What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Restructuring & Insolvency (2nd Edition)
The greatest barriers to successful in-court restructuring is funding and speed because the appointed restructuring administrator and the appointed restructuring accountant must not have advised the company before. Such persons must also quickly familiarize themselves with the company’s affairs and submit statements and restructuring plans to the creditors.
This results in costly administration even in small-scale restructurings.
In addition, there are limited possibilities of obtaining funding for employees’ salaries during an in-court restructuring.
In insolvencies there is often a conflict between company charge holders which hold a charge on the majority of the company’s assets and the financial obligations that to a buyer of a company mean that the employees are entitled to have their employment transferred to a buyer of the business. This may lead to inexpedient termination of employees because it is not possible to set off the employee obligations transferred against the purchase price of the charged assets.
Transfers prior to an in-court restructuring or insolvency come with substantial liability for the management and advisors and it is subsequently often alluring to the management to have insolvency proceedings commenced against the business than to transfer it prior to insolvency.
The Danish Bankruptcy Council under the auspices of the Danish Ministry of Justice has issued a report on revision of the rules on employees’ legal status during insolvency proceedings. If the proposed rules are implemented, this will give a wider scope for handling employees during a restructuring and transfer of insolvent businesses.
The legislative work based on the report has been suspended for an indefinite period.
The biggest hurdles facing efficient and effective bankruptcies in China are perhaps the public’s lack of understanding of the bankruptcy law, overgeneralization of the law, and insufficient social supporting systems that are needed in the implementation of the law. To clear these hurdles, we recommend: 1) stepping up efforts to raise public awareness of China’s bankruptcy law, 2) summarizing experience gathered in handling bankruptcy cases since the promulgation of the bankruptcy law, and timely publishing judicial interpretations of the bankruptcy law to address pressing issues in practice; and 3) improving social supporting laws and systems for the implementation of the bankruptcy law, for example, normalizing government’s financial support to bankrupt enterprises in paying social costs, setting up funds to secure payment of employees’ pay and administrators’ compensation, and bringing about market-oriented reforms in industrial and commercial administration, financial bailouts for distressed enterprises, restoration of the credit of restructured enterprises, tax adjustment for bankrupt enterprises, deregistration of bankrupt enterprises, management of enterprises’ archives, etc., in each case with an aim to solve existing problems at their roots. In recent years, Chinese courts have gained a lot of ground in the trial of bankruptcy cases, and the number of accepted filings has surged significantly. By handling bankruptcy cases, courts endeavor to resolve overcapacity and remove zombie companies, thus setting up a comprehensive system for bankruptcy proceedings and greatly improving China’s business environment. According to the 2017 evaluation of business environment of 190 economies by the World Bank, China ranks 53rd in the number of bankruptcy cases, a rise of 29 spots from its 82nd place in 2013.
In all, the legal framework of Belgian insolvency provides for a well-balanced and efficient system. On 11 September 2017, the new bill of 11 August 2017 on the reform of the existing Belgian insolvency and restructuring law was published in the Belgian Official Gazette. The bill seeks to recodify the relevant laws into one single code (Book XX of the Code on Economic Law), and introduces some modernisation, e.g:
- the scope of application of the insolvency and restructuring proceedings is broadened;
- modernization and modification of both insolvency procedures;
- the introduction of an electronic file/procedure (the Central Registry of Solvency, www.regsol.be, was launched on 1 April 2017); and
- the introduction of a set of coherent rules with respect to director’s liability.
The bill will enter into force on 1 May 2018.
Prior to the introduction of the ILRA, the greatest barriers to efficient and effective restructuring and insolvencies in Australia were:
- The prohibition on directors from incurring a debt where the company is (there are reasonable grounds to suspect the company is) insolvent, as it shifted the focus of company directors from trying to manage business distress to managing their own risk and exposure to personal liability;
- The operation of ipso facto clauses in contracts triggering termination rights, given the value those contracts may have had for the company and the necessity of those contracts to the company’s survival; and
- The statutory duties on receivers and liquidators in relation to administering a ‘pre-pack sale’, as the consequences that may flow from implementing such a transaction (including personal liability) renders them unattractive.
Since the introduction of the ILRA, the landscape has changed somewhat, particularly in relation to the operation of ipso facto clauses and the insolvent trading regime.
The concept of a safe harbour has been introduced to the Corporations Act via a new section 588GA which provides that section 588G(2), being the provision which makes directors personally liable for insolvent trading, will not apply if, after starting to suspect the company is, or may become, insolvent, the director takes steps to develop one or more courses of action that is “reasonably likely to lead to a better outcome for the company” than the immediate appointment of an insolvency practitioner. There are a number of criteria that will be used to assess whether the test has been satisfied so as to enliven the protection, including the engagement of appropriately qualified advisors to provide advice on the restructuring plan. The Explanatory Memorandum accompanying the legislation states that “reasonably likely” requires that there is a chance of achieving a better outcome that is not “fanciful or remote”, but is “fair”, “sufficient” or “worth noting”.
The safe harbour rule does not provide protection in respect of all debts and only covers debts that are incurred:
- in connection with the relevant course of action being pursued; and
- during the period commencing at the time the course of action is being developed ending at the earliest of a “reasonable period” following the course of action not being pursued, when the director ceases to take such course of action, when the course of action ceases to be ‘reasonably likely’ to lead to a better outcome or following the appointment of an insolvency practitioner.
Care should be taken when relying on the safe harbour principle as it will not operate to automatically exempt a director from exposure to personal liability; rather it will be relevant to a director seeking to defend an insolvent trading claim.
Ipso facto clauses
The legislative reform regarding the effect of ipso facto clauses (discussed at question 12 above) should operate to the benefit of a company seeking to implement a restructure or work through an insolvency process enabling more efficient and effective processes to be adopted and implemented.
In the context of the legislative programme Reassessment Insolvency Law, various important developments can be identified. This concerns (amongst others) the following legislative proposals: Corporate Continuity Act I (CCA I) and Act On Dutch Court Confirmation Of Extrajudicial Restructuring Plans To Avert Bankruptcy (Wet homologatie onderhands akkoord; the WHOA).
The CCA I seeks to facilitate a structural and effective winding up of bankruptcies and/or aid the restart of commercially viable parts of the debtor’s business after bankruptcy. It allows the debtor to prepare and negotiate the transaction prior to bankruptcy, i.e. “precook” it as much as possible with the involvement of an intended trustee in a structured manner. Following the judgement of the European Court of Justice regarding the Estro pre-packed bankruptcy (see question 13), the implementation of the CCA I has been stayed until the Minister of Security and Justice has discussed the implications of the aforementioned judgement with the relevant stakeholders.
With respect to the Act On Dutch Court Confirmation Of Extrajudicial Restructuring Plans To Avert Bankruptcy (influenced by the English scheme of arrangement and the US Chapter 11), the possibility is introduced in the Netherlands for companies to offer a composition outside an insolvency proceeding. In this respect, the legislator intends improve the process regarding restructuring of problematic debts at companies outside of insolvency by making the process more flexible, faster and with minimal formalities, costs and uncertainties. Importantly, the WHOA will introduce the possibility to cram down secured creditors, which is currently missing from the Dutch restructuring and insolvency regime.
Prolonged and expensive litigation is the greatest barrier to effective restructurings in the United States. As noted above, expenses incurred by the official creditors’ committee are paid by the debtor’s estate rather than the committee members themselves, which can result in litigation or other similar actions that prolong the restructuring process and do not necessarily result in the most efficient process. Presently, there are no reform efforts in place to combat this inefficiency in the system.
Squeeze out of shareholders through a forced sale of their shares or a forced dilution of their equity stake is viewed as essential by most practitioners to enforce a debt-equity-swap against dissenting shareholders when the equity has lost all value and conversion of debt is the only solution to preserve the business as a going concern.
The law dated 6 August 2015 sought to address this issue and provided for a limited squeeze-out of the shareholders in reorganization proceedings.
However, several authors emphasize that such reform is not audacious enough and think that the conditions to such squeeze-out are so restrictive that it will only be enforced exceptionally. They are in favour of a reform similar to the reform which was recently adopted in Germany, which provides for the possibility to evict shareholders on the sole and sufficient condition that the restructuring plan, accepted by the majority of creditors’ committees, offer them better position than the position they would have had in a liquidation proceeding.
Rescue proceedings in Luxembourg are not very much used as they are considered too costly and burdensome.
On 1 February 2013, the government filed a draft bill No. 6539 on the preservation of business and modernisation of bankruptcy law. This draft bill includes various preventive, repressive, restorative and social provisions which aim to reduce, or at least stabilise, the recent increase of bankruptcies in Luxembourg.
The draft bill was heavily criticised by the State Council (Conseil d'Etat) as lacking efficient processes, providing for complex procedures and creating new duties on court officers, raising questions regarding feasibility and practicability. The bill is currently being redrafted.
In general, there are no significant barriers to efficient and effective restructurings and insolvencies in New Zealand. However, the absence of a strict regime for the qualification or licensing of insolvency practitioners in New Zealand is a significant ongoing challenge to public confidence in the transparency and legitimacy of insolvency processes in New Zealand. At present, provided an insolvency practitioner is over age 18 and not otherwise disqualified (e.g not be a creditor, shareholder, undischarged bankrupt or mentally ill), they can accept an appointment as a liquidator, receiver or administrator. There is otherwise currently no 'fit and proper' person test or qualification requirement which must be met.
In 2015, the New Zealand government formed an 'Insolvency Working Group', to give advice to the government on a wide ranging review of insolvency law.
The Insolvency Working Group had a broad scope of reference (including reviewing the law in relation to phoenix companies, voluntary liquidations, voidable transactions and any other potential improvements to New Zealand insolvency law), but a key part of the mandate of the Insolvency Working Group was to advise on the adequacy of the Insolvency Practitioners Bill, which was introduced into the New Zealand Parliament in April 2010 but has not progressed significantly in the period since. The Bill proposed a light touch regulatory scheme for insolvency practitioners in New Zealand without any requirement for formal qualifications, in order for a practitioner to accept appointments.
The Insolvency Working Group has now produced two reports. The first report issued in July 2016 addressed the question of the regulation of insolvency practitioners and voluntary liquidations. The Government in October 2016, accepted all recommendations of the first report of the Insolvency Working Group and publicly stated its intent to amend legislation to introduce a co-regulatory licensing regime for insolvency practitioners, alongside a number of additional amendments aimed at further raising the practice standards of insolvency practitioners and ensuring they act in accordance with their statutory duties. These statutory proposals remain pending for implementation by the new Government of New Zealand elected in September 2017.
The second report of the Insolvency Working Group was issued in May 2017 and focused on voidable transactions, Ponzi schemes and other corporate insolvency matters. The report made a number of recommendations but most notable are the changes suggested in respect of the law relating to voidable transactions. These proposals include the reduction of the period in which transactions are vulnerable to a voidability challenge from 2 years to 6 months prior to liquidation and removing the "gave value" element of the creditor defence to a voidable transaction claim. The second report went through a process of consultation in late 2017. The new government elected in September 2017 has not yet made any statements as to whether any of the recommendations of the second report will be implemented.
At present, the main barrier in what regards the reorganization chances is quite the companies’ managements that, most of the times, either resort too late to a restructuring procedure and in many cases even after having tried their own recovery measures, but which, unfortunately, in many situations, do nothing else but create financial imbalances at the company’s level, such as, for example, financing of long-term investments with short-term liquidities or over-indebtedness of the company. Another important aspect is relating to taxation, reduction of the receivables by the reorganization plan generates new tax obligations and, at the same time, there are serious restrictions regarding the purchase of the budgetary receivables, as only the par value price is accepted. Currently, there are no clear intentions with regard to the amendment of the insolvency legislation, there being only certain discussions regarding the European directive proposal on increasing the chances for reorganization of companies.
A silent (non-public) moratorium is currently only available for four months. This is a rather short window to achieve a consensual restructuring. It is proposed to extend the maximum duration of a silent moratorium to eight months in the context of the more general amendment to Swiss corporate law referred to above (cf. section 3 above).
For out-of-court restructurings, there has been much debate (and uncertainty) for how long a debtor may attempt to restructure in the state of over-indebtedness on the basis of a viable restructuring plan. This is an uncomfortable situation for the members of the highest executive body of a Swiss corporate in view of the daunting liability risks (cf. section 14 above). It is currently proposed to set the relevant period to ninety days and to clarify the starting point.
Finally, some scholars hold that the mandatory equal treatment of the disparate and large group of third class creditors (cf. section 5 above) creates a meaningful barrier to successful restructurings in Switzerland as no tailored cram-down is available. There is some truth to this but we consider it unrealistic that this fundamental principle of Swiss insolvency laws will be changed in the near future. Also, experience shows that a further distinction may be achieved contractually (although, of course, without the cram-down feature).
The Israeli insolvency laws are mainly based on the Bankruptcy Ordinance and Companies Ordinance, which are archaic legislation based on British legislation which were revoked in the 1980s'. Therefore, court policies and legal precedents govern most of the insolvency legal field.
As set forth above, on March 2018 the new Insolvency Law has been approved. The new Insolvency Law will effectively replace and/or amend the entire existing Israeli insolvency regime, and will create a modern and uniform insolvency legislation.