Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Restructuring & Insolvency (2nd Edition)
In principle, state aid is prohibited by EU rules. Obviously in case where the insolvent company has an impact on the local or national economy or society (e.g. major employer in a region) certain sociopolitical factors may apply. In particular the Insolvency Act provides specific rules for the insolvency of companies running a business of strategical or national interest. The Government may classify - by means of a decree - as major economic operators of preferential status for strategic considerations. The liquidation of such companies shall be carried out in a simplified, transparent and standardized procedure where the liquidator is vested with more powers than in ordinary insolvency proceedings to be able to control and mitigate macroeconomic consequences of such insolvency.
We believe that the sociopolitical factors may give additional influence to the stakeholders in the restructuring or insolvencies in Indonesia, especially in the situations when the restructuring or insolvency proceedings are entered by the following:
- a state-owned enterprise;
- a certain type of debtors, which IBL requires certain state’s institution for initiating the restructuring or insolvency proceedings on. For example (i) banks, by Bank Indonesia (the Indonesian central bank), (ii) securities companies by Otoritas Jasa Keuangan (Financial Service Authority, previously known as BAPEPAM-LK or the Indonesian Capital Markets – Financial Institution Supervisory Board), and (iii) insurance and re-insurance companies, pension funds, state-owned companies operating for the public interest, by the Minister of Finance.
- a debtor under certain circumstances. For example: a bankruptcy petition can also be filed by the Public Prosecutor, if it is in the public interest.
Formally, there is no state support available for a distressed business. In practice, there is a case where a distressed business relates to or affects the state-owned enterprises (e.g.: its big supplier is under distressed situation) , it is often that the state-owned enterprises would take certain actions (e.g.: buyout partially/ entirely the distressed business) to ensure that they would not be affected by or could overcome the effect of such distressed business.
Certain sociopolitical factors – namely, employee benefit and pension plans – have been afforded greater attention and protection in recent years within Canadian insolvency jurisprudence. This is consistent with the growing global trend for greater awareness of certain sociopolitical factors within the insolvency context. In Ontario, this trend is evident, in part, through the increased role that regulators such as the Financial Services Commission of Ontario and other stakeholders have been afforded in insolvency proceedings in order to advocate on behalf of former employees and pensioners of debtor companies.
While both the federal and provincial governments maintain fairly limited involvement in relation to distressed businesses – particularly in connection with larger restructurings – certain Crown corporations including Export Development Canada, Business Development Bank of Canada and Investissement Québec have mandates to assist debtors in their restructurings.
Generally the state does not influence the affairs of a private company in distress in the course of a liquidation or restructuring and remains in a neutral position in the vast majority of cases. However, as recent events and cases of companies in distress have shown (e.g. AirBerlin), the sociopolitical and economic significance of a company can cause the state to take action, by means such as granting new financing on short notice in order to avoid major structural ramifications for the relevant region and municipalities.
Distressed businesses can apply for state subsidies (subject to EU state aid control) or special situation loans backed by state-owned banks provided they can present a sound restructuring plan.
The greatest factor that plays a role in insolvencies and restructurings is employment, or rather unemployment. Employees enjoy a preference in insolvency and restructuring proceedings and employees and registered trade unions have participating rights in business rescue, and may even initiate it. This is due to the low employment rate and the effect that an insolvency or restructuring can have on these numbers. Employment laws are strict in this regard and provide for specific procedures to be followed in respect of, e.g. retrenchments etc.
The state does play a role, for instance in its involvement through the courts and the Master in liquidation proceedings and does sometimes provide indirect funding through institutions such as the Industrial Development Corporation to failing businesses. It will also provide direct support to the state’s own entities (i.e. state owned entities such as South African Airways) that are in distress.
Not in fact. However, as everywhere, sociopolitical factors, obviously, have a direct impact on the financial health of the company and are relevant when taking the decision about the filing of the bankruptcy procedure.
During the judicial reorganization the State is present through the Judiciary whose function shall be limited to the control of legality, that is, the role of the Judiciary is to guarantee that requirements of the BRBL are being observed and also that general principles that govern Brazilian legal system are being attended. In spite of some contrary interpretations, it is not up to the Judiciary to decide whether the company under judicial reorganization is economically viable or not as the BRBL clearly assigns this role to the creditors that shall decide on the viability of the company in judicial reorganization by approving or not the judicial plan that, on the other hand, is subject to the control of legality by the Judiciary. In this regard, the Judiciary will check if the deliberations of the general meeting of creditors and the provisions of the plan does not offend the law and, after that, may homologate the plan in order to bind all creditors subject to the judicial reorganization.
In the Insolvency procedure, however, the role of the State, also exercised through the Judiciary is much broader, notably because once decreed the Insolvency the debtor is no longer considered debtor in possession and all matters related to the Bankruptcy Estate shall be handled by the Trustee appointed by the Bankruptcy Court.
At present sociopolitical factors as well as the government have very limited influence over the restructuring market in the Czech Republic. In principle, state aid is prohibited by EU rules. In recent years, the unemployment rates in the country were very low, which to a substantial degree helped ease potential tensions around major reorganizations in the Czech Republic during the past decade.
There is no state support available to distressed businesses in the Cayman Islands. As noted above at section 19, given the importance of the funds industry in the jurisdiction, the Cayman Islands have been careful to maintain their reputation as a creditor friendly jurisdiction.
The national government may pressure certain stakeholders in restructurings or insolvencies if there is the possibility of significant social impact or unemployment issues. The national government creates or joins corporate reconstruction funds aimed at supporting restructurings, such as the Enterprise Turnaround Initiative Corporation of Japan (‘ETIC’, now the Regional Economy Vitalization Corporation of Japan), and these funds support certain restructurings taking into consideration the value of the business, social impact and the like.
For instance, in 2010, ETIC decided to support Japan Airlines Co., Ltd. (‘JAL’) in creating restructuring plans and providing enough financing to pay unsecured debts from commercial transactions, except financial debts, before filing for corporate reorganisation proceedings. JAL was the largest airline in Japan with about 110 subsidiaries and 48,000 employees in its group, so the national government wanted to avoid significant social impact and unemployment issues. Owing to ETIC’s support, JAL was reorganised and re-listed on the Tokyo Stock Exchange in 2012.
In comparison, prefectural governments are unlikely to have additional influence over stakeholders. Each prefectural government has a restructuring support system for distressed medium-sized companies, although this system is consigned by the national government.
While direct state intervention in an individual insolvency is rare, there has been a recent push by both the legislature and the judiciary to establish Singapore as global insolvency hub. This has led to significant amendments to the insolvency regime in Singapore to provide greater flexibility and options for companies in distress. We anticipate these developments to continue.
British Virgin Islands
As noted above, there are relatively few categories of preferential creditors. Because BVI companies generally operate exclusively outside the BVI, there is rarely any specific public-policy issue concerning employees or other protected group within the territory. In addition, many BVI companies are holding companies, so do not employ significant numbers (other than directors, local agents, and other professionals).
Generally, the opinion in Denmark is that employees are not to be affected by the employer’s unsuccessful restructuring and subsequent insolvency and consequently the employees’ back pay will prior to the insolvency as well as during the subsequent notice period be secured by the Employees’ Guarantee Fund.
As provided for in China’s bankruptcy law, employees’ claims rank second only to security interests in collateral and are followed by social insurance premiums payable and taxes due. Employees’ claims established before August 27, 2006 prevail over secure interest, according to relevant policy. Since the current Enterprise Bankruptcy Law came into force, government or political factors have stopped playing a key or decisive role in bankruptcy proceedings, and bankruptcy cases have been handled by operation of law and in a market-oriented manner. The state’s role has turned to focusing on providing funds and policy support. For instance, 1) some local governments allocate funds to pay compensation of administrators; 2) some local governments set up a mechanism to secure back pay for employees of bankrupt enterprises, helping the employees fulfill their claims; 3) some enterprises form their administrative liquidation teams during their internal sorting of debts, and such teams may take the role of administrator after bankruptcy process commences; and 4) courts emphasize coordination between governments and courts in dealing with bankruptcy cases, whereby governments may tap their powers and resources in investigating assets, handling taxes, protecting employees’ rights and interests, addressing complaints and calls from the people, etc., thus helping move along bankruptcy proceedings.
There is very little state involvement or government intervention for distressed businesses in Australia. However there are certain circumstances where the government has stepped in to guarantee some financial support in formal insolvency proceedings, in particular, in relation to employee entitlements. Whilst employee entitlements (including wages, superannuation, leave entitlements and redundancy payments) are given statutory priority over the payment of other unsecured debts in a distribution of assets, it is sometimes not possible for those debts to be met out of the recoverable assets of the company in a timely manner or indeed, at all.
Pursuant to the Federal Government’s Fair Entitlement Guarantee (FEG), when a company is placed into liquidation leaving employee entitlements unpaid, the Federal government, through FEG, can make payment to employees of certain levels of unpaid entitlements. The government then becomes the creditor and is afforded the same priority in the distribution as the employee claims it paid. Importantly, the position of directors and management is different, and the priority afforded to them is capped substantially.
No. However, employee representatives and labour unions are frequently given the floor by courts in insolvency proceedings, and Belgian courts tend to lean towards decisions that safeguard the continuity of employment. Unions (through their affiliated political parties) do have an increased say in big insolvency proceedings, which can be used as leverage against the debtor/creditors.
The trustee should primarily look after the interests of the creditors. However, the trustee could in specific circumstances take into considerations the interests of other stakeholders (e.g. preservation of employment). While trade unions could exercise some (political) pressure with respect to the preservation of employment, the State does not actively participate in a rescue operation. In that respect, we note that the State (e.g. Tax and Customs Administration) is generally one of the preferred creditors and therefore could have a role in a restructuring.
For the most part, sociopolitical factors do not provide tremendous additional influence to certain stakeholders. However, the Code itself does provide protections for certain constituencies. For example, debtors may not unilaterally terminate collective bargaining agreements, qualified registered pension plans and retiree benefits unless it is able to demonstrate that the modification is necessary to properly effectuate the reorganization.
As noted above, a U.S. Trustee is appointed at the commencement of the case and is charged with overseeing the administration of the estates and able to object to certain actions of the debtor when necessary.
French trade unions tend to adopt fairly aggressive behaviors. This applies also in the context of restructuring proceedings where trade unions usually are very vocal when jobs are at risk.
The state may play a relevant role in relation to distressed businesses. Thus the CIRI (comité interministériel de restructuration industrielle) aims at helping distressed businesses turn around. The CIRI is competent for companies with more than 400 employees.
Companies with less than 400 employees can be assisted by the CODEFI (comités départementaux d’examen des problème de financement des entreprise) which are the local equivalent to the CIRI.
The Luxembourg state provides for certain schemes of support for distressed businesses with employees. In particular, businesses can ask, under certain conditions, to a specific governmental “Conjuncture Committee” to benefit from "part-time" unemployment schemes (chômage partiel), which are designed to avoid redundancies.
State support is available to local businesses in general and in particular in certain strategic branches, but not specifically to distressed businesses.
There is very little involvement or intervention by the New Zealand government in respect of distressed businesses in New Zealand. The key exceptions are where the relevant entity is partly or wholly state owned or in the extremely rare instances where the New Zealand government considers that the distressed business is systemically significant or otherwise meets the public interest criteria so as to engage the statutory management procedure (as discussed above at questions 4 and 7).
The preferential creditor regime (as discussed in question 5) provides a statutory super priority for certain classes of creditor such as the Crown (in respect of certain unpaid taxes) and employees up to a statutory cap.
Any sale of substantial New Zealand assets (value NZ$100m+) and/or 'sensitive land' (which includes most rural land and large holdings) to overseas persons requires the approval of the New Zealand Overseas Investment Office (OIO) in accordance with the Overseas Investment Act 2005. These rules also apply to distressed and/or enforcement sales of such assets. In recent years the sale of New Zealand assets to offshore investors has become a politically sensitive issue and recent changes in policy settings indicate that it will become more difficult for overseas purchasers to satisfy the necessary tests in order to obtain consent.
In principle, the state offers protection to employees, there being a special fund that may be accessed for the payment of salary receivables. At the same time, there is also a certain determinable tendency on the state’s part to create a certain legislative framework slightly favouring budgetary creditors – quite relatively recently there have been amendments that have caused confusions regarding the possibility for budgetary creditors to execute their receivables individually, separately from the insolvency procedure.
Unlike in other jurisdictions, pension authorities do not typically play an important role in restructuring or insolvency proceedings in Switzerland. Unions may play a more active role, namely where a restructuring requires a (mass) dismissal of employees. That said, employment laws in Switzerland are fairly liberal when compared to other jurisdictions.
Leaving aside the TBTF discussion for financial institutions, Swiss governmental authorities do not play a relevant role in relation to distressed businesses and state support would not generally be available. State creditors may, however, be willing to discuss payment terms etc. as any other creditor.
The court take special interest in the rights of traded bondholders, held by pension and trust funds and therefore represent the public savings, as well as in the interests of the company's employees.
The Israeli Official Receiver is a party to any insolvency proceeding and it supervises the court officers appointed in such proceedings.
Sociopolitical factors do not play a significant role in commercial restructurings in Bermuda. Typically, one is dealing with entities that are part of a wider business operating in a transnational sector such as insurance, finance, transport or international trade. Issues such as employees and pensions are therefore unlikely to be substantial. Bermuda is committed to its role as a hub for offshore commerce and any action to prejudice that position is unlikely.
In an examinership, the Court will have particular regard for the potential to save jobs when considering whether or not to approve (a) a petition for examinership or (b) a scheme of arrangement.
There is no availability of state support for insolvent companies, however statutory redundancy is available to employees whose jobs are terminated due to the insolvency of their employer via the Social Insurance Fund.
Irish law also provides a certain level of preferential treatment for certain specific classes of creditor in the event of a corporate insolvency – please see our response to Question 5 for further details.
Certain unpaid contributions into occupational pension schemes and contributions deducted from the employee’s pay are categorised as preferential debts and will rank ahead of floating charge holders in the event of a company’s insolvency.
The Pension Protection Fund (PPF) provides compensation for defined benefit occupational pension scheme members on an employer’s insolvency. The Pensions Regulator has very wide ‘moral hazard’ or ‘anti avoidance’ powers to make third parties liable to provide support or funding to a defined benefit occupational pension scheme in certain circumstances.
Large pension schemes of debtors in difficulty (e.g. BHS) will attract greater public attention and government intervention is more likely, e.g. by seeking to facilitate a deal between the debtor, the Pensions Regulator and unions (if any). Aside from these considerations, state involvement is generally limited.
As in many other jurisdictions, socio-political factors may have some influence in certain restructurings, particularly depending on the industry.
In the recent past, the state has not provided support even in important cases like the Mexicana de Aviación insolvency procedure.
We consider that there are no social political factors which influence the restructuring or insolvency proceedings. However, when a company which is relevant for the economy applies for an insolvency proceeding, the court and all the stakeholders involved in the procedure tend to be more permissive (i.e. the timings can be extended, the promotion to achieve an agreement (financial, restructuring or trading of production unit).
The recent changes in the insolvency and restructuring legal framework in Portugal created a balanced legal regime, which is in line with insolvency legislation at an European level.
The different actors have a fair chance of sustaining their positions and creditors are generally treated equally – the equality of creditors being a core principle of the insolvency regime.
The only exception is the State, which is a privileged creditor and benefits from a special rule included in the General Tax Law granting it preference over all other credits in case of approval of an insolvency plan or a special revitalization plan. This exception rule guarantees that the credits of the State are not affected by restructuring and insolvency proceedings.