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 (3rd edition)
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.
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 many people.
There is no state support available to distressed businesses in the Cayman Islands and sociopolitical factors do not generally play any part in restructurings and insolvencies.
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, by jointly formulating a coordination mechanism regarding protection of state-owned assets, safeguarding of financial security, guarantee of employee placement and reemployment, equal protection of the non-public economy, etc.
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.
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. However, companies with less than 400 employees can be assisted by the CODEFI (“comités départementaux d’examen des problème de financement des entreprises”) which are the local equivalent to the CIRI.
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 state plays no role in the insolvency of companies in Bermuda. The only possible exception to this is that the Bermuda Monetary Authority may commence the insolvency of a Bermuda company where it is in breach of Bermuda regulatory statutes.
The States of Guernsey do not offer financial support to distressed businesses. There is little political will to interfere in restructuring proceedings save to ensure that the legislative framework is up to date and effective.
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.
- There are no relevant socio-political factors which are relevant to restructuring or insolvency in Jersey.
- No state support is available for distressed businesses. Save where there is a public interest in a company being wound up, a Jersey company can be too poor to be wound up.
Paternalistic view to supposedly disadvantaged constituencies -such as labor- have had significant impact in insolvency proceedings. From example, in the case of Mexicana de Aviación, an airline, the courts allowed the reorganization to last four years in hopes of securing financing to cover labor claims.
The decisions concerning the debtor’s course of action and the payment terms are adopted by a qualified majority of creditors; in this regard, if labor creditors constitute a minority, they will have no major influence or strength in decision making.
However, under specific circumstances the creditors may agree on preserving employees or unions may exercise certain (political) pressure with regard to the preservation of jobs, but is to be examined on a case by case basis.
The Government is not actively involved in restructuring proceedings; however, through the Tax Authority (SUNAT), it plays a major role in restructurings and liquidations, by monitoring the development of these proceedings. Also, when social disruptions arise, the Government fosters dialog among creditors, debtors, and other stakeholders.
In Poland, state sometimes plays active role in restructuring, by agencies or state-aid, when it is available and allowed under the EU regulations. Quite often that leads to improvement of employees situation and protection of workplaces.
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.
State support for insolvent companies, strictly speaking, is not allowed. Still, both in restructurings and in bankruptcies, the state funded Salary Guarantee Fund will be available to cover all salaries within certain limitations in time and amount etc. And even if the state will have a recourse claim for any all sums paid out, the recourse claim will not have priority (unlike employees’ claims which are preferential) nor will social fees on such guaranteed salaries be claimed. That in effect constitutes a type state support for the purpose of protecting employees, while at the same time facilitating restructurings.
Further, employment protection has a strong tradition in Sweden and is also allowed to influence insolvency proceedings to some extent. Aside from the state securing salaries to employees in insolvent companies and insolvency laws providing preferential treatment for salary claims, insolvency office holders are allowed by law to consider not only commercial interest but also to safeguard the continuity of employment. Also, unions have a certain advanced position and are allowed to be represented in creditors’ committees, and are given the right to negotiate employment rights and terminations etc when insolvent businesses are wound up.
The state through the Tax Authorities also often play a key role as one of the main creditors in in insolvency proceedings. Even if tax claims, and salary guarantee recourse claims, have no priority, these claims are still often substantial enough for the state to have certain leverage as creditor, for example in voting on a public composition in restructurings which will require a certain majority.
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 in comparison with 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.
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 Code, which is the product of the federal political process in the U.S., has been periodically revised since its adoption over four decades ago to reflect revisions proposed and lobbied for by various stakeholders, including: (i) “safe harbor” treatment for many types of investments; (ii) time limits for debtors to assume or reject a prepetition lease without landlord approval; (iii) section 1114 which prohibits a debtor from unilaterally modifying the payment of retirement benefits in a chapter 11 case without court approval; and (iv) sections 507(a)(4) and (5) which permits certain capped-amounts for prepetition employee wages, benefits, and contributions to employee benefit plans to have the status of priority unsecured claims.
Other than requiring debtors to comply with certain reporting and related obligations prescribed by the Office of the U.S. Trustee, individual states generally does not get involved in the affairs of a private company undergoing a restructuring or liquidation. In certain recent, and large, chapter 11 restructurings (e.g., General Motors, Chrysler), however, the federal government and some individual states have stepped in to provide necessary funding and other significant support.
Generally, the UK does not have the major sociopolitical factors impacting restructurings that exist in certain other jurisdictions, and state involvement in distressed businesses is generally limited to non-existent.
Certain unpaid contributions into occupational pension schemes and contributions deducted from the employee’s pay are categorized as preferential debts and will rank ahead of floating charge holders in the event of a company’s insolvency. The Government also plans reforms to the preferential creditor regime, to make the UK tax authority, HMRC, a “secondary preferential creditor” for certain tax debts, including VAT and PAYE, from April 2020, as mentioned above.
The Pension Protection Fund 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 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.
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.
In the context of insolvency, the Belgian legislator has granted strong legal securities for employees, FPS FINANCE (treasury department) and the National Social Security office. Labour unions and employee representatives have an increased say in larger insolvency proceedings.
The enterprise courts are obliged by law to set up one or more chambers for companies in difficulties in order to monitor the situation of debtors in difficulty, to safeguard the continuity of their activities and to ensure the protection of the rights of creditors. Useful information and data on debtors experiencing financial difficulties are centralized at the enterprise court of the territory in which the debtor has its COMI. They can summon and hear the debtor in order to obtain all information about the state of affairs and about any reorganization.
Both current statutory provisions and the Courts assign great importance to rights of employees of distressed companies. Under the current state of affairs, employees of a corporation in dissolution proceedings are entitled to payment from the State (National Insurance Institute) for unpaid wages, up to a limit specified by law. This provision does not apply to recovery proceedings.
The new Insolvency Law includes a new interim provision regarding this matter, which stipulates that employees of a corporation under recovery proceeding would also be entitled to receive the payment. Since this amendment may also be abused, and involves significant budgetary cost, it was formed as an interim provision for three years, during which the implications thereof would be studied.
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.
Formally, there is no state support available for a distressed business. In practice, there have been seen cases where distress businesses relate to or affect the state-owned enterprises. In these cases the state-owned enterprises often would take certain actions (buyout partially/entirely the distressed business) to ensure that they would not be affected by or could overcome the effect of such distress business.