What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Restructuring & Insolvency (3rd edition)
The two main insolvency procedures are (i) a bankruptcy and (ii) a receivership.
An insolvent liquidation is commonly carried out as a bankruptcy under the BIA. In the context of a liquidation, the BIA is intended to provide for the fair distribution of the debtor's unencumbered assets among its unsecured creditors.
The right to file a claim and receive a dividend in the distribution of the proceeds derived from the liquidation of the bankrupt's unencumbered assets replaces all of the pre-bankruptcy remedies of the debtor's unsecured creditors. However, the bankrupt's secured creditors can also enforce their security outside of the administration of bankruptcy.
When a debtor is insolvent, a bankruptcy can be initiated in three ways:
i) the debtor voluntarily assigns itself into bankruptcy;
ii) the debtor is involuntarily placed into bankruptcy by its creditors; or
iii) the debtor becomes bankrupt as a result of the failure of the BIA Proposal (see Question 8).
If the debtor assigns itself into bankruptcy voluntarily, he can choose a trustee. However, if the debtor is involuntarily placed into bankruptcy, he will have one appointed for him.
For a corporate debtor, initiation also requires the company's board of directors to pass a resolution prior to the court approving the assignment into bankruptcy.
The debtor is considered bankrupt when he:
i) has debts of at least Can$1,000 owing to its creditors; and
ii) has committed an act of bankruptcy within the six (6) months prior to the application for a bankruptcy order, which may include having become insolvent and unable to meet its financial obligations generally as they become due.
Consent and Approvals
An involuntary bankruptcy is made by order of the court upon application by one or more creditors of the debtor. A voluntary bankruptcy is commenced by the trustee in bankruptcy selected by the debtor filing an assignment in bankruptcy with the Superintendent of Bankruptcy (that is, an independent government agency responsible for the supervision and integrity of the Canadian bankruptcy system).
Supervision and Control
Once the bankruptcy is effective, all of the debtor's property and assets vest in the trustee and the debtor ceases to have any control over its affairs. The trustee must be licensed by the Superintendent of Bankruptcy. In a corporate bankruptcy, the trustee:
i) replaces the management of the corporation; and
ii) assumes full control over all of the debtor's property and assets.
Secured creditors retain their right to enforce on their security.
Protection from Creditors
Once a debtor has become bankrupt, all of the debtor's property, wherever located, vests in the trustee subject to the rights of secured creditors. The trustee then proceeds to administer the estate for the benefit of the bankrupt's unsecured creditors. The BIA provides for an automatic stay of proceedings once the bankruptcy has commenced. The debtor's unsecured creditors are prevented from:
i) exercising any remedy against the debtor or its property; or
ii) commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy.
The bankruptcy stay does not affect secured creditors, who are generally free to enforce their security outside of the liquidation process provided they do so in a commercially reasonable manner.
The law governing intellectual property licenses in a bankruptcy proceeding is unclear and licensees may lose their rights to use the intellectual property upon the bankruptcy of the licensor. The trustee-in-bankruptcy has the authority to disclaim executory contracts. Accordingly, the licensee may wish to have the license agreement deemed to be a non-executory contract in the drafting of the license agreement in order to prevent a subsequent trustee-in-bankruptcy from being able to disclaim the license agreement in the bankruptcy proceedings of the licensor.
Length of Procedure
Unlike a BIA Proposal, there is no specified timeline for bankruptcy proceedings (see Question 8, BIA Proposal).
The debtor's assets (after secured creditors have realized their security and after the payment of super-priority creditors) are distributed on a pro rata basis among the unsecured creditors in accordance with their proven claims. The bankruptcy concludes once the trustee has distributed all the proceeds realized from the sale of the property and assets of the debtor to the debtor's creditors and the trustee has been discharged by the court.
The BIA also provides for the enforcement of security and the appointment of receivers on a national basis. A secured creditor who plans to enforce its security on all or substantially all property and assets of an insolvent debtor must give prior notice of its intention to do so pursuant to section 244 of the BIA and then must wait ten (10) days after sending the notice before taking further steps, unless the debtor consents to an earlier enforcement at the time of the delivery of the 244 notice, unless the creditor is able to persuade the court that an “interim receiver” should be appointed.
Duties of Receiver Upon Appointment
Once the receiver is appointed the receiver must:
i) give notice of its appointment to all creditors;
ii) issue reports on a regular basis outlining the status of the receivership; and
iii) prepare a final report and statement of receipts and disbursements when the appointment is terminated.
Appointment of a Receiver
A receiver or receiver/manager is appointed either:
(A) Privately, by a secured creditor. Where a security agreement provides for the private appointment of a receiver, the powers of the receiver must also be set out in the agreement. Unlike a court-appointed receiver (see below), a private receiver's loyalties lie with the appointing creditor, and the receiver will work to maximise recoveries for the creditor. Privately appointed receivers usually have broad powers, including the power to:
i) carry on the business; and
ii) sell the debtor's assets by auction, tender or private sale.
Although private appointments can reduce costs and delays and provide the secured creditor with greater control over the realisation process, it is often advisable to obtain a court appointment. This is especially the case if:
i) there are major disputes among creditors or with the debtor; and/or
ii) it is clear that the assistance of the court will be required throughout the receivership.
It is also often important to potential purchasers of the assets of the debtor from the receiver to have the protection of a court order approving the sale of assets.
In Québec secured creditors may not appoint private receiver. The only recourses available to hypothecary creditors and holders of prior claims are the four (4) recourses set out in the Québec Civil Code (see Question 2).
(B) By Court Order. The jurisdiction for a court appointment of a receiver is found in the applicable provincial judicature acts and rules for court proceedings (except Québec) and pursuant to section 243 of the BIA. A receiver can be appointed under the rules for court proceedings and applicable provincial judicature acts alone, but it is more common for the appointment to be made under both the BIA and the rules for court proceedings/judicature acts. A court appointment may be necessary if the debtor opposes the appointment of the receiver and will not give up possession of its property and assets to the receiver. In certain provincial jurisdictions, the courts will grant possession orders and affirm the appointment of a private receiver with powers as set out in the security documents, and thereby avoiding the requirement for a formal court appointment.
The court's appointment of a receiver usually begins with a secured creditor commencing an action or application against the debtor. The receiver is then appointed in a summary proceeding within the action or application. The order appointing the receiver usually follows a “model” Receivership Order, similar to the “template” CCAA Initial Order (discussed below, see Question 8). The Receivership Order typically:
i) stays proceedings against the receiver and debtor;
ii) provides the receiver with control over the property and assets of the debtor;
iii) authorizes the receiver to carry on the debtor's business and to borrow money on the security of the assets; and
iv) ultimately authorizes the receiver to sell the debtor's property and assets with the approval of the court.
The Receivership Order also typically authorizes the receiver to commence and defend litigation in the debtor's name.
While the duty of a privately-appointed receiver is primarily to the appointing secured creditor (subject to a general duty to act in a commercially reasonable manner), the court-appointed receiver is an officer of the court and has a duty to protect the interests of all of the debtor's creditors. By the nature of its appointment, a court-appointed receiver may not be entitled to obtain an indemnity from the secured creditor who sought the appointment.
In Québec, the Code of Civil Procedure provides for the appointment of a “judicial receiver”, called a “sequestrator”, for the duration of any litigation. The court may, even on its own initiative, order the sequestration of disputed property if it considers it necessary to preserve the parties’ rights in the property, for example, in the case of an immovable left unmaintained. The sequestrator is then put in possession of the movable or immovable property in dispute for the duration of the litigation. As opposed to common law jurisdictions, this is rarely done in practice in Québec, but is available nonetheless in any litigation, if warranted, including in a litigation between a secured creditor and its debtor.
British Virgin Islands
The corporate insolvency procedures available in the BVI include creditor arrangements, receiverships and liquidations (including provisional liquidations). Although the IA contains provisions for administration, these have not yet been brought into force. The most common insolvency procedure in BVI is liquidation.
If a member wishes to apply for the appointment of a liquidator on the insolvency ground, they must first seek the leave of the court, which must be satisfied that there is a prima facie case that the company is insolvent. The court may make an order appointing a liquidator on the just and equitable ground in a variety of circumstances, including where the company was created for the purposes of fraud, or even where there is a pressing need to investigate the company’s affairs.
The BVI courts will exercise insolvency jurisdiction over a company registered in the BVI as of right, even if the company does not have any assets in the BVI or has the its centre of main interests in another jurisdiction.
If a court grants an application to appoint a liquidator, it will usually appoint the liquidator proposed by the applicant, provided consents to act have been given. The result is that the liquidator will immediately take office on the liquidation order being made, which avoids any delays that are sometimes occasioned in other jurisdiction by an intervening official receiver. Whilst the liquidator appointed by the applicant is initially appointed, they can be removed by the company’s creditors at the first creditors’ meeting. Directors’ powers, functions, and duties cease on the appointment of a liquidator, save to the extent they are permitted by the IA or authorised by the liquidator. Additionally, the members of a company may collectively resolve to put the company into liquidation without the need for an application to court by passing a qualifying resolution.
Liquidations are conducted by the liquidator who is an officer of the court, though the liquidator must report to a committee of creditors in cases where a creditors’ committee is formed (except in certain circumstances where the liquidator concludes that there is no real prospect of a distribution). As an officer of the court, the court exercises a supervisory jurisdiction over the liquidation and it is common for the order appointing the liquidator to require the liquidator to seek the court’s sanction before exercising certain powers, such as compromising claims and entering into arrangements with the body of creditors. It is also common for the liquidator to apply to the court for directions, where he is faced with difficult issues or requires the court’s assistance.
The liquidator’s fundamental statutory duties are to gather in and preserve the company’s assets, to decide on claims, to make distributions to creditors in accordance with the statutory priorities, and to distribute any surplus to the company’s members. At the conclusion of the liquidation, the company will be dissolved.
The BVI courts generally hear commercial matters quickly and efficiently. It is possible to petition the court for a winding-up order and obtain the appointment of provisional liquidators within 48 hours, if the matter is very urgent. The order will be issued at the time of the hearing unless the decision is reserved. If judgment is reserved, it is typical for a decision to be given within a matter of days if very urgent, or two to three weeks if not.
In contested liquidations, it is usually possible to arrange a hearing very quickly if the matter is very urgent and if there would be significant consequences arising for one or more of the parties if the hearing were to be delayed.
In cases where no provisional liquidator is sought, the time between filing the initial application and the first hearing of the petition is generally around six weeks. This gives enough time to serve the application, advertise the hearing, and deal with other formal steps prior to the hearing.
The main insolvency procedures in the Cayman Islands are official liquidation under the supervision of the Cayman Court, or voluntary liquidation. The Court can also appoint liquidators on a provisional basis ("provisional liquidators") pending the hearing of a petition to place the company into official liquidation (see question 8 below).
A company may be placed into official liquidation by the Court making a winding up order upon a petition by the company, a creditor, any shareholder, or the Cayman Islands Monetary Authority. The Court will appoint official liquidators over the company, and their primary duty will be to collect in the company's assets and distribute them to the company's creditors, with any surplus assets distributed to the company's shareholders.
The powers of the company's directors cease upon the appointment of official liquidators, who will control the company's affairs subject to the Court's supervision.
On the making of a winding up order, an automatic stay is imposed prohibiting any suit, action or other proceeding from being proceeded with or commenced against the company without the leave of the Court. However, secured creditors are not prohibited from enforcing any valid security interest without reference to the liquidator.
The length of the liquidation process varies on a case by case basis and will largely depend on the nature and complexity of the company's business and the issues required to be dealt with in winding up the company's affairs. There is no timeframe within which an official liquidation must be completed.
The shareholders of a company can resolve by ordinary resolution that the company be wound up voluntarily because it is unable to pay its debts as they fall due, or by special resolution that the company be wound up voluntarily.
On the appointment of the voluntary liquidator, all of the powers of the directors cease, except so far as the company in general meeting or the liquidator sanctions their continuance. Any person, including a director or officer of the company, may be appointed as its voluntary liquidator.
The voluntary liquidator must apply to the Court for an order bringing the voluntary liquidation under the Court's supervision unless, within 28 days of the commencement of the voluntary liquidation, the directors swear a declaration of solvency stating that the company will be able to pay its debts in full (with interest) within a period not exceeding 12 months after the commencement of the liquidation. Creditors and contributories of the company can also apply to the Court for a supervision order if the company is or is likely to become insolvent, or the Court's supervision will facilitate a more effective, economic or expeditious liquidation in the interests of the creditors and contributories. If a supervision order is made, the liquidation will proceed in the same manner as an official liquidation.
Bankruptcy procedures available in China include liquidation, restructuring and settlement. In a liquidation or settlement procedure, the administrator takes over the debtor; while in a restructuring procedure, upon the approval of the court, the debtor may manage its own assets and operate its business under supervision of the administrator, who is nevertheless still in charge of the debtor. Bankruptcy procedures are judicial proceedings subject to the direction and supervision of the court. The administrator is appointed by and report to the court and performs its duties in accordance with law under supervision of the creditors’ meeting and the creditor committee. Creditors exercise their rights via the creditors’ meeting or the creditor committee, but the establishment of the creditor committee is contingent on the decision made at the first meeting of creditors. Certain personnel of the debtor are obliged to provide cooperation in the procedures. In the case where the creditors file for liquidation of the debtor, the capital contributors of the debtor have the right to request for restructuring of the debtor, and if the proposed restructuring plan involves adjustment of the interests of the capital contributors, they are entitled to vote on such plan. Chinese law does not prescribe a specific time limit for hearing a bankruptcy case, but in practice, some courts have set their own one-, two- or three-year limit based on the complexity of bankruptcy cases. For simple bankruptcy cases involving a small amount, some courts have adopted a six-month summary procedure on a trial basis.
- What insolvency procedures are available in the jurisdiction?
There are two types of in-court insolvency procedures in Denmark; restructuring and insolvency.
The purpose of restructuring is to obtain an arrangement with the creditors, transfer a business or a combination or wind down operations in cooperation with the former management.
The purpose of an insolvency procedure is to sell the debtor’s assets with a view to distributing the seller’s assets between the creditors.
- Does management continue to operate the business and / or is the debtor subject to supervision?
In respect of restructuring proceedings, the management continues to operate the business together with a restructuring administrator appointed by the insolvency court. The management must not make important decisions without the consent of the restructuring administrator.
In certain circumstances, the restructuring administrator may take over the management.
When the insolvency order has been issued, the management is deregistered and subsequently the trustee takes over the management of the business.
- What roles do the court and other stakeholders play?
In restructuring proceedings, the proposed solution must be presented to the creditors for their approval. If the proposed solution is not accepted by the creditors, insolvency proceedings will be commenced against the debtor.
In insolvency proceedings, the trustee has the full decision-making power and may consequently deal with the assets of the estate without the consent of the creditors.
In respect of restructuring proceedings as well as insolvency proceedings, the insolvency court is the supreme authority and is not to approve transactions but is only to ensure that the administration is in accordance with the Danish Insolvency Act.
- How long does the process usually take to complete?
A restructuring process may take up to 12 months at which time a restructuring proposal is to be voted on. The restructuring administration usually takes 2-6 months.
There is no specific timeframe for the administration of an insolvent estate but it is typically 1-2 year. In case of particularly complicated estates or if legal proceedings are conducted, the administration may take considerably longer.
- Reorganisation proceedings (redressement judiciaire)
When a company is insolvent and its recovery appears possible, its management, any unpaid creditor or the public prosecutor may apply for the opening of a judicial reorganisation.
The court opens a six-month “observation period” (which is renewable up to 12 months and exceptionally up to 18 months upon request of the public prosecutor) during which the debtor will negotiate with its creditors a waiver of debt or rescheduling.
During the observation period, a judicial administrator will be in charge of assisting the management of the debtor’s business. The administrator may also be empowered by the court to take over the management and control of the debtor.
At the end of the observation period, the judge will make an order for (a) the continuation of the business through a reorganisation plan which must be adopted by the creditors in the same conditions as for the safeguard; (b) the sale of all or part of the debtor’s assets through a sale plan; or (c) if the latter fails, the progression into a liquidation proceeding.
- Judicial liquidation proceedings (liquidation judiciaire)
Liquidation is the appropriate remedy when the company is insolvent and its reorganization or rescue appears obviously impossible. It may be initiated by the debtor, any unpaid creditor or the public prosecutor.
The purpose of such a proceeding is to liquidate a company by selling it as a whole or each branch of activities or asset one by one. In order to request the court to open an immediate liquidation proceeding, the debtor must show evidence that its recovery is hopeless and obviously impossible.
The court may order the immediate liquidation of the debtor’s assets and will appoint a liquidator to replace the debtor in its management and proceed with the sale of the assets (private sale or auction). However, when it seems possible that all or part of the business has the chance to be sold to a third party, then the operation of the company will continue temporarily for up to four months.
The German Insolvency Code provides a single procedure for both liquidation and restructuring measures. Insolvency proceedings generally comprise two stages: (i) the preliminary insolvency proceedings between the insolvency filing and the actual opening of insolvency proceedings by respective court order, and (ii) the opened insolvency proceedings.
These stages can be combined with several tools meant to facilitate restructurings: the debtor-in-possession (“DIP”) proceedings (Eigenverwaltung), the protective shield proceedings (Schutzschirmverfahren) and the insolvency plan proceedings (Insolvenzplanverfahren) (see Question 8).
Preliminary Insolvency Proceedings
The preliminary insolvency proceedings are initiated if a debtor or one of its creditors files for the opening of insolvency proceedings.
After the insolvency court examined the petition for admissibility and substance, the court will order the commencement of preliminary insolvency proceedings and take measures to protect the creditors against harm to the estate, primarily by (i) appointing a preliminary insolvency administrator or monitor (in the case of debtor-in-possession or protective shield proceedings), and (ii) preventing the debtor from transferring assets without the preliminary insolvency administrator’s consent.
The Federal Employment Agency (Bundesagentur für Arbeit) will cover employees’ wages for up to three months before the opening of insolvency proceedings – the so-called insolvency protection payments (Insolvenzgeld), and it is usually in the estate’s best interest to fully use these funds. Therefore, preliminary insolvency proceedings usually take up to three months (see Question 9).
Regular insolvency proceedings
After the preliminary insolvency administrator submits a report of the debtor’s state of affairs (inter alia confirming the insolvency and sufficient funds to cover the costs of the proceedings), the insolvency court will issue an order opening the regular insolvency proceeding. As of that point in time, the debtor is no longer entitled to manage and dispose of its assets. Instead, that power is vested in the (final) insolvency administrator, who is appointed uno actu and typically the preliminary administrator. The court also determines the date of the first creditors’ assembly (Gläubigerversammlung), which should take place within six to eight weeks after the opening of the insolvency proceedings.
At the first creditors’ assembly, the insolvency administrator will report on the debtor’s economic situation and its causes. He or she will assess the prospects (if any) of maintaining the debtor’s enterprise as a whole or in part, indicate the possibility of drawing up an insolvency plan, and describe how each solution will affect the creditors’ satisfaction. The first creditors’ assembly shall decide whether the debtor's enterprise should be closed down or temporarily continued. The assembly may commission the administrator to draw up an insolvency plan, and may determine the plan’s objective for the administrator. Unless insolvency plan proceedings are pursued, most proceedings result in the liquidation of the debtor’s assets, ideally by selling the debtor’s business as a going concern by way of an asset deal (Übertragende Sanierung).
In regular insolvency proceedings, it usually takes several years for the process of asset liquidation and distribution of the insolvency quota among the (unsecured) creditors to be completed.
Self-administration proceedings, protective shield proceedings and insolvency plan proceedings involve variations in the abovementioned processes. For more information, see Question 8.
Liquidation procedures can be divided into compulsory and voluntary liquidations. The purpose of both is to realise assets, pay off creditors, and distribute any remaining assets to the shareholders. The company can then be dissolved and will cease to exist.
A CL can initiated by one of the following petitioning the Supreme Court:
- the company itself (generally by a shareholders' resolution if solvent and a directors' resolution if insolvent);
- a creditor (including contingent or prospective creditors);
- a contributory (i.e. any person liable to contribute to the assets of the company if it is liquidated, including fully paid shareholders); and
- in certain circumstances, the Registrar of Companies, the Supervisor of Insurance or the Bermuda Monetary Authority.
Once compulsory winding up proceedings have started, and prior to the making of a winding up order, the court may appoint a provisional liquidator. After a winding-up order is made, a permanent liquidator is appointed to conduct the liquidation.
Once appointed, a liquidator has wide powers in respect of the company, some of which are required to be exercised only with the sanction of the court or the committee of inspection. The power to sell the company’s assets does not require the approval of the court or the creditors. If appointed, a committee of inspection, which represents the interests of the creditors or contributors (as the case may be), will provide directions to the liquidator in relation to the administration of the assets of the company and their ultimate distribution.
In a compulsory liquidation, once a winding-up order is made or a provisional liquidator appointed, an automatic stay prohibits creditor action. Secured creditors, however, are still entitled to enforce their security.
The process is managed by the court, which will make a winding-up order following the petition for winding-up if the grounds for liquidation are made out.
In terms of the length of procedure, a compulsory liquidation’s duration will depend on the complexity of the company's affairs and the nature of its assets and debts.
Once the liquidator has realised all the company's assets, paid any amounts due in respect of preferential payments, made distributions to creditors and distributed any balance to shareholders, he must comply with certain formalities. In a compulsory liquidation, the liquidator must apply for a release from the court. In doing so, the liquidator must give creditors and shareholders 21 days' notice of his intention to make the application and provide an account of the liquidation with that notice.
There are two types of voluntary liquidation:
- A members' voluntary liquidation (MVL) under which a solvent company is wound up by (and under the direction of) its shareholders; and
- a creditors' voluntary liquidation (CVL), which applies to an insolvent company and is undertaken by the insolvent company’s creditors.
Both types of voluntary liquidations are commenced by the company's shareholders by way of a resolution (which is usually based on the recommendation of the board of directors).
Parties filing for a CVL can demonstrate that the company is, or is likely to become, unable to pay its debts when due by the following:
- On a cash flow basis (the company is unable to pay its liabilities as they become due) or balance sheet basis (the realisable value of the company's assets is less than its liabilities).
- By proof of an unpaid debt (as evidenced by a court judgment or a statutory demand for payment that has not been satisfied or set aside in 21 days).
The Bermuda Supreme Court can also put a company into liquidation if it can be shown that it is just and equitable to do so.
For an MVL, a majority of the directors must make a statutory declaration confirming that they believe that the company will be able to pay its debts in full within 12 months from the date of commencement of the liquidation. If no statutory declaration is made, the liquidation will proceed as a CVL.
In a voluntary scenario, and unless the company’s bye-laws say otherwise, shareholders of the company approve the liquidation by a simple majority vote. In an MVL, the shareholders appoint the liquidator. In a CVL, a creditors’ meeting must be held within 24 hours of the shareholders’ resolution. At that meeting, a majority by value of the creditors present and voting appoint the liquidator and may also appoint a committee of inspection and fix the liquidator’s remuneration.
There is no automatic stay of creditor actions in a voluntary liquidation, but the court can consider a liquidator’s application to grant a stay from the date of the shareholders’ resolution.
As for a compulsory liquidation, a CVL's duration depends on the complexity of the company's affairs and the nature of its assets and debts. In normal circumstances an MVL is concluded in 2-3 months.
In both an involuntary and voluntary liquidation, the liquidator takes over the company's management.
With regard to the role of stakeholders, in an insolvent liquidation (whether compulsory or voluntary) the unsecured creditors play a significant role, particularly in the period following a winding up order. In a CVL, secured creditors can determine the course of the liquidation through their representatives on the committee of inspection.
If the company is solvent, it is the shareholders who have the most significant influence.
Pursuant to sections 406 to 418 of part XXIII of the Companies Law, a company may be wound up by the court and a liquidator appointed. The liquidator's role is to collect and realise the company's assets and to distribute dividends according to a statutory order of priority.
Supervision and control
The court and liquidator supervise the procedure. On hearing a compulsory winding-up application, the court may grant the application (on such terms and conditions as it considers appropriate), dismiss the application, or make such other orders as it thinks fit.
On the making of a compulsory winding-up order, the court will appoint a liquidator nominated by the applicant or, where no person has been nominated, make such appointment as it thinks appropriate. The liquidator(s) is an officer of the Royal Court and must be sworn into office.
On the making of an order, all powers of the company's directors cease an the company must cease to carry on business except in so far as is necessary for the beneficial winding-up of the company.
The liquidator can:
i. bring or defend civil actions on behalf of the company;
ii. carry on the business of the company to the extent beneficial for winding up the company;
iii. make capital calls (that is, demand money promised by an investor);
iv. sign all receipts and other documents on behalf of the company;
v. do any other act relating to the winding-up; and
vi. do any court-authorised act.
A liquidator of a company can seek the court's directions in relation to any matter regarding the winding-up.
Protection from creditors
There is no statutory moratorium on creditors' claims on the making of a compulsory winding-up order. However, a creditor can apply to the court on the making of an application (that is, before the winding-up order is made) for an order restraining an action or proceeding pending against the company.
Court Involvement/Length of procedure
In practice, the Court will allow the appointed liquidators to undertake their role without interference but will step in to provide directions as and when required.
A compulsory liquidation is concluded by way of a hearing in front of a Commissioner of the Royal Court. The Commissioner will examine the final accounts of the liquidation, fix the fees of the liquidators and approve the distributions to be made.
The Companies Law contains no provision as to the length of liquidation. In practice, the court does not impose time frames.
Pursuant to sections 391 to 405 of Part XXII of the Companies Law, the members of a solvent or insolvent company can decide that it should be wound up and appoint a liquidator. The liquidator's role is to collect and realise the company's assets and to distribute dividends according to a statutory order of priority. Unlike a compulsory liquidation, a voluntary liquidation is an out-of-court process.
A company can be voluntarily wound up by ordinary resolution if either:
i. the period (if any) fixed by the memorandum or articles for the duration of the company expires; or
ii. an event (if any) occurs on which the memorandum or articles provide that the company should be dissolved.
Alternatively, any company can be wound up voluntarily if it passes a special resolution to the effect.
Supervision and control
The liquidator realises the company's assets and discharges the company's liabilities. Having done so, he distributes any surplus among the members according to their respective entitlements. A voluntary liquidator is not controlled by the court. From the commencement of a voluntary winding-up the company ceases to carry on business unless beneficial for winding up the company. The company's corporate state and powers continue until dissolution. On the appointment of a liquidator, all powers of the directors cease, except to the extent that the company (by ordinary resolution) or the liquidator approves their continuance. Any person who subsequently purports to exercise any powers of a director is guilty of an offence.
A company being voluntarily wound up can, by special resolution, delegate to its creditors the power to:
i. appoint a liquidator; and
ii. enter into any arrangement regarding the powers to be exercised by the liquidator and the manner in which they are to be exercised. A creditor or shareholder of a company which has entered into such an arrangement can, within 21 days from completion of the arrangement, apply to the court for an order that the arrangement be set aside. The court can set aside, amend, vary or confirm the arrangement.
A member of a company can also apply to the court for directions concerning any aspect of the winding-up. If a resolution for a voluntary winding-up has already been passed, the court can still make an order that the company be compulsorily wound up. This application is unusual but might be made by a creditor who wishes the process to be supervised by the court.
It is important to note that any legal person may, currently, be appointed as liquidator in a voluntary liquidation. Consequently, there is no requirement for independence and may be no formal supervision of the liquidator. Conversely, the procedure may be used in respect of insolent companies and there is a risk of abuse in such circumstances. One proposed change to the Guernsey law in this area is to introduce a requirement for independence in the choice of appointee in insolvent situations.
Protection from creditors
There is no statutory moratorium on creditors' claims on the making of a voluntary winding-up order. Unsecured creditors can prove in a liquidation, although they are only paid once all claims have been proved and the final dividend declared. Secured creditors can also enforce their security.
Length of procedure
The Companies Law contains no provision as to the length of liquidation. However, after one year from the date of a voluntary winding-up, and in each further year, the liquidator must summon a general meeting if the winding-up is not complete. At the meeting, the liquidator should set out an account of his acts and dealings, and of the conduct of the winding-up during the preceding year.
As soon as the company's affairs are fully wound up, the liquidator should both:
i. Prepare an account of the winding-up, giving details of the liquidation and the disposal of the company's property, among other things; and
ii. Call a general meeting to present and explain the account.
After the meeting, the liquidator must give notice to the Registrar of Companies of the holding of the meeting and its date. The Registrar of Companies publishes the notice along with a statement that the company will be dissolved. The company is dissolved three months after the notice is delivered.
Administration is, strictly, an insolvency procedure in Guernsey but is dealt with below.
There are two forms of formal corporate insolvency proceedings available under the laws of Ireland – liquidation and examinership.
There are three forms of liquidation:
- members’ voluntary liquidation – a solvent winding up commenced by shareholder resolution, however, if it becomes apparent to the liquidator in the course of the winding up that the company is insolvent, he must convert the liquidation into a creditor’s voluntary liquidation;
- creditors’ voluntary liquidation - an insolvent winding-up commenced by ordinary shareholder resolution where the members have formed the view that the company cannot, by reason of its liabilities, continue to trade – the process is generally initiated by the directors recommending to the members that the company be wound up due to insolvency; and
- compulsory liquidation – a winding up commenced by Order of the High Court on foot of a petition presented by a creditor, a contributory or by the company itself (having been authorised to do so by its members) – this can be a solvent or an insolvent liquidation but is most commonly initiated by a creditor that has not been paid a debt that is lawfully due.
Save in very limited circumstances, the directors of the company cease to have any powers to deal with the assets of the company, or to have any role in the affairs of the company, with effect from the appointment of the liquidator. If the liquidator decides to continue to trade post-liquidation, he can engage management as employees where this is for the benefit of the winding-up, but that is the liquidator’s decision and the board of directors is nonetheless defunct.
The Court does not have any oversight role with respect to the day to day conduct of a liquidation of a company, including a compulsory liquidation commenced by Court Order. However, a liquidator or any creditor may at any time apply to Court for directions as to the conduct of any liquidation (whether voluntary or compulsory), or for Orders directing parties, such as directors, to co-operate with or provide information to the liquidator concerning the assets or affairs of the company.
In a compulsory liquidation or a creditors voluntary liquidation a committee of inspection may be formed, comprising up to five nominees from the creditors and three nominees of the members, which will exercise day to day oversight with regard to taking of certain actions by the liquidator, including with respect to the commencement of legal proceedings, engaging in a trade post-liquidation, the payment of any class of creditors in full and the settlement or compromise of creditors’ claims. The liquidator's fees are also agreed with the committee of inspection. Finally, the liquidator is obliged to have regard to any directions given by the creditors, contributories or by the committee of inspection with respect to the administration and distribution of the property of the company.
There is no time limit for the completion of compulsory or a creditors’ voluntary liquidation, and it is not unusual for the winding up to take a number of years to complete, depending on the complexity of the affairs of the company concerned.
Examinership is a court protection procedure available to a company that is insolvent, or likely to be insolvent, and which can demonstrate that, provided that its debts are restructured and/or it can attract new investment, it has an undertaking that is capable of surviving as a going concern.
In order to avail of the Court's protection for the company, a petition must be filed and presented to the Court by either the company itself, its directors, any shareholder holding more than 10% of the equity, or any creditor. The company will have protection from its creditors (including secured creditors) for a period of up to 100 days whilst the examiner (invariably an insolvency professional) attempts to seek fresh investment for the company and to formulate a scheme of arrangement that has the support of at least 50% plus one in value and number of at least one class of impaired creditor.
A scheme of arrangement will usually provide for (a) the investment of funds from an investor to fund payments to impaired creditors as well as the costs of the examiner, (b) the writing down of creditors’ claims, and (c) the transfer of the shareholdings to the investor(s). The Court will not approve a scheme of arrangement unless it is satisfied that it is not unfairly prejudicial to any creditor (which is generally taken to mean that a creditor cannot receive less under the proposed scheme than it would have received in a receivership or liquidation).
The management / board of directors of a company in examinership will remain in place during the period of the moratorium unless the examiner applies to Court for an Order to transfer those powers to him or her.
Generally, creditors with a material sum owing by the company will, if they wish, be a notice party to any motions issued or hearings convened during the period of the examinership. The examiner may also convene a committee of inspection to act as a forum for creditors to voice their views on the conduct of the proceedings.
Receivership is not, strictly speaking, a form of formal insolvency proceeding because a receiver is generally appointed by a secured creditor by the exercise of a contractual right to do so, rather than pursuant to any court proceedings. The directors of the company will cease to have any role with respect to assets over which a receiver has been appointed, and if the receiver is also appointed as manager, the receiver can then also assume responsibility for the carrying on of the business of the obligor to the exclusion of the directors.
- Jersey has two principle mechanisms for confirming the bankruptcy of natural and juristic persons, and in the case of companies for winding up their affairs before dissolution.
- The Jersey process of obtaining a declaration of a désastre (literally a disaster) pursuant to the Bankruptcy (Désastre)(Jersey) Law 1990 (the “Désastre Law) allows a debtor or creditor to apply to the Court for an order that the debtor's assets be vested in the Viscount of Jersey, the Court’s executive officer with responsibility for insolvency matters, for the purpose of being ascertained and liquidated for the benefit of creditors.
- An application can be made in respect of an individual, a company, a limited liability partnership or an incorporated limited partnership. The process is largely statutory and is broadly similar to compulsory Court appointed individual bankruptcies in the UK under the Insolvency Act 1986 and the US Chapter 7.
- A creditor's application is made ex parte to the Royal Court, and save in urgent situations, on 48 hours' notice to the Viscount. The Viscount does not have a veto on the application but will review the papers for technical defects and may express concerns as to the process in advance of the hearing.
- To bring an application a creditor must have an ascertained debt in excess of £3,000 and must be able to swear an affidavit asserting that the debtor is insolvent. The insolvency issue is often addressed by an informal demand process which if left unsatisfied is treated as evidence of the debtor's insolvency.
- The application is typically made ex parte but the Court can direct the application to be served on the debtor, often where the debt is questionably uncertain. Once the declaration is made and served, the debtor can apply to set aside the declaration on the grounds that they are balance sheet solvent albeit cash flow insolvent, and they can look to take advantage of a protective remedy such as a remise des biens. The creditor would expect to take an active part in opposing the process.
- The Viscount will tend to ask for an indemnity from the applicant creditor (typically c. £5 – 10,000) to be called on if the debtor's assets are not sufficient to pay her costs.
- On administration of the estate the Viscount is entitled to claim costs capped at 10% of the value of assets collected in plus 2.5% of assets paid out. In practice the Viscount tends to charge sub-commercial lawyers rates on a time charge basis and is at pains to point out that the costs incurred are reasonable when compared to commercial insolvency processes.
- On making the order the assets of the company vest in the Viscount and the directors and shareholders lose control of the company and its assets.
- The secured creditors are entitled to be paid in full less the costs of sale.
- The Viscount will call for claims to be filed within a period of not less than 40 and not more than 60 days, subject to a discretion to allow late claims. No assets other than perishable assets can be sold by the Viscount until the period for filing claims has expired. The Viscount may make interim distributions at their discretion, having due regard to the number of creditors, the value of their claims and the debtor's assets.
- The Viscount is able to assign causes of action vested in a debtor, say claims for breach of duty or recovery of unlawful dividends in the case of a corporate debtor. The Viscount cannot assign causes of action which are vested in the office of Viscount by statute such as claims for wrongful trading.
- A debtor who is a natural person is entitled to be discharged after 4 years although the Viscount will typically apply for a discharge at the earliest opportunity when a point is reached when the process can achieve nothing further.
- Upon completion of the désastre process in respect of a company or other juristic person, the Viscount will apply to eh Court for an order that debtor be dissolved.
- The time taken for completion of the process is fact specific and there is no statutory limit to the time the process may take. Typically we do not expect a désastre process to take more than two years.
- The principle mechanism for winding up insolvent Jersey companies is the creditors' winding up process as per Chapter 21 of the Companies (Jersey) Law 1991 (the “Companies Law”), whereby the shareholders of a company resolve to wind up a company and appoint a liquidator to wind up its affairs.
- The process is as follows:
(i) more than 14 days before the schedule meeting of members, a notice to creditors is sent by post advising that the Company's members will be convening a meeting to consider a Special Resolution to undertake a creditors' winding up and that there will be a creditors' meeting immediately thereafter;
(ii) more than 10 days before the meeting and an advertisement is placed in the Jersey Gazette giving notice of the creditors' meeting;
(iii) on the day of the meetings
(a) the Directors prepare a Statement of Affairs (usually approved at a meeting of directors);
(b) one of the Directors swears an affidavit proving the Statement of Affairs;
(c) a meeting of members is convened, chaired by a Director and the Statement of Affairs is presented to the meeting;
(d) a special resolution of Members for winding up is approved (which requires a 2/3 majority or higher if so provided for in the articles of association) and a decision is made as to the identity of the proposed liquidator; and
(e) a meeting of creditors is convened chaired by a Director, at which the Statement of Affairs is presented and the identity of the liquidator is determined
(iv) in the event the Members and Creditors cannot agree the identity of the liquidator, the Creditors' choice prevails subject to the Company's right to apply to the Court
(v) no later than 14 days after the meetings;
(a) an advertisement must be placed in the Jersey Gazette of the Special Resolution; and
(b) the Liquidator must file a certified copy of the Special Resolution with the Jersey Financial Services Commission.
- The directors and shareholders lose their powers upon the resolution being passed, but all assets remain vested in the company.
- When the Company's affairs have been wound up the Liquidator must convene a final meeting of the Company and Creditors on 21 days' notice, to present the final account. The Liquidator must file a final return with the Registrar within 7 days of the final meeting and the Company is then dissolved.
Creditor's Winding Up
Concurso consists of a single insolvency procedure, encompassing two successive stages. The first is the reorganization stage (conciliación). The second is the liquidation stage (quiebra). Prior to a debtor being placed en concurso, the process includes a preliminary visit stage (visita) to verify whether the commencement standards have been met.
During reorganization, the debtor shall conduct the ordinary operations of the enterprise, including making any essential expenses, while the conciliator oversees the books and records and each transaction carried out by the debtor. The conciliator shall resolve issues pertaining to the assumption or rejection of contracts, any post-commencement financing, implementation or substitution of collateral, and the disposition of assets out of the ordinary course of business.
The conciliator may petition to court to exercise the exceptional remedy of removal (desapoderamiento) in the event in cases where the conciliator considers it to be for the benefit of the estate.
The declaration of liquidation results in the removal of management and management of the debtor’s enterprise would then be vested on the receiver (síndico).
The Insolvency Act regulates two types of proceedings: the ordinary insolvency proceeding and the preventive insolvency proceeding. Ordinary insolvency proceedings may result in voluntary or involuntary liquidations and restructurings, based on which insolvency proceeding has been filed. Preventive insolvency proceedings can be filed only by the debtor, as it is a voluntary proceeding.
- Ordinary Insolvency Proceeding.
a. Voluntary Proceeding
A debtor may apply for an insolvency proceeding provided it meets at least one of the following conditions:
a) If more than a third of its total liabilities are overdue more than thirty (30) calendar days; or
b) If its accumulated losses, net of reserves, exceeds one-third of its paid-in capital stock.
The debtor must express whether he is requesting a restructuring of assets or a liquidation proceeding, as the case may be, taking into account the following:
a) For a restructuring of assets, the debtor must prove, through a report signed by its legal representative and certified public accountant, that its accumulated losses, net of reserves, do not exceed the total of its paid-in capital stock.
The debtor also must specify the processes and requirements necessary to make its recovery feasible and to present a preliminary projection of its results and cash flow for a period of two (2) years.
b) If the condition in paragraph (a) above is not met, the debtor may only request a dissolution and liquidation proceeding, which is so declared upon a resolution declaring the debtor insolvent.
If the debtor applies for an ordinary insolvency proceeding under paragraph (a) above, but its accumulated losses, net of reserves, exceed its capital stock, it may only request dissolution and liquidation.
In addition, in the particular case of natural persons, at least one of the following conditions must be met:
a) If more than 50% of his or her income comes from a business activity developed directly and in his or her own behalf by said natural person; or
b) If more than two-thirds of its liabilities originated from such business activity. Civil liability compensations and reparations resulting from the direct conduction of such activities are included for these purposes.
The Peruvian insolvency law establishes that persons who do not perform business operations are not eligible to apply for Insolvency, business being understood as “a regular and autonomous economic activity, in which such factors of production as capital and labour concur, conducted in order to produce goods or provide services”.
Accordingly, personal loans are not part of the debtor's liabilities (bankruptcy estate) in an insolvency proceeding, as the Peruvian insolvency law has been devised and enacted for business insolvency rather than for natural persons with or without business.
b. Involuntary Proceeding
For a creditor to initiate an involuntary proceeding, It can also request the beginning of the ordinary proceeding if they can evidence that the debtor owes them unpaid obligations, due for more than thirty (30) calendar days, and for an amount over fifty (50) Tax Units (US$ 64,000 approximately).
The Insolvency Act allows creditors to initiate an insolvency proceeding against debtors that have already initiated a liquidation under the Companies Act (Ley General de Sociedades) will be suspended during the time of the insolvency proceeding.
- Preventive Insolvency Proceeding.
The goal of a preventive proceeding for the debtor is to reach a consensual restructuring agreement with its creditors. It is intended to be a fast track proceeding that only a debtor can initiate.
Preventive insolvency proceedings are intended to prevent financial and/or economic distress. Only the debtor may file a (voluntary) preventive insolvency; for that purpose, the debtor must not meet the conditions established for the ordinary voluntary insolvency proceeding. The creditors will decide whether to approve the Global Refinancing Agreement; if approved, the new payment schedule included in it will also be approved; also, an automatic stay will be triggered if the debtor requires one.
The role of the insolvency authority and Judicial courts
On the one hand, Insolvency proceedings in Peru are of administrative nature since 1992; that is, the insolvency authority is not a judge, but rather an organ of a Public Technical Specialized Agency of the Executive Branch, the National Institute for the Defense of Competition and Intellectual Property (“INDECOPI”), which through its Insolvency Commission (the Commission) deals solely with insolvency proceedings. Moreover, in the second instance, the Chamber Specialized in Insolvency Proceedings of INDECOPI’s Tribunal solves to the appeals against the Commission.
This insolvency authority is competent to hear insolvency proceedings against insolvent debtors domiciled in Peru, including cases in which part of the debtor’s assets and/or rights making up its total estate are found outside Peruvian territory.
The Commission has a secondary participation on the development of the insolvency proceeding and on the execution of the decision. Its duty is to assume a supervision role on the process, on the Creditors’ Meeting agreements, on the liquidator and on the creditors. The Commission has the legal authority to initiate investigation procedures to determine whether a sanction has to be imposed on a creditor, the debtor or the liquidator. Acts that contravene the Insolvency Act or the Creditors’ Meeting agreements are punishable.
In addition, during the insolvency proceeding, the Commission is competent to resolve the credits’ recognition requests (verification of credits) that could be filed.
On the other hand, Judicial courts have participation in the process of liquidation when the value of the estate does not allow full payment of credits. In such case, the liquidator has the obligation of requesting for the debtor’s judicial statement of bankruptcy. In addition, the judiciary maintains the attribution to review the decisions of INDECOPI (Commission and Chamber), through the administrative quarrelsome actions.
Regarding the assets that integrate the estate, its safekeeping corresponds to the same creditors by means of the clawbacks and actions during the avoidance period, such judicial actions are filed before the civil judge.
Finally, the length of time of insolvency procedures will depend on their complexity, on account of the debtor’s assets, the total number of creditors, and the company’s actual economic situation.
In Poland, with regard to insolvency procedures, there exists one insolvency procedure – liquidation bankruptcy. The Bankruptcy Law regulates that in result of declaring bankruptcy the debtor loses the right to manage and operate business. The trustee appointed by the bankruptcy Court, is the person who takes over temporally (for duration of bankruptcy proceedings) responsibility to manage and operate the debtor’s business. The Court and appointed Judge-Commissioner supervise the trustee, and issue several decision within the course of proceedings. There is also possibility to establish Creditor’s Committee, which receives several competences of the Judge-Commissioner. Individual creditors can also receive information and may play active role within proceedings.
As of today estimated time of bankruptcy proceedings in Poland is up to few years. Duration of proceedings is determined by constantly growing number of consumer bankruptcy, which is resolved in the same Bankruptcy Courts.
A company may be wound up either voluntarily, or upon the application of one of its creditors. Upon the appointment of a liquidator, the former directors cease to have any control over the company, and usually play little part in the liquidation process.
Once the winding-up order has been made, the Court plays little part in the liquidation process. Instead, the actions of the liquidator are usually supervised by a committee of inspection consisting of creditors and contributories of the company. The length of a liquidation depends on many factors and is difficult to predict, especially if there are cross-border issues or if litigation is necessary to recover assets.
Strictly speaking the Swedish insolvency regime only provides for one insolvency procedure, which is bankruptcy (insolvent liquidation) (Sw. konkurs). In-court company reorganization proceedings are often also referred to as an insolvency procedure which, in contrast to bankruptcy, assumes going-concern and having the purpose of rescuing the business and not liquidating it. As reorganization proceedings will be described separately in Questions 8-11 below, this section and Questions 4-7 will deal only with bankruptcy.
In bankruptcy proceedings the debtor is not in control. Upon the court declaring the company bankrupt, an official receiver (Sw. konkursförvaltare) is appointed, who will assume full and sole control over the business and all assets of the debtor. If the receiver decides to continue the business during the proceedings, he or she may let management or key personnel stay in place to run the business, but it will always be on instructions from and under the supervision of the receiver. The board of directors do remain registered as such, although are relieved of practically all powers to represent the company.
The official receiver is the sole representative of the bankruptcy estate and dismantling and divesting the business and all assets will be carried out in his or her sole discretion. Thus, all decisions throughout the bankruptcy proceedings will be taken by the receiver. Even so, the receiver has an obligation to inform and hear both any affected creditor(s) as well as the Supervisory Authority in Bankruptcies prior to any and all important decisions (e.g. sale of business or property, litigation etc). The bankruptcy court, together with the Supervisory Authority in Bankruptcies, has a supervising role and will rule on any disputes during the proceedings and will eventually be approving the costs of the proceedings (receiver’s fee) and how the surplus is distributed among the creditors.
Bankruptcy proceedings will vary a lot in length, depending on the scope and the complexity of business operations and the estate assets. Normally, proceedings are on-going for at least six to twelve months, but often continues for more than a year, for example where the estate is or becomes involved in disputes or litigation which sometimes can go on for years. Where proceedings continue over a long time, advance distribution may in some situations be offered to preferred creditors.
There are two main types of formal insolvency and restructuring proceedings in Switzerland: bankruptcy (i.e., liquidation) proceedings (Konkursverfahren) and composition proceedings (Nachlassverfahren).
In bankruptcy proceedings, all business activities of the insolvent debtor are generally discontinued and the management can no longer validly act on behalf of such debtor. All acts necessary in the context of the bankruptcy proceedings are subsequently carried out by the competent bankruptcy authorities and the receiver in bankruptcy. In contrast, an insolvent debtor may generally continue its business in the context of composition proceedings. While the executive bodies continue to be in charge of business operations, the insolvent debtor is typically placed under supervision by an administrator who needs to approve certain transactions and can issue instructions of both general and specific nature. The court can further limit the management rights of the insolvent debtor.
The opening of both proceedings must be ordered by the court. The court's further involvement in bankruptcy proceedings is generally limited whereas its role is more prominent in composition proceedings where a number of actions and procedural steps must be approved or granted by the court. Creditors benefit from various rights in both types of proceedings, including inspection rights, rights to challenge certain acts of the insolvency practitioner and participation rights at court hearings.
The duration of insolvency proceedings largely depends on the complexity of the case. Composition moratoria which are terminated due to a successful restructuring will typically take considerably less time (anywhere between a few months and two years) than bankruptcy proceedings in relation to large companies which involve numerous jurisdictions and entail a variety of complex legal issues (which may easily last up to five years or longer).
Where a debtor is over-indebted, restructuring may also be pursued by way of a corporate moratorium or postponement of bankruptcy (Konkursaufschub) which will also have to be granted by a court. An administrator may be appointed by the court but existing executive bodies generally remain in control of the management of the debtor. The statutory framework for a postponement of bankruptcy is fragmentary. In view of inherent uncertainties, it is not used very often in the German speaking part of Switzerland to restructure corporate debtors. The postponement of bankruptcy is proposed of being abolished within the context of the more general revision of Swiss corporate law referred to under section 3 above.
The Spanish legal system regulates different insolvency procedures ,they are been classified according to the following parameters:
Depending on the subject that applies for the DIP, the insolvency procedure shall considered as (art. 22 SIA):
- Voluntary: when the debtor submits the application for the DIP.
- Necessary: when who submits the application for the DIP is any creditor.
Depending on the complexity forecast of the insolvency proceeding (art. 190.1 SIA):
- Abbreviated: when the court considers, from the available information, that the insolvency proceeding does not have special complexity. It will not have special complexity when the following circumstances are met (i) if the submitted by the debtor includes less than 50 creditors, (ii) when the initial estimation of liabilities does not exceed €5 million and (iii) when the valuation of the assets and rights does not reach €5 million.
- Ordinary: When, from the information available, the insolvency proceeding could be complex and the requisites of the compulsory proceeding are not reached.
Although the company has been involved in an insolvency proceeding, the business shall continue its activity, even during the liquidation phase. Nevertheless, during the common phase, directors or boards of directors will have limited rights of administration and disposal of the assets of the debtor. The business activity shall be supervised by the insolvency administrator (“IA”) (art. 33.1, 13º and 48.3 SIA). Once the liquidation phase is declared, the rights of administration and disposal of the assets of the debtor shall be intervened. Therefore, the unique subject that will be able to administrate and dispose the assets of the debtor will be the IA (art. 33.1.11º, 48.3 and 145 SIA).
In the course of the proceeding, the court shall ensure the compliance of the SIA during the proceeding in order to guarantee the creditor’s rights.
On the other hand, the stakeholders only will take a part in the proceeding, in case that the debtor submits a composition proposal (art. 99 and subsequent SIA), since the stakeholders will have to vote it.
Finally, the duration of the process will depend on the court in which the action is brought and the complexity of the proceedings. However, on average, insolvency procedures last 3 years until finalization of the judicial proceedings.
Insolvency Procedures: In the U.S., the primary insolvency procedures are governed by the Code and are described in greater depth below as well as on the website of the U.S. Courts (https://www.uscourts.gov/services-forms/bankruptcy). They include:
- Chapter 7 (Individual and business liquidations): Liquidation under chapter 7 is available to both businesses and individuals. In a chapter 7 liquidation, including when a chapter 11 case is converted to chapter 7, the U.S. Trustee (or the bankruptcy court in Alabama and North Carolina) appoints an impartial case trustee for the debtor. The trustee is responsible for liquidating the debtor's nonexempt assets, reconciling the claims of creditors and making distributions to creditors in accordance with the priorities of the Code. A chapter 7 case does not involve the filing of a plan of repayment.
- Chapter 9 (Municipalities- cities, towns, villages, taxing districts, municipal utilities and school districts): The purpose of chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts. The management of the municipal debtor remains in control and is vested with broad powers to use its property, raise taxes, and make expenditures as it sees fit. The goal of a chapter 9 case is the confirmation of a plan of debt adjustment negotiated between the municipality and its creditors.
- Chapter 11 (Reorganization and Liquidation): Chapter 11 is the reorganization chapter of the Code. Relief under chapter 11 is available to individuals and businesses. In a business chapter 11 case, management of the debtor remains in control of the debtor’s assets and operations, unless the court finds cause to displace management and appoint a chapter 11 trustee. Under section 1104 of the Code, cause for the appointment of a trustee includes establishing fraud, incompetence or gross mismanagement by the management of the debtor. As a general rule, the objective in a chapter 11 case is to obtain bankruptcy court approval of a plan of reorganization the effectuates a financial, and at times operational, restructuring of the business. Chapter 11 may also be used to liquidate a business, as a going concern or piecemeal. The chapter 11 plan must provide, among other things, for a greater recovery than would be available to creditors if the debtor were liquidated under chapter 7 of the Code.
- Chapter 12 (Family farmers and fishermen): This chapter provides for a streamlined process enabling financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts. Under chapter 12, debtors propose a repayment plan to make installment payments to creditors over three to five years. When a chapter 12 petition is filed, an impartial trustee is appointed to administer the case. As in chapter 13, the trustee evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
- Chapter 13 (Wage earner’s plan): A chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan which may last up to, but no more than, five years. Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. The chapter 13 trustee evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
- Chapter 15 (Cross-border cases): This chapter is based upon the UNCITRAL Model Law on Cross Border Insolvencies, with narrow exceptions, and it was enacted in the U.S. on October 17, 2005. The purpose of chapter 15 is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants and other parties in interest involving more than one country, thereby promoting a uniform and coordinated legal regime for cross-border insolvency cases. Unlike a bankruptcy case commenced under chapters 7, 9, 11, 12 and 13, a chapter 15 case is not a plenary bankruptcy case, but rather, is ancillary to the foreign proceeding.
Time to complete insolvency process: The time it takes for a debtor to undergo an insolvency process under any of the chapters of the Code depends on the facts and circumstances of the case.
The role of the bankruptcy court: Although the debtor (in cases under chapters 9, 11 and 15) or the trustee (in cases under chapters 7, 12 and 13) is generally responsible for undertaking a significant amount of the work in a bankruptcy case, the bankruptcy court: (i) presides over and manages each bankruptcy case; (ii) acts as the final arbiter in contested matters; (iii) resolves disputes; and (iv) handles other issues.
Stakeholders: Subject to the bankruptcy protections afforded to debtors under the Code, creditors and other stakeholders are interested parties in bankruptcy cases, and they may pursue their legal or equitable rights in the proceedings, subject in all instances to the provisions of section 362 of the Code regarding the automatic stay. The Code also authorizes the appointment of official committees of unsecured creditors and other types of official committees (e.g., equity, retirees) in chapter 9 and 11 bankruptcy cases.
State-level insolvency procedures: Although the Code is the primary insolvency approach used by businesses and consumers in the U.S., most states have also adopted certain, limited legal insolvency frameworks (e.g., assignment for the benefit of creditors and receiverships).
The key insolvency procedures are administration, liquidation (also known as winding up) and company voluntary arrangement. Outside formal insolvency proceedings, schemes of arrangement have also been used to effect restructurings - see Question 8.
Administration: This is the key insolvency procedure with a view to company rescue. Similar to the U.S. Chapter 11 regime, a company that files for administration has the protection of a statutory moratorium to allow it to be rescued or reorganised or its assets realised. However, unlike in Chapter 11, management lose control of the company to an administrator (who is a licensed insolvency practitioner and an officer of the court). The administrator will seek to rescue the company as going concern in the first instance, but if that is not possible, the goal of the administration is to achieve a better result for creditors than in a liquidation (or, failing that, a realisation of the company’s assets). The administrator’s duties are owed to the creditors as a whole. If the administration has not come to an end within a year, the administration will end automatically unless its term is extended in advance.
“Pre-pack” administrations are particularly prevalent in the UK: an arrangement under which the sale of all or part of the company’s business or assets is negotiated with a purchaser (by putative administrators) prior to the appointment of administrations. The administrators effect the sale almost immediately after appointment, without the sanction of the court or creditors.
Liquidation: This is a dissolution procedure involving the termination of the company (and, ultimately, its removal from the register). It involves the appointment of liquidators who collect and sell the company’s assets and distribute the proceeds to creditors (and members, in the unlikely event of a surplus); directors lose control.
Company voluntary arrangement: This insolvency procedure permits a company to make a binding compromise with its creditors. A CVA cannot compromise secured creditors without their consent. A CVA is implemented out of court unless it is challenged. A CVA requires the consent of at least 75% in value of unsecured creditors; the CVA will not be approved if more than half of the total value of unconnected creditors vote against the CVA. In recent years, CVAs have been used extensively to compromise companies’ leasehold obligations to landlords, especially in the retail and casual dining sector.
Special regimes apply for certain types of companies such as financial institutions, certain regulated entities and charities.
There are two types of insolvency proceedings, bankruptcy and liquidation.
(a) Liquidation proceeding is the proceeding whereby the company is being compulsorily wound-up, and the creditors’ claims are satisfied from the sale of assets. The business is taken over by the liquidator appointed by the court.
(b) The bankruptcy proceeding’s aim is to restore the solvency and liquidity of the relevant company by restructuring its debts during a moratorium period granted by the court. Bankruptcy proceedings may only be commenced by the debtor company. A Bankruptcy Administrator is appointed to supervise the operation of the company whereby the approval of the administrator is required for any action of the company.
Following the announcement of the bankruptcy all creditors are required to report their claims to the company which shall prepare a list of creditors. The stakeholders are free to negotiate the bankruptcy plan and shall vote on the plan, which shall be approved finally by the meeting of the creditors.
The bankruptcy plan is only effective is it is approved by the court. The court shall ensure that the bankruptcy plan complies with the law and does not discriminate creditors.
(c) In order to initiate such proceeding, prior consent is required from the supreme body of the debtor company exercising a founder’s right. If the company wishes to continue its economic operation, it can commence bankruptcy proceedings against itself, or when it is obvious that the company will not able to continue to operate after a restructuring, liquidation proceedings can be initiated by the consent of the decision-making body
An unsuccessful bankruptcy proceeding can also lead to liquidation proceedings: if no composition is arranged, or if the arrangement fails to comply with the relevant regulations, the court shall dismiss the bankruptcy proceedings and consequently declare the debtor insolvent ex officio, and order the liquidation of the debtor.
In bankruptcy proceedings, the payment moratorium shall expire at 00:00 hour on the second working day after a 120-day period following the time of publication. The debtor shall be granted an extension of the stay of payment for a total of no more than 365 days from the time of the opening of bankruptcy proceedings if they are able to secure two-thirds of the votes from the creditors with voting rights, in respect of secured and unsecured claims alike, separately for the claims in question. Therefore, the debtor and the creditors have 120 days to make an arrangement, or all in all no more than 365.
(d) According to the Hungarian Courts’ Statistical Yearbook of 2017 on insolvency proceedings, most of the liquidation proceedings in 2017 lasted between one and two years.
Under Belgian law, the main insolvency procedures are bankruptcy and judicial reorganization.
The bankruptcy procedure seeks to place the debtor's assets under the authority of a bankruptcy trustee who is responsible for managing and liquidating the bankrupt's assets and distributing the proceeds to the creditors. With the intention to liquidate the assets as profitable as possible, the bankruptcy trustee can opt to continue the business for a limited amount of time with the persons he sees fit. Management/the board of the debtor cease to have any authority by law as of the date of the bankruptcy decision. The bankruptcy trustee must report to the judge-commissioner, but has otherwise broad powers to realize the assets. A bankruptcy procedure typically last 1 – 3 years.
The procedure of judicial reorganization is aimed at maintaining, under the supervision of the judge, the continuity of (or part of) the activities of a company. It allows the debtor to request a suspension period for a period up to six months (which is renewable up to 12 months and in exceptional circumstances up to 18 months). During this period, the company in distress has 3 different restructuring routes: (i) judicial reorganization by way of amicable agreement, (ii) judicial reorganization by way of collective agreement and (iii) judicial reorganization by way of transfer under judicial authority. Management continues to operate the business in order to implement the judicial reorganization under the supervision of the court.
The main types of insolvency procedures available under Israeli Law are: insolvency proceedings for individuals pursuant to the Bankruptcy Ordinance; Corporate liquidation proceedings pursuant to the Companies Ordinance; settlement and agreement proceedings pursuant to the Companies Law.
As noted, once the Insolvency Law would become effective, it would incorporate all of the various procedures. Pursuant to provisions of the Insolvency law, rather than filling a different motion for each type of procedure – the applicant would file a motion for an order to initiate proceeding, and the Court would rule what is the appropriate track for the corporation – rehabilitation or dissolution. In cases where the appropriate proceeding is unclear, the Court may rule that the corporation will be operated for a short while by a Trustee prior to the determination whether the company is facing recovery or dissolution.
In the great majority of corporate insolvency proceedings, an Officer is appointed to take over the management authority from current management of the company. In some cases, especially where managing the business calls for specific expertise, the Officer may contract with existing management (which, naturally, would be subject to supervision by the Officer) or with other professionals. All action by the Officer is subject to Court approval and to supervision by the Official Receiver, who is a party to all insolvency proceedings. In recent years, all insolvency proceedings for individuals have also been carried out by Officers.
The duration of insolvency proceedings depends on the nature of the proceeding, with a distinction made between individual and corporate insolvency proceedings.
With regard to individual insolvency proceedings, current legislation does not specify clear outline for the duration of such proceedings. Therefore, the Official Receiver has recently reformed such proceedings, a reform which was also incorporated in the new Insolvency Law. This reform divides insolvency proceedings for individuals into two parts – first, a period in which the debtor's financial standing and behavior will be reviewed. The time allocated for this period is 18-24 months. At the end of the review period, a rehabilitation program would be specified for the individual – after which they would be discharged from their debts. In some exceptional cases, the debtor may be immediately discharged from their debts. The duration of this period is dependent on the program, program objectives and debtor capabilities.
Corporate insolvency proceedings may take several years, with complex proceedings taking even much longer. The operation period of a company targeting recovery would typically last for several months (According to statutory provisions, the duration of a stay of proceedings is set at nine months, but if reasonably justified, the Courts may approve an extension) after which there are two possible routes – first, formulating a creditor arrangement with corporate recovery and second, should the recovery proceeding fail – turning it into a dissolution proceeding.
A debtor may be subjected to a reorganization procedure, a simplified bankruptcy procedure, or a general bankruptcy procedure. Preceding the reorganization and general bankruptcy procedure is an “observation period”, during which the debtor, under supervision of the judicial administrators, and its creditors may opt for either reorganization or bankruptcy, depending on the particularities of each case.
As a general rule, during observation and reorganization, the debtor’s management continues to operate the business, through a Special Administrator appointed by the shareholders, the exception being if the shareholders fail to agree upon such an administrator, and the general and simplified bankruptcy procedure.
A reorganization procedure may take as long as 3 years (with the possibility for extending the reorganization plan for another year), while the recommended duration of the observation period is of 1 year, resulting in a total of 4-5 years. There is no time limit for a bankruptcy procedure.
However, the duration of the observation period frequently exceeds 1 year, resulting in the extension of the whole insolvency procedure.