Is it a debtor or creditor friendly jurisdiction?
Restructuring & Insolvency (3rd edition)
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 generally 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 balance, it is safe to regard Canada as a secured creditor-friendly jurisdiction and recent Canadian jurisprudence, including the decision in Romspen Investment Corporation v Atlas Healthcare (Richmond Hill) Ltd. et al, continues to support this notion. In Romspen, where stakeholders had sought two competing applications – a receivership application brought by secured creditors seeking, inter alia, the the appointment of a receiver in respect of all of the undertaking, assets and properties of the debtors, and a CCAA application brought by certain entities related to the debtor seeking, inter alia, an initial stay of proceedings in respect of the debtor and the approval of a proposed debtor-in-possession credit facility – the court sided wth secured creditors in granting the receivership application finding it just and convenient to do so in light of the various factors surrounding the competing applications.
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.
The Cayman Islands is considered to be a creditor friendly jurisdiction. Once a company is insolvent, the interests of its creditors are paramount and the Court will generally have regard to creditors' wishes in exercising its discretion. Most significantly, no Cayman Islands insolvency procedure prevents a secured creditor from enforcing its security.
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.
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.
Historically, the French restructuring system has always been perceived as a debtor-friendly system. However, a certain shift has begun with regard to the various reforms that have taken place with a view to restoring balance in creditors' rights.
Over the past few years, 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 shift was further emphasized with Order dated 12 March 2014 which has readjusted the balance of powers between creditors and debtors with for example the possibility for creditors to propose alternative plans (when committees are constituted). This trend was confirmed by the “Loi Macron” dated 6 August 2015 with the introduction of a shareholder squeeze-out mechanism 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.
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. ). In March 2019, the European Parliament adopted a directive on the preventive restructuring framework. The aim of this directive is to simplify corporate restructurings prior to an insolvency. After approval by the Council and publication in the Official Journal, the national legislators have two years to transpose the Directive into national law. The German transposition of this directive will most likely lead to a more debtor friendly pre-insolvency restructuring. However, any such pre-insolvency restructuring will finally also require the majority vote of the involved creditor classes.
Bermuda is generally viewed as a creditor friendly jurisdiction by reason of the fact that there is no debtor in possession mechanism to prevent enforcement of security in insolvency proceedings. In addition, the powers of the Supreme Court to use provisional liquidation for the purpose of restructuring remains limited to circumstances in which the creditors as a whole support the company’s restructuring efforts.
Guernsey has historically been and remains a creditor friendly jurisdiction on insolvency.
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.
- Jersey is generally and properly recognized as being a creditor friendly jurisdiction with particular favour for secured creditors.
By international standards, Mexico is a creditor-friendly jurisdiction.
Peru is a debtor-friendly jurisdiction because the requirements to be declared insolvent, especially in the ordinary voluntary insolvency proceeding, are not numerous or hard to achieve. In addition, the start of an insolvency proceeding triggers an automatic stay that allows the debtor in possession of assets to make business decisions as an ongoing concern or to look for an orderly exit from the market, without the urgency to pay overdue debts immediately.
Polish system of regulations related to insolvency has been amended significantly quite recently because of i. a. lack of effectiveness in recovery rates for creditors and insufficient number of successful restructuring procedures conducted within bankruptcy with possibility to make an arrangement.
After the reform of 2016, there are now 4 new restructuring proceedings, and new legal institution – pre-packaged liquidation/administration, based on British and American regulations – so called pre-pack, regulated in the Bankruptcy Law.
All this new legal instruments create a framework which places Poland as beneficial and encouraged restructuring environment for both debtor and active creditors. It should be pointed out however, that the Restructuring Law significantly improved the situation for the debtor with relation to previous law provisions, and – what is even more important – introduced pre-packaged sale which is a new legal institution, beneficial for all involved parties – insolvent debtors, creditors, investors, the economy and the judiciary.
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.
Could be said that Swedish insolvency laws are fairly well-balanced between debtor and creditor interests. On the one hand management is allowed to remain in place and in control in restructurings, and no dilution or debt for equity can be imposed involuntarily on a debtor’s shareholders. At the same time, creditors’ rights are also protected, in particular claims which are secured and creditors with preferential rights such as accountants, employees etc, none of which claims are included and crammed down in statutory compositions.
On balance, as a result of the amendments made to the DEBA in 2014, the role of the debtor was strengthened and composition proceedings have become 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 aim 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 pursued outside of formal restructuring proceedings. This route is typically faster but involves additional risks, namely for executive bodies of the debtor.
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.
The U.S. is generally considered to be a debtor-friendly jurisdiction due to certain key features of the Code, including: (i) chapter 11 permits companies to reorganize, rather than requiring their immediate liquidation, thereby preserving and protecting operations and going-concern value; (ii) current management generally remains in place rather than being automatically replaced with a trustee or an administrator; (iii) a broad, global automatic stay is imposed throughout a bankruptcy case which provides a debtor with the necessary “breathing spell” to formulate an emergence-focused business plan; (iv) courts grant significant deference to debtors by permitting decisions to be evaluated under the relatively lenient “business judgement” standard; (v) unless the bankruptcy court orders otherwise, debtors, alone may have the right to propose and solicit a reorganization plan for up to the initial 20-month period of a case, thereby providing debtors with meaningful control of the process; and (vi) all types of debt may be impaired. With that said, the Code and other aspects of U.S. law seek to balance the rights of all parties impacted by a bankruptcy filing and provide safeguards for creditors.
The UK 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 - with considerable deference to the commercial terms agreed by the parties - and the highest possible reputation for independence / lack of corruption.
Overseas debtors have increasingly looked to take advantage of the English restructuring and insolvency framework, including taking steps to establish jurisdiction here e.g. by moving the debtor’s CoMI, amending the governing law of their debt documents, or otherwise.
Hungary is still rather a debtor friendly jurisdiction, as the rights and interests of debtors are more dominant than the rights and interests of creditors to recover their claims.
Belgian insolvency law is highly regulated and strikes a good balance between the rights of debtors and creditors.