What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Restructuring & Insolvency
The insolvency system is too complex and provides debtors with opportunities for the use of delaying tactics. A comprehensive reform of the IBL - capable of coordinating all proceedings set out therein and bringing forth a suitable balance between the interests of the debtor and those of the creditors – is needed.
There is also a timing problem in restructuring and insolvency procedures considering that, on the one hand, distress is often addressed (with the commencement of a procedure) when it is too late and, on the other hand, the procedures have an excessive duration.
Accordingly, a project of comprehensive reform of the IBL (Project Rordorf) has been approved by the Chamber of Deputies and is now subject to the approval of the Senate. Upon approval by the Italian Parliament, the Government will have delegated powers to detail and develop the reform in accordance with the guidelines provided by the Italian Parliament.
The draft reform provides for:
- the introduction of mediation and alert procedures to help debtors identify suitable measures to tackle and resolve a crisis promptly, with advice from insolvency practitioners and without court involvement;
- companies belonging to the same group should be allowed to file a single group petition, without prejudice to the separateness of the assets and liabilities of each company; should the group companies be subject to different proceedings, the relevant competent bodies should constantly cooperate and exchange information;
- several measures should be enacted in order to the remove the obstacles to the adoption of DRA, such as: (i) cram down in the context of DRA should apply not only to financial intermediaries and banks but also to other creditors and (ii) the 60 percent majority of claims will no longer be required for the execution of the DRA to the extent that no protective measures are requested by the debtor and the non-adhering creditors which are not party to the agreement are immediately paid in full.
- several changes should be introduced with regard to the In-court Settlement: (i) only petitions providing for the continuation of business should be admissible; (ii) petitions may also be filed by third parties (with some protective provisions for the debtor) and (iii) the different interim financing provisions currently in existence should be simplified.
Financing in the in-court proceeding is a great barrier that impede to achieve a composition agreement and the most likely scenario is liquidation.
Authors criticizes that public creditors (social security or tax claims) should take part also of the sacrifice to refinance a company. Nowadays, private creditors are the only ones entering into refinancing agreements, public credits are not crammed-down and no possibility of write off or any other measure is usually adopted by public creditors.
Better raking or priority to new money financings is another proposal to achieve more successful out-of courts restructuring process.
First, in Japan, restructuring plans in out-of-court workouts must be approved by all creditors, and this rule sometimes makes it difficult to achieve successful restructuring plans. Therefore, some practitioners and scholars have proposed to change this rule in several ways, through new legislation or amendments to existing laws.
Second, if the restructuring plan is not approved by the creditors, the priority of new bank loans in out-of-court workouts cannot be confirmed and is subject to the court’s approval thereafter during restructuring or insolvency proceedings. This sometimes makes it difficult for debtors without enough collateral to obtain new bank loans. Therefore, there have been discussions to change this rule as well so that court approval would not be required.
The greatest barriers to successful in-court restructuring is funding and speed because the appointed restructuring administrator and the appointed restructuring accountant must not have advised the company before. Such persons must also quickly familiarize themselves with the company’s affairs and submit statements and restructuring plans to the creditors.
This results in costly administration even in small-scale restructurings.
In addition, there are limited possibilities of obtaining funding for employees’ salaries during an in-court restructuring.
In insolvencies there is often a conflict between company chargeholders which hold a charge on the majority of the company’s assets and the financial obligations that to a buyer of a company mean that the employees are entitled to have their employment transferred to a buyer of the business. This may lead to inexpedient termination of employees because it is not possible to set off the employee obligations transferred against the purchase price of the charged assets.
Transfers prior to an in-court restructuring or insolvency come with substantial liability for the management and advisers and it is subsequently often alluring to the management to have insolvency proceedings commenced against the business than to transfer it prior to insolvency.
The Danish Bankruptcy Council under the auspices of the Danish Ministry of Justice has issued a report on revision of the rules on employees’ legal status during insolvency proceedings. If the proposed rules are implemented, this will give a wider scope for handling employees during a restructuring and transfer of insolvent businesses.
The legislative work based on the report has been suspended for an indefinite period.
Perhaps the greatest barrier to efficient and effective restructurings in Australia is its severe insolvent trading laws. The prohibition on directors from incurring a debt where the company is (or there are reasonable grounds to suspect it is likely to become) insolvent and the possible application of personal liability, is a significant impediment to implementing a corporate reorganisation or turnaround. The application of this duty shifts the focus on company directors from trying to manage business distress to managing their own risk and exposure to personal liability.
Other barriers to efficient and effective restructurings and insolvencies include:
- ipso facto clauses in contracts which trigger termination rights on counterparties following the appointment of an insolvency professional. This can cause a company irreparable harm particularly in the circumstances of in voluntary administration where a potential restructure could save the business;
- the statutory duties on receivers and liquidators can render many nervous when considering ‘pre-pack’ asset sale. Pre-packs tend to be used only in limited circumstances, such as where there are limited alternative sale options available to the receiver or liquidator and there is evidence that a delay in sale may be fatal to the underlying business or where a market testing process was conducted prior to appointment.
Australian insolvency law reform has been the subject of much discussion and debate for a long time and some steps have been taken towards implementing change. For example, the Insolvency Law Reform Act 2016 (Cth) proposes major changes to Australia’s corporate regime insofar as it relates to external administrations, by creating a set of common rules to reduce cost, increase efficiency and stimulate competition.
It is anticipated that further reform will follow to provide for:
- the introduction of a ‘safe harbour’ rule protecting directors from personal liability for insolvent trading following the appointment of a restructuring advisor to develop a turnaround plan for a distressed company;
- the making of ipso facto clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure;
- amendments that allow for pre-packaged sales; and
- the introduction of a voluntary administration style moratorium on creditor enforcement during the formation of schemes of arrangement to allow a distressed company the opportunity to restructure without the threat of possible creditor action.
As noted in section 7 above, the present uncertainty regarding the ability of the directors of a Cayman Islands company to access the provisional liquidation regime for the purpose of effecting a restructuring without has been the subject of criticism from practitioners.
However, it is anticipated that section 94 of the Companies Law will shortly be amended, such that directors of a Cayman Islands incorporated company will have the ability petition for the company's winding up and apply for the appointment of provisional liquidators without the sanction of a resolution passed at a general meeting. This legislative reform will increase the ability of a company to restructure its debts under the supervision of provisional liquidators with the benefit of a moratorium on creditor action.
A silent (non-public) moratorium is currently only available for four months. This is a rather short window to achieve a consensual restructuring. It is proposed to extend the maximum duration of a silent moratorium to eight months in the context of the more general amendment to Swiss corporate law referred to above (cf. section 3).
For out-of-court restructurings, there has been much debate (and uncertainty) for how long a debtor may attempt to restructure in the state of over-indebtedness on the basis of a viable restructuring plan. This is an uncomfortable situation for the members of the highest executive body of a Swiss corporate in view of the daunting liability risks (cf. section 11). It is currently proposed to set the relevant period to ninety days and to clarify the starting point.
Finally, some scholars hold that the mandatory equal treatment of the disparate and large group of third class creditors (cf. section 5) creates a meaningful barrier to successful restructurings in Switzerland as no tailored cram-down is available. There is some truth to this but we consider it unrealistic that this fundamental principle of Swiss insolvency laws will be changed in the near future. Also, experience shows that a further distinction may be achieved contractually (although, of course, without the cram-down feature).
There is no formal framework for preventive out-of-court restructuring procedures encouraging the parties to restructure out of formal insolvency procedures. To the contrary, in out-of-court restructurings, not only fresh money does not enjoy by law any preferential treatment if the restructuring fails, but lenders face a substantial risk of lenders’ liability and of their loan and collateral agreements being considered as invalid. In order to mitigate such risks, well advised lenders commission a restructuring opinion (in general from a major accountancy firm) which confirms, to the satisfaction of the lenders’ legal counsel, that the restructuring concept is conclusive and has a reasonable chance to succeed. This is time-consuming and expensive.
Loans granted prior the finalization of the restructuring opinion are only exempt from giving rise to lenders’ liability if they satisfy the strict requirements for bridge loans, namely are only granted for the time period between the commissioning of the restructuring report and its finalization. According to a recent judgment of the Berlin court of appeal, which is heavily criticized by insolvency practitioners, this period must not exceed three weeks. This is far too short in complex cases.
The proposition of the European Commission for preventive restructuring frameworks of 22 November 2016 contains rules which would remove these obstacles.
A major impediment to financial restructurings has recently been created by the decision of the Federal Tax Court of 28 November 2016 which declared unlawful the Ministry of Finance’s ‘restructuring decree’, which permitted under certain conditions to waive the tax claim resulting from the cancellation of debt income.
The greatest challenges to effective restructurings lie within Mexico’s judiciary system. The workload of Mexican courts is huge.
Given the specialization that insolvency cases require, we understand there are some preliminary discussions about appointing judges that would only hear insolvency cases (currently general federal courts hear insolvency cases), which would be ideal.
British Virgin Islands
There is no route by which a moratorium can be triggered for the benefit of companies in distress. This means that in some situations where the rescue of a company may be possible, an uncooperative creditor or member could upset the process of negotiating a sensible plan or scheme of arrangement, or creditors’ arrangement, by bringing an application for the appointment of a liquidator. In addition, the BVI has not developed the role of the provisional liquidator as a route by which a company may be restructured. It is not known whether or not there are any proposals to remedy these shortcomings. Finally, the BVI has not brought provisions enacting the UNCITRAL Model Law into force, so the routes by which a validly appointed foreign office-holder can seek recognition and support are limited.
Bermuda is a creditor friendly jurisdiction and restructurings and insolvencies can generally be conducted efficiently and effectively.
The process of restructuring provisional liquidation will benefit from greater certainty as more cases are decided and the parameters of the procedure become more defined.
As Bermuda companies so often form part of larger corporate structures, one of the primary barriers to efficient restructurings is coordinating a restructuring/insolvency with processes in other jurisdictions. As noted above, the Courts have demonstrated a willingness to be flexible when dealing with cross-border restructurings and insolvencies, in particular in relation to recognizing and assisting foreign processes, but case law in this area is still developing.
There are currently no proposals for reform.
With the 2015 and 2016 reforms of the GCC and the GIC, Greece has opted to modernize the framework of both enforcement and insolvency rules, battle the inefficiencies of the old systems and allow Greek enterprises (in their vast majority SMSs) to restructure their long lasting debts and continue to operate to the benefit of the national economy
Time, cost and lack of experience are still the main barriers to an effective insolvency and challenges that the new laws are to battle.
Although the recent amendments of the enforcement and bankruptcy proceedings have aimed to condense relevant deadlines for actions or decisions of the Courts it cannot be certain on whether the deadlines prescribed by law will be respected in practice given the overload of the Greek courts’ dockets. The initiative which is currently under examination and consultation of a new law allowing out-of court settlement and rehabilitation plans, limiting the involvement of the courts in those proceedings might significantly reduce the time element of those procedures and reduce the cost of multiple hearings.
In addition, the modernization of the public administration coupled a reformation of the penal law as regards criminal liability of public servants and officers will add value to above reforms.
Singapore is currently ranked 29th out of 190 economies for Resolving Insolvency, according to the findings of Word Bank’s annual “Doing Business” 2017 report. This study measures the efficiency of insolvency frameworks around the world. The indicators include the recovery rate and whether each economy has adopted internationally recognised good practices in the area of insolvency.
Also, a recent 2015 global study by South Square and Grant Thornton showed that Singapore was rated very highly as an effective jurisdiction for cross-border by insolvency practitioners who had direct experience in restructuring work here. However, practitioners with no direct experience rated Singapore less highly. There have been subsequent recommendations seeking to close the perception gap.
In 2011, the Singapore Government appointed an Insolvency Law Review Committee to review current insolvency legislation and to make recommendations. In 2013, the Committee submitted its recommendations to the Singapore Government.
Subsequently in the last quarter of 2016, the Singapore Ministry of Law held a public consultation on the proposed changes to the Singapore Companies Act to enhance Singapore's effectiveness as an international hub for debt restructuring. These game-changing amendments are aimed at modernising and significantly overhauling Singapore’s restructuring and insolvency regime. The amendments include the adoption of the UNCITRAL Model Law and elements of US Chapter 11. In March 2017, the Singapore Government passed the Companies (Amendment) Bill 13/2017. It is envisaged that these amendments will come into effect by the second quarter of 2017.
It remains to be seen what the impact of the UK’s departure from the EU (commonly known as ‘Brexit’) will be on the English restructuring and insolvency regime.
As a member of the EU, the UK has had the benefit of the EU Insolvency Regulation, which, as noted above, gives primacy to insolvency proceedings opened in the Member State of the debtor’s COMI. Once the UK leaves the EU (and without any agreement to the contrary) the Insolvency Regulation will no longer apply to the UK. This could be a considerable blow for the effectiveness of an English insolvency processes for EU debtors in the event that EU-wide recognition is lost.
The loss of the Insolvency Regulation will be less significant in the case of schemes of arrangement, which are a company law (rather than insolvency) tool. If the Judgments Regulation falls away, it may actually be easier to persuade an English court that it has jurisdiction for a foreign debtor if the debt is governed by English law. It is further worth noting that we have recently seen a series of important cases concerning the use of schemes of arrangement by overseas companies to restructure, which have either been challenged or received heightened scrutiny by the court, for example, VGG, Stemcor, Codere and India Kiat.
Pre-packs have also recently undergone increased scrutiny, especially where such sales are to a connected party such as in a ‘phoenix’ transaction, and a voluntary assessment system – the ‘pre-pack pool’ – has been set up with the aim of increasing transparency and credibility of such transactions.
In our experience, the greatest barrier to efficient and effective insolvency proceedings in Indonesia is the uncertain length of time needed to complete the liquidation of the assets. The timing issue is not within the bankruptcy proceedings since the Bankruptcy Law sets a time limit for the panel of judges to hand down the final decision on the bankruptcy petition (60 days). It arises after the bankrupcty declaration as there is no time limit under the law for the liquidation of the assets to be completed.
The liquidation of the assets can in some cases be difficult for the receivers if it is related to land. Most debtors are reluctant to surrender a land certificate to the receiver, so the receiver has to ask the land office for a land certificate. However, the land office often rejects the receiver’s request, because a receiver is not one of the parties entitled to apply for a replacement land certificate under Government Regulation No. 24 of 1997 on Land Registration.
Recently, the Supreme Court has been holding Forum Group Discussions (FGD) to seek solutions to barriers in proceedings under the Bankruptcy Law. The FGDs involve academics from several universities, bankruptcy practitioners/stakeholders (eg receivers, lawyers), law students, and others. One of the most discussed issues in the FGDs is the lengthy asset liquidation process until the debt can finally be settled, which for certain receivers, means extra costs.
Squeeze out of shareholders through a forced sale of their shares or a forced dilution of their equity stake is viewed as essential by most practitioners to enforce a debt-equity-swap against dissenting shareholders when the equity has lost all value and conversion of debt is the only solution to preserve the business as a going concern.
The law dated 6 August 2015 sought to address this issue and provided for a limited squeeze-out of the shareholders in reorganization proceedings.
However, several authors emphasize that such reform is not audacious enough and think that the conditions to such squeeze-out are so restrictive that it will only be enforced exceptionally. They are in favour of a reform similar to the reform which was recently adopted in Germany, which provides for the possibility to evict shareholders on the sole and sufficient condition that the restructuring plan, accepted by the majority of creditors’ committees, offer them better position than the position they would have had in a liquidation proceeding.
The court has very broad discretion, and this creates uncertainty about the outcome of the process. There is an initiative to amend the insolvency legislation. Such amendment is also intended to create more certainty with regard to the point in time in which a company will be deemed insolvent, and with regard to the outcome of an insolvency process.
In the context of the legislative programme Reassessment Insolvency Law, various important developments can be identified. This concerns (amongst others) the following legislative proposals: Corporate Continuity Act I and II.
The Corporate Continuity Act I (CCA I) seeks to facilitate a structural and effective winding up of bankruptcies and/or aid the restart of commercially viable parts of the debtor’s business after bankruptcy. It allows the debtor to prepare and negotiate the transaction prior to bankruptcy, i.e. “precook” it as much as possible with the involvement of an intended trustee in a structured manner. It should be noted that as a result of the recent (negative) opinion of the Advocate General Mengozzi regarding the Estro pre-packed bankruptcy the CCA I might not see the light of day, if the European Court of Justice follows the opinion.
With respect to the Corporate Continuity Act II (influenced by the English scheme of arrangement and the US Chapter 11; CCA II), the possibility is introduced in the Netherlands for companies to offer a composition outside an insolvency proceeding. In this respect, the legislator intends improve the process regarding restructuring of problematic debts at companies outside of insolvency by making the process more flexible, faster and with minimal formalities, costs and uncertainties. Importantly, the CCA II will introduce the possibility to cram down secured creditors, which is currently missing from the Dutch restructuring and insolvency regime.
Rescue proceedings in Luxembourg are not very much used as they are considered too costly and burdensome.
On 1 February 2013, the government filed a draft bill No. 6539 on the preservation of business and modernisation of bankruptcy law. This draft bill includes various preventive, repressive, restorative and social provisions which aim to reduce, or at least stabilise, the recent increase of bankruptcies in Luxembourg.
The draft bill was heavily criticised by the Council of State (Conseil d'Etat) as lacking efficient processes, providing for complex procedures and creating new duties on court officers, raising questions regarding feasibility and practicability. The bill is currently being redrafted.
In all, the legal framework of Belgian insolvency provides for a well-balanced and efficient system. On 20 April 2017, a draft bill on the reform of the existing Belgian insolvency and restructuring law was introduced in the Belgian Parliament. The draft bill seeks to recodify the relevant laws into one single code, and introduces some modernisation, e.g:
- the scope of application of the insolvency and restructuring proceedings is broadened;
- the introduction of the pre-pack bankruptcy that allows a debtor to silently prepare for the actual bankruptcy (together with a (pre-)trustee);
- the introduction of an electronic file/procedure (the Central Registry of Solvency, www.regsol.be, was launched on 1 April 2017); and
- the introduction of a set of coherent rules with respect to director’s liability.
During the coming months, the draft bill will undergo the usual parliamentary procedure.
I think that we have efficient and effective restructuring and insolvencies. However, there are many things to improve.
Finding the right balance between the interests of the debtor, their employees and the creditors is one of them. I personally do not believe in extreme positions (e.g. the law in favor of the debtor or in favor of the creditor). On the contrary, I believe in adequate protection for every stakeholder, which is something doable. Bankruptcy does not have to be win-lose. I think that win-win solutions are feasible and the law gives the tools to find them.
Another big issue in our legislation is that there are no consequences for shareholders in case of bankruptcy unless fraud is discovered. Looking into this subject will probable also help to improve our legal framework.
As the U.S. restructuring industry has matured, sophisticated investors and professionals have developed strategies that maximize returns and professional fees, sometimes to the detriment of an efficient resolution of the restructuring. Sophisticated investors and restructuring professionals on all sides are able to pursue protracted and expensive litigation in order to extract “hold-up” value for creditors and generate large fees for professionals. Such investors typically engage in large chapter 11 cases by forming ad hoc committees with similarly interested investors, or seeking the appointment of an official committee, whose legal fees are satisfied by the debtor’s estate. By successfully forming committees, investors are able to challenge confirmation of a plan, challenge the debtor’s ability to sell substantially all of its assets to third parties, and in certain circumstances pursue direct and indirect litigation to prolong the cases and create uncertainty of outcome. For ad hoc groups or individual creditors, the desire to engage in protracted litigation to extract additional value is tempered by the cost of such litigation and the risk of potentially losing. For official committees, however, there is less fee risk as official committee fees are borne by the estate. To combat this, Congress would need to implement a mechanism that penalizes the groups engaging in frivolous litigation and/or jeopardizes the ability of official committees to recover their fees from the estate.
Market players waited with great interest to see how the new restructuring and bankruptcy regime, which came into effect on 1 January 2016, would work in practice. Many were of the view that management teams of some companies might seek to use the new hybrid insolvency/restructuring remedial proceedings tool for business restructuring to reach agreement with creditors after selling unnecessary assets, “clean up” contracts which do not fit with the business restructuring or adjust employment levels to current needs, instead of declaring bankruptcy. Also, the practicalities of “pre-packaged liquidation sale” are being examined with great attention by distressed assets-oriented funds.
However, in practice, there are still various barriers to efficient and effective restructurings and insolvencies, including the lack of experienced judges and the shortage of bankruptcy/restructuring officers with an adequate understanding of business. Further, a modern IT platform on which the details of restructurings/insolvencies could be widely disclosed to the public has not yet been set up.
In our view, broadly speaking, Irish law provides for effective and efficient restructuring solutions for most corporate insolvency scenarios. We find, however, that a key issue that often arises, and which can act as a barrier to an efficient process, is the availability of DIP financing. There is a lack of a structured and formal DIP financing arrangement applicable equally to all forms of insolvency proceedings. Currently Irish company law only allows for partial priority status for DIP finance in an examinership, and this can make it more difficult to raise the necessary cashflow funding during the period of the moratorium. We are not aware of any proposals to reform this aspect of Irish insolvency law.
Although the recent amendment of the New Hungarian Civil Code dated 1 July 2016 seemed to settle the issue of the validity of fiduciary collateral arrangements (within the meaning of the amendment they became valid in B2B relationships – please refer to Question 1), the Insolvency Act has only been amended in this regard a year later, on 1 July 2017, raising questions concerning the enforceability of fiduciary collaterals in insolvency proceedings. Within the meaning of the long-awaited amendment of the Insolvency Act, recognition of fiduciary collaterals in bankruptcy proceedings and liquidation proceedings became apparent (e.g. fiduciary collateral holders may qualify as secured creditors; in liquidation proceedings fiduciary collateral holders may enforce their claims according to the rules applicable to lien holders etc.), however, as a consequence of the amendment of the Civil Code it became also necessary to adjust the relevant laws and regulations pertaining to the Collateral Register. The amendment of Act CCXXI of 2013 on the Collateral Register and of the Decree No. 18/2014. (III. 13.) of the Minister of Public Administration and Justice on the Detailed Rules of the Collateral Register is currently in the pipeline.