What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Restructuring & Insolvency (3rd edition)
In Canada, the statutes under which an insolvent debtor may restructure its business are the BIA and the CCAA, while the Canada Business Corporation Act (“CBCA”) and most provincial business corporation statutes contain provisions facilitating the restructuring of solvent corporations.
Restructuring under the BIA
The BIA is the appropriate choice of restructuring statute for insolvent debtors who are natural persons and small or mid-sized corporations. This is so because of the administrative nature of its process, which revolves around forms and dealings with governmental authorities and, in the absence of dispute, may limit Court intervention to a minimum and thus lower legal and other professional costs. The BIA is however less commonly chosen for the restructuring of large corporations due to its statutory rigidity as compared to the CCAA.
A restructuring under the BIA is achieved by way of a contract (referred to in the BIA as a “Proposal”) which is proposed by the insolvent debtor, agreed to by the requisite majority of its unsecured creditors, and approved by the Court. For example, the Proposal could provide for the compromise and re-characterization of creditor claims, defer the payment of claims, or convert debt into equity.
To initiate the restructuring process, the debtor must either file a Proposal or a notice of intention to make a Proposal to its creditors (an “NOI”). It is fairly rare that a debtor directly files a pre negotiated Proposal, but it is nevertheless possible.
From the moment the NOI is filed, all proceedings against the debtor and the debtor’s property, either commenced or not, are automatically stayed, including the secured creditors’ enforcement of their security, without requiring a Court order. The stay, which is intended to provide the debtor with some “breathing room” during the Proposal negotiation process, is of an initial period of thirty (30) days and may be extended by the Court to up to six (6) months by increments of a maximum of forty-five (45) days each. A creditor may apply to the Court to lift the BIA stay, but must prove that the continuation of the stay would cause the creditor material prejudice, which is a high threshold.
At the outset of the NOI, a licensed trustee in bankruptcy must accept to act in connection with the Proposal process. The trustee will monitor and draft reports in respect of the proceedings, for the benefit of all stakeholders and, as the case may be, the Court. The trustee will also typically assist the debtor in negotiating with its creditors and formulating the Proposal. The corporate debtor’s governance will not be affected by reason of the NOI. Management is not displaced and continues to operate the debtor’s business as a going concern.
In order to succeed, the BIA Proposal must be agreed to by a “double majority” of unsecured creditors who have duly proven their claims against the debtor before the statutory deadline. The “double majority” is obtained if the Proposal attracts the approval vote of 50%+1 in number of unsecured creditors voting as well as the approval vote of creditors collectively holding at least two-thirds of the aggregate value of all unsecured creditors’ claims against the debtor. Creditors who have not duly proven their claims will not be able to vote on the Proposal but will be bound by its terms once approved by the requisite number of creditors and the Court and is implemented.
The BIA does not require that secured creditor support the Proposal, or that the Proposal include a class of secured creditors. If the Proposal does include the claims of secured creditors, the Proposal will fail if is not accepted by the “double majority” of secured creditors in each class of secured creditors affected by the Proposal. Of course, classification issues can arise if the Proposal is made to secured creditors, as once the “double majority” of secured creditors in each class votes in favour of the Proposal, the Proposal is binding on all the creditors in that class. If the Proposal does not receive the requisite votes, the debtor will be deemed to have made an assignment in bankruptcy and the debtor’s property and assets will be liquidated in accordance with the provisions of the BIA. There is no “cram-down” provision under the BIA.
If the Proposal is accepted by the requisite “double-majority” of unsecured creditors and, as the case may be, the “double-majority” of secured creditors in each class of secured creditors if included in the Proposal, the trustee will prepare a final report and seek Court approval of the Proposal. The BIA is prescriptive as to certain claims for which the debtor may not compromise under the Proposal. For example, the Court may not approve the Proposal which does not pay in accordance with various statutory guidelines tax, employee benefits, and pension related claims. Importantly, the Court may also not approve the Proposal which provides that an equity claim is to be paid before all other claims affected by the Proposal are paid.
Once the Proposal has been approved by the Court, it essentially constitutes a “new deal” between the debtor and its unsecured creditors (as well as the classes of secured creditors, if any, included) and replaces any prior agreements, subject to the terms of the Proposal itself. Creditors who had not proven their claims before the statutory time limit to do so and accordingly, did not vote on the Proposal are permitted to prove their claims afterward in order to receive a distribution or other benefit under the Proposal.
Restructuring under the CCAA
The CCAA is the restructuring statute of choice for large insolvent corporations. The prescriptive provisions under the CCAA are quite limited and the Court is given broad discretion in respect of the interpretation and application of the applicable provisions of the CCAA.
Restructurings under the CCAA are achieved, as in the case of the BIA Proposal, through a contract, referred to in the CCAA as a “plan of arrangement or compromise” (a “Plan”), which is proposed by the debtor company, agreed to by the requisite majority of its creditors, and approved by the Court. For example, the Plan could provide for the compromise and re-characterization of creditor claims, defer the payment of claims, or convert debt to equity.
A company or group of companies is eligible to use the CCAA if it is bankrupt or insolvent and if it has claims exceeding Cdn$5,000,000. Evidence that the debtor cannot meet its obligations generally as they become due is usually sufficient for the Court to conclude that the debtor is insolvent within the meaning of the CCAA.
Restructuring proceedings under the CCAA are commenced by the applicant seeking an Initial Order. Creditor-initiated CCAA proceedings are possible but rare as compared to debtor-initiated proceedings.
Typically, the motion for an Initial Order will be filed with supportive documents, including the affidavit from an officer of the debtor along with a pre filing report of the proposed Monitor (discussed in more detail below) and a draft Initial Order which generally follows a “template” or “model” Initial Order. The “model” Initial Order is neither statutory, nor regulatory, but has been developed by insolvency practitioners and adopted by the applicable Courts in each province across Canada.
The Initial Order will typically provide, inter alia, as follows: (i) an initial stay of proceedings against all creditors of the debtor, including secured creditors for 30 days; and (ii) a stay of proceedings against the corporate debtor’s directors and officers. The initial stay period is may be extended by the Court for longer periods, without statutory limitation. A creditor may apply to the Court to lift the CCAA stay, but must prove that the stay would cause material prejudice to such creditor.
The CCAA requires that a Monitor, generally an accounting or financial advisory firm, be appointed. In most cases, the Initial Order does not alter the debtor’s corporate governance, or provide for the Monitor to take control of the debtor company’s business. The Monitor is an officer of the Court and owes a duty to all stakeholders. The Monitor has certain minimum statutory responsibilities, including to (i) report to the Court on the reasonableness of the debtor’s cash flow statements; (ii) report to the Court as regards the state of the debtor’s business and financial affairs and the cause of its financial difficulties; (iii) advise the Court on the reasonableness and fairness of any Plan that is proposed between the debtor and its creditors; and (iv) report to the Court in connection with every material adverse change in the business or financial affairs of the debtor. In practice, the Monitor is independent and impartial, but is expected to assist the debtor in its restructuring and must also consider, communicate with and take into account the interests of all stakeholders in the restructuring process. The Monitor will be required to file regular reports with the Court, notably in respect of any sale of assets outside of the normal course of business, stay extensions, seeking Court instructions, and the disclaiming any contracts by the debtor company. The Monitor’s reports are made available to the public on the Monitor’s website. The Court typically relies on the Monitor’s reports before rendering any order in a CCAA proceeding.
The CCAA does not provide a fixed timeframe for the development of the Plan. In practice, the negotiation of the Plan may take several months. In order for the Plan to be approved it must be approved by a “double-majority” of the creditors’ voting on the Plan, either in person or by proxy. The double majority approval is the same as is required under the BIA Proposal: approval of 50%+1 in number of creditors voting and holding at least two-thirds of the aggregate value of the proven claims made against the debtor. There is no statutory consequence if the Plan fails to secure the approval of the “double-majority” of creditors. As with the BIA Proposal, there are no “cram down” provisions under the CCAA so if a class of creditors does not approve the Plan, the Plan will fail. Unless a creditor, or group of creditors seek to force the debtor corporation into bankruptcy, the debtor corporation could proceed with formulating a new Plan to be voted on by the creditors.
If the Plan is approved by all a classes of creditors by the required “double-majority, the Plan must be approved by the Court. On the motion for Court approval of the Plan, the Court will look critically at the Plan and ensure that the Plan is fair and reasonable in respect of its effect on the rights of creditors. The Plan may address claims made against directors and officers of the corporate debtor but may not deal with claims that would arise after the approval of the Plan.
Following approval by the debtor’s creditors and the Court and upon implementation, the Plan will be binding on the debtor and all of its creditors and will replace any prior agreement between them, subject to the terms of the Plan.
Even though the primary objective of CCAA proceedings is to effect a restructuring of the debtor’s business pursuant to the terms of a Plan with its creditors, the CCAA has also been effectively used to effect a sale and/or a liquidation of the debtors business and operations under Court supervision and with the assistance of the Monitor.
Restructuring under Business Corporation Statutes (e.g. CBCA)
The CBCA and most provincial business corporation statutes permit corporations incorporated thereunder to effect fundamental corporate changes, such as mergers, acquisitions, reorganizations and other transactions, through a Court approved plan of arrangement (“Plan of Arrangement”), circumventing the sometimes burdensome corporate statutes. In principle, arrangements under most corporate statutes are reserved exclusively for use by solvent corporations. However, the CBCA has been successfully applied to restructure groups of companies where at least one company was solvent, with the primary goal being the compromise of debt, the dilution of existing equity and, even, the issuance of new equity.
The main benefit of the arrangement process is that it is typically much simpler and faster method of achieving a restructuring as opposed to a formal filing under the CCAA or the BIA. The process can be completed in as little as thirty (30) days from the date of obtaining the interim order. One downside of a CBCA Plan of Arrangement is that it is typically only used to effect a restructuring of the debtor’s capital structure.
The typical CBCA arrangement process proceeds as follows:
Prior to initiating the arrangement process under the CBCA, the applicant corporation, with input from its security holders, prepares an information circular which outlines the terms of the proposed Plan of Arrangement. This information circular is distributed to the debtor’s security holders, who will vote on the Plan of Arrangement. If the Plan of Arrangement is approved by the requisite majority, a notice of the arrangement is given to the CBCA Director (the “Director”), an administrative body of the federal Government. The Director will consider whether the statutory requirements for an arrangement have been met and can request further information and documents.
Once the Director is satisfied, the actual CBCA arrangement process may be initiated through an application by the corporation to the Court for an Interim Order. The Interim Order typically sets out the “procedural road map” for the arrangement process, including the framework for dissemination of information and documents to relevant stakeholders and the meetings of the shareholders for the purposes of voting on the Plan of Arrangement.
The CBCA does not set out a specific voting approval threshold. Typically, 66⅔% of the votes in each class of security holder has been required in order to approve the Plan of Arrangement, but in certain cases, CBCA Plans of Arrangement have been approved by the Courts even if the 66⅔% threshold had not been achieved. After the vote, the corporation will apply to the Court for a final order approving the implementation of the Plan of Arrangement and a declaration from the Court that the Plan of Arrangement is fair and reasonable. If the Court approves the Plan of Arrangement, the final order will authorize the corporation to file its articles of arrangement and complete the transaction provided for in the Plan of Arrangement.
Throughout the CBCA Plan of Arrangement process, the Court is given broad powers to make any order it deems appropriate. In certain cases the Court has also made orders during the CBCA Plan of Arrangement proceedings staying all proceedings against the applicant corporation, or staying affected creditors from exercising termination and enforcement rights under their agreements with the debtor.
British Virgin Islands
For companies seeking to reorganise a company’s capital or debts there have, historically, been three main routes available:
- Plans of arrangement;
- Schemes of arrangement; and
- Creditors’ arrangements.
Plans and schemes of arrangement are governed by the BCA and creditors’ arrangements are governed by the IA.
None of these routes is directly analogous either to the English regime relating to company voluntary arrangements under Part 1 of the Insolvency Act 1986 or to that concerning company reorganisation under Chapter 11 of the United States Bankruptcy Code.
Recently, the BVI has joined other offshore jurisdictions, such as the Cayman Islands and Bermuda, in recognising that provisional liquidators can be used, in appropriate circumstances, for restructuring purposes. See in the Matters of Constellation Overseas Ltd and others BVIHC (COM) 2018/0206. It will be interesting to see whether the use of soft-touch provisional liquidations will now become more common place in the BVI.
Unlike schemes of arrangement and creditors’ arrangements, which are based on English law, plans of arrangement were developed under Canadian law and first introduced into the BVI by the International Business Companies Act 1984. The current regime is governed by section 177 of the BCA, which defines the term “arrangement” as including—
a. an amendment to the memorandum or articles;
b. a reorganisation or reconstruction of a company;
c. a merger or consolidation of one or more companies that are companies registered under the BCA with one or more other companies, but only if the surviving or consolidated company is incorporated under the BCA;
d. a separation of two or more businesses carried on by a company;
e. any sale, transfer, exchange or other disposition of any part of the assets or business of a company to any person in exchange for shares, debt obligations or other securities of that other person, or money or other assets, or a combination thereof;
f. any sale, transfer, exchange or other disposition of shares, debt obligations or other securities in a company held by the holders thereof for shares, debt obligations or other securities in the company or money or other property, or a combination thereof;
g. a dissolution of a company; and
h. any combination of any of the things specified in paragraphs (a) to (g).
This definition is very broad. If a company’s directors determine that it is in the best interests of the company, or the creditors or members of the company, they may approve a plan of arrangement. The plan must contain details of the proposed arrangement, and once the directors have approved the plan, the company must apply to the court for approval.
If the company is in voluntary liquidation, the voluntary liquidator may approve a plan of arrangement and apply to the court for approval; if, however, the company is in insolvent liquidation, the liquidator must authorise the directors to approve the plan and take the other steps set out in the BCA.
On hearing an application for approval, the court may make a variety of directions as to how the plan is to proceed, including requiring the company to give notice of the plan to specified persons or classes of persons, determining whether or not the approval of another person or class of person must be obtained, determining whether or not any shareholder or creditor of the company is entitled to dissent from the plan, conducting a hearing in relation to the adoption of the plan, and deciding whether to approve or reject the plan. If the court determines that a shareholder is entitled to dissent from the plan, that shareholder is permitted to demand payment of the fair value of his shares. If the fair value of shares cannot be agreed between the shareholder and the company, there is a statutory framework for referral of the question to a panel of appraisers, whose decision is binding.
Once the plan has been approved by the court, the directors (or voluntary liquidator) must then confirm the plan and comply with the court’s directions relating to notice and obtaining the approval of specified parties. Once this has been done and the necessary approvals have been obtained, the company must execute articles of arrangement, which must contain the plan, the court’s order, and details of the manner of approval. These articles must then be filed with the Registrar of Corporate Affairs, who will issue a certificate. The arrangement comes into effect when it is registered and its implementation is overseen by the company’s directors.
There is no statutory moratorium available in relation to plans of arrangement; therefore, throughout the devising, proposing, and approval phases of a plan of arrangement, the company remains vulnerable to creditors’ claims.
The second type of restructuring procedure is referred to as the scheme of arrangement, though this term is not referred to in the statute: section 179A of the BCA refers to ‘compromise or arrangement’ and further provides that ‘arrangement’ includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both of them.
The section does not contain a great deal of detail with regard to the procedure for obtaining the court’s sanction of a scheme of arrangement; consequently, the BVI court has based its approach on the practice followed by the English courts, hence the adoption of the English terminology.
Whereas plans of arrangement may be very broad, schemes of arrangement specifically relate to the company’s relations with its shareholders and/or creditors. Schemes are aimed at facilitating an agreement that can enable the company to continue as a going concern and avoid formal insolvency proceedings. They are only available in relation to companies that have been formed under the BCA or companies incorporated under earlier BVI legislation or incorporated in another jurisdiction but continued under the BVI legislation, including companies in solvent or insolvent liquidation.
If a company proposes to enter into an arrangement with its creditors or members (or a class of either of those groups), the company will apply to court for an order that it should convene a meeting of creditors or members, as the case may be, to vote on whether or not to approve the scheme (the Convening Hearing). An application for such an order may be made by the company, a creditor, a member, or, if the company is in liquidation (whether solvent or insolvent), the liquidator.
At the Convening Hearing the court will consider issues concerning class composition and jurisdiction. As with an English scheme of arrangement, members and creditors are divided into classes depending on the respective rights that exist between them and the company, and the extent to which those rights stand to be varied by the scheme. The result is that often different classes of creditors and members are treated differently and a separate scheme meeting will be required for each different class.
If, at the meeting(s), a majority in number representing 75 per cent in value of the company’s creditors or shareholders (or class thereof) present or by proxy vote to approve the scheme, the scheme will bind—
- all creditors or shareholders (as the case may be),
- the company,
- any liquidator that has been appointed, and
- any contributory, subject only to the court’s approval. If the majority rejects the scheme, it will not be approved.
If the creditors and/or shareholders vote to approve the scheme, then an application must be made for the court’s approval. The court will not rubber-stamp the scheme simply because it has been approved at the scheme meetings: it will have to be sure that the scheme is fair and reasonable, and that it will be efficacious.
Once a scheme has been sanctioned it must be filed with the Registrar of Corporate Affairs. The scheme takes effect from the moment of filing, and from that date onwards every copy of the company’s memorandum issued after that date must have a copy of the order annexed to it.
Unless the company is insolvent when it proposes to enter into a scheme of arrangement, the directors will remain in control of the company; if the company is in liquidation, the liquidator will have control.
There is no fixed duration for a scheme of arrangement, and its length will be determined by the directions given by the court, the expedience with which meetings are convened, and the terms contained within the scheme itself.
In the BVI, the process of devising and obtaining sanction of a scheme of arrangement outside liquidation is not protected by any moratorium on creditors’ claims; however, once the court sanctions the scheme, it becomes binding on all creditors and shareholders, and the provisions of the BCA relating to mergers and consolidations of companies, plans of arrangement, disposition of large assets, redemption of minority shareholdings, and the rights of dissenters cease to apply. Only creditors whose claims arise subsequently will be able to claim against the company during the term of the scheme. The company therefore remains at risk of aggressive creditors’ action unless it persuades the court to use its extensive discretionary powers to stay any proceedings or suspend the enforcement of any judgment or order for a specified period of time.
The third restructuring procedure is the creditors’ arrangement. The aim of a creditors’ arrangement is to facilitate arrangements between a financially distressed company and its unsecured creditors in order to avoid or mitigate the risk of insolvency. This is designed to be a simple process without any court involvement. A company may enter into a creditors’ arrangement even if it is in liquidation.
A creditors’ arrangement may affect all or part of the company’s debts and liabilities and may affect the rights of creditors to receive all or only part of the debts they are owed. This is subject to the exception that the rights of secured creditors cannot be compromised without their written consent. Also, a creditors’ arrangement cannot result in a preferential creditor receiving less than he would in liquidation without their written consent.
The arrangement may be proposed by any person, but a majority of 75 per cent of the company’s unsecured creditors by value must vote in favour of the arrangement in order to approve it and bind dissenters. A licensed insolvency practitioner must be appointed as supervisor of the arrangement to oversee its implementation.
By contrast with plans and schemes of arrangement under the BCA, a creditors’ arrangement does not require the court’s approval or registration with the Registrar of Corporate Affairs. This appears to be in order to make it a quicker and simpler procedure to invoke, and any disgruntled creditor or member may apply to the court for relief on the basis that their interests have been unfairly prejudiced. There have been few creditors’ arrangements in the BVI since the provisions were enacted.
Again, there is no moratorium; however, as stated above, the effect of the decision by the majority of the company’s unsecured creditors to adopt a plan is to cram down any creditors who may have dissented, even where they did not receive notice of the meeting at which the arrangement was considered (although in such a case they may be able to bring a claim for unfair prejudice).
Lastly, as noted above, soft-touch provisional-liquidations have recently been recognised by the BVI courts. The essence of a “soft touch” provisional liquidation is that a company remains under the day to day control of the directors, but is protected against actions by individual creditors. The purpose is to give the Group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation. It may be appropriate where there is no alleged wrongdoing of the directors.
In the Constellation Overseas case, it was noted that, in principle the court has a very wide common law jurisdiction to appoint provisional liquidators to preserve and protect the assets owned or managed by the Company, and that the jurisdiction includes making such appointments to aid the company’s reorganisation including cooperating with cross border reorganisational efforts aimed at achieving that overriding objective.
In order to secure a soft-touch provisional liquidation, a Court application is required and on that application, the Court can appoint a provisional liquidator where (as will be the case in soft-touch provisional liquidations) where the company consents. Also, as part of or by way or separate application, a stay to proceedings against the company can be sought; see Section 174(1) IA.
Provisional liquidation is currently the only rescue / restructuring insolvency procedure under Cayman Islands law. However, while not strictly an insolvency process, the scheme of arrangement procedure under the Companies Law may be employed to implement a restructuring (often within a provisional liquidation).
After the presentation of a winding up petition (which can be presented by the company itself if necessary), the company may apply for the appointment of provisional liquidators for the purpose of presenting a compromise or arrangement to creditors. The company must be, or be likely to become, unable to pay its debts.
Creditors and members are not able to apply for the appointment of provisional liquidators for this purpose, but need to demonstrate that such an appointment is necessary to prevent mismanagement or misconduct by the directors, the dissipation or misuse of assets, or the oppression of minority shareholders. However, once appointed, provisional liquidators may in any case be in a position to investigate whether a restructuring is appropriate notwithstanding the initial purpose of their appointment.
Provisional liquidation is a flexible procedure. The powers that are given to the provisional liquidators are contained in the Court order appointing them, and may range from a "full powers" appointment (in which all of the directors' powers are removed and the provisional liquidators take full control of the company) to a "light touch" appointment (in which the directors retain day-to-day control of the company subject to broad oversight by the provisional liquidators). A "light touch" provisional liquidation is often employed in support of a restructuring of a Cayman Islands company taking place in foreign insolvency proceedings, such as under Chapter 11 of the United States Bankruptcy Code.
Once provisional liquidators have been appointed an automatic stay on the commencement or continuation of legal proceedings will apply, allowing breathing space for a restructuring to be pursued (although the provisional liquidation will not prevent secured creditors from enforcing their security).
Scheme of arrangement
Where the unanimous consent of stakeholders for a restructuring cannot be achieved, a restructuring may be implemented by a scheme of arrangement. This is a statutory procedure for varying the rights of a company's creditors or members (or any class of them). It is not an insolvency procedure and can be implemented by a solvent company, but in a restructuring context it is often employed within a provisional liquidation to take advantage of the automatic stay.
For a scheme of arrangement to be implemented, each class of creditor/member whose rights are being affected must vote to approve the scheme, and the Cayman Court must also sanction the scheme. For a class to approve the scheme, it must be supported by creditors/members representing a majority in number and 75% by value of the voting creditors/members.
A restructuring procedure as provided by Chinese law may be divided into three stages: (i) review and acceptance of a restructuring application, (ii) prepare and approval of a restructuring plan, and (iii) execution of the restructuring plan. Compared to liquidation, the statutory requirements for restructuring are less strict and more encouraging, so as to facilitate an as early as possible restructuring of distressed companies. Just like what is generally required in the bankruptcy scenario, a restructuring procedure may be initiated if a debtor is unable to repay its debts as they become due and its assets are insufficient for the settlement of all its debts, or if a debtor is unable to repay its debts due and is obviously insolvent. In addition, a restructuring procedure can also be triggered if a debtor is very likely to lose its ability to repay debts. It is noteworthy that, in practice, when vetting a restructuring application, a court usually assesses the value of the debtor and the feasibility of its intended restructuring.
The Enterprise Bankruptcy Law sets forth two modes of management. One is that the administrator manages the assets and business affairs of the debtor, in which case, the administrator may appoint the management personnel of the debtor to take charge of the debtor’s business affairs. The other is to have the debtor manage its own assets and business affairs under supervision of the administrator, subject to the approval of the court.
In the first mode as mentioned above, the administrator plays the key role in the restructuring, while in the second mode, the debtor is the core player, and the administrator acts as a supervisor. The administrator is appointed by, under the direction and supervision of, and compensated at the discretion of, the court. In a restructuring procedure, a court not only plays the role of an impartial referee, but also handles matters such as coordination with other courts or authorities, to ensure a success of the restructuring. Creditors have the right to know, to supervise and to vote regarding the restructuring procedure in which they are involved. Sometimes creditors may become providers of new financing, while some other times they act as the restructuring party, but in general, the participation of creditors in restructuring is somewhat insufficient, and they wield limited power in the process.
Restructuring may be applied to individuals and businesses. In-court restructuring against a debtor may only commence if the debtor is insolvent and if the debtor or creditor requests that the insolvency court commence such proceedings.
It is a condition of in-court restructuring that the restructuring proposal includes a compulsory arrangement with the creditors and/or a transfer of the business.
In case of in-court restructuring the insolvency court will appoint a restructuring administrator (typically an attorney) and a restructuring accountant for the debtor.
The restructuring administrator presents the restructuring proposal to the creditors that vote on the approval of the restructuring proposal. If the restructuring proposal is not approved, insolvency proceedings will commence against the debtor. As a starting point the proposal will be approved if not more than 50% of the creditors present at the meeting disapprove of the proposal.
The management of the debtor continues as a starting point if the creditors or the insolvency court do not decide otherwise. The management must not make important decisions without the consent of the restructuring administrator.
The insolvency court is only a supreme authority and is not to approve transactions but only to ensure that the administration takes place in accordance with the Insolvency Act.
- Mandat ad hoc proceedings
Mandat ad hoc are confidential proceedings which are not limited in time. The management continues to operate the business.
The only role of the court-appointed officer (mandataire ad hoc) is to help the debtor negotiate with its main creditors and find the most suitable solution. Approval by creditors, being on a voluntary basis, is based on a unanimous vote. If an agreement is reached between the company and its creditors, the mandataire ad hoc’s duties end. Otherwise, the agreement is terminated.
- Conciliation proceedings
Conciliation proceedings are available to debtors that face difficulties that are actual or foreseeable. They are confidential proceedings which may last up to five months. They are initiated by the debtor in its sole discretion. Management continues to operate the business.
The agreement reached between the debtor and its creditors is negotiated on a purely consensual and voluntary basis and can be either acknowledged by the judge (accord constaté) or formally approved by the court (accord homologué) in which case, the insolvency date cannot backdated before the court order approving the conciliation agreement. If parties do not manage to reach an agreement, the conciliation proceeding fails and will be deemed as terminated.
- Safeguard proceedings
Safeguard proceedings are judicial proceedings available to debtors that are solvent and that face difficulties that cannot be overcome. The management of the debtor will continue the daily management of the business. The judicial administrator will only exercise ex post facto control over decisions of the management or assist it to make all or some of the management decision.
The safeguard plan is voted either by creditors’ committees at a 2/3 majority if the debtor meets certain thresholds or by creditors on an individual basis. If the creditors consulted individually refuse to approve the plan, the court can impose a ten-year maximum term-out to dissenting creditors, but cannot impose any debt write-off or any debt to equity swap.
- Fast-track financial safeguard (sauvegarde financière accélérée)
The purpose of this proceedings is to restructure financial debt in a very short time frame (maximum two months), assuming the consent of at least two-thirds of financial creditors and, as the case may be, of bondholders is obtained.
Fast-track financial safeguard are only available to debtors which meet certain thresholds and provided that a conciliation procedure is pending in which at least a majority in value of financial creditors and, as the case may be, bondholders are likely to approve the restructuring proposals prepared by the company.
The opening of such proceedings only has effects in relation to financial creditors and, as the case may be, bondholders (excluding therefore suppliers from the process).
- Fast-track safeguard (sauvegarde accélérée)
This proceeding is a variant of the fast-track financial safeguard proceedings. It is governed by the same rules, with two major exceptions: (i) it can last up to three months and (ii) suppliers will be able to vote on the plan.
It is intended to facilitate the negotiation of pre-packaged plans with the ability to eventually cram-down dissenting minority creditors through the vote of creditor classes, including trade creditors.
Debtor-in-possession (“DIP”) proceedings (Eigenverwaltung)
The debtor may apply for insolvency proceedings in the form of DIP proceedings (Eigenverwaltung), particularly, if it wants to implement a restructuring plan. The insolvency court will adopt such motion (after consultation with an existing (preliminary) creditors’ committee) if there is no reason to expect that such DIP management would place the creditors at a disadvantage. In light of this requirement, the debtor’s management is regularly supplemented or supported by experienced restructuring experts. The DIP i.e., the management of a debtor, which is a legal entity must assume the position of an otherwise appointed (preliminary) insolvency administrator. The DIP must comply with insolvency laws. In particular, it must honor the creditors’ interests. The court always appoints an insolvency monitor (Sachwalter), rather than an insolvency administrator, to verify the debtor's economic situation and monitor the management of its business, among other things.
The debtor normally applies for DIP proceedings when it files for the opening of insolvency proceedings (so-called preliminary DIP proceedings) as the debtor thus is able to prepare the restructuring in line with its plans from the very beginning.
Protective shield proceedings (Schutzschirmverfahren, Sec. 270b Insolvency Code)
A variation on application for DIP management during the preliminary insolvency proceedings is the application for so-called protective shield proceedings (Schutzschirmverfahren). Such application must be accompanied by an expert’s certification, with grounds, that offers evidence (i) that the debtor faces imminent insolvency or over-indebtedness but is not already illiquid, and (ii) that the intended restructuring does not manifestly lack the prospect of success. In practice, the main advantage of protective shield proceedings is that the debtor can propose a preliminary insolvency monitor (vorläufiger Sachwalter) and the court may only deviate from the proposal, if the debtor’s selection is manifestly unsuited to the office. A debtor may also benefit from the opportunity to call the proceedings protective shield proceedings, by hiding the fact that it filed for insolvency and reassuring stakeholders.
Insolvency plan proceedings
An insolvency plan can be a very flexible tool that allows deviation from the standard liquidation rules of the insolvency code. For example, an insolvency plan can provide for (i) the restructuring of the debtor itself, rather than its liquidation; (ii) a debt-for-equity swap, share transfer and other corporate transactions; and (iii) an alternative satisfaction of the creditors, such as through future profits rather than liquidation proceeds. An insolvency plan can be used in order to achieve higher and faster pro rata satisfaction of creditors and a much quicker termination of the insolvency proceedings often within months.
Both the debtor and the insolvency administrator (if there are no DIP proceedings) are entitled to submit an insolvency plan to the insolvency court, which will check the plan for completeness, economic conclusiveness/comprehensiveness and several formalities.
The insolvency plan must reasonably define groups of creditors of similar interests/rights, and these groups in turn must approve the insolvency plan in a creditors’ meeting. A group of creditors is deemed to have approved the insolvency plan if its majority – according to both headcount and debt amount - consents to the plan.
If the majority of the creditor groups consent to an insolvency plan, a dissenting creditor group can be overruled if (i) its creditors are not likely to be worse off under the provisions of the insolvency plan, and (ii) they are adequately participating in the economic value devolving on the parties under the insolvency plan.
The insolvency court must confirm the final insolvency plan once it has been approved by the creditors. The court may refuse such approval, if a creditor that is likely to be worse off under the plan objects to the plan. As soon as the final insolvency plan is confirmed, and unless the insolvency plan provides otherwise, the insolvency court shall decide on the termination of the insolvency proceedings.
The German Bond Act (Schuldverschreibungsgesetz) provides rules for an out-of-court restructuring of German bonds. Apart from that, there exists not yet a formal out of insolvency restructuring process in Germany.
In Bermuda the most often used restructuring tool is a scheme of arrangement. The Companies Act does make provision for restructuring through merger or consolidation, but that is less common.
The objective of a scheme of arrangement is to allow a distressed company to restructure its debt and/or equity by entering into a binding compromise or arrangement which if approved by the margins proscribed by statute will be binding on any dissenting creditors and/or shareholders.
A scheme is available to both solvent and insolvent Bermuda companies.
The company itself or any member or creditor can initiate a scheme. Where a provisional liquidator has been appointed, he/she will usually propose the scheme rather than the management of the company. Proceedings are started by applying to the Supreme Court for directions to convene meetings, on notice, with the various classes of creditors and/or shareholders who will be affected by the proposed scheme.
Once approved by each class of creditors and/or shareholders, an application is made to request the Bermuda Supreme Court’s sanction of the scheme.
The scheme must be approved by the various classes of creditors and/or shareholders affected by the proposed scheme. A majority in number and representing 75% in value of those present (in person or by proxy) and voting at each class meeting must vote in favour of the scheme.
To sanction the scheme the court must be satisfied that:
- the statutory requirements have been met;
- each class of creditors or members has been fairly represented; and
- the arrangement is one that a reasonable person of business would approve.
In the case of a solvent company, the company's ordinary management remains in place to carry out the proposed scheme.
In the case of an insolvent company, a winding-up petition is typically presented to the court in advance of the scheme and a provisional liquidator is appointed. The provisional liquidator can be given the power to put forward the scheme, or his powers can be limited to overseeing the company's board and management.
There is no automatic stay preventing creditor action during the carrying out of a scheme of arrangement in Bermuda. To deal with this, during such time as the scheme is being implemented it is commonplace for the relevant company to be placed into provisional liquidation (where such a stay is available under Bermuda law). Liquidation proceedings are then discontinued when the scheme has been implemented.
Administration is the primary form of corporate rescue procedure in Guernsey.
An application must be made to the court, supported by an affidavit seeking an order that the company be placed into administration and setting out the reasons why it should be placed into administration.
The court can grant an administration order if it both:
i. is satisfied that the company does not satisfy, or is likely to become unable to satisfy, the solvency test.
ii. Considers that the making of an order may achieve either:
a. the survival of the company as a going concern;
b. a more advantageous realisation of the company's assets than would be effected on a winding-up.
An administration order can only be made by the court.
Supervision and control
The administrator takes into his custody or control all of the property to which the company is, or appears to be, entitled. The administrator manages the company's affairs, business and property in accordance with any court directions.
The administrator can do all things necessary or beneficial for the management of the company's affairs, business and property. The administrator can apply to the court for directions in relation to:
i. the extent or performance of any function; and
ii. any matter arising in the course of his administration.
The administrator is deemed to act as the company's agent in performing his functions.
The administrator is primarily responsible for the creation and implementation of the restructuring plan so as to ensure that the purpose of the administration order is fulfilled. The directors are not automatically removed from office but they may not exercise their powers in a way that interferes with the performance of the administrators' function.
Protection from creditors
During the period between the presentation of an application for an administration order and the making of such an order, or the dismissal of the application (and during the period for which an administration order is in force):
i. no resolution can be passed or order made for the company's winding-up; and
ii. no proceedings can be commenced or continued against the company except with the court's leave (or, if an administration order is in force, with the administrator's leave). Rights of set-off and secured interests, including security interests and rights of enforcement, are unaffected.
On the making of an administration order, any extant application for the company's winding-up is dismissed.
Length of procedure
The Companies Law does not state how long an administration order can remain in force. The court can therefore make an administration order on any terms as it thinks fit, though courts rarely impose time frames on administration orders.
Role of Stakeholders
Whilst administration is driven by the office holder, secured creditors have a particularly important role to play in the process. Given that there is no moratorium on secured creditor enforcement, an administrator will require the buy in of secured creditors if any restructuring or rescue plan is to be successful.
That will often lead to a significant level of pre-appointment dialogue with secured creditors and perhaps the creation of an informal creditors' committee post-appointment.
Schemes of Arrangement
A scheme of arrangement (a Scheme) is a court-sanctioned arrangement between a company and its members or creditors (or any class of them) pursuant to sections 105 to 112 of the Companies Law. A Scheme could be used for reorganisation or restructuring provided that the relevant parties are in agreement and the Court is sufficiently satisfied that it is appropriate in the circumstances.
In an insolvency context, a Scheme can provide a useful mechanism for formulating an arrangement between a class of creditors and may be used in conjunction with an administration to obtain a moratorium on proceedings against the company.
What is the process?
The process for obtaining sanction of the court for a Scheme is broadly the same as that in the UK. The steps to be taken are as follows:
The company files an application with the court to convene a meeting of the members of the company (or a class of members) for the purpose of considering and voting on the proposed Scheme.
Notice of the meeting must be sent to each creditor or member and must be accompanied by a statement explaining the effect of the Scheme and any material interests of the directors of the company. Every notice summoning the meeting that is given by advertisement must either include such a statement or state where and how creditors or members entitled to attend the meeting may obtain copies of such a statement.
At the Court-convened meeting of creditors / members, a majority in number representing not less than 75 per cent in value of the members (or class thereof) present and voting (in person or by proxy) must approve the Scheme before it can be sanctioned by the Court.
iv. Court sanction
A further application is then made to the Court seeking sanction of the agreed Scheme. In exercising its discretion, the Court may consider whether:
a. the interests of different creditors or members are such that they should be treated as belonging to a different class thereof;
b. each creditor / member (or class thereof) was properly represented by those attending the convened meeting, and whether the majority is acting in good faith in the interests of the creditor / member (or class thereof) and not oppressively towards the minority; and
c. the Scheme is such that an intelligent and honest man might approve.
Once sanctioned by the Court, the Scheme becomes binding on all creditors / members (including secured and preferential creditors).
Examinership is a court protection procedure available to a company that is insolvent but which has a business that is capable of surviving as a going concern. The procedure for instigating an examinership is described in detail at Section 4 above.
The Examiner has a maximum of 100 days from the date of his interim appointment to report to the Court that he has formulated 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, (b) the discharge of the Examiner’s fees, 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 generally means that a creditor cannot receive less in cash terms than it would in a receivership or liquidation). The Court will often have particular regard to the potential for jobs to be saved when considering whether or not to approve a Scheme of Arrangement. A Scheme of Arrangement that has been approved by the Court will be binding on all creditors, including secured creditors, regardless of whether they have voted in favour of the Scheme of Arrangement.
The examinership process is overseen by the High Court. An examiner is an officer of the Court and owes his duties to the Court. The directors’ powers survive the appointment of an examiner and as such they remain responsible for the day-to-day management of the company. The company continues to trade during the period of examinership.
In an examinership, the shareholders retain their shares in the company and their powers are technically unaffected, however, because of the insolvency of the company, the shares are effectively worthless and no action can be brought against the company, including a minority oppression claim, during the period of the examinership without the Court's permission. The scheme of arrangement can, and often will, provide for the compulsory transfer of all issued shares to the investor without any shareholder consent.
Scheme of Arrangement
A scheme of arrangement can be invoked where a solvent or insolvent company proposes to enter into an arrangement with its creditors or its members by way of reconstruction (by a reduction in share capital, amalgamation of any two or more companies or otherwise). A scheme of arrangement can be proposed by the directors, or the liquidator of a company. An application is made to court for a moratorium which restricts creditors from taking enforcement action against the company, which allows the directors to restructure the company without threat of creditor action. The company can continue to trade during the moratorium.
Meetings of the company’s members and creditors are held at which the proposal are put and, where passed by a majority in value of creditors (or members), an application is made to the High Court to sanction the compromise or arrangement. The Court will sanction the scheme where it believes it to be reasonable and offers the company’s creditors a larger return than that which they would have received in a liquidation. The scheme of arrangement will be legally binding once approved by the Court.
The process does not affect the management or operations of the company, or the shareholders of the company save to the extent that the Court has, at its discretion, granted a stay of any proceedings against the company.
In contrast to an examinership, the business of the company does not need to be viable and a scheme may be used to wind up the company's affairs to achieve a greater return for its creditors.
- There is no codified statutory or customary corporate rescue process in common use in Jersey. It has been possible to use the just and equitable winding up jurisdiction under the Companies Law in certain limited circumstances but this is a continually evolving area of law without consistent jurisdiction. There is also an older process under the Loi (1839) Sur Les Remises des Biens and named remise de biens that may be afforded by the Court to temporarily embarrassed debtors with Jersey situs immovable property.
- Part 18A of the Companies Law provides for a company to compromise with creditors and members by way of a scheme of arrangement.
(i) A scheme of arrangement can be made between a Jersey company and its creditors or any class of them, or its shareholders or any class of them. A scheme of arrangement can be implemented subject to obtaining the required level of votes at a meeting of the relevant creditors or shareholders to support a plan which is then sanctioned by the Royal Court.
(ii) The provisions of the Companies Law relating to schemes of arrangement are based on the UK Companies Act 1985 and it is expected that the guidance of the English courts in respect of the UK statutory provisions will be followed in Jersey.
(iii) The company's management is unaffected during the process.
Out-of-court restructuring is governed by scattered substantive and procedural rules, but mostly by internationally recognized principles of conduct and professional practice in the field. Court-assisted reorganization and liquidation are governed by the Insolvency Law.
The Insolvency Law regulates business reorganization and bankruptcy in Mexico. The stated purpose of the business reorganization procedure is to preserve companies and prevent that the generalized default of payment obligations jeopardizes the continuation of the companies themselves and the businesses with which they have dealings, as well as ensuring an adequate protection of creditors in light of the deterioration of the estate.
The stated purpose of the reorganization stage is to conserve or save the business enterprise through a restructuring agreement.
The reorganization stage is designed to be completed within 185 calendar days; although one 90-day extension may be granted if the conciliator or creditors representing more than half of all recognized claims so request. An additional 90-day extension may be granted if the debtor and creditors representing at least 75% of all recognized claims so request. The Insolvency Law clearly provides that in no event may the reorganization stage be extended beyond 365 days, whereupon, if there is no restructuring agreement, the liquidation stage immediately begins.
To become effective, a restructuring agreement must be accepted by the debtor and creditors representing more than 50 percent of the sum of all of the debtor’s allowed unsecured and subordinated claims (regardless whether the holders of such claims have accepted the reorganization plan) plus all of the debtor’s allowed secured or privileged claims accepting the reorganization plan.
After receiving approval of a reorganization agreement from the debtor’s creditors, the conciliator must then submit the reorganization plan to the court for its own review and approval. Unsecured holdout creditors representing more than 50% of all unsecured claims are entitled to veto the reorganization plan for a set period of time. Following such period, the court may then approve the reorganization plan if it finds that the proposed plan meets all of the statutory requirements and is not inconsistent with public policy.
The reorganization plan, with the validation of the court, would become binding on the debtor and on all accepting secured and privileged creditors and on all unsecured and subordinated creditors, whether or not they accepted the reorganization plan.
According to the Insolvency Act, the decision of restructuring a company may only be made by the Creditors’ Meeting, as the Creditors’ Meeting takes over all functions, rights and entitlements from the company's top management; in addition, during restructuring the competence of shareholders, associates, or holders shall be suspended and taken over by the Creditors’ Meeting. The meeting may make any joint decisions required to manage and run the debtor’s operations during the insolvency proceeding. Debtor’s bylaw undergoing restructuring remains effective as long as it does not conflict with the decisions agreed by the Creditors’ Meeting or the Insolvency Act.
The Creditors’ Meeting must approve the debtor’s Restructuring Plan within sixty (60) days of the date on which the debtor’s restructuring was decided.
The decision of restructuring the debtor and the approval of the restructuring plan must be approved by more than 66.6 percent of the allowed claims (in the first call of the Creditors’ Meeting) or more than 66.6 percent of the allowed claims attending the Creditors’ Meeting (in the second call).
However, when there are more than 50% of the recognized creditors of the debtor and these creditors are related to the debtor and the Creditors’ Meeting approves the debtor’s course of action, that is, either the Restructuring Plan or the Liquidation Agreement (both applicable to the ordinary insolvency proceeding) or the Global Refinancing Agreement (applicable to the preventive insolvency proceeding) as amended, votes will be cast in two separate occasions: (i) in the first call, it must be approved by more than 66.6% votes of creditors recognized as related creditors as well as by more than 66.6% votes of creditors recognized as non-related; or (ii) in the second call, it must be approved by more than 66.6% of votes of the attending creditors of both classes.
The Restructuring Plan shall include a schedule of payments listing all of debtor’s debts as of the starting date of the insolvency proceeding (whether recognized or not). Likewise, it must set out a method for the provision of contingent credits (those who are subject to court, arbitration, or administrative litigation).
In addition, the payment schedule must specify the at least 30% of the funds or moneys allocated each year to the payment of claims will be equally allocated to the payment of first-priority labor and pension claims.
The administration regime in a restructuring of assets may either keep the debtor in possession, or designate a new administration, or adopt a mixed regime (both new and old administration); this will depend on the Creditors' Meeting.
The Restructuring Plan approved by the meeting is binding to the debtor and to all creditors involved in the proceeding, even when they have challenged the joint decisions, have failed to attend the meeting for any reason, or have not timely requested the recognition of their claims.
In addition, as we have mentioned before (see question 4), 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.
When the Commission verifies that all claims have been paid (including allowed or not, according to the Restructuring Plan), the restructuring will culminate.
The Creditors’ Meeting may put off the approval of the Global Refinancing Agreement only once for no more than fifteen (15) days after the first Creditors’ Meeting. In this regard, the meeting shall be deemed suspended during the period of time between the date of the first Creditors' Meeting and the new scheduled date.
Just as in the ordinary insolvency proceeding (Restructuring Plan), the decision to approve the Refinancing Global Agreement shall be adopted by more than 66.6 percent of the allowed claims (in the first call of the Creditors’ Meeting) or more than 66.6 per cent of the allowed claims attending in the Creditors’ Meeting (in the second call).
In addition, the Global Refinancing Agreement shall include a schedule of payments. Moreover, at least 30% of the funds allocated to the payment of claims shall be equally allocated to pay labor claims. The applicable interest rate and the collateral, if any, shall also be specified.
The approval of the Global Refinancing Agreement terminates the preventive insolvency proceeding.
In Poland, we have 4 restructuring proceedings: arrangement approval proceedings, accelerated arrangement proceedings, arrangement proceedings and remedial proceedings.
In addition, there is also a possibility to conclude partial arrangement, covering creditors selected by objective criteria. Conclusion of partial arrangement is allowed in arrangement approval proceedings and accelerated arrangement proceedings.
There are various forms of restructuring of the debtor’s obligations within all kinds of restructuring proceedings, for instance debt-for-equity swap, reducing the amount of debtor’s obligations or spreading repayment into instalments. It is also permissible, however as an exception, to vote, conclude the arrangement and adopt it within the bankruptcy proceedings.
One of the most interesting new rescue proceedings is pre-packaged sale (pre-pack), regulated in the Bankruptcy Law. Pre-pack is yet not as popular as it is for instance in the USA or UK, where around 25% of all applications include pre-pack, and one of the highest value acquisitions are made within pre-packaged liquidation procedures. However, there are solid grounds to presume that also in Poland the pre-pack procedure should gain popularity, mainly because while acquiring in pre-pack, investor enjoys execution sale effect, what means that the investor is not liable for old liabilities and commitments of the debtor. Moreover, transaction executed within pre-pack procedure is really quick and investor acquires enterprise as functioning company, ready to continue conducting business. Pre-pack sale is also possible in favour of affiliated entities, however the price cannot be less than stated by the Court’s appraiser. The Court’s decision whether to approve sale-purchase conditions, is made by the bankruptcy Court, along with the decision regarding declaring bankruptcy. Main feature of pre-pack is possibility to sale insolvent debtor’s assets to investor within bankruptcy proceedings without auction or tender. Pre-pack is intended for selling enterprise as ongoing business, with significant benefit which is execution sale effect, meaning that the investor is not liable for old liabilities and commitments of the debtor.
For each restructuring proceedings the debtor may file upon insolvency situation or threat of insolvency. For arrangement approval proceedings and accelerated arrangement proceedings, there is additional premise. Those proceedings may be conducted provided that the total sum of disputed receivable debts giving the right to vote on the arrangement does not exceed 15% of the total sum of receivable debts giving the right to vote on an arrangement, while for arrangement proceedings, the sum of disputed claims may exceed 15% of the total sum of receivable debts giving the right to vote on an arrangement.
Debtor’s management is still in hands of former board members, however under supervision of the Court Supervisor (in certain circumstances, for example if the debtor has violated the law with regard to the administration of assets thereby causing or threatening to cause detriment to the creditors, it is possible to revoke debtor’s administration of the enterprise), in remedial proceedings however the Court appoints Receiver, who usually takes over the responsibility to manage the debtor’s enterprise.
Restructuring plan is prepared by the Arrangement Supervisor (within arrangement approval proceedings) or by the Court Supervisor (within accelerated arrangement proceedings and arrangement proceedings). The restructuring plan is then executed by the debtor under supervision of appointed supervisor.
Within remedial proceedings the restructuring plan is prepared by the Receiver. Receiver is also the person who executes the restructuring plan once it is approved by the Judge – Commissioner. The creditors vote on the arrangement once the restructuring plan is executed fully or in part.
The Court and the appointed Judge – Commissioner supervises the course of the proceedings and issue some ruling thereof.
It is also possible within restructuring proceedings to establish Creditors’ Committee (said body may i. a. change the person of the Court Supervisor or of the Receiver, or decide that administration of the enterprise should be kept by the debtor). Creditors may also submit their own arrangement proposals.
A company may apply to Court to summon a meeting of creditors to approve a scheme of arrangement between a company and its creditors or a class of its creditors. In order for a scheme to be approved, more than 50% of creditors (or a class of creditors) comprising 75% in value must agree to the proposed scheme.
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.
Under a scheme, control of the company remains with management, although scheme managers are usually appointed to assist with negotiations and to give effect to the terms of the scheme.
A company may also be placed under judicial management (either voluntarily, or upon the application of one its creditors), if it can be shown that the company is insolvent or is likely to become insolvent, and if can be shown that the making of the order would achieve one or more of the following purposes, namely:
a. the survival of the company, or the whole or part of its undertaking as a going concern;
b. the approval of a compromise or arrangement between the company and its creditors; or
c. the more advantageous realization of the company´s assets than would occur in a winding up.
Upon the making of a judicial management order, all powers and duties imposed upon by the directors of the company are transferred to the judicial managers. That said, it is common for the directors to continue to work together with the judicial managers to assist in the rehabilitation of the company.
A judicial management order remains in force for 180 days from the date of the order, but the Court may on application of the judicial grant and extension subject to such terms as the Court may impose. This results in the Court taking a more involved role in judicial management, and will usually require the judicial manager keep the Court regularly updated.
The judicial managers are also required to summon a meeting of creditors to approve their proposal for the company (which requires a majority in number and value of the creditors), and if necessary, the creditors are entitled to form a committee of creditors to monitor the progress of the judicial management.
Aside from informal and voluntary arrangements negotiated with all or certain creditors, Swedish law provides for only on in-court restructuring and rescue procedure, namely company reorganization (Sw. Företagsrekonstruktion).
In short, the two main pre-requisites in order to be granted reorganization protection by the court are that the debtor is illiquid and not able to settle all its debts (not necessarily insolvent, but often this is the case), while at the same time having a viable core business that following a restructuring plan can be expected to be profitable again.
As opposed to bankruptcy proceedings, the debtor and its management remain in control during reorganization proceedings. However, an administrator (normally an insolvency lawyer) is always appointed by the court to supervise the reorganization and the operations of the company during that time. Even if this is a debtor-in-control procedure, certain important powers are vested in the administrator which effectively limits the discretion of management; for example, the administrator must approve of any new debt/obligations, approve of any sale or pledge over property critical to the business, and approve of any payment of old debt etc. If the debtor and its management do not comply with the instructions of the administrator or with applicable law, the administrator can (and will be expected to) file for the immediate dis-continuation of the proceedings.
As part of the reorganization procedure, the debtor shall prepare a restructuring plan together with the administrator, describing all operational and financial measures to be taken for the debtor to restructure its business making it profitable. Whereas under Swedish law, the restructuring plan and its implementation is not a legally binding, nor something that the creditors will vote on, it nonetheless represents an important document for the purpose of explaining the rescue plan to the creditors and generally convincing them to approve of the reorganization and in particular to vote in favor of a public composition and write-down of all non-preferential old debt.
Creditors only get to vote on the write-down of old non-preferential debt by a public composition. All secured creditors are assumed to get full settlement once the reorganization proceedings are finalized and will therefore not be part of the vote. Aside from that, all creditors have the right at any time to oppose the reorganization and may ask the court to dis-continue the proceedings, if there is reason to believe that the purpose of the restructuring proceedings will not be achieved.
Company reorganization proceedings are bot opened and terminated by the court issuing an order to that effect based on the filings made by the debtor or a creditor. The court also appoints the administrator, normally a trusted insolvency lawyer proposed by the debtor. The court further rules on any disputes relating to and arising during the proceedings (e.g. voting rights, choice of administrator, extensions on proceedings etc).
Composition proceedings may be used to restructure a creditor as follows:
- Composition proceedings may be used as a mere restructuring moratorium which can be terminated with the approval of the court once the debtor is financially recovered. There is no cram-down element to this procedure. An individual agreement must be reached with each single creditor who is expected to make a concession.
- Where a mere restructuring moratorium is not sufficient, a debtor may choose to offer a composition agreement to its creditors which may take the form of (i) a debt-rescheduling agreement where the debtor offers the creditors full discharge of claims according to a fixed time schedule or (ii) a dividend agreement where the debtor offers the creditors only a partial payment of their claims. A combination of both elements is possible. Further, it would be conceivable to use a composition agreement with assignment of assets as a restructuring tool where the business as such but not the legal entity is viable. If so, the business would be transferred to an acquirer with the legal entity of the transferor to be liquidated. A composition agreement must be approved by the creditors which requires the affirmative vote by a quorum of either a majority of creditors representing two-thirds of the total debt, or one-fourth of the creditors representing three-fourths of the total debt. Creditors with privileged claims and secured creditors will not be entitled to vote on the composition agreement (and will not be subject to its terms). After approval by the creditors, the composition agreement requires confirmation by the composition court and, with such approval, becomes valid and enforceable on all (approving, rejecting and non-participating) creditors.
The competent court initiates composition proceedings based on a request typically brought forward by the debtor. First, a provisional moratorium of up to four months will be granted. In this context, the court can also appoint a provisional administrator. If the court finds that there are reasonable prospects for a successful reorganisation or that a composition agreement is likely to be concluded, it must thereafter grant the definitive moratorium for a period of four to six months (which can be extended to a maximum of 24 months) and appoint an administrator. See section 4 above for the continuing management of the debtor by existing management and the restructuring by means of a corporate moratorium or postponement of bankruptcy.
The SIA distinguishes between the pre insolvency restructuring agreement and the insolvency restructuring agreement.
Firstly, as a pre insolvency restructuring agreement, the debtor in order to avoid the DIP, before to apply for it, he could try to get an agreement with all the creditors (art. 5 bis SIA). The attempt to get an agreement must be made during the period that has the debtor to apply for the DIP. However, the parties have 3 month to achieve it. In the course of the negotiation, the creditors will not be able to initiate to a new proceedings that could affect the debtor’s estate. Likewise that the initiated proceedings will be stayed. In case that by this negotiation getting an agreement, it will be file to the court in order to be approved. Otherwise, the debtor will have to inform to the court that it has been impossible to get an agreement, entailing that the debtor or any creditor to apply for the DIP. It happen the same in case that the debtor will not accomplish with the agreement.
Secondly, the SIA allows that the debtor agree a refinancing agreement with the banks before the DIP. This agreement is regulated in article 71 and the Additional provision nº4 of SIA. It has the same purpose, application and functioning than the agreement with all the debtors, the differences consist of the parties involved in it and that it requires more requirements than the agreement with all the creditors.
Finally, as an insolvency restructuring agreement, the debtor or creditors could file a composition proposal during the insolvency proceeding (art. 100 and subsequent SIA). This proposal could be file jointly with the request for the DIP or in the composition phase. The debtor or any creditor could file the written proposal incorporating the following requirements (art. 99 and 100 SIA):
- It must to be signed by the debtor, or the creditors or their respective representatives with sufficient power of attorney.
- Contain acquaintances and moratoriums or both, as well as alternative proposals for all or some creditors.
- Include a payment scheme that details the resources foreseen for fulfilment.
Once the composition proposal has been file, it will be notified to all the creditors together with a valuation report made by the IA. Then the court shall convene a shareholder meeting in order that the composition will be approved by the creditors and then by the court. If the composition is approved, the debtor quarterly will have to file a compliance report (art. 139 SIA).
On the contrary, if the composition is not approved or breached, the debtor, the IA or any creditors shall apply for the opening of the liquidate phase (art. 140 SIA).
Chapter 11 is the reorganization chapter of the Code and is available to both individuals and business debtors. A chapter 11 case is commenced by filing a petition and paying the filing fee. During a chapter 11 case, the management of a debtor presumptively remains in control. If cause is shown, however, the bankruptcy court may remove management and order the appointment of a trustee. If appointed, the trustee displaces management and the board of directors of the debtor. As a general rule, the debtor’s objective in a chapter 11 case is to obtain bankruptcy court approval of a plan of reorganization or liquidation. A bankruptcy court may confirm a plan of reorganization by consent of creditors voting on the plan, which occurs when 66% of the amount of the claims and the majority of creditors in each class of creditors under the plan who vote on the plan, elect to accept the plan. The bankruptcy court may also impose the plan over one or more dissenting creditors (this is referred to as a “cram-down”) if it finds that the plan is fair and equitable and otherwise meets the requirements for confirmation set forth in section 1129 of the Code.
The bankruptcy court (i) presides over and manages each bankruptcy case, (ii) acts as the final arbiter for deciding whether a request should be approved, (iii) resolves disputes, and (iv) handles other issues. Subject to the bankruptcy protections afforded to debtors under the Code, creditors and other stakeholders are interested parties in bankruptcy cases and may pursue their legal or equitable rights before the bankruptcy court.
In addition to administration and company voluntary arrangements, discussed at Question 4. above (insolvency proceedings which can also be considered restructuring/rescue procedures), a company may utilize a scheme of arrangement to reach a compromise agreement with its creditors.
A scheme of arrangement is a Companies Act process, which requires two court hearings, including court sanction. It will bind all affected creditors (whether secured or unsecured) where at least 75% in value and over 50% by number of voting creditors favor of the scheme. Creditors that are treated differently may need to vote in separate classes. Schemes have proven effective to implement a variety of restructurings, including amends-and-extends, standstills, debt-to-equity swaps and other comprehensive reorganizations. Management stay in control of the company.
The Government has announced reforms to introduce a new restructuring plan process.
The aim of the bankruptcy procedure is to reach an agreement, whereby the debtor and the creditors lay down the conditions for debt settlement, such as particular allowances and payment facilities relating to the debt, the remission or assumption of certain claims, receiving shares in the debtor economic operator in exchange for a debt, guarantees for the satisfaction of claims and other similar securities, the approval of the debtor’s programme for restructuring and for cutting losses, and any and all other action deemed necessary to restore or preserve the debtor’s solvency, including the duration of and the procedures for monitoring the implementation of the composition arrangement.
An agreement may be concluded if the debtor was able to secure the majority of the votes for the agreement from the creditors regarding both secured and unsecured claims. Only the debtor company can initiate a bankruptcy proceeding in Hungary. The procedure starts when the director of the debtor economic operator files for bankruptcy at the court of law.
If the parties do not reach an agreement, 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 shall order the liquidation of the debtor.
The court shall, ex officio, refuse the debtor’s petition for the option of bankruptcy proceeding if the debtor is undergoing liquidation proceedings, and if a decision to declare insolvency and order the debtor’s liquidation has already been adopted.
The directors of the debtor company may file for bankruptcy at the court. Legal representation in the procedure is mandatory. In order to initiate a proceeding, prior consent is required from the supreme body of the debtor company exercising a founder’s right. The company cannot initiate a bankruptcy proceeding in the two years following the publication of the financial and definitive conclusion of the previous bankruptcy proceedings or the debtor being adjudicated in bankruptcy in another court, and if the debtor has submitted another such request within one year before the petition, which was refused by the court ex officio. A bankruptcy proceeding can also not be initiated if an insolvency proceeding was opened in another Member State of the European Union under Council Regulation 1346/2000/EC on insolvency proceedings, and a resolution for the opening of main proceedings was published in the Cégközlöny (means Company Gazette).
In a bankruptcy proceeding, the debtor is granted a stay of payment with a view to seeking an arrangement with creditors, or to attempt to enter into a composition arrangement with creditors.
Bankruptcy proceedings are non-contentious proceedings conducted by the general court of competence and jurisdiction by reference to the debtor’s registered office.
The opening of bankruptcy proceedings commences with a court ruling that is consequently published in the Cégközlöny, and with the indication "cs. a." being entered in the register of companies next to the company’s name. Publication in the Cégközlöny shall take place in the form of a display posted on the official website of the Cégközlöny at 00:00 hours, updated on a daily basis. The court shall ex officio appoint an administrator from the register of liquidators in its ruling on the bankruptcy proceedings. The ruling may not be appealed.
The bankruptcy proceedings are opened on the day the court ruling is published, at which time the name of the debtor company is appended by the words “csődeljárás alatt" (means under bankruptcy) or in the abbreviated form “cs. a.”.
Creditors may register their existing claims within 30 days following the publication of the ruling ordering the opening of bankruptcy proceedings or within eight working days for claims arising after the time of the opening of bankruptcy proceedings.
The debtor shall call a meeting of creditors within a 60-day period following the time of the opening of bankruptcy proceedings for a composition conference, inviting the administrator and all creditors. The invitation and its enclosures shall be sent to the persons invited at least eight working days before the scheduled time of the conference. Unknown creditors shall be invited by way of a public notice published in two nationally circulated daily newspapers within eight working days of the publication of the stay of payment and also on the debtor economic operator’s website (if available).
The stay of payment under shall expire at 00:00 hours on the second working day after a 120-day period following the time of publication, unless the court delivers a ruling for the extension of the stay of payment, endorsed by the administrator, and provides for the publication in the Cégközlöny of the fact that the stay of payment has been extended until the deadline specified in the protocol.
In the course of negotiations with creditors, the debtor may request the creditors’ consent for the extension of the stay of payment, but the total length of the period of the stay of payment, including the extension, may not exceed 365 days from the time of the opening of bankruptcy proceedings. The stay of payment may be extended up to a maximum period of 240 days from the time of the opening of bankruptcy proceedings, if the debtor was able to secure the majority of the affirmative votes from the creditors with voting rights, in respect of secured and unsecured claims alike, separately for the claims in question.
In the composition conference, voting rights are held by any creditor who registered their claim by the deadline and paid the registration fee, and whose claim is shown under recognised or uncontested claims.
Creditors shall have voting rights in proportion to the value of their recognised or uncontested claims where one full vote is granted per HUF 50,000. There are no fractional votes. Creditors holding claims below the HUF 50,000 threshold have one vote. The assignment of creditors’ claims upon other creditors within 180 days prior to the submission of the petition for the opening of bankruptcy proceedings, or upon the submission of a claim for bankruptcy, shall have no effect on the counting of votes. Interest accrued during the term of the stay of payment shall not be taken into consideration with respect to voting rights. Any creditor who fails to participate in person or by way of proxy on a composition conference shall be counted to have voted no.
The arrangement shall also apply to non-consenting creditors who are otherwise entitled to participate in the agreement, or who failed to take part in the conclusion of the agreement in spite of having been properly notified; it shall also apply to the creditors whose contested claims had to be secured by provisions or by way of guarantee (judicial arrangements). The agreement, however, may not stipulate less favourable conditions for these creditors than for the creditors granting consent to the agreement in the given categories, or for the creditors whose vote is calculated at a rate of one quarter.
Payments may be effected from the said provisions to provide satisfaction for a contested claim (or a part of such claim) to the beneficiary of such contested claim if the said beneficiary filed charges against the debtor, and the court’s final ruling declared the creditor’s claim substantiated and awarded the amount of the claim, or if the creditor recovered its claim from the debtor by way of an administrative procedure. If the debtor fails to observe the deadline, they are not able to participate in the agreement and, consequently, will not be covered by the agreement.
Where a creditor’s claim is not registered within the time limit prescribed for notifying such claims, the beneficiary shall not be able to demand satisfaction from the debtor; however, he will be able to notify those claims that have not yet become time-barred in liquidation proceedings initiated by others.
The main stages of the procedure shall be published in the Cégközlöny, such as opening and termination of the procedure and extension of the stay of payment.
An appeal against the ex officio ruling for the refusal of the petition for the opening of bankruptcy proceedings must be lodged within five days. The appeal shall be heard without delay, within a maximum period of eight working days.
The debtor and creditors shall be informed without delay of the classification of claims and the amount registered and shall be given an opportunity to present their views within no less than five working days. Such comments shall be decided by the administrator within three working days, and the creditor and debtor shall be notified immediately of such decision; they then have five working days to submit any objection to the court concerning the administrator’s action pertaining to the classification process, including if the administrator registered a claim in an amount other than that notified by the creditor. The court shall adopt a decision relating to such objections in priority proceedings, within no more than eight working days. The ruling may not be appealed separately. Where a claim is listed under uncontested claims on the strength of the court’s decision, it shall not be construed as an admission of debt and shall not prevent enforcement vis-à-vis the creditor.
The head of the debtor economic operator shall notify the court concerning the outcome of the composition conference within five working days and at least 45 days before the expiry of an extended stay of payment and shall enclose a copy of the agreement where applicable, as well as the reports, agreements and statements verifying compliance.
The court shall deliver its decision on the approval of the composition arrangements within 15 working days of receiving the notification from the head of the debtor economic operator. The court may return the request for the approval of the composition arrangements on one occasion, for remedying any deficiencies within a deadline of three working days. If the composition arrangement conforms with the relevant legislation, the court shall grant approval by way of a ruling and declare the bankruptcy proceedings dismissed.
Any debtor can enter into an out of court settlement with two or more creditors. While not opposable to third parties, if the security granted thereunder is registered in the solvency register, such security will be enforceable even if constituted during the suspect period.
In contrast to a bankruptcy or voluntary liquidation, the judicial reorganization is aimed at maintaining the continuity of (or part of) the activities of a company under the supervision of the court. It allows the debtor whose continuity is threatened to request a moratorium for a period up to six months which prevents in principle any enforcement against the debtor’s assets or the start of any bankruptcy proceedings. Judicial amicable settlements must be approved and declared enforceable by the court.
The company in distress has 3 different restructuring options: (i) judicial reorganization by way of amicable agreement (same as above but now under court supervision), (ii) judicial reorganization by way of collective agreement or (iii) judicial reorganization by way of transfer under judicial authority.
In case of a judicial reorganisation by way of collective agreement the company must prepare a reorganization plan involving a description of the restructuring and a description of each creditor's rights following such restructuring. The plan must provide for payment of at least 20% of each debt to each creditor. The reorganization plan is submitted to a vote at a meeting of creditors and is approved if the majority of creditors attending the meeting and the majority in value of the total claims vote in favour. After approval of the plan by the creditors, this plan must be ratified by the court. The court can refuse to ratify the plan only if the provisions of the law were not respected or if the plan violates public policy. A court can also allow the company to submit an adjusted reorganization plan to the creditors.
The transfer of all or part of the business can be ordered by the court upon request of the company or upon request of the public prosecutor or other interested parties under certain conditions. The court will appoint a judicial administrator to organize the transfer in the name of and for the account of the company. The administrator acts under the supervision of the appointed judge. He will draft one or more sales agreements to present to the delegate judge and the court.
Management continues to operate the business in order to implement the judicial reorganization under the supervision of the court.
Notable change in the new insolvency law is that tax and social security debts incurred during the suspension period in the judicial reorganization are considered debts of the bankrupt estate in a subsequent insolvency procedure.
In Israeli Law, there are proceedings for restructuring and rehabilitation with regard to individual and corporate debtors.
Regarding corporate debtors, subject to the Companies Law, the first stage of the recovery process is filing a motion for a stay of all proceedings against the corporation. At this stage, a preliminary rehabilitation program is typically filed with the Court. Should the Court be convinced of the reasonable likelihood of rehabilitation of the corporation, a stay of proceedings would be ordered and an Officer would be appointed, entrusted with operation and recovery of the corporation, and formulating the creditor restructuring agreement.
Once the stay of proceedings is ordered, the Court-appointed Officer shall take the necessary steps to stop the company's economic deterioration and shall act to put in place a recovery program for the company. The proposed recovery program and creditor restructuring agreement may be based on consideration from sale of company shares, investment by shareholders or third parties, or liquidation of assets.
Later on, meetings of company creditors would be convened (with each creditor class separately convened) in order to approve the restructuring agreement. The creditor restructuring agreement is subject to approval by a majority of creditors voting on the acceptance of such agreement, who hold at least 75% of the value of debt claims filed to the Officer. Furthermore, approval of the creditor restructuring agreement is subject to Court approval, but the Court would only intervene in the creditors' judgment in very exceptional cases.
With regard to insolvency proceedings of individuals, as noted above, in recent years the Official Receiver has reformed such proceedings, with the primary goal being debtor recovery. In this regard, and concurrently with declaring the debtor bankrupt, a repayment plan is assigned to the debtor who takes into consideration their incomes, age and debt repayment capacity, their assets and total debt. Once the repayment plan has been approved by the Court and completed – the debtor may start on a new road, exempt from their debt. Concurrently, existing Law allows the debtor to initiate a restructuring proceeding with their creditors, without being declared bankrupt. The Court may approve the debtor's proposed restructuring plan, should the Court be satisfied that it is reasonable to assume that at least 30% of all unsecured debt would be repaid pursuant to such plan.
The Insolvency Law includes similar provisions for approval of a creditor restructuring agreement for corporate recovery, and also governs the provisions applicable to restructuring agreements reached other than in conjunction with an order to initiate proceedings – both for individuals and for corporations.
The legislation includes an in-court restructuring process, namely a reorganization phase of the insolvency procedure. A restructuring plan must be approved by the shareholders, by the Creditor’s Assembly and approved by the syndic judge.
As a general rule, during reorganization, the business is run by the special administrator, under supervision of the judicial administrator, but the business in run on a “business as usual” principle.
The stakeholders may or may not decide to approve the reorganization plan, and, should the reorganization plan fail to be fulfilled by the debtor, they may file for bankruptcy.