the

bond is registered. This creates a statutory pledge in favourof the mortgagee;

1.1.2 A common law pledge. The creditors must be placed inpossession of the assets subject to the pledge which is thenheld as security. This is uncommon in practice due to thepractical constraints; and

1.1.3 A general notarial bond registered over the movableproperty of the debtor. This is essentially an agreementbetween the creditor and the debtor which entitles thedebtor to take possession of the debtor’s movable assetsupon the happening of a specified event, such as default.Once the creditor takes possession, which is normallypursuant to a court order, his security is converted to apledge.

Security in respect of immovable property (i.e. land) is taken in theform of a mortgage bond which is registered over the property.Security in respect of incorporeal property (i.e. intangible propertysuch as rights) is taken in the form of a cession. The cessionaryholds the rights as security for the indebtedness of the debtor. Themost common form of cession is a cession of book debts.


The following types of transactions may be set aside where acompany in financial difficulties is subsequently placed inliquidation: (a) dispositions made without value; (b) voidable preferences; (c) undue preferences; (d) collusive dealings; and (e) voidable sales of a business or of a property forming part

thereof.Transactions which are found by a court to have constituteddispositions made without value, voidable preferences, unduepreferences and collusive dealings are voidable at the instance of

the liquidator of the company but until such time as thetransactions are set aside by the court they stand. Where aliquidator has reason to believe that a transaction may beimpeachable, it is the liquidator’s duty to investigate thetransaction and, if authorised by creditors, the liquidator maylaunch court proceedings to set the transaction aside. Theprerequisites of the voidable transactions are as follows:A disposition made without value: a court may set aside atransaction where a liquidator proves that more than two yearsbefore liquidation the company disposed of an asset and,immediately following such disposition, the company’s liabilitiesexceeded its assets and the disposition was not made for value;alternatively, the liquidator proves that within two years ofliquidation the company disposed of an asset not for value, unlessthe person claiming under or benefited by the disposition provesthat the company’s assets exceeded its liabilities at the time of thedisposition. Voidable preferences: the court may set aside a transaction wherethe liquidator proves that within six months before liquidation andimmediately after the disposition the liabilities of the companyexceeded its assets, unless the person in whose favour thedisposition was made proves that it was made in the ordinarycause of business and that it was not intended to prefer onecreditor above another. Undue preferences: the court may set aside a transaction wherethe liquidator proves that after the disposition the company’sliabilities exceeded its assets and the disposition was made withthe intention of preferring a creditor and the company wasthereafter liquidated. Collusive dealings: the court may set aside such transaction wherethe liquidator proves that the asset was disposed of in such mannerwhich had the effect of prejudicing creditors or preferring onecreditor above another and the disposition was effected by thecompany in collusion with another. Voidable sale of business: where the company disposes of anybusiness or goodwill belonging to it and the sale is not properlyadvertised to creditors in terms of the relevant provision of theInsolvency Act, the sale will be void against creditors for a periodof six months after disposition and will be void if the company isliquidated any time within that period. The provisions of the Insolvency Act relating to impeachabletransactions do not apply to dispositions effected in accordancewith the rules of a securities exchange or clearing house.In addition to the statutory provisions referred to above, there is acommon law remedy which applies to a disposition which is madein fraud of creditors.

Claire Morgan

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Edward Nathan Sonnenbergs South Africa

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties South Africa?

There is no civil or criminal liability that arises automatically inrelation to directors trading in a company in financial difficulties.On liquidation, directors are, by law, divested of their powers andauthority in relation to the company. After liquidation and afterinvestigation into the affairs of the company have been conductedby the liquidator (which investigations may include formal enquiryproceedings in terms of the Insolvency Act or the Companies Act),the liquidator may sue the former directors for reckless orfraudulent trading within the provisions of the Companies Act.When it appears that the business of a company was or is beingcarried on recklessly with intent to defraud creditors of thecompany, the court may on the application of a liquidator, a creditoror a member declare that any person (not just a director of thecompany) who was or is knowingly a party to the carrying on of thebusiness in the fraudulent or reckless manner, will be personallyliable without any limitation of liability for all or any debts or otherliabilities of the company as the court may direct. Where theliquidator finds evidence of fraud such evidence may be turned overto the relevant authorities for criminal prosecution.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in South Africa?

2.1.1 Scheme of ArrangementA company may enter into a formal, court sanctioned compromiseor arrangement between itself, its members and creditors. Suchcompromise or arrangement must be agreed to by a majority innumber representing three-quarters in value of creditors or a classof creditors or a majority representing three-quarters of the votesexercisable by the members or class of members. If suchcompromise or arrangement is sanctioned by the court then it isbinding on all creditors or classes of creditors or on all members orclasses of members. It is also binding on the liquidator if thecompany is already in the process of being wound up. Suchcompromises or arrangements are effected in terms of section 311of the Companies Act. Compromises or arrangements in terms ofsection 311 may be made in an attempt to avoid liquidation orjudicial management proceedings in respect of the company bycreditors effectively agreeing to limit their claims in order to enablethe company to continue trading.2.1.1 Judicial ManagementWhen a company, usually by reason of mismanagement, is unableto pay its debts and is thereby prevented from becoming asuccessful concern, and there is a reasonable probability that ifplaced under judicial management it may be enabled to pay its debtsand become a successful concern, the court may on just andequitable grounds order that a company be placed under judicialmanagement. A judicial manager (usually a liquidator acting in thatcapacity) will be appointed by the court and will seek to trade thecompany out of its difficulties by reaching a compromise orarrangement with creditors and by proper management of thecompany. Judicial management is uncommon as it has almostalways been found to be ineffective in saving a company.2.1.3 LiquidationMost companies placed in liquidation are wound up by the courtafter application has been made, by the company itself (authorised

by its own directors and members) or by a creditor. In certaincircumstances the company may be wound up by special resolutionwhich resolution is registered in the office of the registrar ofcompanies in Pretoria. A liquidation may be either voluntary orinvoluntary.

2.2 What are the tests for insolvency in South Africa?

The tests for insolvency relating to individuals and trusts aredifferent and more onerous than the test for insolvency in relationto companies. The test for the insolvency of a company is“commercial insolvency” (as opposed to actual insolvency), that is,whether the company is able to pay its debts as and when such debtsarise in the ordinary course of its business.


A company may be wound up by the court if: the company is unable to pay its debts; if it appears to the court that it is just and equitable that thecompany be wound up; if the company itself has resolved by special resolution thatit be wound up by the court; if the company commences business before the registrar ofcompanies certified that it was entitled to commencebusiness; if it does not commence business within a year fromincorporation or has suspended its business for a year; in a case of a public company, if the number of members hasbeen reduced below seven; 75% of the issued share capital of the company has been lost;and in the case of an external company, the company is dissolvedin the country in which it was incorporated.

The main grounds on which companies are placed in liquidation bythe court are the company’s inability to pay its debts and on just andequitable grounds. “On just and equitable grounds” confers on thecourt a wide discretionary power taking into account all relevantcircumstances. An applicant who relies on just and equitablegrounds must come to court with clean hands, that is, the applicantmust not itself be wrongfully responsible for the circumstanceswhich have brought about the state of affairs alleged in theapplication. The five broad categories of just and equitable groundsfor the winding up of a company are: the disappearance of thecompany’s substratum; illegality of the objects of the company andfraud committed in connection therewith; deadlock (betweenmembers or directors); grounds analogous to those for thedissolution of partnerships; and oppression (usually minorityoppression).


The court may order that the company be placed in liquidationwhere application to court is: made by the company itself; by oneor more of its creditors; by one or more of its members; jointly byany or all of the above parties; and, in the case of a voluntarywinding-up, by the Master or any creditor or member; or, in the caseof the discharge of a judicial management order, by application bythe judicial manager. Application is made on one or more of thegrounds set out in question 2.3 above. Where the liquidationapplication is not opposed, an order of liquidation may generally be



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obtained within days of issuing the application at court. Where theliquidation application is opposed either by the company itself or bythe intervention of another creditor, the court hearing will bedelayed by a number of months for the filing of further affidavits.The date of liquidation is deemed to be the date on which theapplication is issued out of Court. The directors are divested oftheir powers and authority on liquidation. The liquidator who isappointed shortly after liquidation thereafter takes control of theaffairs of the company and acts on its behalf.In the case of a voluntary liquidation by way of resolution, thewinding up commences on the registration of the resolution in theoffice of the registrar of companies.


A director files a statement of affairs in the prescribed formatsetting out, inter alia, the asset and liability position of the company.The statement of affairs is a sworn statement which the director isobliged to furnish the liquidator. The former directors of thecompany are furthermore under a duty to assist the liquidator in thewinding up of the company.As soon as a final winding up order has been made by the court orthe resolution for a voluntary winding up has been registered, theoffice of the Master of the High Court calls a first meeting ofcreditors and members whereat the statement of affairs isconsidered, claims against the company are submitted for proof andthe formal nomination of persons for appointment as liquidatoroccurs. The Master will appoint the final liquidator(s) based on thenomination and voting at the first meeting of creditors.Approximately two months later a second meeting of creditors isconvened by the liquidator. At the second meeting the liquidator’sresolutions, which grant the liquidator authority inter alia to enterinto compromises or arrangements with creditors, borrow funds tocontinue trading and sell off the company’s assets without obtainingthe prior sanction of the court, will be passed by members andcreditors. The former directors of the company are obliged to attend the firstand second meetings and may be called on to answer the questionsof the liquidator, the Master of the High Court or a creditor at suchmeetings. The second meeting may be adjourned for formalenquiry proceedings. The liquidator may also institute formalenquiry proceedings after application to court in terms of theCompanies Act. At such enquiry proceedings a commissioner willbe appointed and persons including directors of the company maybe summonsed to give information or documentation concerningthe trade, dealings, affairs or property of the company. Such anenquiry may only be convened where the company is unable to payits debts.Notice of the provisional order of liquidation is published in twolocal newspapers within the jurisdiction of the relevant court and inthe Government Gazette. Notice of the first and second meeting ofcreditors is published in the Government Gazette.

3 Creditors


Unsecured creditors are not free to enforce their rights onliquidation. Court process against a company in liquidation is alsosuspended. Creditors, including unsecured creditors, may lodge

their claims against the company in liquidation in the hope ofreceiving a dividend payment in due course. Dividends are paid outin the legal order of preference of creditors set out in the InsolvencyAct.


Secured creditors are not free to enforce their security onliquidation. Creditors, including secured creditors, may lodge theirclaims against the company in liquidation and may rely solely ontheir security to avoid being levied with a contribution for costs inthe liquidation.


A creditor may not set off a sum owed by it to the company inliquidation subsequent to the date of liquidation. Where a set offhas already been effected between a creditor and a company that isplaced in liquidation within six months of the set off, the liquidatormay set aside the set off if it was not effected in the ordinary courseof business. The creditor may then prove its claim against thecompany as if no set off had occurred.



The liquidator controls the company. On liquidation, directors aredivested of their powers and authority to act on behalf of thecompany. Directors are obliged to assist the liquidator in windingup the affairs of the company. A liquidator may continue to employa director or employees of the business to assist him or her in thewinding up. On liquidation shareholders are also divested of anypowers they may have, for example, to call a meeting of thecompany.


The costs of the liquidation are paid from the realisation of theassets and the business of the company in liquidation. Where theliquidator requires funding that is not readily available to thecompany but which may accrue to it in due course either throughthe sale of assets or through post-liquidation trading by theliquidator, the liquidator may borrow such funds on authorisationby creditors or the court.


The contracts of employment of the company’s employees areautomatically suspended on liquidation, and employees are nolonger required to tender their services although the liquidator maycontinue to employ some or all of the employees to assist in thewinding up or post-liquidation trading. Employees’ contracts arefinally terminated by the liquidator after giving employees notice tothis effect. Employees enjoy a limited statutory preference forpayment of their claims against the company for unpaid salaries andother benefits and rank just below secured creditors. In the event

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that the liquidator sells the business of the company as a goingconcern, the contract of employment of the employees areautomatically transferred to the purchaser. The liquidator cannegotiate with employees to regulate the number of employeeswhose contracts are transferred to the purchaser.


In respect of executory contracts (that is, contracts in whichperformance is still outstanding by one or both parties), theliquidator has the election whether the company in liquidation willabide by the terms of the contract or whether the contract will becancelled. Where the liquidator elects that the company willperform its obligations in terms of the contract, the other party isalso obliged to perform its obligations under the contract, savewhere an accrued right to cancel the contract existed prior toliquidation in which case the other party may cancel the contract.Certain contracts, for example, contracts of agency, terminateautomatically on liquidation.

5 Claims


The creditor will depose to an affidavit incorporating supportingdocumentation which sets out the creditor’s claim against thecompany in liquidation. The claim affidavit will be submitted forproof at a meeting of creditors. A claim admitted to proof at suchmeeting will subsequently be examined by the liquidator who willperform his or her own reconciliation of the claim from the booksand records of the company in liquidation. Where the liquidatordoes not dispute the claim, the creditor becomes a proved creditorand may receive a dividend in due course. Damages claims aresubmitted to meetings of creditors but may not be proved againstthe company in liquidation until a liquidator authorised in terms ofthe second meeting resolutions has compromised such claim oruntil such claim has been settled by court process instituted by thecreditor.


5.2.1 The ranking of claims is governed by the Insolvency Act. 5.2.2 In respect of assets over which security is held, the proceeds

of such assets are first utilised to settle realisation costs andany other costs of liquidation which are applicable to suchasset as thereafter the surplus is utilised to settle the securedcreditor’s claim. Any surplus is transferred to free residue.

5.2.3 In respect of unencumbered assets (i.e. free residue) theproceeds of such assets are applied as follows: costs ofrealisation and cost of liquidation; thereafter in settlement ofcreditors who enjoy statutory preferences such as employeesand internal revenue; and thereafter in payment to concurrentcreditors (i.e. unsecured creditors).


Where a liquidator continues for a time to trade in liquidation, thenordinary tax liabilities will be incurred in the course of trading.

Income tax would be payable on any income earned by theliquidator post liquidation. Such interest on the bank account istaxable.



Creditors vote by number and value in liquidation proceedings.A creditor may not vote on a matter in which it has a directinterest. There is no special process for “cramming down”creditors.


The winding up of a company is complete when the liquidatorhas realised all the assets and completed his investigations (andany action that may have arisen therefrom) into the affairs of thecompany. The liquidator will draw a final liquidation anddistribution account and make the final dividend payment tocreditors (if any). The registrar of companies will de-register thecompany. Alternatively, a company may be discharged fromliquidation by court sanction where creditors enter into acompromise or arrangement with the company in terms of section311 of the Companies Act.


7.1 Is it common to achieve a restructuring outside a formalprocedure in South Africa? In what circumstancesmight this be possible?

It is not common for a company to achieve a materialrestructuring outside the formal procedures because othercreditors are not bound thereby.

7.2 Is it possible to reorganise a debtor rather than realiseits assets and business?

A scheme of arrangement, i.e. a compromise with creditors, maybe entered into outside of a liquidation in terms of section 311 ofthe Companies Act. Attempts may also be made to reorganise adebtor within the context of judicial management (see question2.1 above).

7.3 Is it possible to achieve an expedited restructuring ofthe debtor by means of a pre-packaged sale? How issuch a sale effected?

A liquidator may sell the business as a going concern. Theliquidator may apply to court for its sanction to do so where suchsanction is urgently required. Alternatively, the liquidatorobtains his authority from creditors and members at meetings ofcreditors and members and may thereafter dispose of the businesson the appropriate terms and conditions.



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8 International

8.1 What would be the approach in South Africa torecognising a procedure started in another jurisdiction?

A foreign representative may apply to a South African court forrecognition of the foreign proceedings in which the foreignrepresentative has been appointed. The South African court may

recognise the foreign proceedings. Alternatively, the foreignrepresentative may request from the South African court thatproceedings commence under the laws of South Africa relating toinsolvency or the right to file claims in such proceedings. Onrecognition of foreign proceedings, the foreign representative hasstanding to initiate any legal action to set aside a disposition that isavailable to a liquidator under South African insolvency law. Theforeign representative may also intervene in any proceedings inwhich the debtor is a party.

Gary Oertel

Edward Nathan Sonnenbergs150 West Street, SandownJohannesburg 2196PO Box 783347, Sandton 2146South Africa

Tel: +2711 269 7600Fax: +2711 269 7899Email: [email protected]: www.ens.co.za

Gary is a director at ENS of thirteen years experience and providesadvice on insolvencies, insolvency enquiries, liquidations, section311 compromises and litigation arising out of insolvencies. He alsoassists banks and other creditors in relation to insolvencies andliquidations.

Claire Morgan

Edward Nathan Sonnenbergs1 North Wharf Square, Loop StreetForeshore, Cape Town 8001PO Box 2293, Cape Town 8000South Africa

Tel: +2721 410 2500Fax: +2721 410 2555Email: [email protected]: www.ens.co.za

Claire is a director at ENS and has experience in insolvencyenquiries, insolvency litigation and schemes of arrangement. Sheprovides opinions on the implications of insolvency in commercialand banking transactions and advises clients on the implications ofsequestration, liquidation, securing debt, corporate governance,impeachable dispositions and rehabilitation. Her clients includebanks, retailers, oil and other listed companies, liquidators, trustees,entrepreneurs and corporate investors.

Edward Nathan Sonnenbergs was established in 2006 as the result of a merger between two of South Africa’s mostprominent and leading law firms, Edward Nathan and Sonnenberg Hoffmann Galombik. As a full service law, tax,forensics and business advisory services firm, ENS offers a level of legal competence that sets a new standard in Africa,both geographically and in terms of service, skills and expertise. ENS is based in Johannesburg, Cape Town andDurban. ENS’s Insolvency, Business Rescue and Debt Recovery department assists clients in proactively managinginsolvency and financial exposure. When insolvency is inevitable, however, the strategy becomes one of minimisingloss, maximising returns for creditors and developing and implementing a recovery strategy for viable business activities.



ChapterChapter 39

Uría Menéndez

Spain


1.1 How does a creditor take security over assets in Romania?

Under Spanish Law, in rem security interests are conceived as rightscreated upon certain assets and which allow creditors to enforcetheir credit rights against those assets with priority to other creditorsof the owner of the assets. See questions 3.2 and 5.2 regardingrestrictions for enforcement and ranking of secured creditors.In order to take security over the debtor’s assets, a creditor has awide range of possibilities under Spanish Law: (i) Pledge (prenda) over movable assets. This type of pledge,

which is applicable to almost all types of movable assets(shares, credits, etc.), requires mandatory transfer ofpossession on the relevant asset from the debtor (or owner ofthe asset) to the secured creditor. The pledge is granted in apublic deed in order to have evidence of the date when thepledge was granted and cannot be registered, although thepledge over credits may be granted in another kind ofdocument (not only public deed) which gives enoughevidences on the date.

(ii) Pledge over certain movable assets (e.g., machinery, assetswith serial number, stocks, harvest products, livestock,farming machinery, receivables, even future, not representedby securities) that do not involve the mandatory transfer ofpossession of the relevant asset (prenda sin desplazamiento).This type of pledge is granted in a public deed and registered.

(iii) Mortgage created on real estate assets (hipoteca). Mortgagemust be granted in a public deed and registered with theProperty Registry. No transfer of possession is necessary asthe principles underlying the Property Registry alloweveryone to be aware that a certain asset is the subject of asecurity interest.

(iv) Mortgage on certain movable assets (businesses, motorvehicles, railway wagons, airplanes, industrial machinery,industrial and intellectual property) (hipoteca mobiliaria).This type of mortgage on certain movable assets must begranted in a public deed and registered. No transfer ofpossession is necessary.


The Spanish Insolvency Act provides a claw-back period of twoyears starting from the date when the insolvency is declared by theJudge. All transactions carried out during such period can be

declared void if they have caused damage to the debtor’s state,even if no fraud has been committed. Payment and settlement transactions in securities and financialmarkets and those entered into by the debtor in the ordinary courseof business on an arm-length basis are not subject to claw-backclaims.As a general rule the party who claims the annulment of aparticular transaction carried out within the claw-back period (i.e.,the Trustees or a creditor, which is entitled to do so if the Trusteesdo not claim such annulment in two months since the creditorrequested it by written form, indicating the act subject to claw-back) must give evidence of the damage caused to the debtor’sstate.However, in the following cases it is presumed that damage to thedebtor’s state has been caused irrespective of the evidence brought:(i) transfer of assets without consideration; and (ii) prepayment ofindebtedness maturing after the time the insolvency is declared.In addition, in the following cases it is presumed that damage hasbeen caused to the debtor’s state (although the debtor or theaffected party are allowed to bring the necessary evidence todestroy the presumption): (i) transfer of assets to any of the personsthat are “specially linked with the debtor” (e.g., inter-grouptransactions); and (ii) security granted for securing existing non-secured obligations or new obligations replacing non-securedobligations.If the Judge annuls a transaction under the claw-back provisions,the Judge will order that the party who has received any asset fromthe debtor returns it back with its interests and proceeds. If thiscannot be carried out because the relevant asset was subsequentlytransferred to a third party under any of the circumstances providedby Law according to which such sale cannot be annulled, the firstacquirer will be obliged to deliver to the debtor’s estate an amountequal to the value of the asset as of the time when it took out fromthe debtor’s estate plus interests calculated at legal the interest rate. The consideration delivered by such first acquirer in the voidedtransaction would be considered as a credit against the debtor’sestate that must be paid simultaneously with the return, by the firstacquirer, to the debtor’s estate of the relevant asset.However, if the Judge considers that the clawed back transactionwas carried out in bad faith, the first acquirer will be obliged toindemnify the damages caused to the debtor’s estate. Likewise, itwill be considered that the acquirer’s right to the return of theconsideration delivered is only a subordinated claim, to be paid inthe last position in the ranking (see question 5.2 below).

Ángel Alonso Hernández

Alberto Núñez-Lagos Burguera



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Uría Menéndez Spain

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Spain?

If the directors continue to trade whilst a company is in financialdifficulties, they may face the liabilities referred to below.Directors’ liabilities under any of these grounds can be claimedindependently. (i) Capital impair situation According to article 260.1.4º of the Spanish Public Companies Act,if the company’s net worth is reduced by losses to less than 50% ofthe share capital, the company is in a statutory cause of compulsorydissolution. Directors are obliged to call a general shareholders’meeting within the two months following the date they becomeaware - or should have become aware - of this situation, in order topass a resolution to dissolve or to recapitalise the company. If the general meeting is not held, or if none of these resolutions arepassed, the directors are required to lodge a judicial claimrequesting the dissolution of the company within the two monthsfollowing the date of the general meeting or when such meetingshould have been held. If the directors fail to comply with these obligations, they will beheld joint and severally liable for those obligations arising after thecapital impairment situation. All credits will be presumed that havearisen after the capital impairment situation, unless directors giveevidence to the contrary.The directors’ obligation to apply for judicial dissolution may besubstituted by application for insolvency if the company is ininsolvency as provided in question 2.2 below.(ii) Liability in case of guilty insolvencyIf the insolvency proceedings lead to the liquidation of thecompany, or to a creditors’ agreement which provides for areduction higher than 1/3 of the liabilities of the company or for astay of more than three years, the Insolvency Judge shall analyse ifthe insolvency should be declared guilty or not.Pursuant to the Insolvency Act, the insolvency would be qualifiedas guilty if it has been caused or aggravated due to the debtor’sand/or its directors’ (including shadow and de facto directors) wilfulmisconduct or gross negligence. Absent evidence to the contrary,wilful misconduct or gross negligence will be presumed in thefollowing cases (among others):(a) where directors fail to file an application for insolvency

within two months from the date when they knew or shouldhave known the insolvency situation of the company. It ispresumed, absent evidence to the contrary, that the debtorwas aware of its insolvency situation if any of the factsenabling creditors to file for insolvency has arisen (seequestion 2.2); and

(b) where the annual accounts related to the three fiscal yearspreceding the declaration of insolvency have not been issued,or audited or, once approved, have not been deposited withthe Commercial Registry.

Additionally, it must be highlighted that, among other cases, theInsolvency Act provides that the insolvency will be declared in anycase as guilty if: 1. the debtor has not complied with its accounting obligations

or has double accounting or incurs in a relevant irregularitythat may affect to the understanding of its net worth orfinancing situation;

2. the assets of the debtor are fraudulently transferred out fromdebtor’s estate during the two years prior to the declarationof insolvency; or

3. the debtor has carried out acts with the intention to simulatea fictitious net worth position.

If the insolvency is qualified as guilty, the Judge may order that thedirectors (including shadow and de facto directors) and all thepersons who have fulfilled management functions within the twoyears prior to the insolvency declaration: (i) are disqualified tomanage assets or to become representative for a period of two to 15years; (ii) lose any claims that may be held against the debtor; and(iii) indemnify any damages caused.Likewise, in the event of insolvency proceedings ending inliquidation, such directors can be sanctioned to pay the amount ofcredits that remain unpaid after the liquidation of the debtor.Likewise, the Insolvency Act foresees that at any stage the Judgemay order the seizure of goods owned by directors (includingshadow and de facto directors during the above-referred period oftime) when it is foreseeable that the insolvency will be declared asguilty and that there would not be enough assets to pay all debts.The existence of any of the above-referred circumstances or factsthat may cause the insolvency to be considered guilty may bealleged by any of the creditors, but will be in any case investigatedby the Judge with the assistance of the Trustees and the ProsecutorOffice (Ministerio Fiscal).(iii) Criminal liabilityUnder Spanish Criminal Law (Código Penal), directors may havecriminal liability punished by prison (from two to six years and withpenalties from eight to 24 months), if they have caused or wilfullyaggravated the insolvency of the company(iv) General Corporate Law liabilityThe trustees are entitled to claim damages against the Directorscaused to the company as a result of breach of Law or By-laws, orbreach of their fiduciary duty or duty of care, without prior consentfrom the General Shareholder Meeting. A third party can claimagainst Directors any damage caused by them exercising theirDirectors’ faculties.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Spain?

The Insolvency Act establishes a single procedure (“concurso”) forany type of insolvency (both liquidation and restructuring) that isgoverned by a Judge with participation by a number of trustees(generally three: a lawyer and an auditor with at least five years ofexperience, and an ordinary or generally privileged, non-secured,creditor, which must appoint an auditor). This procedure has acommon phase and two different solutions, namely:a) a creditors’ composition agreement, designed to permit the

debtor to reactivate its business under certain conditions setforth in such agreement for the payment of their credits; and

b) the liquidation of the debtor’s assets (see question 6.2) inorder to pay its debts (through a trustees plan approved bythe Judge, or if it is not approved, according to the rulesstipulated in Insolvency Act). Insolvency Law intends toprivilege the transfer of the entire business of the debtor to athird party as a going concern.

During the common phase, the Judge will appoint the members ofthe trustees panel, whose main function is to determine the debtor’sestate and existing debts, and to control the management of thedebtor’s business. They will issue a report drafted on the causes ofthe insolvency alleged by the debtor and its net worth andaccounting situation, as well as set the inventory of the debtor’sestate and the list of creditors. The common phase ends once allclaims brought by an interested party against such list of creditors

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and/or inventory drafted by the Trustees have been resolved by theJudge.

2.2 What are the tests for insolvency in Spain?

The test for insolvency is the incapability of the debtor to complywith its obligations regularly when they become due and payable. Additionally, the debtor can apply for insolvency if the debtorforesees that it will not be able to regularly comply with itsobligations once they become due and payable. Likewise, any creditor is entitled to file for the debtor insolvency,basing its claim on the insufficiency of attachable assets whenenforcing its credits against the debtor, or otherwise to provideevidence of any of the following facts: (a) general default of the debtor’s payment obligations;(b) general seizure of the debtor’s assets;(c) sale of the debtor’s assets at a loss or in a negligent manner;

and(d) debtor’s failure to pay during the three-month period

preceding the filing for Involuntary Insolvency its (i) taxliabilities; (ii) social security obligations; or (iii) salary andother monetary employment obligations.


See question 2.2 above.


Either the debtor or any of its creditors may file for the insolvencyof the debtor, as referred in question 2.2 above. The directors of a company have the obligation to file for insolvency(a “Voluntary Insolvency”) within two months from the date itsdirectors become aware or should have become aware of theinsolvency situation. Once the debtor evidences to the Judge itsindebtedness and insolvency situation, the Judge automaticallydeclares the debtor to be insolvent. The failure of a debtor to file forVoluntary Insolvency, if it is required to do so, subjects the companyand its directors to various sanctions (see question 1.3 above).A creditor can also file an application for the insolvency of a debtor(an “Involuntary Insolvency”), according to the facts described inquestion 2.2 above. Such creditor, being an ordinary creditor, isprivileged for an amount of the 25% of its credit (see question 5.2).The debtor is entitled to give evidence in a hearing to be held withthis respect that, notwithstanding the concurrence of any of suchfacts, no insolvency as defined in question 2.2 above arises.


Declaration of the insolvency would be made public by placing thecorresponding advertisements in the Spanish Official Gazette and ina newspaper of the same province where the debtor is located. Likewise the declaration of the insolvency would be registered in allPublic Registries and published on the websitewww.publicidadconcursal.es run by the Spanish Ministry of Justiceand the Registries Association.(See question 5.1 regarding communication of credits.)

2.6 How does somebody establish whether the company hasbeen placed into one of these procedures?

Only the Judge may declare that a debtor is insolvent (for publicityof the insolvency see question 2.5 above).

3 Creditors


No enforcements may be started during the insolvency proceedings. Enforcement of claims initiated before the declaration of insolvencywill be suspended on the date of the declaration of insolvency,except for those of an administrative and labour nature, to the extentthat they are enforced on assets which are not necessary to carry outthe business of the debtor.


Until (i) the approval of any composition’ agreement or (ii) theexpiry of one year from the date of declaration of insolvencyprovided that the liquidation phase is not opened (whichever isearlier), no enforcement of security can be commenced or continuedif the enforcement relates to assets required for allocated to thebusiness of the debtor (unless (i) advertisements on the collateral’sauctions would have been published by the time of the declaration ofthe insolvency and (ii) the assets, although allocated to, were notnecessary as to run the debtor’s business). Other creditors (e.g.,financial lessors or sellers of real estate with deferred paymentsubject to termination conditions registered with the CommercialRegistry) are subject to the same regime.If the secured assets are not assigned to the activity of the debtor,secured creditors can enforce their security. According to the scarceexisting case-law, Spanish Courts consider that assets are notassigned to the activity when the debtor ceases to carry out businessor at least the debtor has ceased the part of its business related to theassets granted as security.


No set-off can be carried out after the declaration of insolvencyunless the requirements for such set-off pursuant to Spanish CivilCode are met prior to the declaration of insolvency.Notwithstanding any possible claw-back actions, insolvency will notaffect the right of the creditor to set-off if: (i) the Law that governsthe reciprocal credit of the debtor allows set-off in cases ofinsolvency; or (ii) such set-off is stipulated in a netting agreementpursuant to special legislation.



The declaration of insolvency does not affect the continuation of thedebtor’s ability to continue trading. However, upon request by the



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Trustees, the Judge may decide to shut down the debtor’s operationstotally or partially.In general, during the common phase (see question 2.1 above) ofthe insolvency proceedings, the Trustees will replace the debtor’sexisting management in case of an Involuntary Insolvency (seequestion 2.4 above), and will have certain supervisory powers overthe debtor’s management in case of Voluntary Insolvency. Thisnotwithstanding, the Judge is entitled to reverse this regime at thebeginning or during the insolvency proceedings. Once and if, theliquidation phase starts (see question 2.1 above), directors of thedebtor will cease in their functions, which shall be performedduring the liquidation by the Trustees.Trustees have the right to assist and participate in the board andshareholders meetings of the debtor, although they are not entitledto vote. The insolvency does not have any special effect on shareholders.


Spanish Insolvency Proceedings are quite cost-effective incomparison with the insolvency proceedings regulated by otherjurisdictions since: (i) steering committees are not established andconsequently no fees arise in this respect; and (ii) the debtor doesnot pay the creditor’s lawyer fees, nor the steering committee’slawyer fees.Almost all fees incurred by the professionals acting in theinsolvency proceedings for the benefit of the debtor are consideredcredits against the debtor’s estate, and therefore are paid prior toany other credit.The fees of the Trustees are determined by law, and are determinedbased on the volume of the assets and the complexity of theinsolvency proceeding.Insolvency would be terminated at any time if it is evidenced thatthe debtor or any other liable third party has no assets to paycreditors (see question 6.2 hereunder).


Employment contracts continue being binding and in force,although such contracts may become subject to collectivereorganisation measures as amendment, suspension or termination(including those relating to severance payments or goldenparachutes of high-ranked employees), ruled by the InsolvencyJudge.Besides, the Insolvency Judge has jurisdiction to rule on labourclaims of the debtor’s employees, as well as to: (i) dismiss, undercertain circumstances, senior employees of the debtor; and (ii)decide on the compensation of such employees.


As regards contracts with reciprocal obligations for both parties thatare pending to be performed at the time of the declaration of theinsolvency, such declaration will not affect the existence of therelevant contract that will continue in force and effect. Anyobligations of the debtor under such contract will be funded withthe debtor’s state. Likewise, in such kind of contracts, earlytermination clauses triggered by the declaration of insolvencybecome void and unenforceable.

However, the Insolvency Judge may declare, if convenient for theinsolvency proceedings, the termination of such contracts uponrequest by the Trustees or by the debtor (even if no specifictermination provision exists). In absence of agreement on thetermination terms, the Judge will determine such terms, includingthe indemnification to the creditor that must be paid out of thedebtor’s state. Additionally, any non-compliance by any of the parties of a contractoccurred after the insolvency declaration may enable the non-defaulting party to apply to the Judge for the termination of theagreement, although the Judge may decide not to terminate theagreement if it considers that this is convenient for the insolvencyinterest. (In this case the Judge will determine that any obligationarising under such agreement will be satisfied with the debtor’sstate.) In some cases (for instance, lease or supply agreements), thetermination may be based on defaults arisen prior to the insolvencydeclaration.Likewise, the Trustees may request the reinstatement of loans,credits and other financing agreements, if any of those agreementswere terminated during the three months prior to the insolvencydeclaration, provided that the creditor had not initiated theenforcement of its credit. The Trustees shall pay or deposit all theamounts owed until the time the relevant agreement is reinstatedand undertake to pay all future amounts on account of the debtor’sstate. Reinstatement of other kind of agreements is also provided inSpanish Insolvency Law.Interest on unsecured claims ceases to accrue, while interest onsecured claims continues to accrue up to the value of the collateral.

5 Claims


Creditors must communicate their credits to the Trustees one monthafter the last placed advertisement of the declaration of insolvencyof the debtor. Late notice by creditors can lead to classify theirclaim as subordinated.


Where the insolvency proceedings result in the liquidation of thedebtor, its debts are paid in the following order:1st. Claims against the debtor estate: Certain debts incurred by

the debtor following the declaration of insolvency, includinginter alia: (i) salary claims for 30 days prior to thedeclaration of the insolvency, subject to a limit of twice theminimum legal salary; (ii) legal costs, expenses of theinsolvency or for filing the insolvency proceedings (withcertain limits); (iii) Trustees’ fees; (iv) debts incurred duringthe insolvency proceedings in the ordinary course of thebusiness or any other obligations with the approval of theTrustees; (v) claims due as a consequence of reinstatement ofclaims (see question 4.4 above); and (vi) claims for claw-back actions due to third parties who acted in good faith (seequestion 1.2 above).

2nd. Special privileged claims: Claims secured with assets of thedebtor and which are paid on account of said assets withpreference to any other creditor. For instance: (i) claimsgranted with in rem security interests (see question 1.1above); (ii) salary claims arising from assets manufactured,restored or repaired by employees while such assets are

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owned by or are in the possession of the debtor; (iii) financialleases and purchase agreements with deferred paymentswhich imply a retention of title, a prohibition of disposal ora termination condition; (iv) claims secured with securities;and (v) pledge over claims.

3rd. Generally privileged claims: Claims that are paid withpreference to any creditor other than those referred above,including inter alia: (i) other salary claims and redundancypayments up to a certain threshold; (ii) tax and social securityliabilities (for certain claims up to 50% of the amount owed);(iii) non-contractual civil liabilities; and (iv) in case ofInvoluntary Insolvency, 25% of the amount of the claim ofthe creditor that filed for insolvency.

4th. Ordinary claims: Claims that are not classified by theInsolvency Law as privileged (either specially or generally)or subordinated.

5th. Subordinated claims: Claims that will only be paid out onceall other claims (privileged and ordinary) have been satisfiedin full, including: (i) claims for which timely notice has notbeen provided to the Trustees (see question 5.1 below); (ii)contractual subordination claims; (iii) claims of individualsand companies related to the debtor (e.g., group companies,shareholders with a relevant stake [10% for non-listedcompanies], directors - including shadow directors,liquidators, and relatives); (iv) claims for interest and penaltypayments; and (v) claims for claw-back actions due to thirdparties who acted in bad faith (see question 1.2 above).

Such ranking has also some effects in relation to compositionagreements, basically:(a) claims under 1st, 2nd and 3rd are not subject to the

composition agreement unless such creditors wish (seequestion 6.1 hereunder); and

(b) claims under 5th are paid with twice deferral as agreed underthe composition agreement for ordinary claims.


There are no particularities on tax liabilities or tax regime fortrading whilst the company is in insolvency, except for certain ruleson VAT recovery for unpaid claims.



Only for ordinary and subordinated claims (see question 5.2 above,last paragraph). Such “cramming down” is provided in SpanishInsolvency Law if a creditor agreement (Anticipated or Ordinary) isapproved by creditors plus the Judge since such creditors’ agreementbinds ordinary and subordinated creditors. Secured and privilegedcreditors will only be bound to the extent that they vote in favour tothe composition agreement. Besides, subordinated creditors will bepaid under the creditors agreement once all ordinary creditors (andif applicable privileged creditors) are paid and, in the event thecreditors agreement provides for a stay, subordinated creditors’ stayshall be counted since the day the stay for ordinary creditors hasterminated.An Anticipated Creditors’ Agreement may be filed by the debtorwith the support of the creditors representing at least 20% of the totaldebt till one month has elapsed since the date of the last publicationof the Judge’s rule opening the Insolvency for early approval. In the event creditors representing at least 50% of the ordinary debt(including in such threshold the privileged and secured creditors

who would have adhered to the agreement) adhere to thisAnticipated Creditors’Agreement before the term as to claim the listof creditors/inventory issued by the Trustees elapses (10 Court dayssince the publication of the Trustees’ report), this AnticipatedCreditors’Agreement is deemed approved by the end of the commonphase without there being any requirement for holding a generalcreditors’ meeting (although creditors may withdraw their adhesionsto the Anticipated Creditors’ Agreement if their credits would havebeen modified as a result of any claim brought against the list ofcreditors). Such Anticipated Creditors’ Agreement may be alsosubject to claims by the Trustees or those creditors who have notadhered to the agreement.If there is no Anticipated Creditors’Agreement proposed (or 50% ofthe ordinary claims do not adhere to it and the debtor does notrequest the opening of the liquidation phase), once the commonphase is ended the Court will convene a creditors’ meeting to votethe creditors agreements proposed or to be proposed in legal term(Ordinary Creditors’ Agreement).As a general rule, an Ordinary Creditors’ Agreement is approved bya majority of 50% ordinary claims, including with this respectprivileged and secured creditors voting in favour of the OrdinaryCreditors’ Agreement. However, if the Ordinary Creditors’Agreement contemplates either full payment of ordinary claims in aterm not higher than three years or the immediate payment ofoutstanding claims with a discount of not more than 20%, suchcomposition agreement is approved by simple majority.Subordinated creditors and assignees of credits who have acquiredthe credit after the declaration of insolvency have no right to vote(therefore, it is difficult to create a distressed debt market in Spain).An approved Creditors’Agreement can be frustrated before enteringinto force by the debtor filing for liquidation within the sameproceeding (see question 2.1 above).Once approved by creditors, both Anticipated Creditors’ Agreementand Ordinary Creditors’ Agreement need to be also approved by theJudge.


An insolvency may be terminated: (i) once an approved compositionagreement (see question 6.1 above) has been declared complied bythe Judge without any appeal being possible; or by (ii) theliquidation of the debtor’s estate, which implies the dissolution -oncethe liquidation phase is opened- and subsequent extinction of thedebtor once all the assets owned by the debtor (or by any third partyliable) have been realised as to pay creditors. Finally, the Judge itself may seek the liquidation of the debtor if:(a) a proposed composition agreement submitted by the debtor is

not approved by the creditors; (b) no composition agreement is filed;(c) a composition agreement is declared null and void by a court;

or (d) the debtor’s default under the composition agreement is

declared by a Court.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Spain? In what circumstances might this bepossible?

The decision to structure a corporate rescue through out-of-courtnegotiations with creditors or through formal insolvency



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proceedings depends very much upon the applicable circumstancesof each case. The main legal drivers to decide to follow an out-of-Court restructuring are the following: (a) the agreements obtained as a result of out-of-court

negotiations do not bind the creditors which are not a partyto them - who therefore may accelerate debt or commencelegal proceedings to recover overdue debt;

(b) formal insolvency proceedings interrupt the accrue ofinterest or the enforcement of rights (see questions 3.1, 3.2and 4.4); and

(c) out-of-Court restructuring is not so lengthy.Out-of-court negotiations normally keep the process confidentialand are more flexible as to the content of the restructuringconditions. Besides, if secured creditors hold the main part of debt,or such debt is held by a reduced number of creditors, an out-of-Court restructuring would be the normal outcome.With this respect, there may be some amendments to the SpanishInsolvency Law in the future months which, among other things,defence out-of-Court agreements from claw-back risk.The procedure provided by the Insolvency Act may help toimplement pre-packaged arrangements already negotiated out-of-court by the debtor with some key creditors, in order to impose sucharrangements to the rest of the creditors (except for secured andprivileged creditors) through an Anticipated Creditors’ Agreement(see question 6.1 above).


A composition agreement (Anticipated or Ordinary) may providefor reorganisation measures as:(a) stays and/or debt reductions; (b) mergers or other corporate measures; (c) debt to equity swap if the creditors to become shareholders

as well as the former debtor’s shareholders agree so;(d) new money to be granted by third parties and/or creditors if

they accept so by signing the proposal of the compositionagreement; and

(e) sale of the debtor business (see question 7.3 below).A composition agreement (Anticipated or Ordinary) may notprovide for:(a) a change in the creditors ranking;(b) a moratorium for more than five years (with legal

exceptions);(c) a debt reduction for more than 50% of the debts (with legal

exceptions); (d) a “hidden” liquidation by assignments of debts; or(e) a condition precedent as to be effective (unless such

condition is the approval of a composition agreement in the

insolvency of a company of the same group of the debtor ifboth insolvencies were jointly ruled by the same Judge).


A sale of the debtor’s business may be carried out as a part of acomposition agreement (including Anticipated Creditors’Agreements as a manner or pre-packaged deal) if: (i) the purchasercommits to continue running the business of the debtor as well as topay to the creditors, in the terms stated in the compositionagreement, by means of the funds raised from such business; and(ii) a viability planning is filed with this respect.If no Anticipated Creditors’ Agreements is filed or approved, thereare doubts if under Spanish Insolvency Law it is allowed to sell thebusiness of the debtor during the common phase, or otherwise it isnecessary to wait till the liquidation phase is opened. In any case,such sale during the common phase should be authorised by theTrustees as well as by the Insolvency Judge.In the liquidation phase, Spanish Insolvency Law intends that thebusiness of the debtor (or part of it) is sold as a going concert.The shareholders of the debtor may freely sell their stake during theinsolvency proceeding.

8 International

8.1 What would be the approach in Spain to recognising aprocedure started in another jurisdiction?

The EU Insolvency Regulation provides a set of rules fordetermining which is the competent jurisdiction and how assets andcreditors of insolvent EU companies are to be treated in each case.It goes without saying that the EU Insolvency Regulation isapplicable in Spain.With regard to those international insolvencies which are notgoverned by the EU Insolvency Regulation, the privateinternational law system is very similar to the EU InsolvencyRegulation, which enables the recognition of internationalinsolvency rulings through exequatur proceedings provided that aseries of conditions are satisfied. The Insolvency Act follows a “cooperative-reciprocity” approach:non-EU insolvencies shall be recognised through the exequaturproceeding provided that the same resolution if issued by a SpanishCourt would be recognised in the State in which the resolution hasbeen issued.Consequently, no evidence of reciprocity needs to be renderedwhen requesting the exequatur before the Spanish Court.

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Alberto Núñez-Lagos Burguera

Uría Menéndez Príncipe de Vergara 187MadridSpain

Tel: +34 91 586 0421Fax: +34 91 586 0785Email: [email protected]: www.uria.com

Alberto Núñez-Lagos is a partner in the Madrid office of UríaMenéndez. He joined the firm in 1987 and became a partner in1998. He heads Uría Menéndez’s German Desk.Alberto’s practice covers a wide range of corporate and bankingwork, although he has tended to specialise in restructuring, therebybecoming engaged in insolvency proceedings involving leadingSpanish and international corporations. He has represented clientsinvolved in all major insolvencies in Spain, including cross-borderinsolvencies in the last years, acting either for the debtor, creditorsor management. Alberto has also been active in M&A transactions involving insolventcompanies within their restructuring process. Alberto has been recognised as a leading Restructuring andInsolvency lawyer by Global Counsel 3000 and Euromoney. Legal Teaching: Between 1990 and 1992, Alberto lectured on Commercial Law atthe Universidad Pontificia de Comillas-ICADE in Madrid. Between 1994 and 1996, Alberto lectured on Commercial Law atthe Universidad Abat Oliva in Barcelona. Legal Writing: Information on his publications is available on the firm’s Website.

Ángel Alonso Hernández

Uría Menéndez Príncipe de Vergara 187MadridSpain

Tel: +34 91 586 0421Fax: +34 91 586 0785Email: [email protected]: www.uria.com

Ángel Alonso is a lawyer in the Madrid office of Uría Menéndez. Hejoined the firm in 1997 and became a partner in 2009. Ángel has extensive experience in mergers and acquisitions,financing, private equity investments and general commercialadvice. He specialises in corporate recovery and insolvency, havingadvised all the parties involved when companies are in financialdifficulties (company debtors, directors, creditors, receivers, etc.). His practice has an international scope as most of the transactionsand insolvencies in which he has advised have cross-borderelements. Ángel has worked with clients in a wide range ofeconomic sectors including, among others: real property, financialservices, hotel business and technology and industrial sectors. Ángel has been regarded as one of the Best Lawyers in Spain inInsolvency and Reorganization by Best Lawyers Directory, 2008.Legal Teaching: Professor on Insolvency Law and Corporate Recovery at the Mastersin Legal Practice at the Universidad Pontificia de Comillas in Madrid(2000-2006). Lecturer in the International Business Course at the UniversidadAutónoma de Madrid (2005).Legal Writing:Information on his publications is available on the firm’s Website.

Uría Menéndez (“UM”) is an independent law firm founded in the 1940’s by Professor D. Rodrigo Uría González. Thefirm currently has 14 offices in Spain, Portugal, Europe and The Americas. UM specialises in providing legal advice toSpanish, Portuguese and European Community-based businesses. The firm also provides support to its clients throughits network of offices and through its relationships with equally prestigious international law firms.

The comprehensive legal advice provided by UM covers all areas of Commercial Law.

With regard to insolvency matters, UM provides advice to all the parties that may be involved in a company crisis,covering all kinds of situations. These include, amongst others, company or group restructuring procedures, refinancingof debts, acquisition of distressed assets and debt, protection of creditors’ rights, directors’ duties and liabilities,protection of assets, claw-back actions, design of security structures, corporate recovery as well as general advice oninsolvency proceedings and related litigation. UM’s high level of expertise in insolvency matters covers a broad rangeof economic sectors including, amongst others, industrial companies, banks, financial and insurance institutions,technology, construction and real estate. This expertise enables UM to deal with insolvency situations with an intricateknowledge of the practical business issues and cross-border consequences in foreign insolvency cases.

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1.1 How does a creditor take security over assets in Sweden?

There are various ways of creating security under Swedish law, butthe vastly predominantly used forms of security are floating chargesand pledges.A creditor whose claims are secured by a floating charge is entitledto payment out of the assets covered by the charge in connectionwith a bankruptcy of the company or through seizure. If thecompany is not in bankruptcy, the creditor has to obtain anenforceable judgment or decision in order to demand seizure andreceive payment. Generally speaking, a floating charge covers allassets of the company from time to time that are not subject toanother specific security arrangement.A pledge can be taken over basically all different types of assets ofa company (property, shares, securities, receivables, insurances,bank accounts, contracts, etc.), although the formalities for creatingand perfecting the pledge differs depending on the asset.


Under the Swedish Bankruptcy Act, a transaction may be recoveredto the bankruptcy estate if it has the effect that a certain creditor isinappropriately favoured. It is a requirement that the debtor is orbecomes insolvent at the time of the transaction or by thetransaction. Furthermore, the creditor must have been aware of theinsolvency for the recovery to take place. If the creditor is closelyrelated to the debtor, for example through ownership or by being anexecutive in the debtor, the creditor is presumed to be aware of theinsolvency of the debtor. Recovery may only take place withrespect to transactions that have been carried out within a certaintime span prior to the filing of the bankruptcy at the bankruptcycourt. The times vary depending on the type of transaction.However, under the general recovery rule described above, therecovery period is indefinite as regards transactions with closelyrelated persons or companies.Besides the above stated general recovery rule, there are alsospecial recovery rules which apply in certain situations (security,irregular payments, etc.) and for which specific time periods apply.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Sweden?

Under the Swedish Companies Act, the directors are liable inrelation to the company for any damage caused intentionally or bynegligence. The directors are also liable in relation to shareholdersor other third parties (including creditors) if the damage is a resultof an action taken which is in breach of the Companies Act,applicable accounting legislation or the Articles of Association ofthe company. This liability is applicable irrespective of whether abankruptcy is at hand, but may become applicable in a bankruptcyor reorganisation scenario.Under the Swedish Penal Code, the directors may be subject tocriminal liability if they continue trading when the company isinsolvent or when there is an apparent risk for insolvency.However, this only applies if the continued trading, somewhatsimplified, can be seen as negligent and if the directors, by suchactions, have intentionally or grossly negligent significantlyworsened the financial position of the company.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Sweden?

In Sweden there are two different proceedings with respect to acompany which has difficulties meeting its payment obligations.These are bankruptcy proceedings (Sw: konkurs) pursuant to theBankruptcy Act (Sw: Konkurslagen (SFS 1987:672)) and companyreorganisation (Sw: företagsrekonstruktion) pursuant to theCompany Reorganisation Act (Sw: lagen (1996:764) omföretagsrekonstruktion).In a bankruptcy, the company does not normally emerge as a goingconcern, while in a company reorganisation the intention is that itdoes. However, the Company Reorganisation Act is relativelyseldom used. There are approximately 100 reorganisations eachyear. The majority of these reorganisations are converted intobankruptcy proceedings within a couple of months after theinitiation of reorganisation procedure.

2.2 What are the tests for insolvency in Sweden?

Insolvency is deemed to be at hand if the company cannot pay itsdebts as they become due and such inability is not merelytemporary.

Thomas Pettersson

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A company can be declared bankrupt following a court order if it isinsolvent. If a petition is made by the company itself, insolvency isassumed and not independently tested.A company which has difficulty fulfilling its payment obligationsmay, pursuant to the Company Reorganisation Act and following acourt order, commence specific proceedings in order to reorganiseits business. No creditor consent is required in order for a companyto initiate a rescue under the Company Reorganisation Act.


As regards bankruptcy proceedings, both the insolvent debtor aswell as any creditor may file a bankruptcy petition to the court thathas jurisdiction over the debtor. The decision to start thebankruptcy proceeding is made by the court based on the rules setout in the Bankruptcy Act.The starting of a reorganisation procedure requires the consent ofthe debtor, but the decision to initiate the procedure is made by thecompetent court based on the rules set out in the CompanyReorganisation Act.


When the court declares the company bankrupt, it shallimmediately (i) set a date for a meeting for administration of oaths(Sw: edgångssammanträde), (ii) appoint one or moreadministrator(s) to handle the bankruptcy estate, and (iii) summonthe company, the administrator(s), the supervision authority and thecreditor who made the petition (if applicable) to the meeting foradministration of oaths.When the court approves a petition for reorganisation proceduresand appoints an administrator, it will simultaneously set a date for acreditors’ meeting before the court. After being appointed theadministrator must promptly notify all known creditors of thereorganisation procedures and provide them with certain financialinformation regarding the company.

3 Creditors


As a bankruptcy proceeding is a global procedure for disposing ofthe debtor’s assets and distributing the proceeds to the creditors, noindependent enforcement measures will typically be effectivefollowing the initiation of a bankruptcy procedure.During a company reorganisation procedure, seizures and otherforms of execution under the Swedish Enforcement Execution Codeis prohibited. However, this does not apply to pledges over chattelsand other property that is not real property (Sw. Handpanträtt).Consequently, chattels, pledged shares, patents, trademarks andclaims may be realised by the pledgee during a companyreorganisation provided that there exists a due and payable claim.


As a bankruptcy proceeding is a global procedure for disposing ofthe debtor’s assets and distributing the proceeds to the creditors, noindependent enforcement measures will generally speaking beeffective following the initiation of a bankruptcy procedure.However, a secured creditor may, under certain circumstances andsubject to certain procedural restrictions, sell the security assets andthus effectively enforce their security.As mentioned under question 3.1 above, pledges over chattels andother property that is not real property may be realised by thepledgee during a company reorganisation provided that there existsa due and payable claim.


Under Swedish law, the right of set-off in bankruptcy is generallyviewed as generous to the creditor insisting on set-off. According tothe Bankruptcy Act, a claim against a debtor which may berecognised in the bankruptcy may be used by the creditor to set-off aclaim that the debtor had against him when the bankruptcy decisionwas issued. However, this does not apply if set-off was excludedoutside bankruptcy by reason of the nature of the claim. Inbankruptcy, only claims arising before the issue of the bankruptcydecision may be recognised. A claim under a contract is generallyregarded as having arisen at the time such contract was entered into.A claim may also be recognised in bankruptcy irrespective of whetherit is: (a) dependent upon conditions; or (b) not due for payment.



In a bankruptcy proceeding, the bankruptcy administrator, who istypically a specialised lawyer appointed by the court, exercises themost control over the bankruptcy estate. The distribution of the netassets of the estate is however subject to court approval and theconduct of the administrator is subject to supervision by publicauthorities. The principal rule in the Bankruptcy Act is that thebankruptcy administrator is independently responsible for theadministration of the bankruptcy estate. Thus, actions taken by thereceiver are generally not subject to approval by the creditors or bythe debtor. The only substantial areas where the creditors haveformal right to intervene in the proceeding concerns objectionsagainst creditors’ claims in the bankruptcy, in certain cases the salesmethod for liquidating property, acceptance of a proposal for acomposition and objections against the final distribution of theassets belonging to the bankruptcy estate. All in all, the creditorshave rather limited influence on formal bankruptcy proceedings.The directors and the shareholders have very limited influence onthe proceedings, if any.In a formal reorganisation procedure, the administrator responsiblefor the reorganisation exercises the most control, but theadministrator is dependent on creditor approval for important issuessuch as a composition with the debtor. The directors andshareholders continue to function as normal, however, subject to therestrictions and limitations on actions that can be taken as set out inthe Company Reorganisation Act.



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Both in bankruptcy proceedings and reorganisation proceedings, itis technically possible for the administrators to take up new debt,with senior priority, to finance the operations.In a bankruptcy procedure, the administrator is under an obligationto liquidate the assets of the debtor as soon as possible and thus thequestion of financing the procedures becomes an issue primarily ina larger bankruptcy where the operations are carried on for sometime before the assets are disposed of.In reorganisation procedures, the issue of how the reorganisationprocedure is financed may very well be one of the primary reasonswhy there are so few successful reorganisations in Sweden.Obtaining sufficient financing for the working capital needs of theoperations during the procedure does often prove difficult.For both bankruptcy proceedings and reorganisation proceedings,the State Salary Guarantee provided by the Government for thesalaries of the employees under a certain time period does make itsomewhat more viable to continue the business operations for aperiod of time, as the work force can remain intact during the timethe guarantee applies.


Neither bankruptcy proceedings nor reorganisation proceedingshave in themselves any direct effect on the employees. Theemployees will continue their employment until terminated. Asmentioned in question 4.2, the salaries of the employees areguaranteed by the state for a certain time period.


Under a bankruptcy proceeding, the bankruptcy administrator canchoose to have the bankruptcy estate accede to one or several of thedebtor’s contracts. This decision is made unilaterally by theadministrator and the contract will generally speaking remain validagainst the other party provided that the administrator can providesecurity for the estate’s obligations under the contract. However,the more normal procedure is that the administrator does not havethe estate accede to the contracts, in which case they will just formthe basis for an ordinary claim in the bankruptcy procedures. Thereis no specific right for the debtor to terminate contracts when it isdeclared bankrupt.In a reorganisation proceeding, the debtor’s contracts continuewithout adjustments. If a contract could be terminated by a thirdparty prior to the reorganisation procedures, based on a failure bythe debtor to pay or otherwise perform, such grounds fortermination may not be invoked after the reorganisationproceedings have been initiated.

5 Claims


In a bankruptcy, the administrator will produce a list of assets andliabilities, which will cover all known creditors. If a creditor isknown, it will typically not have to take any action at all in thisprocess. There are specific procedures whereby a more formalclaims procedure is applied and where the creditors will have to file

their claims with the court, but that procedure is less common.A reorganisation does not involve a disposal of assets and paymentof claims and thus no formal claims procedure applies. However,the administrator will prepare a plan for the reconstruction of thecompany that typically involves the writing-down or conversion ofcertain claims which, as described further in question 6.1, requirescertain consent levels.


In a bankruptcy proceeding, a distribution to the creditors shall takeplace as soon as all available property has been converted into cash.Distribution of the cash is settled according to the priority given toeach claim in accordance with the Swedish Priority Rights Act (Sw:förmånsrättslagen (1970:979)). There are three main groups ofclaims: (i) claims with special priority (e.g. secured claims, claimssecured by mortgage and claims secured by seizure); (ii) claims withgeneral priority (e.g. claims given priority because of public interestand floating charges); and (iii) claims without priority. If any assetsremain after the claims with special priority have been satisfied,claims with general priority shall be satisfied out of the remainingassets. Within the group of claims without priority, all claims rankequal in priority (pari passu) and will be satisfied proportionally. The waterfall is applied primarily in bankruptcy proceedings.However, as regards bankruptcy proceedings it is important to notethat there are costs for the remuneration of the bankruptcyadministrator, general costs and expenses for the management of thebankruptcy estate, as well as costs accrued by the estate during thebankruptcy proceeding (i.e. claims from third parties due toagreements that they have entered into with the bankruptcyadministrator). These costs can in large bankruptcies be of asignificant value.In a reorganisation procedure, the waterfall is not formallyapplicable, as no distribution of assets is intended. However, it doesin practice have an effect on the likelihood of individual creditors toaccept any proposal for a composition.


As regards a bankruptcy proceeding, the operations will continue tobe liable for VAT, but regular income tax will, generally speaking,not apply in a bankruptcy. A reorganisation proceeding on the otherhand does not have any effect on the tax status of the debtor and taxwill continue to be payable.



In a bankruptcy, the administrator will prepare a proposal for thedistribution of the debtor’s assets, based on the waterfall describedin question 5.2 above. The proposal can be challenged by a creditorthrough the courts but it will ultimately be determined by the courtbased on the waterfall and no direct creditor influence applies.Under certain limited circumstances a composition procedure canbe carried out within a bankruptcy procedure.Under the Corporate Reconstruction Act a composition can bemade, which is subject to certain consent levels being met amongthe creditors. The composition is an arrangement whereby the

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Thomas Pettersson

Mannheimer Swartling Norrlandsgatan 21, Box 1711111 87 StockholmSweden

Tel: +46 8595 064 65Fax: +46 8595 060 01Email: [email protected]: www.mannheimerswartling.se

Thomas Pettersson is a partner in the Mannheimer Swartling’sBanking and Finance group and is also a member of theRestructuring and Distressed Deals practice groups within the firm.Thomas Pettersson’s work is primarily related to advising ondifferent types of financing and security structures, with a particularfocus on derivates, property finance and workouts andrestructurings. Examples of Thomas Pettersson’s recent experienceincludes advising the Swedish National Debt Office in relation to thesupport package for the financial sector and advising one of themajor Nordic banks in relation to the international restructuring ofthe Nybron-group.


creditors waive their rights to full payment and the debtor only paysa certain percentage of its debts. A composition which yields atleast 50 per cent of the amount of the claim shall be deemed to beaccepted by all the creditors where three-fifths of the creditorsvoting have accepted the proposal and their aggregate amount ofclaims amount to three-fifths of the total amount of claims held bycreditors entitled to vote. If the composition percentage is lower,the composition requires support by not less than three-quarters ofthe creditors representing at least three-quarters of the total claimsheld by creditors entitled to vote.


The purpose of the bankruptcy procedure is the dissolution of thecompany and the distribution of its assets (when converted intocash). A distribution to the creditors shall take place as soon as allavailable property has been converted into cash.The purpose of a company reorganisation is to reorganise thecompany’s business and financial structure following an order by acourt with the ultimate intention of continuing the business. However,as mentioned above, successful reorganisations are rare and most areconverted into bankruptcy within a relatively short time period.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Sweden? In what circumstances might thisbe possible?

Private insolvency proceedings/workouts in a more formal sense ofthe word are rare in Sweden, although they are possible. It hasgenerally been the aim of the Swedish government to improve theSwedish rescue culture (however, without extending the Swedishlegal system to embrace the rescue friendly US system). Theseefforts have however been rather fruitless and rescues are still ratheruncommon in Sweden, albeit increasing. Private rescues areprimarily achieved through private compositions. In privatecompositions, all creditors whose claims will be affected mustconsent to the composition. In practice, this makes private rescuesrather difficult to achieve.Private workouts or restructurings that are effectively based on anegotiation between the major creditor(s), the borrower andpotential sponsors are however reasonably common andincreasingly so in light of the current market conditions. There areno formal requirements in relation to such workouts andrestructurings; they are based solely on a contractual agreementbetween the parties involved.


Reorganisations are possible under Swedish law, but apart from theprocedure under the Company Reorganisation Act described abovethey would be based on a contractual agreement between the partiesinvolved. There are no formal requirements to file for bankruptcyor formal reorganisation in case of financial difficulties, but thepotential liability for management and board members may result ina de facto deadline for achieving a private reorganisation.


There are no established legal procedures for a pre-packaged saleunder Swedish law. They do occur, however, and are typicallybased on pre-agreed documentation and deal terms with a proposedbankruptcy receiver. There can be significant legal uncertainty withsuch process though and it cannot be seen as a common procedure.

8 International

8.1 What would be the approach in Sweden to recognising aprocedure started in another jurisdiction?

Swedish law would recognise procedures started in otherjurisdictions based on and in accordance with the EU InsolvencyRegulation and the Nordic Bankruptcy Convention

Mannheimer Swartling is the leading business law firm in the Nordic region. The firm works with many of Sweden’s,and the world’s, leading major and mid-sized companies and organisations.

Mannheimer Swartling is a full service firm with an extensive international practice. The firm has approximately 650employees, of which approximately 420 are lawyers. The firm’s lawyers can contribute and create added value to theclients’ transactions with both cutting edge expertise and solid industry experience.

Within the area of restructuring and insolvency law, we handle matters which arise in connection with insolvency,bankruptcy and other financial difficulties. Furthermore, Mannheimer Swartling advises companies in financialdifficulties, as well as the board members and shareholders of such companies, creditors, and trustees in bankruptcyand liquidators. A central part of our business in this field consists of assisting in disputes relating to differentinsolvency situations, especially as regards recovery.

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1.1 How does a creditor take security over assets inSwitzerland?

In rem secured rights granted under Swiss law can be classifiedunder three broad categories: (i) mortgages or similar instrumentson land; (ii) rights of pledge on movable goods; and (iii) analogousinstitutions.(i) The mortgage (Grundpfandverschreibung/hypothèque) offers abroad protection to the secured creditor and is, in practice, usedunder the form of a mortgage certificate; (ii) the pledge(Faustpfand/nantissement) is the usual form of collateral insofar asmovable goods are concerned. By charging a pledge on specificassets or claims, the pledgor retains the title over those assets orclaims, granting, however, special rights to the pledgee. It is acondition under Swiss law for the perfection of a pledge to transferpossession of the assets to the pledgee or to an agent acting for him.As a result of the above, a general deed of pledge purporting tocharge all assets, stock and inventory of the debtor in favour of thecreditor is ineffective under Swiss Law; (iii) the stringentrequirement that applies to the pledge in terms of transfer of thepossession explains the development and the practical importanceof alternative forms of collateral such as the transfer of movable orimmovable goods and securities or the assignment of claims by wayof security. Both transfer and assignment for security purposesimply a transfer of title from the debtor (which, consequently, needsto be the owner of the transferred property or the holder of thetransferred claim) to the creditor, but this transfer intervenes on afiduciary basis. This means that the transferee/assignee iscommitted towards the transferor/assignor to strictly exercise thegranted rights in compliance with the purpose of the security and inparticular to retransfer or reassign such property or claims once thesecured claim is repaid or the security is otherwise released. Ageneral deed of assignment whereby a debtor assigns by way ofsecurity all existing as well as future receivables is deemed to bevalid under Swiss law, as opposed to the general pledge.


The Debt Collection and Bankruptcy Act (hereafter DCBA)describes the circumstances under which avoidance actions(Anfechtungsklage/action révocatoire) can be launched. The casescan be summarised as follows: (i) all transactions entered into by

the debtor during the five years prior to the seizure of assets or theopening of bankruptcy proceedings, with the intention, apparent tothe other party, of disadvantaging its creditors or favouring certainof them to the disadvantage of others (article 288 DCBA); (ii) allgifts and voluntary settlements made by the debtor during the yearprior to the seizure of assets or the opening of bankruptcyproceedings. It is to be noted in this context that transactions inwhich the debtor accepted a consideration out of proportion to itsown performance are deemed to be equivalent to a gift (article 286DCBA); and (iii) in case a company is already insolvent, thegranting of collateral for existing obligations which the debtor washitherto not bound to secure; the settlement of a debt of money byanother manner than in cash or by other normal means of paymentas well as the payment of a debt that is not yet due are avoidable,provided that such transaction by an insolvent debtor occurredduring the year prior to the seizure of assets or the opening ofbankruptcy. However, the transaction is not avoided if the recipientproves that it was unaware and need not have been aware of thedebtor’s insolvency (article 287 § 2 DCBA).

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in Switzerland?

The issue of director’s liability typically arises when a corporationhas been declared bankrupt. The general legal basis as regards thecivil liability of directors (Haftung für Geschäftsführung/Responsabilité dans la gestion) is to be found in article 754 of theSwiss Code of Obligations (hereafter “SCO”), pursuant to whichthe members of the board of directors and any person entrusted withthe management or the liquidation of a corporation shall be liablefor damages “caused by wilful or negligent violation of theirduties”. The liability of a director accordingly requires: (i) a breachof the director’s duties; (ii) damages caused to the corporation or aparticular creditor; (iii) a wilful or negligent conduct (fault); and(iv) a causal link between the breach and the damage. Damagestypically cover the increase of loss which occurred between themoment the directors should have known the corporation’sdistressed situation and failed to take appropriate actions (seequestion 2.2 below) and the moment the bankruptcy was actuallydeclared. According to the above, courts have held liable directorswho failed to take the steps required by law, by not informing thecourt about the over-indebtedness of the company. Severalprovisions of the Swiss Criminal Code (hereafter “SCrimC”) mayalso apply in the context of the activity undertaken by a director(Misswirtschaft/gestion fautive; Bevorzugung eines Gläubigers/avantages accordés à certains créanciers). Article 165 SCrimCpunishes the debtor whose acts of mismanagement have caused the

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corporation’s bankruptcy. This criminal provision expressly refersto the case of the debtor who by means of an insufficient capitalendowment causes or aggravates its over-indebtedness before beingdeclared bankrupt. Special attention must also be paid to article 167SCrimC which deals with the issue of the advantages granted tocertain creditors by an insolvent debtor who is subsequentlydeclared bankrupt. As for disqualification (Berufsverbot/interdiction d’exercer une profession) issues, article 67 § 1 SCrimC- which is in fact a very rarely implemented provision - providesthat the court may prevent a convicted person from exercising itsprofession for a period extending from six months to five years ifthis person has been convicted to an imprisonment sanctionexceeding six months for an offence committed within the exerciseof a profession submitted to an official authorisation when thecircumstances give reason to fear new abuses from the convictedperson.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in Switzerland?

There are two main types of insolvency proceedings in Switzerland:bankruptcy (i.e. liquidation) proceedings (Konkursverfahren/faillite);and composition proceedings (Nachlassverfahren/concordat).Composition proceedings can be used either: (i) to organise theliquidation and the realisation of debtor’s assets in a more flexiblemanner than bankruptcy (composition agreement with assignment ofassets); or (ii) result in a debt restructuring (be it through a debt-rescheduling or a dividend agreement).

2.2 What are the tests for insolvency in Switzerland?

There are different tests for initiating insolvency proceedingsagainst a debtor: (i) if a debtor is qualified to be insolvent(zahlungsunfähig/insolvable), i.e. if the debtor is no longer able topay its debts as they fall due. Insolvency, however, only leads to theinitiation of bankruptcy proceedings upon a respective request bythe debtor itself; (ii) if a debtor has ceased to pay its debts(Zahlungseinstellung/cessation de paiment); or (iii) if a debtor isover-indebted (überschuldet/surendetté) within the meaning ofarticle 725 § 2 SCO, i.e. if the company’s liabilities exceed itsassets; if the last annual balance sheet shows that half of the sharecapital and the legal reserves are no longer covered by thecompany’s assets, the board of directors must without delayconvene a shareholders’ meeting and propose measures tofinancially reorganise the company. In case of a substantiatedconcern of over-indebtedness, an interim balance sheet must beprepared and submitted to the auditors for examination. If theinterim balance sheet shows that the claims of the company’screditors are neither covered if the assets are appraised at values ona going concern basis nor at liquidation values, the board ofdirectors must notify the judge, i.e., file for bankruptcy unless (i)there is a subordination of claims and good prospects of financialrestructuring of the company in due course or (ii) there are seriousreasons to believe that the company may be financially restructuredin short time.


A corporation may be declared bankrupt by the competent court andplaced into bankruptcy proceedings: (i) if a creditor whose claim

has not been settled but upheld within the course of debtenforcement proceedings (Betreibung/poursuite) has successfullyrequested for the opening of bankruptcy proceedings(Konkursbegehren/ réquisition de faillite); (ii) upon a debtor’srequest by declaring to the court that it is insolvent; (iii) upon acreditor’s request if the company has committed certain acts to thedisfavour of its creditors or if it has ceased payments or if certainevents have happened during composition proceedings; or (iv) upona notification of the court by the board of directors (or the statutoryauditors) of the company that the company is over-indebted withinthe meaning of article 725 § 2 SCO.Composition proceedings are typically initiated by the debtor, butcan also be requested by a creditor if such creditor is entitled torequest the opening of bankruptcy proceedings. As a first step, areasoned formal application for a moratorium has to be submitted tothe composition court. Furthermore, composition proceedings mayalso be opened ex officio if it appears to the bankruptcy court that acomposition agreement is likely to be concluded with the creditors.


In case a creditor has successfully completed prior debtenforcement proceedings, the debtor is issued a bankruptcy warning(Konkursandrohung/comination de faillite) to the effect thatbankruptcy proceedings will be opened unless payment isforthcoming. Upon the expiry of 20 days after service of thebankruptcy warning, the creditor may request that bankruptcyproceedings be opened. The court will then summon the parties fora hearing on short notice. Unless very limited objections aresustained or procedural rules have been violated, the debtor isdeclared bankrupt (case (i) above). Bankruptcy may, as describedabove, also be declared upon the debtor’s or a creditor’s request(cases (ii) and (iii) above) or upon the notification of the court bythe board of directors of the company in case of over-indebtedness(case (iv) above). Upon declaration of bankruptcy all assets of thedebtor form the bankruptcy estate, which is used to satisfy thecreditors’ claims. The debtor is deprived of its capacity to disposeof its assets and from the date of declaration of bankruptcy it willbe represented exclusively by the bankruptcy administrator(Konkursverwalter/administrateur de la faillite). All obligations ofthe debtor become immediately due and payable, except for claimswhich are secured by mortgages on real estate. In general, intereststops to accrue at the date of bankruptcy declaration.Composition proceedings are typically opened upon the debtor’srequest filed with the composition court. Upon receipt of suchrequest the court will order provisional measures deemedappropriate and necessary for conserving the debtor’s assets andwill grant a provisional moratorium (provisorischeNachlassstundung/sursis provisoire) of up to two months.Furthermore, a provisional administrator (provisorischerSachwalter/commissaire provisoire) may be appointed by the courtto permit an assessment of the debtor’s assets, its financialcondition and the prospects of a successful reorganisation. If thecourt finds that a composition agreement is likely to be concluded,it must grant the definitive moratorium (definitiveNachlassstundung/sursis concordataire) for a period of four to sixmonths (in particularly complex cases up to 24 months) and appointan administrator (Sachwalter/commissaire). During the definitivemoratorium the administrator seeks to negotiate a compositionagreement with the creditors, while creditors of claims other thanfirst class claims (see question 3.1 below) or claims secured by realestate are not entitled to commence or continue debt enforcementproceedings. Realisation of collateral is not permitted during the



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moratorium, and the debtor is restricted in its ability to dispose ofcertain of its assets and there are certain restrictions as to its powerto manage the company’s affairs.


First, the bankruptcy court will establish which rules apply to thebankruptcy proceedings. For this purpose the bankruptcyadministrator has to draw up an inventory. Summary proceedingsare ordered if the proceeds of the bankrupt’s assets are unlikely tocover the costs of ordinary proceedings or if the circumstances ofthe case at hand are particularly clear, unless one or more creditorsexplicitly request ordinary proceedings and are willing to advancethe additional cost. If the rules for ordinary bankruptcy proceedings apply, thebankruptcy estate is administered as follows: the bankruptcyadministrator publishes a notice of bankruptcy, instructing allcreditors and debtors to file their claims and debts within 30 daysand inviting creditors to a first creditors’ meeting (ersteGläubigerversammlung/première assemblée des créanciers). Thefirst creditors’ meeting may appoint a private bankruptcyadministrator acting instead of the state bankruptcy office as well asa creditors’ committee which has certain supervisory (and limiteddecisive) competencies. A second creditors’ meeting (zweiteGläubigerversammlung/seconde assemblée des créanciers) isconvened to pass resolutions as to all important matters, includingthe commencement or continuation of claims against third partiesand the method of realisation of the assets belonging to thebankruptcy estate (the actual realisation, however, is reserved to thebankruptcy administrator).If the rules for summary bankruptcy proceedings apply, there are, inprinciple, no creditors’ meetings and the bankruptcy office willproceed to liquidation and realisation of the assets (includingcollateral) without participation of the creditors. Certain rights ofthe secured parties to oppose to particular realisation methods oftheir collateral remain reserved.Composition proceedings start with the grant of the moratorium,upon which the administrator takes the necessary preparatorymeasures for the following process of creditor and court approval.An inventory is taken and the assets are valued. The administratormakes a public announcement instructing the creditors to file theirclaims within 20 days (Schuldenruf/appel aux créanciers). Allclaims which have arisen either before the public announcement ofthe moratorium or without the administrator’s consent during themoratorium are subject to the composition agreement. As soon asa draft composition agreement is proposed, the administratorconvenes a creditors’ meeting by public notice. Only creditors whohave filed claims are admitted with the right to vote to the creditors’meeting. The creditors’ meeting receives a report of theadministrator, elects the liquidator and decides whether to approveor to reject the proposed composition agreement. Approval of theproposed composition agreement requires the affirmative vote by aquorum of either (a) a majority of creditors representing two-thirdsof the total debt or (b) one-fourth of the creditors representing three-fourths of the total debt. After approval by the creditors, thecomposition agreement requires confirmation by the compositioncourt. With the court’s approval, the composition agreementbecomes valid and binding upon all creditors of claims subject tothe composition agreement whether or not they have participated inthe composition proceedings.

3 Creditors


In bankruptcy proceedings, all unsecured creditors are entitled toclaim the amount of principal plus interest until the date of thedeclaration of bankruptcy. Apart from attending the creditors’meetings, the unsecured creditors have no individual rights toenforce their claims through realisation of any of the debtors’ assets.It is in the sole competence of the bankruptcy administration torealise the debtors’ assets. Unsecured creditors’ claims aresuccessively satisfied out of the realisation proceeds according tothe order as further described under question 5.2 below.In composition proceedings only creditors who have filed claimsare admitted with the right to vote to the creditors’ meeting. Failureto file, however, does not affect the creditor’s entitlement to thecomposition proceeds which, in case of a composition agreementwith assignment of assets, are distributed in the same consecutiveorder as in bankruptcy proceedings.


In bankruptcy proceedings, secured creditors have to hand in thecollateral to the bankruptcy administration and have no right torealise the collateral privately, but will be satisfied in priority of anyother creditors out of the proceeds of the sale of such collateral.This holds true for all claims secured by movable goods beingpledged (rather than transferred by way of security). Real estatemortgages, however, are only realised and proceeds paid out to thecreditors if their claims against the debtor are due; claims securedby real estate mortgages that are not yet due are assigned to theacquirer of the real property.In composition proceedings leading to a liquidation agreementwith assignment of assets (Nachlassvertrag mitVermögensabtretung/concordat par abandon d’actifs) securedcreditors with a pledge on moveable assets are not obliged todeliver the collateral to the liquidator. After the moratorium theyare generally entitled to liquidate the pledged collateral by officialenforcement proceedings or, if the pledge agreement so provides,by private sale.


Irrespective of the applicable substantive law which governs set offSwiss insolvency law has several impacts on the right to set off.Swiss insolvency law distinguishes between different categories ofclaims, of which the following are in practice the most important:the first category encompasses (i) claims of the insolvent partyforming part of the insolvency estate and (ii) claims against theinsolvent party (Konkurs- oder Nachlassforderungen/créances dansla faillite ou le concordat) to be satisfied in cash with dividendpayments out of the proceeds of the insolvency estate. The secondcategory encompasses claims of and against the insolvency estate(Masseforderungen und -verbindlichkeiten/créances et dettes de lamasse). One of the main characteristics of these latter claims is thatthey have come into existence only after the opening of insolvencyproceedings with the consent of the insolvency administration.As a rule, set off is only possible between claims of the samecategory based on the requirement of mutuality between the claims

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to be set off, i.e. claims of the insolvency estate can only be set offwith debts of the insolvency estate, whereas claims of an insolventdebtor may be set off against insolvency claims. However,according to legal doctrine, a creditor may set off its claim againstthe mass with a claim of the insolvent debtor.In addition to these restrictions, set off is not admissible if (i) thedebtor of the insolvent party became creditor of the latter only afterthe opening of bankruptcy proceedings or the grant of amoratorium, respectively, or (ii) the creditor of the insolvent partydid not become debtor of the insolvent party or the insolvencyestate until after the opening of the bankruptcy proceedings or thegrant of a moratorium, respectively. In other words, the creditor ofan insolvent party may as a rule set off its claims against debts it hastowards the insolvent provided both the claims and the debts existedat the time of the bankruptcy decree or the grant of a moratorium,respectively.



Immediately after the filing of the request to open bankruptcyproceedings, the court can order conservatory measures(vorsorgliche Anordnungen/measures conservatoires) necessary forsafeguarding the creditors’ rights. For example, the judge canforbid some payments or command the business to close. Oncebankruptcy proceedings have been opened, the debtor is deprived ofits right of disposal of its assets. A claim forming part of thebankruptcy estate can no longer be validly discharged by paymentto the debtor; such payment only amounts to a valid discharge to theextent that it is received by the bankruptcy estate (Zahlungen an denSchuldner/paiements aux mains du failli). All other enforcementproceedings against the debtor cease and new enforcementproceedings relating to claims which arose before the opening ofbankruptcy proceedings are not permissible. With the exception ofurgent matters, civil court actions to which the debtor is a party andwhich affect the composition of the bankruptcy estate are stayed.The creditor’s committee appointed during the first meeting ofcreditors may have the task to authorise the continuation of thedebtor’s business or trade, under specific conditions, whereas suchcontinuation of business will have to be pursued by the bankruptcyauthority. This committee is also allowed to supervise themanagement activities of the bankruptcy administration and toobject to any measures which contravene the creditor’s interests.According to article 725a SCO, the judge may appoint a curator,and either deprive the board of directors of its powers to dispose, ormake its decisions subject to the approval of the curator. The judgedefines the duties of the curator. During the moratorium, the judge appoints an administrator, whosupervises the debtor’s activities. The debtor may continue itsbusiness activities under the supervision of the administrator. Thecomposition court may, however, direct that certain acts shallrequire the administrator’s participation in order to be legally valid,or authorise the administrator to take over the management from thedebtor. Without the authorisation of the composition court, thedebtor is prohibited during the moratorium to divest, encumber orpledge assets which are affected to business, to give guarantees orto make gifts. Any such transactions are null and void. During themoratorium, enforcement proceedings can neither be initiated norcontinued, except for enforcement proceedings leading to seizurefor first class claims or for the realisation of collateral for claims

secured by a mortgage of real estate, whereas the realisation of thecollateral as such is prohibited.


Enforcement proceedings trigger costs. Debts linked to theliquidation of the bankruptcy have to be paid in the first place.These debts are called debts of the bankruptcy estate(Masseverbindlichkeiten/dettes de la masse). All costs for theopening and carrying out of the bankruptcy proceedings and for thedrawing up of the inventory are paid directly out of the proceeds.The debts of the estate are thus paid prior to the payment of anydividend to the ordinary creditors. In case there are no assets at allthat can be realised, the bankruptcy administration shall pronouncethe closure of the bankruptcy proceedings or invite the interestedcreditors to make an advance to cover the costs of the procedure. The above rules apply to the composition proceedings.


Bankruptcy proceedings do not have an automatic effect onemployment contracts. Claims for unpaid wages have to be filedand are scheduled as any other claim. In case the employerbecomes insolvent, an employee may terminate the employmentrelationship without notice unless such employee is providedsecurity for claims arising from the employment relationship.Subject to the other party’s termination rights, the bankruptcyadministration may decide to maintain some contracts which hadnot or had only partially been fulfilled at the time of the opening ofthe bankruptcy, as for example an employment contract. The otherparty to the contract may however request that security befurnished. The administration may also, as it happens in themajority of cases, cease the business and therefore decide toterminate the work contracts. When doing so it has to comply withthe applicable notice period. The unpaid salaries have to be claimedand scheduled. Although there are some unsettled legal controversies, compositionproceedings have a legal effect that is similar to bankruptcy withrespect to employment contracts.


There are certain types of contracts that are terminated, ex lege, asis the case with insurance contracts, agency or simple partnerships,whereas others can be terminated immediately by one party in caseof bankruptcy of the other (see e.g. employment contract, lease forrent or loan for consumption). The remaining contracts are notautomatically affected by bankruptcy, which means that thebankruptcy estate and the contracting party are still bound unlessthe very contract provides for an automatic termination or atermination right. While the contracting party would have toperform in kind its obligations under an agreement which has notbeen terminated, the rights of the contracting party are affected bythe principle of equality among creditors, as a result of which it isbound to accept a dividend rather than full payment or specificperformance. However, should the bankruptcy administration electto pursue the performance of a contract which had not or onlypartially been fulfilled at the time of opening of the bankruptcyproceedings, the other party to the contract may demand thatsecurity be provided, and it may further expect full performance bythe bankruptcy authority. The right of the bankruptcy



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administration to elect performance of the contract is excluded inthe case of financial future, swap, option and similar strict deadlinetransactions, if the value of the contractual performance can bedetermined based on market or stock exchange prices at the time ofthe opening of the bankruptcy. The bankruptcy administration andthe contractual partner are each entitled to claim the differencebetween the agreed value of the contractual performance and themarket value at the time of the opening of the bankruptcyproceedings.Opening of composition proceedings has no direct effect on thecontracts with the company (unless the very contract provides to thecontrary). However, upon the confirmation of a compositionagreement with assignment of assets the same rules as for thebankruptcy proceedings are applicable by way of analogy.

5 Claims


Creditors are invited by the bankruptcy administration to file theirclaims against the bankrupt debtor within a certain deadline(Schuldenruf/appel aux créanciers). After expiration of thedeadline, claims may still be submitted but the creditor must pay allsuch costs which have been caused by the delay. Once the deadlinefor filing the claims has passed, the bankruptcy authority examinesthe filed claims and makes the necessary inquiries. The debtor isinvited to comment on each claim. The bankruptcy authority,which is not bound by the debtor’s opinion, decides whether or notto admit the claims. The bankruptcy administration then establishesa schedule of claims (Kollokationsplan/état de collocation). Anycreditor wishing to contest the schedule of claims because its claimhas been entirely or partially rejected may bring an action againstthe bankruptcy estate within 20 days of the schedule of claims beingmade available for public inspection. Similarly, a creditor maybring an action to contest the admission of another creditor to theschedule of claims. The composition administrator appointed by the judge makes apublic announcement enjoining the creditors to file their claims. Ifthe composition agreement with assignment of assets is confirmed,the creditors elect liquidators and a committee of creditors tosupervise the proceedings. While the realisation of assets is subjectto less strict rules than in bankruptcy proceedings, the distributionof proceeds to creditors follow the same rules as in the case ofbankruptcy. The liquidators draw up a schedule of claims without,however, making a further call to the creditors (article 321 al. 1DCBA). This document will then be made available to the creditorsand may be challenged through legal actions to contest the scheduleof claims in the same way as in bankruptcy proceedings.


In case the proceeds of the realisation of the bankruptcy estate donot suffice to cover all claims, as is generally the case, said proceedsare distributed pursuant to the order set in the law. Swiss lawrecognises different classes of creditors, one that is the result ofspecial contractual arrangements (security interest) and threeclasses based on distinctions of different categories of claimsderiving from the law. Secured claims (pfandgesicherteForderungen/créances garanties par gage) are satisfied directly outof the proceeds from the realisation of the collateral. Should the

proceeds not be sufficient to satisfy the claim of the securedcreditor, such creditor shall rank with unsecured creditors for theoutstanding amount of its claim. Unsecured claims are satisfied ina specific order out of the proceeds of the entire remainder of thebankruptcy estate. There are three classes of claims. The first classconsists of claims of employees derived from the employmentrelationship which arose during the six months prior to the openingof bankruptcy proceedings, and claims arising from prematuredissolution of the employment relationship due to the opening ofbankruptcy proceedings against the employer and the restitution ofdeposited security. The first class also includes claims of theassured derived from the Federal Statute on Accident Insurance andfrom facultative pension schemes, as well as claims of pensionfunds against employers. Finally, claims for maintenance andassistance derived from family law which arose during the sixmonths prior to the opening of bankruptcy proceedings and whichare to be performed by cash payments are also comprised in the firstclass. The second class consists of claims of persons whose assetswere entrusted to the debtor as a holder of the parental power, foreverything which the debtor owes them in such capacity. Thispreferential right is only valid provided that the bankruptcyproceedings are opened during the parental administration or withina year of its termination. Claims of various contributions to socialinsurances are also included in this class. All other claims arecomprised in the third class. Creditors for such claims only get paidafter all the privileged claims have been fully covered. Ultimately,claims which have been contractually subordinated will only bepaid after the claims of all other creditors have been paid in full.


As a rule, companies in financial difficulties do not benefit fromany special tax treatment under Swiss law. Dissolving hiddenreserves or the forgiveness of debt granted by third parties isconsidered taxable profits. However, a company in financialdifficulties has generally incurred losses in previous years that canbe set off against these profits. In this context, one must note thatSwiss tax law enables set-off with reported losses of the sevenprior years. The forgiveness of debt granted by shareholders is,under certain circumstances, treated as a contribution for noremuneration and is subject to an issuance stamp duty of 1%, as isthe case with respect to an increase of capital. The same analysisprevails in case of a reduction of the share capital followed by anincrease of the share capital or the contribution for noremuneration. In the above cases, however, a waiver of this stampduty can be obtained if levying such duty would be excessivelyharsh for the company.



In bankruptcy proceedings, the creditors’ meetings are legallyconstituted if one quarter of the known creditors is present orrepresented. The meetings pass and adopt resolutions with theabsolute majority of the voting creditors. The second creditors’meeting may even pass and adopt resolutions by circularresolution. In composition proceedings the composition agreement must beadopted by a quorum as set forth in question 2.5 above andapproved by the court. With the court’s approval, the compositionagreement becomes binding upon all creditors of claims subject to

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the composition agreement whether or not they participated in thecomposition proceedings and irrespective of their non-approval ofthe composition agreement.


In bankruptcy proceedings following distribution of the proceeds(according to question 3.1 above) the bankruptcy administrationsubmits its final report to the bankruptcy court. If the court findsthat the bankruptcy proceedings have been completely carried out,it declares them closed. The company ceases to exist and will becancelled from the commercial register. In case of a debt-rescheduling or a dividend agreement, the debtoris not wound-up but rather continues its business, and once suchagreement has been adopted by a quorum of creditors (according toquestion 2.5 above) and approved by the court, the debtor has againfull power to manage the company’s affairs. Only a compositionagreement with assignment of assets will ultimately lead to thewinding-up and the cancellation of the company from thecommercial register.


7.1 Is it common to achieve a restructuring outside a formalprocedure in Switzerland? In what circumstances mightthis be possible?

The achievement of a successful restructuring outside a formalprocedure is not uncommon under Swiss law. It is precisely thepurpose of the insolvency tests imposed by article 725 SCO tocompel the board of directors to adopt measures to improve thefinancial situation of a company before being obliged to commenceformal bankruptcy or composition proceedings. Article 725 § 1SCO, dealing with the issue of loss of capital (Kapitalverlust/pertede capital), obliges the board of directors to convene anextraordinary shareholders’ meeting and to propose appropriaterestructuring measures. Article 725 § 2 SCO describes thecircumstances under which the board of directors must file forbankruptcy by notifying the situation to the judge (see hereafterunder question 2.2). That being said, once being notified about thecompany’s over-indebtedness (Überschuldung/surendettement)pursuant to article 725 § 2 SCO, the judge is empowered topostpone the adjudication of bankruptcy, at the request of the boardof directors or a creditor, provided that there is prospect of afinancial reorganisation.


The judge’s motivation behind a postponement of the adjudicationof bankruptcy in accordance with article 725 § 2 SCO is typicallyto allow for a reorganisation of a debtor rather than for a realisationof its assets within the course of bankruptcy proceedings. Suchreorganisation may occur under the supervision of an administratorwhich is instated by the judge.In addition, there are two forms of composition proceedings whichresult in a debt restructuring (be it through a debt-rescheduling or adividend agreement) rather than in a realisation of the debtor’sassets and business. It is fair to say, though, that such forms ofcomposition agreements are rarely used in practice to reorganiselarge corporate debtors.


It is possible to transfer the business of the debtor by means of apre-packaged sale to a newly established hive-off vehicle or anyother third party. In bankruptcy proceedings, such a transferrequires the consent of the bankruptcy administration which isgenerally bound not to sell the debtor’s assets prior to the secondcreditors’ meeting (ordinary proceedings) or the expiry date forfiling claims (summary proceedings), respectively. According toarticle 243 § 2 DCBA, however, a sale may occur prior to suchdates if the relevant assets are subject to rapid depreciation, requirecostly maintenance or cause disproportionately high storage costs.The Swiss Federal Supreme Court has ruled that an expedited saleof the entire business or certain business units of the debtor may bepermissible under article 243 § 2 DCBA. The sale is documentedin an asset purchase agreement and may occur pursuant to articles69 et seq. of the Swiss Federal Act on Merger, De-Merger,Conversion and Transfer of Assets and Liabilities. In a moratorium,the sale requires the consent of the composition judge according toarticle 298 § 2 DCBA.A sale may also occur outside the scope of insolvency proceedings.However, there is a risk that in a subsequent insolvency proceedingsuch sale will become subject to challenge based on the avoidanceregime in articles 285 et seq. DCBA (see question 1.2 above).

8 International

8.1 What would be the approach in Switzerland to recognisinga procedure started in another jurisdiction?

In bankruptcy matters, Switzerland follows the principle ofterritoriality. Accordingly, a foreign bankruptcy or any similarproceeding has no effect in Switzerland unless it has beenrecognised. The recognition of foreign proceedings (Anerkennung/reconnaissance) is governed by a special chapter in the SwissPrivate International Law Act (hereafter “PILA”). The conditionsfor the recognition are as follows: (i) the bankruptcy decree musthave been rendered in the state of the debtor’s domicile; (ii) thepetition for recognition may only be introduced by the bankruptcy’sadministrator or by a creditor, but not by the debtor itself; (iii) thebankruptcy decree must be enforceable in the state where it wasrendered; (iv) the bankruptcy must not be inconsistent with theSwiss public policy and the fundamental principles of Swissprocedural law; and (v) reciprocity (Gegenrecht/reciprocité) isgranted by the state in which the decree was rendered. Pursuant tothis latter requirement, the Swiss court must examine if the foreignjurisdiction would also recognise, under similar circumstances, aSwiss decree, at conditions which are not sensibly less favourablethan the conditions prevailing under Swiss law for the recognitionof a foreign bankruptcy decree. As soon as the petition forrecognition has been filed, the court may, on application of thepetitioner, order conservatory measures. In principle, once therecognition is granted, the foreign bankruptcy decree has the sameeffects as a Swiss bankruptcy decree with regard to the debtor’sassets located in Switzerland. The foreign bankruptcy is notextended in Switzerland, but gives rise to an ancillary “mini-bankruptcy” that can be viewed as a sort of procedure for judiciallegal assistance. Moreover, pursuant to article 172 § 1 PILA, onlycertain claims may be included in the schedule of admitted debts,i.e. the claims secured by pledge according to article 219 § 1 to 3DCBA and the unsecured but privileged claims of creditors havingtheir domicile in Switzerland according to article 219 § 4 DCBA



Switz

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(first and second classes). After the satisfaction of these creditors,any remaining balance is remitted to the foreign bankruptcy estate(article 173 § 1 PILA). This transfer, which represents the result ofthe Swiss “mini-bankruptcy”, requires, however, the prior

recognition of the foreign schedule of claims, whereby the Swisscourts review in particular whether the creditors domiciled inSwitzerland were fairly treated in the procedure and were grantedan opportunity to be heard.

Daniel Tunik

Lenz & StaehelinRoute de Chêne 301211 GenevaSwitzerland

Tel: +41 58 450 7000 Fax: +41 58 450 7001Email: [email protected]: www.lenzstaehelin.com

Daniel Tunik is a partner in the litigation group of the Geneva officeof Lenz & Staehelin. He studied law at the University of Geneva,and is a graduate of the Geneva Institute of International Studies(1991) and of the LL.M programme at the Georgetown UniversityLaw School (1992). Daniel Tunik is active in the area ofcommercial litigation and is regularly involved in debt collection andbankruptcy matters, assisting creditors as well as debtors in debtcollection, bankruptcy or reorganisation cases pending before Swisscourts.

Tanja Luginbühl

Lenz & StaehelinBleicherweg 588027 ZürichSwitzerland

Tel: +41 58 450 8000Fax: +41 58 450 8001Email: [email protected]: www.lenzstaehelin.com

Tanja Luginbühl is a partner in the corporate, M&A and insolvencygroup of the Zurich office of Lenz & Staehelin. She studied law atthe University of Zurich, Switzerland, 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 corporate, M&A, securedfinancing and insolvency and restructuring. She has been involvedin various insolvency cases and advises banks, rating agencies andcreditors.

Lenz & Staehelin is one of the leading law firms in Switzerland, having offices in Zurich, Geneva and Lausanne. Thefirm comprises more than 160 lawyers and has a strong and long-standing practice in insolvency and restructuringmatters. The firm regularly represents creditors as well as debtors in debt collection, bankruptcy or reorganisation casespending before Swiss courts. We advise Swiss and international clients in the context of official or out-of-court debtrestructurings.



ChapterChapter 42


USA


1.1 How does a creditor take security over assets in the USA?

The granting and perfection of security interests is governed bystate law, and the method of taking and perfecting a security interestdepends upon the asset involved. In most cases, a securityagreement must be signed by the entity granting the interest, and, inorder to perfect the interest against claims of third parties, a filingmust be made in one or more state registries to provide notice of thesecurity interest. In some cases, perfection is accomplished bypossession. For real estate, a real property mortgage must begranted and filed. For other types of property, rules are found in therelevant state’s Uniform Commercial Code.


A transaction may be avoided as a fraudulent transfer orconveyance, or as a preference, if the company was insolvent at thetime of the transaction.If an insolvent company transfers an asset for less than reasonablyequivalent value, the transfer may be attacked as fraudulent by acreditor, under state law, or by the debtor under either state law orunder the Bankruptcy Code, if the transferor files for bankruptcy. A transfer made with the intent to hinder, delay or defraud creditorsis an intentional fraudulent transfer or conveyance, avoidablebecause of the wrongful intent. However, a constructive fraudulenttransfer is also subject to avoidance, even where there is no intentto defraud, and even without knowledge of insolvency. Sometimes,avoidance claims arise in connection with complex transactionsinvolving several steps, such as leveraged buyouts, and a key issueis whether the steps may be “collapsed”. In such instances, goodfaith may play a particularly important role. If a transfer is avoided, the transferee may be required to return theasset or its value, and may retain only a claim against the debtor(though the claim may be avoided as well if there is evidence of badfaith). Under state law, the limitations period on avoidance may extend upto six years after the date of the transaction, so the period of risk isquite long. Under the Bankruptcy Code’s independent provision,the limitations period extends back for two years from the date offiling.Under the Bankruptcy Code, a pre-petition payment of an

antecedent debt may also be avoided, as a preference, if the debtorwas insolvent at the time of the transfer. The Code provides foravoidance of a transfer within 90 days of bankruptcy, or within oneyear if the transfer was to an insider. During these periods, arebuttable presumption of insolvency exists.

1.3 What are the liabilities of directors (in particular civil,criminal or disqualification) for continuing to trade whilst acompany is in financial difficulties in the USA?

There is no civil or criminal penalty arising solely as a consequenceof continuing to operate a business that is in financial difficulties.Generally, the business judgment rule applies and requires directorsto be informed and act in good faith. If they act in a mannerconsistent with the business judgment rule, they should have adefense to any liability claims.No automatic disqualification results from a company continuing tooperate while in financial difficulty. If a company files forbankruptcy and a trustee is appointed, the board of directors isdisplaced, but, otherwise, the board and management will continuein place, though with added responsibilities to creditors. After a bankruptcy, or a sudden stock price drop due to publicationof information about financial difficulties, directors may face civillawsuits from creditors who may assert claims such as breach offiduciary duty, to which the business judgment rule may provide adefense. Investors may also sue under the securities laws, claimingthat disclosure was inadequate.

2 Formal Procedures

2.1 What are the main types of formal procedures available forcompanies in financial difficulties in the USA?

The main types are Chapter 11 of the Bankruptcy Code, whichprovides for reorganisation; Chapter 7, which provides forliquidation; and Chapter 15, which provides for assistance toforeign proceedings. Most corporations with a presence, or property, in the United Statesare eligible to file under Chapter 11 or 7. In addition, there arespecialised subchapters for specific entities, such as stockbrokers.Insolvency proceedings for a broker dealer are governed by theSecurities Investor Protection Act, or under a special section of theBankruptcy Code. Some entities, usually those regulated understate law such as banks or insurance companies, and railroads, arenot eligible to file under the federal Bankruptcy Code, though theirholding companies may be eligible to file.

Karen E. Wagner



USA

Davis Polk & Wardwell USA

A filing under Chapter 11 or 7 gives the bankruptcy court exclusivejurisdiction over the debtor, its estate, and the property of the estate.This jurisdiction is extraterritorial, though the choice of law rulesdo not require application of U.S. law in all circumstances. Theautomatic stay applies to all property of the estate, and all creditors. A Chapter 15 petition may be filed to commence an ancillary case.For a further discussion of Chapter 15, see question 8.1.

2.2 What are the tests for insolvency in the USA?

The tests differ depending upon the circumstances in which the testis to be applied. Insolvency is not a prerequisite for a filing. Proofof insolvency is a prerequisite for successful assertion of anavoidance claim.The term “insolvent” is generally defined in the Bankruptcy Codeas “the sum of [an] entity’s debts is greater than all of such entity’sproperty, at a fair valuation”. Valuation of some forms of property,and of some liabilities, such as contingent tort obligations, may bedifficult, so application of the test may not be simple. This definition is applicable to the federal avoidance provision, toestablish insolvency for fraudulent conveyance or preferencepurposes. However, avoidance may also be accomplished by ashowing that the debtor was engaging in business withunreasonably small capital, or was incurring debts beyond thedebtor’s ability to pay as such debts mature. In addition, relevant definitions under state law may apply. In moststates, balance sheet insolvency and capital inadequacy are amongthe relevant standards.


There are no specified criteria for eligibility to file a petition underChapter 11 or 7 of the Bankruptcy Code.A company may voluntarily invoke bankruptcy protection wherethe company deems itself in need of restructuring. A filing may beattacked if it is made in bad faith, for example to thwart a judgmentof foreclosure in a single asset case. A case may also be dismissedif effective relief is not possible or if the debtor is not eligible forthe provision under which it files. Otherwise, there are few basesupon which to attack a filing.A company may also be placed involuntarily into a procedure. One,or three, creditors, depending upon the total number of creditors,with undisputed claims totalling at least $12,300, may file aninvoluntary petition. The debtor may accede to the filing, or maycontrovert it or seek to convert to a different chapter. If the filing iscontroverted, the petitioning creditors must prove that the debtor isnot generally paying its undisputed debts as they come due. Anypetitioner filing in bad faith is liable for compensatory and punitivedamages.The specialised chapters or subchapters, like Chapter 15 or thestockbroker liquidation subchapter, have additional limitations withregard to eligibility.


A voluntary case is commenced by the filing of a petition by thedebtor. The filing of the petition initiates the bankruptcy case.Usually, immediately after the petition is filed several otherapplications will be made, “first day” applications seeking reliefgeared toward maintenance of uninterrupted business operations.

These may include, for example, applications to pay criticalvendors or to maintain bank account and cash managementsystems. An involuntary case is commenced by the filing of a petition by oneor more creditors, but does not become effective until the courtorders relief. During the “gap” period between the time theinvoluntary petition is filed and the time relief is ordered, the debtormay function without bankruptcy law restraints unless specificcourt orders are issued to address emergent matters.Whether voluntary or involuntary, petitions may be filed undereither Chapter 11 or Chapter 7, though not every type of entity maybe subjected to an involuntary filing.

2.5 What notifications and meetings and publications arerequired after the company has been placed into eachprocedure?

The debtor must appear before creditors in a meeting presided overby the United States Trustee, the administrative arm of thebankruptcy courts. The debtor is also subject to the wide ranginginvestigatory and oversight powers of an official committee ofunsecured creditors, usually chosen from among the 20 largestcreditors, appointed by the United States trustee. Under recentlegislation, the committee also has obligations to provideinformation to creditors.The debtor must also provide notice to creditors and other interestedparties of all material events. The level and scope of the requisitenotice is specified in the Bankruptcy Rules, and is often addressedin an early administrative order. Among the applications of whichthe debtor must provide notice are applications seeking authority toobtain a secured loan or to use cash collateral; for sale or use ofproperty out of the ordinary course of business; for assumption orrejection of executory contracts and leases, including collectivebargaining agreements; and for compromise of claims. Notice mustalso be given of the last date for filing of claims; of the filing of adisclosure statement and a hearing to determine its adequacy; andof plan voting and the confirmation hearing. Notice by publicationmay be required under some circumstances.

3 Creditors


An automatic stay, or statutory injunction, that issues upon thefiling of a Chapter 11 or 7 petition, prevents creditors whose claimsarise pre-petition from pursuing claims against a debtor except inthe bankruptcy court. Both pre- and post-petition creditors arerestrained from exercising collection remedies unless theysuccessfully seek relief from the court. Relief from the stay for thepurpose of exercising remedies will seldom be granted, especiallyearly in the case.


The automatic stay also prevents secured creditors from enforcingtheir rights after a filing. However, secured creditors’ rights in theircollateral are protected. If the debtor wants to use their collateral,or if the value of the collateral begins to decline, secured creditorsmay ask the court to grant additional protections, including thepayment of interest or supplying of additional collateral. In some

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circumstances, a secured creditor may seek a court order providingfor the return of its collateral.


If setoff is permitted under state law, setoff rights exist: pre-petitionclaims may be setoff against pre-petition claims; and post-petitionagainst post-petition claims. However, setoff generally may not begiven effect without a court order modifying the automatic stay.



Generally, in a Chapter 11 case, absent evidence of fraud by thecompany, the debtor will remain in place as debtor in possession,though under recent legislation, it appears that a trustee may bemore easily appointed where there is a charge of fraud or otherwrongdoing by a member of senior management. If a trustee isappointed, the trustee will supersede the board.If the debtor remains in possession, corporate governance is notaffected by the filing, except that the board of directors may haveduties to creditors of an insolvent entity. Shareholders of aninsolvent entity may not have the right to demand normal corporategovernance procedures as their interests may have little value andthe creditors may be the ultimate shareholders of the reorganisedenterprise. In a Chapter 7 case, a trustee is appointed to liquidate thecompany’s assets and make distributions to creditors according tothe absolute priority rule. The board of directors is displaced.Shareholders do not have corporate governance rights in Chapter 7and are unlikely to recover on their equity interests, because thepremise of Chapter 7 is that the debtor cannot be reorganised as anoperating enterprise.


A Chapter 11 debtor may use unencumbered cash or proceeds fornormal corporate activities. The company may obtain a loan, securedby assets, upon court approval (a “debtor in possession” or “DIP”loan). The debtor may also seek court approval to use encumberedcash, cash collateral, by providing adequate protection to pre-petitionsecured lenders. The cash available to the debtor is used to operate the business and tofinance the bankruptcy process. That process may be quite expensive,as the debtor pays for its own professionals and those of any officialcommittees, and, often, of any secured lenders. Payment of all suchprofessionals is usually subject to court approval.A Chapter 7 trustee is paid from unencumbered cash and proceeds ofassets sales.


Current employees of a reorganising company continue to beemployed and to be paid in the ordinary course. Pre-petition unpaidemployee benefit claims may be entitled to priority treatment, up toa certain amount, but may not be paid until a plan of reorganisationis confirmed.

The institution of pre- or post-petition programmes for retentionand severance of executives has been subjected to recent legislativerestrictions. Pre-petition programmes may be avoided as fraudulentconveyances. Post-petition programmes must provide that anyincentive programme prohibit a severance payment to an insiderunless the payment is part of a programme available to all full timeemployees and is not more than 10 times the amount of meanseverance given to non-management employees. It has been heldthat the business judgment rule does not apply to approval of theseprogrammes. A liquidating company, under the supervision of a trustee, may notrequire the continuation of most employees; employees that areterminated will be entitled to the priority claims described herein,and to administrative claims to the extent they provide post-petitionlabour.


Upon a Chapter 11 filing, a debtor may “assume” or “reject” mostexecutory contracts (other than contracts for financial or personalservice) or unexpired leases at any time before confirmation.Assumption and rejection require court approval.“Assumption” means that the debtor adopts the contract, after curingall curable defaults and demonstrating adequate assurance ofperformance, the legal effect of which is to give obligations under thecontract administrative status. A contract or lease must be assumed asis; cherry picking of favourable portions of the contract or lease is notpermitted. With some restrictions, an assumed contract or lease maybe assigned to another person, despite a non-assignability clause.“Rejection” is not the same as termination permitted by the contract;it is akin to an authorised breach, and gives rise to a pre-petition claimfor damages. Because assumption usually may not be followed by a later rejection,and could impose large administrative expense upon the estate, thedebtor, and its creditors, usually prefer that a decision to assumeassumption be made late in the case, after the debtor’s businessstrategy, and likelihood of its success, can be evaluated. However,under recent legislation, the time limits for assumption or rejection ofunexpired leases of non-residential real property have been shortened.The non-debtor counterparty has no right to reject or terminate, evenif the contract contains an insolvency or bankruptcy terminationprovision, absent a post-petition performance or payment default bythe debtor.Special rules govern assumption or rejection of collectivebargaining agreements, which may be rejected only after extensivebargaining and information exchange, and after a court finds thatcertain economic criteria are met. Special rules also governassumption or rejection of other specific types of contract or lease,including intellectual property licences and shopping center leases.

5 Claims


Creditors must file “proofs of claim” setting forth the basis for theirclaims, unless the debtor has filed a schedule showing the claim asundisputed and the creditor agrees. Generally, non-bankruptcy lawgoverns the substance of the claim, and bankruptcy law governs thepriority and status of the claim. A Chapter 11 debtor must give

USA



USA


notice to all creditors of the bar date, the last day for filing claims,and of the procedure for filing claims. Claims must be filed in aChapter 7 case within 90 days after the first meeting of creditors.The filing of a claim submits the creditor to the jurisdiction of thebankruptcy court, and may constitute a waiver of any jury trial rightwith respect to the adjudication of the claim.


The ranking of claims is governed by the Bankruptcy Code. Claimsthat arise as a consequence of post-petition engagement with thedebtor or on behalf of the estate, including trade claims, employeeclaims and tort claims, as well as claims of professionals involvedin the bankruptcy process, have “administrative” priority, whichmeans they are paid first. Secured claims have priority with respectto collateral securing them. Employee benefit and certain otherclaims, including some tax claims, have priority to a specifiedamount. General unsecured claims rank pari passu. Litigationfrequently arises regarding the status of particular claims. In a Chapter 11 plan, the Bankruptcy Code’s designated rankingsmay be varied as creditors negotiate and reach agreement amongthemselves as to how to allocate value, though there is some debateabout the extent that such variation may be approved. In acramdown, and in Chapter 7, the rules of the Code must beobserved.


A Chapter 11 debtor is subject to the laws governing the operationof its business, including the tax laws. However, many debtors cantake advantage of large net operating losses which may reduce taxburdens. In addition, certain state taxes arising upon an assettransfer are not applicable to some transactions, includingparticularly real estate transfers, effected in connection with a plan.



In a Chapter 11 case, if at least one class of impaired creditorsaccepts a plan, then, upon a showing that creditors who reject arereceiving as much as they would in a liquidation (the “best interestof creditors” test), and that no junior creditor receives anydistribution before a senior class is paid in full (the “absolutepriority rule”), the court may “cramdown” the plan on dissentingcreditors and interests. The process can be time consuming andexpensive as it can involve extensive valuation battles.There is no need for cramdown in a Chapter 7 liquidation.


A Chapter 11 reorganisation (or liquidation) is concluded by theconfirmation and consummation of a plan of reorganisation (orliquidation), which governs treatment of all creditors and interestholders. Confirmation is accomplished if creditors and interestholders vote to accept the plan (two thirds in amount and a majorityin number in each class vote in favour) or a cramdown occurs. Theplan provides for distribution of value to creditors, by class, and

usually based upon the debtor’s business plan unless a separate fundis provided. The plan may provide for the creation of a post-reorganisation entity, usually a trust, charged with collection ofclaims of the estate, and may be authorised to engage in litigationof which creditors will be beneficiaries. The court may approve aplan only if it meets criteria specified in the Bankruptcy Code.After confirmation and consummation of a reorganisation plan, thereorganised debtor will ultimately leave the protection of thebankruptcy court, though jurisdiction is retained as to some matters.In exchange for performance under the plan, a corporate debtor isdischarged from claims that were, or could have been, asserted inthe course of the Chapter 11 case. Ultimately, after all mattersrelating to the bankruptcy are resolved, the case is formally closedby the court.A Chapter 7 liquidation is concluded by the sale of all assets of thedebtor, a distribution to creditors according to the absolute priorityrule, and a closing of the case. No discharge follows a Chapter 7liquidation.


7.1 Is it common to achieve a restructuring outside a formalprocedure in the USA? In what circumstances might thisbe possible?

It is not common for a sizeable corporation to restructure outside ofa formal process because, absent such a process, there is no easymethod by which to ensure that all creditors are bound by an agreedrestructuring. If a restructuring is required solely to address a discrete problemwith one or a few creditors, such as renegotiation of the terms of amortgage, and all other creditors can be left unimpaired, an out-of-court process may be possible. Where the problem to be addressedis discrete, but many creditors will be affected, such as in a publicdebt restructuring, a pre-packaged or pre-negotiated, plan ofreorganisation, which calls for negotiations and agreement on a planprior to a filing, may combine an informal procedure with arelatively quick formal procedure.


Yes. See question 2.1.


Yes. The Bankruptcy Code provides for the sale of assets independentof a plan of reorganisation, and such sales may be expedited whennecessary. Any such sale may be negotiated, agreed and documentedprior to or after filing the bankruptcy petition. However, the non-debtor party, or “stalking horse,” is subject to the risk of an auction, aprocedure which is usually mandated. The sale of substantially all assets of the debtor is likely to face greaterhurdles than a sale of discrete assets. However, early sales ofsubstantially all assets are becoming more common. The sale of stock of a debtor is uncommon, because while the assetsmay be sold free and clear of many liabilities, stock is sold subjectliabilities of the business.

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8 International

8.1 What would be the approach in the USA to recognising aprocedure started in another jurisdiction?

A new Chapter 15 has been added to the Bankruptcy Code,replacing former Section 304. Chapter 15 effectively imports theUNCITRAL Model Law on Cross-Border Insolvency. Chapter 15 seeks to balance the right of U.S. courts to administerassets of a debtor with ties to the United States with the rights offoreign courts with respect to assets of the same debtor andprinciples of comity. It has the objectives of cooperation betweenthe U.S. courts, U.S. trustees and debtors and the courts and othercompetent authorities of foreign countries involved in cross-borderinsolvency cases; greater legal certainty for trade and investment;fair and efficient administration of cross-border insolvencies;protection and maximisation of the value of the debtor’s assets; andfacilitation of the rescue of financially troubled businesses. Judges interpreting the law are to “consider its international origin,and the need to promote an application of this Chapter that isconsistent with the application of similar statutes adopted byforeign jurisdictions.” To seek recognition, a “foreign representative” of the debtor mustfile a petition accompanied by evidence of the existence of theforeign proceeding and appointment of the foreign representative.Thereafter, the foreign representative must provide to the court, ina timely manner, notices of change of status concerning all “foreignproceedings” involving the debtor. If the (1) pending foreign proceeding is main or nonmain; (2) theforeign representative is a person or body authorised to administerthe reorganisation or liquidation of the debtor; and (3) the petitionmeets additional relevant requirements, the court is mandated toenter an order recognising a foreign proceeding. The decision togrant recognition is not dependent upon findings, of the sortpreviously mandated by section 304(c), about the nature of theforeign proceedings. However, in some of the first decisionsinterpreting Chapter 15, courts have refused to grant recognition incases in which the foreign proceeding was not considered to meet

relevant definitions. In addition, a public policy exception doesallow a U.S. court to deny recognition that would be “manifestly”contrary to a fundamental U.S. public policy. Emergency relief is available under Chapter 15. Among otherthings, the U.S. bankruptcy court may grant a stay against creditors’execution against the foreign debtor’s assets, may entrust theadministration of the foreign debtor’s assets to the foreignrepresentative, and may suspend the right to dispose of the foreigndebtor’s assets located with the territorial jurisdiction of the UnitedStates, if the foreign representative can show that such relief isurgently needed. The standards applicable to the grant of aninjunction apply to an application under this section.Recognition of a foreign main proceeding results in mandatoryrelief, including an automatic stay. Recognition of both main andnonmain foreign proceedings may result in the grant ofdiscretionary relief, granted to effectuate the purpose of Chapter 15and to protect the assets of the debtor or the interests of thecreditors. Such an order may include a stay of proceedings orsuspension of the right to encumber assets of the debtor and itsliabilities.

USA

Karen E. Wagner

Davis Polk & Wardwell450 Lexington AvenueNew York, New York, 10017USA


KAREN E. WAGNER is a partner at Davis Polk & Wardwell. She hasrepresented debtors, creditors, acquirers and others in bankruptcy,primarily in litigation, and has been involved in a number of recentmatters generated by the credit crisis. She has written on manytopics in the insolvency area and is a member of the InternationalBar Association. She is a 1976 graduate of New York UniversitySchool of Law.

DAVIS POLK & WARDWELL is a global law firm based in New York City. For more than 150 years, our lawyers haveadvised industry-leading companies and global financial institutions on their most challenging legal and businessmatters. Davis Polk ranks among the world’s preeminent law firms across the entire range of our practice, which spanssuch areas as insolvency and restructuring, capital markets, mergers and acquisitions, credit, litigation, investmentmanagement, executive compensation, intellectual property and tax. The firm has more than 600 lawyers in offices inNew York, Menlo Park, CA, Washington, D.C., London, Paris, Frankfurt, Madrid, Hong Kong and Tokyo.

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Documents

Intl Legal Guide to Corp Recovery & Insolvency