Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Restructuring & Insolvency
Protecting employment stability is a policy issue that strongly influences the outcome of extraordinary administrations of large insolvent enterprises.
The Italian state can guarantee (in whole or in part) debts incurred with financial institutions by large insolvent enterprises in extraordinary administration (see answer to Question 7) to finance ongoing operations and re-open and complete plants, real estate and industrial equipment. The overall amount of state-granted guarantees cannot exceed EUR550 million.
Public administrations get involve in some of the restructuring process when the company is relevant in the region in terms of gross domestic product or number of employees. Its informal influence is made through the collaboration of public financial institutions in the restructuring process or its relationships with the main creditors of the debtor.
Non availability of direct state support is given in the restructuring proceedings.
The national government may pressure certain stakeholders in restructurings or insolvencies if there is the possibility of significant social impact or unemployment issues. The national government creates or joins corporate reconstruction funds aimed at supporting restructurings, such as the Enterprise Turnaround Initiative Corporation of Japan (‘ETIC’, now the Regional Economy Vitalization Corporation of Japan), and these funds support certain restructurings taking into consideration the value of the business, social impact and the like.
For instance, in 2010, ETIC decided to support Japan Airlines Co., Ltd. (‘JAL’) in creating restructuring plans and providing enough financing to pay unsecured debts from commercial transactions, except financial debts, before filing for corporate reorganisation proceedings. JAL was the largest airline in Japan with about 110 subsidiaries and 48,000 employees in its group, so the national government wanted to avoid significant social impact and unemployment issues. Owing to ETIC’s support, JAL was reorganised and re-listed on the Tokyo Stock Exchange in 2012.
In comparison, prefectural governments are unlikely to have additional influence over stakeholders. Each prefectural government has a restructuring support system for distressed medium-sized companies, although this system is consigned by the national government.
Generally, the opinion in Denmark is that employees are not to be affected by the employer’s unsuccessful restructuring and subsequent insolvency and consequently the employees’ back pay will prior to the insolvency as well as during the subsequent notice period be secured by the Employees’ Guarantee Fund.
There is very little state involvement or government intervention for distressed businesses in Australia. However there are certain circumstances where the government has stepped in to guarantee some financial support in formal insolvency proceedings, in particular, in relation to employee entitlements. Whilst employee entitlements (including wages, superannuation, leave entitlements and redundancy payments) are given statutory priority over the payment of other unsecured debts in a distribution of assets, it is sometimes not possible for those debts to be met out of the recoverable assets of the company in a timely manner or indeed, at all.
Pursuant to the Federal Government’s Fair Entitlement Guarantee (FEG), when a company is placed into liquidation leaving employee entitlements unpaid, the Federal government, through FEG, can make payment to employees of certain levels of unpaid entitlements. The government then becomes the creditor and is afforded the same priority in the distribution as the employee claims it paid. Importantly, the position of directors and management is different, and the priority afforded to them is capped substantially.
There is no state support available to distressed businesses in the Cayman Islands. As noted above, given the importance of the funds industry in the jurisdiction, the Cayman Islands have been careful to maintain their reputation as a creditor friendly jurisdiction.
Unlike in other jurisdictions, pension authorities do not typically play an important role in restructuring or insolvency proceedings in Switzerland. Unions may play a more active role, namely where a restructuring requires a (mass) dismissal of employees. That said, employment laws in Switzerland are fairly liberal when compared to other jurisdictions.
Leaving aside the TBTF discussion for financial institutions, Swiss governmental authorities do not play a relevant role in relation to distressed businesses and state support would not generally be available. State creditors may, however, be willing to discuss payment terms etc. as any other creditor.
German trade unions tend to act in a far less aggressive manner than eg French ones. This applies also in a crisis of a debtor, where trade unions may even consent to measures reducing the debtor’s labor costs.
In Germany, the economic doctrine prevails that the state should not interfere with insolvency procedures, their macroeconomic function being to eliminate uncompetitive players. While the German State intervenes in fact far less in restructurings than eg the French State, it frequently does not remain passive if very important companies are threatened by insolvency.
While state guarantees may thus under certain conditions be available (at federal or state level), they must comply with the EU ‘Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty’ (2014/C 249/01) which allow state support only under narrow circumstances.
As in many other jurisdictions, socio-political factors may have some influence in certain restructurings, particularly depending on the industry.
In the recent past, the state has not provided support even in important cases like the Mexicana de Aviación insolvency procedure.
British Virgin Islands
As noted above, there are relatively few categories of preferential creditors. Because BVI companies generally operate exclusively outside the BVI, there is rarely any specific public policy issue concerning employees or other protected group within the territory. In addition, many BVI companies are holding companies, so do not employ significant numbers (other than directors, local agents, and other professionals).
Socio-political factors do not play a significant role in commercial restructurings in Bermuda. Typically, one is dealing with entities that are part of a wider business operating in a transnational sector such as insurance, finance, transport or international trade. Issues such as employees and pensions are therefore unlikely to be substantial. Bermuda is committed to its role as a hub for offshore commerce and any action to prejudice that position is unlikely.
Greece enforcement and insolvency systems have been traditionally over-protective to debtors, employees and state entities. Moreover, there was always a clear disconnect between the rules and their practical operation, due to complexities which resulted to high cost and inefficiencies stapled with the limited capacity and poor organization of the judicial system.
The enforcement regime, which allowed the debtor to stay the proceedings in multiple instances, undermined the timely and efficient enforcement resulting to lengthy thus costly and low recovery process.
The Greek legal system has been less protective to secured creditors, than other EU jurisdictions, as a result of the excessive grandfathering of public interest, of employees rights and debtor defenses.
In addition, as Greek banks were recapitalized using public funds, their management and officers have become reluctant and exhaustively bureaucratic in implementing heavy but meaningful restructurings and/or debt downsizings, as they fear to face criminal sanctions for misusing public funds.
As regards state direct support, it has to be noted that given that Greece is EU member state and direct or direct support in a distressed business is largely disallowed due to the state aid rules. Any such support may be exceptionally allowed provided that the scheme of support is first cleared with the European Commission. On the other hand, claims of the State and public entities can be subject to a restructuring as part of the rescue plan of a business.
Unfortunately, although the public (most importantly tax and social security) authorities have the capacity to participate and accept settlement of debts in a restructuring process, they are unwilling to engage in meaningful debt restructuring, due to criminal liability for writing-down of public debts.
There is specific legislation that addresses the insolvency of certain institutions possessing some public interest element, for instance banks, insurance or insurance broking companies, securities exchanges or securities market, electricity licensees and railway licensees.
More generally, the Court also has the power to make a judicial management order where it considers that public interest so requires. To establish this, a decent chance of the company’s survival alone is not enough. The threshold to be satisfied is whether a refusal to make a judicial management order will result in the collapse of the company whose failure will have a serious economic or social ramifications.
A court may exercise its discretion not to wind up an insolvent company on public interest
Certain limited unpaid contributions into occupational pension schemes and contributions deducted from the employee’s pay are categorised as preferential debts and will rank ahead of floating charge holders in the event of a company’s insolvency.
The Pension Protection Fund (PPF) provides compensation for defined benefit occupational pension scheme members on an employer’s insolvency. The Pensions Regulator has very wide ‘moral hazard’ or ‘anti avoidance’ powers to make third parties liable to provide support or funding to a defined benefit occupational pension scheme in certain circumstances.
Large pension schemes of debtors in difficulty (e.g. BHS) will attract greater public attention and government intervention is more likely, e.g. by seeking to facilitate a deal between the debtor, the Pensions Regulator and unions (if any). Aside from these considerations, state involvement is generally limited.
No, political factors should not affect bankruptcy or Delay of Payment proceedings because in Indonesia, the courts rule independently on any case presented to them.
The state only has a role in bankruptcy or Delay of Payment proceedings in that, among other things, a bankruptcy petition may also be submitted by a state attorney for the public interest. For certain debtors, an application for a bankruptcy declaration may only be submitted by OJK (the Financial Services Authority/Otoritas Jasa Keuangan) – (if the debtor is a bank, an insurance company, a financial institution, a pension fund institution, or a securities company, the stock exchange, a clearing and custodian institution, or a settlement and depository institution); and the Minister of Finance (if the debtor is a state-owned company engaged in the public sector).
French trade unions tend to adopt fairly aggressive behaviours. This applies also in the context of restructuring proceedings where trade unions usually are very vocal when jobs are at risk.
The state may play a relevant role in relation to distressed businesses. Thus the CIRI (comité interministériel de restructuration industrielle) aims at helping distressed businesses turn around. The CIRI is competent for companies with more than 400 employees.
Companies with less than 400 employees can be assisted by the CODEFI (comités départementaux d’examen des problème de financement des entreprise) which are the local equivalent to the CIRI.
As mentioned, in insolvencies, and especially in recovery and reorganization proceedings, the courts focus very much on limiting the adverse effect on employees. The courts are also granting increasing weight to protection of publicly-traded debentures, which are usually held by pension and mutual funds. The Companies Law includes special provisions with regard to the latter, prescribing an increased level of supervision with respect to debt restructuring of companies that have such debentures.
The trustee should primarily look after the interests of the creditors. However, the trustee could in specific circumstances take into considerations the interests of other stakeholders (e.g. preservation of employment). While trade unions could exercise some (political) pressure with respect to the preservation of employment, the State does not actively participate in a rescue operation. In that respect, we note that the State (e.g. Tax and Customs Administration) is generally one of the preferred creditors and therefore could have a role in a restructuring.
The Luxembourg state provides for certain schemes of support for distressed businesses with employees. In particular, businesses can ask, under certain conditions, to benefit from "part-time" unemployment schemes (chômage partiel), which are designed to avoid redundancies.
State support is available to local businesses in general and in particular in certain strategic branches, but not specifically to distressed businesses.
No. However, employee representatives and labour unions are frequently given the floor by courts in insolvency proceedings, and Belgian courts tend to lean towards decisions that safeguard the continuity of employment. Unions (through their affiliated political parties) do have an increased say in big insolvency proceedings, which can be used as leverage against the debtor/creditors.
Sociopolitical factors indeed give additional influence to certain stakeholders, such as unions or just groups of employees.
The pressure of the employees might be strong and sometimes it is hard to find a balanced solution for creditors, debtor and employees.
During the last years, we have seen the state playing a role in trying to help distressed companies that were important for regional economies or that provide jobs to many people. In those cases the state plays the role of a mediator and in some cases provides credit (or at least bridge loans) to the debtor.
Any influence that certain creditor constituencies enjoy under the U.S. restructuring regime is largely a product of the U.S. Bankruptcy Code as a matter of law—and less on a case-by-case basis. U.S. Bankruptcy Code sections 1113 and 1114, for instance, provide special protections for employees governed by a collective bargaining agreement or retirees receiving health or pension benefits. Debtors may reject collective bargaining agreements not pursuant to the generally applicable business judgment rule, but only if the court finds that (a) employee representatives lacked good cause to reject modifications, and (b) the balance of the equities clearly favors rejection. Debtors similarly may modify retiree health benefits only if the balance of the equities favors modification. Section 1114 permits interested parties to reinstate retiree health or pension benefits if they were improperly modified, prepetition. Further, section 365 of the U.S. Bankruptcy Code affords special protections to lessors by requiring debtors to continue paying postpetition rent until a commercial lease is rejected. Commercial leases that are not assumed within 120-days after the petition date are automatically rejected—unlike other executory contracts that may be assumed or rejected at or before plan confirmation.
Additionally, the U.S. government plays a role in all bankruptcy cases through the United States Trustee Program of the Department of Justice (“USTP”). USTP attorneys serve monitoring, protective, and administrative functions by actively monitoring in-court bankruptcy proceedings to ensure compliance with the U.S. Bankruptcy Code—such as rules governing professional fee applications and debtor financial disclosures (e.g., monthly operating statements and schedules and statements). USTP attorneys also routinely monitor and object to chapter 11 debtor plan provisions, including most frequently release, injunction, and exculpation provisions—thereby ensuring that debtors do not unfairly abuse the U.S. Bankruptcy Code. In an administrative role, USTP attorneys appoint official creditor and equity committees, appoint and monitor case trustees in chapter 7 liquidations, and refer matters to the Department of Justice for criminal prosecution where appropriate. Additionally, while individual states are often more active participants in chapter 9 municipal bankruptcies, the federal government has exerted influence only in very select circumstances, such as certain of the automotive industry bankruptcies during the financial crisis of the late 2000s.