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?

Restructuring & Insolvency (2nd Edition)

Indonesia Small Flag Indonesia

The conditions apply to the sale of assets / the entire business in insolvency process are as follows:

In Bankruptcy Proceedings, any of the bankrupt debtor’ assets must be sold by way of public auction according to the applicable laws and regulations. If the public auction of the bankruptcy estate cannot be achieved, the sale can be conducted privately with prior approval from the supervisory judge.

In PKPU proceedings, the debtor is entitled to sell its assets with prior approval from the administrator. IBL is silent on this issue as to whether or not the debtor in PKPU may sell its entire business. However, it is unlikely that the debtor sells its entire business since any restructuring being proposed to settle its debts under the composition plan would rely on the operation of some of its existing business.

IBL is silent on whether the purchaser acquires the assets ‘free and clear’ of claims or some liabilities pass with the assets. As such, based on general provisions of Indonesian Civil Code, it will be subject to the provisions mutually agreed in the sale and purchase agreement. Also, it is provided that the party acquiring the assets has to be well informed regarding the conditions of the assets and the debtor. In general, however, aside from (i) the in rem security right or (ii) the retention right or (iii) the rights of specific statutorily preferred creditors whose preference relates only to the debtor’s specific assets, being imposed on the assets being purchased by the purchaser, the claims on or the liability of the debtor in general should not pass with the assets to the purchaser.

Yes, the security can be released without creditor’s consent on certain circumstances. During the stay period in both Bankruptcy and PKPU Proceedings, the receiver / administrator can use the bankruptcy / debtor’s estate in the form of either moveable or immoveable assets or sell the bankruptcy / debtor’s estate in the form of moveable assets under the control of the receiver / administrator in the framework of the continuation of the business of the bankrupt debtor / debtor in PKPU, when the reasonable protection for the interest of the secured creditors or the relevant third parties have been provided. The bankruptcy estate’s assets that can be sold by the receiver / administrator is limited to the inventory and/or current assets (moveable assets), although such assets are encumbered with in rem security rights. Further, the reasonable protection refers to the protection that needs to be provided to protect the interest of the secured creditors or other third party whose rights are stayed. The transfer of such assets by the receiver / administrator results in the condition where the in rem security right over the assets is deemed as terminated by the operation of law.

The protection may be in the form of among others:

a. the compensation on the decrease of the value of the bankruptcy estate;

b. the net proceeds from the sale;

c. the replacement of in rem security rights;

d. the reasonable and fair of the compensation as well as other cash payments (of the debt being secured).

IBL does not recognize credit bidding in the sale of the bankruptcy / debtor’s estate under the Bankruptcy / PKPU Proceedings. The creditors may not purchase the debtor’s assets and make payment of the purchase price by reducing the amount of its claim against the debtor.

IBL also does not recognize pre-packaged sales in the sale of the bankruptcy / debtor’s estate under the Bankruptcy / PKPU Proceedings. Theoretically, due to the public auction requirement for the sale of the bankruptcy / debtor’s estate under the Bankruptcy / PKPU Proceedings, it is impossible to have pre-packaged sales whereby an arrangement under which the sale of all or part of a bankruptcy/debtor’s business or assets is negotiated with a purchaser prior to the commencement of the Bankruptcy / PKPU Proceedings, and the court-appointed receiver / administrator effects the sale immediately on, or shortly after, his/her appointment. If the public auction is not successful, an approval from a supervisory judge is required for the private sale of the assets to a purchaser.

Canada Small Flag Canada

In BIA/CCAA restructurings, the Court must approve any sale of property outside of the normal course of business. In deciding whether to approve such a sale the Court is to consider, among other things, (i) whether the process leading to the proposed sale or disposition was reasonable and approved by the Trustee/Monitor; (ii) the report and opinion of the Trustee/Monitor; (iii) whether creditors oppose the sale; and, most importantly (iv) whether the consideration to be received for the assets is fair and reasonable, taking into account their market value.

In a bankruptcy, the Trustee has broad powers to monetize the debtor’s estate, including any sale of assets, subject to the approval of the inspectors, if required. The Trustee does not have the power to alter rights attached to the property sold at the moment of the sale – the property is usually sold on an “as is, where is” basis.

In both the restructuring and the liquidation contexts, and under both statutes, the Court has authority to order that any charge or security interest that attaches to the property or assets subject to the sale will be payable from the proceeds of the sale of such property or assets. Such an order is often sought in the restructuring process in order to attract potential buyers and collect funds which, in turn, may permit the negotiation of a viable Proposal or Plan.

As to credit bidding and pre-packaged sales, both are valid and are part of Canadian insolvency practice.

Germany Small Flag Germany

The fate of the debtor shall not be determined prior to the opening of insolvency proceedings. Therefore, the disposal of assets beyond the debtor’s regular business/trade normally does not take place during the preliminary insolvency proceedings. However, the preliminary insolvency proceedings are often used to start a sales process. Thus, while German law does not provide for pre-packaged deals, pre-arranged deals that can be quickly implemented after the opening of insolvency proceedings are typical.

In regular insolvency proceedings, only the insolvency administrator is entitled to sell the debtor’s assets. In DIP proceedings such power vests in the debtor, but the insolvency court may order the debtor to obtain the consent of the insolvency monitor.

Internally, the insolvency administrator or the debtor-in-possession, respectively, shall obtain the consent of the creditors’ committee if he or she intends to engage in transactions of particular importance to the insolvency proceedings. If no creditors’ committee has been appointed, the administrator shall obtain the consent of the creditors’ assembly. In case of a sale to a person with a specific interest (e.g. a secured creditor or a person close to the debtor), the transaction shall require the approval of the creditors’ assembly.

The purchaser acquires the assets, including encumbered assets that the administrator is allowed to dispose of in accordance with Sec. 166 Insolvency Code (see Question 2) free and clear of third-party claims and liabilities. If the insolvency administrator erroneously sells assets that are subject to a right of segregation (Aussonderungsrecht, Sec. 47 Insolvency Code) and/or are not up for his or her disposal/collection, the purchaser only acquires the assets free and clear of claims and liabilities if the acquisition took place in good faith, according to Sec. 932 et seq. Civil Code. In such a case, the administrator may be held liable by the owner/beneficiary of the sold asset.

Under German law, any party may bid on pledged assets, including lenders or pledgees, in a public or private (freehand) sale process. However, German law does not provide for rules on non-cash credit bidding but requires (partially) debt payments in public auctions.

South Africa Small Flag South Africa

Insolvency: Assets are sold in order to satisfy costs of liquidation and creditors’ claims. The liquidator is obliged to realise the assets in a manner and upon conditions directed by creditors, but if creditors do not give directions, he must sell the property by public auction or public tender.

Restructuring: During business rescue a company may only dispose of property if (1) it is in the ordinary course of its business; or (2) a bona fide transaction at arm’s length for fair value, that has been approved in advance and in writing by the practitioner; or (3) in a transaction that is part of an approved business rescue plan.

Under (1) and (2) assets are mostly sold in the ordinary course, on negotiation with the purchaser. When sold in accordance with a business rescue plan (under (3) above), assets are sold as contemplated in the business rescue plan pursuant to a bidding process. The business rescue process is more appropriate to accommodate the sale of the entire business as a going concern and the Companies Act makes specific provision for this under the chapter for Fundamental Transactions.

Does the purchaser acquire the assets “free and clear” of claims and liabilities
Insolvency: The liquidator acts with the authority granted by meetings of creditors and shareholders or on the directions of the Master and has wide ranging powers. There is no general rule that the purchaser acquire the assets “free and clear” of claims and liabilities and there are no specific legislative requirements. Generally they are acquired as is.

Restructuring: There is no general rule that the purchaser acquire the assets “free and clear” of claims and liabilities and there are no specific legislative requirements. The business rescue practitioner will have greater freedom to negotiate with bidders and it can be agreed that the purchaser acquire the assets “free and clear” of claims and liabilities, subject to the proviso that this is ultimately accepted in a finalized business rescue plan.

Can security be released without creditor consent:
Insolvency: Generally, once a principal obligation of a debtor is discharged, the security accessory to the principal obligation is automatically released, i.e. without the creditor’s consent. Further formalities depend on the type of security. Certain forms of security require further acts to release the security, for example, the cancellation of a mortgage bond at the deeds registry and ultimately the agreement of the creditor. Parties can also enter into a release agreement to govern the release of security.

Restructuring: Before a company disposes of any property over which a third party has any security or title interest, it must obtain the prior consent of the third party, unless the proceeds of such disposal will be sufficient to fully discharge the amount of the third party's secured or protected claim or title interest. Essentially, if the company disposes of property over which a secured creditor holds security, it may dispense with the consent of the creditor, provided that the proceeds of the disposal are sufficient to pay the creditor in full and the company promptly so pays the creditor or, alternatively, the company provides security for the amount of those proceeds to the reasonable satisfaction of the creditor.

Is credit bidding permitted.
Insolvency: Allowing a secured creditor to bid in the sale of its secured asset for the amount of its debt - as a credit bid - is not specifically regulated. The procedure is that the secured creditor must deliver the property to the liquidator and prove his claim, placing a value on the property. The trustee may then, if authorised by the creditors, take over the property at the value placed on it by the creditor. He must do so within three months and if he does not take over the property within this period he must realise it for the benefit of all creditors whose claims are secured by it, according to their respective rights.

Restructuring: There is no general rule relating to credit bidding. The business rescue practitioner will have greater freedom to negotiate with bidders and it can be agreed that credit bidding takes place, subject to the proviso that this is ultimately accepted in a finalized business rescue plan.

Are pre-packaged sales possible
Insolvency: Legislative insolvency provisions do not provide for pre-packaged sales, and the process in insolvency is not well suited thereto.

Restructuring: As stated above, business rescue may, but does not necessarily, involve the sale of the distressed business. The current regime provides for preparation of a rescue plan after business rescue is initiated. But the process may well involve the preparation of a business rescue plan “in principle” and in advance of the company being placed under supervision, and the negotiation of that draft plan with major creditors to establish its acceptability to them.

Brazil Small Flag Brazil

See above.

Czech Republic Small Flag Czech Republic

See above.

Cayman Islands Small Flag Cayman Islands

The principal of caveat emptor will apply to any purchaser of a company's assets / business by a liquidator (whether a provisional liquidator or an official liquidator). Only very limited representations and warranties will be given by the liquidators who will act as agents of the company without personal liability. The purchaser will therefore take the assets subject to existing claims and security interests, although the company will remain liable for any existing creditor claims.

Liquidators have no power to release security without creditor consent.

Whilst rarely seen in practice, there is no prohibition on credit bidding pursuant to Cayman Islands law. Although, there are no specific rules that would apply to credit bidding, it should be noted that if the restructuring was taking place within a provisional liquidation context, the provisional liquidators would be required to seek sanction of the proposed sale from the Cayman Court. In exercising its discretion as to whether to sanction the proposed sale, the Cayman Court would take into account the details of the sales process and whether the creditor's bid was the best deal available for the company in the circumstances. Pre-packaged sales of assets are also possible and have been implemented under Cayman Islands law but would also require approval from the Cayman Court in circumstances where they are being proposed in a liquidation context.

Romania Small Flag Romania

When the insolvency procedure is opened, the ongoing agreements to which a debtor is a party are maintained, any contractual clauses of termination of the ongoing agreements, of forfeiture of the term or declaration of anticipated exigibility for the reason of opening of the procedure being null. For maximizing the debtor’s estate, the official receiver is the one entitled to appraise if an ongoing agreement should be maintained or terminated, which right may be exercised in a term of 3 months from the insolvency procedure opening date – nonetheless, an agreement executed essentially may not be terminated, there always being the risk of payment of indemnities. The same term applies also to the co-contracting party for the exercise of its right to notify the official receiver for pronouncing on the maintaining or termination of an agreement, in the absence of an answer in a term of 30 days the agreement being considered terminated. The insolvency law provides for a series of special rules applicable to certain categories of ongoing agreements: credit agreement, employment agreement, lease agreement, a series of variants of the sale-purchase agreement, a distinct situation being that of the leasing and utility supplier agreements and, at the same time, termination and set-off of receivables may be applied, and if an agreement is not terminated, the parties will execute their assumed obligations. The opening of an insolvency procedure does not affect the right of a creditor to invoke the set-off of its receivable with the one of the debtor on him, when the legal conditions are met. The reorganization plan may provide both for the sale of assets and the sale of business, the condition being that the sale is made in the conditions approved by the creditors. At the same time, under the law, the assets sold in the insolvency procedure are purchased by the buyer free of any encumbrances, such as privileges, mortgages, pledges or retention rights, seizures of any kind, except for the precautionary measures ordered in the criminal trial for special confiscation and/or extended confiscation. As an exception from the general provisions, mortgages shall be deregistered only under the sale deed signed by the official receiver/judicial liquidator, no express agreement on the secured creditor’s part being necessary to this end. There is the possibility to release a mortgage without the creditors’ consent only in the conditions in which the reorganization plan is approved by the vote on classes and is confirmed by the syndic judge subsequently or by the sale of the asset according to a sale regulation approved by the creditors. Adjudication on the account of the receivable and pre-package sale are possible, but they are not frequent in practice.

Denmark Small Flag Denmark

N/A

Bermuda Small Flag Bermuda

N/A

Japan Small Flag Japan

In both types of proceedings, business and asset sales are possible during the rehabilitation process whether those are pre-packaged or not, but are subject to the consent of the court and/or the supervisor in some cases. Whether the purchaser can acquire the assets ‘free and clear’ of claims and liabilities depends on the agreement between the debtor or the trustee and the purchaser. In principle, security cannot be released without the creditor’s consent, though the debtor or the trustee may request the court to grant permission for extinguishment of a security interest on assets of the debtor if such extinguishment is essential for the debtor’s rehabilitation. Credit bidding is not permitted.

Singapore Small Flag Singapore

A judicial manager may dispose of assets subject to a floating charge without the consent of the charge holder. For all other types of charges, the Judicial Manager may apply to Court to dispose of the subject property as if it were not subject to the security.

There are no fixed conditions that apply to the sale of assets in a restructuring or insolvency process, although an insolvency practitioner may be challenged if he does not take reasonable efforts to obtain a fair value for the assets being disposed of. Typically, a buyer would require any assets purchased to be free from any encumbrances, although there may be circumstances where a buyer may be prepared to accept existing claims and liabilities as part of the purchase consideration.

There are no formal statutory processes for credit bidding, although it is an available option for insolvency practitioners to consider when deciding how to restructure a company’s debt.

Under the 2017 amendments to the Companies Act, a company may now also apply to Court for approval of a pre-packaged scheme, which dispenses with the need to hold a meeting of creditors. In order for such a scheme to be approved by the Court, the Court must be satisfied that had a meeting of creditors been summoned, each relevant class of creditors would have approved the scheme.

British Virgin Islands Small Flag British Virgin Islands

From the date of their appointment, the liquidator has custody and control of the company’s assets and also the power to sell the company’s property, subject only to the supervision of the court or the creditors’ committee, depending on the type of liquidation. The only other qualification on the liquidator’s power to sell company property and give clear title is the requirement that the liquidator notify the creditors’ committee of any sale to a person connected with the company.

It is important to note, however, that the general rule nemo dat quod non habet applies to liquidators: the liquidator cannot give a purchaser greater title to property than the company had, though if the company has legal title, a bona fide purchaser for value without notice affecting the property will take that legal title free of equities.

The appointment of a liquidator does not affect the right of a secured creditor to take possession of and realise or otherwise deal with his collateral. A secured creditor may therefore exercise rights to foreclosure, sale, the appointment of a receiver, and so forth, that are generally available to holders of security interests (see above). As always, a secured creditor exercising a power of sale must get the best price reasonably obtainable for the asset and account to the liquidator for any surplus. If the price obtained does not discharge the debt owed to the creditor, they may prove a claim for the balance as an unsecured creditor.

Alternatively, the secured creditor may choose to place a value on the assets that are subject to their security interest and submit a claim in the liquidation for the unsecured balance. If they do so, the liquidator may give notice of an intention to redeem the security interest. On the expiry of 28 days, if the creditor has not sought to revise the valuation placed on the assets, the liquidator may redeem the security at the value placed on the assets.

If a secured creditor omits to disclose its security interest when submitting a claim in the liquidation of the company, the security is surrendered, though the creditor may apply to the court for relief. A secured creditor may also elect to surrender their security for the benefit of the estate, and submit an unsecured claim for the entirety of the debt they are owed.

There are no specific rules concerning credit bidding, though a secured creditor exercising a power of sale cannot purchase the asset themselves. A receiver selling on behalf of a creditor may accept a credit bid from the creditor, however. In certain cases concerning secured assets, the liquidator may cause a public sale by auction, and in those circumstances both the liquidator and the secured creditor may bid for the assets.

China Small Flag China

N/A

Australia Small Flag Australia

Voluntary administration

A voluntary administrator may sell assets, noting, however, it is not permitted to sell assets subject to security without consent (a receiver will often be appointed and have control over such assets). Administrators can apply to the court if such consent is not given and the court may make an order if it is satisfied that the secured creditor is adequately protected.

Liquidation

Liquidators appointed in the context of either voluntary or compulsory liquidations can sell or otherwise dispose of unencumbered property of the company without needing to seek approval from the court or other parties to the liquidation. The purchaser will acquire the assets unencumbered unless there are debts or liabilities passing to the purchaser as provided for in the sale documentation. If assets are encumbered, consent of the encumbrancer will be required unless a court directs otherwise. A liquidator owes fiduciary duties to the company. In realising company property, a liquidator (or administrator) has a duty to obtain the highest possible prices for the assets of the company, keeping in mind that the winding up should not be unnecessarily protracted. Property may be sold in any way the liquidator deems fit, including private contract and, usually, public auction. While creditors may purchase assets of the company, the purchase price will not be able to be set off against the debt owed to the creditor by the company. Instead any funds raised by the sale of company property will be for the benefit for the creditors as a whole, to be distributed according to the relevant distribution rules.

Receivership

As previously noted, a receiver is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances pursuant to section 420A of the Corporations Act. Upon a sale, the receiver will transfer the asset free of security interests (a release will be provided by the appointing secured creditor) and often the terms of any intercreditor arrangements will provide for the automatic release of subordinated security. In circumstances where an automatic release mechanism is not provided for, director negotiations will need to take place with the subordinated secured creditors.

Schemes of arrangement

The terms of the scheme itself can provide for the disposal of assets and any associated release of security provided. Such releases will not be automatic (unless specifically provided for in an approved scheme) and will need either agreement from the creditors or the provision of such release in associated finance and security documents.

Informal reorganisations

In an informal reorganisation of a company the conditions of the reorganisation and sale or use of assets are as negotiated with the relevant creditors.

Credit bids

Credit bids are permissible under Australian law and generally a means of pursuing loan to own strategies, but are rare given the need for a sales process to be conducted and the need for proceeds to flow.

Pre-packaged sales

The “pre-pack sale” in the traditional English and US tradition has had limited application in the Australian restructuring environment due to the stringent obligations placed on insolvency practitioners and the protections afforded to creditors under both statute and common law. However, the use of pre-packs may increase following the introduction of the ILRA and the safe harbour protection.

Attempts to effect a “pre-pack” are also restricted by the specific obligations on receivers vis-à-vis the disposal of assets. Section 420A of the Corporations Act requires a receiver to, upon the sale of an asset, either achieve a price not less than market value (if a market exists for the asset), or alternatively the best price reasonably obtainable. Australian Courts have identified certain steps that a receiver should take in order to comply with the second limb of the obligation, which include a market or auction sale process and marketing campaign, which has made “pre-pack” sales difficult for receivers to achieve. Accordingly, pre-packs tend only to be used in circumstances where:

(a) there are limited alternative sale options available to the insolvency practitioner appointed and there is evidence to support the assumption that any delay in sale may be fatal to the underlying business; or
(b) a market testing sale process has already been undertaken prior to the appointment of the receiver or administrator.

Notwithstanding the above, the market may well evolve such that we see more pre-packs if it can be demonstrated clearly that junior creditors and shareholders are out of the money.

Belgium Small Flag Belgium

Restructuring: transfer of activities

At the request of the company in distress or the public prosecutor, the court appoints a judicial administrator to organise and effect the transfer of activities. The administrator is free to determine the process and conditions, and acts under the supervision of a delegated judge. The transfer is subject to the court’s scrutiny. Subject to certain exceptions, the transfer will be free from any liens and binding on all (secured) creditors. Pre-packaged sales are not possible.

Bankruptcy

The trustee must sell all assets in the interest of the estate and creditors. He can sell the assets or activities through a private or public sale process. The assets are sold free and clear of any liens or encumbrances. After realising all assets, the trustee must call a final meeting of creditors to approve the accounts, costs and distribution of proceeds. A credit bid is available to certain creditors (such as the first ranking mortgagee in case of a sale of the mortgaged real estate). Pre-packaged sales are not possible.

The Netherlands Small Flag The Netherlands

In respect of the liquidation of the estate, the trustee is only entitled to sell unencumbered assets that are part of the bankrupt estate. The trustee is not entitled to sell assets that are owned by or secured in favour of a third party, unless with consent of such parties. The trustee is entitled to demand from a secured creditor to, within a reasonable period of time set by the trustee, exercise its rights with regard to the secured assets, for instance by foreclosing its right of pledge or right of mortgage, by failure of which that creditor loses its right to do so in favour of the trustee. In case of a suspension of payments the administrator does not have such possibility.

Under Dutch law any party may bid on pledged assets, including lenders or pledgees, in a public or private sale process with or without the approval of the court. Therefore, the pledgee is allowed to bid for pledged shares in a Dutch company and may do so by way of a credit bid (i.e. bidding by way of (effectively) set-off with the outstanding debt). We note that appropriation of shares by a pledgee is not permitted under Dutch law.

While pre-packaged deals are still theoretically possible, the European Court of Justice in the Estro bankruptcy ruled that the Dutch pre-pack process is not in line with the Transfer of Undertaking Directive. Therefore, all rights and obligations of employees of the bankrupt transferor of an undertaking are automatically transferred to the transferee in case of a sale through a pre-pack. This has material implications for Dutch pre-packs, as a potential buyer will be (very) reluctant to acquire an undertaking from a bankrupt transferor if (the rights and obligations of) the employees of such undertaking are automatically transferred.

United States Small Flag United States

Under Section 363 of the Bankruptcy Code, debtors are able to sell some or all of their assets. Those sold in the ordinary course of business do not require court approval while those sold outside the ordinary course do require notice, a hearing, and court approval. Debtors are required to demonstrate a legitimate business reason for the sale – a standard which is relatively flexible, as courts consider many relevant factors pertaining to the proceeding and the proposed sale.

Debtors may also sell their assets pursuant to the chapter 11 restructuring plan. Selling assets under section 363 of the Code allows property to be transferred to a buyer “free and clear” of all liens and encumbrances if the debtor can show (a) it is permitted under nonbankruptcy law; (b) the entity consents; (c) a lienholder of the property is oversecured; (d) such interest is the subject of a bona fide dispute; or (e) the interest holder can be compelled to accept a money satisfaction.

The Code also permits a holder of a lien securing an allowed claim to “credit bid” its interest, generally up to the face amount of its secured claim—in most cases, regardless of what the claim holder actually paid for the claim.

France Small Flag France

In amicable proceedings, if the debtor intends to use or sell its assets, there will be no permissions required other than contractual consents of creditors.
During safeguard proceedings, however, if the observation period has started, the debtor is allowed to carry out day-to-day transactions and any transaction that would entail the sale of an important asset of the business would be subject to the insolvency judge’s authorisation. The judge may indeed authorise the sale of certain assets on a piecemeal basis if the situation so requires.
In judicial reorganisation, the same rules as for safeguard proceedings apply. If the court orders the liquidation of the debtor’s assets, a liquidator is appointed. The liquidator will liquidate all the assets of the company in order to best distribute proceeds among the creditors. Either the debtor’s business can be sold as a whole in the framework of a sale plan or its assets can be sold on a piecemeal basis either through a public auction or by mutual agreement.

Luxembourg Small Flag Luxembourg

Under controlled management proceedings, the debtor cannot dispose of its assets without the receiver’s prior approval.

The bankruptcy receiver, with the supervisory judge’s approval, may immediately sell perishable movable assets.

Assets may only be sold with the prior consent of the relevant practitioner/court. There is no credit bidding process provided under Luxembourg law and a receiver would not be entitled to sell assets that are owned by or secured in favour of a third party, without that party’s approval.

New Zealand Small Flag New Zealand

Directors Duties and Liabilities

The Companies Act 1993 imposes high standards on directors to avoid reckless trading. The key duties that a director should most bear in mind when a company is in a position of financial difficulty are those in sections 135 and 136 of the Companies Act 1993 which are commonly referred to as the reckless trading or 'insolvent trading' provisions.

Under both sections 135 and 136 the duty owed by the director is to the company, and not to the shareholders or creditors. The liability of directors under these provisions is civil. Any damages or compensation awarded for breach of such duties must be paid by the directors to the company in insolvency for distribution to all creditors in accordance with their statutory priorities. The prospect of liability for reckless trading claims is a common catalyst for directors to place a company into voluntary administration or liquidation.

Section 135 states that a director has a duty to the company not to trade recklessly. It provides that a director must not:

  • Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
  • Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Section 135 is not intended to penalise directors merely for taking legitimate business risks. In fact, the preamble to the Companies Act 1993 reaffirms the economic and social value of a company “taking business risks”. It is only the taking of illegitimate business risks which will warrant a finding of reckless trading.

Section 136 sets out a director's duties to the company in relation to incurring obligations. It provides that a director of a company must not agree to the company incurring an obligation unless the director believes at the time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. A director's belief under section 136 must be held on reasonable grounds. The director’s belief at the time is a subjective test, although the decision must be made on reasonable grounds, which is an objective test.

In a Court application relating to a breach of director's duties a shareholder or creditor cannot in the normal course obtain compensation payments directly. Remedy for a breach is to be sought by the company, or by a shareholder on behalf of the company (with the leave of the Court by a derivative action under section 165).

However, post-liquidation of a company, section 301 of the Companies Act 1993 allows a liquidator, a creditor or a shareholder of the company to bring actions against directors (and others) where, among other things, such directors (and/or others) have misapplied, retained, or become liable or accountable for money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company.

The Court may grant relief directly against the directors in their personal capacity with the liability of the directors usually extending from the time that the company was in peril and the reckless actions were taken by the directors. The Court is given a wide discretion under section 301(1)(b)(ii) to order the director to “contribute such sum to the assets of the company by way of compensation as the Court thinks just”.

Shadow Directorship

Section 126 of the Companies Act provides that a director includes (in addition to someone occupying the position of director, by whatever name called) a person in accordance with whose directions or instructions a director of the company may be required or is accustomed to act, and a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act.

However, a professional advisor will not be a shadow director if the person provides advice only in a professional capacity. A receiver is also excluded from the definition of a director.

Shadow directors will owe the same duties as are imposed by the Companies Act on directors, including the duties relating to reckless trading. Penalties associated with a breach of those duties will also apply.

Related company liability in liquidation

A liquidator may seek an order of the Court under section 271 of the Companies Act 1993 that a company related to a company in liquidation, but not itself in liquidation, pay all or part of the claims made in the liquidation (a contribution order). The definition of 'related company' is broad and includes majority shareholders, subsidiaries, companies which are both related to a third company or companies where the businesses of the two companies are carried on such that the separate businesses of each company are not readily identifiable.

In determining whether to grant a contribution order the Court will have regard to the extent to which the related company took part of the management of the company in liquidation, the conduct of the related company towards creditors of the company in liquidation, and the extent to which the circumstances that gave rise to the liquidation are attributable to the actions of the related company.

Switzerland Small Flag Switzerland

In bankruptcy proceedings, the requirements for the sale of assets depend on the type of proceedings. While in ordinary proceedings the receiver in bankruptcy must generally follow more strict rules with regard to the realization of assets, in particular where it is envisaged to realize an asset of the insolvent debtor by means of a bilateral sale outside of an auction process, there is larger discretion in case of summary bankruptcy proceedings. In each case, the secured creditors must consent to such asset not being sold by public auction and all creditors must be given the possibility to submit a higher offer for real estate property or other assets of high value. Sales generally occur on an 'as is where is' basis and, thus, the acquired asset would not necessarily be free of claims and liabilities. No representations and warranties are typically given by the receiver in bankruptcy. Upon completion of the sale, the security will be released. Credit-bidding is available to a secured creditor only.

In composition proceedings, the insolvent debtor typically requires both the consent from the administrator and the competent court (or, if one has been formed, the creditor committee) if it wishes to sell its assets or even the entire business during the moratorium phase. The administrator's consent is sufficient for the sale of current assets, though. Court approval can also be sought at the outset of the proceedings which allows a pre-packaged restructuring (including a pre-packaged sale to an independent third party) under Swiss law. The consent of a secured creditor will be required for a release of a security interest. The terms of the disposal, including representations and warranties, will have to be negotiated between the seller and the purchaser. Again, credit-bidding is only available to a secured creditor and subject to contract.

Israel Small Flag Israel

There are no specific rules with respect to the sale of asset/the-entire in insolvent company, and transaction will be subject to the approval of the creditors as set forth in Section 8 above, which are in such circumstances the material stakeholders, if not the actual owners of the company/assets sold.

The sale method is a contractual matter and can be done on an AS IS basis without any representation with respect to the company or the sold assets. A "free and clear" sale of control in Companies is possible, and it will usually also include the transfer of all the company's current obligations and certain assets and rights to a trustee for the benefit of the creditors (this is the common technique, for example, for the sale of traded "Shell" corporations in the Israeli Stock Exchange).

A court officer may release a collateral without the secured creditor consent, by selling a pledged asset in the ordinary course of business, subject to proper protection to the creditor and that the sale is required for the recovery of the company; a release of a fixed charge shall also be subject to the court's approval. Such asset's sale proceeds shall be pledged in favor of the secured creditor, up to the amount of the original asset.

Credit bidding is not permitted, and the realization of collaterals is only permitted in accordance with the specific provisions of the law, as set forth in Section 2 above.

Pre-packed sales are not prohibited, but will be subject to scrutiny with respect to their influence on the company’s creditors, and to the duties of officers and directors in insolvency and distress situations towards the creditors of the company.

Ireland Small Flag Ireland

Examinership

A scheme of arrangement in an examinership does not involve the sale of the assets and business of the company. Rather, the balance sheet of the company is rendered solvent through the cramming down and discharge of pre-petition liabilities. The pre-petition equity is also typically transferred, free from encumbrances, to the investor in the scheme.

It is commonplace for a scheme of arrangement to provide for the cramming down and discharge of secured claims (to the value of the security), whereupon the security will be released. A scheme of arrangement can provide for the cramming down of secured claims and the release of security without the consent of the secured creditor(s) provided that (a) the majority of at least one class of impaired creditor has voted in favour of the scheme and (b) the scheme is not unfairly prejudicial to the secured creditor.

There is nothing under Irish law to suggest that a secured creditor cannot put forward an investment proposal to fund a scheme of arrangement with a view to acquiring an equity position in the company, and such a proposal could involve some element of credit bidding, including a debt for equity swap, although payments to other classes of impaired creditors under scheme of arrangement will need to be cash funded.

Liquidation

A liquidator is required to obtain the best price reasonably obtainable for the assets of the company. Where the liquidator has decided to continue to trade the business post-liquidation, he can also sell the business as a going concern. However, the liquidator will invariably exclude all warranties and personal liability in the sale contract.

Where assets are secured in favour of a creditor a liquidator will not be able to sell free and clear of that security unless the secured creditor agrees to release its security, save where the proceeds will be sufficient to discharge the entirety of the secured obligation.

A liquidator may permit a credit bid by a creditor provided that other creditors are not prejudiced and all pro rata payments due to other creditors are paid in cash.

Receivership

The receiver has a statutory to obtain the best price reasonably obtainable for the secured assets over which he or she has been appointed. Where the receiver has also been appointed as a manager he or she can also carry on the trade and sell the business as a going concern. However, the receiver will invariably exclude all warranties and personal liability in the sale contract.

Save where the proceeds exceed the entirety of the secured liabilities, the receiver cannot compel the secured creditor to release its security on the sale of the assets.

There is nothing under Irish law to prevent a secured creditor from credit bidding to acquire the secured assets from a receiver that it has appointed (although usually the asset is acquired by an affiliate rather than in the secured creditor’s own name) provided that other creditors are not prejudiced and any payments that the receiver is obliged to pay to preferential creditors are cash funded.

Pre-pack sales (usually implemented through a receivership) are not prohibited under Irish law. The insolvency practitioner must take precautions to ensure that he obtains best price reasonably obtainable at the time of sale (usually by reference to a market valuation) and that no creditor is prejudiced as a result of a swift sale.

United Kingdom Small Flag United Kingdom

An administrator can sell assets free and clear of security either with the relevant securityholder’s consent or with a court order (provided that the proceeds are used to discharge the sums secured by the security).

Unlike in a solvent sale, a buyer from an administrator will generally be expected to acknowledge that it enters into the agreement without reliance on any warranties or representations. A buyer may also be expected to provide wide ranging indemnities to the administrator.

Credit bidding (including where the credit bidder is an assignee of the original creditor) in an administration sale process or pre-pack is permitted, although there is also no specific legislation on this point. It will be up to the administrator to decide whether a particular deal is in the best interests of the creditors and so should be implemented. Where there are no other bidders, it would be prudent to demonstrate that a marketing process was pursued (and that there was no other available bidder) or to obtain an independent valuation of the assets being sold.

Pre-packaged sales are possible and common in the UK. The perceived lack of transparency and creditor consultation associated with pre-packs has attracted increased scrutiny, especially where assets are sold to a purchaser connected to the debtor. A voluntary independent assessment system – the ‘pre-pack pool’ – has been set up with the aim of increasing transparency and credibility of such transactions.

Mexico Small Flag Mexico

As of the issuance of an Insolvency Judgment, any sale of assets should be approved by the Insolvency Court. In a liquidation scenario, all assets should be transferred free and clear of claims and liabilities.

A security interest cannot be released without creditor´s consent.

Credit bidding is not regulated by the Insolvency Law.

There are no pre-packaged sales, but in order to expedite an Insolvency Proceeding, the insolvent entity may file a proceeding with a reorganization plan, pre-agreed upon with its creditors that represent at least a simple majority of all outstanding indebtedness. In such case, there will be no need for a visit in order to declare the insolvency of the relevant entity, and the Mediation Stage of the proceeding would be limited to the definitive approval of the reorganization plan pursuant to the voting of the Reorganization Agreement.

Updated: June 1, 2018