What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Restructuring & Insolvency
There are 3 formal insolvency procedures that operate in:
- Voluntary administration
- Liquidation (including provisional liquidation)
Each of the formal processes, other than receivership, has a moratorium in place to prevent unsecured creditors (including shareholders) from enforcing their rights. Whilst no such moratorium exists in a receivership, to the extent an unsecured creditor takes action to enforce its rights, it has recourse to the assets which are secured and in the control of the receivers.
Voluntary administration is a creditor driven process, and whilst designed to be short and temporary, can last for months if not years in complex situations.
Upon appointment, the administrator takes control of the company’s business, affairs and property. The administrator has extensive powers and is entitled to perform any function and exercise any power the company or its officers would otherwise perform. In performing this function, the administrator will be acting as the company’s agent. Administrators are granted a right of indemnity out of the company’s property (other than retention of title property that is subject to a perfected PPSA security interest).
The purpose of the voluntary administration process (outlined in Part 5.3A of the Corporations Act) is to either:
(a) maximise the chances of the company, or as much as possible of its business, continuing into existence; or
(b) result in a better return for the company’s creditors and members than would result from an immediate winding up, if it is not possible for the company or its business to continue to exist.
In practice, administrators tend to recommend or adopt one of three strategies; a simple sale of business and assets, a move to liquidation or a recapitalisation plan (effected through a deed of company arrangement). The latter two strategies require the approval of 50% in number and 50% in value of creditors.
In Australia, a company may be wound up:
- if solvent, voluntarily by its members (members’ voluntary liquidation); or
- if insolvent, by its creditors (creditors’ voluntary liquidation) or compulsory order of the court (provisional and compulsory liquidation).
Upon appointment, the liquidator will control the affairs of the company and has the power to realise and distribute assets to the exclusion of the directors and shareholders. A provisional liquidator will also control the affairs of the company to the exclusion of the directors and shareholders but cannot realise and distribute assets.
Court involvement is required in a compulsory winding up, where it will appoint the liquidator. It will also consider applications by the liquidator, pursuant to section 480 of the Corporations Act for an order that the liquidator be released and that the company be deregistered after the liquidator has realised all of the property of the company or so much of that property as can in his or her opinion be realised without needlessly protracting the winding up, has distributed a final dividend (if any) to the creditors, has adjusted the rights of the contributories among themselves and made a final return (if any) to the contributories The court must be satisfied that no creditor will be adversely affected by the order.
The length of a liquidation process will vary depending on the company and how complex the business and affairs of the company are. Other factors that will affect the length of the liquidation include whether litigation is necessary to recover funds/assets belonging to the company. For a small company, with uncomplicated affairs, the winding up can usually be completed between 12 to 18 months. Where the company has more complicated affairs and is the subject of litigation, the winding up can take some time.
Upon the appointment of a receiver or receiver and manager the control of the company’s business and affairs is taken over by the receiver. The receiver will also take immediate possession of the company’s assets. Directors of the company maintain their statutory duties during this period and are obliged to assist the receiver if need be, but only have such powers as a receiver allows them to have.
Receivership is a process driven by secured creditors. Most commonly, receivers are appointed pursuant to the relevant security documents granted in favour of the secured creditor when a company has defaulted and the security has become enforceable. Although it is uncommon, a receiver can also be appointed pursuant to an application to the court. Court appointments are normally done to preserve the assets of the company in circumstances where it may not be possible to otherwise trigger a formal insolvency process.
Like liquidation, the length of the receivership process is uncertain. A receivership concludes when the secured assets are realised and the secured creditors are repaid (either in full or to the fullest extent possible). When realising assets, receivers are under a statutory obligation to obtain ‘market value’ or, in the absence of a market, the best price obtainable in the circumstances under section 420A of the Corporations Act. The process will depend on the nature and size of the assets to be realised and the relevant market in which they are to be sold.
Insolvency proceedings in the Cayman Islands are generally subject to the supervision of the Court. The main processes are as follows:
- Liquidation (Official and Voluntary);
- Provisional Liquidation (discussed at section 7 below); or
- Scheme of arrangement (discussed at section 7 below). (Although not an insolvency proceeding per se, schemes may be used within or outside an insolvency proceeding for the purpose of achieving a compromise with creditors or shareholders.)
A company is placed into official liquidation upon the making of a court order for the appointment of liquidators. Official liquidators will act as officers of the Court and their primary duty will be to collect in the company's assets and distribute them pari passu to the company's creditors in accordance with the statutory waterfall of payments, with any surplus assets available for distribution to the company's shareholders.
The powers of directors will cease upon the appointment of official liquidators, who will control the company's affairs, subject to the court's supervision.
On the making of a winding-up order, an automatic stay is imposed prohibiting any suit, action or other proceeding from being proceeded with or commenced against the company without the leave of the Court and any rights of action against the company are converted into claims in the liquidation proceedings. Notwithstanding the making of a winding up order, a secured creditor is not prohibited from enforcing any valid security interest.
The length of the liquidation process varies on a case by case basis and will largely depend on the nature and complexity of the company's business and the issues required to be dealt with in order to allow a liquidator to wind up a company's affairs. There is no timeframe within in which a liquidation must be completed.
Although not technically an insolvency procedure, the Companies Law also provides a mechanism by which a company incorporated in the Cayman Islands may be wound up voluntarily by an ordinary resolution of its members if it is unable to pay its debts as they fall due.
The voluntary liquidator must apply to the Court for an order bringing the voluntary liquidation under the Court's supervision unless within 28 days of the commencement of the liquidation, the directors sign a declaration that the company will be able to pay its debts in full (with interest) within a period not exceeding 12 months after the commencement of the liquidation. If a supervision order is made, the liquidation will thereafter proceed in the same manner as an official liquidation.
There are two main types of formal insolvency and restructuring proceedings in Switzerland: bankruptcy (i.e., liquidation) proceedings (Konkursverfahren) and composition proceedings (Nachlassverfahren).
In bankruptcy proceedings, all business activities of the insolvent debtor are generally discontinued and the management can no longer validly act on behalf of such debtor. All acts necessary in the context of the bankruptcy proceedings are subsequently carried out by the competent bankruptcy authorities and the receiver in bankruptcy. In contrast, an insolvent debtor may generally continue its business in the context of composition proceedings. While the executive bodies continue to be in charge of business operations, the insolvent debtor is typically placed under supervision by an administrator who needs to approve certain transactions and can issue instructions of both general and specific nature. The court can further limit the management rights of the insolvent debtor.
The opening of both proceedings must be ordered by the court. The court's further involvement in bankruptcy proceedings is generally limited whereas its role is more prominent in composition proceedings where a number of actions and procedural steps must be approved or granted by the court. Creditors benefit from various rights in both types of proceedings, including inspection rights, rights to challenge certain acts of the insolvency practitioner and participation rights at court hearings.
The duration of insolvency proceedings largely depends on the complexity of the case. Composition moratoria which are terminated due to a successful restructuring will typically take considerably less time (anywhere between a few months and two years) than bankruptcy proceedings in relation to large companies which involve numerous jurisdictions and entail a variety of complex legal issues (which may easily last up to five years or longer).
Where a debtor is over-indebted, restructuring may also be pursued by way of a corporate moratorium or postponement of bankruptcy (Konkursaufschub) which will also have to be granted by a court. An administrator may be appointed by the court but existing executive bodies generally remain in control of the management of the debtor. The statutory framework for a postponement of bankruptcy is fragmentary. In view of inherent uncertainties, it is not used very often in the German speaking part of Switzerland to restructure corporate debtors. The postponement of bankruptcy is proposed of being abolished within the context of the more general revision of Swiss corporate law referred to under section 3 above.
German insolvency law knows only a single, uniform procedure (Einheitsverfahren), so that when proceedings are commenced their result (restructuring or liquidation) is open. There are, however, two procedural phases (see below) and certain variations available designed to facilitate restructurings (see question 7).
Preliminary insolvency proceedings
The petition itself does not commence insolvency proceedings. Preliminary insolvency proceedings are commenced by court order, pursuant to the petition by the debtor or one of its creditors, to enable the insolvency court to gather all the information required to determine whether the prerequisites for the opening of insolvency proceedings are met. It may take any measures necessary to protect the creditors against any detrimental changes with regard to the debtor's assets until a decision with respect to the petition has been made. Those measures usually include the appointment of a preliminary administrator (vorläufiger Insolvenzverwalter), an order preventing the debtor from transferring assets and/or stipulating that transfers are only effective with the consent of the preliminary administrator.
The court generally allows the preliminary administrator four to eight weeks to submit a written report, including (i) a high level description of the company and its activities, (ii) a statement as to whether an insolvency event has occurred, (iii) a statement as to whether the company can be restructured as a going concern or whether it should be liquidated and (iv) a statement as to whether there are sufficient funds to cover the cost of the insolvency proceeding. In practice, the preliminary administrator is responsible for running the business as a going concern and not only establishing whether or not the company can be restructured but also laying the groundwork for any possible restructuring. He or she needs to co-operate with the managing director who regularly remains in charge, both regularly form a kind of a tandem.
Preliminary proceedings generally take up to three months because the preliminary insolvency administrator will often utilise the funding provided by the State to cover the employees’ wages during a three month period preceding the opening of insolvency proceedings to increase the chances of rescuing the company’s business. The preliminary proceedings end upon the issue of the court order opening (standard) insolvency proceedings.
Standard Insolvency Proceedings (liquidation)
Once insolvency proceedings are opened, the court appoints an insolvency administrator who normally will be the same person as the preliminary administrator. The authority to manage and dispose of the estate’s assets becomes exclusively vested in the administrator (Sec. 80 Insolvency Code). Dispositions made by the debtor’s management after the opening of proceedings are void.
The creditors have significant influence. Their assembly or committee (if appointed) is vested with important rights, including the approval of (i) the appointment of the administrator and (ii) the sale of the business as a whole, of significant assets or shareholdings belonging to the estate.
The court is not permitted to direct the administrator in the execution of his duties and does not approve sales or other transactions.
The order opening insolvency proceedings will include the date for the first creditors’ assembly, usually six to eight weeks thereafter. In the preliminary proceedings, it may already have been determined that the company cannot survive as a going concern. If the first creditors’ assembly agrees that this course should be pursued, the insolvency administrator liquidates the company’s assets and, usually after a period of several years, sets a date with the court for the final hearing, following which the unsecured creditors receive a dividend of the liquidation proceeds.
The following restructuring procedures (see question 7):
- Self-administration Proceedings
- Protective Shield Proceedings (Schutzschirmverfahren)
- Insolvency Plan