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 (2nd Edition)
As discussed in question 4, the restructuring and rescue procedures that are available under IBL are: (a) Bankruptcy Proceedings; and (b) PKPU Proceedings. The issue on (i) the entry requirement of both proceedings; (ii) the involvement of the management in the operation of the business (as well as the applicable supervision); and (iii) the roles that the court and other stakeholders play have been discussed in question 3 and 4.
With respect to how a restructuring plan approved can be summarized in the following:
After a bankruptcy declaration is rendered, the bankrupt debtor is entitled to submit a composition plan (containing restructuring plan) to all of its creditors and must provide this plan at the latest 8 (eight) days before the scheduled claim verification meeting in the court registrar (if the bankrupt debtor still intends to do so). The discussion regarding the plan and the decision thereof would be postponed until subsequent meeting which date will be decided by the Supervisory Judge falling on a maximum of 21 (twenty-one) days thereafter under certain circumstances.
Further, the secured creditors are not entitled to cast vote in the voting process in accepting or rejecting the submitted composition plan, unless they have releases their priority and privileged right prior to the voting process and therefore becoming unsecured creditors. In the event that the composition plan is rejected, the secured creditors releasing their priority rights will remain to have the status of unsecured creditors. In addition, the secured creditors who can prove that a part of their claims is unlikely to be settled from the proceeds of the sale of their security, may request to be given the rights of unsecured creditors with respect to this part of such claims, without prejudice to their preferential rights on the security for their claims.
The decision to approve the composition plan requires the affirmative votes of: (a) more than half of the unsecured creditors, who are present or represented at the meeting, whose rights are acknowledged or provisionally acknowledged; and (b) who represent at least two-thirds of the total amount of the unsecured claims of the unsecured creditors present or represented at the meeting, whose rights are acknowledged or provisionally acknowledged;
If more than half of the creditors, who are present or represented at the meeting, representing at least half of the total amount of the claims having voting rights, approve the composition plan, within 8 (eight) days of the date the aforesaid (first) voting process is held, a second voting process must be held and the creditors are not bound to the vote given in the first voting.
The Supervisory Judge must determine the schedule for the Commercial Court to hold a hearing for receiving the supervisory judge’s report and hearing the arguments of the creditors (including the dissenting creditors) and the bankrupt debtor in relation to the approval or rejection of the plan. At this hearing or at the latest within 7 (seven) days of this hearing, the Commercial Court must decide whether or not to ratify the approved composition plan together with its grounds. The Commercial Court may only refuse to ratify the approved composition plan if:
- the estate of the debtor, including goods for which a right of retention is exercised, is much larger than the amount agreed in the composition; or
- implementation of the plan is not adequately assured; or
- the plan was concluded fraudulently or under undue influence of certain creditors;
If the ratification of the approved plan is granted by the Commercial Court, the dissenting creditors or the creditors who do not attend the voting process or the approving creditors realizing that the plan was concluded fraudulently or under undue influence of certain creditors within not later than 8 (eight) days as of the ratification may file petition for cassation against such decision to the Supreme Court in cassation. The petition for case review can also be submitted under the case review grounds and rules. If the ratification approval decision has become final and binding, the composition plan binds all unsecured creditors without exception.
If the ratification of the approved plan is rejected, either the approving creditors or the debtor within not later than 8 (eight) days of this rejection may file a petition for cassation to the Supreme Court in cassation.
A final composition plan to be voted can be submitted only once. If (i) no composition plan is submitted in the creditors meeting for the claim verification, or (ii) the composition plan is rejected in the voting process by the creditors, or (iv) the composition plan is approved by the creditors but the ratification was rejected by the Commercial Court and such decision has become final and binding or (v) the composition plan is approved and the ratification was approved by the Commercial Court but was later on overturned by the Supreme Court, either in cassation or case review so that the ratification rejection decision has become final and binding, the bankruptcy estate will be declared to be in the state of insolvency.
After a decision granting the debtor a provisional PKPU is rendered, the debtor is entitled to submit a composition plan to all of its creditors.
A meeting of creditors must be called within 45 (forty five) days of granting a provisional PKPU. At this meeting, the secured and unsecured creditors must:
- approve the composition plan, if a plan has been submitted to the Commercial Court; or
- agree to convert the provisional PKPU into a permanent PKPU for a or several period(s) of cumulatively up to 270 (two hundred seventy) days from the date of granting the provisional PKPU; or
- reject the composition plan or the request to convert the provisional PKPU into the permanent PKPU, in which cases the debtor will subsequently be declared bankrupt (at this stage, the bankruptcy estate will immediately be in the state of insolvency and the debtor no longer has the opportunity to submit a composition plan/proposal to its creditors).
In the voting process at the creditors’ meeting, the decision to approve the composition plan or to extend the PKPU period or to grant a permanent PKPU requires the affirmative cumulative votes of:
- (a) more than half of the unsecured creditors, who are present or represented at the meeting, whose rights are acknowledged or provisionally acknowledged; and (b) who represent at least two-thirds of the total amount of the unsecured claims of the unsecured creditors present or represented at the meeting , whose rights are acknowledged or provisionally acknowledged; and
- (a) more than half of the secured creditors, who are present or represented at the meeting; and (b) who represent at least two-thirds of the total amount of the secured claims of the secured creditors present or represented at the meeting.
If more than half of the creditors, who are present or represented at the meeting, representing at least half of the total amount of the claims having voting rights, approve to accept the composition plan, within 8 (eight) days of the (first) voting process held, the second voting process must be held and the creditors are not bound to the vote given in the first voting.
If a composition plan is approved, the dissenting secured creditors must be compensated by the lowest value of either the collateral (can be selected between the collateral value being determined by the collateral documents or collateral value being determined by appraiser being appointed by the supervisory judge) or the actual claim directly secured by in rem security rights.
At a pre-determined date, a hearing will be held by the Commercial Court to receive the report of the Supervisory Judge and hear the arguments of the administrator, the creditors (including the dissenting creditors) and the debtor in relation to the approval/rejection of the plan. At this hearing or at the latest within 14 (fourteen) days of such hearing, the Commercial Court must decide whether or not to ratify the approved plan together with its reasoning. The Commercial Court may only refuse to ratify the plan if:
- the estate of the debtor, including goods for which a right of retention is exercised, is much larger than the amount agreed in the composition; or
- implementation of the plan is not adequately assured; or
- the plan was concluded fraudulently or under undue influence of certain creditors; and/or
- the administration costs cannot be paid.
If the ratification of the approved plan is granted by the Commercial Court, the petition for cassation can be submitted by the creditor of the debtor against such decision to the Supreme Court within not later than 8 (eight) days of the reading out of this decision. The petition for case review can also be submitted under the case review grounds and rules. If the ratification approval decision has become final and binding, the composition plan becomes binds all secured and unsecured creditors, except for the dissenting secured creditors.
If the Commercial Court decides to reject the ratification of the approved composition plan, no legal remedy is available, except for the case review petition which needs to be submitted under the case review grounds and rules.
A final composition plan to be voted can be submitted only once. If (i) no plan is submitted and the request to extend the PKPU fails to be granted by the creditors or (ii) no composition is approved by the creditors after the maximum period for PKPU (i.e.: 270 (two hundred seventy) days as of the provisional PKPU is granted) expires or (iii) the plan is rejected in the voting process by the creditors or (iv) the plan is approved by the creditors but the ratification was rejected by the Commercial Court and such decision has become final and binding or (v) the composition plan is approved and the ratification was approved by the Commercial Court but was later on overturned by the Supreme Court, either in cassation or case review so that the ratification rejection decision has become final and binding, bankruptcy will immediately be declared and the bankruptcy estate will be in a state of insolvency.
With respect to how a restructuring plan implemented can be summarized in the following:
According to IBL, a creditor of the bankrupt debtor / debtor under the PKPU proceedings, can request the Commercial Court to nullify a final and binding ratified composition plan if the debtor is negligent in fulfilling the content of the ratified composition plan. The debtor is obligated to prove that the ratified composition plan has been fulfilled. The Commercial Court is authorized to grant a one time grace period to the debtor to fulfil its obligations within not later than 30 (thirty) days, commencing as of the date the decision granting the grace period is read out. If the Commercial Court decided to nullify the ratified composition plan, it will order to re-open the bankruptcy / declare the debtor bankrupt by appointing a Supervisory Judge, a receiver and the members of creditors committee (if under the previous bankruptcy proceedings, the creditors committee exists.)
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.
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 administrator 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 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.
There are two restructuring options, i.e. business rescue or a compromise with creditors.
- Business rescue entails a process aimed at facilitating the financial rehabilitation and ultimate rescue of a company that is “financially distressed” (see question 3).
- In order to qualify for business rescue the entity must (1) be financially distressed and (2) there must appear to be a reasonable prospect of rescue.
- The process is begun by:
- by the directors resolving that the company voluntarily commence proceedings; (not if in liquidation already); or
- any creditor, shareholder, registered trade union or employee not represented by a trade union (“Affected Person/s”), applying to the High Court (can be done after the commencement of liquidation proceedings, such proceedings will automatically be suspended).
- Once a company is placed in business rescue, a business rescue practitioner is appointed to manage the company and the process. The practitioner has full management control of the company in substitution for its board and management, however, the board of directors stay in office throughout the business rescue period; must continue to exercise the functions of directors, subject to the practitioner’s authority; must exercise any management functions at the instruction of the practitioner.
- During business rescue employees, creditors and shareholders are entitled to notice of proceedings and are entitled to participate in any proceedings. Employees and creditors are entitled to be present and make submissions at meetings but employees have no voting rights. A business rescue plan must be prepared by the practitioner and voted on by creditors. It is approved by 75% of creditors, of which at least 50% must be independent creditors, i.e. creditors who are neither controlling shareholders nor directors of the company. Shareholders may only vote on a proposed plan if it proposes to alter the rights associated with their shares.
- The business rescue process is not court driven and the court only plays a supervisory role in the proceedings in, for example, the initiation of the proceedings (compulsory commencement); objections to company resolutions to commence proceedings; applications for leave to institute legal proceedings against companies in business rescue; and the removal and replacement of a business rescue practitioner.
- A compromise:
- is an arrangement or a compromise of the financial obligations of the company;
- is an agreement between a company and its creditors, or certain classes of creditors, in terms of which the creditors may for instance agree to accept a certain portion of their claim and agrees that the remaining portion will be written off; and
- may be proposed by the board of a company (if is not in business rescue) or a liquidator (where the company is in liquidation) to all of its creditors, or to all of the members of any class.
- The proposal will be adopted if it is supported by a majority in number and at least 75% in value of the creditors or class who are present and voting.
- If a proposal is adopted, the company may apply to the court to sanction the compromise (this being the only role of the court in the compromise process itself). The order sanctioning an arrangement or compromise has no effect until it has been filed with the Companies and Intellectual Property Commission.
- A company may (but is not obliged to) have a receiver appointed to perform particular functions in the implementation process (e.g. to accept or reject claims and make distributions of payments to creditors). Management continues to operate the business, however, if the compromise or arrangement is proposed while the company is in liquidation, the liquidator operates the business.
The BRBL provides that the debtor in an economically distressed situation may file for a judicial or out-of-court reorganization procedure, in order to make possible for the debtor to overcome its economic and financial crisis, thereby maintaining the debtor’s business as a source of production and employment, and the protection of creditors’ rights.
To be eligible for judicial reorganization relief, the debtor must fulfill several conditions required by law, including being in business for at least two years and not having obtained a granting of judicial reorganization within the last five years. Moreover, in an application for judicial reorganization proceeding, the debtor must also make a statement of the reasons for the economic and financial crisis, and must attach the following documents in the request: (i) accounting statements for the last three financial years and those drawn up to support the petition; (ii) a full nominal list of creditors; (iii) a full list of employees; (iv) a certificate of regular standing of the debtor at the Company Public Registry, updated articles of association and minutes of appointment of current officers; (v) list of assets of the debtor’s controlling partners and officers; (vi) statements of the debtor’s bank account and any financial investments of any kind; (vii) certificates of the protest offices in the debtor’s headquar¬ters and branches; and (viii) a list signed by the debtor of all legal actions to which it is party with an estimate of the respective amounts claimed.
Once the decision ordering the judicial reorganization has been taken, an independent trustee is appointed by the Court whose the main task is to monitor the debtor’s activity and also the accomplishment of the reorganization plan (presented by the debtor and approved by its creditors), as in the judicial reorganization procedure the debtor and his managers remains in possession of its assets and shall continue to lead the corporate activities under the supervision of the appointed trustee.
The debtor must elaborate and submit the judicial reorganization plan, which can entail any kind of agreement permitted or not forbidden by the law, within 60 days of publication in the Official Gazette of the decision to process the judicial reorganization plan. It is extremely common for creditors to file an objection to the reorganization plan and, pursuant the BRBL, the judge must call a general meeting of creditors to deliberate on the matter.
The general meeting of creditors will deliberate about several issues, including approval of the reorganization plan, constitution of the creditors’ committee, etc. The judge may grant the judicial reorganization of a debtor whose plan has not been rejected by any creditor or has been approved by all classes of creditors (labors, secured creditors, unsecured creditors and micro and small companies) at the general meeting of creditors. The general rule states that, to be approved, the plan must be accepted by secured and unsecured creditors representing more than half of the total value of credits at the meeting and by the majority of the creditors present. Labor and micro and small corporation creditors will vote per head regardless of the amount of their claims. If approved, all creditors will receive their credits as per the judicial reorganization plan, but if the general meeting of creditors rejects the reorganization plan and the conditions to cram down are not fulfilled, the judge must decree the debtor liquidation. Once approved, the plan must be homologated by the court and, after that, will bind all creditors subject to the judicial reorganization.
On the other hand, the out-of-court reorganization enables private agreements between the debtor and its creditors thus providing favorable and faster conditions for restructuring a company in financial distress. Such agreements must be reflected in a reorganization plan that under specific circumstances can be filed only by the debtor for judicial homologation.
Therefore, out-of-court reorganization is much swifter and less expensive than judicial reorganization, since there is no need for a general meeting of creditors and there is no trustee to supervise the debtor’s activity. More than that, the role of the bankruptcy court is just to homologate the plan if and when required by the debtor, circumstance in which binds all creditors encompassed by the out-of-court plan since it is signed by creditors representing over 3/5 of all claims encompassed in the plant.
Private workouts used to represent a significant alternative to per partes sales for companies in financial distress. In the past, a few large companies were successfully restructured. As in other jurisdictions, the greater value of a going concern as compared to the liquidation value of the business, the involvement of experienced creditors and reasonable prospects for the sale of the business increase the chances of a successful restructuring.
Reorganization is the only court-sanctioned rescue procedure available to corporations in the Czech Republic. Debtors in the process of liquidation, securities traders or commodities traders automatically do not qualify for reorganization proceedings. Furthermore, unless the debtor applies for a pre-packaged reorganization (i.e., a pre-approved reorganization plan by the majority of secured and unsecured creditors), the debtor only qualifies for reorganization procedures if its total revenues in the last accounting period preceding the insolvency petition reached a minimum of CZK 50,000,000, or if it employs more than 50 employees.
Insolvency proceedings are technically divided into two stages. In the first stage, the insolvency court decides whether the debtor is insolvent or whether the debtor is under an imminent threat of insolvency. In the second stage, the insolvency court decides whether liquidation bankruptcy or reorganization procedures should apply.
If the debtor files a duly pre-approved reorganization plan with the insolvency court, the insolvency court allows the reorganization unless other formal requirements have not been satisfied.
In the case of large companies which apply for reorganization and do not have a pre-approved reorganization plan, the insolvency court calls the creditors’ meeting, which may then vote on whether liquidation bankruptcy or reorganization procedures should apply. If a sufficient number of creditors vote for liquidation bankruptcy, the insolvency court is, in principle, bound by the vote and decides on liquidation bankruptcy.
In reorganization, the debtor remains in control of the business as “debtor in possession” unless the insolvency court imposes restrictions on the debtor-in-possession’s rights. The insolvency court may restrict the rights of the debtor in possession rights typically in cases of mismanagement or fraud. The Creditors’ committee approves transactions of the debtor in possession that have a substantial impact on operations.
Shareholders’ general meetings are suspended and their rights are exercised by the insolvency trustee. In principle, the directors of the debtor may only be overruled by a joint decision of the shareholders and the Creditors’ committee.
In reorganization proceedings, the creditors vote on the reorganization plan. For these purposes, the reorganization plan divides claims into classes. Each class of creditor accepts the plan if more than half in number and those holding more than half of the amount of allowed claims approve the plan. Each class of shareholders accepts the plan if more than half in number and those holding more than two thirds of the amount of the allowed claims approve the plan.
It is possible for more than one plan to be filed and accepted, although only one plan may be confirmed by the insolvency court. Standards for the confirmation by the insolvency court vary depending on whether the plan is accepted by every class of creditors.
If the plan is accepted by every class of creditors, the insolvency court confirms the plan if:
a) the plan complies with the Insolvency Act and other applicable laws,
b) the plan is proposed in good faith,
c) the amount which each holder of a claim receives under the plan is not less than the amount that such holder would receive if the debtor were liquidated in liquidation bankruptcy proceedings,
d) all preferential claims are to be paid without undue delay after the effective date of the plan.
If the plan is accepted by fewer classes of creditors, the insolvency court confirms the plan if the confirmation requirements applicable to a plan which is accepted by every class are satisfied and:
a) the plan was accepted by at least one of the unimpaired classes of creditors,
b) the plan is fair and equitable,
c) the plan does not unfairly discriminate,
d) confirmation of the plan is not likely to be followed by insolvency of the debtor.
There are two main statutory proceedings allowing for a rescue / restructuring of a company's operations and debts:
- Scheme of Arrangement; and
- Provisional Liquidation.
Scheme of Arrangement
A scheme will allow a debtor company to enter into an agreement with its shareholders / or creditors (or any class of them) pursuant to section 86 of the Companies Law for the purpose of either:
- restructuring its affairs to allow the company to continue to trade and avoid a winding up; or
- reaching a compromise or arrangement with creditors (or any class) following the commencement of liquidation proceedings.
A scheme will be subject to the supervision of the Cayman Court and can be implemented by the company, any creditor or shareholder or a provisional liquidator applying to the Cayman Court for an order convening a meeting of creditors, shareholders or any class of them as directed by the Cayman Court.
In order for a scheme to be implemented, a majority constituting at least 50% in number and 75% in value of the creditors, shareholders or each class of them present and voting at the meeting must agree to the compromise or arrangement. Subject to obtaining the requisite approvals, the party proposing the scheme must then apply to the Cayman Court for an order sanctioning the scheme. Once the Cayman Court sanctions the proposed scheme, it will become effective and binding on all creditors and/or shareholders (including those who voted against it or who did not vote at all) when a copy of the sanction order is filed with the Cayman Islands Registrar of Companies.
In the event that a scheme is proposed outside of liquidation, the directors will maintain control of the company's affairs and no moratorium would be available. If the scheme is implemented in a provisional liquidation scenario, the provisional liquidator will control the company's affairs, subject to the supervision of the Cayman Court and the company would benefit from an automatic stay on claims against the company.
The purpose of a provisional liquidation is usually to preserve and protect a company's assets pending the hearing of a winding up petition in respect of the company.
However, the 'soft touch' provisional liquidation regime may be implemented by a company for the purpose of appointing Court appointed provisional liquidators to protect itself from creditors and restructure its business whilst effecting a compromise or scheme of arrangement with a company's stakeholders. The use of this procedure is comparable to the UK administration procedure and the Chapter 11 process in the United States.
Any creditor, shareholder or the company itself can apply for the appointment of provisional liquidators in the period following the presentation of a winding up petition and prior to the hearing of the petition.
Upon appointment, the provisional liquidators will be subject to the Cayman Court's supervision and may only carry out the functions set out in the order appointing them. In the event that a company restructuring is proposed, existing management may be permitted to retain control of the company subject to the supervision of the Cayman Court and the provisional liquidators.
The issue of whether a company's directors have the power to present a winding up petition in the absence of a resolution of its shareholders has been the subject of judicial debate in the jurisdiction, with the decision of Justice Mangatal In Re China Shanshui Cement Group Limited (Grand Cayman Court, Mangatal J, 25 November 2015), laying down a restrictive interpretation of directors' powers to present a winding up petition in the name of the company without the approval of the company in general meeting or the power to present such a petition in the company's articles of association.
However, in a recent first instance decision In Re CHC Group Ltd (Grand Cayman Court, McMillan J, 17 January 2017), Justice McMillan held that in circumstances in which a creditor's winding up petition has been presented against a company, its directors could then seek the appointment of provisional liquidators, notwithstanding the absence of an express power in the company's articles of association or a resolution of the company's shareholders.
As discussed at section 21 below, it is anticipated that this area of the law will be subject to legislative reform in the near future, thereby bringing section 94 of the Companies Law in line with section 124 of the UK Insolvency Act, in addition to introducing a new statutory regime allowing a company to petition for the appointment of restructuring officers to obtain a stand-alone restructuring moratorium.
There are two types of restructuring procedures in Japan: civil rehabilitation proceedings (minji-saisei) and corporate reorganisation proceedings (kaisha-kosei).
a. Civil Rehabilitation Proceedings
The entry requirement for the civil rehabilitation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In civil rehabilitation proceedings, the board of the debtor company remains in control and has the power to manage the company’s business. However, the court may require the debtor to obtain permission of the court in order to conduct certain types of activities, including (but not limited to): (i) disposing property, (ii) accepting the transfer of property, (iii) borrowing money, (iv) filing an action, (v) settling a dispute or entering into an arbitration agreement, and (vi) waiving a legal right. In practice, the court appoints a supervisor in most cases and grants him or her the authority to give such permission to the debtor on its behalf in respect of the debtor’s activities.
The debtor must propose and submit to the court a rehabilitation plan within the period specified by the court. A registered creditor also has the right to propose and submit a rehabilitation plan. The rehabilitation plan must be approved at a creditors meeting by a majority in number of creditors present and voting at the meeting and a majority by value of all creditors who hold voting rights. If approved, the court authorises the rehabilitation plan, which will bind the company and the creditors.
b. Corporate Reorganisation Proceedings
The entry requirement for corporate reorganisation proceedings is that (i) there is a risk that the debtor will not be able to pay its debts as they become due or that a debtor’s debts exceed its assets or (ii) the debtor is unable to pay its debts already due without causing significant hindrance to the continuation of its business.
In corporate reorganisation proceedings, a trustee must be appointed for the corporate debtor. The trustee has control and possession of the debtor’s business and its assets. The trustee is appointed by the court and is usually an attorney who has expertise in insolvency cases. However, a trustee can also be a business person who is deemed to be a fit person to operate the debtor’s business.
There have been an increasing number of cases in which the court appoints trustees from the current management. Such proceedings are called debtor in possession-type (‘DIP-type’) reorganisation proceedings, as opposed to traditional ‘administration-type’ proceedings. In those cases, the court usually also appoints a supervisor, who monitors management’s activities. Thus, the proceedings look similar to civil rehabilitation proceedings.
The trustee must propose and submit to the court a reorganisation plan within the period specified by the court. The debtor company, a registered creditor or a stockholder may also propose and submit a reorganisation plan. The reorganisation plan must be submitted to and approved at a stakeholders meeting. If approved, the court authorises the rehabilitation plan, which will bind the stakeholders. Different classes of stakeholders (e.g. unsecured creditors, secured creditors and shareholders) vote separately, and approval must be obtained from each class. The Corporate Reorganisation Act sets forth different thresholds for different classes (for example, for unsecured creditors the requisite majority is a majority by value).
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.
British Virgin Islands
For companies seeking to reorganise a company’s capital or debts there are 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.
Unlike other offshore jurisdictions, such as the Cayman Islands and Bermuda, the BVI does not use provisional liquidators for restructuring; rather, provisional liquidators tend to be appointed simply to preserve assets until the application for the appointment of a permanent liquidator can be heard.
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 clearly 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.
In the case of In re B&A Fertilisers Ltd; In re Rio Verde Minerals Development Corp BVIHC (COM) 132 of 2012, unreported (22 January 2013), a plan of arrangement was used as an alternative to the merger provisions under sections 170 to 173 of the BCA. B&A Brazil wished to take over Rio Verde with the consent of Rio Verde’s board. The parties therefore proposed a plan of arrangement pursuant to which each member of Rio Verde would have its shares in Rio Verde exchanged for the equivalent number of redeemable shares in B&A. These redeemable shares would then be redeemed by B&A at the same share price as Rio Verde’s then share price the next business day. The effect of the plan of arrangement would be to achieve the takeover of Rio Verde by B&A.
This route was chosen as a means of enabling Rio Verde to divest itself of its obligations to the holder of some 18 million warrants. The original plan of arrangement had proposed that upon the merger each of the warrants were to be repurchased and cancelled by B&A for no consideration. The Commercial Court judge however rejected this proposal on the basis that it amounted to forfeiture, saying—
“[T]here is nothing in section 177 which permits a company to promote an arrangement under which property of any person is forfeited or confiscated and … the Court could not approve an arrangement which purported to have any such effect.”
The court gave directions that any plan would have to be subject to the approval of the warrant holder and that any plan affecting the warrant holder must entitle members of Rio Verde and the warrant holder to dissent in accordance with the provisions of section 179.
Rio Verde is significant for several reasons:
- Firstly, section 177 of the BCA does not provide that a threshold number of shareholders must approve the plan. This is in contrast to the 75 per cent in value test under a scheme of arrangement. Under section 177(2) it is the directors of the company that determine whether or not the proposed plan is in the best interests of the company; however, the Court will not merely rubber stamp a plan of arrangement which has been proposed by the board under section 177(2) but will assess it critically.
- Secondly, section 177 does not provide an automatic right to dissent. Under section 177(4)(c), the Court has a discretion to allow any holder of shares, debt obligations or other securities to dissent under section 179. In Rio Verde the judge considered that warrant holders would be within the ambit of section 179 as holders of “other securities” under section 177(4)(c).
Once a final order approving a plan of arrangement is made, it cannot be appealed except on a point of law. If a party does wish to appeal on a question of law, the notice of appeal must be filed within 20 days immediately following the date of the order.
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 and, in particular, in the Chancery Division’s Practice Statement (Companies: Schemes of Arrangement)  1 WLR 1345, 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.
As with plans of arrangement, there is no moratorium available in the context of schemes of arrangement, so they remain liable to upset by creditors’ claims until sanctioned by the court.
The third restructuring procedure referred to is the creditors’ arrangement, which is governed by Part II of the IA. The aim of a creditors’ arrangement is to facilitate arrangements between a financially distressed company and its unsecured creditors in order to stave off 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; however, there have been relatively 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).
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.
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.
Local restructuring proceedings
Restructurings and other informal work outs can be pursued in Australia provided adequate attention is paid to the prohibitions on insolvent trading under Australia’s stringent insolvent trading laws. One way to alleviate directors’ concerns about their insolvent trading obligations is for the company to enter into forbearance or standstill arrangements with its creditors pursuant to which creditors might agree not to enforce any rights that might otherwise arise during the restructuring or work out period. In doing so, the company will have an opportunity to restructure what might otherwise be current debt obligations.
Outside a fully consensual debt restructuring, there are two ways to effect a restructure of a company’s debts under Australian law:
- through a deed of company arrangement (DOCA); and
- through a scheme of arrangement.
A DOCA is a flexible restructuring tool in terms of outcomes that it can deliver. These include debt-for-equity swaps, a transfer of equity, moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of, outstanding debt. DOCAs also have the benefit of being fast and subject to low voting thresholds (50% in number and value).
A DOCA takes place in the context of a voluntary administration (i.e. a formal insolvency appointment). It is a creditor approved arrangement governing how a company’s affairs will be restructured. As a voluntary administrator is formally appointed, they take over the management and control of the company’s business and affairs for the term of the appointment. A DOCA is effectively a contract or compromise between the company and its creditors. Whilst it is a feature of voluntary administration, it should in fact be viewed as a distinct regime, where the rights and obligations of the creditors and the company differ to those under voluntary administration.
Once a company is in voluntary administration, a DOCA can be proposed by anyone with an interest in the company. Creditors are required to vote to resolve that the company should execute the DOCA. Once the terms of the DOCA are approved (by the relevant threshold majorities), the instrument must be executed within 15 business days of such a resolution. A DOCA can be varied by either a subsequent resolution of creditors or by the court.
A DOCA binds not only creditors (other than secured creditors) but also the company, directors and shareholders. Whilst binding on shareholders, it is recognised in scenarios where a shareholder has limited interest in the company under administration and is not entitled to vote in the DOCA in its capacity as shareholder. The statutory priority afforded to employees in a liquidation scenario must be the equivalent in a DOCA (unless the employees vote otherwise). In this way, employees are afforded a level of protection under a DOCA.
Upon the execution of the DOCA the voluntary administration ends. The outcome of the DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. The recourse of the court is available to creditors to set aside the DOCA if it does not achieve its goal or is challenged by creditors on grounds that they are unfairly prejudiced in a relative sense.
Schemes of arrangement
A scheme of arrangement is a court approved process binding the creditors and/or members to some form of rearrangement or compromise of pre-existing rights and obligations. Schemes may involve the deleveraging of a business or the reduction of outstanding debt in exchange for the issuing of equity. There are two types of schemes of arrangement:
- a members’ scheme of arrangement (between the company and its members); and
- a creditors’ scheme of arrangement (between the company and its creditors).
Schemes of arrangement can be implemented without the commencement of a formal insolvency process. As such, the company and its directors can remain in control of the business during the proposal and approval phase (and, depending on the terms of the scheme, after its implementation).
The approval process is heavily regulated and involves a number of steps, including the preparation of explanatory statements and scheme booklets, notification to the corporate regulator, the Australian Securities & Investments Commission (ASIC), an application to court to convene scheme meetings, the holding of those meetings, court approval of the scheme and finally, the filing with ASIC of the court approved scheme. The timeline for scheme approval is typically between 3 months (but can often take between 4 to 6 months) from the commencement phase through to the final approval and implementation phase.
Schemes of arrangement must be approved by a majority of 50% in number and 75% in value of the voting class (of affected members and/or creditors) at the scheme meeting. Classes are determined by reference to commonality of legal rights and only those whose rights will be compromised or affected by the scheme need be included. Unlike a DOCA, a scheme can bind secured creditors who vote against it and release third party claims.
The key element to the success of a scheme of arrangement is the willingness of creditors (most commonly financial creditors, as opposed to trade and operational creditors) to work with the management of the distressed company as well as other stakeholders. The starting point for the negotiation will often involve an agreement or undertaking on a standstill or forbearance period, during which the company will look to refinance its current debt structure (often through the injection of new capital and/or equity).
The (out-of-court) rescue procedures are laid down in the law of 31 January 2009 on the continuity of enterprises.
A company in distress can enter into an out-of-court amicable arrangement with two or more of its creditors, to restructure or remedy the company’s financial situation. This arrangement will not be subject to judicial scrutiny, and must be filed with the commercial court’s registrar. The arrangement is protected against certain claw-back rules that may apply if the debtor is declared bankrupt.
A judicial reorganisation procedure is available to a company if its continuity is threatened in the short or medium term. Being in a state of bankruptcy does not prevent a company from seeking protection under this procedure.
Besides the in-court amicable arrangement, a debtor can apply for a transfer of (part of) its activities under court supervision, or a procedure whereby a reorganisation plan is agreed upon with the debtor’s creditors. The reorganisation plan must be approved by the majority of the creditors that must represent at least half of the outstanding principal amounts, and the court.
The directors remain in charge of the management of the debtor, but a delegated judge will supervise the procedure and report to the court. Only if the board has made blatant mistakes or is acting in bad faith, a temporary director/administrator can be appointed by the court to replace the existing board.
The company can propose a consensual restructuring of its debts (i.e. outside of formal bankruptcy scenarios). However, the principle of freedom of contract means that creditors who are not willing to co-operate with the consensual restructuring can in principle not be forced to co-operate therewith. A large majority of creditors should therefore be willing to co-operate to ensure that a consensual restructuring is successful.
It is possible for a debtor, both in a suspension of payments or in a bankruptcy, to offer a composition to its (ordinary) creditors. A composition constitutes a proposal by the debtor to its creditors pursuant to which a partial payment is made on the claims of the creditors. As a result, the creditors are deemed to have waived the remaining part of their respective claims, effectively rendering the debtor debt free and in a position to continue its business. Once the composition is adopted by a majority vote of the recognised and admitted creditors, such majority representing a majority of the aggregate amount of admitted claims, and subsequently approved by the court, all creditors are bound by the terms of the composition, regardless whether they voted in favour or against the composition. All creditors are then effectively “crammed down”. As a result of the adopted and approved composition, the bankruptcy or the suspension of payments, as the case may be, will be terminated. We note that secured creditors cannot be bound by such composition, since they can foreclose on the secured assets regardless of the bankruptcy or suspension of payments.
As noted above, companies seeking to restructure generally initiate a voluntary chapter 11 proceeding. After filing, the management of the debtor remains in place and continues to have the authority to make decisions on behalf of the company.
Initially, the debtor is the only party with the authority to present and solicit a restructuring plan, which specifies the treatment and manner of distributions. This exclusive period provides a debtor with a 120 day “breathing spell” after the commencement of the bankruptcy proceeding to present a plan and an additional 60 days to solicit votes on the plan. This period may also be extended for up to 18 months from the date of the filing. Once the exclusive period ends, any party is able to present a plan. In order to seek votes from creditors, the court must first approve of the debtor’s disclosure statement, which provides voting parties with the necessary information to vote on the plan. For a plan to be approved, in addition to the plan complying with applicable provisions of the Bankruptcy Code, either (a) each impaired class must approve the plan by at least two-thirds in dollar amount and by more than 50% of the number of voting creditors, or (b) at least one impaired class must accept the plan and the court must determine the plan does not “discriminate unfairly” and is “fair and equitable” to non-accepting dissenting classes. After a plan has been approved by creditors, the court must also approve it. The plan then becomes effective and the debtor exits bankruptcy as a reorganized debtor.
The bankruptcy court plays a very active role in the restructuring process and, as demonstrated above, ultimately approves the plan that allows the debtor to exit restructuring. For instance, valuation of the debtor’s estate is integral to formation and confirmation of the plan of reorganization. Because judges are not generally thought to be experts at valuing companies, the role of the court is generally viewed as being to police the process that leads to valuation of the company to ensure that the resulting proposed plan is within the range of confirmable plans. The U.S. Department of Justice also appoints a trustee (the “U.S. Trustee”), which examines the proceedings for procedural and substantive fairness, and various creditor constituencies also play a very important role in the process.
- 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.
A formal financial reorganisation can be made through controlled management (gestion contrôlée), composition with creditors (concordat préventif de faillite) or suspension of payments (sursis de paiement)
• Suspension of payments (sursis de paiement)
The procedure of suspension of payments allows a commercial company who faces temporary liquidity difficulties to subject itself to the procedure until its financial liabilities can be met.
The debtor can apply for a suspension of payments by filing a request with the district court and the Superior Court of Justice. This procedure cannot be initiated by creditors.
The debtor will only be eligible for the procedure if :
- The debtor's temporary financial difficulties are due to extraordinary and unexpected circumstances and the debtor has sufficient means to pay off all its creditors.
- The debtor is in a situation where re-establishment of a proper balance between assets and liabilities appears likely.
The court can grant a temporary stay, either immediately or at a later stage of the procedure. The suspension from payments requires the consent of a majority of creditors representing 75% of the debtor's liabilities and the approval of the Superior Court of Justice.
The court order appoints one or more commissioners (commissaires) to supervise the management of the company during the suspension of payments period.
• Controlled management (gestion contrôlée)
A commercial company may also apply for controlled management, which may be used, either :
- to reorganise and restructure its debts and business; or
- to realise its assets in the best interest of creditors.
This procedure cannot be initiated by creditors and may only be initiated where the debtor files an application before the district court sitting in commercial matters. To be eligible, the debtor must be acting in good faith and demonstrate that its creditworthiness is impaired, that it is facing difficulties meeting all of its commitments and that creditors are pushing for enforcement procedures. More than 50% of the creditors (in number) representing more than 50% in value of the debtor's debts must approve the plan, which must in turn be approved by the court.
• Composition with creditors (concordat préventif de faillite)
This procedure aims at avoiding bankruptcy by allowing a debtor facing financial difficulties to negotiate a settlement or a rescheduling of its debts with its creditors. The renegotiated terms of the debts must then be approved by the district court. This procedure is initiated through a filing with the district court sitting in commercial matters and cannot be initiated by creditors. To be eligible, the debtor must either be, unable to meet its engagements or have lost all creditworthiness and must additionally be deemed unfortunate and acting in good faith, the appreciation of which is subject to the court’s discretion. To be successful, the application requires the consent of a 75% majority of the creditors, must meet the legal provisions and must not be deemed contrary to the public interest or the interests of the creditors by the court.
None of the above rescue proceedings would affect the enforcement by creditors of security qualifying as financial collateral arrangements. These proceedings are rarely used by Luxembourg companies as they are lengthy, costly and lack flexibility.
Voluntary administration (also discussed in questions 4 and 7)
The purpose of voluntary administration is to allow companies that are under financial distress a chance to rehabilitate, by imposing a moratorium on creditors' claims while an administrator is appointed to investigate the company's affairs and evaluate its chances of survival. The voluntary administration procedure is governed by Part 15A of the Companies Act 1993.
Voluntary administration begins when an administrator is appointed. Where a company is likely to become insolvent, an administrator can be appointed by: a resolution passed by a company's board of directors; a liquidator; a creditor holding a charge over a substantial amount of a company's property; or the High Court of New Zealand (Court) following an application by a creditor, liquidator, or the Registrar of Companies (Registrar).
While a company is under administration, the administrator, as the company's agent, has control of the company's property and affairs until the watershed meeting is held to determine the future of the company. There is very limited involvement required by the Court. The administrator can, however, seek directions from the Court as to the extent of his or her statutorily proscribed powers and the manner in which those powers are to be exercised. An administrator can be replaced by the Court upon application of the Registrar or a creditor (or a liquidator, if the company is in liquidation). The company's creditors also have the ability, at the first creditors' meeting, to remove an administrator from office and appoint a replacement.
Following appointment, the administrator investigates the company's affairs and reports his or her findings to the company's creditors in order to determine whether the company should continue trading. The company can continue to trade during the period of administration, under the administrator's direction. The administrator is personally liable for debts incurred in the exercise of his or her functions and powers as administrator. The administrator is, however, entitled to be indemnified out of company property for personal liabilities incurred in due performance of his or her duties (excluding those incurred negligently or in bad faith).
As discussed above in Question 7, a moratorium on claims is automatically imposed upon appointment of an administrator.
The fate of a company in voluntary administration, is decided by creditors at what is known as the "watershed meeting".
The administrator must convene a watershed meeting within 20 working days of their appointment (unless an extension is granted by the Court). At least five working days before the watershed meeting, the administrator must provide a report to creditors outlining the company's business, property, affairs and the administrator's recommendation as to whether the company should be liquidated, returned to the directors, or enter a DOCA. The creditors must then elect between those options. All creditors are bound by a decision made by a majority of creditors in number (and 75% in value of debt owed by the company).
The effects of a voluntary administration on stakeholders depends entirely on what creditors resolve should happen to the company following the watershed meeting. If the company:
- Is to be returned to the management of the directors, then the status-quo prior to the administration is restored.
- Is to be liquidated, the formal liquidation process outlined above is adopted with the administrators as default liquidators.
- Enters a DOCA:
- A deed administrator can be appointed at the watershed meeting, who oversees performance of the terms of the deed.
- All unsecured creditors (and secured creditors who voted in favour of the DOCA) are bound by the conditions of the DOCA to the extent that the creditors' claims arose prior to the stipulated cut-off date. The DOCA also binds: owners/lessors of property occupied by the company that voted in favour of the DOCA; the company; its directors, officers, and shareholders; and the deed administrator.
- Creditors are restricted from applying to liquidate the company and commencing or continuing proceedings against the company in accordance with the terms of the DOCA.
- All creditors are to be repaid their debts (either in full or in specified proportions) in the manner specified in the DOCA which will be unique for each insolvency and could include (without limitation) distribution of the proceeds of sale of certain assets or the distribution of revenues over time or the one off distribution of equity injected by stakeholders. These arrangements often involve creditors taking a pro rata "haircut" on their original debt.
Voluntary administration ends once the requisite majority of creditors at the watershed meeting have decided that the company be returned to the directors, liquidated, or enter into a DOCA.
Creditors' compromise (also discussed in questions 4 and 7)
The purpose of a creditors' compromise is to allow a company that is under financial distress to cancel or vary certain debts owed to creditors, or to allow a company to alter its constitution in a manner that affects the likelihood of the company being able to pay some or all of its debt. Unlike voluntary administration, a compromise is not a reorganisation procedure where an administrator is brought in to run the company. Rather, control of the company remains with the directors. Creditors' compromises are governed by Part 14 of the Companies Act 1993.
A creditors' compromise can be proposed only if the proponent has reason to believe that the debtor company either is, or will be unable to, pay its debts. A creditors' compromise can be proposed by either the board of directors of a company, a receiver that has been appointed over the whole or substantially the whole of a company's assets, or the liquidator of a company. In some circumstances, creditors and shareholders of a company may propose a compromise, provided that the Court has given leave.
Day-to-day control of a company that has implemented a compromise remains with the directors. There is often little ongoing supervision required, because once a compromise is passed by achieving the requisite majority at a meeting of creditors, the process is usually at an end. The Court usually has no involvement in the process, except when leave is sought by a creditor or shareholder to propose a compromise, or when a creditor that did not support a compromise challenges its validity. The adoption of a compromise is entirely at the will of the creditors that are intended to be bound by it.
The first stage in the adoption of a creditors' compromise is for a compromise to be proposed. The proponent then compiles a list of creditors detailing the amount owed to each creditor, and the votes that each creditor is entitled to cast on a resolution. Certain information relating to the compromise must be provided to creditors. The Court has the ability to give directions in relation to, or waive or vary, any procedural requirements. A meeting of creditors is then held and if a majority in number (and 75% in value of) vote in favour of the compromise, it is binding on that class of creditors.
Once a compromise is approved, it is binding upon the company and all creditors that received notice of the compromise (such notice must be sent to every creditor entitled to attend the meeting, no less than five working days before the meeting). Any moratorium imposed by the compromise is binding on the class of creditors that are bound by the compromise, no Court approval is necessary.
Creditors that do not support a compromise under which they are bound may apply to the Court for orders that, inter alia, they be exempted from it. Such orders can be obtained if the Court is satisfied that: creditors received insufficient notice of the creditors' meeting; there was a material regularity in obtaining approval of the compromise; or if the compromise is unfairly prejudicial to any creditors.
While a compromise is being implemented, and after it has been passed, the debtor company continues to be operated by its directors. A compromise imposes no restriction on the debtor company continuing to operate its business, or to incur further debts.
As discussed above, certain information must be provided to creditors prior to the meeting where the compromise is being voted on. Specifically, the proponent must provide:
- Notice of the intention to hold a meeting of creditors.
- A statement:
- Containing the name and address of the proponent and the capacity in which the proponent is acting.
- Containing the address and telephone number to which inquiries may be directed during normal business hours.
- Setting out the terms of the proposed compromise and the reasons for it.
- Setting out the reasonably foreseeable consequences for creditors of the company of the compromise being approved.
- Setting out the extent of any interest of a director in the proposed compromise.
- Explaining that the proposed compromise and any amendments proposed at a meeting of creditors or any classes of creditors will be binding on all creditors, or on all creditors of that class, if approved at the meeting.
- Containing details of any procedure proposed as part of the proposed compromise for varying the compromise following its approval.
- A copy of the list or lists of creditors.
Although there is no requirement that a compromise provide a better outcome to creditors than they would receive in liquidation, if a compromise provides a worse result that may be unfairly prejudicial to creditors, and so form a basis upon which creditors can apply to the Court for orders that they are exempted from a compromise.
Scheme of Arrangement (also discussed in questions 4 and 7)
Under Part 15 of the Companies Act 1993, a company, shareholder or creditor may apply to Court for the approval of a scheme of arrangement, amalgamation or compromise (s236(1)).
A scheme can encompass a wide range of possible outcomes and can include a compromise with creditors, a reorganization of share capital, an amalgamation of two or more companies or any combination of such concepts which affects the rights and obligations of a company, its creditors and shareholders.
Once sanctioned by the Court, a scheme becomes binding on a company, its creditors and shareholders. The essence of a scheme of arrangement is that it is non-consensual and derives its authority from the Court's approval of the scheme, as opposed to approval by creditors (which is in contrast to the position in respect of a creditors compromise (as discussed above) and deeds of company arrangement (DOCA implemented under a voluntary administration (as discussed above)). However a Court in approving a scheme will typically make orders requiring that before implementation the scheme be approved by a meeting of creditors and/or shareholders.
A Court can approve a creditors compromise as a scheme of arrangement under Part 15 in circumstances where the Part 14 procedure could have been used (s238(b)), including in circumstances where a compromise proposal has been rejected by creditors under Part 14.
Schemes of arrangement are versatile and there is no requirement that a company be insolvent before a scheme of arrangement can be proposed or implemented. This is in contrast to the position in respect of a creditors compromise and commencement of voluntary administration.
Before granting orders to approve an application in respect of a scheme, the Court has power, either on application or on its own motion, to make a wide range of procedural orders, including orders (s 236(2)):
- at notice of the application, and information, be given to specified persons;
- that meetings of creditors, shareholders, or any class of them be held to consider and, if thought fit, approve the arrangement;
- that a report on the proposal be prepared for the Court, and such other persons as the Court orders;
- as to who is entitled to be heard on the application for approval.
as to costs; and
When an order is made approving the application in respect of a scheme, the Court may, at the time of that order or subsequently, for the purpose of giving effect to the arrangement, amalgamation, or compromise, make orders relating to (s 237(1)):
- the transfer or vesting of real or personal property, assets, rights, powers, interests, liabilities, contracts, and engagements;
- the issue of shares, securities, or policies of any kind;
- the continuation of legal proceedings;
- the liquidation of any company; and
- the provisions to be made for persons who voted against the arrangement or amalgamation or compromise at any meeting called in accordance with any order made under subs (2)(b) of that section or who appeared before the Court in opposition to the application to approve the arrangement or amalgamation or compromise; and
- such other matters that are necessary or desirable to give effect to the arrangement or amalgamation or compromise.
Romanian legislation provides for the possibility of initiation of insolvency prevention proceedings that may lead to understandings with the creditors in a regulated framework, and we are referring here to the procedure of the arrangement with creditors and of the ad-hoc mandate. In the procedure of the arrangement with creditors practically an agreement is concluded by and between the debtor and the creditors having at least 75% of the value of the accepted and uncontested receivables. This agreement must be homologated by the syndic judge. In other words, besides an insolvency procedure, the debtor proposes a plan for recovery and collection of the receivables of those creditors, and these accept to support the debtor’s efforts to overcome the difficulty this is in. Nonetheless, although there is a legislative framework for such a restructuring proceeding outside insolvency, most of the companies would rather resort directly to the judicial reorganization procedure.
However, the most frequent proceeding is the formal and judicial means in front of the court of law of recovery of companies in insolvency. To this end, Romanian legislation regulates judicial reorganization, based on a plan that may be proposed by the debtor, the creditors or the official receiver, voted by the creditors and confirmed by the judge. In principle, any company against which a general insolvency procedure has been opened may enter into a judicial reorganization procedure, provided that this has not been subject to an insolvency procedure in an interval of 5 years prior to the opening of the insolvency procedure. To be admitted, a reorganization plan must be viable, voted by at least half of the classes of creditors, and the creditors accepting the plan must own at least 30% of the total value of the receivables admitted in the final table. The reorganization procedure, after a plan is confirmed, is usually managed by the debtor by the special administrator, under the supervision of the official receiver. Exceptionally, companies may be managed also by official receivers in certain conditions provided by the law, but such situations are rare. Syndic judges exercise a legality control when certain disputable matters are referred to them by the interested persons, and, in the absence of filed claims, the court receives periodically the activity reports containing the ordered measures and the stage of execution of the reorganization plan. Further, also in the reorganization period the creditors’ meeting exercises an opportunity control on the concrete measures adopted for the implementation of the plan.
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 nature and scope of recovery plan is very wide and can range from the rearrangement of the company's debt, sale of its shares or assets and/or investment by the controlling shareholder or third party investor.
There are no specific entry requirement, and the court may even grant an order of stay of proceedings for limited time, without advancing a clear draft of restructuring plan.
The approval of a restructuring plan requires the approval of 75% of the debt voting in each meeting of the creditors of the shareholders (to the extent applicable – see Section 5(5) above). Such meetings are held separately for each type of creditors or shareholders based on their material specific interest differs from the other creditors/shareholders.
Although the Companies Act 1981 makes provision for restructuring through merger or consolidation, the most often used restructuring tool is a scheme of arrangement either with or without the appointment of restructuring provisional liquidators to “hold the ring” while a scheme is being promoted.
Schemes of Arrangement
Under a scheme of arrangement, a company can restructure its debt and/or equity by entering into a binding compromise or arrangement which, if approved by the prescribed statutory majorities, will be crammed down on dissenting creditors and/or shareholders. Although not strictly an insolvency procedure, schemes of arrangement are frequently used in this context. 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 Supreme Court’s sanction of the scheme.
The court must be satisfied that the:
- Applicable statutory requirements have been met.
- Each class of creditors or members has been fairly represented.
- The arrangement is such as a reasonable man of business would approve.
If there are no objections to the scheme, the court will generally accept that it is fair on the basis that it has been approved by a requisite majority. To be effective, a copy of the sanction order must be delivered to the Registrar of Companies, following which it must be annexed to any copies of the company’s memorandum of association issued subsequent to the order.
The scheme must be approved by the various classes of creditors and/or shareholders affected by the scheme’s proposals. A majority in number and representing 75% in value of those present (either in person or by proxy) and voting at each class meeting must vote in favour of the scheme.
Supervision and control. This depends on the company’s solvency:
- Insolvent: a winding-up petition is typically presented to the court in advance of the scheme and a provisional liquidator is appointed (See Restructuring Provisional Liquidation). 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. At the conclusion of the scheme, the winding-up petition will be dismissed and the provisional liquidator released.
- Solvent: the company’s ordinary management is in place and normal principles of corporate governance apply.
Protection from creditors. There is no automatic stay preventing actions against the company during the period when the scheme is being proposed and implemented. However, the Supreme Court of Bermuda often makes use of the ability to place companies in provisional liquidation to achieve such a stay. Once a company is placed into provisional liquidation, there will be an automatic stay and the company will be protected from its creditors during the implementation of the scheme. On successful implementation of the scheme, the liquidation proceedings will be discontinued without ever entering full liquidation.
Length of procedure. The duration of the scheme process varies depending on the following:
- The complexity of the company’s affairs.
- The scheme’s proposals.
- The scheme’s purpose.
Once the court has sanctioned the scheme and it is lodged with the Registrar of Companies, it is binding on the company and all of the affected creditors and shareholders, regardless of whether they voted or were aware of its proposals.
Once the scheme’s terms have been carried out, the company continues to operate as a going concern subject to changes imposed under the scheme’s terms.
Restructuring provisional liquidation
The Court has the power under sections 164(1) and 170 of the Companies Act 1981, when read together, to appoint provisional liquidators to aid in the restructuring of an insolvent company (Re Titan Petrochemicals Limited  Bda LR 76).
The primary purpose for appointing restructuring provisional liquidators is to trigger the statutory stay on proceedings being commenced or continued against the company (section 167(4) of the Companies Law 1981) thereby giving the company breathing space to attempt a restructuring without fear of winding up proceedings being brought against it by a disgruntled creditor.
In order to appoint restructuring provisional liquidators, it is first necessary for a winding up petition to be presented so as to found the jurisdiction of the Court. Typically, the petition will be presented by the company although where a creditor’s petition has already been presented, the company may apply for the appointment of restructuring provisional liquidators in the course of the creditor’s proceeding. In the case of a company’s petition, the application will typically be made ex parte. Upon the appointment being made, the hearing of the winding-up petition will be adjourned.
The view of the Supreme Court is that provisional liquidators play a central role in insolvent restructurings, a role which centrally shapes the character of the related court proceedings and the role played by the Court. As such, there is a strong starting assumption in favour of the appointment of restructuring provisional liquidators (In re Energy XXI Ltd  SC (Bda) 79 Com (18 August 2016); In re Up Energy Developments Group Limited  SC (Bda) 83 Com (20 September 2016)). As elaborated below, the same principle applies where the restructuring is to take place in a foreign jurisdiction.
The Court has a broad discretion as to the scope of the powers it grants to restructuring provisional liquidators and which powers will remain with the company’s directors. Often, the provisional liquidators will be given ‘light touch’ powers where they simply act in aid of a restructuring being otherwise proposed by the company – effectively playing a monitoring and reporting role. However, that will not always be the case especially where it may be inappropriate for the company’s directors to promote the restructuring or if the directors consider it to be more prudent or practical for the promotion to be done by provisional liquidators (as was the case in In re Z-Obee Holdings Limited  SC (Bda) 16 com (17 February 2017)). Ordinarily, the separation of powers between the provisional liquidators and the directors will be agreed prior to the making of the application and presented to the Court on a consensual basis.
If a compromise is reached and a scheme is sanctioned by the Court, the provisional liquidation will be terminated and the company will continue as a going concern. If not, then the company will be wound up.
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.
In addition to an administration, discussed at Question 4 above, a company may utilise other statutory procedures to reach a compromise agreement with its creditors.
The principal two procedures are (1) a company voluntary arrangement (CVA); and (2) a scheme of arrangement. For both of these procedures, management stay in control of the company. Either may be used in conjunction with an administration to utilise the moratorium.
A CVA is implemented out of court unless it is challenged. It binds all unsecured creditors and, if they voluntarily agree to be bound, secured creditors. The requisite consent is 75% in value of unsecured creditors and 50% in value of those unsecured creditors that are unconnected to the debtor. We have seen a recent increase in the use of CVAs, in particular in the retail and casual dining sectors, to restructure liabilities owed to landlord creditors.
A scheme of arrangement is conducted in court and requires court sanctioning. It will bind all creditors where 75% in value and 50% in number of voting creditors favour 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, debt-to-equity swaps and other comprehensive reorganisations.
The Concurso Mercantil is considered a restructuring proceeding as the Mediation Stage is designed to restructure the debts of an insolvent entity. In order for a Reorganization Agreement to become effective, it is required to be entered into by the insolvent entity and those Recognized Creditors that represent more than 50% of the sum of (a) the amount of all Recognized Claims of all unsecured Recognized Creditors and Subordinated Creditors of the insolvent entity, plus (b) the amount of all Recognized Claims of those secured Recognized Creditors that enter into the Reorganization Agreement.
However, if the Recognized Claims of Subordinated Creditors of the insolvent entity (including certain unsecured related party claims) represent 25% or more of total amount of all Recognized Claims, then such subordinated claims will not be taken into account for the voting requirements described above.
With respect to the management, supervision and the role of the court during the Mediation Stage, please refer to our answer to Question 4 above.
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).
When a situation of insolvency is merely eminent, Portuguese Law provides for a Special Revitalization Proceeding (Processo Especial de Revitalização - “PER”). The PER is intended to allow companies in a difficult financial situation to renegotiate their debts with all creditors and prepare a recovery plan, without being declared insolvent.
The proceeding is commenced by filling with the court a written statement signed by the company and, at least, 10% of its non-subordinated creditors, announcing they have begun negotiations in order to approve a recovery plan.
Following, the court issues a judicial order appointing an Administrator and creditors are granted a 20-day deadline to claim their credits.
The recovering company will have a period of two months (extendable for an additional period of one month) to conclude negotiations and present a recovery plan that its creditors will have to approve.
During this period, the creditors are not entitled to request the court to declare the insolvency of the company.
During PER proceedings, the company continues to carry out its business, but it will be supervised by a court-appointed administrator and by the court itself, which will have the last say.
A revitalization/reorganization plan is approved by written vote and by a required majority of: (i) two-thirds of the votes issued, provided that at least half of the votes issued are not subordinated and that one-third of the total amount of credits with voting rights issue their votes; (ii) the votes of the creditors representing more than one-half of the total amount of credits, provided that at least half of the votes issued are not subordinated.
A restructuring of the company can also be achieved in the insolvency proceedings – see question 4. In this case, the insolvency plan is approved at the creditors’ general meeting by two-thirds of the votes, provided that at least half of the votes issued are not subordinated and that one-third of the total amount of credits with voting rights are represented at the creditors’ meeting.