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
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.
There are currently no proposals for reform.