How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

Restructuring & Insolvency (2nd Edition)

Denmark Small Flag Denmark

When insolvency proceedings commence against a company, it is treated as an independent legal entity. This means that the remaining part of a group is not affected by the insolvency.

If restructuring or proceedings are commenced against more companies of the same group, it will often be the same trustee or restructuring administrator who administers the estates.
Group companies are not entitled to vote in restructuring proceedings.

China Small Flag China

There’s no explicit provisions in China’s bankruptcy law on consolidated bankruptcy of members of a company group. Chinese courts respect the independent legal person status of each group member, and, as a basic principle, treat the bankruptcy of each member as an isolated case. Only when the insolvent members of a company group are inextricably intertwined, and separation between their assets would result in unreasonably high costs and severely prejudice the creditors’ rights to a fair compensation, will the courts handle the bankruptcy cases of the members on a substantively consolidated basis. If more than one member of a company group has a ground to be bankrupted, but their bankruptcy cases are not qualified to be heard on a substantively consolidated basis, their courts may coordinate with each other how their bankruptcy cases will be heard based on the applications of relevant parties and taking into account the efficiency of hearing, the order of the bankruptcy filings, the scale of each insolvent member and the location of the controlling member, among other concerns, and then request their common higher-level court to designate a court to hear all these bankruptcy cases. In practice, to facilitate the disposal of the assets and dealing with the debts of group members of which the bankruptcy cases are heard on a substantively consolidated basis, the hearing court usually appoints the same administrator for all the members involved.

Australia Small Flag Australia

In insolvency proceedings involving corporate groups, a consolidated group is not considered as a single entity. Where companies operate as a consolidated group, the starting legal position is that the ‘separate legal personality’ principle prevents creditors of an insolvent company from gaining access to the funds of other companies for payment of their debts. Having said that, groups of companies often enter into a deed of cross guarantee to afford themselves the benefit of consolidated financial reporting. That deed commits the companies a party to it to pay the liabilities of all the other companies party to it in a liquidation.

The Corporations Act does provide for a holding company to be liable for the debts of its insolvent subsidiaries in certain circumstances. These provisions enable the subsidiary’s liquidator to recover amounts from the parent company equal to the amount of the new debt incurred by the subsidiary after the subsidiary becomes insolvent, but only where the parent company failed to prevent the subsidiary from incurring the debts and where there were reasonable grounds to suspect that the subsidiary was cash flow insolvent.

The corporate veil may also be lifted in circumstances where an insolvent subsidiary is deemed to be acting as a mere agent, conduit or partner of its parent company. However, Australian courts have displayed some reluctance to lifting the corporate veil in these circumstances.

Pooling of group funds may occur in limited circumstances, as prescribed by Division 8 and Part 5.6 of the Corporations Act, being section 5.71 to 5.79L. Generally, those circumstances are where there is a substantial joint business operation between members of the same corporate group and external parties; such members of the group are jointly liable to creditors. The liquidator of the corporate group entity being wound up makes what is called a pooling determination, after which separate meetings of the unsecured creditors of each company must be called to approve or reject the determination. The court may vary or terminate any approved pooling determination.

Finally, in group insolvencies, office holders tend to be appointed from the same firm. If material conflicts arise, special purpose officeholders tend to be appointed.

Belgium Small Flag Belgium

Under Belgian law, there is no so-called company group law. Each company within a group structure is considered to be a separate legal entity (except if the conditions for piercing the corporate veil are met). Hence, the insolvency of a parent company does not automatically lead to the insolvency of its subsidiaries.

The Netherlands Small Flag The Netherlands

For the purposes of (amongst others) streamlining and coordination with respect to insolvency proceedings of group companies, the same person is often appointed as the trustee for, in principle, all members of the group. It is of relevance to note that even though the trustee could be the same person for various members of a corporate group, each proceeding remains distinct and separate from the other.

There are no specific Dutch rules on group insolvencies.

United States Small Flag United States

The Bankruptcy Code permits, and courts routinely allow, affiliated debtors or parents and subsidiaries with integrated operations to file jointly and seek joint administration of their chapter 11 cases, thus allowing debtors to combine all filings on one docket for administrative ease and cost efficiency. The joint filing and administration of a case is distinct from substantive consolidation, for joint administration does not allow a court to distribute group company assets pro rata without regard to the assets and liabilities of the individual corporate entities in the proceeding. Rather, when entities are jointly administered, the distributive value allocated to each entity within a corporate group depends on the assets and liabilities of each entity in the group and a creditor with a claim against one entity has no rights against another entity, as joint administration is merely a procedural efficiency.

In contrast, substantive consolidation combines all assets and liabilities of a group of debtors into one estate for voting and distribution purposes, creating one fund from which all creditors of all entities are paid. U.S. courts generally only allow substantive consolidation when the various estates are too intermingled to properly distinguish amongst the entities.

France Small Flag France

The French insolvency regime did not include specific rules tailored for corporate groups until Law No. 2015-990 dated 6 August 2015. Before that, insolvent corporate groups were obliged to initiate separate plenary insolvency proceedings for individual companies. This new law created specialised commercial courts which have jurisdiction in case of large insolvency cases. If a specialised commercial court has jurisdiction over the parent company, it will also have jurisdiction over its subsidiaries.
In addition, the corporate veil may be lifted and insolvency proceedings initiated against a company may be extended to another company on the ground either that (i) the debtor is held to be a fictitious legal entity, or (ii) that the assets and liabilities of the parent company and those of its subsidiary are so intertwined that they should be deemed to be one single entity.
Finally, European law tends to take into consideration the existence of a corporate group. EU Regulation 2015/848 of the European Parliament and of the Council dated 20 May 2015 has introduced a group co-ordination proceeding between all courts before which an insolvency proceeding is opened by an entity of a group.

Luxembourg Small Flag Luxembourg

Under Luxembourg law, there is no recognition of the concept of group. Each company within a group structure is considered to be a separate legal entity (except if the conditions for piercing the corporate veil are met). Hence, the insolvency of a parent company does not automatically lead to the insolvency of its subsidiaries.

New Zealand Small Flag New Zealand

Separate legal personality

In an insolvency proceeding involving corporate groups, the members of the group are not considered as a single entity. The starting legal position, is that the 'separate legal personality" principle prevents creditors of an insolvency company from gaining access to the funds of other group companies for payment of the debts of the insolvent company. The common exception to this principle is where guarantees are granted which commit one or more related company of a debtor to pay particular debts of that debtor.

Pooling orders in liquidation

A liquidator may seek an order of the Court under section 271 of the Companies Act 1993 that the liquidation of two related companies proceed as if they were one company (a pooling order).

The definition of 'related company' is broad and includes majority shareholders, subsidiaries, companies which are both related to a third company or companies where the businesses of the two companies are carried on such that the separate businesses of each company are not readily identifiable.

In determining whether to grant a pooling order the Court will have regard to the extent to which any of the companies took part in the management of any of the other companies, the conduct of any of the companies towards creditors of any of the other companies, and the extent to which the circumstances that gave rise to the liquidation of any of the companies are attributable to the actions of any of the other companies.

Pooling orders in voluntary administration

A administrator or creditor may seek an order of the Court under section 239AER of the Companies Act 1993 that the administration of two or more related companies proceed as if they were one company (a pooling order).

The applicable definition of 'related company' is the same in administration as that discussed above in the context of liquidation and the Court will have regard to the same factors as for liquidation in determining whether to grant a pooling order in an administration situation.

Cooperation between office holders

It is not unusual in New Zealand for receivers and liquidators or receivers and administrators to be appointed to the same company. In situations of parallel appointment, there is scope for cooperation between office holders with the receiver typically responsible for the realisation of assets subject to relevant security, whilst the relevant liquidator or administrator undertakes meetings of creditors, administration of unsecured claims and reporting.

Romania Small Flag Romania

Regulation in the area of insolvency of groups of companies is based on rules providing for the “consolidation” of the insolvency procedures opened against the members and provisions regarding their “coordination”. Consolidation implies that all the procedures opened against the companies that are part of a group be reunited in front of one court and the same insolvency practitioner be appointed to administer the group’s insolvency procedure. The second component implies the regulation of mechanisms of cooperation and coordination of the insolvency procedures initiated against members of the group of companies. The insolvency law encourages communication of information and it even obliges insolvency practitioners to cooperate as much as possible based on a protocol for the integrated performance of the economic, legal and operational activities at the group’s level, as well as by the granting of the right to participate in the creditors’ meetings or the creditors’ committees of any of the group members. Thus, these measures may lead to the improvement of the economic decisions made in the insolvency proceedings and to the avoidance of making of contradictory decisions at the level of the group of companies.

Switzerland Small Flag Switzerland

Swiss insolvency law does not recognize the concept of substantive consolidation. Hence, separate insolvency or restructuring proceedings will have to be initiated for each member of a corporate group. That said and pursuant to Art. 4a DEBA, Swiss insolvency authorities are held to coordinate their actions to the extent possible in a group insolvency. A similar obligation is currently proposed for international group insolvencies where the Swiss authorities would have to coordinate and cooperate with foreign office holders.

Updated: April 19, 2018