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
Bankruptcy (fallimento) is the ordinary judicial procedure aimed at liquidating the insolvent debtor's assets and distributing the proceeds pari passu among the creditors in proportion to their respective claims. The application of the equal treatment rule has limited exceptions recognised in law that benefit secured and preferential creditors with statutory priority.
A bankruptcy adjudication means that the debtor is deprived of the power to manage and dispose of its assets and a trustee is appointed to administrate the estate. The trustee acts under the supervision of an insolvency judge and the creditors' committee, whose authorisation is required to carry out certain transactions outside the ordinary course of business.
Since bankruptcy proceedings generally take a very long time (being 7/8 years the average duration), a provision has been recently enacted declaring that liquidation of the debtor's assets must be finalised within two years from the bankruptcy declaration.
Certain kinds of enterprises (banks, insurance companies, co-operatives, public entities) are subject to different insolvency proceedings called compulsory administrative liquidation (liquidazione coatta amministrativa).
According to Spanish Insolvency Act, Insolvency judicial proceedings or Bankruptcy, is the compulsory process in which to handle financial distressed. Spanish Insolvency Act, therefore, only foresees one kind of judicial procedure - the so-called Concurso de Acreedores-. However, under certain circumstances, the proceedings could be managed throughout the abbreviated process envisaged by the Insolvency Act (i.e. when the debtor files together with a pre-packaged plan or a liquidation plan containing a binding offer to purchase an existing business unit , etc.)
All Insolvency proceedings are directed by the commercial court with jurisdiction and managed by a specific body called the “insolvency administrator” (administración concursal).
The declaration of insolvency implies that the directors lose control over the insolvent debtor’s activity, since their powers of management and disposition would be intervened or even exclusively controlled by the insolvency administration. In case the insolvency is voluntary, debtor’s powers to manage and dispose of its business may be under supervision by the insolvency administrator. However, if the insolvency is mandatory, then the debtor is removed from its power over its assets, which are managed by the insolvency administrator. These situations may be modified at any time by the competent court.
The insolvency procedure is divided into different phases which may last (approximately and always depending on the workload of the competent Court), in average:
- Common phase – between 6 to 18 months: it lasts from the insolvency is judicially declared until the insolvency administrator files its definite report.
- Composition phase – between 6 to 12 months: it lasts from the date when the common phase is closed and the composition phase is opened, until the proposal for composition agreement is judicially approved, or rejected by the creditors.
- Liquidation phase – between 12 to 18 months: it lasts from the date when the liquidation phase is initiated, until the conclusion of the insolvency proceedings.
- Categorisation phase – between 3 to 9 months: it lasts between 6 to 9 months. When the liquidation phase starts, the insolvency must be categorised. However, in the event of a composition, the categorisation process will not start when judicial approval of a composition agreement is granted whereby a debt relief lower than a third of the amount of the credits or a grace period not exceeding three years is established for all creditors or for one or several classes, including also those defined in article 94.2 LC (e.g. labour, public, financial and others), unless the composition is breached.
There are two options for court liquidation for insolvent companies: bankruptcy proceedings (hasan) and special liquidation proceedings (tokubetsu-seisan), the latter being more flexible than the former. Special liquidation proceedings allow a director or an officer of the company to be the liquidator to execute the liquidation, while bankruptcy proceedings require a court-appointed trustee to execute the liquidation.
Because of the nature of bankruptcy as liquidation, the main role of a trustee and a liquidator is to realise and distribute the debtor’s assets rather than to continue its business. However, a trustee may operate the debtor’s business to the extent necessary and appropriate to sell the debtor’s assets at maximum value.
Both of a trustee and a liquidator are subject to court supervision. For example, the court may on its own motion or upon a petition by an interested party remove a trustee or a liquidator if it finds that he/she is not administering the debtor’s assets appropriately. In addition, some activities of a trustee or a liquidator are subject to the court’s approval. Such activities include (but are not limited to):
- the transfer of real property rights;
- the borrowing of money;
- the filing of an action; and
- the waiver of a right.
According to court statistics, more than 90% of bankruptcy proceedings are completed within one year and it is rare to take more than two years to complete. No statistics are available for special liquidation proceedings but the period within which to complete them is generally similar to that of bankruptcy proceedings. In 2015, there were 71,533 bankruptcy proceedings (including those for individuals) and 286 special liquidation proceedings initiated.
There are two types of in-court insolvency procedures in Denmark; restructuring and insolvency.
The purpose of restructuring is to obtain an arrangement with the creditors, transfer a business, or a combination or wind down operations in cooperation with the former management.
The purpose of an insolvency procedure is to sell the debtor’s assets with a view to distributing the seller’s assets between the creditors.
• Does management continue to operate the business and / or is the debtor subject to supervision?
In respect of restructuring proceedings, the management continues to operate the business together with a restructuring administrator appointed by the in-solvency court. The management must not make important decisions without the consent of the restructuring administrator.
In certain circumstances the restructuring administrator may take over the management
When the insolvency order has been issued, the management is deregistered and subsequently the trustee takes over the management of the business.
• What roles do the court and other stakeholders play?
In restructuring proceedings, the proposed solution must be presented to the creditors for their approval. If the proposed solution is not accepted by the creditors, insolvency proceedings will be commenced against the debtor.
In insolvency proceedings, the trustee has the full decision-making power and may consequently deal with the assets of the estate without the consent of the creditors.
In respect of restructuring proceedings as well as insolvency proceedings, the insolvency court is the supreme authority and is not to approve transactions but is only to ensure that the administration is in accordance with the Danish Insolvency Act.
• How long does the process usually take to complete?
A restructuring process may take up to 12 months at which time a restructuring proposal is to be voted on. The restructuring administration usually takes 2-6 months.
There is no specific timeframe for the administration of an insolvent estate but it is typically 1-2 year. In case of particularly complicated estates or if legal proceedings are conducted, the administration may take considerably longer.
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
The Mexican insolvency law (Ley de Concursos Mercantiles, the “Insolvency Law”) contemplates a single proceeding for reorganization (concurso mercantil) and bankruptcy (quiebra) (the “Insolvency Proceeding”) with two successive stages:
- Mediation. The first stage, known as the “mediation” stage, is compulsory and is designed to reorganize the insolvent entity (the “Mediation Stage”).
- Bankruptcy. The second stage, known as the “bankruptcy stage”, provides for the bankruptcy and liquidation of the insolvent entity (the “Bankruptcy Stage”).
During Mediation Stage, the directors or managers of the insolvent entity will remain in their respective positions, and the mediator (conciliador, the “Mediator”) will be in charge of supervising the accounting books and all transactions carried out by the insolvent entity, with the goal of maintaining the insolvent entity as an on-going business.
In order to preserve the estate of the insolvent entity, the Mediator may request the insolvency court (the “Insolvency Court”) to (i) remove directors or managers; or (ii) order the insolvent entity to cease operations. During the Bankruptcy Stage, directors or managers of the insolvent entity will be removed and the insolvent entity will be brought under the management of a bankruptcy trustee appointed by the Insolvency Court.
The Mediation Stage has a maximum term of 365 calendar days. If a valid reorganization agreement (the “Reorganization Agreement”) has not been reached upon the conclusion of such term, the insolvent entity will be automatically declared in bankruptcy. The Bankruptcy Stage will end upon the sale of the estate of the insolvent entity and the payment of its obligations up to the amount of its estate, as described in our answer to Question 5 below.
British Virgin Islands
The main insolvency procedure available in the BVI is liquidation. Although the IA contains provisions for administration, these have not yet been brought into force.
The company, a creditor, a member, a supervisor of a creditors’ arrangement in respect of the company, the Financial Services Commission, or the Attorney General may apply to the court for the appointment of a liquidator on the bases that the company is insolvent, that it is just and equitable to appoint a liquidator, or that liquidation is in the public’s interest. The court will generally appoint the liquidator proposed by the applicant, though the company’s creditors may vote to replace the court-appointed liquidator at the first creditors’ meeting. Directors’ powers, functions, and duties cease on the appointment of a liquidator, save to the extent they are permitted by the IA or authorised by the liquidator. Additionally, the members of a company may resolve to put the company into liquidation without the need for an application to court.
Liquidations are conducted by the liquidator, though the liquidator must report to a committee of creditors, except in certain circumstances where the liquidator concludes that there is no real prospect of a distribution. The court exercises a supervisory jurisdiction and it is common for the order appointing the liquidator to require the liquidator to seek the court’s sanction before exercising certain powers such as compromising claims and entering into arrangements with the body of creditors.
The liquidator’s statutory duties are to gather in and preserve the company’s assets, to decide on claims, to make distributions in accordance with the statutory priorities, and to distribute any surplus to the company’s members. At the conclusion of the liquidation, the liquidator will apply to the court for release, and the company will be dissolved.
The BVI courts tend to hear commercial matters quickly and efficiently. It is possible to petition the court for a winding-up order and obtain the appointment of provisional liquidators within 24 to 48 hours, if the matter is particularly urgent. The order will be issued at the time of the hearing unless the decision is reserved. If judgment is reserved, it is typical for a decision to be given within a matter of days if very urgent, or two to three weeks.
In contested liquidations, it is possible to arrange a hearing very quickly if the matter is very urgent and if there would be significant consequences arising for one or more of the parties if the hearing were to be delayed.
In cases where no provisional liquidator is sought, the time between filing the initial application and the first hearing of the petition is generally around three weeks, to permit time for service of the application and advertisement of the hearing in compliance with time requirements.
Where a company is insolvent, there are two forms of liquidation that will be relevant: compulsory liquidation and creditors’ voluntary liquidation. Both are creditor driven processes whereby the liquidator takes over the company’s management.
A liquidator does not need to be a licensed insolvency practitioner nor resident in Bermuda. The liquidator may carry on the business of the company so far as is necessary for its beneficial winding-up, and during such period, will have the power and authority to supervise the conduct of the business on a day-to-day basis.
Compulsory liquidation is conducted under the supervision of the Court. It is initiated by a petition presented to the Court by one of:
- a creditor, including contingent or prospective creditors;
- the company itself (by a directors' resolution);
- the power of the directors themselves to petition for the compulsory winding up of an insolvent company in certain circumstances has been recognised by the Court (In re First Virginia Reinsurance Ltd.  Bda LR 47).
- in certain circumstances, the Registrar of Companies (section 163 Companies Act 1981) or the Supervisor of Insurance (section 35 Insurance Act 1978).
The liquidator of a company in Bermuda is described as a permanent liquidator (in contrast to a provisional liquidator). On appointment, an automatic stay comes into effect staying creditor actions, though secured creditors remain entitled to enforce their security (section 167(4) Companies Act 1981).
Once the liquidator has realised all the company's assets and made distributions to creditors and shareholders, the liquidator must apply for a release from the Court and the company will be dissolved.
Creditor’s voluntary liquidation
A creditor’s voluntary liquidation is controlled by creditors of a company, although somewhat incongruously, it must be initiated by the company's shareholders through a resolution based on the recommendation of the board of directors (section 216 Companies Act 1981). Shareholders of the company approve the liquidation by a simple majority vote (unless the company's bye-laws specifically provide otherwise), after which a creditors' meeting must be held within 24 hours. At that meeting, a majority by value of the creditors present and voting appoint the liquidator and may also appoint a committee of inspection and fix the liquidator's remuneration.
The automatic stay on proceedings being commenced or continued against the company does not apply in a voluntary liquidation. However, the Court can consider a liquidator's application to grant such a stay of creditor action.
At the conclusion of the voluntary liquidation, the liquidator must convene final creditors' and shareholders' meetings. Within seven days of the meetings, the liquidator must notify the Registrar of Companies of the meetings and provide an account of the liquidation
Role of stakeholders
Those with an economic interest in the company will have influence during the process. For both compulsory liquidation and creditor’s voluntary liquidation, the unsecured creditors will therefore play the most significant role. In a voluntary liquidation, creditors can determine the course of the liquidation through their representatives on the committee of inspection.
Length of process
The length of time the process takes varies greatly depending on matters such as the size and complexity of the company and its debts.
The Greek Insolvency Laws provide for the following insolvency proceedings:
- Stricto sensu bankruptcy - liquidation;
- Stricto sensu bankruptcy – restructuring plan (article 107 of the Greek Bankruptcy Code);
- the pre-bankruptcy scheme proceedings of articles 99 106f of the Greek Bankruptcy Code; and
- Special administration proceedings of articles 68 – 77 of the Special Administration Law.
Upon initiation of the bankruptcy proceedings by the competent court, a bankruptcy trustee (syndikos) is appointed the exact date of cessation of payments with respect to the debtor (which may not be set more than two years prior to the date of declaration of the bankruptcy) is determined and the estate of the debtor is sealed. Upon the debtor’s request and at the court’s discretion, an injunction may be granted upon the filing of the bankruptcy petition, in order to protect the debtor from its creditors.
In the interim period between application and proclamation of bankruptcy, the management of the entity remains with the board of directors or company’s administrators which though have to act for the protection of the bankruptcy estate to the benefit of the creditors.
After the initiation of the bankruptcy proceedings the insolvent entity is exclusively administered by the bankruptcy trustee, who is obliged at a later stage to publicly invite the creditors to announce their claims in order for them to be verified by the trustee.
A members’ voluntary winding up commences upon the passing of a special resolution by the members of the company. The company must be in a position to pay its debts in full within 12 months after the commencement of winding up. The directors of the company are required to file a declaration of solvency to the above effect. If this declaration is made without reasonable grounds, there are penal consequences. In a members’ voluntary winding up, the liquidator will be appointed by the company.
Where a company is unable to pay its debts and wishes to be wound up, it may do so by way of a creditors’ voluntary winding up. In addition to the requirement of a members’ resolution to wind up the company, the company must also convene a meeting of its creditors to consider the proposal for a voluntary winding up. The company will appoint a liquidator, subject to any preference the creditors may have as to the choice of liquidator.
From the commencement of winding up, the company shall cease to carry on its business. On the appointment of a liquidator in a members’ voluntary liquidation, all the powers of the directors shall cease except so far as the liquidator or the company in general meeting with the consent of the liquidator approves the continuance thereof. On the appointment of a liquidator in a creditors’’ voluntary liquidation, all the powers of the directors shall cease, except so far as the committee of inspection, or, if there is no such committee, the creditors, approve the continuance thereof.
The following parties can apply to wind up a company compulsorily:
- The company itself;
- A creditor of the company;
- A shareholder of the company;
- A liquidator;
- A judicial manager; or
- Various Ministers on grounds specified under the law.
There are certain grounds upon which a company can be wound up compulsorily. A company’s inability to pay its debts is a common ground for presenting an originating summons for compulsory winding up. A company is deemed to be unable to pay its debts if:
- A creditor having a claim against the company for more than S$10,000 has served a statutory demand requiring payment, and the debt is not paid or secured or compounded to the reasonable satisfaction of the creditor within 3 weeks;
- Execution of a judgment obtained by a creditor against the company remains unsatisfied in part or in whole; or
- It is proved to the Court’s satisfaction that the company is unable to pay its debts.
If the court orders that the company be wound up, the winding up is deemed to have commenced at the time of presentation of the application. Any disposition of the company’s property or any share transfer made after the commencement of the winding up is void unless the court orders otherwise. The appointment of a liquidator in a compulsory winding-up renders the board of directors functus officio, because the powers of the board of directors are assumed by the liquidator.
Part VIIIA of the Companies Act provides for the appointment of a judicial manager by the court upon an application by the company, its directors, or a creditor if the Court is satisfied that the company is unable to pay its debts and that the appointment would be likely to achieve: (a) the survival of the company or the whole or part of its undertaking as a going concern; (b) the approval of a compromise or arrangement between the company and its creditors; or (c) a more advantageous realisation of the company's assets than could be effected on a winding up.
At the hearing of the application, the court has full discretion to grant or dismiss the application or adjourn the hearing and make such interim orders as may be necessary.
Once a judicial management order is made, the board is functus officio. All powers conferred and duties imposed on the directors shall be exercised and performed by the judicial manager.
When a judicial manager is appointed, he has 60 days (or such longer period as the court may allow) to formulate and lay before the creditors of the company at a meeting called for that purpose a statement of his proposals for the achievement of the purposes for which the order was made. Unless discharged earlier or extended by the court, a judicial management order remains in force for 180 days.
Where insolvency cannot be avoided, a company will either file for (or be filed for) administration or liquidation (also known as a winding up).
The key insolvency procedure with a view to company rescue is administration. Similar to the US Chapter 11 regime, a company that files for administration has the protection of a statutory moratorium to allow it to be rescued or reorganised or its assets realised. However, unlike in Chapter 11, management lose control of the company to an administrator (who will be an insolvency practitioner and an officer of the court). The administrator will seek to rescue the company as going concern in the first instance, but if that is not possible, the goal of the administration is to achieve the best possible result for creditors. If the administration has not come to an end within a year, the administration will end automatically unless its term is extended in advance.
“Pre-pack” sales are particularly prevalent in the UK, being processes in which the debtor and its creditors conclude a deal to sell the debtor’s business as a going concern on the day of the administrator’s appointment, thereby minimising the period in which the company is subject to insolvency proceedings.
When there is no reasonable prospect of rescuing a company as a going concern liquidation will be the only option. An administration can also be converted into a liquidation whereby the administrators will wind down the businesses and liquidate the assets.
Under the Bankruptcy Law, the insolvency procedure means bankruptcy proceedings. Bankruptcy is applied for if a distressed company cannot be turned around and the decision is that the best solution is for the company to cease doing business, sell its assets, and distribute the proceeds from the asset sales amongst its creditors. In most cases, a debtor who is declared bankrupt will be ceased to exist as a legal entity. It is also possible that, following to the bankruptcy proceedings, the debtor still exists provided that the requirements under the Bankruptcy Law are met, eg existence of the debtor is proposed by the creditor or the receiver and this proposal is approved by the creditor representing more than 50% of the acknowledged and accepted creditor’s claim. The main purpose of the bankruptcy procedure is to impose a general attachment on all of the the assets of the bankrupt debtor to satisfy the creditors’ claims. A declaration of bankruptcy may be applied for by the debtor, creditor or by a third party. For example, (i) the Attorney General can file a petition for the bankruptcy of any party for the public interest or (ii) the Financial Services Authority may do so if the debtor is a bank or insurance company.
The following are the involvement and roles of the parties during the Bankruptcy Proceedings:
- the bankrupt debtor: the debtor must cooperate fully with the appointed receiver so that the receiver can identify the debtor’s rights and liabilities and in the proceedings, the debtor must be accompanied by an attorney;
- the creditors are required to submit their claims to the receiver for verification and voting rights;
- the receiver is authorized and entitled to manage the debtor assets and must be an independent party, with no conflict of interest vis a vis the bankrupt debtor or its creditors, and act in the best interests of the creditors;
- the supervisory judge: a judge within the Court who will supervise the receiver; and
- the creditors’ committee (not mandatory): if required, the Court has the discretion to appoint a temporary creditors' committee consisting of three individuals selected from the creditors to advise the receiver.
Under the Bankruptcy Law, the Court must rule on the petition for bankruptcy within 60 calendar days of the petition’s submission. The ruling is subject to appeal to the Supreme Court within 8 calendar days, and the Supreme Court must issue its ruling within 60 calendar days. If the Court declares the debtor bankrupt, the Court will appoint a receiver to manage all of the assets of the bankrupt debtor. Upon the issuance of the bankruptcy ruling, the management of the bankrupt’s debtor is no longer entitled to manage (eg transfer) the debtor’s assets.
- Reorganisation proceedings (redressement judiciaire)
When a company is insolvent and its recovery appears possible, its management, any unpaid creditor or the public prosecutor may apply for the opening of a judicial reorganisation.
The court opens a six-month “observation period” (which is renewable up to 12 months and exceptionally up to 18 months upon request of the public prosecutor) during which the debtor will negotiate with its creditors a waiver of debt or rescheduling. During the observation period, a judicial administrator will be in charge of assisting the management of the debtor’s business. The administrator may also be empowered by the court to take over the management and control of the debtor.
At the end of the observation period, the judge will make an order for (a) the continuation of the business through a reorganisation plan which must be adopted by the creditors in the same conditions as for the safeguard; (b) the sale of all or part of the debtor’s assets through a sale plan; or (c) if the latter fails, the progression into a liquidation proceeding.
- Judicial liquidation proceedings
Liquidation is the appropriate remedy when the company is insolvent and its reorganization or rescue appears obviously impossible. It may be initiated by the debtor, any unpaid creditor or the public prosecutor. The purpose of such a proceeding is to liquidate a company by selling it as a whole or each branch of activities or asset one by one. In order to request the court to open an immediate liquidation proceeding, the debtor must show evidence that its recovery is hopeless and obviously impossible. The court may order the immediate liquidation of the debtor’s assets and will appoint a liquidator to replace the debtor in its management and proceed with the sale of the assets (private sale or auction). However, when it seems possible that all or part of the business has the chance to be sold to a third party, then the operation of the company will continue temporarily for up to four months.
The primary legal source regulating a company’s liquidation is the Companies Ordinance.
Liquidation process under Israeli law involves receivership of the company’s assets, consolidation of its debt, and transfer of the company’s rights to the various eligible parties (generally, the company’s creditors, unless there are more assets than obligations, in which case the remaining assets are distributed among the shareholders), after which the company is liquidated and ceases to exist, unless an arrangement enabling the company to continue to exist is reached as part of the liquidation process.
Alongside insolvency procedures, there are also alternate procedures relating to companies in financial distress, including debt arrangements, restructuring and recovery procedures (as set forth primarily in Articles 350 and 351 of the Companies Law, 1999 (the “Companies Law”)). The purpose of these procedures is to help the company recover and continue operating as a going concern (similarly to the procedures set forth in the US “Chapter 11”). These procedures can be used even when a company is not insolvent. Article 350 of the Companies Law provides that the company, a creditor, a shareholder or a liquidator of the company may file a motion requesting the court to convene a meeting of the creditors or shareholders in order to consider a proposal for a settlement or an arrangement. In order to facilitate the restructuring process, the court is authorized to issue a "stay of proceedings" order against the company’s creditors for a up to nine months, and appoint an officer of the court to continue running the company as a "going concern" during this period.
In a case concerning IDB Holdings, the court ruled that when a company becomes insolvent, the creditors can force a debt arrangement scheme on the company, and consent of the board or shareholders of the company is not required. The court held that the creditors are entitled to choose the course of action (liquidation, reorganization, new investor, etc.) that will, in their opinion, maximize the amount that they can recover, except in special cases, where the court will not honor such decision.
In a later case, concerning the Israel Postal Company, in which the creditors of a company that was on the verge of insolvency opened a reorganization process, the court also held that the farther the company was along the "insolvency axis", and the greater the scope of its insolvency, the more the court would be inclined to allow creditors to propose a debt arrangement scheme.
Operating the business:
When a company is in insolvency proceedings, the court appoints an administrator to manage the company. Although the administrator has the power to retain some of the old management team, this does not happen in most cases.
There is no fixed timetable for these procedures, since they depend on the amount of the company's assets, number of creditors, and the availability of the court. Appointing an administrator does not take long, but the length of the insolvency procedure from start to finish, varies from case to case.
There are two main types of insolvency proceedings under Dutch law: bankruptcy proceedings and suspension of payments proceedings. Generally, a bankruptcy is aimed at the liquidation of the assets of the debtor for the benefit of his creditors, whereas a suspension of payments primarily serves to provide the debtor temporary relief against pressing creditors with a view to continuity of his business.
The most important effect of the bankruptcy is that the debtor loses the power to dispose of its assets. Only the trustee can dispose of the assets from then on.
In a suspension of payments, the debtor may no longer administer or dispose of his assets without the cooperation, authorisation or assistance of the administrator.
The court opens the bankruptcy proceedings at the application of the debtor or a creditor. At the time the bankruptcy is declared, a trustee (curator) and a bankruptcy judge, whose main task is to supervise the actions of the trustee, are appointed by the court. Furthermore, the court opens the suspension of payments proceedings at the application of the debtor. When a suspension of payments is granted, the court will also appoint a member of the local bar as administrator, and usually also a bankruptcy judge. In principle, the debtor has no control over who the court appoints as administrator or trustee.
Employees and shareholders have a limited role to play in insolvency procedures. If the insolvent debtor is an employer, employment contracts can be terminated by both the trustee and the employee.
There is no set time frame within which bankruptcy proceedings should be concluded. In practice various factors (e.g. complexity of the bankruptcy, agenda of the trustee) are relevant. Bankruptcy proceedings may therefore in practice last between one and several years. Given that a suspension of payments serves to provide the debtor temporary relief against pressing creditors, a suspension may be granted for a maximum period of 18 months and may be extended without limit at the request of the debtor for successive 18 months periods.
The bankruptcy proceedings (faillite) are the most common proceedings filed against commercial companies in Luxembourg. These proceedings aim at winding-up a company's assets in the best interests of the estate and its creditors.
Once a bankruptcy procedure is opened, the directors/managers are removed from their functions and a bankruptcy receiver is appointed by the court to manage the bankruptcy estate. The receiver is responsible for realising the debtor's assets and distributing the proceeds to the creditors, under the supervision of a supervisory judge (juge-commissaire). Creditors have no control over the procedure and the appointment of the receiver or its actions.
Individual legal actions by privileged and unsecured creditors against the debtor are suspended once the company has been declared bankrupt. Creditors must file a proof of claim with the court, nevertheless, "bankruptcy proof" secured creditors (for example, security receivers/assignees for security purposes under the Financial Collateral Law and mortgagees) can freely take enforcement action regardless of the bankruptcy proceedings.
Bankruptcy proceedings are concluded by a judgment closing the proceedings.
The procedure typically lasts between one and three years but can be significantly longer, depending on the complexity of the case.
At 0:00 hours on the day of the court order opening the bankruptcy, the management and administration powers will be taken over by a bankruptcy trustee. The directors must comply with any request of the bankruptcy court and/or trustee.
The court appoints a judge-commissioner, who will supervise the trustee, approve certain transactions and report to the court. The court usually only intervenes upon request of the trustee (who has very broad powers, and must realize all assets and distribute the proceeds amongst the creditors), e.g. to approve a temporary continuation of the business or decide upon a contested creditor claim.
Depending on the complexity, a bankruptcy procedure usually takes 1-3 years.
Leaving aside the reorganization procedure (in and out-of-court) that will be addressed in question #7, insolvency has only one procedure and can be initiated by the debtor or any of the creditors.
Once insolvency is declared, the debtor ceases in the administration of their business and a liquidator (síndico) is appointed in order to start the liquidation proceedings under the supervision of the court.
The law establishes that the court has a three-month period (that could be extended up to 4 months) to sell all the assets of the debtor and distribute the proceeds to the creditors (in accordance with the rank that will be explained in the next question). In practice, liquidation process may take months, years and even decades, depending on the size of the company.
The U.S. Bankruptcy Code is a federal statute that governs insolvency proceedings in the United States. The U.S. Bankruptcy Code is the preeminent method for restructuring distressed enterprises (both public and private) in the United States.
Chapter 7: Liquidation (Individuals and Corporations). Individuals and corporations may file for chapter 7, which governs liquidations. Upon filing a chapter 7 petition, a corporate debtor’s management and board are displaced, and a trustee is appointed to marshal and liquidate the assets for the benefit of creditors. One of the trustee’s first actions is to file a notice to all creditors, including actual and known potential litigation claimants, alerting them of the chapter 7 filing. Thereafter, the chapter 7 trustee will convene a meeting of creditors, examine the debtor and its assets (including potential claims that it may have), liquidate the debtor’s property, and, ultimately, distribute the proceeds of estate property to holders of claims and interests that are entitled to a recovery. The length of time that it takes to complete a chapter 7 liquidation varies based on the facts and circumstances, and it may take several years based on the nature and scope of the assets of the debtor (such as claims against former employees, officers, directors, counterparties, creditors, and other parties, which claims often take a long period of time to resolve). The length of a chapter 7 liquidation depends on the facts and circumstances of a particular case; an individual with minimal assets and liabilities may receive a discharge in a matter of months; on the other hand, it is not uncommon for it to take years for a trustee to resolve complex causes of action, liquidate hard assets, and reconcile claims in chapter 7 cases of larger corporate debtors.
Chapter 9: Municipalities. Chapter 9 of the U.S. Bankruptcy Code permits certain political subdivisions of states to reorganize like a corporation under chapter 11 of the U.S. Bankruptcy Code (which is described in greater detail below). To file for chapter 9, a municipality (only municipalities, not states or the federal government may file for chapter 9) must be: (a) be authorized to seek protection under state law; (b) be insolvent; (c) have a desire to effect a plan to adjust its debts; (d) have: (i) agreed on a plan with a majority of claims in each class; (ii) negotiated in good faith and failed to obtain such a majority in each class; (e) demonstrated that negotiations are impracticable; or (f) reasonably believed that a creditor may try to obtain an avoidable transfer. Upon filing, the automatic stay protects the municipality from enforcement actions. However, the protections of the automatic stay are substantially broader for a chapter 9 debtor than they are for a chapter 11 debtor. In addition to the stay under section 362, among other things, section 922 applies to actions or proceedings against officers or inhabitants of the municipality, a system that ensures that creditors cannot gain leverage over municipalities by applying pressure to its officials or its residents. The end result of a chapter 9 case is confirmation of a plan of arrangement, which is similar (but not identical) to a plan of reorganization in a chapter 11 case. A bankruptcy court shall confirm a plan if and only if the plan complies with certain chapter 11 confirmation requirements, including, that it has been proposed in good faith and not by any means forbidden by law and does not discriminate unfairly and is fair and equitable; the plan complies with the provisions of chapter 9; the debtor is not legally prohibited from taking any action necessary to carry out plan; and the plan is in the best interests of creditors and is feasible. A notable distinction between a chapter 9 confirmation hearing and one in chapter 11 is that the absolute priority rule has limited application in chapter 9 because there are no shareholders. And, because a municipal debtor cannot liquidate, the best interests test considers whether the plan is a better alternative to creditors than dismissal of the case. Additionally, the bankruptcy court has a much more limited role in reviewing operational issues than it does in a corporate setting such as chapter 11, which is described in further detail below.
Chapter 11: Reorganization (Individuals and Corporations). Chapter 11 of the U.S. Bankruptcy Code governs reorganizations. An individual or a corporate entity is entitled to file for chapter 11. A chapter 11 restructuring is a court-supervised restructuring of a debtor’s business and pre-filing financial obligations. Chapter 11 is focused on reorganization, not liquidation; instead, the debtor generally continues ordinary course business and seeks to emerge with a stronger balance sheet and, where necessary, operational changes enabled by the U.S. Bankruptcy Code, as well. The goal of a chapter 11 restructuring is confirmation of a “plan of reorganization,” which is a court-approved contract that replaces the debtor’s pre-filing obligations with a new set of manageable obligations. During the post-filing period, a corporate debtor’s board and management typically remain in control absent the infrequent appointment of a trustee by the court (either because it is in the best interests of creditors or “for cause,” such as fraud, dishonesty, incompetence, or gross mismanagement. While the debtor’s prepetition management typically stays in control, any action outside of the ordinary course of business is subject to notice to creditors and approval by the court. The length of a chapter 11 restructuring varies based on the complexity of the debtor’s affairs. Upon filing a bankruptcy petition, the debtor has the exclusive right to propose a chapter 11 plan for 120 days and to solicit acceptances of that plan for 180 days. Thereafter, the court may extend the debtor’s exclusive period to file a plan for up to 18 months post-filing and the debtor’s exclusive right to solicit acceptances of the plan for up to 20 months post filing.
Chapter 12: Family Fishermen and Farmers. Chapter 12 is designed for “family farmers” or “family fishermen” with “regular annual income.” Under chapter 12, a debtor proposes a repayment plan to make installments to creditors over three to five years. Generally, the plan must provide for payments over three years unless the court approves a longer period “for cause.” In tailoring bankruptcy law to meet the economic realities of family farming and the family fisherman, chapter 12 eliminates many of the barriers a debtor would face if seeking to reorganize under either chapter 11 or 13 of the U.S. Bankruptcy Code. For example, chapter 12 is more streamlined, less complicated, and less expensive than chapter 11, which is better suited to large corporate reorganizations. In addition, few family farmers or fishermen find chapter 13 to be advantageous because it is designed for wage earners who have smaller debts than those facing family farmers. In chapter 12, the U.S. congress sought to combine the features of the U.S. Bankruptcy Code, which can provide a framework for successful family farmer and fisherman reorganizations.
Chapter 13: Individuals. A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, a debtor proposes a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts. This chapter discusses six aspects of a chapter 13 proceeding: the advantages of choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13 proceeding and plan works, and the special chapter 13 discharge.
Chapter 15: Recognition of Foreign Proceedings. The U.S. has largely adopted the principles of the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency, and enacted a set of procedures for cooperation among U.S. and foreign courts presiding over multiple insolvency proceedings. These procedures, enacted in 2005, are embodied in chapter 15 of the U.S. Bankruptcy Code. Although courts utilized ad hoc protocols and other contractual procedures prior to chapter 15’s enactment, cross-border proceedings now benefit from express statutory authority regarding international recognition of judgments. Chapter 15 is essentially designed to give U.S. judicial access to a foreign debtor (or representative thereof) for the purpose of protecting the foreign debtor’s U.S. assets and providing express statutory authority for the foreign debtor or its representative to administer the foreign debtor’s U.S. assets.
As discussed in more detail below, foreign proceedings can be recognized in the U.S. either as “foreign main proceedings” or “foreign non-main proceedings.” Recognition as a “foreign main proceeding” provides for immediate application of the U.S. Bankruptcy Code’s automatic stay to the foreign debtor’s U.S. assets. Although recognition as a “foreign non-main proceeding” does not, a foreign debtor or its representative can petition the court to impose the automatic stay. Recognition as a “foreign main proceeding” requires demonstration that the foreign debtor’s main insolvency proceeding constitutes an actual “foreign proceeding” as defined in the U.S. Bankruptcy Code and the foreign debtor’s “center of main interests” (“COMI”) is located in the foreign jurisdiction.
Once a foreign proceeding is formally “recognized” under chapter 15, its judgments generally will be enforced unless the parties in interest opposing recognition demonstrate that recognition is “manifestly contrary to the public policy of the United States,” a very demanding standard. Upon recognition: (a) foreign representative has standing and can intervene in U.S. courts; (b) U.S. courts shall grant “comity or cooperation” to foreign representative; and (c) the foreign representative can file involuntary or voluntary bankruptcy petitions. For a foreign main proceeding, U.S. Bankruptcy Code sections 361 and 362 regarding adequate protection and automatic stay automatically apply. For non-main proceedings, representative needs to apply for automatic stay. In addition, the foreign representative can operate business as debtor-in-possession, can sell U.S. assets, and avoid postpetition transfers, with court approval required for activities outside the ordinary course of business. For foreign main and non-main proceedings, court can: (a) grant additional relief requested by representative, including injunctions; (b) allow discovery relating to debtor’s assets and affairs; (c) entrust distribution of U.S. assets to foreign representative, but only if interests of U.S. creditors are protected; and (d) stay execution or right to transfer assets.