What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Restructuring & Insolvency
Under Hungarian law, bankruptcy proceedings can be considered as the sole regulated restructuring procedure. Sui generis rescue procedures are not expressly regulated. However, each of the two insolvency proceedings, bankruptcy and liquidation, offers the debtor a chance of survival trough the conclusion of a debt restructuring agreement (composition agreement) with the creditors; in line with one of the main objectives of Hungary’s insolvency law: to reverse the company’s financial position to one of solvency if possible.
Debt restructuring in bankruptcy proceedings
Debt restructuring means the debtor’s agreement with the creditors laying down the conditions for debt settlement. In particular, this means: (i) any allowances and payment facilities relating to the debt; (ii) the remission or assumption of certain claims; (iii) the receipt of shares in the debtor company in exchange for a debt; (iv) guarantees for the satisfaction of claims and other similar securities; (v) the approval of the debtor’s programme for restructuring and for cutting losses; (vi) and all other actions deemed necessary to restore or preserve the debtor’s solvency, including the term of the debt restructuring agreement and the procedures to monitor the implementation of the debt restructuring arrangements.
A debt restructuring agreement may be concluded if the debtor is able to secure in all creditor groups (i.e. in groups of secured and unsecured creditors; see the definition of "secured creditors" below) a majority of votes in favour of the agreement. The debt restructuring agreement shall be concluded under the principle of good faith, and it may not contain provisions and conditions which are clearly and manifestly unfavourable or unreasonable from the point of view of all or certain groups of creditors.
A debt restructuring arrangement applies to all creditors who registered their claims within 30 days after the start of the bankruptcy proceedings, even if those creditors are non-consenting creditors who are otherwise entitled to participate in the debt restructuring agreement, and even if those creditors have failed to take part in the conclusion of the debt restructuring agreement.
Creditors who fail to register their claims within the 30-day deadline are not entitled to participate in the debt restructuring, and if the parties conclude a debt restructuring agreement, then the provisions of the agreement will not apply to such creditors. Furthermore, said creditors will no longer be entitled to enforce those claims against the debtor that were not registered within the above-mentioned deadline.
As a formal requirement, debt restructuring agreements must be executed in writing and shall be countersigned by the administrator and by the creditor’s select committee. The restructuring agreement shall contain in particular:
(i) a list of the creditors participating in the debt restructuring, their classification, the amounts of their registered claims recognized or uncontested, and the number of their voting rights;
(ii) the debt settlement and restructuring programme approved by the creditors, and the method of execution and oversight;
(iii) any modification in the time limits and deadlines of performance, the remission or assumption of the claims of creditors, and any other factors that are deemed essential by the debtor and the creditors for the purpose of restoring or preserving the debtor’s solvency;
(iv) the name and mailing address of each creditor, their representatives or agents for service and, in connection with select committees, an indication of the creditors they represent.
As a consequence of the recent amendment of the Civil Code (please refer to Question 1) in connection with the nullity of fiduciary collateral arrangements, the Insolvency Act has also been amended, causing a significant change in the circle of secured claims and secured creditors. Within the meaning of the amendment to the Insolvency Act, holders of fiduciary collaterals – as of 1 July 2017 – shall also be considered as secured creditors.
Following the amendment, “secured claim” means a claim:
(1) up to the value of the property pledged in security, the payment of which has been secured by:
(i) a pledge established before the commencement of the bankruptcy proceedings on an asset of the debtor, acting as lienor in the form of a lien or a subordinated lien – and in case of the designation of a lien holder’s agent even if the lien holder’s agent itself is not entitled or not exclusively entitled to hold that specific claim;
(ii) a pledge established before the commencement of the bankruptcy proceedings on an asset of the debtor in the form of a security deposit;
(iii) an option right on a specific asset of the debtor established by way of security before the commencement of the bankruptcy proceedings, provided that the option right has been registered in the Land Register or the Collateral Register and the holder of the option right is able to demonstrate that the option right has been established by way of security; or
(iv) the transfer of a right or a claim assigned by way of security before the commencement of the bankruptcy proceedings, provided that the debtor’s statement which is required for the transfer of the relevant right or claim has been registered in the Collateral Register;
(2) for which a right of enforcement relating to the debtor’s asset has been registered before the commencement of the bankruptcy proceedings, or the debtor’s asset was seized in the process of enforcement.
Role of other parties involved in bankruptcy proceedings
In bankruptcy proceedings the management may continue to operate the business, however, subject to supervision of the administrator appointed by the court in its ruling on the opening of bankruptcy proceedings. The administrator monitors the debtor’s business activities with a view to protecting the creditors’ interests and preparing for the debt restructuring agreement with the creditors. Accordingly, the administrator has powers, inter alia:
- to review the debtor’s financial standing;
- to inspect the debtor’s books, assets and liabilities, contracts and current accounts;
- to request information from the debtor’s executives, supreme body, supervisory board and the auditor;
- to approve and endorse any new financial commitment of the debtor after the time of opening bankruptcy proceedings;
- to contest, at its discretion, any contract or legal statement the debtor has made in the absence of his approval or endorsement.
The administrator may only grant approval for a commitment, or for a payment, if it serves the debtor’s interests in terms of operations (i.e. reduces losses) and for the purposes of preparing for the restructuring agreement, and may provide guarantees for such commitments only if agreed by the creditors representing the majority of the claims held by creditors with voting rights.
As in the case of liquidation proceedings, creditors in bankruptcy proceedings are also entitled to form a creditors’ select committee (hitelezői választmány) for the protection of their interests and to provide representation, as well as to monitor the activities of the administrator. The select committee represents the founding creditors in court and during consultations with the administrator.
Debt restructuring in liquidation proceedings
Following a period of 40 days subsequent to the publication of the opening of liquidation proceedings, the creditors and the debtor may, at any time, conclude a debt restructuring agreement before the final liquidation balance sheet is submitted.
Similar to bankruptcy proceedings, a debt restructuring agreement is deemed valid if supported by the votes of at least half of the creditors with proper entitlement to conclude a debt restructuring agreement in all creditor groups (i.e. in groups of secured and unsecured creditors) − until their claims are satisfied − provided that the claims of these creditors account for two-thirds of the total claims of those entitled to conclude the debt restructuring agreement.
If the company’s solvency is restored through debt restructuring, and the debt restructuring is in conformity with applicable laws and regulations, the court confirms the debt restructuring agreement; otherwise it issues an order of rejection and proceeds with the debtor’s liquidation.
A. Three restructuring and rescue instruments are available to businesses that are in "crisis status" (i.e. insolvency or at least a debtor's financial distress, including a temporary illiquidity or inability to pay its debts). Payments made, security interests granted, new finance given, and transaction carried out pursuant to any of these three instruments are exempted from avoidance actions and are shielded from the risk of civil liabilities and criminal charges in case of subsequent insolvency proceeding of the debtor.
I. Certified rescue plan (piano attestato di risanamento)
The debtor may propose and implement an entirely out-of-court restructuring or reorganization plan to ensure repayment of outstanding debt and its own financial re-balancing to secure the continuity of business as a going concern. The feasibility of the restructuring plan must be certified by an independent expert who must be a chartered auditor appointed by the debtor.
II. Debt restructuring agreement (accordo di ristrutturazione dei debiti)
The debtor may reach an out-of-court debt restructuring agreement (DRA) with its creditors representing at least 60% of the total indebtedness. The non-consenting creditors must be paid in full. The feasibility of the restructuring plan underlying the agreement must be certified by an independent expert.
The DRA must then be validated by court decree. The DRA must also be filed with the Enterprises Register and published.
Should the DRA involve debtors with obligations to banks or financial intermediaries amounting to no less than 50% of the debtor's aggregate indebtedness, the DRA can create one or more categories of bank or financial intermediary creditors with common economic interests. In this case, the terms of the restructuring agreement will be binding on all creditors in a class if (i) creditors holding at least 75% of the amount of claims in the class approve the restructuring proposal and (ii) all creditors in the class have been duly and timely notified of the pending restructuring and have had an opportunity to participate in the negotiations.
During the procedure, the debtor can carry on business as normal without being subject to supervision and creditors are prevented from starting or continuing precautionary or enforcement actions against the debtor.
The validation decree closes the procedure. After validation, the debtor must implement the DRA with no further intervention by the court and can carry on business as normal in accordance with the provisions of the DRA.
III. In-court settlement with creditors (concordato preventivo) (In-court Settlement)
The concordato preventivo is a typical in-court debtor-in-possession procedure, subject to supervision by the court—which for such purposes appoints a commissioner supervising the debtor—and ending with court confirmation of the arrangement with creditors.
The key features are: (i) the plan proposed by the debtor is binding upon dissenting creditors if approved by the required majority (i.e. absolute majority (50 per cent +1) of the total outstanding claims admitted to vote, provided that if there is a plurality of classes, the same majority shall be reached in the majority of classes) and confirmed by the court; (ii) the debtor may put forward an offer of In-court Settlement providing for less than 100 per cent payment to secured creditors (provided that secured creditors must be offered not less than what they would presumably get from the sale at auction of the collateral, and the proposed treatment of the various classes of creditors under the debtor’s proposal cannot disregard the legally established order of priorities among such classes); (iii) the contents of the settlement proposal are flexible and may vary from case to case, including either debt restructuring through "haircuts" and/or rescheduling and/or debt-to-equity swap mechanisms or assignment of the debtor's assets to third-parties or creditors; (iv) upon application for commencement (that may be filed even without submitting the plan) the debtor obtains an automatic stay of individual actions; (v) when an opposition to the plan is filed either by a creditor belonging to a dissenting class or, in the absence of classes, by dissenting creditors representing 20% of claims with voting rights and the suitability of the plan is challenged, the court can validate the plan only after comparing it to other available alternatives and verifying that the proposal is more convenient for the creditor than alternative options; (vi) after court confirmation, the plan is implemented by the debtor under the commissioner's supervision and upon fulfilment of its obligations under the plan, the debtor is discharged from all the prepetition debts that have remained unpaid.
In the past, In-court Settlement was seen as a liquidation procedure, but recent legal amendments have made it more of a reorganisation procedure. It is now possible to arrange for business activity to continue on a standalone basis or by selling (or contributing) the going concern to third parties.
In this scenario, known as "In-court Settlement with business continuity", (i) certain measures apply to make it easy for business to continue, including providing a one-year moratorium on paying secured creditors and paying certain pre-petition debts towards critical suppliers/vendors subject to court's prior authorisation and (ii) no statutory minimum level of satisfaction for unsecured creditors is required (whereas if the settlement provides for liquidation of the company's assets, it must ensure a payment of at least 20% for unsecured creditors).
Recent reforms have enacted creditors’ chances to have a pro-active role in the context of In-court Settlement. Creditors holding in aggregate at least 10% of the unsecured claims against the debtor can propose a competing restructuring plan (unless the debtor's plan provides that unsecured creditors will be paid at least 40% of the face value of their claims in a liquidation scenario, or 30% in a settlement with business continuity, as certified by an expert). Competing plans can also provide for a capital increase in the debtor company against consideration, excluding or limiting any applicable pre-emption rights in favour of the existing shareholders.
B. There are also two extraordinary administration procedures reserved for large insolvent enterprises exceeding a certain size (amministrazione straordinaria).
These two procedures are an administrative procedure coupled with judicial supervision of certain aspects and their main goal is to regulate insolvency and minimise its social consequences (typically, protection of the stability of employment) by preserving the integrity of any viable business branches or sectors of the enterprise.
Two different administration procedures are available:
- A procedure for "ordinary cases", being businesses with at least 200 employees (in the last one year) and indebtedness exceeding two-thirds of both the total assets and the total turnover. The procedure is commenced by court order with subsequent heavy involvement from the government.
- A procedure for "extraordinary cases" (used by, for example, Parmalat, Alitalia case and Ilva), for enterprises with more than 500 employees (in the previous year) and whose indebtedness exceeds EUR300 million. The procedure is started directly by the competent Ministry of Economic Development on application from the debtor with no preventive scrutiny by the court.
The rescue plan drafted by the extraordinary commissioner appointed by the Ministry can provide either the transfer of the business (or business branches) as a going concern (or even of a bundle of assets and contracts for debtors in the essential public utility services or running a plant of strategic national interest) within one year or the economic and financial restructuring of the debtor based on a stand-alone reorganisation plan lasting not more than two years.
Spanish Insolvency Act provides for out-of courts and in-courts rescue finance procedures to solve insolvency problems.
The standard out-of courts procedure is implemented by a refinancing agreement reached with a certain majority of the finance creditors of the debtor. The refinancing agreements must fulfilled the requirements set forth in the Spanish Insolvency Act, to benefit from the irrevocability of the transactions and securities granted under such refinancing agreement, as those refinancing agreements are not subject to third parties claw-back action pursuant to article 71 of the Spanish Insolvency Act.
Pursuant to article 71.bis.1 of the Spanish Insolvency Act, the refinancing agreement must be signed by, at least, 60% of the total creditors of the debtor certified by the auditor and it must imply an additional financing and an amendment of the existing liabilities and extent their final maturity date, in accordance with a viability plan that reflects the continuity of the company in a short and medium term. All those documents shall be formalized in a public document before a Notary
According to article 71.bis.2 of the Spanish Insolvency Act, singular refinancing agreement with some of the creditors could benefit from avoiding claw-back risks if certain measures pro-debtor are included therein (a proportional increase of the assets against the liabilities, the short term assets are higher than the short term liabilities, the interest rate applicable could not increase over 1/3 additional to the previous interest rate, the assessment of the security could not be higher than 9/10 of the company liabilities). Singular refinancing agreement must be formalized in public documents also.
The restructuring agreements can be sanctioned by a judicial procedure (“homologación”) which provides additional protection to claw-back actions and extent the effects of the refinancing agreement to dissident finance creditors. To be beneficiary of the court sanctioned procedure, the refinancing agreement must be signed at least by the 51% of the finance creditors of the debtor, and additional majority are required in case of requests to extent the effects to dissident creditors (between 60% and 80% of the finance creditors of the debtor depending on the nature of the measures included in the refinancing agreement (capitalization of debts, write-offs and extensions on the maturity) and if the dissident finance creditors are deemed secured or unsecured).
The in-court rescue procedure are less likely as the Spanish Insolvency Act does not provide for certain tools requires to achieve such result. Thus, not provision of debt-in-possession financing is possible and liquidation rate is over 90% when a company is declared bankrupt in Spain. New money in an insolvency procedure will require the prior authorization of the insolvent administrator and even the judge if the new financing will imply granting of new security by the debtor.
In an out-of court restructuring procedure, the management continues with the normal administration of the company and no supervision is required. In an in-court restructuring procedure, the most likely scenario is that the management will keep the administration of the company but certain transactions must be approved by the insolvent administrator or the judge. Only if a certain negligence in the administrators’ behavior in the management of the company is proved and a third party is the one filing for insolvency, the managers could be replaced of its management faculties of the company.
Public creditors are not affected by the refinancing agreements, and labor credits has certain privileges and prior ranking in payments. Commercial creditors do not usually take part of the restructuring process. Thus, the financial creditor provides working capital financing to satisfy the key suppliers or providers of the debtor to continue with its activity during the restructuring process.
There are two types of restructuring procedures in Japan: civil rehabilitation proceedings (minji-saisei) and corporate reorganisation proceedings (kaisha-kosei).
a. Civil Rehabilitation Proceedings
The entry requirement for the civil rehabilitation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In civil rehabilitation proceedings, the board of the debtor company remains in control and has the power to manage the company’s business. However, the court may require the debtor to obtain permission of the court in order to conduct certain types of activities, including (but not limited to): (i) disposing property, (ii) accepting the transfer of property, (iii) borrowing money, (iv) filing an action, (v) settling a dispute or entering into an arbitration agreement, and (vi) waiving a legal right. In practice, the court appoints a supervisor in most cases and grants him or her the authority to give such permission to the debtor on its behalf in respect of the debtor’s activities.
The debtor must propose and submit to the court a rehabilitation plan within the period specified by the court. A registered creditor also has the right to propose and submit a rehabilitation plan. The rehabilitation plan must be approved at a creditors meeting by a majority in number of creditors present and voting at the meeting and a majority by value of all creditors who hold voting rights. If approved, the court authorises the rehabilitation plan, which will bind the company and the creditors.
b. Corporate Reorganisation Proceedings
The entry requirement for corporate reorganisation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In corporate reorganisation proceedings, a trustee must be appointed for the corporate debtor. The trustee has control and possession of the debtor’s business and its assets. The trustee is appointed by the court and is usually an attorney who has expertise in insolvency cases. However, a trustee can also be a business person who is deemed to be a fit person to operate the debtor’s business.
There have been an increasing number of cases in which the court appoints trustees from the current management. Such proceedings are called debtor in possession-type (‘DIP-type’) reorganisation proceedings, as opposed to traditional ‘administration-type’ proceedings. In those cases, the court usually also appoints a supervisor, who monitors management’s activities. Thus, the proceedings look similar to civil rehabilitation proceedings.
The trustee must propose and submit to the court a reorganisation plan within the period specified by the court. The debtor company, a registered creditor or a stockholder may also propose and submit a reorganisation plan. The reorganisation plan must be submitted to and approved at a stakeholders meeting. If approved, the court authorises the rehabilitation plan, which will bind the stakeholders. Different classes of stakeholders (e.g. unsecured creditors, secured creditors and shareholders) vote separately, and approval must be obtained from each class. The Corporate Reorganisation Act sets forth different thresholds for different classes (for example, for unsecured creditors the requisite majority is a majority by value).
Restructuring may be applied to individuals and businesses. In-court restructuring against a debtor may only commence if the debtor is insolvent and if the debtor or creditor requests that the insolvency court commence such proceedings.
It is a condition of in-court restructuring that the restructuring proposal includes a compulsory arrangement with the creditors and/or a transfer of the business.
In case of in-court restructuring the insolvency court will appoint a restructuring administrator (typically an attorney) and a restructuring accountant for the debtor.
The restructuring administrator presents the restructuring proposal to the creditors that vote on the approval of the restructuring proposal. If the restructuring proposal is not approved, insolvency proceedings will commence against the debtor. As a starting point the proposal will be approved if not more than 50% of the creditors present at the meeting disapprove of the proposal.
The management of the debtor continues as a starting point if the creditors or the insolvency court do not decide otherwise. The management must not make important decisions without the consent of the restructuring administrator.
The insolvency court is only a supreme authority and is not to approve transactions but only to ensure that the administration takes place in accordance with the Insolvency Act.
Restructurings and other informal work outs can be pursued in Australia provided adequate attention is paid to the prohibitions on insolvent trading under Australia’s stringent insolvent trading laws. One way to alleviate directors’ concerns about their insolvent trading obligations is for the company to enter into forbearance or standstill arrangements with its creditors pursuant to which creditors might agree not to enforce any rights that might otherwise arise during the restructuring or work out period. In doing so, the company will have an opportunity to restructure what might otherwise be current debt obligations.
Outside a fully consensual debt restructuring, there are two ways to effect a restructure of a company’s debts under Australian law:
- through a deed of company arrangement (DOCA); and
- through a scheme of arrangement.
A DOCA is a flexible restructuring tool in terms of outcomes that it can deliver. These include debt-for-equity swaps, a transfer of equity, moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of, outstanding debt. DOCAs also have the benefit of being fast and subject to low voting thresholds (50% in number and value).
A DOCA takes place in the context of a voluntary administration (i.e. a formal insolvency appointment). It is a creditor approved arrangement governing how a company’s affairs will be restructured. As a voluntary administrator is formally appointed, they take over the management and control of the company’s business and affairs for the term of the appointment. A DOCA is effectively a contract or compromise between the company and its creditors. Whilst it is a feature of voluntary administration, it should in fact be viewed as a distinct regime, where the rights and obligations of the creditors and the company differ to those under voluntary administration.
Once a company is in voluntary administration, a DOCA can be proposed by anyone with an interest in the company. Creditors are required to vote to resolve that the company should execute the DOCA. Once the terms of the DOCA are approved (by the relevant threshold majorities), the instrument must be executed within 15 business days of such a resolution. A DOCA can be varied by either a subsequent resolution of creditors or by the court.
A DOCA binds not only creditors (other than secured creditors) but also the company, directors and shareholders. Whilst binding on shareholders, it is recognised in scenarios where a shareholder has limited interest in the company under administration and is not entitled to vote in the DOCA in its capacity as shareholder. The statutory priority afforded to employees in a liquidation scenario must be the equivalent in a DOCA (unless the employees vote otherwise). In this way, employees are afforded a level of protection under a DOCA.
Upon the execution of the DOCA the voluntary administration ends. The outcome of the DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. The recourse of the court is available to creditors to set aside the DOCA if it does not achieve its goal or is challenged by creditors on grounds that they are unfairly prejudiced in a relative sense.
Schemes of arrangement
A scheme of arrangement is a court approved process binding the creditors and/or members to some form of rearrangement or compromise of pre-existing rights and obligations. Schemes may involve the deleveraging of a business or the reduction of outstanding debt in exchange for the issuing of equity. There are two types of schemes of arrangement:
- a members’ scheme of arrangement (between the company and its members); and
- a creditors’ scheme of arrangement (between the company and its creditors).
Schemes of arrangement can be implemented without the commencement of a formal insolvency process. As such, the company and its directors can remain in control of the business during the proposal and approval phase (and, depending on the terms of the scheme, after its implementation).
The approval process is heavily regulated and involves a number of steps, including the preparation of explanatory statements and scheme booklets, notification to the corporate regulator, the Australian Securities & Investments Commission (ASIC), an application to court to convene scheme meetings, the holding of those meetings, court approval of the scheme and finally, the filing with ASIC of the court approved scheme. The timeline for scheme approval is typically between 3 months (but can often take between 4 to 6 months) from the commencement phase through to the final approval and implementation phase.
Schemes of arrangement must be approved by a majority of 50% in number and 75% in value of the voting class (of affected members and/or creditors) at the scheme meeting. Classes are determined by reference to commonality of legal rights and only those whose rights will be compromised or affected by the scheme need be included. Unlike a DOCA, a scheme can bind secured creditors who vote against it and release third party claims.
The key element to the success of a scheme of arrangement is the willingness of creditors (most commonly financial creditors, as opposed to trade and operational creditors) to work with the management of the distressed company as well as other stakeholders. The starting point for the negotiation will often involve an agreement or undertaking on a standstill or forbearance period, during which the company will look to refinance its current debt structure (often through the injection of new capital and/or equity).
There are two main statutory proceedings allowing for a rescue / restructuring of a company's operations and debts:
1. Scheme of Arrangement
A scheme will allow a debtor company to enter into an agreement with its shareholders / or creditors (or any class of them) pursuant to section 86 of the Companies Law for the purpose of either:
- Restructuring its affairs to allow the company to continue to trade and avoid a winding up; or
- Reaching a compromise or arrangement with creditors (or any class) following the commencement of liquidation proceedings.
- A scheme will be subject to the supervision of the Grand Court and can be implemented by the company, any creditor or shareholder or a provisional liquidator applying to the Court for an order convening a meeting of creditors, shareholders or any class of them as directed by the Court.
In order for a scheme to be implemented, a majority constituting at least 50% in number and 75% in value of the creditors, shareholders or each class of them present and voting at the meeting must agree to the compromise or arrangement. Subject to obtaining the requisite approvals, the party proposing the scheme must then apply to the Court for an order approving the scheme.
In the event that a scheme is proposed outside of liquidation, the directors will maintain control of the company's affairs. If the scheme is implemented in a provisional liquidation scenario, the provisional liquidator will control the company's affairs, subject to the supervision of the Grand Court.
2. Provisional Liquidation
The purpose of a provisional liquidation is usually to preserve and protect a company's assets pending the hearing of a winding-up petition in respect of the company.
However, the 'soft touch' provisional liquidation regime may be implemented by a company for the purpose of appointing court appointed provisional liquidators to protect itself from creditors and restructure its business whilst effecting a compromise or scheme of arrangement with a company's stakeholders. The use of this procedure is comparable to the UK administration procedure and the Chapter 11 process in the United States.
Any creditor, shareholder or the company itself can apply for the appointment of provisional liquidators in the period following the presentation of a winding up petition and prior to the hearing of the petition.
Upon appointment, the provisional liquidators will be subject to the court's supervision and may only carry out the functions set out in the order appointing them. In the event that a company restructuring is proposed, existing management may be permitted to retain control of the company subject to the supervision of the Court and the provisional liquidators.
The issue of whether a company's directors have the power to present a winding up petition the absence of a resolution of its shareholders has been the subject of judicial debate in the jurisdiction, with the recent decision of Justice Mangatal In Re China Shanshui Cement Group Limited (Grand Court, Mangatal J, 25 November 2015), laying down a restrictive interpretation of directors' powers to present a winding up petition in the name of the company without the approval of the company in general meeting or the power to present such a petition in the company's articles of association.
However, in a recent first instance decision In Re CHC Group Ltd (Grand Court, McMillan J, 17 January 2017), Justice McMillan held that in circumstances in which a creditor's petition has been presented against a company, its directors could seek the appointment of provisional liquidators, notwithstanding the absence of an express power in the company's articles of association or a resolution of the company's shareholders.
As discussed at section 19 below, it is anticipated that this area of the law will be subject to legislative reform in the near future, thereby bringing section 94 of the Companies Law in line with section 124 of the UK Insolvency Act, in addition to introducing a new statutory regime allowing a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium.
Composition proceedings may be used to restructure a creditor as follows:
- Composition proceedings may be used as a mere restructuring moratorium which can be terminated with the approval of the court once the debtor is financially recovered. There is no cram-down element to this procedure. An individual agreement must be reached with each single creditor who is expected to make a concession.
- Where a mere restructuring moratorium is not sufficient, a debtor may choose to offer a composition agreement to its creditors which may take the form of (i) a debt-rescheduling agreement where the debtor offers the creditors full discharge of claims according to a fixed time schedule or (ii) a dividend agreement where the debtor offers the creditors only a partial payment of their claims. A combination of both elements is possible. A composition agreement must be approved by the creditors which requires the affirmative vote by a quorum of either a majority of creditors representing two-thirds of the total debt, or one-fourth of the creditors representing three-fourths of the total debt. Creditors with privileged claims and secured creditors will not be entitled to vote on the composition agreement (and will not be subject to its terms). After approval by the creditors, the composition agreement requires confirmation by the composition court and, with such approval, becomes valid and enforceable on all (approving, rejecting and non-participating) creditors.
The competent court initiates composition proceedings based on a request typically brought forward by the debtor. First, a provisional moratorium of up to four months will be granted. In this context, the court can also appoint a provisional administrator. If the court finds that there are reasonable prospects for a successful reorganisation or that a composition agreement is likely to be concluded, it must thereafter grant the definitive moratorium for a period of four to six months (which can be extended to a maximum of 24 months) and appoint an administrator. See section 4 above for the continuing management of the debtor by existing management and the restructuring by means of a corporate moratorium or postponement of bankruptcy.
German insolvency law knows only a single, uniform procedure (Einheitsverfahren), of which the below procedures are only variations designed to facilitate restructurings (see question 4).
If certain conditions are met, the insolvency court may allow the debtor's management to run the business. The management is supervised by a trustee (Sachwalter) charged with protecting the creditors’ interests. If the creditors’ interests are negatively affected by management’s actions, the insolvency court may rescind the self-administration order and appoint an insolvency administrator.
The opening of insolvency proceedings will nearly always be preceded by preliminary proceedings (see question 4), which may be conducted as preliminary self-administration proceedings (vorläufige Eigenverwaltung) with a preliminary trustee (vorläufiger Sachwalter) being appointed instead of a preliminary insolvency administrator.
Protective Shield Proceedings (Schutzschirmverfahren)
Introduced in 2012 to encourage a rescue culture, they constitute a variation on preliminary insolvency proceedings, combining preliminary self-administration and a stay on execution by creditors. They are designed to permit the debtor to draft an insolvency plan and find their conclusion in opened insolvency proceedings (see question 4), normally as self-administration proceedings, which are necessary to adopt and implement an insolvency plan.
Both the debtor’s management and the insolvency administrator, if standard insolvency proceedings (see question 4) have been opened and an insolvency administrator has been appointed, may initiate an insolvency plan. In such a plan the distribution of the insolvency estate as well as the liability of the debtor may be treated differently than laid out in the Insolvency Code. Submission and implementation of an insolvency plan requires that insolvency proceedings have been commenced, but pre-packaged plans can be submitted with the insolvency filing.
The plan must be approved by the different creditor groups with majority consent being required in each group. The composition of these groups is defined by the plan, but the court may reject the draft plan if the creditors have not been divided into reasonable groups.
At least secured creditors, unsecured creditors and subordinated creditors, if their claims are not waived, and the shareholders must form separate groups to the extent that their rights are infringed upon by the stipulations in the insolvency plan. In practice, separate groups are often contemplated for employees, the pension insurance association and/or the tax authorities; creditors with different levels of seniority may be placed in different groups (Sec. 222 Insolvency Code).
The vote of a dissenting group may be crammed down and the plan deemed to be accepted, if such group
- does not receive less than it would in straight liquidation;
- receives appropriate benefit from the plan; and
the majority of the groups has accepted the plan (Sec. 245 Insolvency Code).
After the plan has been accepted and if all procedural requirements are met, the court has to issue its final approval.
The Concurso Mercantil is considered a restructuring proceeding as the Mediation Stage is designed to restructure the debts of an insolvent entity. In order for a Reorganization Agreement to become effective, it is required to be entered into by the insolvent entity and those Recognized Creditors that represent more than 50% of the sum of (a) the amount of all Recognized Claims of all unsecured Recognized Creditors and Subordinated Creditors of the insolvent entity, plus (b) the amount of all Recognized Claims of those secured Recognized Creditors that enter into the Reorganization Agreement.
However, if the Recognized Claims of Subordinated Creditors of the insolvent entity (including certain unsecured related party claims) represent 25% or more of total amount of all Recognized Claims, then such subordinated claims will not be taken into account for the voting requirements described above.
With respect to the management, supervision and the role of the court during the Mediation Stage, please refer to our answer to Question 4 above.
British Virgin Islands
For companies seeking to reorganise a company’s capital or debts there are three main routes available:
- Plans of arrangement;
- Schemes of arrangement; and
- Creditors’ arrangements.
Plans and schemes of arrangement are governed by the BCA and creditors’ arrangements are governed by the IA.
None of these routes is directly analogous either to the English regime relating to company voluntary arrangements under Part 1 of the Insolvency Act 1986 or to that concerning company reorganisation under Chapter 11 of the United States Bankruptcy Code.
Unlike other offshore jurisdictions, such as the Cayman Islands and Bermuda, the BVI does not use provisional liquidators for restructuring; rather, provisional liquidators tend to be appointed simply to preserve assets until the application for the appointment of a full liquidator can be heard.
Plans of arrangement were first introduced into the BVI by the International Business Companies Act 1984. Section 177 of the BCA defines the term “arrangement” as including—
- an amendment to the memorandum or articles;
- a reorganisation or reconstruction of a company;
- a merger or consolidation of one or more companies that are companies registered under the BCA with one or more other companies, but only if the surviving or consolidated company is incorporated under the BCA;
- a separation of two or more businesses carried on by a company;
- any sale, transfer, exchange or other disposition of any part of the assets or business of a company to any person in exchange for shares, debt obligations or other securities of that other person, or money or other assets, or a combination thereof;
- any sale, transfer, exchange or other disposition of shares, debt obligations or other securities in a company held by the holders thereof for shares, debt obligations or other securities in the company or money or other property, or a combination thereof;
- a dissolution of a company; and
- any combination of any of the things specified in paragraphs (a) to (g).
This definition is clearly very broad. If a company’s directors determine that it is in the best interests of the company, or the creditors or members of the company, they may approve a plan of arrangement. The plan must contain details of the proposed arrangement, and once the directors have approved the plan, the company must apply to the court for approval.
If the company is in voluntary liquidation, the voluntary liquidator may approve a plan of arrangement and apply to the court for approval; if, however, the company is in insolvent liquidation, the liquidator must authorise the directors to approve the plan and take the other steps set out in the BCA.
On hearing an application for approval, the court may make a variety of directions as to how the plan is to proceed, including requiring the company to give notice of the plan to specified persons or classes of persons, determining whether or not the approval of another person or class of person must be obtained, determining whether or not any shareholder or creditor of the company is entitled to dissent from the plan, conducting a hearing in relation to the adoption of the plan, and deciding whether to approve or reject the plan. If the court determines that a shareholder is entitled to dissent from the plan, that shareholder is permitted to demand payment of the fair value of his shares. If the fair value of shares cannot be agreed between the shareholder and the company, there is a statutory framework for referral of the question to a panel of appraisers, whose decision is binding.
Once the plan has been approved by the court, the directors (or voluntary liquidator) must then confirm the plan and comply with the court’s directions relating to notice and obtaining the approval of specified parties. Once this has been done and the necessary approvals have been obtained, the company must execute articles of arrangement, which must contain the plan, the court’s order, and details of the manner of approval. These articles must then be filed with the Registrar of Corporate Affairs, who will issue a certificate. The arrangement comes into effect when it is registered and its implementation is overseen by the company’s directors.
There is no statutory moratorium available in relation to plans of arrangement; therefore, throughout the devising, proposing, and approval phases of a plan of arrangement, the company remains vulnerable to creditors’ claims.
The second type of restructuring procedure is referred to as the scheme of arrangement, though this term is not referred to in the statute: section 179A of the BCA refers to ‘compromise or arrangement’ and further provides that ‘arrangement’ includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both of them.
The section does not contain a great deal of detail with regard to the procedure for obtaining the court’s sanction of a scheme of arrangement; consequently, the BVI court has based its approach on the practice followed by the English courts and, in particular, in the Chancery Division’s Practice Statement (Companies: Schemes of Arrangement)  1 WLR 1345, hence the adoption of the English terminology.
Whereas plans of arrangement may be very broad, schemes of arrangement specifically relate to the company’s relations with its shareholders and/or creditors. Schemes are aimed at facilitating an agreement that can enable the company to continue as a going concern and avoid formal insolvency proceedings. They are only available in relation to companies that have been formed under the BCA or companies incorporated under earlier BVI legislation or incorporated in another jurisdiction but continued under the BVI legislation, including companies in solvent or insolvent liquidation.
If the company proposes to enter into an arrangement with its creditors or members (or a class of either of those groups), the company will apply to court for an order that it should convene a meeting of creditors or members, as the case may be, to vote on whether or not to approve the scheme (the Convening Hearing). An application for such an order may be made by the company, a creditor, a member, or, if the company is in liquidation (whether solvent or insolvent), the liquidator.
At the Convening Hearing the court will consider issues concerning class composition and jurisdiction. As with an English scheme of arrangement, members and creditors are divided into classes depending on the respective rights that exist between them and the company, and the extent to which those rights stand to be varied by the scheme. The result is that often different classes of creditors and members are treated differently and a separate scheme meeting will be required for each different class.
If, at the meeting(s), a majority in number representing 75 per cent in value of the company’s creditors or shareholders (or class thereof) present or by proxy vote to approve the scheme, the scheme will bind—
1 all creditors or shareholders (as the case may be),
2 the company,
3 any liquidator that has been appointed, and
4 any contributory,
subject only to the court’s approval. If the majority rejects the scheme, it will not be approved.
If the creditors and/or shareholders vote to approve the scheme, then an application must be made for the court’s approval. The court will not rubber-stamp the scheme simply because it has been approved at the scheme meetings: it will have to be sure that the scheme is fair and reasonable, and that it will be efficacious.
Once a scheme has been sanctioned it must be filed with the Registrar of Corporate Affairs. The scheme takes effect from the moment of filing, and from that date onwards every copy of the company’s memorandum issued after that date must have a copy of the order annexed to it.
As with plans of arrangement, there is no moratorium available in the context of schemes of arrangement, so they remain liable to upset by creditors’ claims until sanctioned by the court.
If an order is made approving a scheme of arrangement, the provisions of the BCA relating to mergers and consolidations of companies, plans of arrangement, disposition of large assets, redemption of minority shareholdings, and the rights of dissenters cease to apply.
The third restructuring procedure referred to is the creditors’ arrangement, which is governed by Part II of the IA. The aim of a creditors’ arrangement is to facilitate arrangements between a financially distressed company and its unsecured creditors in order to stave off or mitigate the risk of insolvency. This is designed to be a simple process without any court involvement. A company may enter into a creditors’ arrangement even where it is in liquidation.
A creditors’ arrangement may affect all or part of the company’s debts and liabilities and may affect the rights of creditors to receive all or only part of the debts they are owed with the exception that the rights of secured creditors cannot be compromised without their written consent. Also, a creditors’ arrangement cannot result in a preferential creditor receiving less than he would in liquidation without their written consent.
The arrangement may be proposed by any person, but a majority of 75 per cent of the company’s unsecured creditors by value must vote in favour of the arrangement in order to approve it and bind dissenters. A licensed insolvency practitioner must be appointed as supervisor of the arrangement to oversee its implementation. A disgruntled creditor or member may apply to the court for relief on the basis that their interests have been unfairly prejudiced.
By contrast with plans and schemes of arrangement under the BCA, a creditors’ arrangement does not require the court’s approval or registration with the Registrar of Corporate Affairs. This appears to be in order to make it a quicker and simpler procedure to invoke; however, there have been relatively few creditors’ arrangements in the BVI since the provisions were enacted.
Again, there is no moratorium; however, as stated above, the effect of the decision by the majority of the company’s unsecured creditors to adopt a plan is to cram down any creditors who may have dissented, even where they did not receive notice of the meeting at which the arrangement was considered (although in such a case they may be able to bring a claim for unfair prejudice).
There are two key restructuring procedures available in Bermuda: schemes of arrangement and the appointment of restructuring provisional liquidations to “hold the ring” while a scheme is being promoted.
Schemes of Arrangement
A scheme of arrangement, once sanctioned by the Court, creates a binding compromise between a company and its creditors and/or shareholders (section 99 Companies Act 1981). Schemes of arrangement are available to both solvent and insolvent Bermuda companies.
The company itself or any member or creditor can initiate a scheme. Where a permanent liquidator has been appointed, the liquidator will propose the scheme rather than the company and may act in conjunction with the company’s directors.
Proceedings are started by applying to the Court for directions as to the classes of creditors and/or shareholders proposed to be compromised by the scheme, and to convene meetings, on notice, of the various classes.
Once approved by each class of creditors and/or shareholders, the Court will exercise its discretion to sanction the scheme if satisfied that:
- The requisite statutory requirements have been met and the directions made at the convening hearing have been complied with;
- Each class of creditors or shareholders has been fairly represented;
- The arrangement is fair to creditors and/or shareholders generally; and
- There is otherwise no blot on the scheme.
The scheme must be approved by the various classes of creditors and/or shareholders affected by the scheme's proposals. A majority in number representing 75% in value of those present (either in person or by proxy) and voting at each class meeting must vote in favour of the scheme in order for the scheme to proceed to the sanction stage.
There is no automatic stay preventing actions against the company during the period when the scheme is being proposed and implemented. However, it is possible to place a company into provisional liquidation, as elaborated below, to take advantage of the automatic stay whilst attempting to conclude a scheme.
Once the Court has sanctioned the scheme and a copy of the sanction order is lodged with the Registrar of Companies, it is binding on the company and all affected creditors and shareholders, regardless of whether they voted.
Restructuring provisional liquidation
The Court has the power under sections 164(1) and 170 of the Companies Act 1981, when read together, to appoint provisional liquidators to aid in the restructuring of an insolvent company (Re Titan Petrochemicals Limited  Bda LR 76). The primary purpose for appointing restructuring provisional liquidators is to trigger the statutory stay on proceedings being commenced or continued against the company (section 167(4) of the Companies Law 1981) thereby giving the company breathing space to attempt a restructuring without fear of winding up proceedings being brought against it by a disgruntled creditor.
In order to appoint restructuring provisional liquidators, it is first necessary for a winding up petition to be presented so as to found the jurisdiction of the Court. Typically, the petition will be presented by the company although where a creditor’s petition has already been presented, the company may apply for the appointment of restructuring provisional liquidators in the course of the creditor’s proceeding. In the case of a company’s petition, the application will typically be made ex parte. Upon the appointment being made, the hearing of the winding-up petition will be adjourned.
The view of the Supreme Court is that provisional liquidators play a central role in insolvent restructurings, a role which centrally shapes the character of the related court proceedings and the role played by the Court. As such, there is a strong starting assumption in favour of the appointment of restructuring provisional liquidators (In re Energy XXI Ltd  SC (Bda) 79 Com (18 August 2016); In re Up Energy Developments Group Limited  SC (Bda) 83 Com (20 September 2016)). As elaborated below, the same principle applies where the restructuring is to take place in a foreign jurisdiction.
The Court has a broad discretion as to the scope of the powers it grants to restructuring provisional liquidators and which powers will remain with the company’s directors. Often, the provisional liquidators will be given ‘light touch’ powers where they simply act in aid of a restructuring being otherwise proposed by the company – effectively playing a monitoring and reporting role. However, that will not always be the case especially where it may be inappropriate for the company’s directors to promote the restructuring or if the directors consider it to be more prudent or practical for the promotion to be done by provisional liquidators (as was the case in In re Z-Obee Holdings Limited  SC (Bda) 16 com (17 February 2017)). Ordinarily, the separation of powers between the provisional liquidators and the directors will be agreed prior to the making of the application and presented to the Court on a consensual basis.
If a compromise is reached and a scheme is sanctioned by the Court, the provisional liquidation will be terminated and the company will continue as a going concern. If not, then the company will be wound up.
Bankruptcy - Restructuring plan
The restructuring proceedings of article 107 of the GIC allow insolvent debtors to avoid bankruptcy or to distribute the estate on a certain manner, on the basis of a restructuring plan. The restructuring plan may provide for the continuation of the debtor’s business as a going concern, where the debtor may retain management of the business with the supervision of the bankruptcy trustee, based on the terms and conditions of the plan. A proposed restructuring plan may be submitted to the competent court by the debtor along with the application for declaration of bankruptcy or within three (3) months from the decision declaring bankruptcy, where such period may be extended by the Insolvency Court for an additional period not to exceed one (1) calendar month. A restructuring plan may also be submitted to the competent court by creditors representing 60% of claims, at least 40% of which must be of secured creditors, along with the application for declaration of bankruptcy.
The proposed restructuring plan may provide for any restructuring measure, including, inter alia, haircut of claims, rescheduling of payments, capitalization of debts, the sale of any of the debtor’s business sector(s) as a going concern, simple and complex refinancing or asset sales, etc. The proposed restructuring plan should at least include the following information:
- accurate and complete information on the debtor’s financial status;
- comparison of the expected satisfaction of creditors’ claims on the basis of the restructuring plan against their satisfaction in the course of bankruptcy proceedings;
- measures implemented or proposed to be implemented (e.g. financing, corporate restructuring) in order to fulfill the terms of the restructuring plan; and
- description of the rights and obligations of each creditor and of the debtor pursuant to the restructuring plan.
Following the acceptance of the proposed restructuring plan by creditors representing at least 60% of the total claims value, including 40% of the claims of secured creditors, the plan is submitted to the competent court for ratification. Upon ratification by the court the plan is binding upon all creditors of the debtor including any dissenting and non participating creditors. Thereafter, the bankruptcy proceedings are terminated and, unless otherwise provided in the restructuring plan, the debtor resumes administration of its business with a view to fulfilling the terms of the restructuring plan.
Pre-Bankruptcy Scheme proceedings
Articles 99 106(f) of the GIC establish a collective pre bankruptcy rehabilitation procedure that allows debtors who are in a status of cessation of payments or facing an imminent threat of cessation of payments to avoid bankruptcy and to remain operational on the basis of a rehabilitation plan (the rehabilitation plan). The objective of such scheme is the execution and ratification by the insolvency court of a “rehabilitation agreement” between both the debtor and its creditors or between the creditors with the aim that the debtor satisfies (even partly) its creditors and remains operational following ratification of the agreement. The hearing date for the ratification of the agreement is set within 2 months from the submission of the application for the ratification.
The submission of the application may also be filed even if a petition for the declaration of bankruptcy has already been filed. In such case, the petition for the declaration of bankruptcy is examined by the court if the court rejects the ratification of the rehabilitation agreement.
The agreement must be concluded prior to the opening of the scheme process (in the form of a so-called “pre-pack”). If the debtor is in a cessation of payments it submits together with the pre bankruptcy application, an application for the declaration of bankruptcy. The court has the discretion to approve either applications and on the basis of the evidence submitted regarding rescue possibility for the debtor.
The rehabilitation agreement is ratified by a court decision and initiated following submission of an application to the competent court by (a) the insolvent debtor and provided that it has been concluded between the debtor and creditors representing 60% of claims, at least 40% of which must be of secured creditors, or (b) creditors representing 60% of claims, at least 40% of which must be of secured creditors, regarding the rehabilitation plan agreed between them and provided that the debtor is already in a status of cessation of payments . In order for the agreement to be ratified it has to be evidenced that the debtor’s business will probably become viable and that the “no-worse off” principle for the creditors is respected.
Upon ratification, the rehabilitation plan is binding upon all creditors, including any dissenting and non participating creditors.
From the submission of the application for the ratification of the rehabilitation agreement and until the issuance of a relevant court decision, any individual and collective enforcement actions against the debtor are automatically suspended for a maximum period of four (4) months. Such suspension is available only one time per debtor. Following the above mentioned 4month period, a moratorium may be imposed following an application to that effect by anyone having a legal interest. For great business or social reasons, such moratorium may also be extended in favor of guarantors. Additionally, a moratorium may also be imposed even before the submission of the application for the ratification of the rehabilitation agreement, following an application by the debtor or a creditor provided that (a) the applicant files a written declaration of creditors representing at least 20% of claims and (b) there is an urgent situation or an imminent danger. Such moratorium is valid until the application for the ratification of the rehabilitation agreement and up to a maximum period of four (4) months.
The scheme proceedings also permit an agreement for the en bloc sale of the assets of the debtor’s business or part thereof, with or without the obligations or part thereof.
Special administration proceedings (articles 68-77 of the Special Administration Law)
Any natural or legal person that is eligible to bankruptcy, has its registered seat in Greece and is in a cessation of payments, may be put under special administration following a petition filed by its creditors representing at least 40% of the total amount of claims, among which at least one creditor is a financing institution. The petition is filed before the Single Member Court of the debtor’s seat and the hearing date is set within two (2) months from the filing of the petition. The decision of the court must be issued within one (1) month after the hearing. The submission of the petition to the competent court suspends any pending petitions, with regard to the same debtor, for the opening of a rehabilitation process or for the declaration of the debtor into bankruptcy.
The acceptance of the petition results in the appointment of a “special administrator” for a period of twelve (12) months and all individual enforcement actions against the same debtor, including the administrative enforcement measures that are available for State authorities, are automatically suspended for as long as the special administration procedure is open. After the filing of the application and before the issuance of the court’s decision anyone having legitimate interest may file an application for interim measures and the court may rule the imposition of any interim measures deemed appropriate to prevent any harmful for the creditors deterioration of the insolvent debtor’s property, including the suspension of individual enforcement actions.
The special administrator proceeds to a public tender (on the basis of the ‘highest offer price’) with regard to the sale of the business assets (either as a whole or by sector or any parts thereof), which will then be ratified by the court assuming all legal requirements are met.
The creditors announce their claims following a relevant invitation by the special administrator and the sale consideration paid by the purchaser(s) is distributed to such announced creditors in an identical way as provided for in the special liquidation procedure. The special administrator decides on whether the above liquidation amount suffices for the satisfaction of all creditors of the debtor. If this is not the case, the special administrator is obliged to file a petition with the insolvency court for the declaration of bankruptcy of the debtor.
The special administration procedure may expire, if the disposal of minimum 90% of the debtor’s assets (in terms of accounting value) has not been concluded within twelve (12) months from the publication of the court’s decision to open such procedure.
To propose a scheme of arrangement, the company must apply to court for an order summoning a meeting of the creditors of the company and/or the members of the company, as the case may be.
If the court grants leave to convene the meeting(s), the company must send out a notice calling the meeting(s) and the notice must contain an explanatory statement explaining the effect of the proposed compromise or arrangement. The scheme must be approved at the meeting(s) by a majority in number representing three-quarters in value of each class of creditor or member present and voting at the meeting, unless the court orders otherwise.
After the requisite majority has been obtained, the scheme will only be binding on the company and its members and creditors if the Court approves it. Such approval may be subject to such alterations or conditions as the Court thinks just and equitable. Thus, the validity of a scheme emanates from the court order approving it.
The current management of the debtor company remains in place with full powers, subject only in certain cases to oversight by an insolvency professional.
In addition to an administration, discussed at Question 3 above, a company may utilise other statutory procedures to reach a compromise agreement with its creditors.
The principal two procedures are (1) a company voluntary arrangement (CVA); and (2) a scheme of arrangement. For both of these procedures, management stay in control of the company. Either may be used in conjunction with an administration to utilise the moratorium.
A CVA is implemented out of court unless it is challenged. It binds all unsecured creditors and, if they voluntarily agree to be bound, secured creditors. The requisite consent is 75% in value of unsecured creditors and 50% in value of those unsecured creditors that are unconnected creditors. CVAs have most commonly been used to restructure liabilities owed to landlord creditors, in particular in the retail sector.
A scheme of arrangement is conducted in court and requires court sanctioning. It will bind all creditors where 75% in value and 50% in number of voting creditors favour of the scheme. Creditors that are treated differently may need to vote in separate classes. Schemes have proven effective to implement a variety of restructurings, including amendments to finance agreements.
For restructuring the debtor’s debts, the Bankruptcy Law recognizes the Delay of Payment procedure. A Delay of Payment is not a condition in which the debtor is unable to pay or is insolvent and it is not the purpose of the liquidation of the bankruptcy estate. The main concern is regarding not just the debtor, but also the creditors. It may not be the case that the debtor cannot repay its loans, but only that the debtor needs more time to repay them. In this situation, the creditors do not want the debtor to be declared bankrupt; they would prefer that the debtor repays its debts.
A decision on a Delay of Payment is not the same as a bankruptcy decision, where once bankruptcy is declared, the debtor’s management loses its right over its wealth. In a Delay of Payment, the debtor’s management retains its right. However, to take any corporate action, they require prior approval from the appointed administrator.
The company’s management may be allowed to continue operating with a view to eventually trading out of its difficulties. This procedure provides a company temporary relief to re-organise and continue its business activities under the management of its directors together with an appointed administrator, under the supervision of a supervisory judge. By continuing its business, the company may able to settle its debts to creditors in accordance with the composition plan.
Under the Bankruptcy Law, the Court must issue its Delay of Payment ruling within (i) 20 calendar days if the petition is filed by the creditor or (ii) 3 calendar days if the petition is filed by the debtor. For the Court proceedings, the debtor or the creditor must be represented by an attorney. The Delay of Payment ruling is not subject to appeal to the Supreme Court. If the Delay of Payment ruling accepts the petition, the Delay of Payment procedure must last no longer than 270 days from the date of the issuance of the ruling (including 45 calendar days for the temporary Delay of Payment).
The requirements for a Delay of Payment are same as those for Bankruptcy in 3. above.
The test for a Delay of Payment for the debtor or the creditors to apply for a Delay of Payment is that the debtor cannot pay its debts and the debtor or the creditors foresee that the debtor will not be able to pay its debts on time.
The effects of a Delay of Payment are the following:
- The management of the debtor’s business is placed under the supervision of one or more administrators who in turn are supervised by a Supervisory Judge.
- If any of the Debtor’s obligations are met without approval from the administrator after the delay of payment decision, they can only be charged to the Debtor’s assets if they benefit the Debtor’s assets.
- During the temporary/permanent Delay of Payment, the debtor is relieved from any liability to pay its debts.
- Any attachments which have been obtained against the debtor’s assets are declared null and void and if the debtor has been taken into custody as a hostage, the debtor must be released immediately.
- Creditors’ claims secured by pledges, hypothecs, fiduciary agreements or other priority rights may not be enforced nor may secured assets be attached by the creditors.
- Proceedings already commenced by the Court do not end nor does the Delay of Payment preclude the initiation of new proceedings.
For the restructuring of the debts, during the Delay of Payment procedure (within 270 calendar days):
- the debtor can submit a composition plan to be discussed and approved by all of the registered creditors in the creditors’ meeting; and
- if the creditors’ meeting (more than 1/2 the registered secured creditors and 1/2 the registered unsecured creditors) agree and approve the proposed composition plan, the administrator and the supervisory judge will inform the Court’s panel of judges so that the composition plan can be incorporated in the final and binding court ruling.
If the composition plan does not meet the minimum requirements for approval, the debtor will automatically be declared bankrupt, and the bankruptcy procedure will apply. A decision declaring a debtor bankrupt or approving a delay of payment cannot be appealed.
- Mandat ad hoc proceedings
Mandat ad hoc are confidential proceedings which are not limited in time. The management continues to operate the business. The only role of the court-appointed officer (mandataire ad hoc) is to help the debtor negotiate with its main creditors and find the most suitable solution. Approval by creditors, being on a voluntary basis, is based on a unanimous vote. If an agreement is reached between the company and its creditors, the mandataire ad hoc’s duties end. Otherwise, the agreement is terminated.
- Conciliation proceedings
Conciliation proceedings are available to debtors that face difficulties that are actual or foreseeable. They are confidential proceedings which may last up to five months. They are initiated by the debtor in its sole discretion. Management continues to operate the business. A conciliator is appointed, who can have two missions:
- to facilitate the conclusion of an agreement between the debtors and its creditors. This agreement is negotiated on a purely consensual and voluntary basis and can be either acknowledged by the judge (“accord constaté”) or formally approved by the court (“accord homologué”) in which case, the insolvency date cannot be backdated before the court order approving the conciliation agreement. If parties do not manage to reach an agreement, the conciliation proceeding fails and will be deemed as terminated.
- since 2014 the conciliator may also be empowered, at the request of the debtor and after consultation with the creditors, to organize a partial or total sale of the company (a so-called “pre-pack sale”) which can be implemented in a subsequent safeguard, reorganization or liquidation proceeding.
- Safeguard proceedings
Safeguard proceedings are judicial proceedings available to debtors that are solvent and that face difficulties that cannot be overcome. The management of the debtor will continue the daily management of the business. The judicial administrator will only exercise ex post facto control over decisions of the management or assist it to make all or some of the management decision.
The safeguard plan is voted either by creditors’ committees at a 2/3 majority if the debtor meets certain thresholds or by creditors on an individual basis. If the creditors consulted individually refuse to approve the plan, the court can impose a ten-year maximum term-out to dissenting creditors, but cannot impose any debt write-off or any debt to equity swap.
- Fast-track financial safeguard (sauvegarde financière accélérée)
The purpose of this proceedings is to restructure financial debt in a very short time frame (maximum two months), assuming the consent of at least two-thirds of financial creditors and, as the case may be, of bondholders is obtained.
Fast-track financial safeguard are only available to debtors which meet certain thresholds and provided that a conciliation procedure is pending in which at least a majority in value of financial creditors and, as the case may be, bondholders are likely to approve the restructuring proposals prepared by the company. The opening of such proceedings only has effects in relation to financial creditors and, as the case may be, bondholders (excluding therefore suppliers from the process).
- Fast-track safeguard (sauvegarde accélérée)
This proceeding is a variant of the fast-track financial safeguard proceedings. It is governed by the same rules, with two major exceptions: (i) it can last up to three months and (ii) suppliers will be able to vote on the plan.
It is intended to facilitate the negotiation of pre-packaged plans with the ability to eventually cram-down dissenting minority creditors through the vote of creditor classes, including trade creditors.
The common recovery procedures are the following: recovery by selling the company, restructuring the company’s debt, a combination of the two options mentioned above, recruiting an investor to invest in the company, and any other method decided by the court. An application must be submitted to the court with a basic recovery plan. When the court accepts the application, an administrator is appointed and he/she may work with the existing management team or replace it in whole or in part (see above, question 4).
The company can propose a consensual restructuring of its debts (i.e. outside of formal bankruptcy scenarios). However, the principle of freedom of contract means that creditors who are not willing to co-operate with the consensual restructuring can in principle not be forced to co-operate therewith. A large majority of creditors should therefore be willing to co-operate to ensure that a consensual restructuring is successful.
It is possible for a debtor, both in a suspension of payments or in a bankruptcy, to offer a composition to its (ordinary) creditors. A composition constitutes a proposal by the debtor to its creditors pursuant to which a partial payment is made on the claims of the creditors. As a result, the creditors are deemed to have waived the remaining part of their respective claims, effectively rendering the debtor debt free and in a position to continue its business. Once the composition is adopted by a majority vote of the recognised and admitted creditors, such majority representing a majority of the aggregate amount of admitted claims, and subsequently approved by the court, all creditors are bound by the terms of the composition, regardless whether they voted in favour or against the composition. All creditors are then effectively “crammed down”. As a result of the adopted and approved composition, the bankruptcy or the suspension of payments, as the case may be, will be terminated. We note that secured creditors cannot be bound by such composition, since they can foreclose on the secured assets regardless of the bankruptcy or suspension of payments.
A formal financial reorganisation can be made through controlled management (gestion contrôlée), composition with creditors (concordat préventif de faillite) or suspension of payments (sursis de paiement).
Suspension of payments (sursis de paiement)
The procedure of suspension of payments allows a commercial company who faces temporary liquidity difficulties to subject itself to the procedure until its financial liabilities can be met.
The debtor can apply for a suspension of payments by filing a request with the district court and the Superior Court of Justice. This procedure cannot be initiated by creditors.
The debtor will only be eligible for the procedure if:
- the debtor's temporary financial difficulties are due to extraordinary and unexpected circumstances and the debtor has sufficient means to pay off all its creditors.
- The debtor is in a situation where re-establishment of a proper balance between assets and liabilities appears likely.
The court can grant a temporary stay, either immediately or at a later stage of the procedure. The suspension from payments requires the consent of a majority of creditors representing 75% of the debtor's liabilities and the approval of the Superior Court of Justice.
The court order appoints one or more commissioners (commissaires) to supervise the management of the company during the suspension of payments period.
Controlled management (gestion contrôlée)
A commercial company may also apply for controlled management, which may be used, either:
- to reorganise and restructure its debts and business; or
- to realise its assets in the best interest of creditors.
This procedure cannot be initiated by creditors and may only be initiated where the debtor files an application before the district court sitting in commercial matters. To be eligible, the debtor must be acting in good faith and demonstrate that its creditworthiness is impaired, that it is facing difficulties meeting all of its commitments and that creditors are pushing for enforcement procedures. More than 50% of the creditors (in number) representing more than 50% in value of the debtor's debts must approve the plan, which must in turn be approved by the court.
Composition with creditors (concordat préventif de faillite)
This procedure aims at avoiding bankruptcy by allowing a debtor facing financial difficulties to negotiate a settlement or a rescheduling of its debts with its creditors. The renegotiated terms of the debts must then be approved by the district court. This procedure is initiated through a filing with the district court sitting in commercial matters and cannot be initiated by creditors. To be eligible, the debtor must either be, unable to meet its engagements or have lost all creditworthiness and must additionally be deemed unfortunate and acting in good faith, the appreciation of which is subject to the court’s discretion. To be successful, the application requires the consent of a 75% majority of the creditors, must meet the legal provisions and must not be deemed contrary to the public interest or the interests of the creditors by the court.
None of the above rescue proceedings would affect the enforcement by creditors of security qualifying as financial collateral arrangements. These proceedings are rarely used by Luxembourg companies as they are lengthy, costly and lack flexibility.
A company in distress can enter into an out-of-court amicable arrangement with two or more of its creditors, to restructure or remedy the company’s financial situation. This arrangement will not be subject to judicial scrutiny, and must be filed with the commercial court’s registrar. The arrangement is protected against certain claw-back rules that may apply if the debtor is declared bankrupt.
A judicial reorganisation procedure is available to a company if its continuity is threatened in the short or medium term. Being in a state of bankruptcy does not prevent a company from seeking protection under this procedure.
Besides the in-court amicable arrangement, a debtor can apply for a transfer of (part of) its activities under court supervision, or a procedure whereby a reorganisation plan is agreed upon with the debtor’s creditors. The reorganisation plan must be approved by the majority of the creditors that must represent at least half of the outstanding principal amounts, and the court.
The directors remain in charge of the management of the debtor, but a delegated judge will supervise the procedure and report to the court. Only if the board has made blatant mistakes or is acting in bad faith, a temporary director/administrator can be appointed by the court to replace the existing board.
The law provides two options as regards restructuring proceedings: the reorganization procedure (concurso preventivo) and the out-of-court restructuring agreement (acuerdo preventivo extrajudicial - APE).
The reorganization procedure can only be filed by the debtor at any time prior to bankruptcy and even as a petition of conversion of bankruptcy (if declared) into a reorganization procedure.
The process is controlled by the court, which also appoints a receiver (síndico) and a creditor’s committee. However, the management still administers the company.
Provided that the company faces a situation of cessation of payments, the requirements when filing the reorganization procedure are as follows.
The debtor must submit:
- Evidence of registration of the company before the Public Registry of Commerce, articles of incorporation and by-laws and amendments thereto.
- Explanation of the financial crisis.
- Statement with a complete detail of assets and liabilities.
- Copies of the debtor’s financial statements of the last three fiscal years.
- List of existing creditors with some information about them.
- List of commercial and corporate books.
- Declaration of the existence of any previous reorganization procedure.
- List of debtor’s employees with relevant information about them.
After opening the proceedings and the recognition of the credits, the debtor has an exclusivity period during which the debtor can negotiate a restructuring plan with the creditors. Such restructuring plan shall be approved if the debtor obtains the consent of the absolute majority of the creditors in each category, representing at least two-thirds of the total outstanding amount of the unsecured credits in each category.
A plan for creditors with special preferences will need the approval of every creditor in the category.
Once the plan is approved by the creditors it also has to be confirmed by the court which has the power to reject it in case it is abusive, discriminatory or fraudulent.
Out-of-court restructuring agreement
An out-of-court restructuring agreement consists of a private self-regulated restructuring agreement with the unsecured debtor’s creditors. The purpose is to negotiate a restructuring plan outside the formal framework of a judicial reorganization procedure.
To the extent that the agreement is executed by the required majorities (absolute majority of the creditors representing at least two-thirds of the total unsecured creditors), the debtor may file it before a court and obtain its endorsement, upon which it will be binding to all pre-petition unsecured creditors.
The requirements that the petition should meet are quite similar to the ones of the reorganization procedure:
- Statement of assets and liabilities.
- List of existing creditors with some information about them.
- List of judicial claims against the company.
- List of commercial and corporate books.
The out-of-court restructuring agreement is simpler than the judicial reorganization procedure and certainly less expensive (there is no receiver, it does not require “cessation of payments, etc.).
Insurance companies and financial entities cannot file a judicial restructuring nor enter into an out-of-court restructuring agreement.
A company seeking to restructure its assets will generally seek protection under chapter 11 of the U.S. Bankruptcy Code. Chapter 11 is a court supervised process used to implement the restructuring of a company’s business and financial obligations. There is no eligibility requirement for commencing a chapter 11 case and a company need not be insolvent to seek chapter 11 protection. A debtor typically will commence a chapter 11 case by filing a voluntary petition for relief in the bankruptcy court. The U.S. Bankruptcy Code also provides a mechanism for creditors to file involuntary petitions against debtors under certain circumstances, such as failure to generally pay debts as they come due. Upon filing, the debtor will become a debtor in possession and a bankruptcy “estate” consisting of all of the debtor’s property will be created. In the majority of cases, management and the board of directors stay in control of the debtor’s operations. In rare cases where fraud or misconduct is alleged, the bankruptcy court may appoint a trustee to oversee the debtor’s operations and administer the chapter 11 proceedings.
The ultimate goal of a chapter 11 case is to confirm a plan of reorganization. The plan establishes the key terms of the debtor’s restructuring and the treatment of all classes of creditors and equity holders. The U.S. Bankruptcy Code provides a debtor with a 120-day “exclusive period” from the petition date to file a plan, plus an additional 60 days to solicit votes for the plan. This period may be extended for cause to a date that is no more than 18 months from the petition date. Once the exclusive period lapses, any party may propose a plan. Before soliciting votes on a plan, a debtor must first obtain bankruptcy court approval of a disclosure statement, which provides the necessary information for a reasonable investor to make an informed judgment about whether to vote for the plan. Once a disclosure statement is approved, impaired classes of creditors may vote to accept or reject the plan. For a class of claims to approve the plan, at least 2/3 in dollar amount and more than 1/2 in number of voting creditors must vote in favor of the plan. After voting, the court will confirm a plan if, among other things, the plan complies with the applicable provisions of the U.S. Bankruptcy Code and has been proposed in good faith. Once the plan is confirmed, the debtor exits chapter 11 on the effective date. On the effective date, the debtor’s assets vest in the reorganized company free and clear of all claims and the reorganized debtor is discharged from all prepetition debts.
The bankruptcy court plays a critical role in a chapter 11 case, overseeing and approving all non-ordinary course transactions and ultimately determining whether to approve a debtor’s plan of reorganization. Additional key stakeholders include secured creditors, unsecured creditors (including the official committee of unsecured creditors), shareholders, the board of directors, management, and the office of the United States Trustee.
Starting from 1 January 2016, the following restructuring proceedings have been available with respect to a debtor which is insolvent or is threatened to be insolvent:
(i) proceedings for approval of an arrangement (postępowanie o zatwierdzenie układu):
- the debtor may appoint a restructuring advisor as the supervisor of an arrangement (nadzorca układu), but such appointment does not generally affect the debtor’s right to manage its assets;
- the debtor collects the required number of votes of its creditors to approve the arrangement and then files a motion with the court for the opening of a restructuring and seeking approval of the arrangement within 14 days following the motion;
- the proceedings for approval of an arrangement may not be conducted if, based on the lists of liabilities prepared by the restructuring advisor, the sum of disputed claims exceeds 15% of the sum of all the debtor’s liabilities; and
- the process is almost entirely conducted out of court by the debtor, and supported by the restructuring advisor;
(ii) accelerated arrangement proceedings (przyśpieszone postępowanie układowe):
- the debtor and creditors may enter into an arrangement during a creditors’ meeting scheduled by the court (within a relatively short time after the motion is filed with the court by the debtor);
- the formal procedures are relatively simple i.e. the debtor prepares a list of its liabilities without the court’s involvement and without a procedure for verification of such list (however, if a creditor opposes the correctness of the list, its claim shall be considered as a “disputed claim”);
- again, the proceedings may not be conducted if the sum of disputed claims exceeds 15% of the sum of all the debtor’s liabilities;
- the debtor may perform actions within the ordinary course of business, but the court supervisor’s (nadzorca sądowy) consent is required for the performance of actions exceeding such scope;
- the establishment of in rem securities in respect of claims that arose before the opening of proceedings is not allowed;
- enforcement proceedings concerning claims that are subject to the arrangement are suspended; and
- enforcement of existing security can be postponed for up to three months if such enforcement concerns collateral that is needed to run the business activity of the debtor;
(iii) arrangement proceedings (postępowanie układowe):
- apart from remedial proceedings, these are the most court-driven and formalized proceedings among the available restructuring proceedings;
- the list of creditors is prepared by way of a procedure conducted by a court in cooperation with a court-appointed officer, and creditors are entitled to file their objections as to the correctness of the list;
- proceedings may go ahead irrespective of the amount/proportion of the disputed claims;
- the debtor may perform actions within the ordinary course of business, but the court supervisor’s consent is required for the performance of actions exceeding such scope; and
- the rules for establishment and enforcement of securities and other enforcement proceedings are the same as for accelerated arrangement proceedings;
(iv) remedial proceedings (postępowanie sanacyjne):
- the key new restructuring tool in which a receiver (zarządca) appointed by the court generally takes over the management of the debtor’s estate (in specific circumstances, the debtor may be permitted to manage its affairs within the ordinary course of business), and any enforcement including enforcement of security against the assets included in the remedial estate is prohibited following the opening of the remedial proceedings;
- the receiver may use certain institutions, such as the right to terminate certain contracts or to sell the debtor’s assets (but not the entire business) free and clear from encumbrances; and
- the receiver prepares the list of creditors entitled to vote on the arrangement proposals and prepares and realises the restructuring plan.
In all these restructuring procedures, a restructuring plan is prepared by a court supervisor and approved by the judge commissioner. A debtor having the support of creditors holding more than 30% of the debts can cause the court to appoint a specific court supervisor. A group of creditors holding more than 40% of the debts can cause the judge commissioner to appoint one member of the creditors’ committee for every 20% of the debts. The creditors’ committee can cause the court to change the court supervisor if four out of five members of the committee vote in favour of such change.
Examinership is a court protection procedure available to a company that is insolvent but which has a business that is capable of surviving as a going concern. The procedure for instigating an examinership is described in detail at Section 4 above.
The Examiner has a maximum of 100 days from the date of his interim appointment to report to the Court that he has formulated a Scheme of Arrangement that has the support of at least 50% plus one in value and number of at least one class of impaired creditor. A Scheme of Arrangement will usually provide for (a) the investment of funds from an investor to fund payments to impaired creditors, (b) the discharge of the Examiner’s fees and (c) the transfer of the shareholdings to the investor(s). The Court will not approve a Scheme of Arrangement unless it is satisfied that it is not unfairly prejudicial to any creditor (which generally means that a creditor cannot receive less in cash terms than it would in a receivership or liquidation). The Court will often have particular regard to the potential for jobs to be saved when considering whether or not to approve a Scheme of Arrangement. A Scheme of Arrangement that has been approved by the Court will be binding on all creditors, including secured creditors, regardless of whether they have voted in favour of the Scheme of Arrangement.
The examinership process is overseen by the High Court. An examiner is an officer of the Court and owes his duties to the Court. The directors’ powers survive the appointment of an examiner and as such they remain responsible for the day-to-day management of the company. The company continues to trade during the period of examinership.
In an examinership, the shareholders retain their shares in the company and their powers are technically unaffected, however, because of the insolvency of the company, the shares are effectively worthless and no action can be brought against the company, including a minority oppression claim, during the period of the examinership without the Court's permission. The scheme of arrangement can, and often will, provide for the compulsory transfer of all issued shares to the investor without any shareholder consent.
Scheme of Arrangement
A scheme of arrangement can be invoked where a solvent or insolvent company proposes to enter into an arrangement with its creditors or its members by way of reconstruction (by a reduction in share capital, amalgamation of any two or more companies or otherwise). A scheme of arrangement can be proposed by the directors, or the liquidator of a company. An application is made to court for a moratorium which restricts creditors from taking enforcement action against the company, which allows the directors to restructure the company without threat of creditor action. The company can continue to trade during the moratorium.
Meetings of the company’s members and creditors are held at which the proposal are put and, where passed by a majority in value of creditors (or members), an application is made to the High Court to sanction the compromise or arrangement. The Court will sanction the scheme where it believes it to be reasonable and offers the company’s creditors a larger return than that which they would have received in a liquidation. The scheme of arrangement will be legally binding once approved by the Court,
The process does not affect the management or operations of the company, or the shareholders of the company save to the extent that the Court has, at its discretion, granted a stay of any proceedings against the company.
In contrast to an examinership, the business of the company does not need to be viable and a scheme may be used to wind up the company's affairs to achieve a greater return for its creditors.