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)
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.