Is it a debtor or creditor friendly jurisdiction?
Restructuring & Insolvency (2nd Edition)
From the letter of the law, IBL is a piece of legislation that can be considered as creditor friendly, given the fact that the IBL provides creditors with various strong rights to have control on the restructuring and insolvency process.
Nevertheless, the consistency of the inconsistent practical application of the IBL provisions by various relevant actors (e.g.: judges, receiver, administrator) which among others related to or driven by the following factual conditions, as well as the barriers mentioned below in answer to question 17, may have lead Indonesia be deemed as a debtor friendly jurisdiction:
- Indonesian judges operate in an inquisitorial legal system, have very broad fact finding powers and a high level of discretion in relation to the manner in which those powers are exercised. Consequently, Indonesian judges can sometimes be influenced by factors, issues and evidence which may not be immediately apparent on the face of the court documents in question;
- Under Indonesian's civil law system, the common law doctrine of precedent does not exist and each case must be determined on its own facts and merits although consideration' may be given to previously decided similar cases and academic theories;
- In reality, any unjustifiable legal basis being raised by certain parties may be broadly interpreted by the Indonesian judges to serve certain purpose, leading to an unpredictable outcome.
In the context of a bankruptcy, Canada is understood to be a secured creditor-friendly jurisdiction. Secured creditors are not affected by the stay of proceedings in a bankruptcy. Provided that secured creditors comply with any legal requirements as applicable under provincial law, secured creditors are permitted to realize on their security notwithstanding a bankruptcy.
In a restructuring, however, Canada is seen as being more debtor-friendly. The claims of secured creditors are also stayed. Debtors may obtain interim financing and the creation of various prior ranking restructuring charges (such as a DIP Charge, a D&O Charge, a Key Employee Retention Charge, etc.), which provide debtors with significant resources in order to effect a restructuring. The CCAA, in particular, does not provide for a maximum duration of the Court ordered stay of proceedings, thereby providing the debtor with the ability to maintain control of the reorganization process. Under both the BIA and the CCAA, the debtor may also terminate agreements more easily than its counterparts to such agreements. Although the BIA and the jurisprudence under CCAA provide for checks and balances between the debtor’s and the creditors’ rights, when in doubt, Courts will generally favour the debtor if it will increase the likelihood of the debtor’s restructuring being successful, even if it could negatively affect the rights of creditors.
On the one hand, German insolvency law is creditor friendly. As examples:
- Pursuant to Sec. 1 Insolvency Code, the main purpose of the German Insolvency Code is the joint satisfaction of the creditors.
- German law honors creditors’ security rights
- Creditors have a decisive role via the creditors’ assembly and the creditors’ committee (see Question 11) and can influence the outcome of the proceedings.
However, on the other hand, the German jurisdiction provides for rules which certainly allow debtors to restructure their business. In response to cases of forum shopping and political discussions at the EU level, German law has become more debtor friendly and this tendency will continue (e.g. with the introduction of a preventive restructuring framework as currently discussed at the EU level).
Both. The liquidation process is creditor friendly and the restructuring processes, debtor friendly.
There is a pro-debtor-bias in Brazil.
Brazilian Courts, when ruling, lends more weight to social justice principle, leaving in second place the legality principle. In this scenario, it is not uncommon to observe a willingness of Brazilian Courts to ignore contracts in order to promote social justice.
In a study conducted in the year 2002, among members of Brazilian elite, by two Brazilian political scientists, Lamounier and Souza, it was shown that only 7% of the members of the Judiciary were prepared to rule on contracts independently of social considerations. Also, 61% of the judges interviewed answered that the achievement of social justice is enough to justify decision in breach of the contracts. This situation can be observed in an particularly acute way in the Judicial Reorganizations filed around the country, notably, because the BRBL stress the importance of the debtor to overcome its economic and financial crisis, in order to maintain the debtor’s business as a source of production and employment, thus contributing to preserve the company and its social aim and to foster economic activity. Due to that, Brazilian Courts tend to see the company as a social entity that despite its distressed situation it is still able to generates wealth.
Also, the Judiciary’s slow pace argues strongly in favor of the debtors, increasing the difficult for creditors to enforce their rights or to repossess collateral.
The Czech Republic is a creditor-friendly jurisdiction as to corporate insolvencies and a debtor-friendly jurisdiction as to consumer insolvencies.
The Cayman Islands has traditionally been, and continues to be, regarded as a creditor friendly jurisdiction, with creditors being treated equally irrespective of the jurisdiction in which they are domiciled.
With respect to restructuring proceedings, the creditor cannot take the initiative, nor has the right, to control the proceedings both institutionally and factually in Japan. For instance, in general, the debtor in civil rehabilitation proceedings or the trustee in corporate rehabilitation proceedings has the right to control almost the entire restructuring proceedings. As a result, we believe that Japan is a debtor friendly jurisdiction.
Traditionally, Singapore has been seen as a creditor friendly jurisdiction. However, the 2017 amendments to the Companies Act have introduced a number of debtor friendly provisions. These include:
a. A debtor can apply to Court to obtain approval for rescue financing with super-priority over all other creditors.
b. An automatic 30-day moratorium against creditor action upon the filing for an application by the debtor company.
c. The ability to cram down dissenting classes of creditors in schemes of arrangement.
d. A relaxation of the test of judicial management – previously, a company had to be actually insolvent before a judicial manager could be appointed. Now, an applicant only needs to show that a company is likely to become insolvent.
British Virgin Islands
While there are measures that are designed to protect both types of stakeholder, and the BCA provides significant advantages for companies while they are solvent, the onset of insolvency triggers a number of important protections for creditors. As such, the BVI is likely to be seen as a creditor-friendly jurisdiction. There is no real parallel to the ‘debtor-in-possession’ principle that applies in some jurisdictions, and, as noted above, company directors only retain such powers after the making of a liquidation order as the liquidator permits.
Generally, Denmark is a creditor friendly jurisdiction as restructuring and insolvency proceedings may be commenced at the petition of a creditor.
As a starting point, the debtor cannot avoid the restructuring or insolvency proceedings if the creditor is able to prove that the conditions have been fulfilled.
The purpose of China’s bankrupt law is to settle claims and debts fairly and protect the legitimate rights and interests of both creditors and debtors, so as to maintain the order of socialist market economy. Although maximizing creditors’ interests is not highlighted in China’s bankruptcy law, the provisions on creditors’ meeting, the right to request for invalidation of prescribed acts, the right of offset, exemption right, etc. clearly demonstrate the legislator’s intention to lean towards protecting creditors’ interests during liquidation. In restructuring proceedings, the introduction of voting groups composed of capital contributors and the voting power granted to voting groups show the legislator’s attention to the rights and interests of contributors/shareholders and to equal protection of the interests of all parties including creditors, debtors and contributors.
Australia is widely considered to emphasise the rights of creditors over debtors and as such is recognised as a creditor-friendly jurisdiction. Whilst there are some limitations on the options that might otherwise be available to distressed companies and some inflexibility in certain of the tools available to insolvency practitioners, Australia’s insolvency regime is, for the most part, primarily focused towards protecting the rights and interests of creditors over the interests of debtors. For example, Australia’s voluntary administration regime is controlled by creditors to the exclusion of management and members and its purpose is designed to maximise creditor returns. Further, unlike the United Kingdom for instance, receivership is alive and well in Australia.
Creditors are active participants in all insolvency processes in Australia. They can enforce their rights in each process and, whilst there are some timing limitations placed on their enforcement rights in a voluntary administration scenario, enforcement rights over secured assets are otherwise unfettered.
Secured creditors and employees enjoy a statutory priority in a distribution of assets and, in some circumstances, unsecured creditors can also place themselves in a position of protection. Unlike secured creditors, unsecured creditors are given no legal right to priority, yet due to a particular relationship that may exist with a debtor (for example, as a supplier of essential materials), they can exercise that power to obtain payment and ensure future payments as a practical necessity to maximise value and keep the debtor business running.
Belgian insolvency laws provide for a good balance between the debtor and creditor’s interest. We do identify a tendency towards preserving the continuity of the debtor’s activities, combined with an increased accountability of the debtor towards creditors.
The Netherlands is generally perceived as a secured creditor friendly jurisdiction.
The United States is widely perceived as debtor-friendly jurisdiction, illustrated in large part by the deference afforded debtors. The debtor-in-possession regime permits companies to reorganize as going concerns with existing management remaining in place and running the business as it deems fit with courts examining their actions under the flexible “business judgment standard.” Further, in chapter 11 proceedings, the debtor has the exclusive right to propose a plan for the first 120 days, which may be extended through the date that is 18 months after the filing of the chapter 11 petition..
Historically, the French restructuring system has always been perceived as a debtor-friendly system. More recently, however, French legislation has rather favoured creditors’ interests and the courts have favoured a number of lender-led restructurings enabling lenders or a group of lenders to take control of the debtor out of the hands of its existing shareholders (mainly financial sponsors). Furthermore, a number of alternative funds have increased their focus on the French market and as such have provided liquidity to French banks willing to sell their claims on the secondary market.
The Order dated 12 March 2014 readjusted the balance of powers between creditors and debtors with for example the possibility for creditors to propose competing plan.
More recently, the law dated 6 August 2015 has introduced a system of shareholder squeeze-out under which shareholders may be forced to sell their shares if they do not consent to share capital increases required to redress the distressed business.
Luxembourg is generally perceived as a secured creditor friendly jurisdiction, especially in light of the very wide implementation under Luxembourg law of the Financial Collateral Arrangements Directive.
New Zealand is generally considered to be a creditor friendly jurisdiction. Whilst there are some procedural limitations in place on enforcement and recovery in respect of consumer debt and security over real property, in general New Zealand's insolvency regime is focused towards protecting the rights and interest of creditors over the interests of insolvent debtors.
Romanian jurisdiction is a balanced one. The purpose of the insolvency law is to institute a collective procedure to cover the distressed debtor’s liabilities, obviously by relating to its capacity to fulfil its obligations by the assets at its disposal, and with the granting, when possible of the chance of recovery. Thus, on the one hand, the Romanian legislation in the matter of insolvency grants the debtor the necessary protection for recovery, and, at the same time, it institutes for creditors certain rights allowing them to participate in the decision-making process with regard to the aspects related to opportunity. At the same time, for guaranteeing the conducting of a legal and balanced procedure, the law institutes clear mechanisms by which the court of law controls the legality of the measures taken either by the debtor or the creditors or by the official receiver or judicial liquidator.
On balance, recent amendments to the DEBA have strengthened the role of the debtor and have made composition proceedings a more attractive tool for restructurings from a debtor's perspective. In particular, the availability of a silent (not published) provisional moratorium and the new statutory rule regarding an exit from a composition moratorium without the need for a composition agreement are aimed at facilitating in-court restructurings. That said, creditors are still adequately protected in various ways so that, from an overall perspective, the DEBA strikes a fair balance between the interests of the involved parties. Active creditors may exercise a significant influence on the proceedings (broad information access rights, consent requirements, participation rights at court hearings etc.) and passive creditors are protected by the supervision of the proceedings by an administrator (which is regularly appointed although not mandatory for all types of proceedings) and the court. Still, in our perception, the majority of restructurings is being pursued outside of formal restructuring proceedings. This route is typically faster but involves additional risks, namely for executive bodies of the debtor.
Israel was generally a creditor's friendly jurisdiction. In the past several years, certain limitations were imposed on secured creditors in order to increase the chances of recovery and protect the interests of other stakeholders. The new Insolvency and Economic Rehabilitation law, might change this assessment, as it puts the possible rehabilitation of debtors as a main goal. I suppose practical answer to this question will be possible after the courts will start implementing the provisions of the new Insolvency Law.
However, the Israeli law and ruling still provide many protections and tools to creditors. Those include the requirement to appoint a court expert in any traded bonds Arrangement; the right of a creditors to initiate and approve a recovery plan notwithstanding the lack of consent of the company (Liquidation Case 36681-04-13 IDB Development Company Ltd. v. Hermetic Trust (1975) Ltd. Series 7 and 9 Bond Trustee); and the recent adoption of the creditors committee concept in the new Insolvency Law.
The statutory scheme of Bermuda casts it as a creditor friendly jurisdiction with the emphasis being on creditor recoveries. There are no regimes in place akin to a UK administration or a Chapter 11 proceeding under the US Bankruptcy Code. In recent years however, there has been a strong judicial move in Bermuda, through case law, to embrace a culture of corporate rescue notwithstanding that the Companies Act 1981 does not expressly support such an approach. This has in turn has moved Bermuda away from its previous status as being creditor friendly. To date, it is only decisions at first instance which have promoted this approach and it remains to be seen whether the Courts of Appeal take a similar interpretation of the relevant statutory provisions.
We believe that Ireland should generally be regarded as a creditor friendly jurisdiction but one in which the legitimate interests and rights of borrowers and other obligors are also protected.
The English restructuring and insolvency regime has historically been perceived as a creditor friendly jurisdiction (in particular for senior secured creditors), but it is extremely effective for both creditors and debtors. The English courts are the forum of choice for major international financial and other contracts because the system is seen as flexible and commercially-oriented whilst also offering certainty and predictability.
Overseas debtors have increasingly looked to take advantage of the flexibility of the English regime (e.g. by using schemes of arrangement or administrations) and they have established jurisdiction by moving their COMI, amending the governing law of their debt documents, or otherwise.
The courts have been in certain cases particularly accommodating to foreign debtors. In Codere, it was found that incorporating an English subsidiary that assumed the debtor group’s liabilities could be sufficient for the court to establish jurisdiction for a scheme of arrangement. The court considered that ‘forum shopping’ in this manner may be justified if there is a compelling case that a scheme will be more favourable than alternative restructuring regimes in foreign jurisdictions (and much reliance was placed on the considerable creditor support in that case).
We consider that our law is a well-balanced law. Its main purpose is to allow an insolvent entity to get a fresh start by reaching out an agreement with its creditors, but at the same time provides good protection to those creditors. Our Insolvency Law is based on the UNCITRAL Law.
According to our experience in insolvency proceedings in Spain, at the initial phase the, court usually tries to benefit the debtor in order to get over the insolvency. However, once the procedure advances and the liquidation phase is initiated, the court seeks to facilitate and accelerate the liquidation of the assets in order to satisfy totally o partially the credits.
There is a fair balance between the positions of debtors and creditors in the Portuguese jurisdiction and there is no identifiable trend to favour neither of these parties.