Is it a debtor or creditor friendly jurisdiction?
Restructuring & Insolvency
The reforms of the IBL of 2005–2012 were mainly aimed at favoring the business continuity of distressed but still viable enterprises as a key element for the success of restructuring plans. Many mechanisms aimed at favoring the debtor have thus been introduced, such as: the absence of any minimum statutory level of satisfaction of creditors, the freezing of counterparties’ rights to terminate executory contracts, the debtor’s entitlement to request the court’s authorization for terminating executory contracts or paying pre-petition debts towards key suppliers, a one-year moratorium for paying secured creditors, the debtor’s entitlement to apply for reorganization at an early stage, even without submitting the restructuring plan, to get the automatic stay of enforcement actions.
Subsequently, the reforms of the IBL of 2013–2015 have (i) enhanced creditors’ chances to have a pro-active role in restructurings (for instance, by exercising their right to submit competing proposals), thus increasing financing and investment opportunities for domestic and foreign lenders and investors also through the implementation of loan-to-own strategies and (ii) reduced the space for opportunistic and delaying tactics of the debtor.
The result is a jurisdiction which maintains a debtor-friendly approach, but also takes into serious account the creditors’ interests.
The reforms introduced in the last years to the Spanish Insolvency Act have introduced changes that remove some of the practical problems arising in relation to refinancing process. The amendments introduced has included better tools to debtors and creditors to achieve out-of courts refinancing agreements and investors acquiring assets or business units in the in-court proceedings.
However, public creditors remains with privileges and they are not affected by the pre-insolvency status (5.bis notice), the stay in the enforcement of their security or the cram down related to the refinancing agreement sanctioned in courts (homologación).
With respect to restructuring proceedings, the creditor cannot take the initiative, nor has the right, to control the proceedings both institutionally and factually in Japan. For instance, in general, the debtor in civil rehabilitation proceedings or the trustee in corporate rehabilitation proceedings has the right to control almost the entire restructuring proceedings. As a result, we believe that Japan is a debtor friendly jurisdiction.
Generally, Denmark is a creditor friendly jurisdiction as restructuring and in-solvency proceedings may be commenced at the petition of a creditor.
As a starting point, the debtor cannot avoid the restructuring or insolvency proceedings if the creditor is able to prove that the conditions have been fulfilled.
Australia is widely considered to emphasise the rights of creditors over debtors and as such is recognised as a creditor-friendly jurisdiction. Whilst there are some limitations on the options that might otherwise be available to distressed companies and some inflexibility in certain of the tools available to insolvency practitioners, Australia’s insolvency regime is, for the most part, primarily focussed towards protecting the rights and interests of creditors over the interests of debtors. For example, Australia’s voluntary administration regime is controlled by creditors to the exclusion of management and members and its purpose is designed to maximise creditor returns. Further, unlike the United Kingdom for instance, receivership is alive and well in Australia.
Creditors are active participants in all insolvency processes in Australia. They can enforce their rights in each process and, whilst there are some timing limitations placed on their enforcement rights in a voluntary administration scenario, enforcement rights over secured assets are otherwise unfettered.
Secured creditors and employees enjoy a statutory priority in a distribution of assets and, in some circumstances, unsecured creditors can also place themselves in a position of protection. Unlike secured creditors, unsecured creditors are given no legal right to priority, yet due to a particular relationship that may exist with a debtor (for example, as a supplier of essential materials), they can exercise that power to obtain payment and ensure future payments as a practical necessity to maximise value and keep the debtor business running.
The Cayman Islands has traditionally been, and continues to be, regarded as a creditor friendly jurisdiction, with creditors being treated equally irrespective of the jurisdiction in which they are domiciled.
On balance, recent amendments to the DEBA have strengthened the role of the debtor and have made composition proceedings a more attractive tool for restructurings from a debtor's perspective. In particular, the availability of a silent (not published) provisional moratorium and the new statutory rule regarding an exit from a composition moratorium without the need for a composition agreement are aimed at facilitating in-court restructurings. That said, creditors are still adequately protected in various ways so that, from an overall perspective, the DEBA strikes a fair balance between the interests of the involved parties. Active creditors may exercise a significant influence on the proceedings (broad information access rights, consent requirements, participation rights at court hearings etc.) and passive creditors are protected by the supervision of the proceedings by an administrator (which is regularly appointed although not mandatory for all types of proceedings) and the court. Still, in our perception, the majority of restructurings is being pursued outside of formal restructuring proceedings. This route is typically faster but involves additional risks, namely for executive bodies of the debtor.
German insolvency law is creditor friendly:
- The primary goal of German insolvency proceedings is the payment of the creditors’ claims (Sec. 1 Insolvency Code). This applies also in insolvency plan procedures, in particular due to the ‘best interest test’, according to which a dissenting group may only be crammed down if it does not receive less than it would in straight liquidation (question 7).
- Security interests are respected by the Insolvency Code.
However, this conservative view is beginning to change in Germany, also in view of the EU Proposal of 25 November 2016 on preventive restructuring frameworks (COM(2016) 723 final). Practitioners begin to accept that also the debtor must have the right to initiate its restructuring.
We consider that our law is a well-balanced law. Its main purpose is to allow an insolvent entity to get a fresh start by reaching out an agreement with its creditors, but at the same time provides good protection to those creditors. Our Insolvency Law is based on the UNCITRAL Law.
British Virgin Islands
While there are measures that are designed to protect both stakeholders, and the BCA provides significant advantages for companies while they are solvent, the onset of insolvency triggers a number of protections for creditors. As such, the BVI is likely to be seen as a creditor-friendly jurisdiction.
The statutory scheme of Bermuda casts it as a creditor friendly jurisdiction with the emphasis being on creditor recoveries. There are no regimes in place akin to a UK administration or a Chapter 11 proceeding under the US Bankruptcy Code. In recent years however, there has been a strong judicial move in Bermuda, through case law, to embrace a culture of corporate rescue notwithstanding that the Companies Act 1981 does not expressly support such an approach. This has in turn has moved Bermuda away from its previous status as being creditor friendly. To date, it is only decisions at first instance which have promoted this approach and it remains to be seen whether the Courts of Appeal take a similar interpretation of the relevant statutory provisions.
Following the recent amendments in the bankruptcy laws, Greece has adopted a more creditor friendly and creditors’ supporting insolvency rules, attempting to solve impasses created by no-cooperative debtors or shareholders in a rehabilitation pre-bankruptcy situation and limiting cases where debtors where making abusive use of protective measures granted to them under the previous regime to disallow or delay creditors rights of enforcement.
According to the new rules, the only insolvency proceedings that a distressed debtor can initiate without the support and consent of creditors is filing for bankruptcy. Thus, the new provisions of bankruptcy law are eliminating the chances where a distressed debtor files for protection by creditors without their support.
Moreover the fact that now creditors representing 60% of claims, at least 40% of which must be of secured creditors, can file a pre-bankruptcy rehabilitation plan agreed between them (without the consent of the debtor) provided that the debtor is already in a status of cessation of payments, proves that under the new rules creditors are considered as “stakeholders” in a distressed debtor and allows to by-pass non-cooperating debtors, to avoid bankruptcy and to preserve the business.
To be noted that following the recent amendments, the issue of non-cooperative shareholders in a rehabilitation plan has been regulated given that the Court considers probable that in case of liquidation the shareholders will not be reimbursed by the proceeds of liquidation, it can appoint a special representative to exercise voting rights of those shareholders of the debtor, who do not co-operate for adopting decisions required for the fulfillment of the terms of the rehabilitation agreement.
The early archetype of insolvency law in Singapore followed the traditional common law pro-creditor bias. In recent times, there has been a gradual trajectory towards creating a climate more conducive to corporate rescue.
The English restructuring and insolvency regime has historically been perceived as a creditor friendly jurisdiction (in particular for senior secured creditors), but is extremely effective for both creditors and debtors. The English courts are the forum of choice for major international financial and other contracts because the system is seen as flexible and commercially-oriented whilst also offering certainty and predicability.
Overseas debtors have increasingly looked to take advantage of the flexibility of the English regime (e.g. by using schemes of arrangement or administrations) and they have found jurisdiction by moving their COMI, amending the governing law of their debt documents, or otherwise.
The courts have been in certain cases particularly accommodating. In Codere, it was found that incorporating an English subsidiary that assumed the debtor group’s liabilities could be sufficient for the court to establish jurisdiction for a scheme of arrangement. The court considered that ‘forum shopping’ in this manner may be justified if there is a compelling case that a scheme will be more favourable than alternative restructuring regimes in foreign jurisdictions.
In general, we believe that the Bankruptcy Law is more friendly to creditors, provided that it is applied properly because the creditors have a more important role in determining or deciding on certain key issues that may affect the proceedings significantly (in both bankruptcy and/or Delay of Payment). Among other things, creditors can vote on whether to approve or reject the composition plan in the creditors’ meeting as explained in No. 7 above; and the creditors may ask the supervisory judges to establish a creditors’ committee if necessary, to work with the receiver and/or the administrator.
However, in recent years, the courts have been more debtor friendly, as 2 (two) large debtors have been able to restructure their loans with their creditors.
Historically, the French restructuring system has always been perceived as a debtor-friendly system. More recently, however, French legislation has rather favoured creditors’ interests and the courts have favoured a number of lender-led restructurings enabling lenders or a group of lenders to take control of the debtor out of the hands of its existing shareholders (mainly financial sponsors). Furthermore, a number of alternative funds have increased their focus on the French market and as such have provided liquidity to French banks willing to sell their claims on the secondary market.
The Order dated 12 March 2014 readjusted the balance of powers between creditors and debtors with for example the possibility for creditors to propose competing plan.
More recently, the law dated 6 August 2015 has introduced a system of shareholder squeeze-out under which shareholders may be forced to sell their shares if they do not consent to share capital increases required to redress the distressed business.
The Israeli legal system cannot be said to be friendlier to either creditors or debtors. That said, in insolvency proceedings, the courts assign much importance to the rights of employees and debenture holders from the public.
The Netherlands is generally perceived as a secured creditor friendly jurisdiction.
Luxembourg is generally perceived as a secured creditor friendly jurisdiction, especially in light of the very wide implementation under Luxembourg law of the Financial Collateral Arrangements Directive.
Belgian insolvency laws provide for a good balance between the debtor and creditor’s interest. We do identify a tendency towards preserving the continuity of the debtor’s activities, combined with an increased accountability of the debtor towards creditors.
Although the law provides adequate protection for both creditor and debtor, when applying it, judges may interpret it in favor of one or the other.
In that sense, I would say that we are currently a debtor friendly jurisdiction that -at the same time- offers creditors the right tools to fight for their rights.
While the U.S. is generally considered a debtor-friendly jurisdiction, fundamental notions of due process underlie the U.S. Bankruptcy Code, ensuring that creditors are sufficiently protected throughout the bankruptcy process. There are many features of the U.S. Bankruptcy Code that make the U.S. a more debtor-friendly than certain foreign jurisdictions, including:
- chapter 11 of the U.S. Bankruptcy Code allows companies to reorganize as going concerns instead of liquidating;
- existing management is generally allowed to continue running the businesses instead of being automatically replaced by a trustee or other third party;
- decisions of debtors in possession are afforded significant deference by bankruptcy courts under the “business judgment standard;”
- the U.S. insolvency regime allows for the impairment of almost all levels of debt, including secured debt; and
- the debtor is granted an exclusivity period of up to 20 months to file and solicit a plan of reorganization under section 1121 of the U.S. Bankruptcy Code, which often gives the debtor significant control over the reorganization process.
The U.S. Bankruptcy Code balances these provisions with safeguards designed to protect creditors. For example, the U.S. Bankruptcy Code requires extensive notice procedures to put all relevant creditors on notice prior to comprising their claims, rejecting their contracts, or taking any other action that may impact their property. Additionally, recent amendments to the U.S. Bankruptcy Code cap the debtor’s ability to continuously extend the exclusive periods to file and solicit a plan of reorganization. By cutting limiting the debtor’s exclusivity periods, creditors are guaranteed an opportunity to direct the outcome of the case if the debtor is unable to timely implement a successful reorganization.
We believe that, starting from 1 January 2016 when a fundamental reform of the Polish bankruptcy and restructuring law took place, Poland is a more debtor friendly jurisdiction than it used to be, principally because:
- new restructuring tools became available for debtors including, in particular, remedial proceedings in which certain legal instruments exist that may significantly weaken the creditors’ position;
- restructuring proceedings are now generally initiated only on a motion of the debtor (prior to the reform, such proceedings could be initiated either on a motion of the debtor or its creditors); and
- currently, the scope of the rights of creditors in restructurings/bankruptcies seems to have become strongly influenced by the extent to which the creditors take a pro-active approach.
We believe that Ireland should generally be regarded as a creditor friendly jurisdiction but one in which the legitimate interests and rights of borrowers and other obligors are also protected.