Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
Restructuring & Insolvency (2nd Edition)
Under Danish law creditor committees cannot be formed in restructuring proceedings only in bankruptcy proceedings. In practice, however, it is not usual that a creditor committee is formed in bankruptcy proceedings.
If a creditor committee is formed, the creditors will be permitted to be represented by an attorney. However, it is only the appointed members of the creditor committee who may be paid by the estate in bankruptcy. Expenses for the members’ own advisors will as the predominant main rule not be paid by the estate in bankruptcy.
The trustee does not require the consent of the creditor committee in order to make transactions but the trustee must inform the creditor committee prior to material decisions. Non-compliance with the duty to inform may result in a complaint from the bankruptcy court and possibly appointment of a new trustee. The creditor committee does not have the authority to make decisions.
Existing contracts and assets / business sales
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract? What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
• Contracts in restructuring processes
With the consent of the restructuring administrator the debtor may as a starting point continue contracts/bilateral contracts entered into. The debtor may also terminate the contracts with the consent of the restructuring administrator which is usually also the case for non-terminable contracts unless the non-terminability is secured by registration.
In restructuring proceedings, contracts are treated under the same rules as contracts in insolvency proceedings so please see the section on such contracts.
It is noted that the debtor cannot continue the contract without the consent of the other contracting party if except from the restructuring proceedings the other contracting party was entitled to terminate the contract without notice for other reasons that debtor’s delay in the contractual payment.
In restructuring proceedings, the debtor may in certain circumstances continue agreement than the other contracting party had terminated without notice no later than 4 weeks prior to the restructuring.
If the creditors approve a restructuring proposal that includes a transfer of business, the contracts may in certain cases be transferred to the buyer without the consent of the other contracting party.
• Contracts in insolvency proceedings
The insolvent estate may decide to let the insolvent estate adopt the contract or not. Consequently, it cannot be effectively agreed in advance that insolvency or restructuring proceedings means that the agreement be terminated without notice. The other contracting party may require that the insolvent estate decides on the adoption of a contract without undue delay.
If the insolvent estate does not adopt the contract, the other contracting party may as a starting point terminate the agreement without notice and claim damages for its loss suffered by the non-performance of the contract.
If the insolvent estate adopts the contract, the insolvent estate assumes the rights and obligations under the terms of the contract.
The maintenance of retention of title in restructuring and insolvency proceedings requires that the retention of title is valid prior to the commencement of the restructuring proceedings or the issue of the insolvency order. Right of set-off may as a starting point be maintained but it is governed by the Danish Insolvency Act.
If the insolvent estate adopts the contract, the other contracting party may only terminate the contract without notice if the insolvent estate is in breach of its contractual obligations unless the other contracting party could terminate without notice on the basis of the general rules of Danish law of obligations.
However, even though the insolvent estate has adopted the contract, the insolvent estate is always entitled to terminate the contract by giving a month’s notice if the contract concerns the delivery of an on-going service.
• What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
In restructuring as well as insolvency proceedings transfer of individual assets and entire businesses may take place.
In restructuring proceedings, the entire business or part of such business is sold on the basis of a restructuring proposal made by the restructuring administrator. The proposal must be approved by the creditors.
The transfer typically takes place free of claims and liabilities but the final terms depend on the restructuring proposal.
When insolvent estates sell assets together or one by one, such assets will as the predominant main rule be transferred without any liability for the insolvent estate or the trustee and any buyer must consequently take over the asset as is.
In insolvency proceedings the trustee is not obliged to ask the creditors unless the assets transferred are charged.
If the assets are charged, the creditor must accept the transfer unless the sale is a forced sale.
If employees are transferred as part of a transfer of the entire business, the buyer takes over the employees’ employment contracts, including the terms of the employment contract and any due payments.
• Credit bidding
Credit bidding is allowed under Danish law, but it requires that the chargee outbids the other bidders in respect of the charged asset.
• Pre-packaged sales
Legislation on pre-packed sales has not been passed in Denmark.
Liabilities of directors and others
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The board of directors and the executive board (the ”management”) of a business that suffer from cash unavailability must pay particular attention to the so-called ”time of no avail”.
The time of no avail cannot be fixed in advance but it defines the time at which the management ought to have realised that the business could not continue operations properly without any further losses for the creditors.
If the management continues operations beyond the time of no avail, the trustee of the subsequent insolvent estate and creditors that believe that operation beyond the time of no avail has caused losses for the business and/or the creditors may at a later time raise a claim for damages against the former management.
If the business has passed the time of no avail, the management is also obliged to ensure that payment of creditors in an insolvent business takes place in a manner that complies with the ranking of creditors so that some creditors are not given preference over others.
In addition, the management must ensure that the business fulfils the general bookkeeping and tax obligations as these factors are decisive in a later assessment of any management liability.
The management may incur liability, see above, but may also be disqualified by the insolvency court if up to the insolvency the management has not fulfilled its management obligations. Disqualification means that each management member cannot participate in the management of a limited liability company without being personally liable for claims against the company.
• Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The executive board and shareholders may incur liability if decisions made results in losses for the company or a third party. The executive must have acted intentionally or negligently in order to incur liability for the loss that the decisions have caused the company or a third party.
The assessment of liability is more severe in case of shareholders as the shareholder must have acted with gross negligence in order for him to incur liability for the loss that the company, other shareholders or a third party has suffered. This is consequently an exception to the rule that as a starting point the shareholder cannot incur liability.
The formation of a creditor committee is subject to vote by the creditors’ meeting. In practice, it is normally the administrator who proposes whether or not to set up a creditor committee, and the administrator’s role in the formation and composition of a creditor committee is crucial. A creditor committee is not a must in restructuring, and it is usually formed in large and complicated restructuring cases. The Enterprise Bankruptcy Law has laid down in detail the powers of a creditor committee, for example, monitoring the management, disposal and distribution of the debtor’s assets, proposing to hold meetings of creditors, and exercising other powers granted by the creditors’ meeting. In addition, the law also requires that an administrator shall promptly report to the creditor committee if it disposes of the debtor’s assets in a way prescribed by the law and having a significant impact on the interests of the creditor.
There are no words in the law as to retainment of advisers by creditor committees. Advisor’s fees may not be paid out of bankrupt assets. Creditor committees or creditors may hire advisors at their own discretion and expense.
Committees in the Australian insolvency regime are creatures of statute and are not seen in the context of representing creditor stakeholder groups as they might in other jurisdictions such as the United States. In this context, committees are fairly common in Australia, particularly in large liquidations (where they are most often used) where it is difficult for the liquidator to engage with the entire body of creditors on a regular basis.
The role of the creditor committee is to supervise and assist the liquidator. Examples of the type of direction the committee may make include approving the remuneration of the liquidator, approving the institution of legal proceedings on behalf of the company and directions as to the compromise of debts owing to the company. Members of the committee owe the general body of creditors and members fiduciary duties and therefore must act in the best interests of the creditors and members rather than for their own benefit.
It is very rare for a committee of inspection to retain advisors or their own Counsel.
Committees can also be formed in administrations and in respect of companies subject to a DOCA. They exist to consult.
No, Belgian law does not know the concept of creditor committees in restructuring proceedings.
A creditors’ committee is not very common in Dutch bankruptcies. Under Dutch law, a bankruptcy court may, in the bankruptcy order or in a later order, appoint a provisional committee (voorlopige commissie) of between one and three creditors in order to advise the bankruptcy trustee. The court may appoint such provisional committee, if justified by the importance or the nature of the estate and as long as no definitive committee (definitieve commissie) has been appointed. Whether or not there will be a definitive committee is to be decided by the creditors during the verification meeting.
A creditors’ committee may require inspecting the books and documents relating to the bankruptcy at any time (i.e. a right to information). A creditors’ committee may at all times and at its own discretion advise the bankruptcy trustee on the course of action of the bankruptcy proceeding. Furthermore, a creditors’ committee is obliged to submit an advice under the following circumstances: (i) a proposed composition plan (faillissementsakkoord) or (ii) a proposed continuation of the business.
Dutch law does not provide for specific provisions as regards retaining advisers or funding of the expenditures.
In chapter 11 cases, the U.S. Trustee is generally required to appoint a committee of unsecured creditors and has the authority to appoint other committees if it sees fit, though this requirement is not often observed in “pre-packaged plan” cases. The official creditor’s committee is generally comprised of five to seven creditors, selected from the debtor’s 20 largest creditors. This committee serves as a fiduciary for the unsecured creditors and performs oversight functions such asinvestigating the debtor’s acts, conduct, assets, liabilities and other matters of relevance to the development of the plan. If the court approves, the committee may retain legal and financial counsel, with those expenses paid from the debtor’s estate. Unofficial or ad-hoc committees are also often formed in restructuring proceedings, but they are self-appointed and self-regulating. While these committees often retain legal and financial counsel as well, the debtor is not necessarily required to pay their expenses. However, if the court finds that the ad-hoc committee made a “substantial contribution” to the case, the debtor may be required to pay their expenses as well.
Creditor committees are formed in order to adopt the safeguard (or restructuring) plan for companies whose annual turnover is superior to €20M or whose number of employees is superior to 150 or upon request of the debtor for smaller companies. Creditor committees are of 2 types: committee of the main suppliers and committee of credit institutions. The bondholders if any are also grouped into a single assembly to be consulted on the plan. Unlike creditors' committees, the bondholders cannot propose an alternative plan.
They are permitted to retain advisers but only at their own expense.
Under the law of 30 June 1930 on the creation of creditors’ committee for the safeguard of creditors’ interests during bankruptcy and composition with creditors (“concordat préventif de faillite”), the supervisory judge may appoint a creditors’ committee.
The creditors’ committee however merely assists the receiver and has a strictly advisory nature. Specific rules apply to the appointment and dismissal of committee’s members, who are remunerated for their services.
The institution is very rarely used in practice and not comparable to the UK and US creditors’ committees in their nature, function and powers.
Creditors in a voluntary administration may resolve at the first creditors meeting to form a creditors committee. The function of such a committee is to consult with the administrator about matters relating to the administration and to receive and consider reports by the administrator. Only creditors or their agents may be members of the committee. Such a committee has no standing to give directions to or control the administrator and the power to require administrator reports is intended to ensure disclosure by the administrator of all matters relevant to the administration. The power to receive reports is not a power to control the administrator's investigations or a power to require the administrator to seek the opinion of third parties on matters respecting which the administrator has a duty to form an opinion.
The formation of creditors committees is not unusual in large New Zealand voluntary administration cases. Such committees and their members are free to seek advice as they see fit, however no provision is made in the laws of New Zealand for the funding of the cost of any such advice or advisors.
In most of the insolvency proceedings a creditors’ committee formed of 3 or 5 creditors is appointed, with a structure that would be representative for as many classes of creditors as possible. The powers and duties of the creditors’ committee are the following: i) to analyse the debtor’s situation and to make recommendations to the creditors’ meeting with regard to the continuation of the debtor’s activity and to the proposed reorganization plans; ii) to negotiate the appointment conditions with the official receiver or with the judicial liquidator who wants to be appointed by the creditors in the file; iii) to take note of the reports prepared by the official receiver or by the judicial liquidator, to analyse them and, if the case, to challenge them iv) to prepare reports, which to present to the creditors’ meeting regarding the measures taken by the official receiver or by the judicial liquidator and their effects and to propose, justifiably, also other measures; v) to request the lifting of the debtor’s right of administration; vi) to introduce claims for the annulment of fraudulent deeds or operations to the creditors’ detriment, if such claims have not been filed by the official receiver or by the judicial liquidator. Usually, the creditors’ committee does not appoint its own advisors, but this may appoint them with the consent of the creditors’ committee.
Following a recent amendment to the DEBA, it is now possible for a creditor committee to be formed during a composition moratorium. In practice, however, it is rare that in a moratorium a creditor committee is formed. This may change once practitioners become more familiar with this new possibility. If established, the main duties of a creditor committee in moratorium proceedings are to supervise the administrator and to approve (in place of the composition court), inter alia, the sale of assets and the posting of new collateral (cf. section 12 below). If restructuring is achieved through a composition agreement with assignment of assets (cf. section 8 above), a creditor committee is mandatory.
Members of the creditor committee are compensated. Such compensation is usually calculated on a time-spent basis and paid out with priority. The members of the committee are often advisers who act for one or more creditors.
There is no legal basis for a creditor committee to retain advisers and absent a highly complex fact pattern we would not expect a composition court to grant such request. It is, however, possible for the administrator to retain advisers and share their findings with the creditor committee.
It is not common for different types of creditors to form creditors' committees.
However, it is very common that Israeli traded bondholders from one or more series of bonds forms a representative body, which includes representatives of three or four of the major bondholders, or a professional representative chosen by the majority of the bondholders.
The representative body is considered as an advisor of the Bondholders Trustee who is nominated according to the Securities Law 1968. The representative body, together with the Trustee, usually handles the negotiations with the company and the investor/controlling shareholder and is capable of providing an initial insight or guidelines as to the terms agreeable by the bondholders.
As all powers of the bondholders are asserted to the Bondholders Trustee, the Israeli law does not set any provisions regarding the power or responsibilities of the representative body, but the establishment, treatment of information, conflict of interest etc. of the representative body are regulated by the Israeli Securities Authority guidelines and instructions.
The representative body generally retains financial and legal advisors, the costs of which are born by the company, either by virtue of the deed of trust allowing the bond trustee to engage consultants of the company's expense, or by virtue of a separate commitment, which some companies undertake upon commencement of negotiations with the bondholders. To the extent the company did not borne such expenses there is usually an indemnification rights towards the bondholders.
In addition to the possible representative body, Israeli Companies Law demands that court will nominate an expert to escrow debt arrangement process that involve public traded bonds. The expert furnishes his professional opinion to the bondholders and other creditors, with respect to the fairness of the suggested arrangement, comparison to possible outcome of liquidation process and to possible legal proceedings against controlling shareholders, directors and officers.
The new Insolvency Law introduces the concept of a creditors committee the court is entitled to appoint, comprising of different types of creditors other than the unsecured creditors. The creditors committee may present its position in different matters, but does not have a decisive role.