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 (3rd edition)
One of the greatest barriers to efficient and effective restructurings and insolvencies in Canada are costs, especially with respect to restructurings and liquidations under the CCAA.
Since the CCAA involves a considerable amount of Court discretion during the course of a CCAA proceeding rather than statutory instructions, as discussed above, court attendances can be frequent. The fees and expenses of the Monitor in a CCAA restructuring, as well as the fees and expenses of the Monitor’s legal counsel, must be borne by the estate and may be substantial, especially in large, complex, and long-lasting CCAA restructurings/liquidations. Finally, the relatively recent openness of Canadian Courts to (i) ordering the formation of “creditor committees” and (ii) ordering that the legal expenses of other court-appointed representatives (and their legal counsel) be paid by the debtor’s estate also significantly increase the costs of CCAA restructurings/liquidations. The increased likelihood of prohibitive costs underlie the reason why the CCAA, as discussed above, is, in practice, almost exclusively used for the restructuring/liquidation of large corporate debtors. Canadian Courts are becoming more technologically adapted and it maybe possible for Courts to reduce the costs associated with insolvency/restructuring proceedings by permitting, for example, that hearings be conducted via videoconferencing, which has been implemented in certain instances and is being encouraged by the Ontario Superior Court of Justice (Commercial List) on a case-by-case basis for unopposed matters that would be heard “in Chambers”.
There are currently no ongoing or foreseeable reform of the Canadian insolvency and restructuring statutes. The latest major reform of the BIA, the CCAA and the WURA dates back to 2009.
British Virgin Islands
There is no route by which a moratorium can be triggered for the benefit of companies in distress. This means that in some situations where the rescue of a company may be possible, an uncooperative creditor or member could upset the process of negotiating a sensible plan or scheme of arrangement, or creditors’ arrangement, by bringing an application for the appointment of a liquidator.
This has been mitigated, in part, by the BVI Court’s opening the door to provisional liquidations to support the restructuring of companies (as noted above).
Finally, the BVI has not brought provisions enacting the UNCITRAL Model Law into force, so the routes by which a validly appointed foreign office-holder can seek recognition and support are limited.
The inability to prevent secured creditors from enforcing their security presents a significant challenge to Cayman provisional liquidators seeking to implement a restructuring. However, the importance to the Cayman funds industry of maintaining the jurisdiction's creditor friendly reputation means that this is unlikely to change.
In 2015, the Cayman Court found that in the absence of an express power in the company's articles or a resolution of the company's shareholders, the company's directors are unable to present a petition to wind up the company. This caused significant uncertainty as to the circumstances in which a company can apply to be placed into provisional liquidation to implement a restructuring because: (i) an application to appoint provisional liquidators can only be made after a winding up petition had been presented; and (ii) as a result of ambiguously drafted legislation, it was not clear whether the application could be made after a creditor had presented a petition, or only after a petition by the company.
Consequently, without shareholder support, directors of an insolvent company (who have a duty to consider the interests of creditors) could have found themselves unable to take steps to either wind up the company or appoint provisional liquidators to implement a restructuring. However, the Cayman Court has on a number of recent occasions appointed provisional liquidators on the application of the company following a petition by creditors. The issue therefore appears to be resolved, but amendments to the legislation to clarify the position would be welcome.
Draft legislation has been proposed which would introduce a new restructuring regime to allow a company to obtain a restructuring moratorium on the appointment of "restructuring officers".
The biggest hurdles facing efficient and effective bankruptcies in China are perhaps the absence of legal basis for natural person bankruptcy, the public’s lack of understanding of the bankruptcy law, overgeneralization of the law, insufficient social supporting systems that are needed in the implementation of the law, an inadequate level of market-oriented operation of the restructuring system, and insufficiency of judicial professionals in the bankruptcy sector . To clear these hurdles, we recommend: 1) enacting natural person bankruptcy law; 2) stepping up efforts to raise public awareness of China’s bankruptcy law and directing market players to do their part in bankruptcy proceedings; 3) improving and adopting self-management practice by debtors in restructuring proceedings and enhancing the marketization of restructuring; 4) summarizing experience gathered in handling bankruptcy cases over the past 11 years following the promulgation of the bankruptcy law, and timely publishing judicial interpretations of the bankruptcy law to address pressing issues in practice; and 5) improving social supporting laws and systems for the implementation of the bankruptcy law, for example, 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. At the year end of 2018 and in early 2019, China saw a successive launch of three bankruptcy courts in Shenzhen, Beijing and Shanghai, which have greatly boosted the professionalism of China’s trial practice in the bankruptcy sector and substantially contributed to the tackling of “difficulties in enforcement of court decisions”.
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.
France is still perceived as a debtor-friendly jurisdiction. This a real incentive for creditors, especially financial institutions, to opt for other jurisdictions or to create alternative credit protection through sophisticated collateral structures, such as the “Double LuxCo”. In this context, the next round reform should consider this factor: for example, by the law and the courts effectively and clearly recognizing the arrangements between lenders and their creditors; but also those between higher and lower ranking creditors.
Recently, the PACTE Law adopted on 11 April 2019 aims in particular to facilitate the transposition of the European Directive 2016/0359 which provides especially for the introduction of cross class cram down, the respect of subordination agreements and the diminution of duration of proceedings. At the same time, it provides for the capacity for the government to amend security law by way of order. Such a reform is therefore welcome and could make it possible to meet these challenges while making the French security law more readable and consequently the French insolvency law more effective and attractive.
On another note, 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.
The German insolvency law has been consistently improved (most recently by new rules regarding group insolvencies (see Question 18) and been most recently officially reviewed by the federal government and legislator. The team of experts consulted by the Federal Government have come to the result that the improvements introduced have largely been perceived as positive in practice and that a return to the old law is not necessary. In particular, the insolvency plan procedure is essentially working well. The practical scope of application for plan solutions has expanded considerably. The experts’ report proposes amendments only in some minor respects. In particular, without limitation, the report suggests a higher concentration of insolvency courts particularly for restructuring proceedings and a higher specialisation as well as better education/preparation of insolvency judges regarding restructurings.Restructuring proceedings prior to insolvency or in the form of an insolvency plan proceedings frequently require the (partial) waiver of creditor claims that are not or not fully recoverable. Under the former German tax laws, such waivers triggered taxable profits. The German legislator reacted to this and - after carrying out the notification procedure of the European Commission - passed a law on the tax exemption of restructuring profits (§ 3a EStG). Thus, this barrier has also been removed in Germany recently.
Another barrier can constitute the fact that restructuring measures outside of insolvency proceedings sometimes fail due to the lack of approval by individual creditors. So far, interventions in creditors’ rights against their will are only permitted in insolvency proceedings which themselves trigger some disadvantages like the costs of the proceedings, the negative impact on the debtor’s reputation and its business. In this regard, however, an EU directive coming into force soon will lead to an improvement: The European Parliament adopted a "Directive on preventive restructuring frameworks, second chance and measures to improve the efficiency of restructuring, insolvency and asset relief procedures" in March 2019. The transposition of these rules into German law will allow for setting up a privy restructuring plan affecting only certain classes of creditors and taking restructuring measures based on a majority vote of the affected creditors at an early stage.
The jurisdiction has a long track record of efficient restructuring and insolvencies of large and complex companies over several decades. The primary barrier to efficient and effective restructuring is typically ensuring that stakeholders are aware of the options available to them under Bermuda law at an early stage.
Guernsey's statutory regime is "light touch". The absence of specific statutory detail can, occasionally, cause issue in large restructurings. Equally, the creditor friendly nature of the jurisdiction makes debtor led work outs difficult outside of a consensual process. However, the existing regime has been used flexibly to deal with complex commercial scenarios with the support of the Court.
On 9 February 2017 the Committee for Economic Development recommended the enactment of amendments to Guernsey's existing insolvency regime. On 31 March 2017 Guernsey's legislative body directed that legislation necessary to give effect to the reforms should be drafted. The draft is expected in late 2017. The key reforms are as follows:
i. The creation of a basic set of insolvency rules covering the key procedural issues that not currently legislated for.
ii. The ability to end an administration by dissolution. The current system requires liquidation if a company cannot be rescued.
iii. The expansion of office holders' investigatory powers.
iv. A potential increase in the level of reporting required by office holders.
v. The introduction of statutory provisions dealing with transactions at an undervalue.
vi. The introduction of disclaimer.
vii. The ability to wind up foreign registered entities.
viii. Better oversight for insolvent voluntary liquidations.
In our view, broadly speaking, Irish law provides for effective and efficient restructuring solutions for most corporate insolvency scenarios. We find, however, that a key issue that often arises, and which can act as a barrier to an efficient process, is the availability of DIP financing. There is a lack of a structured and formal DIP financing arrangement applicable equally to all forms of insolvency proceedings. Currently Irish company law only allows for partial priority status for DIP finance in an examinership, and this can make it more difficult to raise the necessary cashflow funding during the period of the moratorium. We are not aware of any proposals to reform this aspect of Irish insolvency law.
- Jersey does not have a creditor instigated winding up process whereby a creditor can apply to any local Court for orders to appoint a private liquidator for the purpose of the winding up of a Jersey company on the grounds it is insolvent or it is otherwise just and equitable that a company should be wound up.
- The Jersey legislature is currently considering an amendment to the existing statutory regime which would allow a creditor to apply to the Royal Court of Jersey for a Creditors’ Winding Up process to be commenced. There is no clear timetable as to when this legislation might come into force.
- Jersey does not have any statutory rescue remedy similar to administration under the English Insolvency Act 1986 or Chapter 11 of the US Bankruptcy Code. There are presently no plans to introduce such a regime.
The most significant barrier to effective reorganization is the lack of professional courts. The 2014 amendments provided for the creation of specialized courts. However these have not been implemented yet.
An insolvency system must be responsive and friendly to distressed debtors. However, the Peruvian insolvency regime has both structural and regulatory shortcomings.
Structural shortcomings include lengthy proceedings, when they should be both short and predictable.
As for the regulatory aspect, the scarce yet unclear regulations on the clawback actions for any operations during the avoidance period make it inefficient and unappealing for creditors to use them, which prevents this process from achieving its goal, that is, to settle, integrate, keep, and appraise the debtor’s assets. Furthermore, not granting payment priority to creditors willing to finance restructuring discourages access to financing sources.
In addition to that, insolvency regulations should be enacted that makes cross border insolvency more efficient seeking to secure equal treatment to both local and foreign creditors (UNCITRAL Model Law); in addition to especial insolvency regulations appropriate for natural persons and small business.
The greatest barrier to efficient and effective restructuring and insolvencies in Poland is the lack of division in Courts between complicated and complex restructuring and sometimes small, but numerous consumer bankruptcies, which number is constantly growing. That means that judges in Bankruptcy Courts are handling too many cases, and thus the Court’s decisions are delayed.
There is proposal of reform in abovementioned scope, but it surely will take time to restore effectiveness within Bankruptcy Courts.
Another obstacle is lack of electronical system, which is planned to be implemented and enter into force by December 2020.
Unfortunately, debtors seldom commence restructuring efforts until it is far too late, leaving little resources for the insolvency practitioner to implement an effective restructuring. It is also not unusual to see failing companies pillaged by errant directors prior to the commencement of insolvency proceedings. However, recovering these assets can be a challenge, are the debtor typically has insufficient funds to commence litigation to reverse these transactions or to mount a claim against the former directors.
Both the legislature and the judiciary have acknowledged these challenges, and have lowered the barriers to obtaining rescue financing as well as litigation funding for companies in liquidation.
Costs and time are often a concern in corporate restructurings, not least in smaller and mid-sized distressed businesses. One thing that would allow for swift and less costly restructurings would be to introduce a separate procedure for composition and a cram-down of old debt. What distressed companies need is sometimes just a way of dealing with its trade debts and other unsecured non-preferred debt (with an otherwise healthy and profitable business). Within the current legal framework such businesses need to enter into and go through full-blown in-court reorganization proceedings.
As mentioned in the above, under Swedish law there are no mechanisms for squeeze out of shareholders or forced dilution of their equity stake, which some believe is an important toolkit for successful restructurings. Also, there are no mechanisms to replace dysfunctional or non-performing debtor management, which sometimes can obstruct or at least make a successful restructuring more difficult.
Another recurring challenge in restructurings is that of financing and liquidity. Under Swedish law there is no structured and formal DIP financing arrangement similar to the DIP financing regime under the US Bankruptcy Code. There are techniques to be used where certain priority is granted to restructuring financing, but there are often competing interests, for example potential erosion of the floating charge security, to be considered, which can make it difficult to raise the necessary cashflow funding during the proceedings.
There are currently no concrete pending or imminent proposals to reform the above aspects of Swedish insolvency law.
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 corporation 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).
Previously, the regulation of the insolvency proceeding was focused in the liquidation of the assets. Nonetheless, with the last legal amendment of SIA (Act 9/2015 Amendment of Insolvency Act) it was introduced a number of pre-insolvency mechanisms in order to achieve a solution to the situation of insolvency in advance and avoid that the insolvent company applies for the DIP as the agreement of the article 5 bis of SIA and refinancing agreement of art. 71 and the Additional provision nº4 of SIA.
However, nowadays there are relevant legal problems regarding the purchase of the production unit, since the buyer not only has to assume the Social Security and labor debts of the worker that will still work for the company once it is acquired, but also he will have to assume, additionally, all the Social Security and labor debts of the rest of the workforce. Despite having caused detrimental effects to the purchase of production units in Spain, the legislation will not be amended in the near future.
The two greatest impediments to effective and efficient restructurings are cost-related barriers to entry for small and medium-sized companies and the time restrictions imposed on companies limiting their ability to take full advantage of the “breathing spell” offered by chapter 11.
First, the significant and increasing costs of administering a chapter 11 case (e.g., professional fees of the lawyers and financial advisors (and sometimes other professionals) of debtor and the official committee of unsecured creditors and the effective interest rates charged by lenders that provide DIP financing) have had a significant impact on the ability of small and middle-market, financially-distressed companies to afford undertaking a chapter 11 case.
Second, the Code was originally designed to provide a financially-distressed company with an extended period of time to remain under bankruptcy protection in order to carefully assess operations and to develop a new business plan that would serve as the basis for emerging from bankruptcy. However, the combination of revisions to the Code during 2005 and time restrictions often imposed on debtors by lenders who provide DIP lending, have significantly curtailed the time that a debtor has to develop an effective business plan which, in turn, may be resulting in an increase number of “chapter 22” filings (repeat bankruptcy filings) and liquidations.
There are no concrete reform efforts related to these issues.
There are three, in our view: the lack of a true pre-insolvency restructuring procedure with provision for cross-class cram-down; questions of UK recognition of foreign plans of reorganization, and questions of EU recognition of UK proceedings post-Brexit.
- Lack of a true pre-insolvency restructuring procedure with provision for cross-class cram-down: The absence of such a procedure has not prevented many efficient and effective restructurings and insolvencies. However, we (broadly) welcome reforms announced in August 2018, including a new procedure which will be akin to Chapter 11 in certain respects and will include the possibility of cross-class cram-down. Timing of the reforms is uncertain.
- UK recognition of foreign plans of reorganization: See Question 16. above. The UK is likely to implement the new UNCITRAL Model Law on Insolvency-Related Judgments in due course, but there is no indication of timing.
- EU recognition of UK proceedings post-Brexit: There are uncertainties around Brexit and its impact on the English restructuring and insolvency regime. In particular, if the UK leaves the EU, absent alternative arrangements, EU member states will no longer automatically recognize UK insolvency proceedings. This will be a matter of the private international law regimes in each Member State. At the time of writing (May 2019), there is no known date for Brexit.
Market participants are still concerned to use the official bankruptcy proceeding due to negative PR effects and are usually trying to achieve an out of court settlement with creditors. Macroeconomic factors, such as good growth and increasing foreign investments have improved the efficiency of the restructurings and liquidations by creating demand for assets and “more room” to achieve mutually acceptable restructurings.
On the legal front we would welcome legislation enabling super senior position for fresh money invested into insolvent companies and recognition of contractual subordination which would enable more efficient resolution of insolvency situations.
Belgium has made extensive progress in making the restructuring and insolvency procedures more efficient, modern and effective, inter alia through the introduction of the following recent laws:
- new insolvency law, Book XX of the Economic Law Code (applicable as from 1 May 2018);
- revised law concerning securities on movable property, Pledge Act of 11 July 2013 (applicable as from 01 January 2018); and
- a new company code, the new Belgian Companies and Associations Code (applicable as from 01 May 2019).
Greatest barriers at the moment are the duration of insolvency proceedings, the absence of pre-pack legislation and possible inconsistencies between the new laws.
Prior to legislation of the new Insolvency Law, most insolvency laws were based on a number various Ordinances dating back to the British Mandate period. The multiply legislative provisions created unnecessary distinction between laws applicable to individuals and to corporation, along with interpretive difficulties of the inter-relationships between the various statutory provisions. Some of the missing parts were completed by Court rulings and by reforms instituted by the Official Receiver, which were not anchored in legislation – but they, too, did not create comprehensive, unified regulation and have left some uncertainty with regard to some of the issues.
The Insolvency Law is designed to rectify this state of affairs, institutes a comprehensive reform in this field, eliminating the existing ordinances and old arrangements. The Law has also created a structural change regarding the management of these proceedings by the authorities, in order to create faster, more efficient proceedings. The Law also strives to create proceedings with high certainty, and such certainty is valuable for modern commercial and economic life, with the intention of providing market stability.
However, the Insolvency Law itself has also been extensively criticized by people in academia, judges, jurists and others involved in insolvency proceedings, who have called for the Law to be amended with regard to many, diverse issues. We believe that once the new Law will have become effective, in September 2019, with application of the principles and arrangements stipulated therein, it is unavoidable for the Law to be amended and revised, so as to allow it to be implemented in Israeli law and to form a stable legislative framework.
The most recent amendments to the insolvency matters are given by the entry into force in 2018 of the Governmental Emergency Ordinance no. 88/2018 (“GEO 88/2018”) for the amendment and supplement of certain normative acts related to insolvency. This GEO 88/2018 takes into consideration inter alia:
- the necessity to improve the mechanisms for recovering the budgetary receivables from the companies in insolvency, respecting the chances of their recovery;
- the avoidance of harm to the competitive environment by abusive insolvency procedures by some borrowers using the mechanisms provided by these law in order to avoid paying the amounts due to the general consolidated budget;
- improving the legal framework to create the premises for a balanced vote of creditors that respects both the immediate budgetary interest and the general economic and social interest of Romania.