ICLGThe International Comparative Legal Guide to: Corporate Recovery & 2018

12th Edition

A practical cross-border insight into corporate recovery and insolvency work

Published by Global Legal Group, in association with INSOL International, with contributions from:

Ali Budiardjo, Nugroho, Reksodiputro Matheson Barun Law LLC Miyetti Law BlackOak LLC Nishimura & Asahi Campbells Noerr LLP De Pardieu Brocas Maffei Aarpi Paul, Weiss, Rifkind, Wharton & Garrison LLP Dhir & Dhir Associates Pirola Pennuto Zei & Associati Dirican | Gozutok | Bagci Schindler Rechtsanwälte GmbH Gall SOLCARGO Gilbert + Tobin SUE Abogados, S.L.P. Hannes Snellman Attorneys Ltd Tatara & Partners & Insolvency Law Firm INFRALEX Thornton Grout Finnigan LLP INSOL International Wijn & Stael Advocaten Kennedys Chudleigh Ltd. Zamfirescu Racoți & Partners Attorneys at Law Kovács Réti Szegheő Law Firm Zepos & Yannopoulos Law Office Waly & Koskinen Ltd. Lenz & Staehelin Loyens & Loeff Luxembourg Macfarlanes LLP The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2018

Editorial Chapter:

1 INSOL International – An Overview – Adam Harris, INSOL International 1 General Chapter:

2 Resolving Insolvency the World Bank Way – Jat Bains & Paul Keddie, Macfarlanes LLP 4

Contributing Editor Country Question and Answer Chapters: Jat Bains, 3 Australia Gilbert + Tobin: Dominic Emmett & Alexandra Whitby 8 Macfarlanes LLP Sales Director 4 Austria Schindler Rechtsanwälte GmbH: Martin Abram & Florian Cvak 15 Florjan Osmani 5 Bermuda Kennedys Chudleigh Ltd.: Alex Potts QC & Nick Miles 21 Account Director Oliver Smith 6 Canada Thornton Grout Finnigan LLP: Leanne M. Williams & Puya J. Fesharaki 30 Sales Support Manager 7 Cayman Islands Campbells: Guy Manning & Guy Cowan 37 Toni Hayward 8 England Macfarlanes LLP: Jat Bains & Paul Keddie 44 Sub Editor Hollie Parker 9 Finland Law Office Waly & Koskinen Ltd.: Tuomas Koskinen & Sami Waly 50 Senior Editors Suzie Levy 10 France De Pardieu Brocas Maffei Aarpi: Joanna Gumpelson & Philippe Dubois 56 Caroline Collingwood 11 Germany Noerr LLP: Dr. Thomas Hoffmann & Isabel Giancristofano 63 Chief Operating Officer Dror Levy 12 Greece Zepos & Yannopoulos: Emmanuel Mastromanolis & Group Consulting Editor Danai Eirini Falconaki 69 Alan Falach 13 Hong Kong Gall: Nick Gall & Ashima Sood 78 Publisher Rory Smith 14 Hungary Kovács Réti Szegheő Law Firm: Dr. Eniko Vida & Dr. Attila Kovács 84

Published by 15 India Dhir & Dhir Associates: Alok Dhir 89 Global Legal Group Ltd. 59 Tanner Street 16 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Theodoor Bakker & London SE1 3PL, UK Tel: +44 20 7367 0720 Herry Kurniawan 97 Fax: +44 20 7407 5255 Email: [email protected] 17 Ireland Matheson: Tony O’Grady & Karen Reynolds 102 URL: www.glgroup.co.uk 18 Italy Pirola Pennuto Zei & Associati: Massimo Di Terlizzi 109 GLG Cover Design F&F Studio Design 19 Japan Nishimura & Asahi: Yoshinori Ono & Hiroshi Mori 116

GLG Cover Image Source 20 Korea Barun Law LLC: Thomas P. Pinansky & Joo Hyoung Jang 123 iStockphoto Printed by 21 Luxembourg Loyens & Loeff Luxembourg: Anne-Marie Nicolas & Véronique Hoffeld 130 Ashford Colour Press Ltd April 2018 22 Mexico SOLCARGO: Fernando Pérez Correa & F. Abimael Hernández 135

Copyright © 2018 23 Netherlands Wijn & Stael Advocaten: R.M. Vermaire & F.B. Bosvelt 141 Global Legal Group Ltd. All rights reserved 24 Nigeria Miyetti Law: Jennifer Douglas-Abubakar & Oluwole Olatunde 147 No photocopying 25 Poland Tatara & Partners Restructuring & Insolvency Law Firm: ISBN 978-1-912509-04-1 Karol Tatara & Mateusz Kaliński 153 ISSN 1754-0097 26 Romania Zamfirescu Racoți & Partners Attorneys at Law: Stan Tîrnoveanu & Strategic Partners Cătălin Guriță-Manole 158 27 Russia INFRALEX: Artem Kukin & Stanislav Petrov 163

28 Singapore BlackOak LLC: Ashok Kumar & Darius Tay 169

29 Spain SUE Abogados, S.L.P.: Antonia Magdaleno Carmona & Julián Chamizo Renau 176

30 Sweden Hannes Snellman Attorneys Ltd: Paula Röttorp & Carolina Wahlby 180

31 Switzerland Lenz & Staehelin: Tanja Luginbühl & Dr. Roland Fischer 186

32 Turkey Dirican | Gozutok | Bagci: Gokben Erdem Dirican 194

33 USA Paul, Weiss, Rifkind, Wharton & Garrison LLP: Alan W. Kornberg & Elizabeth R. McColm 201

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

WWW.ICLG.COM Chapter 1

INSOL International – An Overview

INSOL International Adam Harris

It is a privilege to contribute once again to this publication and to Fellows are considered leaders in their field and whilst many are take the opportunity to showcase some of the activities and projects younger practitioners, the course itself has allowed them to develop of INSOL International which will be of interest to the readers of a close network enabling an opportunity to leverage off the strengths this global publication. The reach and scope of INSOL’s activities and contacts of the entire group. Furthermore, an interesting and is truly international, and I have no doubt that the activities, obviously valuable by-product for the Fellows has been the cross- learning opportunities and publications featured in this note will be referral of work. The course itself is exclusive and enrolment on informative and valuable to the readers who have, or aspire to, a an annual basis is limited to 20 participants. The 2017/2018 class profile which transcends borders. was fully subscribed, and we already have received a number of To give a flavour of what sits behind the INSOL International registrations for the 2018/2019 class, which will commence later this logo, I will try to conduct a quick helicopter view tour, looking at year. The cadre of Fellows (now some 130-strong) also constitutes learning, our talent pool, publications, conferences, and outreach a talent-pool from which many participants in the development and programmes. And, of course, the future and how we see the presentation of diverse technical programmes, (such as INSOL’s organisation developing even further. various conferences and seminars), are drawn. This gives INSOL an unbeatable resource of young, dynamic talent, and gives INSOL International is continually refining and developing its the individual and his or her firm the benefit of the international offering to its members and the numerous organisations with which exposure, the networking and the cross-referrals. we work closely, as is apparent from the highlights referred to in this article. Attend: Conferences and Seminars Learn: INSOL International Global A visit to the INSOL International website will provide a taste of the Insolvency Practice Course many and varied activities and programmes which INSOL presents annually. Whilst INSOL organised many regional seminars this A strong underlying theme of the work which INSOL undertakes is past year, by far the biggest event of 2017 was the Quadrennial held that our members are able to operate globally. Given that modern in Sydney, Australia, which attracted over 1,000 delegates. The enterprises regularly conduct business across multiple jurisdictions, congress covered a multitude of interesting topics over three days it is generally the case that the of a global business and overwhelmingly positive feedback was received. It would not will traverse borders and that it can no longer be dealt with in be overstating it to say that it was a spectacular event! One particular terms of the legal framework and insolvency regime of only one highlight of the educational programme was the case study – “Oil particular jurisdiction. In fact, the ever-growing number of cross- in a Day’s Work”. Shown over the course of day one, this scripted border insolvency cases continues to present new challenges to and filmed video case study provided delegates with subject-matter the turnaround and insolvency professionals. This is no longer a to discuss, debate and consider in great detail. The discussion phenomenon which attracts attention. In response, the professionals continued over coffee, lunch, dinner and drinks – all debated with must not only be skilled in the provisions of their own jurisdictions, great passion, a sure sign that the material had hit the right note. All but, in addition, they need to have a thorough and extensive in all, INSOL 2017 was a most impressive and successful event. knowledge of the multinational aspects (both legal and financial) In addition to the Quadrennial, we held a number of regional with which a distressed entity operating across borders is faced. seminars on the international stage in 2017. In February, we held With a background such as this, the INSOL International Global our first seminar in Seoul, followed by our annual Latin America Insolvency Practice course (also known as the Fellowship Seminar, held in São Paulo, in May. We also held seminars in Tel Programme) was created to fulfil a need for a broadly scoped, Aviv in June, the Channel Islands in September, and Kuala Lumpur advanced educational qualification which has a focus on in November. international and cross-border restructuring and insolvency matters. At the time of writing this piece, more than 700 registered delegates The Fellowship course was designed to provide its graduates with are looking forward to INSOL New York in late April. The technical such knowledge and expertise. programme is interesting and thought provoking, covering a range I am proud to say that the course itself has been one of the most of topical and relevant subjects. Of course, there will be abundant successful projects undertaken by INSOL International, with the opportunities for networking and catching up with contacts from Fellows themselves becoming true ambassadors for INSOL and across the globe. involving themselves in many of our workstreams and projects. The

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The revised statement of principles has been welcomed by the Read: INSOL International Technical Bank of England and the IILG was commended by Governor Mark Publications Carney for directing the global conversation around best practices for of companies in distress. In his letter of endorsement, INSOL International produces a number of high quality technical Governor Mark Carney welcomed the release of the updated papers and research works every year. The range of publications principles, as leading the global discussion: “Experience suggests can be accessed through the INSOL International website. The that a collective approach, such as the one advocated, can help latter has itself undergone a significant makeover over the last year, preserve value to the benefit of the creditors as a whole and which will provide an enhanced user journey for INSOL members. other stakeholders in the company.” Some of the recent publications will be of particular interest and The revised Statement of Principles has also been endorsed by value to the readership of this publication. the World Bank, a global standard-setter. It commended INSOL International for what it described as a “timely contribution to the “Directors in the Twilight Zone” evolving debate regarding the design and operation of insolvency systems”. The Fifth Edition of “Directors in the Twilight Zone” was published in early May. For the first time, it has been published in e-book The Implications of Brexit for the format. The work addresses the risks which are faced by the controllers of companies in the “twilight zone” of insolvency. Restructuring and Insolvency Industry: A The publication takes its name from the uncertain and challenging Collection of Essays period when a company becomes financially distressed, and when it is uncertain whether or not a formal will eventuate or As part of our suite of Special Reports, the collection of essays in whether it will be possible to resolve the matter between the various this publication deals with the effects of Brexit not only domestically stakeholders on a consensual basis. but also in some of the European Union Member States and, indeed, internationally. In reading these, what was fascinating was that The publication features contributions from various jurisdictions. while there seems to substantial agreement on what the effect of The current edition not only updates and refreshes the content, but Brexit will be on the insolvency and restructuring industry in the UK, also adds 10 new countries to the list. Most recently added are the there appears to be a substantial divergence of views (especially in Bahamas, Belgium, Cayman Islands, Columbia, Estonia, Greece, Europe) as to what the impact of Brexit will be in other jurisdictions. Indonesia, Singapore, South Africa and the UAE.

“Statement of Principles for a Global Approach to Multi- Outreach – INSOL’s Work in Developing Workouts” Economies

INSOL has also published the Second Edition of its seminal work, INSOL remains active in developing jurisdictions and regions the INSOL International Statement of Principles for a Global such as Asia and Africa. Covering the latter, an exciting and well- Approach to multi-creditor Workouts. established project is the Africa Round Table, held each year in a different African jurisdiction. The seventh iteration in 2017 was The first iteration of the Statement of Principles was published some held in Mauritius, and the 2018 project will be presented in Maputo, 16 years ago. It was produced by a collective effort of the INSOL Mozambique. International Lenders Group (“IILG”), a diverse group from around the world. The Statement of Principles was endorsed by the Bank The Project itself brings together (by invitation only), policy-makers of England, the World Bank and the British Bankers Association. and legislators, as well as regulators, Judges and practitioners creating a forum within which to debate common issues on a peer- Effectively, the Principles embodied in the report were designed and to-peer basis, and to discuss and learn about international best developed to be regarded as statements of best practice for all multi- practice. creditor workouts. The intention was that these principles would be applicable equally in all jurisdictions and would form the basis INSOL presents the Africa Round Table jointly with the World Bank upon which local multi-creditor workout principles were formulated Group, a partnership which greatly enhances the depth and breadth having regard to local law, custom, and practice. of the programmes presented. The scope of the issues which have been addressed over the life of the Africa Round Table project is During the period since its first publication, the Statement of extensive. These have ranged from discussion surrounding the Principles has been used in multiple rescues and workouts around most appropriate legislative structures for countries considering the globe and remains a well-utilised source of reference by reforms of their insolvency systems, to the actual implementation governments and financial institutions. of the system designed. The Africa Round Table recognises the Taking account of the fast-changing pace of the commercial philosophy that there is no “one size fits all” model, which enhances world, there have, of course, been significant developments during the debate and discussion around tailored best practice solutions. the period since the publication of the First Edition. The IILG The World Bank Group has commended INSOL’s “long standing has reviewed and updated the Statement of Principles to ensure commitment to the global enhancement of awareness and best that it adequately reflects the complex cross-border world of practice within the international professional community”. today’s commercial activities, and that it is applicable to financial far more complex than was the norm when the Principles were first published. Project – The Future The IILG itself has a broad world view, and includes representatives from numerous lenders in different jurisdictions around the globe, 2017 and 2018 have seen the developing stages of the representing interests as geographically diverse as Abu Dhabi, implementation of the strategies that were the result of INSOL’s Australia, the United Kingdom, and the United States of America. Task Force 2021 strategic review. No fewer than 20 working

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groups have discussed, debated and drawn up practical and detailed the months to come, INSOL will improve its social media presence plans that will see INSOL International not only remain a relevant utilising well known platforms such as LinkedIn, Facebook and and valuable resource for years to come, but to enhance its position. Twitter. Furthermore, work will soon commence on an app that This is not only to the benefit of our 10,500 members, but also will complement the new website and which will provide members our partner organisations, and the global community which we with an easier way to engage with us, whether in or out of the office. serve. The contribution made so far by all those involved has been Given the range and scope of what the organisation consistently immense. achieves, its position in the international arena, and its contributions Whilst 2017 proved to be an exciting year in the history of INSOL, from members, it is from a personal perspective a most exciting time 2018 continues apace. The project to build a new website and to hold the position of President of INSOL International, and I look CRM (client relationship management) system continues and in forward to the next 12 months, and what we will be able to achieve.

Adam Harris INSOL International / Bowmans 22 Bree Street Cape Town, 8000 South Africa

Tel: +27 21 480 7837 Email: [email protected] URL: www.bowmanslaw.com www.insol.org

Adam Harris is a Director of Bowmans, South Africa, and specialises in business restructuring, insolvency and related fields. He is the current President of INSOL International. Adam represents lenders and creditors, such as a number of major banks, and other institutions such as professional indemnity insurers, as well as business rescue and insolvency practitioners in various aspects relating to the restructuring or winding up of companies and the of insolvent estates. He has represented international practitioners and creditors in various cross-border matters, to obtain recognition, and in relation to asset tracing, the valuation of such assets, and the ultimate disposal thereof and the repatriation of the proceeds. In the course of representation of creditors and business rescue practitioners, Adam has dealt with various aspects such as the rights of creditors given the moratorium established on commencement of the formal proceedings, post-commencement (DIP) finance, the ranking of claims, and the formulation and implementation of rescue plans. Adam has attended to some of the leading cases on different aspects of winding-up, insolvency and business restructuring such as the constitutionality of interrogations, impeachable transactions (claw-backs), procedural aspects of winding up applications, the interpretation of the Business Rescue legislation and insolvency practitioners’ remuneration. He is one of the co-authors of “Mars: The Law of Insolvency” (9th Ed), a leading insolvency text in South Africa.

INSOL International is a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. There are currently over 40 Member Associations world-wide with over 10,000 professionals participating as Members of INSOL International. Copyright © No part of this document may be reproduced or transmitted in any form or by any means without prior permission of INSOL International. The author accepts no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any view expressed herein. ©2017 Copyright INSOL INTERNATIONAL. All Rights Reserved. Registered in England and Wales, No. 0307353. INSOL, INSOL INTERNATIONAL, INSOL Globe are trademarks of INSOL INTERNATIONAL.

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Resolving Insolvency the World Bank Way Jat Bains

Macfarlanes LLP Paul Keddie

■ establishing or promoting reorganisation or Introduction procedures; ■ eliminating formalities and introducing or tightening time There are lists of achievements in which the United Kingdom limits; would be confident of achieving a high ranking, if not placing first. ■ regulating the profession of insolvency administrators; These would include tea-drinking, queuing and underperforming at sporting events. They would not, however, (at least according to ■ strengthening creditors’ rights; the World Bank) include the efficacy of the UK’s insolvency laws. ■ clarifying rules for commencing insolvency proceedings; The World Bank released its most recent set of rankings on the ease ■ improving provisions applicable to treatment of contracts and of doing business in October 2017. These rankings feature 190 voidable transactions; and jurisdictions, each of which is allocated a score based on a variety ■ introducing provisions on post-commencement financing. of indicators, which include “resolving insolvency”. The UK UK practitioners would be fairly confident in saying that the UK achieves a respectable seventh placing in the overall “ease of doing does well on each of these practices, with the exception of post- business rankings” although, in what may come as a surprise to commencement financing, on which English law does not provide many practitioners in the UK restructuring and insolvency market, any statutory framework. Generally speaking, UK insolvency ranks fourteenth when it comes to resolving insolvency (down from law is clear, well-tested and put into practice by lawyers and thirteenth for the previous year). qualified insolvency practitioners who are highly regulated. On The UK is (somewhat accurately) perceived to be a “creditor- initial impressions it therefore appears puzzling as to why English friendly” jurisdiction and English law has developed a reputation insolvency processes do not achieve higher rankings. of providing an effective framework to creditors to recover amounts owed to them by insolvent or distressed . At the same time, The Methodology Applied by the World English law and the English courts are perceived as being reliable Bank and efficient in resolving disputes. English law is therefore often the preferred choice of governing law in financing and other commercial A change in the World Bank’s methodology which was introduced agreements, and the English courts are often the chosen forum for in connection with its 2015 rankings may, however, explain why resolving disputes between parties to those agreements. One would the UK isn’t featured higher in the rankings. The “strength of therefore expect English law and English insolvency processes, at insolvency framework index” measures are tested by reference least as far as creditors are concerned, to be scored favourably in any to principles developed by the World Bank’s own “Principles for comparative rankings with other jurisdictions. Effective Insolvency and Creditor/ Regimes” (the “World Insofar as the ability of creditors’ to make recoveries in insolvency Bank Principles”) and UNCITRAL’s “Legislative Guide on proceedings, England scores fairly highly. The World Bank, when Insolvency Law” (the “UNCITRAL Guide”). The “strength of ranking jurisdictions on resolving insolvency, includes consideration insolvency framework index” is then based on four other indices: of the rate of recovery achieved by secured creditors in insolvency ■ the commencement of proceedings index, which measures proceedings. By this metric, the UK does comparatively well the type of proceedings ( and reorganisations) with secured creditors in UK insolvency proceedings, on average, that both debtors and creditors can instigate in the relevant achieving a recovery of 85.2 cents on the dollar (or pence on the jurisdiction and what standard is used to declare a debtor pound), with proceedings taking around a year to result in a recovery. insolvent; That rate of recovery is good for tenth place in the rankings, which ■ the management of debtor’s assets index, which measures is a higher rate than the USA and Germany, both of which achieve a whether, once proceedings have been commenced, a debtor higher ranking than the UK in the overall rankings. can continue transactions essential to the survival of its business. This also includes whether contracts that are In addition to the recovery rate, a number of other factors are taken burdensome can be terminated by the company, the extent to into account when measuring a jurisdiction’s overall score and place which the insolvency office-holder can challenge transactions in the rankings. These include the cost of , the ease entered into by the company and whether the debtor can of commencing proceedings and the strength of that jurisdiction’s obtain new financing during the proceedings; insolvency framework. The World Bank’s own guidance sets out ■ the reorganisation proceedings index, which measures what it considers to be the “main good practices” in this respect as: whether and how creditors vote on a reorganisation plan and what protections are available to dissenting creditors (i.e. can they be “crammed down” in those proceedings); and

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■ the creditor participation index, which measures whether insolvency proceedings, corresponds to the process of the filing of a creditors participate in decision making during proceedings voluntary petition for Chapter 11. It is also not difficult to interpret (and object to any decisions which affect their rights and the measure of whether the debtor can continue transactions essential access to information. to the survival of its business in the “management of debtor’s assets The UK achieves a score of 11, which is the same as the score index” as a reference to the “” process pursuant achieved by Trinidad and Tobago and the UAE (which has only to Chapter 11, whereby a company that has filed for Chapter 11 had a consolidated bankruptcy law since 2016) and which is bankruptcy protection remains in control of its property and considerably less than the score of 15 achieved by the USA and business. Finally, the importance attached to the priority of “post- Germany. A score of 11 ranks the UK around 50 places below commencement creditors” is quite clearly a reference to debtor-in- the jurisdictions achieving the highest ranking. This is clearly possession (“DIP”) financing that can be provided to companies in concerning to practitioners in the UK. Why does the UK, despite Chapter 11 and rank senior to existing creditors. being one of the world’s leading financial and legal centres, score so poorly on these metrics? The World Bank’s Approach

Why Does the UK Place So Poorly? It is not the intention of the authors of this piece to criticise the approach of the World Bank when producing its rankings. There is To some extent the UK’s relatively poor placing can be explained clearly a great degree of merit in using the processes employed by by the objectives of an effective insolvency regime identified by the largest economy in the world as the basis on which to measure the World Bank Principles and the UNCITRAL Guide. Whilst the processes in other jurisdictions. However, it is clear that the principles applied by each are not identical, there are some common jurisdictions with processes that most closely resemble those of the themes. These include: USA benefit the most from this approach to measurement, perhaps ■ the “preservation of the insolvency estate”, which is to the detriment of jurisdictions which have their own efficient and measured in the UNCITRAL Guide. A similar test of the mature processes, but which are relatively dissimilar to those of the “premature dismemberment of a debtor’s assets by individual USA in some ways. creditors” is measured in the World Bank Principles. This, It should also be noted that the World Bank has itself cited the essentially, tests the strength and breadth of any automatic desirability of a uniform set of principles and processes adopted stay on creditor action imposed by a jurisdiction’s insolvency proceedings; by as many jurisdictions as possible in order to facilitate a more harmonious and efficient cross-border insolvency market. From ■ the “equitable treatment of similarly situated creditors” is the outset of publishing its guidelines, in its working paper titled referred to in both the UNCITRAL Guide and the World Bank Principles, as a measure of “how similarly situated creditors “the World Bank principles and guidelines for effective insolvency vote on a reorganisation plan” in the strength of insolvency and creditor rights systems”, the World Bank refers to its aim of framework index; and “promoting international consensus on a uniform framework to ■ the recognition of “creditor rights” and the priority of claims assess the effectiveness of insolvency and creditor rights systems, within a clear set of rules and processes is referred to in both offering guidance to policymakers on the policy choices needed to the UNCITRAL Guide and the World Bank Principles, the strengthen them”. It can be implied that a key way to achieve such assessment of which includes whether post-commencement a uniform framework is via the adoption of universal processes and creditors (such as creditors which provide funding to the techniques for application in insolvency proceedings. There must debtor within insolvency proceedings) receive priority over therefore, by definition, be a set of processes which are already existing creditors. in existence which other jurisdictions can adopt or use as their On first view, the UK could be expected to score highly onall inspiration as a means of achieving such consensus. It appears that three tests. Administration and liquidation, being the two most the World Bank has adopted Chapter 11 bankruptcy as the process commonly used insolvency processes in the UK, both provide which other jurisdictions would be best-advised to look towards in for stays on creditor action without the insolvency officeholder’s order to improve their rankings. consent or the consent of the court (and administration goes further However, the benefits of processes of jurisdictions which aren’t by imposing an automatic moratorium on enforcement action by a directly analogous to Chapter 11 should not be discounted. The without the consent of the administrator or an order fact that the UK has a relatively high recovery rate, as is recognised of the court). Similarly, UK insolvency law provides a tried-and- by the World Bank rankings, suggests that even though it has its tested regime for ranking the priority of creditor claims, including own distinct insolvency regime, that regime is effective in ensuring post-commencement “expenses” incurred by an administrator or that creditors receive an acceptable return on their investment, even which rank ahead of, amongst others, ordinary unsecured where the debtor is in an insolvency process. The ability of creditors creditors. English law is also flexible regarding how it treats claims to achieve such a return is fundamental to the proper functioning of of creditors which might not previously have been considered by the the credit markets. courts (for example, claims under complex financial instruments). It should also be noted that UK law also provides for two forms of Observers of the recent Lehman Brothers “waterfall” decision1 binding compromise (schemes of arrangement and CVAs) which, would no doubt have noted how the English courts were able to whilst leaving the company within the control of its directors, efficiently adjudicate claims relating to several matters specific to provide creditors and companies with tried-and-tested means of the unusual situation of the administration of Lehman Brothers’ effecting restructurings which, provided that a certain threshold English business within the framework of the UK’s insolvency laws. of creditors vote in favour, bind all creditors (or at least those However, it is clear that the methodology applied by the World Bank creditors affected by the process). Schemes in particular have uses US-style Chapter 11 bankruptcy proceedings as the comparator become a tool by which companies are able to effect complex and for the laws of other jurisdictions, rather than UK insolvency far-reaching restructurings – there is perhaps no greater testament proceedings. The emphasis on how creditors vote in respect of a to their effectiveness than the number of non-UK companies which “reorganisation plan”, and the emphasis on the automatic stay on have relied on the flexibility of the UK courts to use schemes in

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recent years. Furthermore, English law and the English courts under English law for processes which provide breathing space provide certainty and the means for companies to carry out informal to allow a company to negotiate with its creditors and propose a restructurings with minimal court involvement and without the restructuring plan without the disruption caused by creditor action, requirement for insolvency proceedings. English law governed or the threat of such action. finance documents are, as a result, used in many cross-border It can be said that the proposals could be perceived as being financings due to the certainty that English law provides, including somewhat debtor-friendly. In particular, allowing distressed that the underlying mechanics of the documents allow lenders and companies, no matter their size and without a requirement of borrowers to facilitate restructurings quickly and efficiently. The support from key creditors, such as a lender holding a security over a fact that companies can, by relying on English law, avoid the need substantial part of their assets, to propose a three-month moratorium for an insolvency process in the first place should, in our view, be against creditor-action, whilst their directors remain in control (with given recognition. no exposure for personal liability but under the supervision of a qualified professional), will be closely scrutinised by lenders in the How Can the UK Improve its Position in the UK market. Clearly the prospect of being locked out of enforcing whilst the moratorium is in place will raise a few eyebrows Rankings? What are the Concerns with Any amongst lenders, although insolvency practitioners and independent Potential Changes? turnaround advisors may take a different view. However, provided that creditors are protected by being able to “lift” the moratorium if Notwithstanding the effectiveness of the UK’s insolvency and the company is taking actions which prejudice creditors’ interests restructuring processes in their current guises, the UK government or the value of their collateral (which is mentioned in the proposals, is taking steps to make those processes more consistent with Chapter albeit potentially only limited to the first 28 days of the moratorium) 11-type processes in other jurisdictions. A consultation titled “a and if there are creditor protections such as liability for directors review of the corporate insolvency framework” produced by the who claim a moratorium even when there is no reasonable prospect Insolvency Service in May 2016 sets out the UK government’s of achieving a restructuring (which is not) then there should be an intention to “enable more corporate rescues of viable businesses agreeable middle-ground between a company’s wish to restructure 2 and ensure that the insolvency regime delivers the best outcomes”. its affairs without the looming threat of enforcement, and the wish The consultation sets out a number of proposals which are intended of creditors to be able to enforce if they feel that the amount they to achieve this purpose. These include: could recover is being diminished by the company. ■ the introduction of a “preliminary moratorium” of up to three There is also a concern that the new corporate re-organisation months, during which a company can consider its options process would be in replacement of existing tools, being the CVA (under the supervision of an “authorised supervisor” who and , rather than in addition to them. That monitors the company’s conduct and actions during the would limit the main attraction of a CVA, being the flexibility of moratorium) with the benefit of a stay on creditor action; a “single class” procedure. It could also limit the flexibility of a ■ the company being able to designate certain contracts as scheme, where a company can choose to focus solely on a particular “essential contracts” (in addition to the provision of IT class of claims and not have to win the support of unaffected services and utilities, which are already protected under UK creditors. law). The essential contracts cannot be terminated or varied by the counterparty during the moratorium (provided the In addition, secured lenders may be concerned about the proposals payments under the contract are maintained when due) and for rescue finance and, specifically, whether such finance could rank would provide a tool for dealing with “ransom” creditors; senior to existing secured creditors. The proposals regarding rescue ■ a company being able to propose a binding reorganisation/ finance are, essentially, that if existing lenders refuse to provide restructuring plan to its creditors – this would be similar additional finance, the company (or its authorised supervisor) would to a scheme of arrangement. For example, creditors will seek their consent to rescue finance being advanced by a third party. be separated into different classes and 75% of creditors by If the existing lenders wanted to challenge the proposal they would value and (unfortunately for those who regard the numerosity need to make an application to court, with the onus then being on requirement as a weakness) a majority in number of creditors the supervisor to demonstrate, to the satisfaction of the court, that in each class would be required to vote in favour of the plan. (i) the granting of security for the rescue finance is a necessary pre- However, a reorganisation plan would be proposed as a means to bind/effect all creditors, unlike a CVA or scheme where a condition to that finance being made, (ii) the interests of existing specific group of stakeholders or creditors are often targeted. chargeholders is adequately protected, and (iii) obtaining rescue The reorganisation plan will also benefit from a moratorium finance is in the best interests of creditors as a whole. Satisfying which will allow the company to propose and work through limb (ii) of this test is likely to require independent valuation advice the plan without the threat of creditor action (currently only to demonstrate that there is sufficient value in the company’s assets CVAs of relatively small companies may benefit from such a for both the existing secured lender and any rescue finance to be moratorium); and paid in full if those assets are disposed of. Disputes could therefore ■ the introduction of rules relating to rescue finance, which arise regarding valuations which secured lenders feel over-value the re-order the priority of expenses in administrations to company’s assets in order that rescue finance be made available to encourage rescue finance (by ensuring that rescue finance is the company. An agreed set of principles governing such valuations senior to other expenses incurred by the administrator) and could help guard against this, although clearly the methodology the introduction of debtor in possession provisions whereby used will differ between various businesses and sectors. security can be granted to new lenders over property which is already secured to other creditors (and may rank senior to, or pari-passu with, the existing creditor’s security). Striking a Balance It is not difficult to see the source of the government’s inspiration when preparing these proposals – they do, to a large extent, replicate Aligning the UK’s insolvency processes with those of other steps available to companies in Chapter 11. It is clear that when jurisdictions, where most of those other jurisdictions are leaning drafting the proposals the UK government has recognised a need towards Chapter 11 style processes, certainly has potential benefits.

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Creating a harmonised regime where creditors and debtors are law and its financial markets could be pronounced. For example, familiar with the processes used in each jurisdiction provides if rescue financing is introduced into UK law in a manner which certainty, particularly in large, cross-border restructurings. does not prejudice existing lenders, an entirely new market of rescue On the other hand, part of what makes the UK market attractive finance could grow. It would be difficult for the World Bankto to lenders is the fact that it is perceived as being creditor-friendly, ignore those improvements. without being unduly punitive for borrowers (the UK’s insolvency and bankruptcy laws for individuals are, for example, far less Endnotes restrictive than other jurisdictions). Adopting laws which mirror Chapter 11 may mean that the UK loses what makes it unique – 1. The Joint Administrators of Lehman Brothers Limited why, for example, would an overseas company shift its COMI to (Appellant) v. Lehman Brothers International (Europe) (In the UK to utilise an English administration, or go to the trouble of Administration) and others (Respondents) [2017] UKSC 38. proposing a scheme of arrangement in the English courts, when the 2. “A review of the corporate insolvency framework: a UK has adopted processes which are similar to a number of other consultation on options for reform”, Insolvency Service, jurisdictions?3 page 6. The onus will be on the government to strike a balance between 3. A huge caveat to this point, of course, is the looming threat aligning UK insolvency law with that of other major jurisdictions of Brexit and the prospect that a failure to agree a deal on without sacrificing the benefits of its current regime. That won’t be the recognition of jurisdiction and judgments could cause the easy. However, if done well, the improvements to UK insolvency UK restructuring regime to become less accessible than it has been in the past [as discussed elsewhere in this publication].

Jat Bains Paul Keddie Macfarlanes LLP Macfarlanes LLP 20 Cursitor Street 20 Cursitor Street London EC4A 1LT London EC4A 1LT United Kingdom United Kingdom

Tel: +44 20 7849 2234 Tel: +44 20 7849 2894 Email: [email protected] Email: [email protected] URL: www.macfarlanes.com URL: www.macfarlanes.com

Jat specialises in a range of debt finance transactions, acting for a Paul advises on a broad range of corporate restructuring and recovery diverse range of stakeholders including credit and special situations issues. funds, corporate clients, sponsors, bondholders and senior and His clients include companies in financial difficulties, their directors mezzanine lenders in relation to, amongst other things, workouts and and shareholders, insolvency practitioners appointed over such restructurings. companies, lenders to and other major creditors of troubled entities, He has been involved in restructurings in a wide range of sectors investors interested in a “loan-to-own” strategy and buyers of including retail, healthcare, hotels, consumer lending, technology businesses where there is an insolvency aspect. and media, construction, manufacturing, professional services and Paul’s experience also includes a secondment to Warwick Capital infrastructure. Partners LLP, a leading distressed credit fund. Jat’s restructuring experience includes a secondment to the Paul is a qualified , having passed the Joint restructuring group legal team at Royal Bank of Scotland, where he Insolvency Examination Board examinations in 2013. was involved in the $12bn restructuring of an international financial institution. Jat is a member of the Institute for Turnaround.

From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high- net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters. Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals. Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation. We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.

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Australia Dominic Emmett

Gilbert + Tobin Alexandra Whitby

Following the recent introduction of a “safe harbour” protection 1 Overview into Australia’s legislative regime (see question 9.2 below), Australia may see an increase in the use of informal work-outs. The 1.1 Where would you place your jurisdiction on the protection is designed to provide financially distressed companies spectrum of debtor to creditor-friendly jurisdictions? time to develop an informal turnaround where a formal insolvency might have otherwise been necessary. Given the real exposure Australia is widely considered to emphasise the rights of creditors directors have to personal liability, which risk is only mitigated and over debtors and as such is recognised as a creditor-friendly not eliminated by the safe harbour provisions, it is unclear at this jurisdiction. Whilst there are some limitations on the options stage whether the reforms go far enough to significantly increase the that might otherwise be available to distressed companies and use of informal work-outs. some inflexibility in certain of the tools available to insolvency practitioners, Australia’s insolvency regime is, for the most part, 2 Key Issues to Consider When the primarily focused towards protecting the rights and interests of creditors over the interests of debtors. For example, Australia’s Company is in Financial Difficulties voluntary administration regime is controlled by creditors to the exclusion of management and members and its purpose is designed 2.1 What duties and potential liabilities should the to maximise creditor returns. Further, unlike the United Kingdom directors/managers have regard to when managing a for instance, is alive and well in Australia. company in financial difficulties? Is there a specific Creditors are active participants in all insolvency processes in point at which a company must enter a restructuring or insolvency process? Australia. They can enforce their rights in each process and, whilst there are some timing limitations placed on their enforcement rights in a voluntary administration scenario, enforcement rights over Directors owe a number of general and specific law duties to the secured assets are otherwise unfettered. company, its shareholders and creditors. These include: ■ duties of good faith and due care and diligence; Secured creditors and employees enjoy a statutory priority in a distribution of assets and, in some circumstances, unsecured ■ to not improperly use the position, or information obtained creditors can also place themselves in a position of protection. by virtue of the position, to gain personal advantage or cause detriment to the company; Unlike secured creditors, unsecured creditors are given no legal right to priority, yet due to a particular relationship that may exist ■ to keep adequate financial records; with a debtor (for example, as a supplier of essential materials), ■ to take into account the interests of creditors; and they can exercise that power to obtain payment and ensure future ■ to prevent insolvent trading. payments as a practical necessity to maximise value and keep the Compliance with these duties means that directors should place a debtor business running. company into external administration at such time that the company is cash flow insolvent or there exists a less than reasonable prospect 1.2 Does the legislative framework in your jurisdiction that the company will remain cash flow solvent. allow for informal work-outs, as well as formal Australia’s new safe harbour provisions could, in certain restructuring and insolvency proceedings, and to circumstances, enable a company to delay a formal insolvency what extent are each of these used in practice? appointment where it seeks to pursue a turnaround plan with a “better outcome” for the company (see question 9.2 below). If such Informal work-outs and reorganisations can be pursued in Australia a plan is being developed, the company must ensure it meets the provided adequate attention is paid to the prohibitions on insolvent criteria to enliven the protection, because as a matter of practice, trading. The Act bestows a positive duty on directors to prevent if the turnaround plan is unsuccessful and a formal insolvency a company from incurring a debt whilst it is insolvent (or where follows, the safe harbour protection will only be a defence to an they suspect it is likely to become insolvent). A breach of this insolvent trading claim rather than a positive exception to liability. duty exposes the director(s) to penalties such as personal liability for future debts incurred, including during any informal workout period.

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■ unreasonable director-related transactions, which are 2.2 Which other stakeholders may influence the voidable if entered into during the four years ending on the company’s situation? Are there any restrictions on the relation-back day; and action that they can take against the company? For ■ transactions entered into for the purpose of defeating, example, are there any special rules or regimes which delaying or interfering with creditors’ rights on a company’s apply to particular types of (such winding up, which are voidable if entered into during the 10 as landlords, employees or creditors with retention years ending on the relation-back day. of title arrangements) applicable to the laws of your jurisdiction? Uncommercial transactions and unfair preferences are voidable if the company was insolvent at the time of the transaction or Stakeholders who have the power to influence a company’s situation at a time when an act was done to give effect to the transaction. include: Australian Courts have held that a transaction is “uncommercial” if Australia a reasonable person in the company’s circumstances would not have ■ Secured creditors, who may seek to enforce their security and appoint a receiver to realise the assets of the company. entered into it. An is one where a creditor receives more for an unsecured debt than would have been received if the ■ Unsecured creditors, where they may have a particular creditor had to prove for it in the winding up. The other party to relationship with a debtor (e.g. as a supplier of essential the transaction or preference may prevent it being held void if they materials), may exercise that power to obtain future payment of its debts as a practical necessity to keep the debtor business can show they became a party in good faith, they lacked reasonable running. grounds for suspecting that the company was insolvent and they provided valuable consideration or changed position in reliance on ■ Shareholders. the transaction. An automatic moratorium applies in respect of each of the formal Loans to a company are “unfair” and thus voidable if the interest procedures, other than receivership, to prevent unsecured creditors or charges in relation to the loan were, or are, not commercially (including shareholders and landlords) from enforcing their rights. reasonable. This is distinct from the loan simply being a bad Whilst no such moratorium exists in receivership, to the extent an bargain. Any “unreasonable” payments made to a director or a close unsecured creditor takes action to enforce their rights, they have no associate of a director are also voidable, regardless of whether the recourse to the assets which are secured and in the control of the payment occurred when the company was insolvent. receivers. The introduction of the Personal Properties and Securities Act (Cth) in 2009 (PPSA) provided a new regime for certain unsecured 3 Restructuring Options creditors and the protection of a supplier’s title to goods relevantly supplied. A uniform concept of “” exists under the 3.1 Is it possible to implement an informal work-out in PPSA to cover all existing forms of security interests under which your jurisdiction? an interest in personal property is granted pursuant to a consensual transaction that, in substance, secures payment or performance of an See question 1.2 above. obligation. It also applies to certain deemed security interests such as certain types of lease arrangements for certain terms, retention of title arrangements and transfers of debt, regardless of whether 3.2 What formal rescue procedures are available in the relevant arrangement secures payment or performance of an your jurisdiction to restructure the liabilities of obligation. Personal property is defined broadly and essentially distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can includes all property other than land, fixtures and buildings attached creditors and/or shareholders block such procedures to land, water rights and certain statutory licences. or threaten action (including enforcement of security) To perfect a title under the PPSA, suppliers are required to register to seek an advantage? Do your procedures allow you retention of title arrangements on the Personal Property and to cram-down dissenting stakeholders? Securities Register (PPSR). If a security interest is not perfected it will, on liquidation of the grantor, vest in the grantor, despite the There are two processes available to effect a restructure of a agreement between supplier and recipient that the supplier retains company’s debts: title to those goods until payment is received. ■ deed of company arrangement (DOCA); or ■ scheme of arrangement (Scheme).

2.3 In what circumstances are transactions entered DOCA into by a company in financial difficulties at risk of A DOCA takes place in the context of a voluntary administration challenge? What remedies are available? (i.e. a formal appointment). Once a company is in voluntary administration, a DOCA can be Transactions are only vulnerable to challenge where a company is proposed by anyone with an interest in the company. A DOCA is in liquidation. Liquidators have the power to bring an application to effectively a contract or compromise between the company and the court to declare the following types of transactions void: its creditors. Whilst it is a feature of voluntary administration, it ■ insolvent transactions (which includes both unfair preferences should in fact be viewed as a distinct regime, where the rights and and uncommercial transactions) if entered into, in the case of obligations of the creditors and company differ to those under a unfair preferences, during the six-month period ending on the voluntary administration. relation-back day (the relation-back day is generally the date of the application to wind up the company) or in the case Approval of a DOCA requires a simple majority (50% of creditors of uncommercial transactions, during the two-year period voting in number and value). Where a DOCA is approved, it will ending on the relation-back day; bind unsecured creditors, secured creditors who vote in favour of ■ unfair loans, which are voidable if entered into any time it, the company, directors and shareholders. Secured creditors who before the winding up began; do not vote to approve the DOCA retain their rights to enforce their security at any time, including by appointing a receiver.

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Shareholders have no entitlement to vote on a DOCA, but will be bound by it. 3.3 What are the criteria for entry into each restructuring procedure? 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 pursuant to section 444GA of the Act, moratorium of debt DOCA repayments, a reduction in outstanding debt and the forgiveness of Where a DOCA has been proposed by an interested party, it will all, or a portion of, outstanding debt. be accepted at the second meeting of creditors if the majority of Scheme of arrangement creditors (50% in number and value) vote in favour of it. A Scheme is a restructuring tool that sits outside of a formal Scheme of arrangement insolvency. It is a court-approved agreement which binds company’s A Scheme will be approved where at least 50% in number and 75% Australia creditors and/or members to some form of rearrangement or in value of creditors in each class of creditor vote in favour of it. compromise of their pre-existing rights and obligations. Where the issuance of equity forms part of its terms, the scheme also Schemes typically involve the deleveraging of a business or the requires shareholder approval (simple 50% majority). reduction of outstanding debt in exchange for the issuance of Final court approval is required. equity. Recently, in the Bis Industries transaction, Schemes were used to facilitate a subsequent proposed (and not mandatory) debt restructuring, rather than to actually implement it. 3.4 Who manages each process? Is there any court involvement? The approval threshold for Schemes is 50% by number and 75% by value of the debt held by those creditors voting in each class DOCA such that it is possible for dissenting creditors to be crammed down. However, given the approval threshold must be met in each class, The management of the company under the DOCA will depend dissenting creditors will have a power of veto if they can establish entirely on its terms. A Deed Administrator may be appointed to they belong in a separate class. Classes are determined by reference control the company and/or management may be reinstated. to commonality of legal rights and only those creditors whose rights Court supervision is not mandatory for a DOCA; however, should a will be affected need be included. section 444GA share transfer be contemplated, it is likely leave of Shareholders will also have the ability to block a Scheme in certain the court will be required for implementation. circumstances. For example, where a Scheme contemplates the Dissatisfied creditors also have recourse to the court to havea issuance of equity as part of its terms, shareholder approval will DOCA set aside. also need to be obtained. Scheme of arrangement The key element to the success of both restructuring procedures is the The pre-existing management of the company generally continue in willingness of (any) secured creditors to work with the management that capacity during the Scheme process and approval phases (and, of the distressed company as well as other stakeholders. The depending on the terms of the Scheme itself, after implementation). starting point for the negotiation will often involve an agreement or undertaking on a standstill or forbearance period during which The Scheme process is heavily supervised by the court (as well as the company will look to refinance its current debt structure (often regulatory bodies) and is subject to two hearings. The first court through the injection of new capital and/or equity). hearing is to approve the convening of the meeting for the relevant Pre-packaged sales class(es) of creditors. At the second court hearing, the court must approve the Scheme prior to implementation. The “pre-pack sale” in the traditional English and US tradition has had limited application in the Australian restructuring environment due to the stringent obligations placed on insolvency practitioners 3.5 What impact does each restructuring procedure have and the protections afforded to creditors under both statute and on existing contracts? Are the parties obliged to common law. However, the use of pre-packs may increase given perform outstanding obligations? Will termination and the recent introduction of the safe harbour protection. set-off provisions be upheld? Attempts to effect a “pre-pack” are also restricted by the specific There is no formal insolvency procedure that results in the automatic obligations on receivers vis-à-vis the disposal of assets. Section termination of contracts between the debtor and third parties. 420A of the Act requires a receiver to, upon the sale of an asset, either achieve a price not less than market value (if a market exists Following appointment, administrators, receivers and liquidators for the asset), or alternatively the best price reasonably obtainable. can choose not to continue to perform a contract. Any damages Australian Courts have identified certain steps that a receiver should flowing to the counterparty from the non-performance of a contract take in order to comply with the second limb of the obligation, which will rank unsecured against the company. However, any contract include a market or auction sale process and marketing campaign, that an insolvency practitioner continues with may result in the which has made “pre-pack” sales difficult for receivers to achieve. practitioner being held personally liable under the Act. Due to the impediments described above, pre-packs tend only to be Contractual and mandatory set-off will apply in formal insolvency used in circumstances where: processes, with certain exceptions. Section 553C of the Act provides (a) there are limited alternative sale options available to the for a statutory set-off in a liquidation where there have been mutual insolvency practitioner appointed and there is evidence to dealings between the distressed company and the relevant creditor. support the assumption that any delay in sale may be fatal to In such circumstances an automatic account is taken of the sum due the underlying business; or from one party to the other in respect of those mutual dealings, and (b) a market testing sale process has already been undertaken the sum due from one is set-off against any sum due from the other. prior to the appointment of the receiver or administrator. Under the current landscape, contracts may contain ipso facto Notwithstanding the above, the market may well evolve such that clauses allowing a counterparty to terminate or renegotiate a we see more pre-packs if it can be demonstrated clearly junior contract on the occurrence of any insolvency event (which can be creditors and shareholders are out of the money. defined to include any form of restructure).

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However, the Australian landscape in respect of ipso facto clauses ■ where a liquidator is appointed by members, the liquidator is in the process of reform. From 1 July 2018, a new ipso facto forms the opinion that the company is in fact insolvent, they clause regime will operate in Australia following the introduction will convert the process from a members’ voluntary winding of the Insolvency Law Reform Act 2016 (Cth) (ILRA) and its up into a creditors’ voluntary winding up; and associated instruments. That regime will impose an automatic ■ a company may also enter into a creditors’ voluntary winding stay on the enforcement of ipso facto termination rights that are up at the end of an administration if the creditors resolve to do so at the second creditors’ meeting. triggered simply because a company enters into a formal or informal insolvency or restructuring process. The stay will operate during Compulsory liquidation a “stay period”, the length of which is determined by reference A creditor can apply to the court for an entity to be wound up. The to the length of the relevant restructuring process. There are also most common ground for the application is insolvency, usually

circumstances in which the stay period will be indefinite. A court indicated by a failure to comply with a statutory demand or Australia will also have the power to lift the automatic stay where it considers judgment debt. Other grounds not related to insolvency are also it is in the interests of justice to do so. available, including that it is “just and equitable” to do or because The full effect of the new regime will take some time to be properly of a deadlock at a shareholder or director level affecting the ability understood as it does not operate retrospectively and only applies to to manage the company. contracts entered into after 1 July 2018. All existing contracts as at 1 July 2018 that contain ipso facto termination clauses will confer Upon application to the court to wind up a company, the court can rights on the counterparty to enforce those rights in accordance with order the appointment of a provisional liquidator. the terms of the contact.

4.3 Who manages each winding up process? Is there any 3.6 How is each restructuring process funded? Is any court involvement? protection given to rescue financing? Liquidation The costs of a DOCA will be the company’s costs in the Following appointment, a liquidator will control the affairs of the administration. Equally, Scheme costs will usually be the costs of company and has the power to realise and distribute assets to the the company, unless otherwise negotiated. exclusion of the directors and shareholders. A debtor can obtain financing and otherwise use its assets as security Court involvement is required in a compulsory winding up, where it in a scheme of arrangement and informal voluntary reorganisations. will appoint the liquidator. This is solely a matter for agreement between the company and its creditors. There are no special priorities given to new debt as of Courts will also consider applications by the liquidator, pursuant to right and such priorities have to be negotiated and agreed with any section 480 of the Act, for an order that the liquidator be released existing creditors who already hold some form of priority. and that the company be deregistered after the liquidator has realised all of the property of the company or so much of that property as can be realised (in his or her opinion) without needlessly protracting the 4 Insolvency Procedures winding up, has distributed a final dividend (if any) to the creditors, has adjusted the rights of the contributories among themselves and made a final return (if any). The court must be satisfied thatno 4.1 What is/are the key insolvency procedure(s) available creditor will be adversely affected by the order. to wind up a company? Provisional liquidation A company may be wound up: The provisional liquidator controls the affairs of the company during the provisional liquidation to the exclusion of the directors ■ if solvent, voluntarily by its members; or and shareholders. ■ if insolvent, by its creditors or compulsorily by order of the court. 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any 4.2 On what grounds can a company be placed into each restrictions on the action that they can take (including winding up procedure? the enforcement of security)?

Members’ voluntary winding up Generally, unsecured claims rank (with some exceptions), A members’ voluntary liquidation is a solvent winding up. It with secured creditors afforded a level of priority by virtue of the requires the directors of the company to make a declaration of security arrangements in place. However, the court has the power solvency under section 494 of the Act that, in their opinion, after an (in limited circumstances) to change the rank of a creditor’s claim. inquiry into the affairs of the company, the company will be able to Section 564 of the Act provides an incentive to creditors to give discharge its debts in full within 12 months of the commencement financial assistance or indemnities to the liquidator to pursue asset of winding up. This is coupled with a special resolution of the recovery proceedings or to protect or preserve property. If creditors members to wind up the company (at least 75% of votes cast by provide such assistance, the liquidator may apply to the court for an members entitled to vote). order that the contributing creditors receive a higher dividend from the company’s assets than they would otherwise be entitled to. Creditors’ voluntary winding up After the commencement of a winding up of a company, or after A creditors’ winding up arises when the company is insolvent. It the appointment of a provisional liquidator, leave of the court can occur in a number of circumstances, including: is required to commence or continue legal proceedings against a ■ if the members of the company resolve that the company company. Secured creditors are generally exempted from this be wound up and the directors cannot provide a solvency process, assuming the validity of their security, as they remain declaration; entitled to realise their security despite the liquidation.

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Provisional liquidation 4.5 What impact does each winding up procedure have on Provisional liquidation does not automatically terminate employees. existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off Liquidation provisions be upheld? The winding up of a company automatically terminates the employment of employees. Employees are afforded a statutory See question 3.5. priority ahead of other unsecured creditors, and in some cases, secured creditors. The position of directors and management is 4.6 What is the ranking of claims in each procedure, different, and the priority afforded to them is capped significantly. including the costs of the procedure? A liquidator that chooses to run the business for a short period of

Australia time as part of the process will become personally liable for services Generally, the statutory waterfall set out in the Act has secured provided by individuals retained or employed during that period. creditors paid in priority to unsecured creditors. Secured creditors Scheme of arrangement may contract priority arrangements between themselves if there are A Scheme itself generally does not affect employment. different levels of secured debt within a company. There is an exception to this for employee entitlement claims. During a winding up, the entitlements of employees have priority 7 Cross-Border Issues over all other unsecured debts and claims, as well as those assets subject to a circulating security interest (formerly floating charges). 7.1 Can companies incorporated elsewhere use The numeration, costs and expenses of liquidators are afforded restructuring procedures or enter into insolvency priority over all creditors’ claims, including employees. proceedings in your jurisdiction?

4.7 Is it possible for the company to be revived in the Companies registered as foreign in Australia could future? have receivers, administrators or liquidators appointed to them, but it is rare for this to occur. We are not aware of any foreign A company cannot be revived in the future following a winding- corporations having initiated a scheme of arrangement in Australia. up. Once the company’s assets have been sold, the company is deregistered with the corporate regulator and ceases as a corporate 7.2 Is there scope for a restructuring or insolvency identity. process commenced elsewhere to be recognised in your jurisdiction?

5 Tax Australian Courts act cooperatively with foreign courts and insolvency practitioners, and will recognise the jurisdiction of the 5.1 What are the tax risks which might apply to a relevant court where the “centre of main interest” is located. This restructuring or insolvency procedure? approach follows the UNCITRAL “Model Laws” on insolvency which were codified into Australian law through the Cross-Border Tax liabilities (including PAYG and capital gains tax) can continue Insolvency Act 2008 (Cth). to be incurred during trade-ons in each of the insolvency and There is also scope under different legislation (such as the Act) for restructuring processes. Whilst the tax office is not afforded priority, Australian Courts to recognise foreign judgments in Australia. Such certain tax liabilities are met regularly in distressed situations as recognitions require compliance with the relevant court practice and directors can be rendered personally liable of those certain tax procedure rules. liabilities which are not paid.

7.3 Do companies incorporated in your jurisdiction 6 Employees restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?

6.1 What is the effect of each restructuring or insolvency It is becoming increasingly common for Australian companies procedure on employees? subject to a formal insolvency process to seek recognition of that process in other jurisdictions (for example, Chapter 15 recognition Receivership in the United States) but it is rare for Australian companies to look A receiver becomes personally liable for the services rendered by to initiate a formal insolvency process or restructure exclusively in an employee to the company. A receiver may choose to terminate a foreign jurisdiction. employment contracts, and is not personally liable for accrued entitlements prior to appointment. The claims of the terminated 8 Groups employees are given priority to all other unsecured claims. Voluntary administration 8.1 How are groups of companies treated on the The position of an employee under any voluntary administration insolvency of one or more members? Is there scope will be at the discretion of the administrator. for co-operation between officeholders? DOCA Employees are afforded a level of protection under a DOCA. The In insolvency proceedings involving corporate groups, a statutory priority afforded to employees in liquidation must be the consolidated group is not considered as a single legal entity. Where equivalent in a DOCA (unless the employees vote otherwise). companies operate as a consolidated group, the starting legal

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position is the “separate personality” principle which prevents ■ Corporates and Other Legislation Amendment (Insolvency creditors of an insolvent company from gaining access to the funds Law Reform) Regulation 2016, which amends the of other companies for payment of their debts. Having said that, Corporations Regulations 2001 (Cth) and other relevant groups of companies often enter into deeds of cross guarantee to regulations consequential on the Insolvency Practice Rules; afford themselves the benefit of consolidated financial reporting. In and a liquidation scenario, that deed commits the companies a party to it ■ instruments to provide for the partial delay of certain of the to pay the liabilities of all the other companies that are a party to it. ILRA’s amendments. The Act, however, provides for a holding company to be liable for Whilst the reforms do not make wholesale changes to Australia’s the debts of their insolvent subsidiaries in certain circumstances. current insolvency regime, they will affect the day-to-day operation These provisions enable the subsidiaries’ liquidator to recover of both formal and informal restructuring processes and will bolster amounts equal to the loss or damage suffered by creditors from the creditor information rights. Australia parent company if the parent failed to prevent the subsidiary from Two of the biggest changes contemplated by the reforms include: incurring debts while the subsidiary was trading whilst cash flow ■ the introduction of a “safe harbour” concept to the insolvent insolvent. trading laws (see questions 1.2 and 2.1); and Pooling of group funds may occur in limited circumstances, as ■ the operation of the automatic stay on ipso facto termination prescribed by Division 8 and Part 5.6 of the Act being sections clauses (see question 3.5). 5.71 to 5.79L. Generally, those circumstances are where there is a The safe harbour protection has been incorporated by introducing substantial joint business operation between members of the same a new section 588GA into the Act which provides that section corporate group and external parties; such members of the group 588G(2), being the provision which makes directors personally are jointly liable to creditors. The liquidator of the corporate group liable for insolvent trading, will not apply if, after starting to suspect makes what is called a pooling determination, after which separate the company is, or may become, insolvent, the director takes steps meetings of the unsecured creditors of each company must be called to develop one or more courses of action that is “reasonably likely to approve or reject the determination. The court may vary or to lead to a better outcome for the company” than the immediate terminate any approved pooling determination. appointment of an insolvency practitioner. There are a number of criteria that will be used to assess whether the test has been satisfied so as to enliven the protection, including the engagement 9 Reform of appropriately qualified advisors to provide advice on the restructuring plan. The Explanatory Memorandum accompanying 9.1 Have there been any proposals or developments in the legislation states that “reasonably likely” requires that there your jurisdiction regarding the use of technology or is a chance of achieving a better outcome that is not “fanciful or reducing the involvement of the courts in the laws remote”, but is “fair”, “sufficient” or “worth noting”. of your jurisdiction, which are intended to make The safe harbour rule does not provide protection in respect of all insolvency processes more streamlined and efficient? debts and only covers debts that are incurred: ■ in connection with the relevant course of action being Whilst Australia’s insolvency laws have recently undergone pursued; and substantial reform, that reform has not had regard to the use of technology or a reduction in the involvement of the courts. ■ during the period commencing at the time the course of action is being developed ending at the earliest of a “reasonable For details of the reforms, see question 9.2. period” following the course of action not being pursued, when the director ceases to take such course of action, when the course of action ceases to be “reasonably likely” to lead 9.2 Are there any other governmental proposals for to a better outcome or the appointment of an insolvency reform of the corporate rescue and insolvency regime practitioner. in your jurisdiction? Care should be taken when relying on the safe harbour principle as Australia’s corporate insolvency law has been the subject of recent it will not operate to automatically exempt a director from exposure reform. Significant changes have been introduced via the ILRA, to personal liability; rather it will be relevant to a director seeking to with many of the reforms either in their infancy or still in the process defend an insolvent trading claim. of being rolled out. To give full effect to the ILRA, a number of additional instruments have been introduced, including the: ■ Insolvency Practice Rules (Corporations) 2016, which provides a range of rules regarding the external administration of companies and the registration and discipline of external administrators;

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Dominic Emmett Alexandra Whitby Gilbert + Tobin Gilbert + Tobin Level 35, Tower Two Level 35, Tower Two International Towers Sydney International Towers Sydney 200 Barangaroo Avenue 200 Barangaroo Avenue Barangaroo NSW 2000 Barangaroo NSW 2000 Australia Australia

Tel: +61 2 9263 4328 Tel: +61 2 9263 4114 Email: [email protected] Email: [email protected] URL: www.gtlaw.com.au URL: www.gtlaw.com.au

Australia Dominic specialises in non-contentious restructuring and insolvency Alexandra practises in restructuring and insolvency disputes as well as work for banks and financial institutions, as well as special situation non-contentious restructuring and insolvency transactions. groups and distressed debt funds. His expertise includes: preparing Alexandra has been or is involved in advising on a number of high- and negotiating standstill and forbearance arrangements; debt profile transactions, including: restructuring and schemes of arrangement; structured administration and receivership sales; and advice to directors, receivers, ■■ Bis Industries, in relation to a recapitalisation plan to restructure its administrators and liquidators. A$1.17 billion debt. Recent and current roles in the resources sector include Bis Industries, ■■ The receivers and managers appointed to the Clem 7 (Airport Link) Arrium, Emeco, Boart Longyear, Paladin and WICET. Tunnel in Brisbane, Queensland (BrisConnections). Dominic was also involved in a significant if not lead role in Atlas ■■ The receivers and managers appointed to the North South Bypass Iron, Mirabela Nickel, Straits Resources, BrisConnections, RiverCity, Tunnel in Brisbane, Queensland (RiverCity). Nine Entertainment, Westpoint, Ansett, Billabong, Alinta Energy, ■■ Nine Entertainment Group, in respect of its A$3.4 billion debt-for- I-Med, Centro, Freight Link, Cross City Tunnel, Timbercorp, Walter equity restructuring by way of scheme of arrangement. Construction, MF Global, Top Ryde, Allco Finance, Raptis and FAI. ■■ The deed administrators of Mirabela Nickel Limited, in respect of a recapitalisation plan to restructure its A$500 million debt. ■■ GrainCorp, in representative proceedings in the Supreme Court of New South Wales. ■■ The majority group of term lenders in the Atlas Iron creditors’ scheme of arrangement.

Gilbert + Tobin is Australia’s leading independent law firm. Established in 1988, the firm employs more than 500 lawyers and professionals nationally. From our Sydney, Melbourne and Perth offices, we work on transactions and cases that define and direct the market. Our clients include major corporations and government clients, throughout Australia and the Asia-Pacific region, and around the world. We are a diverse mix of talented, energetic and creative thinkers who bring different perspectives to find original solutions to unprecedented problems. With insight and rigour, we cut through complexity to get to the point. Our core competency practice areas are: Restructuring + Insolvency, Corporate Advisory/M+A, Banking + Infrastructure, Capital Markets, Competition + Regulation, Intellectual Property, Litigation + Dispute Resolution, Technology, Media + Telecommunications, Employment, Energy + Resources, Real Estate, Environment + Projects.

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Austria Martin Abram

Schindler Rechtsanwälte GmbH Florian Cvak

not sufficient to satisfy all of the creditors and a business forecast 1 Overview shows that the debtor is likely to become illiquid within a reasonably predictable period; usually at least the current and the following 1.1 Where would you place your jurisdiction on the financial year are considered for such a test. If a debtor is illiquid spectrum of debtor to creditor-friendly jurisdictions? or insolvent, the managing directors have to file for the opening of insolvency proceedings without undue delay; however, no later than Austria is generally considered a creditor-friendly jurisdiction, as it within 60 days; failure to meet this obligation exposes the managing does not provide for UK or US styles of restructuring proceedings. directors to civil and criminal liability, as follows: In case of such delays, the managing directors will be liable to all creditors for the damages caused by such delay. Existing creditors, 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal i.e. creditors who had a claim against the debtor before the opening restructuring and insolvency proceedings, and to of the insolvency proceedings, are entitled to claim quota damages, what extent are each of these used in practice? i.e. the difference between the quota they would have received in case of a timely filing and the lower quota they received because of the Austrian law allows for both informal work-outs as well as (within delayed filing. New creditors, i.e. creditors who became creditors of the framework of the Austrian Insolvency Code) formal restructuring the company after the point in time when management would have and insolvency proceedings, all of which are used in practice. The been obliged to file, will be entitled to be reimbursed for the negative Austrian Insolvency Code provides for three types of insolvency interest, as they would have most likely not have contracted with the proceedings, namely: debtor had its management already filed for insolvency. ■ restructuring proceedings with self-administration (where the Criminal liability can occur under several circumstances, most management of the debtor retains control over the day-to-day notably in cases of grossly negligent encroachment of creditors’ business); interests, preferential treatment of creditors, withholding of social ■ restructuring proceedings without self-administration (where security payments and fraudulent intervention with creditors’ claims. the court-appointed administrator takes control over the day- to-day business); and 2.2 Which other stakeholders may influence the ■ bankruptcy proceedings (where the court-appointed company’s situation? Are there any restrictions on the administrator takes control over the debtor with the aim to action that they can take against the company? For realise all assets to pay off the creditors). example, are there any special rules or regimes which The following chapter solely deals with work-outs, restructuring and apply to particular types of unsecured creditor (such insolvency proceedings of corporate entities, and not individuals. as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? 2 Key Issues to Consider When the Company is in Financial Difficulties Shareholders or members of the supervisory board of the debtor (if any) are not entitled to file for the opening of insolvency proceedings. If they exert their influence to induce management not to file for the 2.1 What duties and potential liabilities should the opening of proceedings, this may expose a stakeholder to claims for directors/managers have regard to when managing a damages for contributing to a delay of the filing. company in financial difficulties? Is there a specific point at which a company must enter a restructuring Creditors are entitled to (and frequently do) file for the opening or insolvency process? of insolvency proceedings; however, they can only apply for the opening of bankruptcy proceedings, and not for the opening of in- Managing directors are obliged to timely file for insolvency if the court restructuring proceedings. Creditors which have ongoing debtor is considered “insolvent” according to the Austrian Insolvency contractual relationships with the debtor may be barred from Act, i.e., if it is illiquid or over-indebted. A debtor is illiquid if it terminating such contracts in in-court restructuring proceedings, cannot settle the liabilities due – known but not due liabilities are not if such contracts are vital for the restructuring of the debtor (see considered – and this is not just a temporary occurrence. A debtor question 3.5). Otherwise, there are no special types of rules or is over-indebted if its assets – based on their liquidation value – are regimes applying to particular types of unsecured creditors.

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Additionally, the Austrian Reorganisation Act also provides – at 2.3 In what circumstances are transactions entered least in theory – provisions for the restructuring of a company in into by a company in financial difficulties at risk of financial difficulty. However, these provisions have little practical challenge? What remedies are available? relevance, as the completion of such procedure requires the consent of all creditors. Court-appointed insolvency administrators can (and frequently do) Austrian law does not contain any special rules on pre-packaged challenge before the insolvency court transactions undertaken by sales or debt-for-equity swaps. the debtor prior to the opening of the proceedings during certain “suspect periods” (not applicable for restructuring proceedings For in-court restructuring proceedings, creditors can influence under self-administration). For example, transactions in which the the process through threatening to withhold their consent to the

Austria debtor intentionally puts certain creditors at a disadvantage relative restructuring plan. The restructuring plan must be approved by to one or several other creditors who knew of such an intention simple majority (by headcount) of the insolvency creditors present can be challenged when made within a suspect period of 10 years at the restructuring plan hearing (Sanierungsplantagsatzung) who before the opening of the proceedings. In other cases, suspect must represent at least 50 per cent of the outstanding unsecured debt periods range between six months and two years. Cases include the represented at the hearing and be confirmed by a decision of the transfer of assets without due consideration (two years), provision court. Insolvency creditors who have acquired their claims after of security or settlement of an obligation not due at the time (one the opening of the proceedings have no voting right (unless they year), and business transactions with the insolvent debtor when acquired the claim based on an agreement entered into prior to the the counterparty knew or should have known of its insolvency (six opening of the proceedings). In principle, the restructuring plan must months). treat all insolvency creditors equally (Paritätsprinzip) unless (where a group of insolvency creditors is concerned) unequal treatment is approved by a simple majority (by headcount) of the affected 3 Restructuring Options insolvency creditors present at the restructuring plan hearing, who must represent at least 75 per cent of the affected insolvency claims represented at the hearing or (where an individual creditor is 3.1 Is it possible to implement an informal work-out in concerned) the individual creditor has granted his explicit consent. your jurisdiction? The court decision confirming the restructuring plan releases the debtor from his obligation to pay insolvency creditors in excess of Out-of-court restructurings can only be implemented pre-insolvency the agreed quota. If the debtor defaults and fails to come current or within the 60-day grace period (that is, management has an during the requisite cure period, the released claims are reinstated obligation to file for the opening of insolvency proceedings without and become immediately due. undue delay but in any event within 60 days of insolvency; during the 60-day grace period, management may make reasonable efforts Shareholders also have some (albeit less formalised) influence on to restructure the debtor or prepare an application for restructuring the process; typically, the debtor will require additional shareholder proceedings). The obvious advantage of an out-of-court restructuring funding to (a) satisfy the estate claims during the proceedings, and is that the proceedings are not registered in the insolvency database (b) fulfil the payment obligations pursuant to the restructuring plan. (as would be the case with in-court restructuring proceedings), and As opposed to creditors, the Austrian Insolvency Code does not thus it is less likely to become public. The other advantage is that provide for a (creditor-initiated) shareholder cramdown. out-of-court restructurings tend to offer more flexibility and can be implemented quicker as long as all relevant parties contribute. 3.3 What are the criteria for entry into each restructuring The downside is that out-of-court restructurings only capture the procedure? contracting parties (and not all insolvency creditors) and in certain situations there may be a risk of voidance where an agreement is An in-court restructuring process can only be opened by the entered into at a time where the debtor is already insolvent and the competent insolvency court based on an application by the debtor; effect thereof is to potentially reduce the value of the estate. in case a creditor files for the opening of bankruptcy proceedings, the debtor has the option to request that such proceedings are opened 3.2 What formal rescue procedures are available in as restructuring proceedings. your jurisdiction to restructure the liabilities of The debtor’s application for in-court restructuring proceedings must distressed companies? Are debt-for-equity swaps include a restructuring plan (Sanierungsplan), which must provide and pre-packaged sales possible? To what extent can (i) that the rights of secured creditors (that is, rights of creditors creditors and/or shareholders block such procedures holding a property interest in an asset in the estate to request return or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you of the asset (Aussonderungsgläuber) and the rights of creditors to cram-down dissenting stakeholders? (Absonderungsgläubiger) holding a security interest in an asset to the proceeds of enforcement into that asset) will not be affected, As mentioned under question 1.2 above, the Austrian Insolvency (ii) full payment of all estate claims (Masseforderungen) (these Code provides for three types of formal insolvency proceedings. are, ranked in order of practical importance, claims for labour, The two types of restructuring proceedings (with or without self- services and goods furnished to the estate post-filing, the costs of administration by the debtor) are aimed at ensuring the continuing the proceedings (including the remuneration and reimbursement survival of the debtor by providing a restructuring of (some of his) awarded to the creditor’s committee and the Special Creditors’ financial obligations. On the other hand, bankruptcy proceedings Rights Protection Associations), any monies advanced by a third (see question 1.2 above) are aimed at realising the assets of the party to cover the initial costs of the proceedings (to avoid a estate and distributing the proceeds to the debtor’s creditors. In case dismissal of the filing in limine), and the fees of the administrator), restructuring proceedings are not successful, they are transformed as well as (iii) an offer to pay at least 20 per cent (or 30 per cent if into bankruptcy proceedings. self-administration is requested) of the claims filed by insolvency creditors, i.e. other (unsecured) creditors that were not contested

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by the administrator, within two years of the approval of the restructuring plan. Furthermore, the debtor must provide evidence 3.6 How is each restructuring process funded? Is any in the application that he is able to fund the estate claims for a period protection given to rescue financing? of 90 days following the application. As mentioned above, the debtor needs to provide proof of funds to cover its post-petition payment obligations for a period of 90 days 3.4 Who manages each process? Is there any court following the application. There are no restrictions on the sources involvement? of funding, so funds can be provided by shareholders, through operating cash flows, through existing unused financing lines or Out-of-court restructurings are managed by the company itself through new debt financing. without any court involvement. Austria In restructuring proceedings with self-administration, the debtor retains control over the estate. The administrator’s approval is 4 Insolvency Procedures required only for matters outside the ordinary course of business. However, the administrator may also veto matters which fall within 4.1 What is/are the key insolvency procedure(s) available the ordinary course of business. In restructuring proceedings to wind up a company? without self-administration, control over the estate is transferred to the administrator. There are two types of proceedings to wind up a company, namely Following the receipt of an application for restructuring proceedings, (i) a voluntary liquidation, and (ii) bankruptcy proceedings pursuant the court will issue a formal edict opening the proceedings. In such to the Austrian Insolvency Code. edict, the court will determine the type of proceedings, appoint the administrator and set dates/deadlines for (i) the report hearing (where the administrator has to present his or her report of the 4.2 On what grounds can a company be placed into each winding up procedure? status of the debtor), (ii) the first creditors’ convention, (iii) the filing of insolvency claims, (iv) the examination hearing (where the filed insolvency claims are examined), and (v) the restructuring A voluntary liquidation can only be initiated by a resolution of the plan hearing (where the creditors will take a vote on the proposed shareholders of a company. In such resolution, a special suffix is restructuring plan). The report hearing and the first creditors’ added to the company name to denote that the company is in wind- convention typically take place within 14 days of the publication of down. Both the resolution and the change of the company name the edict and the examination hearing within 60 to 90 days. have to be notified to the Companies Register. Following the acceptance of the restructuring plan, the debtor will For the preconditions of opening bankruptcy proceedings, see (again) be vested with all rights in and to the estate. However, the question 2.1 above. As with in-court restructuring proceedings, the restructuring plan may also provide that a trustee is appointed to (i) proceedings are opened by an edict of the competent insolvency court. supervise the fulfilment of the restructuring plan by the debtor (in Please note that the debtor has the option to apply for a conversion which case supervision is similar to that during self-administration of bankruptcy proceedings into restructuring proceedings, provided proceedings), (ii) take over the estate (übernehmen) with the that he can show that the preconditions are met. mandate to fulfil the restructuring plan (Sanierungstreuhand), or (iii) liquidate the estate (Liquidationstreuhand). 4.3 Who manages each winding up process? Is there any court involvement?

3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to A voluntary liquidation is managed either by (all or some of) perform outstanding obligations? Will termination and the managing directors of the company or by newly appointed set-off provisions be upheld? liquidators, as decided by the company’s shareholders. Court involvement for a voluntary liquidation is limited; the liquidators Out-of-court restructuring proceedings do not have any impact on have to make certain filings with the Companies Register, which existing contracts. Thus, as the debtor will at this point most likely be are only subject to a limited review by the court. The liquidators in under certain of its financing arrangements, it is customary will have to terminate all existing contractual relationships of the for banks to agree on a standstill for the duration of such out-of- company, settle all outstanding claims and repay all debt of the court restructuring. It has to be borne in mind that the 60-day filing company before the company can be finally wound down. obligation of the debtor’s management still applies in this case. For bankruptcy proceedings, the process is similar to the process For in-court restructuring proceedings, the Insolvency Act provides for in-court restructuring proceedings; the court will appoint an for a six-month moratorium for vital contracts, which limit a administrator who will take care of the liquidation of the assets of contracting party’s ability to terminate for good cause. Default on the debtors and the payment of the quota to the insolvency creditors. payments and deterioration of the financial or economic state of the debtor is not considered good cause. The most notable exception to 4.4 How are the creditors and/or shareholders able to that rule is funding commitments under credit facilities. influence each winding up process? Are there any Subject to this restriction, termination and set-off provisions will restrictions on the action that they can take (including still be upheld; however, set-off in an insolvency setting is modified the enforcement of security)? compared to the general rules of the Austrian Civil Code, as claims of creditors are converted to monetary claims upon the opening of In a voluntary liquidation, the liquidators need to pay-off all existing the insolvency proceedings, and thus can be set off at an earlier creditors of the company, so the creditors are in a strong position to point. However, claims arising post-petition cannot be set off demand full repayment of their claims. Shareholders still retain their against claims of the debtor. influence (to the extent allowed by law), even after they decided to put the company in liquidation.

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In bankruptcy proceedings, the shareholders do not have any Insolvency claims: insolvency claims are claims by unsecured noticeable degree of influence on the proceedings. They are, creditors of the debtor relating to the pre-petition period. Such however, entitled to bid for assets of the debtors in the same way as claims needs to be filed with the court (within a period of time set other creditors. The influence of unsecured creditors is also limited forth in the opening edict of the proceedings) and can be contested in bankruptcy proceedings; certain decisions by the administrator by the administrator. require the prior consent of the creditors’ committee, where the Subordinated claims: claims of shareholders or claims based on various creditors have voting rights depending on the amount of equity replacing services to the debtor can only be satisfied if all their (accepted) claims against the debtor. other of the aforementioned claims have been satisfied in full.

Austria 4.5 What impact does each winding up procedure have on 4.7 Is it possible for the company to be revived in the existing contracts? Are the parties obliged to perform future? outstanding obligations? Will termination and set-off provisions be upheld? Following the completion of the bankruptcy proceedings, the (Austrian) debtor is deleted from the Companies Register. To the In a voluntary liquidation, the shareholder decision to put the extent additional assets of the debtor are discovered at a later point company into liquidation does by itself not impact on the existing in time, the company could be revived for as long as it takes to contracts of the company. Typically, counterparties of the company distribute such additional assets to the creditors. will have a contractual right to terminate their contract for cause if the company is put into liquidation. Absent the company and its counterparty exercising such termination right or reaching a different 5 Tax agreement, the outstanding obligations under such contracts have to be fulfilled. Set-off provisions (whether by contract or by statute) will typically not be affected by a decision to put a company into 5.1 What are the tax risks which might apply to a voluntary liquidation. restructuring or insolvency procedure? In bankruptcy proceedings, the insolvency administrator may elect to assume or withdraw from contracts which neither party has fully The opening of a restructuring or insolvency procedure itself performed at the time of the opening of the insolvency proceedings. does not give rise to tax risks or liabilities. In an out-of-court If the contract is assumed, further claims of the contracting party are restructuring, any formal or waiver of existing (preferred) estate claims (Masseforderungen), whereas in case of a shareholder debt may lead to the debtor recognising a taxable gain, withdrawal, any resulting (damage) claims of the contracting party which – in most circumstances – can be offset against current losses are ordinary insolvency claims. Where the estate is the tenant, the or loss carry-forwards. insolvency administrator (not the landlord) can terminate the lease, For a voluntary liquidation to be finalised, the company will need in which case he must only observe the statutory notice period or to obtain a tax clearance certificate before it can be deleted from the a shorter contractual notice period (but is not bound by a longer companies register. contractual notice period). The six-month moratorium referred to under question 3.5 above may also apply in case of bankruptcy proceedings if the administrator has sufficient funds to pay the estate 6 Employees claims and can show that keeping such contracts in place will likely enhance the chances of successfully selling the business enterprise 6.1 What is the effect of each restructuring or insolvency of the debtor during the bankruptcy proceedings for higher sales procedure on employees? proceeds. Where the estate is the landlord, no special termination rights exist. As regards set-off provisions, please see question 3.5 The opening of in-court restructuring or insolvency proceedings by above. itself does not affect the employees of the debtor. The insolvency administrator has special rights to terminate 4.6 What is the ranking of claims in each procedure, employment upon a partial or total shut down, only requiring the including the costs of the procedure? administrator to comply with the (mandatory) notice periods under statute and the applicable collective bargaining agreement (but not All Austrian in-court restructuring and insolvency proceedings longer contractual notice periods). A similar provision is available differentiate between certain types of claims, which are ranked in to a debtor in a restructuring with self-administration if he decides to the following order: close part of the business or unit, and continuing the employment of Secured claims: claims of creditors holding a property an employee engaged in that part of the business or unit would put interest in an asset in the estate to request return of the asset the restructuring or the business at risk. Such a measure, however, (Aussonderungsgläuber) and creditors holding a security requires the consent of the insolvency administrator. interest in an asset to the proceeds of enforcement into that asset Please note that mass lay-offs in connection with restructuring or (Absonderungsgläubiger). insolvency proceedings require a 30-day pre-notification of the Estate claims: estate claims (Masseforderungen), which consist of competent branch of the Austrian Labour Market Service. During (i) costs of the proceedings, (ii) costs for the administration of the the aforementioned 30-day notice period, no termination can be estate, (iii) costs for post-petition salaries, (iv) costs for terminating effectively announced – which means that the notice period is de certain types of employment agreements, (v) claims for the facto prolonged by that period. fulfilment of agreements not terminated by the administrator, (vi) claims based on acts of the administrator, (vii) unjust enrichment claims against the estate, and (viii) compensation claims by the creditor protection organisations.

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7 Cross-Border Issues 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? Generally, Austrian companies tend to restructure or enter into insolvency proceedings in Austria. As opposed to Germany, where several debtors have tried to open insolvency proceedings in the UK Under the Austrian Insolvency Code, companies registered outside in the recent past, we have not observed such attempts in Austria. of Austria (but in another EU Member State) can enter into insolvency proceedings in Austria if their centre of main interest Austria (COMI) is in Austria and no insolvency proceedings have been 8 Groups opened in respect of such debtor in another EU Member State as a main proceeding according to Council Regulation (EC) No 848/2015. Companies registered outside the EU can in principle 8.1 How are groups of companies treated on the also enter into insolvency proceedings in Austria, provided that insolvency of one or more members? Is there scope their COMI is in Austria; in this case, the Austrian Insolvency for co-operation between officeholders? Code provides for a rebuttable assumption that the COMI of a non- Austrian debtor is located in its country of registration. Since the 2017 amendment, the Austrian Insolvency Code incorporates the provisions of Council Regulation (EC) No 848/2015 regarding insolvency proceedings for groups of 7.2 Is there scope for a restructuring or insolvency companies. These provisions basically provide for increased process commenced elsewhere to be recognised in your jurisdiction? coordination of the insolvency proceedings for the various group entities. Insolvency proceedings that were opened as main proceedings in another EU Member State have to be recognised in Austria pursuant 9 Reform to Council Regulation (EC) No 848/2015. For foreign insolvency proceedings opened outside of EU Member States, the Austrian Insolvency Code provides for a recognition of 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or such proceedings provided that the COMI of the debtor is located reducing the involvement of the courts in the laws in the country where the insolvency proceedings were opened and of your jurisdiction, which are intended to make the foreign insolvency proceeding is comparable to an Austrian insolvency processes more streamlined and efficient? insolvency proceeding. Please note that the Insolvency Code does not provide for a formal recognition procedure, such as a Chapter 15 There have not been any such proposals or developments in filing in the United States; thus, the question of the effects for such Austria. foreign insolvency proceedings will be decided by Austrian courts on a case-by-case basis, primarily when creditors try to initiate enforcement actions against the debtor in Austria. 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?

There are currently no proposals for reform.

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Martin Abram Florian Cvak Schindler Rechtsanwälte GmbH Schindler Rechtsanwälte GmbH Tuchlauben 13 Tuchlauben 13 A-1010 Vienna A-1010 Vienna Austria Austria

Tel: +43 1 512 2613 300 Tel: +43 1 512 2613 500 Email: [email protected] Email: [email protected] URL: www.schindlerattorneys.com URL: www.schindlerattorneys.com Austria Martin Abram is a founding partner of Schindler Rechtsanwälte. Prior Florian Cvak is a founding partner of Schindler Rechtsanwälte. Prior to that, Martin was a partner at Wolf Theiss. His practice focuses on to that, he co-headed the private equity practice of Schönherr. His corporate law, corporate restructurings, mergers & acquisitions and practice focuses on private equity, mergers & acquisitions, general project and real estate financing transactions. He regularly counsels corporate law and corporate finance transactions. He frequently financially troubled companies, their shareholders, management and assists financial sponsors and corporates on their investments in supervisory boards as well as financing banks and other creditors in distressed debt and businesses in distress, and regularly advises dealings with distressed debtors. shareholders, management and supervisory boards of financially troubled companies.

Schindler Rechtsanwälte is an Austrian law firm specialising in transactional work with extensive experience in the fields of M&A, private equity, finance, real estate, corporate, tax, securities law and restructurings. We regularly counsel leading national and international financial investors and their investments in corporate businesses, as well as financing banks.

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Bermuda Alex Potts QC

Kennedys Chudleigh Ltd. Nick Miles

There are various statutory provisions relevant to the taking of 1 Overview security in Bermuda, including, for example, section 19(d) of the Supreme Court Act 1905, section 1 of the Bonds and Promissory 1.1 Where would you place your jurisdiction on the Notes Act 1874, and section 2 of the Charge and Security (Special spectrum of debtor to creditor-friendly jurisdictions? Provisions) Act 1990. With this legislative background in mind, Bermuda can be Bermuda is a self-governing British Overseas Territory. The systems described, for the most part, as a very creditor-friendly jurisdiction. of law administered in Bermuda are local Bermudian legislation, Secured creditors can generally enforce their security outside of the Bermudian common law (as developed from English common law), insolvency process, and the insolvency legislation is highly pro- and UK legislation expressly made applicable to Bermuda. creditor. It provides, in particular, for the right of an unsecured Bermuda has its own Court system, including a designated creditor with an unpaid debt to apply for an order that the corporate Commercial Court which is part of the Supreme Court of Bermuda, debtor be compulsorily wound up and its assets applied in satisfaction with rights of appeal to the Court of Appeal for Bermuda, and then of its debts, and there is no statutory corporate rescue regime beyond the Privy Council in London. the ‘Scheme of Arrangement’, discussed below. Nevertheless, the Supreme Court has developed an insolvency practice, through The formal procedures available for companies in financial the appointment of ‘soft-touch’ provisional liquidators, which is difficulties are principally contained in the Companies Act 1981 designed to support formal and informal restructuring plans that (the winding up provisions of which are substantially modelled on have credible prospects of success, and the support of the majority the UK’s Companies Act 1948). Some provisions of the Bankruptcy of creditors. In appropriate circumstances, therefore, the Court does Act 1989 are also applied to companies, by virtue of section 235 of have the power to approach corporate insolvencies in a ‘debtor- the Companies Act 1981, and there is some scope for debate as to friendly’ manner, with a view to achieving a corporate restructuring. the applicability of certain provisions of the Bankruptcy Act 1989 to corporate partnerships. There are also specific provisions relating to insurance companies in the Insurance Act 1978 and relating to 1.2 Does the legislative framework in your jurisdiction segregated accounts companies and their general and segregated allow for informal work-outs, as well as formal accounts in the Segregated Accounts Companies Act 2000. There restructuring and insolvency proceedings, and to are also specific provisions relating to banks in the Banking (Special what extent are each of these used in practice? Resolution Regime) Act 2016, although only sections 1 and 10 of that Act are currently in force. There is no provision in Bermuda’s legislation for informal work- outs. However, informal work-outs are common in Bermuda, and The rules relating to compulsory winding up of companies are the Supreme Court has developed certain practices to support and contained in the Companies (Winding up) Rules 1982 and also, to a assist them as discussed in our answer to question 3.1. lesser extent, in the Rules of the Supreme Court 1985. The only formal restructuring process in Bermuda is the Scheme of As in other jurisdictions that follow English common law, there Arrangement, discussed in our answer to question 3.2. The Scheme are various ways by which a creditor can take security over assets of Arrangement is a highly versatile statutory procedure enabling in Bermuda, by agreement between the creditor and the debtor, the restructuring of debt (and capital) by majority approval and including by way of: legal mortgage; equitable mortgage; fixed Court sanction. It is frequently used to restructure debt where the charge; ; pledge; contractual ; and assignment. consent of all creditors is unlikely to be forthcoming. The nature of the security interest, in any particular case, will be The only formal insolvency proceeding is compulsory winding up determined by: by the Supreme Court. As we discuss in what follows, the Court’s (a) the terms of the parties’ agreement, ordinarily set out in the compulsory winding up jurisdiction can serve as a protective device relevant security documents; within which to restructure a company’s debt with a view to its (b) the nature of the property being secured; and continued trading. Compulsory liquidations are common in Bermuda. (c) the nature of the debtor’s interest in the property being secured.

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account representative to make a written report to the Registrar 2 Key Issues to Consider When the of Companies within 30 days of reaching the view that there is a Company is in Financial Difficulties reasonable likelihood of a segregated account or the general account of a segregated accounts company for which he acts becoming insolvent, and section 30 makes it a criminal offence to fail to do so. 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific 2.2 Which other stakeholders may influence the point at which a company must enter a restructuring company’s situation? Are there any restrictions on the or insolvency process? action that they can take against the company? For example, are there any special rules or regimes which

Bermuda Directors’ and officers’ duties are principally owed to the company apply to particular types of unsecured creditor (such itself. To the extent that the company is solvent, such duties are as landlords, employees or creditors with retention ordinarily owed to the company for the benefit of its present and of title arrangements) applicable to the laws of your jurisdiction? future shareholders. When the company enters the zone of insolvency, directors must act Creditors with security over an insolvent company’s core assets in the best interests of the company’s creditors. Directors that allow have the greatest influence over the company’s situation. a company to continue to trade while it is in financial difficulties face a range of potential liabilities, depending on the precise Unsecured creditors also exercise considerable influence as a result circumstances and the relevant director’s conduct and state of mind of the rights which they enjoy, pursuant to Bermuda’s winding (as discussed below). up jurisdiction. The greater the value of an unsecured creditor’s debt (and the greater the support that it can command from other : Section 246 of the Companies Act 1981 unsecured creditors), the greater the influence. Minority unsecured provides that any director that has knowingly caused or allowed a creditors have relatively limited influence, above and beyond their company to carry on business with intent to defraud creditors of the statutory and contractual rights. company or for any fraudulent purpose may be found personally liable for all, or any, of the debts or other liability as the Court may In addition to the Supreme Court (and any foreign Courts with direct. This would include carrying on the business of the company jurisdiction over the company), certain regulatory authorities in when it is known to be insolvent. Bermuda may also influence the company’s situation, depending on the circumstances. For example, the Registrar of Companies, Personal liability for fraudulent conveyances/fraudulent the Bermuda Monetary Authority and the Regulatory Authority of preferences: It is possible that directors might be held to be Bermuda might, in appropriate circumstances, investigate the affairs personally liable, in certain circumstances, for fraudulent of an insolvent company and exercise such regulatory powers as conveyances or fraudulent preferences, as discussed in our answer may be appropriate. to question 2.3 below. Breach of fiduciary duty and failure to exercise reasonable skill and care: Directors owe duties to the company both pursuant to 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of section 97 of the Companies Act 1981, and as a matter of common challenge? What remedies are available? law, to act honestly and in good faith with a view to the best interests of the company (which can include the interests of the company’s Payments, transfers of assets, and security transactions can be creditors when the company is in the zone of insolvency), and to vulnerable to attack in the event of the company’s insolvency or exercise the care, diligence and skill that a reasonably prudent liquidation. Reviewable transactions include fraudulent conveyances, person would exercise in comparable circumstances. Failure to fraudulent preferences, floating charges, onerous transactions, and comply with these obligations may result in personal liability on the post-petition dispositions. part of directors. Although not confirmed in statute, the power of the directors of a Bermuda company to petition for the compulsory Fraudulent conveyances: Sections 36A to 36G of the winding up of an insolvent company has been recognised in Re First Conveyancing Act 1983 provide that a creditor of a company may Virginia Reinsurance Ltd. [2003] Bda LR 47. be entitled to apply to the Court to have a transaction set aside to the extent required to satisfy its claim, provided that the dominant and breach of trust: Section 247 of the Companies intention of the transaction was to put the property beyond the reach Act 1981 provides that a director may be personally liable if he has of other creditors and the transaction was entered into for no value misapplied, or retained, or become liable, or accountable for any or significantly less than the value of the property transferred. For money or property of the company, or been guilty of any misfeasance these purposes, a creditor is one to whom an obligation is owed at or breach of trust in relation to the company. The scope and effect the date of the transfer, or to whom it is reasonably foreseeable an of section 247 was recently considered by the Supreme Court of obligation will be owed within two years of the date of the transfer, Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ. or to whom an obligation is owed pursuant to a cause of action which Miscellaneous offences and liabilities: Sections 243 to 248 of the accrued before, or within, two years after the date of the transfer. Companies Act 1981 set out a range of criminal offences that may Fraudulent preferences: Section 237 of the Companies Act be committed by directors of companies, including, for example, 1981 provides that any conveyance, mortgage, delivery of goods, by fraudulently altering documents relating to company property or payment, execution or other act relating to property made or done by affairs, falsifying books or accounts with the intention of defrauding or against a company within six months before the commencement any person, or fraudulently inducing a person to give credit to the of its winding up shall be deemed a fraudulent preference of its company. There are also various legislative provisions that impose creditors and be invalid accordingly. Section 238 provides for personal liability on directors for any failure to pay certain taxes and the liability and rights of fraudulently preferred persons. In order remit pension contributions. to fall foul of the provision, the transfer or disposition must have Segregated accounts companies representatives: Section 10 of been made within the six months prior to the commencement of the the Segregated Accounts Companies Act 2000 requires a segregated winding up. In the case of a compulsory winding up, this would be

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the date of the presentation of the petition to the Supreme Court of Following presentation of a petition for the winding up of the Bermuda. The transfer will be invalid if it was carried out with the company (usually presented by the company itself, if the company dominant intention of preferring one creditor over others at a time contemplates a restructuring), a provisional liquidator may be when the company was unable to pay all of its creditors in full. appointed, who may then apply for a statutory stay of all proceedings Floating charges: Section 239 of the Companies Act 1981 provides against the company while the work-out process continues, whether that a floating charge on the undertaking or property of a company informally or through the medium of a Scheme of Arrangement. The created within 12 months of the commencement of the winding up board of directors retains control over the company, and endeavours shall be invalid, unless it is proved that the company immediately to effect a work-out under the supervision of the ‘soft-touch’ after the creation of the charge was solvent, except to the amount of provisional liquidator and the Court. If the work-out negotiations any cash paid to the company at the time of, or subsequently to, the are successful, the winding up petition can be dismissed; if they creation of the charge, together with interest at the statutory rate. are unsuccessful, the winding up petition can be restored for final Bermuda hearing and the company can be wound up and placed into full Onerous transactions: Section 240 of the Companies Act 1981 liquidation. While the work-out plan is negotiated, the hearing of provides that the liquidator of a company can, with the Court’s the winding up hearing petition is adjourned (although the company permission, disclaim any property belonging to the company or any enjoys the protection of the statutory moratorium). rights under any contracts which he considers to be onerous for the company to hold, or is unprofitable or unsaleable. 3.2 What formal rescue procedures are available in Post-petition dispositions: Section 166 of the Companies Act 1981 your jurisdiction to restructure the liabilities of provides that, in a compulsory winding up, any disposition of the distressed companies? Are debt-for-equity swaps property of a company, including things in action, and any transfer and pre-packaged sales possible? To what extent can of shares or alteration in the status of the members of the company, creditors and/or shareholders block such procedures made after the commencement of the winding up (being the time or threaten action (including enforcement of security) of presentation of the petition) shall be void, unless the Court to seek an advantage? Do your procedures allow you otherwise orders by way of a validation order. In the case of an to cram-down dissenting stakeholders? insolvent company, the Court should only make an order validating a post-petition disposition where it can be shown that the disposition Liquidation procedures can generally be divided into compulsory will benefit (in a prospective case), or that it has benefitted (in a liquidations and voluntary liquidations. Voluntary liquidations can, retrospective case), the general body of unsecured creditors so as to in turn, be divided into solvent liquidations (members’ voluntary justify the disapplication of the pari passu principle. The focus of liquidations) or insolvent liquidations (creditors’ voluntary the test is mainly directed to an objective assessment of the benefit to liquidations). be obtained by the general body of unsecured creditors, rather than As above, the general purpose of liquidation is to gather in, and the necessity or expedience of the disposition from the company’s realise assets, to pay off creditors in accordance with their rights and or directors’ perspective. In the case of a solvent company, in priorities, and to distribute any remaining assets to the company’s contrast, there are four elements which must be established before a shareholders. The only formal rescue procedure is the Scheme validation order may be made: first, the proposed disposition must of Arrangement (although see further below in this section for an appear to be within the powers of the company’s directors; second, exception to this rule). A Scheme of Arrangement (“scheme”) is a the evidence must show that the directors believe the disposition is formal procedure which may be used to reorganise the business of necessary or expedient in the interests of the company; third, it must the debtor with a view to its continued trading. appear that the directors in reaching that decision have acted in good A scheme may result in the adjustment or compromise of all or a faith; and fourth, the reasons for the disposition must be shown to be class of the debt of the company. It may include the transfer of ones which an intelligent and honest director could reasonably hold. rights, property and liabilities of the company to another company. Bulk sales in fraud of creditors: Under section 5 of the Bulk Sales Schemes of arrangement may also reorganise the company’s capital, Act 1934, certain sales and purchases of stock in bulk are deemed to and accordingly may be used (and have on several occasions been be fraudulent, and absolutely void as against the vendor’s creditors, used) to implement a debt-for-equity swap. unless the proceeds of sale are sufficient to pay the vendor’s creditors The Court has jurisdiction to make specific provision for this in the in full, and are in fact so applied. order sanctioning the scheme. A scheme is not an intrinsically insolvency-related procedure. However, it may be employed after the appointment of a liquidator 3 Restructuring Options or provisional liquidator, and there can be advantages in employing a scheme in this way. Where illiquidity issues confront the company, 3.1 Is it possible to implement an informal work-out in for example, its freedom to promulgate or pursue a Scheme of your jurisdiction? Arrangement may be susceptible to litigation or compulsory winding up petitions presented by dissentient creditors. Where this Yes, where the consent of all relevant creditors is forthcoming. It is a concern, the powers of the Court pertaining to the winding up of companies and appointment of liquidators may be employed in is not possible to ‘’ creditors in the absence of a formal the protection of a proposed scheme. This may include the use of a restructuring process. ‘soft touch’ provisional liquidation, along the lines described in our Where there is a risk that negotiations towards an informal work- answer to question 3.1. out may be jeopardised by creditors instituting or continuing In the case of an insolvent insurance company, there is another proceedings against the company seeking enforcement of their restructuring tool potentially available under section 37(5) and debts, the negotiations may be protected by a ‘soft touch’ provisional section 39 of the Insurance Act 1978. These provisions enable the liquidation, a procedure developed as part of the insolvency practice Court, if it thinks fit, to reduce the amount of the insurance contracts of the Supreme Court and now commonly used to support work- of the insurer, on such terms and subject to such conditions as the outs. The procedure is described below. Court thinks fit. Although the procedure and case law in this area is not fully developed in Bermuda, it is likely that the Court would

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require that a meeting of policyholders be convened, and their views If a majority within each class of creditors present and voting canvassed, and one relevant consideration for the Court would be (including by proxy) at the meeting, representing 75 per cent by the effect of any reduction order on the company’s ability to make value of that class, votes in favour of the scheme, and the Court recoveries against its reinsurers. Depending on the circumstances, a approves it, then the scheme will be binding on all creditors. Court formal Scheme of Arrangement may be required in any event. approval is a discretionary matter. The Court must be satisfied that A pre-packaged sale involves the pre-agreement of terms of a sale the statutory requirements have been met, including the holding of of the business of the company to another party or a new company, requisite class meetings and approval of necessary majorities, and which sale is then effected directly after the appointment of an that each class was fairly represented at each meeting. In addition, office-holder. The sale and its terms are frequently negotiated by, or the Court must be satisfied that the scheme is fair to creditors with the approval of, major secured creditors of the company. The generally – in other words, that the majority has not taken unfair Bermuda prevailing regime in Bermuda does not lend itself to the use of pre- advantage of its position. packaged sales. Winding up proceedings anticipate the death of the The scheme is not effective until a copy of the sanction order is company and distribution of its assets. Conversely, the Scheme of delivered to the Registrar of Companies. The scheme order must be Arrangement process is too dependent upon the views of the general annexed to any copies of the company’s memorandum of association creditor body. Neither allows the discretion necessary to pre-agree issued subsequent to the order. and dictate a disposal of the business of the company, in the manner required for a pre-packaged sale. Conceivably, a receiver and 3.4 Who manages each process? Is there any court manager appointed by a secured creditor pursuant to a charge over involvement? substantially all the assets of a company may achieve something akin to a pre-packaged sale. It is also conceivable that a Bermudian If the Scheme of Arrangement is conducted outside a liquidation, exempt company whose centre of main interests is in the United the company’s board of directors and any managers control the Kingdom, or whose assets and liabilities are situated in the United process, although a Scheme Administrator is normally appointed to Kingdom, might seek the assistance of both the Courts of Bermuda administer the scheme once it is implemented. and the Courts of England and Wales for the purposes of having If the scheme is conducted within a liquidation, the liquidator a pre-packaged sale effected under the supervision of a court- controls the process. appointed administrator. The procedure, however, is not as common However, there is a hybrid option, under which the scheme is in Bermuda as it is in certain other jurisdictions, such as Jersey, and conducted within a ‘soft touch’ provisional liquidation, used to there is some uncertainty in the case law as to the scope of the power implement a restructuring within the protective environment of a of Bermudian Courts and English Courts in this respect. provisional liquidation but without the necessity of winding up the As is noted in our answer to question 3.3, a binding Scheme of company. The ‘soft touch’ provisional liquidation procedure has Arrangement requires the approval of a majority within each class been described in our answer to question 3.1. The board of directors of creditors present and voting (including by proxy) at the meeting normally manages the scheme process under the supervision of the of that class, representing 75 per cent by value of that class, votes provisional liquidator. in favour of the scheme. Accordingly, the Scheme of Arrangement must be on such terms as may be approved by the majority of 3.5 What impact does each restructuring procedure have creditors in each class, and a Scheme of Arrangement is often the on existing contracts? Are the parties obliged to result of promotion and direction by majority creditors. perform outstanding obligations? Will termination and Those voting at scheme meetings may in some circumstances set-off provisions be upheld? include persons beneficially interested in the company’s debt. In a recent Scheme of Arrangement of debts of a company evidenced The commencement of a Scheme of Arrangement has no by a global note held by a trustee, beneficial owners of the note, automatic effect on contracts, save in the case where the relevant who were each entitled to require issuance of an individual note contract contains contractual terms to that effect. If a Scheme of enforceable directly against the company, were allowed to vote in Arrangement with creditors is approved, the scheme will govern any the Scheme as contingent creditors of the company. issues relating to the termination of contracts with those creditors. As may be seen from the above, a minority of dissenting creditors in each class may be crammed down by a Scheme of Arrangement. 3.6 How is each restructuring process funded? Is any protection given to rescue financing?

3.3 What are the criteria for entry into each restructuring The company generally uses its own assets to finance the procedures procedure? of voluntary liquidation, compulsory liquidation, and any Scheme of Arrangement. However, if the company does not have sufficient The Scheme of Arrangement procedure may be initiated by assets or liquidity, it is possible for the company, or its liquidators, to application of a creditor, a member, the company itself, or (where enter into funding arrangements with those interested in the outcome one has been appointed) the liquidator. of the procedures, typically creditors, if doing so is necessary for The applicant requests the Court to convene a meeting of the the beneficial winding up of the company. In such a case, funding creditors, or the relevant class of creditors, of the company. If liabilities would be expected to be re-paid by the company or the Court so directs (which will almost always be the case, absent by the liquidator prior to the repayment of unsecured creditors, exceptional circumstances), creditors must be summoned by notice. although subject to the specific terms of any funding agreement and Notification commonly includes advertisement of the meeting. the Court’s approval. In this context, it is possible as a matter of Bermuda law to secure protection (or priority treatment) for rescue Where, because of differences in their respective rights, two or more financing on an ad hoc basis, and by agreement in appropriate creditors are unable to consult together with a view to their common circumstances. In certain cases, the liquidator appointed by the interest, it will be necessary to separate creditors into classes for the Court is the , being a government official with a purposes of voting on the scheme proposal. limited government budget.

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petition for the winding up of the whole company, and also for the 4 Insolvency Procedures Court to wind up a company of its own motion. Section 170(2) of the Companies Act 1981 also allows the Court 4.1 What is/are the key insolvency procedure(s) available to appoint a provisional liquidator between the presentation of a to wind up a company? winding up petition and its final hearing.

As set out above, the formal procedures available for companies 4.2 On what grounds can a company be placed into each in financial difficulties are principally contained in the Companies winding up procedure? Act 1981 (the winding up provisions of which are substantially modelled on the UK’s Companies Act 1948). Some provisions of

A company may be compulsorily wound up by the Court in any of Bermuda the Bankruptcy Act 1989 are also applied to companies, by virtue the following circumstances, under section 161 of the Companies of section 235 of the Companies Act 1981, and there is some Act 1981: scope for debate as to the applicability of certain provisions of the Bankruptcy Act 1989 to corporate partnerships. There are also (a) if the company has, by resolution, resolved that the company be wound up by the Court; specific provisions relating to insurance companies in the Insurance Act 1978 and relating to segregated accounts companies and (b) if there is default in holding the company’s statutory meeting; their general and segregated accounts in the Segregated Accounts (c) if the company does not commence its business within a year Companies Act 2000. There are also specific provisions relating of its incorporation or suspends its business for a whole year; to banks in the Banking (Special Resolution Regime) Act 2016, (d) if the company carries on any restricted business activity; although this legislation has not yet been brought into force. The (e) if the company engages in a prohibited business activity; rules relating to compulsory winding up of companies are contained (f) if the company is unable to pay its debts; in the Companies (Winding up) Rules 1982 and also, to a lesser (g) if the company’s ministerial consents were obtained as a result extent, in the Rules of the Supreme Court 1985. of a material misstatement in the application for consent; or Insolvent liquidation procedures can generally be divided into (h) if the Court is of the opinion that it is just and equitable that compulsory liquidations and insolvent voluntary liquidations the company should be wound up. (creditors’ voluntary liquidations). The Supervisor of Insurance (being the Bermuda Monetary The general purpose of the liquidation process is to gather in and Authority) can present a petition for the winding up of an insurance realise assets, to pay off creditors in accordance with their rights company if it is in breach of the regulatory provisions of the and priorities, and then to distribute any remaining assets to the Insurance Act 1978, or if it is in the public interest that the insurance company’s shareholders. However, liquidators in a winding up of a company should be wound up on just and equitable grounds. company have the power to promote compromises and arrangements Section 34 of the Insurance Act 1978 also provides that the Court whether by consensual means or using a Scheme of Arrangement. may order the winding up of an insurance company subject to the Furthermore, where the company is not already in liquidation, the modification that the insurance company may be ordered to be wound winding up jurisdiction of the court and statutory machinery may up on the petition of 10 or more policyholders owning policies of be invoked in order to protect the implementation of a restructuring an aggregate value of not less than $50,000, provided that such a (as discussed above in connection with ‘soft-touch’ provisional petition shall not be presented except by leave of the Court, and leave liquidation). shall not be granted until a prima facie case has been established Liquidators are generally given a degree of discretion as to the time to the satisfaction of the Court and until security for costs for such period within which to effect and complete the liquidation, which amount as the Court may think reasonable has been given. may depend to some extent on the nature, location, and liquidity of The Registrar of Companies can petition for the winding up of a the company’s assets. After the liquidation process is complete, the company if directed to do so by the Minister of Finance following company can then be dissolved and it will cease to exist as a legal receipt of a report of an Inspector to investigate the company under entity. section 110 or section 132 of the Companies Act 1981. Voluntary liquidation A provisional liquidator can be appointed prior to the final hearing of An insolvent voluntary liquidation is initiated by the company’s a compulsory winding up petition if there is a good prima facie case shareholders through a resolution, based on the recommendation that a winding up order will be made, and if the Court considers that of the board of directors. Although creditors participate in the a provisional liquidator should be appointed in all the circumstances creditors’ voluntary liquidation procedure, they can only secure the of the case. active supervision of the Court by petitioning for the compulsory liquidation of the company. 4.3 Who manages each winding up process? Is there any Compulsory liquidation court involvement? The compulsory liquidation process is initiated by one of the following making a petition to the Supreme Court of Bermuda: Compulsory liquidation: the liquidator or provisional liquidator a creditor, including any contingent or prospective creditor; a appointed by the Court controls the procedure of liquidation, and contributory (that is, any person liable to contribute to the assets displaces the company’s board of directors upon his appointment. of the company in the event of its liquidation, i.e. a shareholder or The exercise by the liquidator of his powers is subject to the member); the company itself (by a shareholders’ resolution if it is sanction, supervision and control of the Court, and, to a lesser extent, solvent and/or by a directors’ resolution if it is insolvent); and, in the Committee of Inspection, if one is appointed. In the same way certain circumstances, the Registrar of Companies or the Supervisor as the board of directors is displaced, so too are the powers of the of Insurance (being the Bermuda Monetary Authority). shareholders displaced. It is also possible, in exceptional circumstances, for receivers ‘Soft touch’ provisional liquidation: subject to the circumstances of segregated accounts within a segregated accounts company to of the case, the Court can order that a provisional liquidator be

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appointed with limited powers (i.e. a ‘soft touch’), and that the directors continue to retain all of their powers or certain limited 4.6 What is the ranking of claims in each procedure, powers, subject only to the supervisory role to be played by the including the costs of the procedure? provisional liquidator (subject, in turn, to the Court’s supervisory role). This can be an important tool for the purposes of effecting a In a compulsory liquidation or a creditors’ voluntary liquidation, restructuring, especially in the context of international insolvencies creditors’ claims are ranked in the following order: which require parallel restructuring procedures both in Bermuda (1) secured creditors enforce their security outside the liquidation, and in other jurisdictions. but essentially in priority to all other creditors; Voluntary liquidation: the liquidator appointed or approved by the (2) the costs and expenses of the liquidation, including all costs, company’s creditors controls the procedure of voluntary liquidation. charges and expenses properly incurred in the company’s Bermuda The board of directors is displaced upon the appointment of the winding up, including the liquidator’s remuneration if sanctioned by the Court (pursuant to sections 194, 232, liquidator, and their powers are terminated. and 236(6) of the Companies Act 1981 and Rule 140 of the Companies (Winding up) Rules 1982); 4.4 How are the creditors and/or shareholders able to (3) debts due to employees located in Bermuda under section influence each winding up process? Are there any 33(3) of the Employment Act 2000; restrictions on the action that they can take (including (4) preferential debts owed to preferential creditors pursuant to the enforcement of security)? section 236(1) of the Companies Act 1981, including unpaid taxes under the Taxes Management Act 1976, unpaid social Subject to any orders dispensing with the need for approval, a insurance/Government pension contributions under the number of the powers of a liquidator appointed in an insolvent Contributory Pensions Act 1970, liability for compensation winding up of a company may only be exercised with the approval under the Workmen’s Compensation Act 1965, and payments of a ‘Committee of Inspection’ comprising representative creditors of up to $2,500 due to employees of Bermudian companies of the company. It is also possible for creditors to apply to the Court but resident outside of Bermuda; with respect to the exercise or proposed exercise of the liquidator’s (5) debts secured by a floating charge (although higher priority powers, under sections 175 and 176 of the Companies Act 1981. debts must be paid out of any property secured by a floating charge if the assets of the company are not otherwise sufficient The making of a winding up order brings about a statutory to meet them pursuant to section 236(5) of the Companies moratorium on proceedings against the company. This will not Act 1981); prevent secured creditors enforcing their security where they can do (6) unsecured creditors’ debts, including the unsecured balance so without instituting proceedings before the court. Furthermore, of secured creditors’ claims (pursuant to sections 158(g), 225 even where judicial assistance is needed, leave will usually be given and 235 of the Companies Act 1981); to enforce valid security interests notwithstanding the statutory (7) post-liquidation interest on unsecured creditors’ debt claims; moratorium. A judgment creditor will not be permitted to continue with execution of its judgment against the company where notice (8) debts due to shareholders in their capacity as such (pursuant to section 158(g) of the Companies Act 1981); and of an order winding up the company is received by the Provost Marshall prior to sale of goods of the company taken in execution (9) shareholders’ equity in the event of a surplus balance, or prior to completion of execution by receipt or recovery of the full according to their rights and interests under the company’s bye-laws. amount of the levy. Each category of debts must be paid in full before payment of creditors in the subsequent category. Creditors in the same category 4.5 What impact does each winding up procedure have on rank equally (or pari passu) among themselves. existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off However, in the case of the winding up of segregated accounts provisions be upheld? companies, section 25 of the Segregated Accounts Companies Act 2000 provides that the liquidator shall deal with the assets Other than the statutory provisions governing contracts of and liabilities which are linked to each segregated account only in employment discussed in our answer to question 6.1, as a matter of accordance with the segregation principles of the legislation and the law, there is no automatic termination of contracts with the company relevant governing instruments or contracts for each transaction. upon the commencement of a compulsory liquidation or a creditors’ Section 36 of the Insurance Act 1978 also provides that, in the voluntary liquidation (save in the case of the liquidator disclaiming case of an insurer carrying on long-term business, the assets in the an onerous contract or transaction, and save in the case where the insurer’s long-term business fund will only be available for meeting relevant contract contains contractual terms to that effect). However, the liabilities of the insurer attributable to its long-term business, and a contracting counterparty can only claim in the liquidation for debts its other assets shall only be available for meeting its other liabilities. which exist at the date of commencement of the liquidation, and There is some scope for argument as to the order of priority for interest also ceases to run from that date. In the circumstances, there payment of claims asserted by former shareholders in mutual is, as a matter of fact, a termination or cancellation of contracts in fund companies, whose shares have been redeemed but who are the event of liquidation, unless the liquidator elects to affirm the owed payment of the redemption proceeds at the commencement relevant contract. Contracting counterparties can also seek to assert of liquidation. The general view is that these are debts due to claims against the company for damages sustained as a result of any shareholders that rank behind outside trade creditors’ debts, but breach of contract caused by the commencement of the liquidation, ahead of shareholders’ equity, but the legislative provisions, subject to proof in the liquidation. including section 158(g) of the Companies Act 1981, are not entirely clear in this respect, notwithstanding a recent judgment of the Supreme Court of Bermuda that has touched upon the issue.

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There is also scope for argument as to the order of priority of outstanding occupational pension payment liabilities under the 7 Cross-Border Issues National Pension Scheme (Occupational Pensions) Act 1998 and Regulation 56 of the National Pension Scheme (General) Regulations 7.1 Can companies incorporated elsewhere use 1999, since the legislative provisions are not entirely clear. restructuring procedures or enter into insolvency proceedings in your jurisdiction?

4.7 Is it possible for the company to be revived in the future? Following the decision of the Privy Council in PricewaterhouseCoopers v Saad Investments Company Limited In the course of the liquidation, the liquidator will adjudicate the [2014] UKPC 35 (discussed in more detail in our answer to claims of unsecured creditors and collect the assets of the company. question 7.2), it is clear that the Supreme Court of Bermuda Bermuda Assets will be distributed (to the extent available) according to the currently has no jurisdiction to wind up ‘overseas companies’ that statutory priorities in the form of dividends. have not been granted a permit by the Minister of Finance to carry on business in Bermuda. A previously used ‘loophole’ under the At the end of this process, the liquidator is generally released, and External Companies (Jurisdiction in Actions) Act 1885 was closed the company is dissolved. by the Privy Council’s decision. Under section 260 of the Companies Act 1981, the Court has The Supreme Court currently lacks jurisdiction to order the the power to declare a of a company void in certain convening of meetings of creditors in relation to a proposed circumstances, up to a period of either two years (most liquidation compromise or arrangement of the debt of an overseas company, cases) or 10 years (members’ voluntary liquidation) after the date of unless that company has been registered by the Minister of Finance dissolution, and under section 261 of the Companies Act 1981 the as a Non-Resident Insurance Undertaking under the Non-Resident Court has power to restore a company that has been struck off the Insurance Undertakings Act 1967. Register for up to 20 years after strike-off. Following Court approval of a Scheme of Arrangement (see below), 7.2 Is there scope for a restructuring or insolvency the scheme is implemented under the auspices of the company’s process commenced elsewhere to be recognised in directors and the Scheme Administrator (or the liquidator, if one has your jurisdiction? been appointed). The company may continue in all respects (subject to the scheme) as before. Alternatively, where the scheme was Bermuda has no statutory equivalent of Chapter 15 of the US’s promoted in the context of winding up proceedings, the liquidation Bankruptcy Code, section 426 of the UK’s , or of the company may proceed on the basis of the balance of its assets the UK’s Cross-Border Insolvency Regulations 2006, by which the and liabilities. UK implemented the United Nations Commission on International A Scheme of Arrangement of the debts of a company extinguishes Trade Law’s Model Law on Cross-Border Insolvency. The the debts and has no effect on the existence, powers or capacity Supreme Court of Bermuda has nonetheless confirmed, following of the company. Accordingly, the company may go on to trade the Privy Council decision in Cambridge Gas Transportation unburdened by the debts that have been discharged as a result of the Corp v Navigator Holdings plc [2007] 1 AC 508 that, as a matter Scheme of Arrangement. of common law, the Supreme Court of Bermuda may (and usually does) recognise liquidators appointed by the Court of the company’s domicile and the effects of a winding up order made by that Court, 5 Tax and has a discretion pursuant to such recognition to assist the primary liquidation Court by doing whatever it could have done in 5.1 What are the tax risks which might apply to a the case of a domestic insolvency. restructuring or insolvency procedure? However, the precise scope of Bermudian Courts’ common law power to assist foreign liquidations, and, in particular, to “provide No particular tax liabilities are incurred in each procedure, as a matter assistance by doing whatever it could have done in the case of a of local Bermuda law. Stamp duty is payable in the ordinary way, domestic insolvency” has been the subject of considerable debate in save that section 253 of the Companies Act 1981 provides various a number of recent judgments, including in two recent judgments by exemptions from stamp duty where a company is in compulsory the Privy Council, on appeals from the Court of Appeal for Bermuda, liquidation or creditors’ voluntary liquidation. in Singularis Holdings Limited v PricewaterhouseCoopers [2014] UKPC 36 and PricewaterhouseCoopers v Saad Investments Company Limited (referred to in our answer to question 7.1). 6 Employees In summary, subject to the facts of any particular case, the Bermuda Court is likely to recognise the winding up orders of foreign Courts, 6.1 What is the effect of each restructuring or insolvency and to assist foreign liquidators to the fullest extent possible, in procedure on employees? circumstances where: (1) there is a ‘sufficient connection’ between the foreign Court’s Section 33(1) and 33(2) of the Employment Act 2000 provide jurisdiction and the foreign company making it the most that the winding up or insolvency of an employer’s business shall appropriate, or the ‘most convenient’ jurisdiction to have cause the contract of employment of an employee to terminate one made an order for the winding up of the company and month from the date of winding up or the appointment of a receiver, appointment of foreign liquidators; unless, notwithstanding the winding up or insolvency, the business (2) there are documents, assets, or liabilities of the foreign continues to operate. company within the jurisdiction of Bermuda; the foreign company has conducted business or operations within, or from, the jurisdiction of Bermuda, whether directly or by agents or by branches; the foreign company has former

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directors, officers, managers, agents or service providers the same office-holders as liquidators to multiple companies in the within the jurisdiction of Bermuda; and/or the foreign same group of companies, subject to suitable arrangements being company properly needs to be involved in litigation or made with respect to any conflicts that might arise (including by arbitration within the jurisdiction of Bermuda; and way of appointment of a ‘conflicts’ liquidator). In appropriate cases, (3) there is no public policy reason under Bermudian law to the Supreme Court has also supported and approved co-operation the contrary (if, for example, there would be unfairness or agreements that have been entered into between separate office- prejudice to local Bermudian creditors). holders of companies within a group of companies. However, the Privy Council has stressed that the question of how far it is appropriate to develop the common law so as to assist foreign liquidations depends on the facts of each case, and 9 Reform

Bermuda the nature of the power that the Bermuda court is being asked to exercise. In the context of an application for an order for 9.1 Have there been any proposals or developments in production of documents by an entity within the jurisdiction of the your jurisdiction regarding the use of technology or Bermuda court, the Privy Council has noted that such a power is reducing the involvement of the courts in the laws available only where necessary to assist the officers of a foreign of your jurisdiction, which are intended to make court of insolvency jurisdiction or equivalent public officers, but is insolvency processes more streamlined and efficient? not available to assist a voluntary winding up, which is essentially a private arrangement. It is not a power to assist foreign liquidators No, there have not. to do something which they could not do under the law by which they were appointed, and its exercise must be consistent with the 9.2 Are there any other governmental proposals for substantive law and public policy of the assisting court in Bermuda. reform of the corporate rescue and insolvency regime There is some uncertainty as to whether a foreign Scheme of in your jurisdiction? Arrangement or related procedure (such as an insurance business transfer scheme under legislation implementing European single One of the more significant recent legislative developments in market insurance directives) can be recognised and enforced in Bermuda is the Banking (Special Resolution Regime) Act 2016, Bermuda as a matter of common law. Although the Supreme Court which has been enacted but not yet brought into force, save with of Bermuda has shown some willingness to recognise foreign Court respect to sections 1 and 10 (as at the time of writing). This is a orders approving foreign schemes (in the absence of opposition), very substantial piece of legislation which provides a new statutory it is unclear what position it might take in a contentious situation. toolset for dealing with the failure or insolvency of a bank in Bermuda. 7.3 Do companies incorporated in your jurisdiction The Companies and Company Amendment Act restructure or enter into insolvency proceedings in 2017 also introduced certain legislative changes regarding retention other jurisdictions? Is this common practice? of the books and papers of a company and its liquidators. The Bermuda Monetary Authority is actively engaged in a Exempted companies incorporated in Bermuda carry on business consultation exercise regarding potential reform of the order predominantly or exclusively in foreign jurisdictions, and in which insurance policyholder creditors rank for payment in frequently have their shares and other securities listed on foreign an insolvent liquidation of an insurer. It is anticipated that this public exchanges. They are accordingly subject to the insolvency consultation exercise will lead to certain legislative changes to the regimes of the jurisdictions in which they do business, where these Insurance Act 1978 later in 2018. extend to companies incorporated overseas. Proceedings in other The Chief Justice has recently published various consultation papers, jurisdictions, for example: the United States; the United Kingdom; proposing certain procedural reforms to the Companies (Winding the British Virgin Islands; the Cayman Islands; Hong Kong; and Up) Rules 1982 and certain Rules of the Supreme Court of Bermuda Singapore, affecting insolvent Bermuda exempted companies 1985 which are of relevance to corporate litigation. It is anticipated are common. Where necessary, these are commonly supported that certain rule changes will be implemented later in 2018. by ancillary liquidation proceedings in Bermuda or by judicial recognition and assistance (of the type discussed in our answer to The Government of Bermuda is actively engaged in a consultation question 7.2) from the Supreme Court with the foreign proceedings, exercise with respect to potential relaxation of the 60/40 Bermudian in the absence of winding up proceedings in Bermuda. ownership and control requirements for local Bermuda companies. The Restructuring and Insolvency Specialists Association (Bermuda) is also actively considering a variety of industry proposals for 8 Groups potential law reform in the area of insolvency and corporate rescue, and this is also an area of interest to the Government of Bermuda, as 8.1 How are groups of companies treated on the well as the Chief Justice. insolvency of one or more members? Is there scope for co-operation between officeholders?

There are no statutory provisions for the treatment of insolvent group companies. The Supreme Court has, however, occasionally appointed

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Alex Potts QC Nick Miles Kennedys Chudleigh Ltd. Kennedys Chudleigh Ltd. 20 Brunswick Street 20 Brunswick Street Hamilton HM10 Hamilton HM10 Bermuda Bermuda

Tel: +1 441 296 9276 Tel: +1 441 296 9276 Email: [email protected] Email: [email protected] URL: www.kennedyslaw.com/bermuda URL: www.kennedyslaw.com/bermuda

Alex Potts QC has a wide-ranging commercial litigation and arbitration Nick Miles’ practice focuses on restructurings and reorganisations, Bermuda practice, with a focus on disputes in the fields of contentious insolvency, frequently with an insurance element. He has acted for petitioning banking, financial services, investment funds, insurance, reinsurance, creditors seeking the compulsory winding up of Bermuda companies professional negligence, aircraft finance, company law, and trusts. and for creditors of Bermuda companies subject to Schemes of Arrangement. He is a member of The Restructuring and Insolvency Mr. Potts has conducted cases and appeared as counsel before a Specialists Association (Bermuda) (“RISA”) and of INSOL. He is variety of courts and , in England and Wales, Bermuda and currently participating as a representative of RISA in a working group the Cayman Islands, representing creditors, directors, managers, consulting on reform of the order in which insurance policyholder liquidators, and debtors. creditors rank for payment in an insolvent liquidation of an insurer. Mr. Potts has appeared in a number of reported insolvency cases Nick Miles’ full professional profile is available at: http://www. in Bermuda, and he regularly advises, speaks and writes on issues kennedyslaw.com/nmiles/ http://www.kennedyslaw.com/nmiles/. of insolvency law in Bermuda. He is a committee member of The Restructuring and Insolvency Specialists Association (Bermuda) and a member of INSOL. Alex Potts’ full professional profile is available at: http://www. kennedyslaw.com/apotts/.

Kennedys Chudleigh Ltd. provides expert counsel in relation to commercial matters. In addition to its insurance practice, the firm handles insolvency and restructuring matters, commercial litigation and arbitration, corporate and trust disputes, contract drafting, and general corporate advisory/regulatory work. The firm excels at prosecuting and defending complex matters involving significant exposure, sensitive public relations issues, and industry-wide policies. Kennedys Chudleigh offers its clients not only local Bermuda expertise but also multinational legal expertise through its association with the international law firm Kennedys LLP. In its insolvency and restructuring practice, Kennedys Chudleigh counsels clients both in Bermuda and in other jurisdictions with connections to Bermuda. Recent matters handled by the team include: representing the Liquidators of two BVI fund companies in compulsory winding up proceedings in Bermuda; advising on Schemes of Arrangement; representing the compulsory Liquidators and segregated accounts receivers of two Bermuda mutual fund companies structured as segregated accounts companies; representing creditors and shareholders of various Bermuda companies, funds and private equity structures in a number of contested compulsory winding up petitions; representing the interests of unsecured creditors in various ; and representing a Bermuda mutual fund company structured as a segregated accounts company in responding to various claims and applications for its various segregated accounts to be put into receivership. Kennedys Chudleigh’s Bermuda insolvency and restructuring team includes Alex Potts QC, Mark Chudleigh, Nick Miles, Neil Thomson, and Caitlin Conyers.

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Canada Leanne M. Williams

Thornton Grout Finnigan LLP Puya J. Fesharaki

including by considering all relevant information, identifying 1 Overview reasonable alternatives and seeking input from appropriate advisors. Directors face many potential liabilities as regards a financially 1.1 Where would you place your jurisdiction on the troubled company. A variety of stakeholders have standing to spectrum of debtor to creditor-friendly jurisdictions? seek an oppression remedy against a director where the director’s conduct was oppressive, unfairly prejudicial or unfairly disregarded Canada is a relatively creditor-friendly jurisdiction. Canada’s the interests of a shareholder, creditor, director or officer of the restructuring legislation is drafted to provide creditors with company. In such circumstances, the court can make any order it sufficient remedies and latitude while balancing those remedies with deems fit, including holding the director personally liable for any protections in favour of the debtor to ensure fairness. damages. In addition, various statutes impose personal liability on directors for the company’s failure to meet its obligations. Examples include a company’s failure to pay wages or vacation 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal pay to its employees and to remit source deductions for employee restructuring and insolvency proceedings, and to income taxes and Employment Insurance and Canada Pension Plan what extent are each of these used in practice? contributions. While there is no statutory requirement to enter a restructuring Many restructurings never become public and are not formalised. or insolvency process at a particular time, a company must be In order to avoid the costs of a formal restructuring process, parties “insolvent” in order to qualify for insolvency protection. For often attempt an informal restructuring prior to commencing a proceedings under the Companies’ Creditors Arrangement public insolvency filing. Act (CCAA) (Canada’s primary restructuring statute for large companies, which is discussed in greater detail below), courts have interpreted the term “insolvent” broadly, finding that a company is 2 Key Issues to Consider When the insolvent if it is reasonably expected to run out of liquidity within a Company is in Financial Difficulties reasonable proximity of time as compared with the time reasonably required to implement a restructuring. 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a 2.2 Which other stakeholders may influence the company in financial difficulties? Is there a specific company’s situation? Are there any restrictions on the point at which a company must enter a restructuring action that they can take against the company? For or insolvency process? example, are there any special rules or regimes which apply to particular types of unsecured creditor (such Under Canadian law, the directors of a company have a fiduciary as landlords, employees or creditors with retention duty to the company and not to its creditors, shareholders or of title arrangements) applicable to the laws of your jurisdiction? other stakeholders. This is so even when the company is facing insolvency. However, directors may consider the interests of various stakeholders, including shareholders, creditors, employees A variety of stakeholders may influence the company’s situation in and suppliers, in fulfilling their fiduciary duty. The fiduciary duty is the pre-filing context. Various statutory regimes may govern certain a duty of loyalty – it requires directors to act honestly and in good aspects of the relationship between the company and certain of its faith with a view to the best interests of the company. This means stakeholders. Additionally, stakeholders may have certain rights that a director must prefer the interests of the company over, for against the company under common law. For example, secured example, the interests of a shareholder who nominated the director creditors may have the ability to compel the company to file for to the board or the director’s own interests in a business opportunity insolvency protection or may have a contractual right to appoint a that properly belongs to the company. receiver to take over the company’s business and/or realise on its assets. Directors also have a duty of care that requires them to exercise the care, diligence and skill that a reasonably prudent person would The government is also a key player in the pre-filing context, as it is exercise in comparable circumstances. In other words, directors able to impose financial sanctions on the company for a variety of must take steps to ensure that they are making informed decisions, reasons, including environmental, pension and other wrongdoings.

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Landlords may exercise various remedies as against a tenant- company upon non-payment of rent including, in addition to their 3.2 What formal rescue procedures are available in express contractual rights, the right to distrain on the tenant’s goods your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps or to terminate the lease. A company’s employees may also affect a and pre-packaged sales possible? To what extent can company’s decision about whether to file for insolvency protection creditors and/or shareholders block such procedures and there are very limited circumstances under which a collective or threaten action (including enforcement of security) agreement can be altered in both a bankruptcy and restructuring to seek an advantage? Do your procedures allow you situation. to cram-down dissenting stakeholders? In the post-filing context, there are restrictions on the actions certain stakeholders can take against the company. If a company Formal restructuring proceedings are provided for under the BIA Canada files for protection under the CCAA, typically all creditors (secured and the CCAA to either liquidate or restructure a company’s and unsecured) are stayed from exercising their rights against the indebtedness. A formal restructuring may also be implemented by company. By contrast, if the company files for protection under the a ’s governing statute. This chapter will focus on the Bankruptcy and Insolvency Act (BIA), only unsecured creditors are mechanisms by which a debtor may restructure it liabilities; as a restricted from pursuing their rights against the company. result, certain other liquidation and sale mechanisms will not be fully explored. A restructuring under the BIA typically takes the form of a 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of restructuring proposal to the company’s creditors. If a proposal challenge? What remedies are available? process is commenced, a licensed (trustee) is appointed as proposal trustee who will work with the debtor company There are generally two types of transactions entered into by a to prepare a proposal to put to its creditors. The proposal trustee is financially troubled company that are at risk of challenge. The first required to monitor the business of the debtor but management of occurs where the company makes a transfer (e.g., a gift, conveyance, the corporation remains under its control. assignment, payment of dividends, premiums, etc.) to or for a A debtor company is not restricted in what its proposal may include. creditor at the expense of other creditors. The second occurs where Typically, a proposal under the BIA will offer to pay a percentage the company makes a transfer and the consideration received by the of the debt owing to compromised creditors or establish a pool of company (if any) is far less than the value of the consideration given money which is to be divided up among creditors and/or provide by the company. an extension of the time required to pay the amounts afforded It is possible to challenge such transactions under various provincial under the proposal. The restructuring proposal must be put to a and federal statutes. Where the company has filed for insolvency vote by the creditors being compromised at a meeting established protection under either the BIA or the CCAA, typically the party for that purpose. During the creditors’ meeting, at least 51 per challenging the transaction is the court officer overseeing the cent of creditors holding at least 66⅔ per cent of the voting claims insolvency proceedings, although it is possible for a creditor to do so must approve the proposal for it to be passed and approved. Even where the court officer refuses or neglects to act. A creditor can also if approved by the required majorities, the proposal must also be challenge the transaction under various provincial statutes, regardless approved by the court. In the event that the proposal is not approved of whether the company has filed for insolvency protection. by the required majorities or the court, the proposal will fail and the company will automatically be deemed bankrupt. The requirements to prove that such a transaction has occurred vary depending on the statute pursuant to which the transaction Debtor companies with liabilities of at least $5 million may is challenged. For example, in certain instances, it is necessary commence restructuring proceedings under the CCAA. The CCAA to prove that the company intended to defraud, defeat or delay a is designed to be a flexible and discretionary statute by which larger creditor, while in other cases it is not necessary to prove intent. companies are able to restructure their indebtedness. A CCAA Where a creditor successfully challenges a transaction under a plan of arrangement must be approved by at least 51 per cent of provincial statute, the transaction is void against any person injured creditors holding at least 66⅔ per cent of the voting claims and by the transaction. Where the company has filed for insolvency the court. Unlike a vote under a BIA proposal, there is no deemed protection under either the BIA or the CCAA and the transaction bankruptcy if a CCAA plan is not approved by the creditors or the is successfully challenged by the court officer overseeing the court. However, in the event that the creditors of a debtor under the proceedings, typically the transaction is void as against the court CCAA fail to approve the debtor company’s plan of arrangement, it officer. In certain cases, it is also possible for the court officer to is likely that the creditors will move to pursue a liquidation of the order that a party or any other person who is privy to the transaction debtor’s assets for the benefit of its creditors. make a payment to the company’s estate to make it whole. A debtor company may also successfully restructure its obligations under the provisions of its governing statute, whether such company is provincially or federally incorporated. Certain restructurings do 3 Restructuring Options not require the extensive relief afforded by the BIA or CCAA and, as such, its governing statute may provide the flexibility to restructure certain discrete aspects of a corporation’s capital structure. In 3.1 Is it possible to implement an informal work-out in your jurisdiction? Canada, such restructurings are not common but have become more prevalent in recent years. Often an informal restructuring of a company’s balance sheet or The creditors must ultimately vote in favour of any restructuring sale of assets is approved through an abridged court process. In proposal or plan of arrangement. If the vote is successful, those appropriate circumstances, the court will approve a consensual creditors not in favour will be subjected to the will of the majority restructuring that is in the best interests of the debtor company and and have the proposal or plan of arrangement crammed down on its creditors without a full-blown insolvency proceeding. them.

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Parties are expressly prohibited from terminating a contract for 3.3 What are the criteria for entry into each restructuring reason of the commencement of the proceedings. The purpose of procedure? the CCAA is to preserve the status quo in order to allow the debtor to restructure its affairs. The CCAA explicitly states that the law of A bankruptcy proposal may be filed by an “insolvent person”. An set-off applies in CCAA proceedings. insolvent person is defined by the BIA as one whose liabilities The terms and structure of a restructuring under a corporation’s amount to $1,000 and (i) who is unable to meet his obligations as governing statute is completely discretionary. Typically, the stay of they generally become due, (ii) who has ceased paying his current proceedings is very limited. obligations in the ordinary course of business as they generally become due, or (iii) the aggregate of whose property is not, at a Canada fair valuation, sufficient to pay its obligations. A bankruptcy 3.6 How is each restructuring process funded? Is any proposal is commenced by either filing (i) a notice of intention to protection given to rescue financing? make a proposal (NOI) together with a statement of creditors having claims in excess of $250, or (ii) the filing of the actual proposal In the event that sufficient funding is not available to sustain the together with a statement of the financial affairs of the debtor, with business through the process, Debtor-in-Possession (DIP) financing a government office known as the official receiver. The NOI must may be obtained in either a BIA proposal process or a CCAA also appoint a trustee to act as proposal trustee. process. In order to qualify to restructure under the CCAA, a debtor company Under both the BIA and the CCAA, the court may grant a super- or affiliated debtor companies must have total obligations in excess priority charge in favour of the DIP lender which ranks ahead of all of $5 million. A CCAA restructuring is commenced by way of other creditors of the debtor. The ranking of charges is discussed in application to the court in the province within which the head office more detail in question 4.7. or chief place of business resides. In the event that the company has no place of business in Canada, a company may file in any province where the company’s assets are situated. 4 Insolvency Procedures A restructuring under a corporation’s governing statute is dependent on the particular framework of that statute. This type of restructuring 4.1 What is/are the key insolvency procedure(s) available is typically reserved for a solvent corporation that is attempting to wind up a company? to make a fundamental change; however, the courts have used a flexible approach to this interpretation. Depending on the nature of the company, it may be wound up through bankruptcy or receivership proceedings under the BIA or the Winding up and Restructuring Act (WURA). The WURA 3.4 Who manages each process? Is there any court involvement? governs the liquidation and restructuring of certain types of financial institutions including incorporated banks or savings banks, authorised foreign banks, trust companies, insurance companies, The proposal trustee manages the process of a BIA proposal. The loan companies having borrowing powers and building societies debtor company remains in possession and control and any proposal having a capital stock. The WURA also applies, but is rarely used to approved by the debtor’s creditors must be approved by the court. liquidate federally regulated corporations, including not-for-profit A CCAA restructuring is also a debtor-in-possession process. A corporations. The WURA has been used sparingly in recent years monitor is appointed by the court (Monitor) to oversee the process and will not be discussed in detail in this chapter. on its behalf. The CCAA is a purely court-driven process. Any While the CCAA is primarily a restructuring statute, it is possible to plan of arrangement approved by the creditors of the debtor must be liquidate or wind up a debtor company under the CCAA if attempts approved by the court. to restructure the debtor company under the CCAA fail. A restructuring under a corporation’s governing statute is managed by the corporation. The court typically plays a central role in the arrangement process. The court establishes the process by which 4.2 On what grounds can a company be placed into each the arrangement will be presented to the company’s stakeholders winding up procedure? which must then be approved by the court prior to implementation. Bankruptcy proceedings in Canada can be commenced on a voluntary or involuntary basis. A voluntary bankruptcy proceeding 3.5 What impact does each restructuring procedure have may be commenced by a company that meets the statutory definition on existing contracts? Are the parties obliged to of “insolvent person” under the BIA. An insolvent person is defined perform outstanding obligations? Will termination and set-off provisions be upheld? as a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to $1,000, and: Once the BIA proposal process has commenced, a debtor may disclaim or resiliate any agreement to which the debtor is a party (a) who is for any reason unable to meet his obligations as they by giving notice in a prescribed manner to the other parties to the generally become due; agreement and to the proposal trustee. A stay of proceedings is (b) who has ceased paying his current obligations in the ordinary granted which prohibits parties from terminating or failing to honour course of business as they generally become due; or their obligations under the proposal process unless such agreement (c) the aggregate of whose property is not, at a fair valuation, is disclaimed. Creditors are not permitted to set off for goods and sufficient, or, if disposed of at a fairly conducted sale under services delivered by them after the date of filing. legal process, would not be sufficient to enable payment of all his obligations, due and accruing due. During a CCAA process, the court order will grant a stay of By contrast, an involuntary application may be initiated by one proceedings prohibiting a party from exercising any rights or or more unsecured creditors where: (i) their debt owing to the remedies against the debtor, including the termination of contracts.

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applicant creditor(s) is at least $1,000; and (ii) the debtor company may be privately appointed or appointed pursuant to court order. has committed a prescribed act of bankruptcy within six months Privately appointed receivers will generally only act on behalf of the preceding the filing of the application. A secured creditor may also secured creditor that appointed them and will realise on the property commence an involuntary bankruptcy application provided that it specifically covered by the relevant security or loan agreement can establish that the debtor company has unsecured debts of at least under which they were appointed. Privately appointed receivers are $1,000 owing and that an act of bankruptcy has occurred with six not overseen by the court. Court-appointed receivers are officers of months preceding the filing of the application. the court and act on behalf of all creditors of the debtor company. With respect to receiverships, a creditor’s contractual right to The powers and rights of court-appointed receivers are included appoint a receiver is often triggered by a default under the terms in the court order that appointed them. Similar to trustees, court- of the security document governing the credit relationship. A appointed receivers will provide the court with periodic reports and Canada receiver may be privately appointed by a creditor if the right to do must seek court approval when taking certain steps. so is contained in the security documentation governing the credit relationship. 4.4 How are the creditors and/or shareholders able to Alternatively, a creditor may seek a court-appointed receiver where influence each winding up process? Are there any such appointment is “just or convenient”. In determining whether restrictions on the action that they can take (including the enforcement of security)? an appointment would be “just and convenient”, a court may look to the following factors: Under liquidation proceedings under the BIA, a secured creditor ■ whether the company’s default justifies the appointment of a may proceed to enforce its security without obtaining the consent receiver; of the trustee or leave of the court. The stay of proceedings that ■ whether a right to appoint a private receiver exists; comes into effect on the bankruptcy of a company does not apply to ■ whether it is in the interests of all parties to have a receiver a secured creditor in realising or otherwise dealing with its security appointed by the court; unless the court orders otherwise, which occurs infrequently. ■ whether appointment by the court is necessary to enable the Under CCAA proceedings, all creditors, including secured creditors, receiver to carry out its work and duties; are stayed from taking enforcement action against the debtor ■ whether the assets of the company are in jeopardy; company. ■ whether the appointment would cause prejudice to innocent Shareholders typically have very little or no influence over the wind third parties; and up of a debtor company under each of Canada’s insolvency and ■ whether the appointment would maximise recoveries for all restructuring regimes. creditors. If a company qualifies for liquidation under the WURA, it may be liquidated if it is: insolvent; in liquidation or in the process of being 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform wound up and asked to be brought under the WURA by petition of outstanding obligations? Will termination and set-off any stakeholders, assignees or liquidators; or a financial institution provisions be upheld? and it is (or its assets are) under the control of the Superintendent of Financial Institutions and is subject to an application for a winding The rules applicable to contracts in insolvency differ depending up order. on whether the company is being wound-up under the BIA or CCAA. In certain cases, existing contracts may be disclaimed 4.3 Who manages each winding up process? Is there any by the debtor company (i.e., rejected) or they may be assigned court involvement? to purchasers notwithstanding that the agreement contains a restriction on assignment. However, post-filing contracts, eligible Bankruptcy proceedings under the BIA are managed by a trustee. financial contracts and collective agreements are not assignable. At the time of the trustee’s appointment, all property of the debtor Counterparties to a contract with the debtor company may also be company passes to the trustee, including property located outside stayed from exercising what are commonly known as ipso facto Canada and property of the company in the possession of third clauses, which purport to terminate, amend or accelerate payment parties. After taking possession of the debtor company’s property, in the event that the counterparty to the contract becomes insolvent. the trustee will sell the company’s property and distribute the Termination or acceleration rights triggered by insolvency or proceeds to creditors, subject to the rights and actions of secured bankruptcy are stayed in CCAA proceedings but may not be stayed creditors. in bankruptcy proceedings under the BIA where the company is The trustee will compile certain statutory documents in accordance being wound-up. with the BIA, notify creditors of the debtor company’s bankruptcy, The disclaimer of contracts by a company is statutorily authorised investigate the affairs of the debtor company and arrange for the under the CCAA with the consent of the Monitor, subject to the right first meeting of creditors to provide creditors with information on of any party to the contract to move before the court for an order that the bankruptcy. Following the distribution to creditors, the trustee the company should not be permitted to disclaim the contract. If is discharged and the company is usually discharged from its debts. the Monitor does not consent to the contract rejection, the company As part of the bankruptcy process, the trustee will provide the court may move before the court on notice to all parties to the contract with periodic reports and must seek court approval when taking for an order permitting the rejection of the contract. It is important certain steps, such as selling the debtor company’s property and to note that certain types of categories of contracts may not be finalising its discharge. disclaimed: an eligible financial contract; a collective agreement; a With respect to receiverships, the winding up process is managed financing agreement if the company is the borrower; and a lease of by a receiver. A receiver may take control of the debtor company’s real property if the company is the lessor. business (at which point the receiver becomes a receiver-manager) While a trustee does not have the statutory right to disclaim a and dispose of the company’s property. As noted above, a receiver contract made by the company, the common law has held that the

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trustee has a right to do so. With respect to intellectual property, restructuring or insolvency proceeding is the potential application while a licensor may reject a licence, the licensee continues to be of the debt forgiveness rules contained in the Income Tax Act. In entitled to use the intellectual property during the term of the licence general terms, the debt forgiveness rules apply where debt of a agreement provided the licensee continues to perform its obligations company is forgiven or settled for payment of an amount that is under the licence agreement. As noted above, the CCAA explicitly less than the principal amount owing. The forgiveness causes a states that the law of set-off applies in CCAA proceedings. While reduction in various tax accounts or tax attributes or, ultimately, the law of set-off in the bankruptcy context is different from that an income inclusion. In addition, the sale of a company’s assets under the CCAA, it continues to apply in BIA proceedings. may give rise to tax liabilities if the debtor company does not have sufficient tax losses to offset the gains made on the sale of the assets.

Canada 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 6 Employees The BIA contains a statutory scheme that governs the ranking of claims. The rights of secured creditors will rank ahead of 6.1 What is the effect of each restructuring or insolvency substantially all claims against the debtor company, except for procedure on employees? certain “super-priority” claims. These super-priority claims include: (i) claims for unpaid payroll tax deductions (known as None of the three procedures discussed in this chapter have an source deductions); (ii) claims made by suppliers for the return of automatic effect on the status of the employment of the debtor’s goods supplied to the debtor company in the 30-day period prior employees. However, in the event that a BIA proposal is to bankruptcy; and (iii) claims for up to $2,000 for unpaid salary, unsuccessful and a debtor is deemed bankrupt, the act of bankruptcy wages, commissions and benefits. Once super-priority claims and automatically terminates the employees of the debtor. The BIA secured claims are satisfied, preferred claims are paid. Preferred and CCAA both prohibit the termination of collective bargaining claims include fees of the trustee and its legal counsel and claims for agreements during a restructuring. up to three months of arrears of rent and three months of future rent Notwithstanding that the employment relationship remains by landlords. Once preferred claims are paid, the claims of general unaltered, in each process, certain amounts owing to employees unsecured creditors are paid pari passu. If the debtor company may be compromised. has funds remaining after all unsecured creditors are paid, equity holders and other subordinated claims may receive a distribution. The CCAA does not contain a statutory scheme for distribution. 7 Cross-Border Issues However, the BIA scheme of liquidation and distribution supplies the backdrop for distribution if a CCAA reorganisation is ultimately unsuccessful and a company is liquidated under the CCAA. Under 7.1 Can companies incorporated elsewhere use the CCAA, the court typically grants super-priority charges which restructuring procedures or enter into insolvency rank ahead of secured creditors for certain claims. These super- proceedings in your jurisdiction? priority charges often include: (i) fees for professionals such as the Monitor and its counsel, fees for counsel to the company and fees for Companies incorporated in a foreign jurisdiction can restructure or other restructuring professionals such as a chief restructuring officer enter into insolvency proceedings in Canada. In order to restructure (administrative charge); (ii) DIP financing (DIP financing charge); or enter into insolvency proceedings under the CCAA, a debtor and (iii) amounts to pay post-filing suppliers to the company that are company must be incorporated in Canada or have assets or conduct deemed critical suppliers (critical supplier charge). business in Canada. Companies not incorporated in Canada, but seeking to restructure in Canada, will often have to establish that their centre of main interest (COMI) is situated within Canada. 4.7 Is it possible for the company to be revived in the Three factors generally determine where a debtor company’s COMI future? is situated: (i) the location of the company’s headquarters or head office; (ii) the location of the company’s management; and (iii) A dissolved company that is insolvent or bankrupt may be revived. the location which a significant number of creditors’ recognise as A revival, however, does not change the company’s status under the company’s COMI. Other secondary factors, which a Canadian the BIA. When the company is revived, the rights, liabilities and court may review in determining COMI, include: obligations arising before and after the dissolution are restored to the revived company. The company is put in the same position ■ the location where corporate decisions are made; as though it was never dissolved. The company benefits from, is ■ the location of human resource functions; bound to and is liable for, all acts taken while the corporation was ■ the existence of shared management within entities and in an dissolved. Also, any changes to the internal affairs of the company organisation; are deemed valid. Any legal actions dealing with the internal affairs ■ the location where cash management and accounting of a revived corporation taken between the time of its dissolution functions are administered; and its revival are valid. ■ the location of the debtor company’s marketing and communication functions; 5 Tax ■ whether the debtor company is managed on a consolidated basis; ■ the extent of integration of the debtor company’s international 5.1 What are the tax risks which might apply to a operations; restructuring or insolvency procedure? ■ the centre of the debtor company’s corporate, banking, strategic and management functions; Certain steps in a restructuring or insolvency procedure may ■ the location where pricing decisions and new business give rise to certain tax risks. The primary tax consideration in a development initiatives are made; and

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■ the location of the debtor company’s treasury management companies may file in a foreign jurisdiction and seek recognition functions, including management of accounts receivable and of that foreign proceeding in Canada. Alternatively, a company or accounts payable. group of companies may file in the jurisdiction that is the group’s COMI, with each debtor company filing in only one jurisdiction and 7.2 Is there scope for a restructuring or insolvency then coordinating each separate filing either through recognition process commenced elsewhere to be recognised in proceedings or some other mechanism. Finally, each member in your jurisdiction? a corporate group may make separate full filings in Canada and the foreign jurisdiction(s). Foreign restructuring or insolvency proceedings may be recognised Coordinated filings are often implement in circumstances in which by courts under the BIA (in the case of a bankruptcy) or the CCAA there is a corporate group consisting of entities that are related but Canada (in the case of a restructuring). To commence the process, a foreign not centrally managed or highly integrated. representative must apply to the court for recognition of a foreign Concurrent main filings involve full insolvency proceedings under insolvency proceeding. If the applicant is successful in convincing the CCAA or BIA as well as a full filing in the foreign jurisdiction(s) the court that he or she is a “foreign representative” and that the by the same entity. This approach is administratively complex and application relates to a “foreign proceeding” as those terms are has rarely been used since the UNCITRAL Model Law on Cross- defined under the CCAA and the BIA, the court must make an order Border Insolvency was adopted by Canada in 2009. recognising the foreign proceeding. Courts and office holders (professionals administering the debtor If the court is satisfied that the applicant is a foreign representative company’s insolvency) involved in multi-jurisdictional insolvency and that the application relates to a foreign proceeding, the court proceedings typically enter into communication or cooperation must determine whether the foreign proceeding is a “foreign main protocols to ensure that cross-border insolvency proceedings are proceeding” or a “foreign non-main proceeding”. If the proceeding managed in a harmonious and efficient manner. is characterised as a foreign main proceeding, the court will issue an order staying all proceedings against the debtor, restraining further proceedings in any action. By contrast, if the proceeding is classified 9 Reform as a non-main proceeding, a stay is not automatic. Rather, the court has the discretion to make any order necessary for the protection of the debtor’s property or the interests of creditors. 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws 7.3 Do companies incorporated in your jurisdiction of your jurisdiction, which are intended to make restructure or enter into insolvency proceedings in insolvency processes more streamlined and efficient? other jurisdictions? Is this common practice? In the spring of 2017, the Ontario Superior Court authorised the Companies incorporated in Canada can enter into insolvency use of video-conferencing for certain non-complex matters heard proceedings in other jurisdictions. However, this is rare given that before the Court. The Court is actively promoting the use of video- Canada’s insolvency regimes are advanced and Canadian insolvency conferencing to make the insolvency process more streamlined and practitioners and courts are recognised around the world. efficient and may choose to expand the service in the future.

8 Groups 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope There are not currently any fundamental proposals of reform that for co-operation between officeholders? have been tabled in respect of the restructuring regime in Canada.

There are a number of different approaches for seeking insolvency protection for a corporate group in Canada. A company or group of

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Leanne M. Williams Puya J. Fesharaki Thornton Grout Finnigan LLP Thornton Grout Finnigan LLP Suite 3200, 100 Wellington Street West Suite 3200, 100 Wellington Street West Toronto Dominion Centre Toronto Dominion Centre Toronto, ON, M5K 1K7 Toronto, ON, M5K 1K7 Canada Canada

Tel: +1 416 304 1616 Tel: +1 416 304 1616 Email: [email protected] Email: [email protected] URL: www.tgf.ca URL: www.tgf.ca Canada Leanne Williams is a partner at Thornton Grout Finnigan LLP Puya Fesharaki is an associate practising exclusively in the area of practising exclusively in the area of restructuring and insolvency, corporate restructuring and insolvency. He acts for debtors, lenders including reorganisations, workouts, refinancings and secured and court officers in complex domestic and cross-border restructurings transactions. Leanne has extensive experience in Canadian and and insolvencies. cross-border restructurings on behalf of both debtors and creditors Puya obtained his law degree from Osgoode Hall Law School, where across a broad spectrum of industries. She also regularly acts for he won several awards and worked as a research assistant. Prior to accounting firms during the insolvency process. Leanne represents becoming a lawyer, Puya worked as a project and financial analyst for all types of stakeholders in the restructuring process with the goal of industry-leading companies in the pharmaceutical and retail sectors. achieving a successful workout both within and outside of formal court proceedings.

Thornton Grout Finnigan LLP (TGF) is a Canadian boutique law firm with an office located in the financial district of Toronto, Ontario, practising exclusively in two areas: (i) insolvency and restructuring; and (ii) commercial litigation. As one of the first Canadian firms to recognise the value provided by a high-end boutique model, TGF was founded in a spirit of innovation with a view to providing a more focused and efficient vehicle for delivering legal services to sophisticated clients. TGF is a mix of senior restructuring and litigation lawyers with a full range of experience gained by years of practice, both inside and outside major full-service law firms, combined with talented and energetic younger lawyers who thrive in the entrepreneurial environment of a boutique firm.

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Cayman Islands Guy Manning

Campbells Guy Cowan

Properties, the Grand Court of the Cayman Islands (the “Grand 1 Overview Court” or the “Court”), following the well-known line of English authorities, held that where a company is insolvent or of doubtful 1.1 Where would you place your jurisdiction on the solvency, the directors’ duty to act in the best interests of the company spectrum of debtor to creditor-friendly jurisdictions? requires them to have regard to the interests of its creditors. It is in the interest of the creditors to be paid, and it is in the interest of the The Cayman Islands has traditionally been regarded as a creditor- company to be safeguarded against being put in a position where it friendly jurisdiction and that remains the case. Creditors are treated is unable to pay. Although there is no prescribed statutory point at equally irrespective of where they are domiciled. which a company must enter a restructuring or insolvency process, directors can be made personally liable to the company for any losses which they cause to the company if they act in breach of that duty; 1.2 Does the legislative framework in your jurisdiction an example of this might be incurring additional liabilities when they allow for informal work-outs, as well as formal knew or should have known that there was no reasonable prospect of restructuring and insolvency proceedings, and to what extent are each of these used in practice? the company avoiding insolvent liquidation.

Informal work-outs are not addressed in the legislative framework, 2.2 Which other stakeholders may influence the but they are used in practice when there is requisite support from company’s situation? Are there any restrictions on the affected stakeholders. Formal restructuring and insolvency action that they can take against the company? For proceedings are provided for in the Companies Law (2016 example, are there any special rules or regimes which apply to particular types of unsecured creditor (such Revision) (the “Law”) and are employed frequently. Schemes as landlords, employees or creditors with retention of arrangement are common, often combined with a provisional of title arrangements) applicable to the laws of your liquidation in order to obtain an automatic stay. The scheme may jurisdiction? be promoted by the provisional liquidators or by the management, with the liquidators having a supervisory role in what are known As set out below, formal insolvency proceedings can be instigated as “light touch” provisional liquidations. Occasionally a Cayman by a company’s creditors or contributories (amongst others). Their provisional liquidation is used to facilitate an overseas restructuring right to present a winding up petition is, however, subject to any process without a Cayman scheme of arrangement. Restructuring contractually binding non-petition clauses and, in the case of a and insolvency proceedings are addressed in more detail below in contributory, to the contributory having either inherited or been sections 3 and 4, respectively. allotted its shares, or having been registered as their holder for at least six months. There are no special rules which apply to particular 2 Key Issues to Consider When the types of unsecured creditor although, as set out below, certain types of creditor claims will rank differently in terms of priority – see Company is in Financial Difficulties question 4.6 below.

2.1 What duties and potential liabilities should the 2.3 In what circumstances are transactions entered directors/managers have regard to when managing a into by a company in financial difficulties at risk of company in financial difficulties? Is there a specific challenge? What remedies are available? point at which a company must enter a restructuring or insolvency process? The principal applicable statutory provisions are sections 99 (avoidance of property dispositions), 145 (voidable preference), 146 As a general principle of Cayman Islands law, directors’ duties are (avoidance of dispositions at an undervalue) and 147 (fraudulent owed to the company, rather than directly to shareholders or creditors. trading) of the Law. A number of duties might be engaged in circumstances of financial difficulty, but the fiduciary duty to act in the best interests ofthe Section 99 (avoidance of property dispositions) provides that any company will always be relevant. What is meant by the best interests dispositions of a company’s property (or transfers of its shares) of the company in times of financial difficulty was considered in made after the deemed commencement of the winding up will be Prospect Properties v McNeill [1990–91 CILR 171]. In Prospect void in the event that a winding up order is subsequently made,

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unless validated by the court. The liquidator is entitled to apply for Schemes can be promoted by the management outside of any appropriate relief to require the repayment of the funds or the return insolvency process, but they are commonly combined with the of the asset. presentation of a winding up petition and the appointment of Pursuant to section 145 (voidable preference), any payment or provisional liquidators, in order to obtain the benefit of an automatic disposal of property to a creditor constitutes a voidable preference if: stay of actions against the company while the scheme process is undertaken. A scheme implemented during a provisional liquidation ■ it occurs in the six months before the deemed commencement of the company’s liquidation and at a time when it is unable to may still be promoted by the directors with the provisional liquidators pay its debts; and merely having a supervisory role (in what are known as “light touch” provisional liquidations), or the provisional liquidators can ■ the dominant intention of the company’s directors was to give the applicable creditor a preference over other creditors. temporarily displace the directors in order to promote the scheme. If the scheme is sanctioned by the Grand Court, then typically the A payment or disposition is deemed to have been made to give the winding up petition would be dismissed, the provisional liquidators

Cayman Islands creditor a preference where the creditor has the ability to control the would be discharged, and the restructured company would be company or exercise significant influence over it in making financial returned to the full control of its management. and operating decisions. In some instances, restructurings have been implemented without a If a payment or disposition is set aside as a preference it is then void scheme of arrangement, by using a Cayman provisional liquidation and the creditor will be required, on application by the liquidator, to to obtain an automatic stay and to facilitate and give effect to an return the payment or asset and prove (claim) in the liquidation for overseas restructuring process. the amount of its claim. Debt-for-equity swaps are a common feature of Cayman schemes. Section 146 (avoidance of dispositions at an undervalue) provides Pre-packaged sales are also possible, but are less common in that transactions in which property is disposed of at an undervalue practice. with the intention of wilfully defrauding a company’s creditors are voidable on the application of the liquidator. This is subject to A scheme creditor or shareholder may be able to influence the the application being brought within six years of the disposal. If a scheme terms through holding sufficient votes to block the scheme transferee has not acted in bad faith then, although the disposition at the meeting stage, and/or through membership of an ad hoc group will be set aside, the transferee’s pre-existing rights and claims will or provisional liquidation committee. A dissentient creditor or be preserved, and it will be entitled to a charge over the property shareholder also has the right to oppose the scheme at the sanction securing the amount of costs which it properly incurs defending the stage, although its options will generally be more limited at that point. proceedings. If a scheme takes place outside of a provisional liquidation process, If the business of a company was carried on with intent to defraud there is no statutory bar preventing a creditor or shareholder from creditors or for any fraudulent purpose then, pursuant to section 147 enforcing its rights prior to the scheme becoming effective, although (fraudulent trading), a liquidator may apply for an order requiring the Grand Court might be persuaded to exercise its discretion to stay any persons who were knowingly parties to such conduct to make or adjourn proceedings brought against the company by a scheme such contributions to the company’s assets as the court thinks proper. creditor or shareholder pending the completion of the scheme process. The appointment of provisional liquidators results in an Lastly, transactions made by a company in financial difficulty and automatic stay on actions against the company in Cayman, but in breach of the directors’ fiduciary duties may also be vulnerable to this may not be effective to prevent actions being commenced or claims based on dishonest assistance or knowing receipt. pursued against the company overseas. In principle, secured creditors are capable of being bound by a 3 Restructuring Options scheme as it is the underlying debt rather than the security interest which is compromised by the scheme. In reality, secured creditors will be left out of a scheme or will have a significant influence on its 3.1 Is it possible to implement an informal work-out in terms, either because of their ability to enforce their security prior your jurisdiction? to the scheme becoming effective or because their security interest puts them into their own scheme class and therefore gives them a It is possible to implement informal work-outs in the Cayman Islands, blocking position. provided that they are supported by the requisite stakeholders. Dissentient creditors and shareholders who are included in a scheme are crammed down in accordance with the scheme terms upon the 3.2 What formal rescue procedures are available in scheme becoming effective. your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can 3.3 What are the criteria for entry into each restructuring creditors and/or shareholders block such procedures procedure? or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you Schemes of arrangement involve three main stages: to cram-down dissenting stakeholders? ■ an application for orders convening the scheme meetings (at which the Grand Court will principally be concerned with The principal mechanism used to restructure a company’s liabilities issues of class composition, any jurisdictional or similar issues, is a scheme of arrangement between the company and its creditors or and the adequacy of the scheme documentation and notice); members, or classes of creditors or members, pursuant to section 86 ■ the scheme meetings (at which the scheme will require of the Law. If a scheme is approved by more than 50% by number the approval of a majority in number representing not less and 75% by value of those attending and voting in each class, and is than 75% by value of those present and voting in each class subsequently sanctioned by the Grand Court, it will bind all scheme meeting); and participants (including any dissentient minority) and compromise ■ a hearing to sanction the scheme (at which the Grand Court their rights in accordance with the scheme terms. will principally be concerned with compliance with the

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convening orders, whether the majority fairly represent the class, and whether the arrangement, having regard to the 4 Insolvency Procedures scheme comparator, is such that an intelligent and honest man, who is a member of the class concerned and is acting in 4.1 What is/are the key insolvency procedure(s) available his own interest, might reasonably approve it). to wind up a company? The criteria for entry into provisional liquidation are addressed in question 4.1 below. Provisional liquidation Provisional liquidation is available to companies liable to be wound 3.4 Who manages each process? Is there any court up under the Law, following the presentation of a winding up involvement? petition. A creditor, shareholder, the company itself or (in respect of regulated businesses) the Cayman Islands Monetary Authority

The directors remain in control of the company if the scheme is (“CIMA”) can apply for the appointment of provisional liquidators Cayman Islands proposed outside of liquidation, and the Grand Court is involved in between the presentation and the hearing of the winding up petition. ordering the convening of the scheme meetings and sanctioning the Applications by creditors, shareholders or CIMA are made for the scheme (i.e., stages 1 and 3 in question 3.3 above). purpose of preserving and protecting the company’s assets until the If the scheme is promoted within a provisional liquidation then hearing of a winding up petition and the appointment of official the management of the scheme process will depend on the terms liquidators. of the order appointing the provisional liquidators. In some cases, A company (if properly authorised) can also petition for its own the provisional liquidators will only be given the powers necessary winding up and apply for the appointment of provisional liquidators to supervise the directors’ promotion and implementation of the in order to present a compromise or arrangement to creditors with scheme. In other cases, the provisional liquidators will displace the the protection of an automatic stay. The purpose of appointing directors entirely for the duration of the restructuring. In either case, a provisional liquidator in this situation is similar to the UK the provisional liquidators will be subject to the Court’s supervision, administration process or US Chapter 11 procedure, albeit there are and the Court’s involvement in the scheme process will be the same significant legal and procedural differences. irrespective of whether the company is in provisional liquidation. Official liquidation The purpose of official liquidation is to wind up the company and 3.5 What impact does each restructuring procedure have distribute its assets to its creditors and shareholders in accordance on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and with the statutory order of priorities. set-off provisions be upheld? Official liquidation is available to: ■ companies incorporated and registered under the Law; The impact of a scheme on existing contracts, and whether the ■ bodies incorporated under any other law; and parties will be obliged to perform outstanding obligations under ■ foreign companies which: those contracts or whether they will be terminated, will depend on the terms of the scheme (in particular the extent to which it purports ■ carry on business or have property located in the Cayman Islands; to compromise rights under those contracts) and the terms of the contracts. If the scheme takes place in the context of a provisional ■ are the general partner of a limited partnership registered in the Cayman Islands; or liquidation, the appointment of provisional liquidators will not in and of itself affect existing contracts, other than as might be provided ■ are registered as foreign companies under the Law. within the contracts themselves. Contractual rights of set-off would Winding up petitions may be presented by the company (if properly usually be relevant for the purpose of valuing a scheme claim. authorised) or (subject to the restrictions identified in question 2.2 above) by any creditor (including a contingent or prospective creditor) or shareholder of the company. CIMA may also present a 3.6 How is each restructuring process funded? Is any protection given to rescue financing? petition in relation to a company which is carrying on a regulated business in the Cayman Islands. The process is funded from the scheme company’s assets and/or Voluntary liquidation from new money invested by way of debt or equity. In practice, Voluntary liquidation can be used by companies incorporated new money comes from a wide variety of sources. Security can and registered under the Law. It is commenced by shareholder be granted in respect of rescue financing, but there is no statutory resolution or on the expiry of a period or the occurrence of an event protection (or priority) afforded to rescue financing in the context of (see below). However, an application must be made to bring a a scheme taking place outside of a provisional liquidation process. voluntary liquidation under the supervision of the Court (at which Similarly, rescue financing provided during a provisional liquidation point it proceeds as an official liquidation) if any of the directors is will have no statutory protection (or priority) in the event that the unable or unwilling to swear the requisite statutory declaration of company emerges from the provisional liquidation but subsequently solvency or in certain other circumstances. fails. However, if rescue financing is provided during a provisional liquidation and the company is subsequently wound up without 4.2 On what grounds can a company be placed into each having emerged from the provisional liquidation process, i.e. winding up procedure? because no restructuring was approved, then the financing is likely to constitute an expense of the provisional liquidation. As such it Provisional liquidation would have priority over the majority of official liquidation expenses and all unsecured creditors’ claims in the official liquidation. A creditor or shareholder can apply on the grounds that there is a prima facie case for making a winding up order and the appointment of provisional liquidators is necessary to prevent:

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■ dissipation or misuse of the company’s assets; ■ oppression of minority shareholders; or 4.3 Who manages each winding up process? Is there any court involvement? ■ mismanagement or misconduct by the directors. As mentioned above, the company, if properly authorised, can apply Provisional liquidation for the appointment of provisional liquidators on the grounds that Provisional liquidators are appointed by the Grand Court. They are the company is or is likely to become unable to pay its debts and subject to the Court’s supervision and only carry out the functions intends to present a compromise or arrangement to its creditors. that the Court confers on them. Their powers are prescribed by the An application to appoint provisional liquidators can only be made order appointing them and the scope will depend on the reason for following the presentation of a winding up petition. their appointment. If a company restructuring is proposed, existing Official liquidation management can be allowed to remain in control of the company subject to the supervision of the Court and the provisional liquidators,

Cayman Islands A company may be wound up by the Grand Court if any of the following apply: although in other cases the management will be displaced entirely by the provisional liquidators. The Court may (or may not) direct ■ The company passes a special resolution requiring it to be wound up by the Court. that a provisional liquidation committee be established. ■ The company does not commence business within a year of Official liquidation incorporation. Official liquidators are also appointed by the Grand Court and their ■ The company suspends its business for a whole year. authority always displaces that of the company’s directors. The ■ The period (if any) fixed by the company’s articles for the official liquidators control the company’s affairs, subject tothe company’s duration expires, or an event occurs which under Court’s supervision. Certain powers are exercisable without the the articles triggers the company’s winding up. sanction of the Court, whereas others cannot be exercised without ■ The company is unable to pay its debts (see below). Court sanction. A liquidation committee is required to be established in every official liquidation. ■ The Court decides that it is just and equitable for the company to be wound up. Voluntary liquidation ■ The company is carrying on a regulated business in the On appointing a voluntary liquidator, the directors’ powers cease, Cayman Islands and is not duly licensed or registered to do except to the extent the company (through a general meeting) or so. the liquidator sanctions the continuance of those powers. The ■ Certain other grounds specified in regulatory and other laws. Grand Court will not be involved in a voluntary winding up unless The test of inability to pay debts for this purpose is a cash-flow test. a petition is presented to bring it under the Court’s supervision or The company’s balance sheet is irrelevant in this context. Based the voluntary liquidator or any contributory applies to the Court to on earlier authorities, the cash-flow test in the Cayman Islands was determine any question arising in the voluntary liquidation or with generally regarded as being confined to debts which were presently regard to the exercise of powers which the Court might exercise in a due and payable. However, in Re Weavering Macro Fixed Income Court-supervised liquidation. Fund Ltd. (in liquidation) [2016 (2) CILR 514], the Court of Appeal stated that “the cash flow test in the Cayman Islands is not confined 4.4 How are the creditors and/or shareholders able to to consideration of debts that are immediately due and payable. influence each winding up process? Are there any It permits consideration also of debts that will become due in the restrictions on the action that they can take (including reasonably near future”. Although the Court’s comments were the enforcement of security)? technically obiter, they are very likely to be followed by the Grand Court, such that a Cayman company may be liable to be wound up Provisional liquidation if it is presently unable to pay its debts, or if it will become so in the Creditors or contributories of the company may apply to the Court reasonably near future. What will constitute the “reasonably near for orders and directions with regard to the exercise or proposed future” for the purposes of the test will be fact-specific in each case. exercise of the provisional liquidators’ powers (these are known as The same cash-flow test is also used in relation to preference claims “sanction applications”). under section 145 of the Law (see question 2.3 above). A provisional liquidation committee comprising of creditors and/ If the debt claimed in the demand is disputed by the company in or shareholders may (but will not always) be established in a good faith and on substantial grounds then it cannot form the basis provisional liquidation. The composition and function of liquidation of a winding up petition. committees are addressed in more detail below in the context of Voluntary liquidation official liquidations. A company can be wound up voluntarily in the following cases: There is no restriction on the enforcement of security during ■ When the fixed period, if any, for the duration of the company a provisional liquidation, but the appointment of provisional in its memorandum or articles expires. liquidators triggers an automatic stay on the commencement or ■ If an event occurs which the memorandum or articles provide continuance of proceedings against the company without the leave is to trigger the company’s winding up. of the Court. ■ If the company resolves by special resolution that it be wound Official liquidation up voluntarily. Creditors or contributories of the company may also make sanction ■ If the company resolves by ordinary resolution that it be applications with regard to the exercise or proposed exercise of the wound up voluntarily because it is unable to pay its debts as official liquidators’ powers. they fall due. In addition, a liquidation committee must be appointed unless the Court orders otherwise. The principal purposes of a liquidation committee are to act as a “sounding board” for the liquidators and to consider the basis and amount of their remuneration. The

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committee comprises three to five creditors (if the liquidator has ■ In an official liquidation lasting more than six months, interest determined that the company is insolvent) or shareholders (if the accruing on the company’s debts since commencement of the liquidator has determined that the company is solvent). If the liquidation. liquidator determines that the company is of doubtful solvency, the ■ Amounts due to preferred shareholders (under the company’s committee must comprise three to six members of whom a majority articles of association). must be creditors and at least one of whom must be a shareholder. ■ Debts due to the holders of redeemable shares in the company Members are elected at meetings of creditors and/or shareholders whose shares were due to be redeemed before the liquidation (as appropriate). Liquidation committees also have standing to commenced but were not redeemed due to the company’s make sanction applications. default. There are no prohibitions or restrictions on the rights of secured Any surplus remaining after payment of the above amounts is creditors to enforce their security during an official liquidation but, returned to the shareholders of the company in accordance with its as in provisional liquidations, no proceedings can be commenced or articles or any shareholders’ agreement. Cayman Islands continued against the company without the leave of the Court. Voluntary liquidation 4.7 Is it possible for the company to be revived in the Voluntary liquidators are required to pay debts owed to creditors as future? they fall due. If they fail to do so, there is nothing to stop a secured creditor from enforcing its security or to prevent any creditor from Liquidation is intended to be a terminal procedure and ordinarily commencing ordinary litigation or winding up proceedings against results in the dissolution of the company. Once a company has been the company. dissolved following a voluntary or official liquidation, it cannot be revived. A contributory may apply to the Grand Court to determine any question arising in the voluntary winding up or with regard to the In certain circumstances, a voluntary liquidation can be recalled exercise of all or any of the powers which the Court might exercise by the Court prior to dissolution and the company placed back into if the company were being wound up under the Court’s supervision. active status. In an official liquidation, the liquidator or any creditor or shareholder has the right to apply for the liquidation to be stayed prior to 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform dissolution, and the Grand Court may make an order staying the outstanding obligations? Will termination and set-off proceedings, either permanently or for a limited time, on such terms provisions be upheld? and conditions as it thinks fit.

Other than contracts of employment (in respect of which, see below), 5 Tax the winding up process per se will not have any effect on contracts unless there is a specific contractual provision to that effect. Further, liquidators have no statutory power to disclaim onerous contracts 5.1 What are the tax risks which might apply to a under Cayman law. The parties are therefore obliged to perform restructuring or insolvency procedure? their outstanding obligations, although in practice a liquidator might elect not to do so and instead to adjudicate whatever claim There are no tax risks or issues which arise within the Cayman the contractual counterparty seeks to prove in the liquidation as Islands as a result of a restructuring or insolvency procedure. a result of the breach. Liquidators are required to give effect to any contractual rights of set-off or netting of claims between the company and any persons, subject to any agreement to waive or 6 Employees limit such rights. In the absence of any set-off provision, account must be taken of what is due from each party to the other in respect 6.1 What is the effect of each restructuring or insolvency of their mutual dealings, and set-off is applied in relation to those procedure on employees? amounts. Employees’ rights would only be affected by a scheme of 4.6 What is the ranking of claims in each procedure, arrangement if and to the extent that it purported to compromise including the costs of the procedure? their rights as creditors under their employment agreements. This would be unusual in practice. A voluntary or provisional liquidation Liquidation expenses, including liquidators’ fees and disbursements. would have no legal effect on employees save to the extent, if ■ Preferential debts, which are: any, provided for in their employment agreement. Under the ■ certain sums due to employees; common law, a winding up order serves to terminate all contracts of employment of the company in official liquidation. ■ certain taxes due to the Cayman Islands government; and ■ for certain Cayman Islands banks, certain sums due to depositors. 7 Cross-Border Issues ■ Ordinary debts which are not otherwise secured, and not subject to subordination or deferral agreements, including debts incurred by the company in respect of the redemption 7.1 Can companies incorporated elsewhere use or purchase of its own shares, provided the redemption or restructuring procedures or enter into insolvency purchase took place before the liquidation commenced. proceedings in your jurisdiction? ■ Ordinary debts that are subject to subordination or deferral agreements. Yes. A foreign company can be the subject of a Cayman Islands scheme of arrangement or be wound up here provided that it has property located, or is carrying on business, in the Islands, is the

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general partner of an ordinary or exempted Cayman Islands limited partnership, or is registered as a foreign company under the Law. 8 Groups

7.2 Is there scope for a restructuring or insolvency 8.1 How are groups of companies treated on the process commenced elsewhere to be recognised in insolvency of one or more members? Is there scope your jurisdiction? for co-operation between officeholders?

Yes. On application by a foreign representative (defined as a trustee, It depends on where the insolvent company sits within the group. liquidator or other official appointed for the purposes of a foreign Liquidators of the holding company will, generally speaking (and bankruptcy proceeding), the Grand Court can make orders ancillary subject to applicable local laws), have the ability to take control to the foreign bankruptcy proceedings to: of and/or sell the company’s subsidiaries. If multiple Cayman companies within the group enter into insolvency proceedings, the

Cayman Islands ■ Recognise the foreign representative’s right to act in the Cayman Islands on behalf, or in the name, of the debtor. Grand Court will, where appropriate, appoint the same or common liquidators. Although there are no formal provisions for cooperation ■ Grant a stay of proceedings or the enforcement of a judgment between liquidators of different companies within a group, this may against the debtor. occur informally in practice to the extent it is in the interests of ■ Require certain persons with information concerning the both estates. In certain limited circumstances, the Grand Court may debtor’s business or affairs to be examined by, and produce documents to, the foreign representative. be willing to make an order by which the assets and liabilities of different companies within a group are pooled. ■ Order the turnover of the debtor’s property to the foreign representative. 9 Reform 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws Yes, Cayman companies with extra-territorial assets will regularly of your jurisdiction, which are intended to make enter into concurrent insolvency regimes in other jurisdictions; for insolvency processes more streamlined and efficient? example, under Chapter 11 or Chapter 15 of the US Bankruptcy Code. In such circumstances, Cayman liquidators must consider A pilot scheme will commence in March 2018 in the Financial whether or not it is appropriate to enter into an international protocol Services Division to test an Electronic Filing system, whereby with any foreign officeholder in order to promote the orderly attorneys (and ultimately private litigants in person) may file administration of the estate and avoid duplication of work and proceedings online. Video conferencing is often used (with the conflict. leave of the Court) to conduct hearings where appropriate, in order to allow litigation to be conducted in the most cost efficient way.

9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?

There are no formal proposals for reform of the insolvency regime in place at this point in time.

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Guy Manning Guy Cowan Campbells Campbells Floor 4, Willow House Floor 4, Willow House Cricket Square Cricket Square Grand Cayman KY1-9010 Grand Cayman KY1-9010 Cayman Islands Cayman Islands

Tel: +1 345 949 2648 Tel: +1 349 949 2648 Email: [email protected] Email: [email protected] URL: www.campbellslegal.com URL: www.campbellslegal.com

Guy is head of Campbells’ Litigation, Insolvency & Restructuring Guy is a senior associate in Campbells’ Litigation, Insolvency & Group. He has acted for officeholders and stakeholders in relation Restructuring Group. His primary areas of practice and expertise to the restructuring and liquidation of numerous Cayman Islands involve solvent and insolvent liquidations, often with significant cross- Cayman Islands companies. Guy also has an active general litigation practice border aspects. He acts for distressed hedge funds, insolvency involving widely varying commercial contexts and structures, but with practitioners, stakeholders and financial institutions and regularly a particular emphasis on shareholder and investment fund disputes. advises in relation to creditor and/or shareholder disputes and remedies, antecedent transactions, contentious restructuring matters, Recent instructions include advising the Liquidation Committee of schemes of arrangement and enforcement actions. He has significant SAAD Investments Company Limited, acting for a dissenter group in experience of all insolvency procedures under Cayman law and has substantial fair value appraisal proceedings arising from a take private appeared before the Grand Court’s specialist Financial Services transaction involving Nord Anglia Education, Inc, and advising LDK Division and the Cayman Islands’ Court of Appeal on numerous Solar CO., Ltd. and its provisional liquidators in connection with the occasions. cross-border restructuring of USD$700 million of offshore debt across the LDK group. Guy is ranked by all the major legal directories. He has given expert evidence of Cayman Islands law to various foreign courts and is a regular speaker at international insolvency and fund conferences.

Campbells have been leading the way for over 45 years, advising clients on Cayman Islands and British Virgin Islands law. We are regularly trusted to advise some of the most prominent names in finance, investment, insolvency and insurance, and are frequently involved in the largest and most complex disputes, liquidations and restructurings in both jurisdictions. The Group acts for local and overseas insolvency professionals, creditors, investors, directors and other professional service providers in connection with all aspects of the restructuring and winding up of companies, investment funds, limited partnerships and structured finance entities. Our litigators have the experience and strength in depth to handle the largest and most complex disputes, liquidations and restructurings. The size of our team also enables us to ensure that each case is staffed appropriately, which in turn leads to cost efficiencies and value for our clients.

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England Jat Bains

Macfarlanes LLP Paul Keddie

English law also provides for two types of court-approved 1 Overview restructuring processes – company voluntary arrangements (“CVA”s) and schemes of arrangement (schemes). Whilst there are 1.1 Where would you place your jurisdiction on the a number of differences between the two processes, each essentially spectrum of debtor to creditor-friendly jurisdictions? allow a company to (provided that a specific amount of its creditors vote in favour) compromise creditor claims and take other steps The UK is typically considered to be a creditor-friendly jurisdiction to restructure its affairs, which binds all creditors (regardless of and, in particular, friendly towards secured creditors. Enforcement whether they voted in favour or not). of security in the UK is regularly carried out without the need for any court involvement other than the filing of certain prescribed 2 Key Issues to Consider When the forms. Notarisation or similar requirements that can sometimes delay enforcements in other jurisdictions are also not required. Company is in Financial Difficulties Consequently, English law is often chosen as the governing law of contracts and disputes are litigated in the English courts by 2.1 What duties and potential liabilities should the both local and overseas parties. A number of high profile cross- directors/managers have regard to when managing a border restructurings have also been conducted using English law company in financial difficulties? Is there a specific governed documents and the English courts have been flexible in point at which a company must enter a restructuring or insolvency process? facilitating the use of English law to govern proceedings concerning overseas companies. In the context of restructurings, this is perhaps best demonstrated by the sanctioning of a number of schemes of English law does not prescribe a set point in time at which a arrangement proposed by foreign companies in the English courts, company’s directors must file for insolvency. It is the duty of the even where those companies have a limited connection to the UK directors to decide the appropriate time to file (although secured (such as English law-governed finance documents which are being creditors may, in practice, take the decision to enforce and put the amended via the scheme). company into an insolvency process prior to the directors taking action). The main impetus for directors in this respect is that directors of 1.2 Does the legislative framework in your jurisdiction companies who knew, or should have known, that the company of allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to which they are a director had no reasonable prospect of avoiding what extent are each of these used in practice? entering an insolvency process, but caused creditors to incur losses after that point, can be personally liable to compensate creditors for Informal work-outs without any court involvement or the use of those losses. This is known as “”. Consequently, formal insolvency proceedings are common in the English market. directors are often eager to file for insolvency without too much Such work-outs can take a variety of forms and range from (for delay, although a premature filing which causes losses to creditors example) amendments to credit agreements to relax covenant testing also presents a risk to directors. levels or extend maturity dates to debt-for-equity swaps. Further, from the point at which a company becomes insolvent There are also a number of formal insolvency processes available under English law (either on a “balance sheet basis” – the under English law. The most commonly used insolvency process company’s liabilities exceed the value of its assets – or on a “cash is administration, pursuant to which a licensed professional is flow basis” – the company owes a liability or liabilities that it is appointed to manage a company’s affairs in place of its directors. The unable to pay when due), the directors of the company must have administrator has extensive powers to trade the company and may their primary regard to the interests of the company’s creditors. also dispose of the company’s assets, either after a period of trading Prior to that point, it is the company’s shareholders to whom the or immediately upon his appointment (known as a “pre-pack” sale). directors should have their primary regard. Breaching this duty and causing the company’s creditors to incur losses by doing so risks the The alternative to administration is liquidation, which is primarily director being personally liable for the offence of “misfeasance” if used in respect of companies which have insufficient remaining the company subsequently enters liquidation. assets to be traded or sold and whose affairs are therefore being wound down.

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are connected to the company, and six months for preferences to 2.2 Which other stakeholders may influence the unconnected persons) and the company must be insolvent at the time company’s situation? Are there any restrictions on the of the transaction or become insolvent as a result of it. A company action that they can take against the company? For must also have the “desire” to prefer the recipient of a preference in example, are there any special rules or regimes which order for such a challenge to be successful. apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention Floating charges (which are a type of security which “floats” over of title arrangements) applicable to the laws of your a company’s non-fixed, movable assets, such as stock) entered jurisdiction? into by a company within two years (for floating charges granted to connected persons) or one year (for floating charges granted The “pari-passu” principle provides that a company’s ordinary, to unconnected persons) prior to it entering administration or unsecured creditors should be treated the same and without liquidation are also invalid to the extent that they secure “old” England preference between them within an English insolvency process. consideration. This would apply if, for example, no new money However, certain types of unsecured creditors are granted certain was advanced by the recipient of the floating charge when it was additional rights and given a different status notwithstanding the granted by the company. application of that principle: ■ employees rank ahead of other unsecured creditors to the extent of their “preferential claims” against the company 3 Restructuring Options – these are claims for certain liabilities such as wages and unpaid holiday pay owed to the employee up to certain 3.1 Is it possible to implement an informal work-out in prescribed limits. Claims in excess of those limits rank your jurisdiction? alongside all other unsecured claims against the company; ■ landlords are granted certain rights to “distrain” over a Yes – there are a number of tools available to companies and company’s assets (i.e. to seize those assets, sell them and creditors which wish to restructure the Company’s obligations under apply the proceeds towards unpaid rent due by the company) and to forfeit (i.e. terminate) a lease if it is breached. These English law financing contracts. The Loan Market Association’s rights do not automatically terminate upon a company (“LMA”) recommended forms of loan facility documentation entering insolvency; however, the moratorium against contain extensive amendment and waiver provisions which govern, creditor action which applies in administrations prevents a amongst other things, the percentage by face value of a company’s landlord from taking any such action without the benefit of a lenders (usually a “majority” of lenders holding in aggregate more court order or the consent of the administrator; and than two thirds of the participations under the relevant loan, or for ■ suppliers of goods to a company may include retention of certain exceptional changes, all of those lenders) required to vote title clauses in the terms of their supply which provide that in favour of steps such as waivers of debt, conversions of debt into the supplier retains title to the relevant goods until those equity, re-setting of financial covenants and disposals of assets. goods are, either by themselves or along with all other goods Schemes are often used to push through restructurings where supplied by that supplier, sold by the company. Such clauses finance documents require the approval of 100% of the company’s survive the company entering an insolvency process and lenders to amendments and waivers required in connection with the therefore mean that the administrator or liquidator either has restructuring. If the company cannot secure the consent of all of its to set-aside the proceeds of a sale of the relevant goods and pay them to the supplier (rather than distribute them to all lenders, but has the approval of the requisite number of creditors creditors equally) or allow the relevant supplier to collect the to approve a scheme (see below), the company can use a scheme goods from the company’s premises if they are not necessary to effect the relevant amendments and waivers which, if approved, to the conduct of the proceedings. binds all of the company’s creditors.

2.3 In what circumstances are transactions entered 3.2 What formal rescue procedures are available in into by a company in financial difficulties at risk of your jurisdiction to restructure the liabilities of challenge? What remedies are available? distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures Certain types of transactions entered into by a company prior to or threaten action (including enforcement of security) its entry into administration or liquidation can be challenged by to seek an advantage? Do your procedures allow you the administrator or liquidator. If that challenge is successful, to cram-down dissenting stakeholders? the transaction can be unwound or, if that is not possible (for example, because the counterparty to the transaction was dealing Schemes and CVAs are commonly used for companies looking to with the company in good faith and it would therefore be unfairly restructure their liabilities. Each process causes creditors who vote detrimental to that counterparty if the transaction was clawed back), against (or, in the case of a scheme, creditors who have no economic the directors can be ordered to make a compensatory payment to the interest in the scheme and are not being affected by it) to be crammed company’s creditors for the losses caused. down provided that a requisite number of creditors vote in favour. The two main types of challenge are for transactions at an In the case of a CVA, 75% by value of the companies’ unsecured undervalue (where the company disposes of assets for significantly creditors present or voting by proxy at a meeting convened to vote less than their value) and preferences (where a company does on the CVA (provided that no that no more than 50% by value of something or causes something to be done which has the effect of any creditors who vote against the proposal are creditors who are putting a creditor in a better position upon the company entering unconnected with the company) must vote in favour of the CVA. administration or liquidation than it would have otherwise been). If approved, the CVA binds all the companies’ unsecured creditors, In order to be challenged by the administrator or liquidator, the although it cannot affect the rights of a secured creditor without its consent. relevant transaction must be entered into within a certain period prior to the administration or liquidation commencing (two years A scheme requires that creditors (both secured and unsecured) are for all transactions at an undervalue and preferences to persons who divided into classes, based on commonality of their rights against

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the company, to vote on the scheme. Each class must then vote with the CVA supervisor in order for it to be properly implemented. on the scheme at a meeting held for that purpose and provided that There is no requirement for a qualified insolvency practitioner 75% by value and a majority in number of each class of creditors to supervise a scheme, it is simply carried out by the company’s present (in person or by proxy) at such meetings vote in favour, and directors in accordance with the terms of the scheme. the scheme is sanctioned by the Court, the scheme binds all creditors A CVA proposal must be filed at court and creditors who feel they of the company. If a company can demonstrate that a particular have been unfairly prejudiced by a CVA or there has been a material class of creditors is not affected by the scheme (usually “out of the irregularity in the CVA process may challenge a CVA via a court money” creditors who have no economic interest in the company), application within 28 days of its approval. There is more court such class will not be required to vote on the scheme. involvement in a scheme – the court must, at a first hearing, approve Creditors are able to challenge schemes and CVAs on the basis the company’s classification of its creditors to vote on the scheme England of being treated unfairly in comparison to other creditors or that in meetings convened for that purpose, and then, if the requisite the outcome of the CVA or scheme realises a poorer result than an number of creditors vote in favour of the scheme at those meetings alternative process. Further, other than in the case of relatively small and assuming that the court is satisfied that the scheme is fair to the companies proposing a CVA, there is no moratorium or stay on company’s creditors, “sanction” and approve the scheme at a second creditors threatening enforcement prior to the scheme or CVA being hearing. approved, which can potentially disrupt the process (although the courts are becoming increasingly willing to stay enforcement action by creditors which would disrupt a scheme which has reached an 3.5 What impact does each restructuring procedure have advanced stage and would produce a more favourable outcome for on existing contracts? Are the parties obliged to creditors than if that enforcement action was allowed to proceed). perform outstanding obligations? Will termination and Pre-packaged sales are also frequently used as a means to restructure set-off provisions be upheld? a company’s liabilities by transferring the company’s assets to a newly incorporated subsidiary free of any liabilities which the A company entering into an insolvency process does not company is unable to pay in full, or to effect a sale of a company to automatically cause contracts to which the company is party to a third party. A pre-pack involves the documentation and terms of terminate, although those contracts may contain terms which the sale being negotiated and agreed in advance and then completed allow the counterparty to terminate the contracts upon the process by the administrator immediately upon, or shortly after, their commencing. However, an administrator or liquidator may simply appointment. This is often preferable to the sale being executed by refuse to perform the company’s obligations under contracts if doing the company’s directors because it is the administrator, rather than so is in the best interests of the company’s creditors. Creditors those directors, who bears the responsibility of ensuring that the are prevented from court action to enforce breaches of contract assets are sold for the best possible value. Furthermore, a pre-pack without the administrator/liquidator’s approval or an order of the sale is often executed quickly and can be publicised to creditors and court and even if action is successfully taken, the counterparty has third parties as a way of rationalising a company’s liabilities so it an unsecured claim against the company which ranks alongside all can trade on successfully, which reduces the “stigma of insolvency” other unsecured creditors (so effectively is not worth pursuing). for the company. A liquidator has additional powers to “disclaim” unprofitable contracts (including leases) to which the company is party (which 3.3 What are the criteria for entry into each restructuring has the effect of determining the counterparty’s rights under the procedure? contract upon the disclaimer becoming effective and entitles the counterparty to an unsecured claim against the company). A company must be insolvent (on either a balance-sheet or cash flow basis) in order to be placed into administration by its directors. 3.6 How is each restructuring process funded? Is any In order for a secured creditor to appoint an administrator to a protection given to rescue financing? company the creditor’s security must be enforceable in accordance with its terms. If an administrator or liquidator trades a business, the costs and Schemes and CVAs can be initiated by the directors of a company expenses of the process (including their fees) will usually be at any time but, as mentioned above, require a certain threshold of discharged from the receipts of the trading. An administrator or creditors to vote in their favour together with, in the case of a CVA, liquidator also may seek additional funding which is then repaid as the consent of any affected secured creditors. an “expense of the administration or liquidation” (ranking above ordinary unsecured claims). However, outside of that possibility 3.4 Who manages each process? Is there any court within a formal insolvency process, there is no statutory mechanism involvement? for rescue/debtor in possession financing under English law.

Administration and liquidation 4 Insolvency Procedures A qualified insolvency practitioner must be appointed asan administrator or liquidator of a company and, for all intents and purposes, manage the company in place of its directors (including 4.1 What is/are the key insolvency procedure(s) available to effect a pre-pack). to wind up a company? Schemes and CVAs Companies looking to wind down their affairs, and creditors who In a CVA, a qualified insolvency practitioner will act as “supervisor” wish for a company to be wound up, can initiate a liquidation, of the CVA and carry out the steps and actions provided for in the whereby a liquidator realises the company’s assets, distributes the CVA proposal (which sets out the terms of the CVA). The directors proceeds to creditors and then winds the company down. remain in control of the company, although they will co-operate

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There are two types of liquidation: voluntary liquidation; and compulsory liquidation. Voluntary liquidations can either be made 4.5 What impact does each winding up procedure have on on a “solvent” basis (known as a members’ voluntary liquidation) existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off (“MVL”) where the company’s directors are willing to swear a provisions be upheld? statement to the effect that the company has sufficient assets to meet its liabilities over the next 12 months, or on an “insolvent” basis Termination is covered above. Set-off provisions in contracts are, (known as a creditors voluntary liquidation) (“CVL”) where the however, superseded by mandatory set-off rules which apply in directors are unwilling or unable to give that statement. Both types liquidations and which provide that amounts owed by a creditor to of voluntary liquidation are initiated by a company’s shareholders; the company are set-off against amounts that the company owes to however, in a MVL the shareholders nominate the liquidator, whereas the creditor (with only the net balance, if any, being claimable by in a CVL the creditors have the final say in the choice of liquidator. England that creditor). Compulsory liquidation is made by filing a petition at court, followed by a court hearing. A hearing of the petition is then held at court and if it can be demonstrated to the court that one or more 4.6 What is the ranking of claims in each procedure, prescribed circumstances applies to the company (usually that the including the costs of the procedure? company is insolvent) the company is placed into liquidation. Creditors holding “fixed” charges over a company’s assets (essentially a charge over assets which the company is not able 4.2 On what grounds can a company be placed into each to freely deal with, such as property) rank first, followed by the winding up procedure? expenses and costs of the liquidation/administration. Creditors with “preferential” claims (usually only employees for unpaid Voluntary liquidations require a resolution of the company’s wages, holiday and pension contributions up to certain prescribed shareholders (the exact proportion of those shareholders which are limits) rank next, followed by creditors with “floating” charges over required to pass the resolution will be determined by the company’s the company’s assets (assets which the company can freely deal constitutional documents – usually 75%) to initiate the process with, such as stock). A fund of up to £600,000 is also set aside and, in a MVL, that the directors swear the declaration of solvency for unsecured creditors from realisations of floating charge assets referred to above. known as the “prescribed part”. If there are sufficient funds available Compulsory liquidation requires that one or more prescribed after the prior-ranking amounts have been paid in full, a distribution circumstances apply to the company. Usually this is that it can be can then be made to unsecured creditors. In the somewhat unlikely proved to the court that the company is “unable to pay its debts” scenario that unsecured creditors are paid in full, they are then (i.e. is insolvent on either a balance sheet or cash flow basis) which entitled to claim interest for the period of administration/liquidation is often demonstrated by serving demand on the company to pay on their claims and, in the even more unlikely scenario that all such amounts owed to the petitioning creditor which, if not paid, can then claims to interest are paid in full, any surplus is distributed to the be used as evidence that the company is cash-flow insolvent. shareholders.

4.3 Who manages each winding up process? Is there any 4.7 Is it possible for the company to be revived in the court involvement? future?

There is court involvement in respect of a compulsory liquidation, Yes, in theory, a company that is wound down and dissolved (which which requires a court hearing to order that the company enters is the outcome at the culmination of a liquidation) can be restored liquidation. Voluntary liquidations do not usually require any for up to six years after it is dissolved by court order, although this involvement of the court. Once the company has entered liquidation, is extremely rare. the liquidation process is managed by the liquidator (with the sanction of shareholders or creditors – see below). 5 Tax

4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any 5.1 What are the tax risks which might apply to a restrictions on the action that they can take (including restructuring or insolvency procedure? the enforcement of security)? CVAs and schemes Liquidation, unlike administration, does not impose a moratorium A company is taxed in the usual way whilst going through a CVA or on the rights of secured creditors to enforce their security, so a scheme. However, releases of debt usually incur a tax charge by the liquidator will either obtain the consent of the relevant secured company although this can be avoided if made pursuant to a CVA or creditor before dealing with any secured assets or allow that creditor scheme (which is an added benefit of the CVA or scheme). to take its own action in respect of those assets. Liquidation does, Administration and liquidation however, impose a stay on court proceedings, which can only be lifted with the consent of the liquidator or approval of the court. Unpaid tax at the commencement of the administration or liquidation is simply an unsecured debt of the company. Corporation tax on Liquidators (also unlike administrators) can only take certain gains which arise from the disposal of assets during the period actions if sanctioned to do so. In a MVL, this sanction comes from of the administration or liquidation is paid as an expense of the shareholders. In a CVL sanction must be obtained from creditors. administration or liquidation. It is also common, at least in larger liquidations, for a committee of three to five creditors to be formed as a representative body and to, amongst other things, scrutinise the steps taken by the liquidator and approve certain actions taken by them.

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6 Employees 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction? 6.1 What is the effect of each restructuring or insolvency procedure on employees? The EC Reg provides for automatic recognition of proceedings commenced in other EU Member States. Recognition of CVAs and schemes proceedings in jurisidictions outside the EU is also provided for in CVAs and schemes have no direct impact on a company’s employees. the UNCITRAL Model Law on Cross-Border Insolvency, which has Administration been enacted into English law. England Contracts of employment do not automatically terminate upon the appointment of an administrator. There is a 14-day period which 7.3 Do companies incorporated in your jurisdiction commences upon a company entering into administration during restructure or enter into insolvency proceedings in which the administrator can dismiss any employees who are not other jurisdictions? Is this common practice? required for the conduct of the administration. Wages, holiday and sickness pay and pensions contributions due to employees retained Not commonly – because the English system is generally perceived after this period are paid as expenses of the administration. If the to be creditor-friendly, companies incorporated in England and Wales administrator sells the company as a going concern (either after a (and their creditors) will usually want to use English insolvency and period of trading or as a pre-pack) employees, as well as liabilities restructuring proceedings. The only real exception to this is, whilst owed to those employees, automatically transfer to the buyer. also uncommon, companies establishing a link to the USA (which Determining the amount of such employees and the sums owed to can simply just involve opening a bank account or having a retainer them is therefore a key area of diligence in sales by administrators. with a law firm) in order to use Chapter 11 bankruptcy and benefit Liquidation from the extensive automatic stay on proceedings it affords, will generally be recognised by the English courts. A company entering compulsory liquidation automatically causes its employees’ contracts of employment to terminate. The liquidator then has to re-employ any employees needed for the conduct of the 8 Groups liquidation. Voluntary liquidation does not automatically terminate employment contracts, although the liquidator can simply refuse to perform employment contracts (with the result that the affected 8.1 How are groups of companies treated on the employee(s) can then claim as a creditor of the company for amounts insolvency of one or more members? Is there scope owed to them). for co-operation between officeholders?

Each company within a group is, for the purposes of English law, 7 Cross-Border Issues treated as distinct so there is no concept of group-wide proceedings. Each company in a group will, therefore, need to go into an insolvency process on an individual basis although it is common 7.1 Can companies incorporated elsewhere use for the same administrator or liquidator to be appointed to multiple restructuring procedures or enter into insolvency proceedings in your jurisdiction? companies within a group. This is in contrast to the position in respect of cross-border Yes. The EC Regulation on Insolvency Proceedings (the “EC insolvencies involving companies within the EU (including, as Reg”) provides that companies incorporated in the EU but which of the time of writing, the UK). A “group coordinator” can be have their “centre of main interests” (“COMI”) (being their primary appointed in such proceedings, to coordinate proceedings in a place of business activity) in England or Wales can commence number of jurisdictions and generally preside over them (albeit that administrations, liquidations and CVAs (each of which are governed the proceedings themselves will still be conducted by the office- by the EC Reg) in England or Wales as “main proceedings”. EU holders appointed to the various insolvent companies). companies which do not have their COMI in England or Wales but which have a non-transitory “establishment” here may open 9 Reform “secondary” proceedings which are restricted to assets situated in England or Wales. Schemes are not governed by the EC Reg, so there is no requirement 9.1 Have there been any proposals or developments in for a company to have its COMI or an establishment in England or your jurisdiction regarding the use of technology or Wales in order to propose a scheme. Instead, overseas companies reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make have been able to use schemes where those companies have insolvency processes more streamlined and efficient? demonstrated a “sufficient connection” to England and Wales. The existence of such a connection has been interpreted widely The Insolvency (England and Wales) Rules 2016, which replaced by the courts over recent years so that companies have been able the Insolvency Rules 1986, contain a number of provisions which to (amongst other things) amend the governing law of finance are designed to streamline and modernise insolvency proceedings. documents to English law in order to establish such a connection. These include the ability for office-holders to conduct meetings and correspondence with creditors via non-physical, electronic means

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(such as posting notices on websites and holding meetings virtually) as well as “deemed consent” procedures, where certain matters 9.2 Are there any other governmental proposals for which previously required a vote from creditors are deemed to be reform of the corporate rescue and insolvency regime in your jurisdiction? agreed to unless 10% by value of creditors object. By introducing these proposals the hope is that insolvency proceedings can be conducted more cost-efficiently and quickly than under the previous Yes – please see chapter 1 which addresses these reforms. regime. England Jat Bains Paul Keddie Macfarlanes LLP Macfarlanes LLP 20 Cursitor Street 20 Cursitor Street London EC4A 1LT London EC4A 1LT United Kingdom United Kingdom

Tel: +44 20 7849 2234 Tel: +44 20 7849 2894 Email: [email protected] Email: [email protected] URL: www.macfarlanes.com URL: www.macfarlanes.com

Jat specialises in a range of debt finance transactions, acting for a Paul advises on a broad range of corporate restructuring and recovery diverse range of stakeholders including credit and special situations issues. funds, corporate clients, sponsors, bondholders and senior and His clients include companies in financial difficulties, their directors mezzanine lenders in relation to, amongst other things, workouts and and shareholders, insolvency practitioners appointed over such restructurings. companies, lenders to and other major creditors of troubled entities, He has been involved in restructurings in a wide range of sectors investors interested in a “loan-to-own” strategy and buyers of including retail, healthcare, hotels, consumer lending, technology businesses where there is an insolvency aspect. and media, construction, manufacturing, professional services and Paul’s experience also includes a secondment to Warwick Capital infrastructure. Partners LLP, a leading distressed credit fund. Jat’s restructuring experience includes a secondment to the Paul is a qualified insolvency practitioner, having passed the Joint restructuring group legal team at Royal Bank of Scotland, where he Insolvency Examination Board examinations in 2013. was involved in the $12bn restructuring of an international financial institution. Jat is a member of the Institute for Turnaround.

From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high- net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters. Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals. Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation. We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.

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Finland Tuomas Koskinen

Law Office Waly & Koskinen Ltd. Sami Waly

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a Finland is more of a creditor-friendly than debtor-friendly company in financial difficulties? Is there a specific jurisdiction. Both the legal framework and the praxis support point at which a company must enter a restructuring the enforcement of debt obligations through bankruptcy and or insolvency process? execution. The position of a secured creditor is strong in the event of proceedings. Overall, the bankruptcy process is creditor-driven. Under the Finnish Companies Act (624/2006), the directors of a company have a general duty to act in the best interests of the Simultaneously, the statutory restructuring procedure available to company and to prudently ensure the protection of the interests of debtors is a debtor-friendly process. Entering into restructuring the company. Finnish company legislation does not recognise any gives the debtor an extensive protection from enforcement of special interests owed to parent companies or other group companies, pre-existing debts. In court practice, debtors are often allowed and as such, all decisions must be done with the corporate benefit of to enter into restructuring. However, a successful restructuring each individual company in mind. process requires co-operation between the debtor and the various stakeholders. The duties of the directors and managers do not differ greatly when managing a company in financial difficulties. However, a key consideration is that directors and managers may incur criminal 1.2 Does the legislative framework in your jurisdiction or civil liability if they continue to enter into further commitments allow for informal work-outs, as well as formal even while being aware that the company will not be able to meet restructuring and insolvency proceedings, and to what extent are each of these used in practice? them. A safe course of action for directors in such a situation is to file for bankruptcy or restructuring, if emergency financing is not available. Additionally, payment of dividends from a company in The Finnish legal system has one formal restructuring and financial distress is limited. one formal insolvency process, restructuring (governed by the Restructuring of Enterprises Act 47/1993) and bankruptcy (governed by the Bankruptcy Act 120/2004), respectively. 2.2 Which other stakeholders may influence the According to annual statistics published by Statistics Finland, company’s situation? Are there any restrictions on the 2,160 bankruptcy proceedings and 427 restructuring proceedings action that they can take against the company? For were initiated during 2017. As such, both proceedings are used in example, are there any special rules or regimes which apply to particular types of unsecured creditor (such practice. as landlords, employees or creditors with retention The Finnish legal framework has no statutory bars on informal of title arrangements) applicable to the laws of your work-outs, but it also does not have any support for them. In jurisdiction? practice, a successful informal work-out requires either a limited pool of creditors or existence of LMA-style documentation and an The legislative framework grants no formal power to stakeholders intercreditor agreement. Such loan documentation and intercreditor over a company in financial difficulties which has not entered any agreements are increasingly common among sophisticated creditors. insolvency procedure. From a purely legal point of view, the debtor Such informal work-outs are much rarer than the formal proceedings, company operates as it would during ordinary course of business. but on average, they also typically concern much larger companies Any stakeholder influence over the debtor is the result of contractual with sophisticated creditors. arrangements in place or for purely business reasons.

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The primary statutory method of influence granted to stakeholders schedule, interest, or the principal itself. In practice, the amount of is the possibility to file for the debtor company’s bankruptcy principal owed is reduced almost as a rule. Secured obligations are or restructuring. A creditor has the right to file for the debtor’s protected from this, since the principal of a secured debt cannot be bankruptcy almost at will, given that statutory requirements for a reduced below the secured amount. bankruptcy filing are met. Creditors may also apply for the debtor’s Debt-for-equity swaps and pre-packaged sales are possible; restructuring, but such applications are uncommon and have limited however, the statutory framework provides no tools for forcing such chance to succeed without the debtor’s co-operation. Influence of actions. Pre-packaged sales in the form used in, e.g. the United stakeholders that are not creditors are somewhat more limited. States or the UK are not used in Finland. Creditors may object to the initiation of restructuring by lodging

2.3 In what circumstances are transactions entered their formal opinion to the court. Typically, an application with Finland into by a company in financial difficulties at risk of required support is accepted even if some creditors object. The challenge? What remedies are available? commencement of restructuring provides for a relief period from stakeholder pressure. A security cannot be enforced during the The legislative framework for challenging, and potentially preparation phase of a restructuring plan, an exception being if the recovering, transactions entered into by a company in financial creditor shows that the secured asset is unnecessary for the debtor’s distress is the Act on the Recovery of Assets to a Bankruptcy Estate business. (758/1991). The same Act is also applied to a restructuring process A restructuring plan is put to creditor vote and it does not need to and execution proceedings. Any transaction favouring a creditor be adopted unanimously. Adopting the plan requires reaching a or other party at the expense of other creditors by either reducing majority in the different creditor groups, most typically secured and the debtor’s assets or increasing the debtor’s liabilities is potentially unsecured creditors. Any dissenting stakeholders are automatically recoverable by the bankruptcy estate or the administrator of a crammed-down if they form a minority. restructuring procedure. Primary considerations for recovery are whether the debtor is legally insolvent and whether the creditor was aware of the debtor’s insolvency. 3.3 What are the criteria for entry into each restructuring procedure? The most significant ground for a challenge is if a debt was paid during a three-month window prior to commencement of bankruptcy or a restructuring process. Such a payment may be recoverable The Restructuring of Enterprises Act stipulates that a company may given three alternative conditions: first, if the method of payment enter into restructuring proceedings if it lodges its own application was unusual (usually, anything else than money); second, if the or a joint application with its creditors. Creditors have a legal right payment was made in advance to becoming due and payable; or, to apply for restructuring without the debtor, but in practice this third, in excess of an amount considered significant in relation to the almost never happens. The criteria, one of which must be met, for estate’s assets. Court practice has established that any payment in entry into restructuring are 1) a joint application with, or the consent excess of 10% of the assets of an estate at the time of bankruptcy is of, two unaffiliated creditors which represent at least 20% ofall considered significant in this respect. A counterargument for such the debts of the debtor company, 2) an existing threat of the debtor recovery is if the payment is considered to have been made in the company becoming insolvent, or 3) the debtor company being ordinary course of business. insolvent without any of the obstacles of restructuring being present. Various statutory obstacles for entering into a restructuring procedure exist, with the court having broad power of interpretation 3 Restructuring Options over some. Such obstacles include, e.g. that the criteria for initiating restructuring have not been met or that the debtor is trying to avoid debt collection via restructuring. In legal practice, courts apply 3.1 Is it possible to implement an informal work-out in caution in ruling that such obstacles exist, since typically courts your jurisdiction? lack enough evidence for their existence in all but the most extreme cases. Yes. The legislative framework has no bars for implementing an informal work-out. However, there is no support for such a work- out either. A method used in practice over purely informal work- 3.4 Who manages each process? Is there any court outs is one where the largest creditors reach a joint agreement in involvement? advance with the debtor and any opposing minor creditors are dealt with using the formal restructuring process. A court-appointed administrator manages the restructuring process. Courts have an overseeing role in the process, by initiating it and affirming the restructuring plan once approved by the creditors. 3.2 What formal rescue procedures are available in Courts also rule on objections made to individual creditor’s debts. your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can 3.5 What impact does each restructuring procedure have creditors and/or shareholders block such procedures on existing contracts? Are the parties obliged to or threaten action (including enforcement of security) perform outstanding obligations? Will termination and to seek an advantage? Do your procedures allow you set-off provisions be upheld? to cram-down dissenting stakeholders?

The Restructuring of Enterprises Act has the force of mandatory Finnish legislation provides one formal restructuring process, the legislation, superseding all conflicting contractual terms agreed by restructuring of a company under the Restructuring of Enterprises the debtor. According to the Act, only terms allowed in the Act itself Act. The purpose of such a restructuring process is adopting a form an exception, and any other contractual terms conditional on restructuring plan acceptable by the creditors. The restructuring entering into restructuring are unenforceable, such as termination plan allows for changes in the debt obligations, such as repayment

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and set-off provisions. In addition, the entry into restructuring is not enough grounds for the debtor’s contractual parties to demand 4.3 Who manages each winding up process? Is there any additional security for the continuation of their services or the court involvement? provision of their goods. The Act therefore obligates contracting parties to perform outstanding obligations irrespective of the The bankruptcy process is overseen by the courts in various stages. initiated restructuring process. Firstly, the bankruptcy process is managed by a court-appointed administrator of the bankruptcy estate. The court appoints the However, the debtor company entering into restructuring, but administrator based on the views of the largest creditors. Courts are not creditors, may terminate leases and leasing contracts, any also involved in ending the bankruptcy proceedings and approving termination clauses included therein notwithstanding. Such the distribution list, as well as resolving various disputes, such as termination may lead to additional liabilities owed by the company Finland the existence of a creditor’s debt or the enforceability of a security entering restructuring in the form of compensation for premature given to a creditor. termination. Such compensation is subject to the restructuring proceedings and, e.g. haircuts. The debtor company may also terminate any agreements deemed unusual. 4.4 How are the creditors and/or shareholders able to Any liabilities incurred by the debtor company after the initiation influence each winding up process? Are there any restrictions on the action that they can take (including of restructuring proceedings must be paid in due course and they the enforcement of security)? are not subject to haircuts. Same holds true for any obligations agreed prior to restructuring but fulfilled only after the initiation of The Finnish bankruptcy process is a creditor-driven process. All restructuring. major decisions are made by the creditors in a creditors’ meeting. Each creditor has one vote for one euro of debt owed to them. Only 3.6 How is each restructuring process funded? Is any decisions of lesser implication are done by the administrator of the protection given to rescue financing? bankruptcy estate alone. The administrator has also the duty to safeguard the interests of all creditors on equal standing. The costs of restructuring are borne by the company being A security may be enforcement as normal during a bankruptcy restructured itself. This includes the administrator’s fee. If the procedure. Upon a decision of the administrator, the bankruptcy restructuring fails and the company is declared bankrupt, any debt estate may temporarily prevent the enforcement of a security for obligations that have been entered into after the initiation of the two months if the interests of the bankruptcy estate require such. restructuring process have precedence over past debts when the Typically, secured creditors may ask the administrator to enforce proceeds of the bankruptcy are divided to creditors. and realise securities as part of the bankruptcy proceedings. In a typical bankruptcy proceeding, shareholders have almost no 4 Insolvency Procedures influence. Low-ranking creditors, i.e. creditors entitled to pay only after all other creditors, such as shareholders or creditors of capital loans (as statutorily defined), are typically barred from voting, if 4.1 What is/are the key insolvency procedure(s) available their debts are not expected to receive payment. Influence of to wind up a company? shareholders in bankruptcy proceedings usually stems from the fact that they have a double-role as creditors. Finnish law provides for two procedures to wind up a company: bankruptcy under the Bankruptcy Act; and liquidation of a company under the Companies Act. Liquidation proceedings are only possible 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform if the company is not insolvent, meaning that the company has more outstanding obligations? Will termination and set-off assets than liabilities. Liquidation is initiated by the shareholders of provisions be upheld? a company and does not involve court involvement. Liquidation is not an insolvency procedure in itself, since it is typically used only The Bankruptcy Act is mandatory legislation and supersedes all for companies that cease their business for other reasons besides conflicting contractual terms of the debtor’s agreements. Upon the insolvency. For this reason, liquidation is not considered any further commencement of bankruptcy proceedings, the bankruptcy estate in this article. assumes all the rights and liabilities of the bankrupt company. In legal praxis this has been interpreted to mean that the initiation 4.2 On what grounds can a company be placed into each of bankruptcy proceedings itself does not change the rights and winding up procedure? liabilities of the bankrupt company. In Finland, almost all contractual terms conditional on bankruptcy, such as those entitling the creditor The statutory grounds for the bankruptcy procedure to be initiated to terminate the contract or set-off liabilities, are unenforceable. is the insolvency of the debtor, meaning the inability to pay debts Parties to a contract are obliged to perform outstanding obligations. as they fall due other than temporarily. Bankruptcy may be applied The administrator of a bankruptcy estate has the right to terminate by the debtor itself or any of its creditors. In a debtor application, any agreements unilaterally regardless of any commitments made by insolvency is presumed and usually not questioned. A creditor the company prior to bankruptcy. If the bankruptcy estate upholds requires either a court ruling (or a debt which is enforceable without any agreements, debts incurred after the initialisation of bankruptcy one) or a debt obligation which is otherwise indisputable enough. proceedings are paid with the highest priority before any debts The creditor must also provide proof for the debtor’s insolvency. incurred prior to bankruptcy, second only to the administrator’s own This is typically accomplished by sending out a payment demand fee. with the threat of filing for bankruptcy. If such a payment demand is not paid within a week, the debtor is presumed insolvent.

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4.6 What is the ranking of claims in each procedure, 7 Cross-Border Issues including the costs of the procedure?

7.1 Can companies incorporated elsewhere use The highest-ranking claims are those incurred by the bankruptcy restructuring procedures or enter into insolvency estate during the bankruptcy proceedings itself, among which the proceedings in your jurisdiction? administrator’s fee takes the top priority. Any such debts must be paid in full before any bankruptcy debts can be paid. All other debts The primary legislative framework for international insolvency in get a pro rata share of the liquidated assets of a bankruptcy estate. Finland is the recast regulation (EU) 2015/848 of the European Exceptions to this primary rule are secured creditors, creditors Parliament and of the Council of May 2015 on insolvency holding enterprise mortgages (floating charges), and creditors with proceedings (the “Recast ”), applied both to Finland debts owed that were incurred during a restructuring procedure that bankruptcy and restructuring. The Recast Insolvency Regulation preceded the bankruptcy. Lower ranking debts consist of statutory grants jurisdiction to the courts of the Member State in which the capital loans, various statutory sanctions and junior bonds. centre of a debtor’s main interests is situated. The centre of main interests is the primary place in which the administration of the 4.7 Is it possible for the company to be revived in the debtor is conducted, which, unless proven otherwise, is assumed future? to be the place of registered office. This being considered, the jurisdiction of incorporation is not relevant if the centre of a debtor’s The Finnish legal framework provides for no method through main interests is situated within Finland, which grants jurisdiction to which a bankrupt company may be revived once the bankruptcy Finnish courts over such a debtor. proceedings start. Bankruptcy proceedings may be cancelled for If a debtor having its centre of main interests in another EU Member eight days if legal grounds for this are presented to the court. State has an establishment in Finland, secondary bankruptcy In practice, especially in the case of a smaller company, it is not proceedings (but not restructuring) may be initiated in Finland. atypical that a bankruptcy estate sells all or most of its assets, Such a secondary bankruptcy proceeding is limited to the debtor’s including the business name to a new entity. Legally, this constitutes assets located in Finland. Additionally, the Member State in which the establishment of a new legal entity with a common name to the a real property involved in insolvency proceedings has exclusive bankrupt company. jurisdiction over such real property. In addition, a treaty between the countries results in Finnish 5 Tax courts having no jurisdiction over debtors that have entered into bankruptcy proceedings in Iceland, Norway or Denmark, provided that the debtor was domiciled therein. 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? If the Recast Insolvency Regulation does not apply, and there is no relevant treaty in force, the legal starting point is that any company The processes themselves do not typically give rise to tax liabilities. with a place of business in Finland may enter into bankruptcy In some cases, it is possible that certain actions, such as divestments, proceedings before the Finnish courts. This holds true regardless may give rise to tax liabilities as a part of an insolvency procedure. of whether the company conducted business in Finland through The tax creditor is on equal footing with other creditors. For example, a registered establishment or as an unregistered presence. Such taxes accrued prior to the initiation of a bankruptcy procedure are bankruptcy proceedings are limited to assets situated within subject to the bankruptcy proceedings and the bankruptcy estate Finland. These proceedings are also rare and may require case-by- is not liable for such taxes. The bankruptcy estate is only taxed case evaluation. if it continues to conduct business during the bankruptcy process. The legal situation concerning restructuring of companies Realisation of assets is not typically taxed. incorporated in other non-Member State jurisdictions is unrefined. A principle of international law is the equal treatment of bankruptcy 6 Employees and insolvency proceedings (and similar). As such, it could be entirely possible for a company incorporated out of the EU to enter into restructuring in Finland. However, the foreign company must 6.1 What is the effect of each restructuring or insolvency have a business presence in Finland for the restructuring to have procedure on employees? any desired results. To the authors’ knowledge, such restructuring proceedings of non-EU companies are almost unheard of. An initiated restructuring procedure allows for a shorter notice of termination. If the accepted restructuring plan includes actions that result in the termination of employment, this allows for the 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in termination of employment contracts with two months’ notice. your jurisdiction? Additionally, if the restructuring leads to ceasing or decreasing of work, the same two months’ notice period applies. The employee has the right to terminate their employment with 14 days’ notice If an insolvency process has been commenced in another EU during a restructuring process. Member State, the Recast Insolvency Regulation applies. This leads to the automatic recognition of insolvency processes started in other When a bankruptcy process is initiated, all employment contracts EU Member States. Under the Recast Insolvency Regulation, such may be terminated on 14 days’ notice without the requirement of any further grounds besides the bankruptcy itself. If there are insolvency processes are construed according to the laws of the EU no sufficient funds in a bankruptcy estate to pay out salary debts, Member State in which such a process was initiated in. the state-run pay security scheme pays out debts to employees In addition, Finland is a party to several conventions on the given certain conditions and becomes a creditor in the insolvency recognition of foreign judgments, including the Brussels and Lugano proceedings instead of the employees themselves. conventions. These have been largely replaced by applicable EU

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legislation between Member States. If no convention applies, the recognition of a restructuring or insolvency process initiated out of 9 Reform the EU requires an exequatur from a Finnish court. 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or 7.3 Do companies incorporated in your jurisdiction reducing the involvement of the courts in the laws restructure or enter into insolvency proceedings in of your jurisdiction, which are intended to make other jurisdictions? Is this common practice? insolvency processes more streamlined and efficient?

The primary situation in which this happens is when another The Finnish Office of Bankruptcy Ombudsman oversees bankruptcy Member State has jurisdiction over a Finnish company based on Finland proceedings. Bankruptcy estates are required by law to lodge the Recast Insolvency Regulation. Enforcement of insolvency various documents to the Ombudsman. In early 2013, it launched proceedings initiated outside of the EU and concerning companies an internet-based portal (called “Kosti”) for the delivery of such incorporated in Finland may be difficult. To the authors’ knowledge, documents, intending to streamline the delivery and distribution of such practices are not commonplace. the documents. Creditors may access such documents electronically in the portal. In practice, only professional creditors use the 8 Groups system extensively. The authors are not aware of further proposals regarding the use of technology at this time.

8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope 9.2 Are there any other governmental proposals for for co-operation between officeholders? reform of the corporate rescue and insolvency regime in your jurisdiction? Finnish company law and insolvency legislation treats each The Bankruptcy Act was last reformed in 2004 and the Restructuring company as a fully independent legal entity, regardless of whether of Enterprises Act entered into force in 1993 with the latest major it has group interests. Thus, the insolvency process of each group changes entering into force in 2007. There have been various entity proceeds separately. Legally, a group company does not discussions on amendments to these statutes, but the authors are differ in a material way from other stakeholders. not aware of any major changes. Perhaps the largest proposed It should be noted that, from a recovery standpoint, transactions change being discussed is the possibility for natural persons to between related parties are evaluated more stringently and the critical effectively declare bankruptcy, but no proposed acts have yet been period, during which challenges to transactions are possible, is longer. published. Care should therefore be taken that any significant transactions with related parties are done on an arm’s-length basis, which may also be required for other reasons (e.g. tax or corporate law).

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Tuomas Koskinen Sami Waly Law Office Waly & Koskinen Ltd. Law Office Waly & Koskinen Ltd. Ratavartijankatu 3 Ratavartijankatu 3 00520 Helsinki 00520 Helsinki Finland Finland

Tel: +358 09 4257 8780 Tel: +358 09 4257 8780 Email: [email protected] Email: [email protected] URL: www.wklaki.fi/en URL: www.wklaki.fi/en Finland Tuomas Koskinen is a partner at Law Office Waly & Koskinen Ltd. Sami Waly is a partner at the Law Office Waly & Koskinen Ltd. Besides insolvency, Tuomas focuses on dispute resolution, especially Besides insolvency matters, Sami focuses on dispute resolution and real estate and construction disputes, and white-collar crimes. He white-collar crimes. Sami also frequently advises clients from the received his LL.M. from the University of Helsinki and also holds a Middle East region in various corporate matters. Sami received his Bachelor’s Degree in Business Administration, majoring in accounting, LL.M. from the University of Helsinki. from the Aalto University School of Business.

Law Office Waly & Koskinen Ltd. is a Finnish boutique law firm with an office in the Helsinki capital focusing mostly on dispute resolution, white- collar crimes and insolvency, as well as general corporate advice to medium and small-sized companies. The practitioners have together a shared experience involving more than 100 bankruptcy estates. Our core value offered to our clients is that we provide excellent value service with predictable pricing. With the cost structure of a boutique firm, we can provide our services at a discount without compromising the quality of service provided.

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France Joanna Gumpelson

De Pardieu Brocas Maffei Aarpi Philippe Dubois

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a Historically, French bankruptcy law was generally considered to company in financial difficulties? Is there a specific be rather debtor-friendly. However, the French Bankruptcy Code point at which a company must enter a restructuring has been regularly amended since 2005 with a view to reinforcing or insolvency process? creditors’ rights both in the context of out-of-court workouts and also insolvency proceedings. In particular, an ordinance dated 12 The company’s legal representative must file for rehabilitation March 2014 reformed bankruptcy laws with a view to favouring or liquidation (if rehabilitation appears impossible), no later than reorganisation at a preventive stage, strengthening the efficiency of 45 days from the date on which the company becomes insolvent out-of-court proceedings and increasing the rights of creditors. In (see question 3.3), unless conciliation proceedings (which are also addition, a bill dated 6 August 2015 introduced the possibility, under available to insolvent companies) are pending. certain limited conditions, to squeeze-out dissenting shareholders of For certain specific breaches such as using the company’s assets or a bankrupt company in rehabilitation proceedings, notably to favour credit for their own benefit or carrying out business activities at a debt-for-equity swap restructurings. loss to further their own interests, directors can be forced to assign their equity interest in the company and prohibited from managing any business for up to 15 years. 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal Liability can also arise where, as a result of management errors restructuring and insolvency proceedings, and to (other than mere negligence), a company’s assets do not cover what extent are each of these used in practice? its debts: an action for mismanagement can lead to an insolvent company’s directors being liable for all or part of its debts. French bankruptcy law provides for two main types of restructuring These liabilities can extend to formally appointed directors/ proceedings: managers with representation powers, and to any individual or ■ Out-of-court proceedings: ad hoc proceedings and entity that, though not officially a director/manager, repeatedly conciliation proceedings are flexible, voluntary and influenced the company’s management or strategic decisions (de confidential proceedings that aim at facilitating work-outs facto directors/managers). between a distressed company and its major creditors under the supervision of a court-agent. Those are frequently used especially for large groups of companies in the context of 2.2 Which other stakeholders may influence the financial restructurings. company’s situation? Are there any restrictions on the ■ Court-monitored formal proceedings: safeguard (as well action that they can take against the company? For as pre-packaged safeguard); rehabilitation; and liquidation example, are there any special rules or regimes which proceedings. Safeguard and rehabilitation are formal apply to particular types of unsecured creditor (such proceedings that aim, depending on the situation of the as landlords, employees or creditors with retention company, at restructuring the company’s liabilities whether of title arrangements) applicable to the laws of your through a restructuring plan or a total or partial sale of its jurisdiction? business and/or assets. The liquidation aim at selling the company’s assets (as a whole where possible or on an asset- When a company faces difficulties, the French Commercial Code by-asset basis) where the rescue of the company appears as provides for different types of warning proceedings (procédures obviously impossible. d’alerte) to draw the directors’ attention to any matter likely to jeopardise the continued operation of the company. They can be triggered by the company’s external auditors, the employees’ representatives or shareholders provided that they own at least 5% of the share capital.

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With respect to creditors, the opening of out-of-court proceedings In conciliation specifically, the company has two options to does not trigger any automatic stay. However, the debtor can apply implement the work-out agreement: for a moratorium (for a maximum of two years) if any creditor ■ It can obtain the president of the court’s approval, which does attempts to enforce its right while ad hoc proceedings or conciliation not involve publicity. proceedings are pending. ■ It can request formal court approval, which encourages The opening of court-monitored proceedings triggers a stay on creditors to extend credit to the company to benefit from a enforcement (subject to few exceptions, see question 3.2). super-senior repayment status (see “new money” privilege in question 3.6). Except where fraud has taken place, a court- approved work-out agreement is also protected from the risk 2.3 In what circumstances are transactions entered of being voided in the future (see question 2.3). However, this into by a company in financial difficulties at risk of approval must be recorded in a full judgment accessible to the France challenge? What remedies are available? public and therefore subject to challenge by a third party or appeal. Employees’ representatives must be informed of the In rehabilitation or liquidation (but not in safeguard as those agreement and invited to attend the court hearing. proceedings are available to solvent companies only), any Since 2014, the court-appointed agent may be entrusted with the transaction entered into during the hardening period (période mission to arrange a pre-packaged sale of a business in conciliation, suspecte) can be subject to clawback provisions. The hardening which could ultimately be implemented in rehabilitation or period runs from the date when the company is deemed insolvent liquidation proceedings. and can be backdated by the court by up to 18 months before the judgment opening rehabilitation or liquidation proceedings. If a 3.2 What formal rescue procedures are available in court-approved conciliation agreement has been entered into prior your jurisdiction to restructure the liabilities of to the opening of insolvency proceedings, the insolvency date distressed companies? Are debt-for-equity swaps cannot be backdated to a date before the court order approving the and pre-packaged sales possible? To what extent can conciliation work-out agreement. creditors and/or shareholders block such procedures A limited number of transactions are automatically voided if or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you performed during the hardening period, for instance: to cram-down dissenting stakeholders? ■ any deed entered into without consideration transferring a title to moveable or immoveable property; Safeguard proceedings ■ any bilateral contract in which the debtor’s obligations significantly exceed those of the other party; Safeguard proceedings allow solvent debtors to be restructured at a preventive stage under the court’s supervision. They begin with an ■ any payment by whatever means, made for debts that have observation period of up to six months (which can be extended) to not fallen due on the date when payment is made; assess the company’s financial position. Once opened, there is an ■ any payment for outstanding debts, if not made by cash automatic stay of all creditor payment and enforcement actions – settlement or wire transfers, remittance of negotiable subject to few exceptions (and notably claims secured by a security instruments, or Dailly-type assignment of receivables or any other means commonly used in business transactions; or interest conferring a retention right, claims secured by a trust (fiducie) and set-off of related claims) – against the main debtor and ■ any mortgage or pledge (both contractually agreed or court- individuals acting as guarantors and joint debtors. ordered) granted to secure a pre-existing debt. The general outcome of safeguard is the approval by the court of a In addition, any transaction or payment entered into during the safeguard plan that can involve a debt restructuring, re-capitalisation hardening period is subject to optional voidance if proper evidence is of the company, debt-for-equity swap, sale of assets or a partial sale brought that the contracting party or the beneficiary of the payment of the business. However, it cannot include a proposal to sell the knew the company’s insolvency (this knowledge being presumed business as a whole. for companies belonging to the same corporate group). For companies of a certain size, three classes of creditors must be arranged, comprising financial institutions, major trade creditors 3 Restructuring Options and bondholders, which are invited to vote on the draft safeguard plan at a two-thirds majority in value for each class. Subordination agreements, if any, shall be taken into account by the administrator 3.1 Is it possible to implement an informal work-out in in the computing of the votes. If those classes are not set up, or if your jurisdiction? one of them has rejected the draft plan, the plan must be negotiated on a one-to-one basis with each creditor. The court can impose a 10- Ad hoc proceedings and conciliation proceedings are confidential year maximum term-out to dissenting creditors, but cannot impose and consensual out-of-court proceedings that aim at facilitating the any debt write-off. negotiation of a work-out agreement between a distressed company and its major creditors under the supervision of a court-appointed If the plan provides for any operation requiring shareholder approval agent. Trade creditors and major shareholders can also be invited to (e.g. debt-for-equity swap), shareholders must also be consulted and take part in the negotiations. Social and tax authorities can be asked vote at a two-thirds majority. However, the court can reduce both to consent to a debt-rescheduling plan or a cancellation of debt. quorum and majority applicable to shareholder meetings on first notice. A work-out agreement accepted by some creditors cannot be imposed on other dissenting creditors, as the process is consensual Once approved by the court, the safeguard plan is enforceable and no cramdown can be imposed (subject to the subsequent opening against all members of the creditors’ classes, including the dissenting of pre-packed safeguard proceedings, see question 3.2). In practice, minority within each class. majority rules provided for in the existing credit documentation apply.

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Pre-packaged safeguard proceedings 3.4 Who manages each process? Is there any court Two types of pre-packaged safeguard proceedings are available: involvement? accelerated financial safeguard and accelerated safeguard. Their global purpose is to enable debtors, for which conciliation proved In out-of-court proceedings, the court agent does not have any unsuccessful to reach all participating creditors’ consent, to be management responsibilities. There are no restrictions on business restructured in a very short timeframe with the consent of a two- activities. thirds majority within creditor classes. In formal court-monitored proceedings, the judgment opening Rehabilitation proceedings safeguard or rehabilitation proceedings appoints: As a whole, rules applicable to the observation period, the automatic ■ An insolvency judge (juge commissaire) who oversees the France stay and classes of creditors are the same as in safeguard. whole procedure. He/she must approve all management Unlike in safeguard, however, there are two main possible outcomes decisions that go beyond ordinary actions and any decision to for rehabilitation proceedings: settle pending disputes. ■ a rehabilitation plan, where the same principles apply as in ■ An administrator (administrateur) who supervises or assists safeguard proceedings; and the management to prepare the restructuring plan, but cannot take over any management responsibility in safeguard ■ a sale plan, where the court can authorise the administrator proceedings. In rehabilitation proceedings, he/she can be to auction the business as a whole or in part. Creditors in charge of assisting the management or also, in limited (except for limited exceptions, e.g., creditors benefiting from situations, taking control of the company’s management. a retention right) have no say on the choice of the purchaser made by the court when approving the sale plan. ■ A creditors’ representative (mandataire judiciaire) who represents the creditors’ interests and assesses proofs of As in a safeguard, if shareholder approval is required, the court claim, and who can be assisted by supervising creditors can reduce quorum and majority rules applicable on first notice. (créanciers contrôleurs) appointed by the court. Moreover, in rehabilitation proceedings only, if the insolvent company’s net equity is not restored and shareholders have refused to increase the company’s equity to at least half of its share value 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to (which is a legal requirement in France), the administrator can perform outstanding obligations? Will termination and petition the court to appoint an agent in charge of convening the set-off provisions be upheld? shareholder meeting and to vote, on behalf of the dissenting shareholders, on the recapitalisation of the company for the amount Out-of-court proceedings suggested by the administrator, when the draft plan provides for a Since the 2014 reform of the French Bankruptcy Code, ipso facto change in the share capital in favour of one or several committed provisions are deemed null and void. More generally, any contractual investors. provision increasing the debtor’s obligations (or reducing its rights) In addition, under certain narrowly defined circumstances, the Court by that sole reason of the opening of out-of-court proceedings (or of can order the squeeze-out of shareholders through a forced sale of any filing for that purpose) is also null and void. all or part of their shares should those shareholders have refused Safeguard and rehabilitation proceedings to implement the required change in the equity structure and hold directly or indirectly a majority stake or a blocking minority stake in Notwithstanding any contractual provisions, ongoing contracts the capital of the company, or through an imposed dilution of their cannot be terminated by the sole reason of the opening of such proceedings. The administrator can require the debtor’s contracting equity stake. party to perform ongoing contracts in exchange for the performance of the debtor’s post-petition obligations. However, all contracts 3.3 What are the criteria for entry into each restructuring can be terminated by court order at the request of the administrator, procedure? should this termination be necessary to the company’s safeguard and not excessively detrimental to the contracting party’s interests. The French insolvency test is a pure cash-flow test: a company is The contracting party can require the administrator to express his/ deemed insolvent (en état de cessation des paiements) when it is her position on the assumption of an ongoing contract, which will unable to meet its due and payable liabilities out of its available be automatically terminated once a formal notice is sent to the assets (those in the form of cash or those that can be quickly turned administrator and has remained unanswered within a month. into cash), taking into account undrawn committed facilities and The debtor’s contracting party must perform its obligations despite other credit reserves and moratoriums/standstills accepted by non-performance by the debtor of its own pre-petition obligations, creditors. which will only allow the contracting party the right to file proof Ad hoc proceedings: the company must be solvent, although there of claim. have been some recent precedents where ad hoc proceedings were For obligations resulting from certain kinds of financial instruments opened for insolvent companies (but for a very short period of time only, early termination and set-off provisions remain enforceable only). irrespective of the opening of insolvency proceedings. Conciliation proceedings: the company must face legal or financial difficulties (whether actual or foreseeable) and can be insolvent but 3.6 How is each restructuring process funded? Is any for less than 45 days before the petition is filed. protection given to rescue financing? Safeguard proceedings: the company must be solvent and facing difficulties that cannot be overcome, with no restrictions applied to New money injected in the context of a court-approved work-out the concept of “difficulty”. agreement entered into in conciliation benefits from a statutory Rehabilitation proceedings: the company must be insolvent, but super-senior status if the debtor subsequently files for insolvency. rescue does not appear to be impossible. In this case, the new money providers do not have to suffer any rescheduling in a term-out scenario and cannot have any write-off,

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debt-for-equity swap or rescheduling imposed through the vote of automatically terminated when the contracting party is informed of creditor classes. the liquidator’s decision not to assume the contract. In safeguard and rehabilitation proceedings, post-petition claims In addition, in case a sale plan is approved by the court, some supply arising for the purpose of funding the observation period benefit contracts deemed necessary to continue the transferred activity are from a certain statutory privilege (see question 4.6). judicially assigned to the transferee by the sole effect of the court’s decision. 4 Insolvency Procedures 4.6 What is the ranking of claims in each procedure, including the costs of the procedure?

4.1 What is/are the key insolvency procedure(s) available France to wind up a company? Where creditors rank on insolvency is complex, and any attempt to provide a simple list can be misleading. However, a simplified Liquidation proceedings aim at liquidating a company by selling ranking of claims could be summed-up as follows: its business, as a whole or per branch of activity, or by selling its ■ Arrears of wages: a portion of employees’ pre-petition claims assets one by one. Creditors are repaid according to their rank and benefit from a senior preferential status, which protects the privilege with the sale proceeds. last 60 days’ wages in arrears before the judgment opening There is a simplified form of liquidation proceedings available for insolvency. If the bankruptcy estate cannot pay these claims small businesses, which lasts for a maximum of one year. from its available cash, they are paid as advances by a national wage insurance body, which then replaces the employees’ ranking as a creditor. 4.2 On what grounds can a company be placed into each ■ Post-petition court costs, which arose for the purpose of the winding up procedure? proceedings. ■ “New money” facilities granted in the framework of a court- The debtor must be insolvent and its rehabilitation must appear as approved work-out in conciliation proceedings (if any) also obviously impossible. Liquidation is the only possible outcome benefit from a senior legal privilege. when rehabilitation proceedings are attempted without success. ■ Post-petition claims: in safeguard and rehabilitation proceedings, they benefit from a statutory privilege provided that they either arise for the purpose of funding the 4.3 Who manages each winding up process? Is there any observation period, or represent consideration in a business court involvement? transaction directly connected to the company’s activities continued during the observation period. They must be paid The judgment opening liquidation proceedings appoints: when they fall due. If not, they rank ahead of both secured ■ An insolvency judge to oversee proceedings. and unsecured pre-petition claims. ■ A liquidator, who is responsible for: ■ Secured pre-petition claims. ■ collecting in all of the company’s assets and paying the ■ Unsecured pre-petition claims. creditors to the extent that funds are available; and ■ Shareholders do not receive any repayment of their capital ■ assessing proofs of claim and representing the creditors’ investment, unless a surplus remains after all the creditors interests. have been paid in full (which is extremely rare). The liquidator has sole authority to bind the company and assumes In liquidation proceedings, the creditors’ ranking is the same, except all management responsibilities. that pre-petition mortgage claims rank ahead of post-petition claims benefiting from the statutory privilege.

4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any 4.7 Is it possible for the company to be revived in the restrictions on the action that they can take (including future? the enforcement of security)? The court closes the liquidation in two hypotheticals: hardly ever, Liquidation proceedings trigger an automatic stay of enforcement when all the creditors are repaid; or when no more proceeds can against the company, subject to few exceptions. Yet, in liquidation be expected from the sale of the company’s business/assets. In the only (unlike in safeguard or rehabilitation), secured creditors second case, the company shall terminate and cannot be revived. benefiting from a pledge can enforce their security interest through Once closed, liquidation may be re-opened if some of the debtor’s a court-monitored allocation process (attribution judiciaire), that is, assets have not been sold off, or if a legal action in the interests of request the court to be transferred ownership of the pledged asset(s). the creditors shall be initiated.

4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform 5 Tax outstanding obligations? Will termination and set-off provisions be upheld? 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? The same rules applicable in safeguard and rehabilitation apply to liquidation proceedings, where the liquidator is recognised the same prerogatives as the administrator. A taxpayer remains liable for all taxes while undergoing restructuring or insolvency proceedings and the French tax However, in liquidation proceedings, ongoing contracts where the authorities typically benefit from a preferential ranking as debtor’s performance consists in the payment of a sum of money are creditors. In addition, if the taxpayer benefits from debt waivers

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granted by creditors as part of these proceedings, the amount of these debt waivers will typically be included in its taxable income, 7 Cross-Border Issues thereby potentially generating additional tax liabilities. If a debt waiver is granted as part of safeguard, rehabilitation or liquidation 7.1 Can companies incorporated elsewhere use proceedings or pursuant to a court-approved conciliation agreement, restructuring procedures or enter into insolvency the debtor can, however, fully offset its available carry-forward proceedings in your jurisdiction? losses against the amount waived. This possibility is expressly provided for in the French tax code as an exception to the general Under Regulation (EU) 2015/848 of the European Parliament of rule whereby carry-forward losses can only be used up to an the Council of 20 May 2015 on insolvency proceedings, reforming amount, in any given year, of €1 million plus 50% of the taxable the Regulation (EC) 1346/2000 on insolvency proceedings and France profits realised in that year. On the creditor side, whether the debt applicable to insolvency proceedings commenced after 26 June waiver will be treated as a tax-deductible loss will mainly depend 2017 (the Insolvency Regulation), the EU Member State where on whether it can qualify as a “commercial debt waiver”, in which a company’s centre of main interests (COMI) is located shall case, it will typically be treated as deductible, or as a “financial have exclusive jurisdiction to commence insolvency proceedings debt waiver”. A financial debt waiver may be tax deductible at the regarding this company. level of the creditor if granted as part of safeguard, rehabilitation or liquidation proceedings or pursuant to a court-approved conciliation A company’s COMI is presumed to be the place of its registered agreement, subject to limitations where the creditor is a shareholder office unless it is proven that both: of the debtor. ■ Its COMI, as defined in the Eurofood decision of the European Court of Justice, is in a country other than its place Instead of granting debt waivers, creditors may subscribe to a of incorporation. share capital increase of the debtor by way of offset against their ■ The company’s trade and financial partners are fully receivables, thereby implementing a debt-for-equity swap. This aware that the COMI of such company is not its place of would generally not trigger the recognition of taxable income at incorporation. the level of the debtor, which would then retain its existing carry- forward losses intact. This, however, needs to be reviewed on a case- Under this framework, a company incorporated in another EU by-case basis, having in mind also the resulting consequences for Member State can commence insolvency proceedings in France if the relevant creditors. A French corporate creditor having recorded its COMI is located in France. If it only has an establishment based a depreciation on its receivable and treated this depreciation as a in France, secondary proceedings can be subsequently commenced deductible expense would need to reverse that depreciation upon in France which shall apply to its assets located in France. conversion of the receivable into shares, which would create taxable With respect to a company incorporated outside of the EU, where income at its level. The recording of a depreciation on the shares no international treaty applies, French courts have jurisdiction received in exchange would not be tax-deductible if these shares to commence proceedings if such courts find that the company’s constitute a participating interest and a later sale of these shares for COMI is located in France. a price lower than the initial book value of the receivable would also not generate a tax deductible loss. A successful restructuring will thus also involve reconciling the interest of both the creditors and 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in the debtor from a tax standpoint. your jurisdiction?

6 Employees If insolvency judgments are made in a jurisdiction that is party to a treaty with France, they are recognised and enforceable in France. In addition, the Insolvency Regulation allows insolvency procedures 6.1 What is the effect of each restructuring or insolvency in different EU Member States to be automatically recognised. procedure on employees? In other cases, foreign judgments can only be recognised and enforced if they have been subject to an inter partes recognition Employment contracts remain in force during the restructuring procedure known as exequatur, which is intended to verify that the procedure. foreign court had proper jurisdiction, international public policy has Unlike other creditors of the company, employees do not need to been complied with and no fraud has taken place. file proof of claim. Salaries and paid leaves due prior to the opening judgment benefit 7.3 Do companies incorporated in your jurisdiction from a preferential status (subject to certain caps), which allows restructure or enter into insolvency proceedings in their payment after the opening judgment and as soon as funds are other jurisdictions? Is this common practice? available. Salaries due after the opening judgment have to be paid on their Some companies incorporated in France have entered into due date. insolvency proceedings in other jurisdictions, especially in schemes Payment of salaries and severance pay may be guaranteed under of arrangement in the UK (e.g. Zodiac). Yet, it is not common certain conditions and up to certain caps by the AGS, a national practice. agency which pays these claims as advances and then replaces the Contrariwise, it is far more common for foreign companies to employees’ ranking as a creditor. seek protection under French Bankruptcy law and to commence The employees’ representatives are involved notably through insolvency proceedings in front of French Courts, based on the the information and consultation obligations applicable to the location of their COMI in France (e.g. Coeur Défense, Mansford, restructuring procedures. Orco Property Group or NextiraOne). The redundancy process may be subject to specific timing constraints.

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■ Is owned or controlled by a company against which court- 8 Groups monitored proceedings have commenced and that owns or controls another company against which court-monitored proceedings have commenced. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders? 9 Reform

Under French law, a corporation is deemed to be an autonomous entity, and the company’s assets should not be affected by insolvency 9.1 Have there been any proposals or developments in proceedings commenced against other companies within the same your jurisdiction regarding the use of technology or France group. reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make However, the court can, under certain circumstances, find that insolvency processes more streamlined and efficient? there is a ground for a consolidation of estates (confusion des patrimoines), so that debt of several companies can be paid from a Since 2015, an electronic portal for claim filing has been set up. larger consolidated pool of assets. However, its effects in practice are yet to be confirmed. In addition, when insolvency proceedings are commenced against a company, the same court has jurisdiction to hear any proceedings 9.2 Are there any other governmental proposals for relating to a company it controls or is controlled by, and a common reform of the corporate rescue and insolvency regime administrator and a common creditors’ representative may be in your jurisdiction? appointed for all the proceedings. Furthermore, at least two administrators and creditors’ The last reform on insolvency matters was implemented by representatives must be appointed by the court, if the net revenues an ordinance dated 2 November 2017 adjusting French law to of the debtor or of one of the companies mentioned below reach at Regulation (EU) 2015/848 (see question 7.1). Otherwise, the least a threshold of €20 million and the debtor either: current focus of the French Parliament relates to civil law and ■ Owns at least three secondary establishments located in the employment law and it is yet to be seen how any of these measures jurisdiction of another Commercial Court than the one the would potentially impact the French restructuring practice. debtor is registered in. ■ Owns or controls at least two companies against which court- monitored proceedings have commenced.

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Joanna Gumpelson Philippe Dubois De Pardieu Brocas Maffei Aarpi De Pardieu Brocas Maffei Aarpi 57 avenue d’Iéna 57 avenue d’Iéna 75773 Paris 75773 Paris France France

Tel: +33 1 53 57 71 71 Tel: +33 1 53 57 71 71 Email: [email protected] Email: [email protected] URL: www.de-pardieu.com URL: www.de-pardieu.com France Joanna Gumpelson specialises in insolvency proceedings and debt- Philippe Dubois has considerable experience in restructuring & restructuring. She represents French and foreign investment funds, insolvency. He advises banking and financial institutions as well as banks, as well as lease-finance and factoring institutions, bondholders large French and foreign industrial groups in a wide range of economic or suppliers, etc. She also regularly represents French or foreign sectors. His practice focuses on restructuring, litigation and arbitration issuers, in particular in the context of failing LBOs. She also handles in diverse areas such as shareholder disputes, indemnification commercial, banking and finance litigation cases. agreements and liabilities. Admitted to the Paris Bar in 2002, she graduated from HEC Paris He manages the firm’s Restructuring & Insolvency and Arbitration (2000) and holds an advanced degree (DESS) in Tax and Business teams. law from the University of Paris I Panthéon-Sorbonne (2000). She Admitted to the Paris Bar in 1994, Philippe Dubois, a doctor-at-law and joined De Pardieu Brocas Maffei’s Restructuring & Insolvency team in teaches business law at the University of Paris X Nanterre. He joined 2002. She was appointed counsel in 2009, before being co-opted as the firm in 2008 as a partner, after working at Jeantet (1984–2005) and Partner in 2014. Sonier Poulain (2005–2007). Joanna Gumpelson was elected as “Lawyer of the Year 2017” by He was named “Best Lawyer of the year” in Restructuring by Option Best Lawyers in Restructuring and Reorganisation Law, and she is Droit & Affaires magazine (2015). also recognised by the 2016 Who’s Who Legal – Restructuring & Insolvency publication. Vice Chair of the Financial Institutions Subcommittee IBA (2017– 2018).

De Pardieu Brocas Maffei is one of France’s leading independent business law firms and currently has 33 partners. Founded in 1993, the Firm has become a key player in French business law and also has a highly regarded international practice. The firm’s lawyers regularly advise on both domestic and international matters, and clients primarily include large French and overseas corporations. The Restructuring and Insolvency team offers a full range of advisory and litigation services in relation to companies facing financial difficulties. The team regularly advises lending institutions, investment funds, credit insurers, factors and leasing companies, in connection with the drafting and negotiating of all types of agreements, including renegotiating existing loan documentation. The team also represents listed and non-listed companies faced with financial difficulties and/or their shareholders, with respect to their reorganisation or the renegotiation of their debts, with solutions ranging from mandat ad hoc/conciliation to safeguard procedures and continuation plans.

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Germany Dr. Thomas Hoffmann

Noerr LLP Isabel Giancristofano

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a The German Insolvency Act (“Insolvenzordnung, InsO”) states company in financial difficulties? Is there a specific that the main goal of a formal insolvency proceeding is the equal point at which a company must enter a restructuring satisfaction of the creditors’ claims by liquidating the debtor’s or insolvency process? assets or otherwise by an insolvency plan, particularly to allow the business of the debtor to continue. The German Insolvency There are strict rules under German statutory insolvency law: Act contains creditor-friendly tools, such as avoidance rights, Managing directors are obliged to file for insolvency within three director’s criminal and civil liability for late insolvency filing, and weeks of the occurrence of an insolvency reason (illiquidity or cram-down of shareholders or minority creditors in insolvency balance sheet over-indebtedness with no going-concern prognosis). plan proceedings. It also enables a debtor efficient restructuring by Directors are subject to criminal and civil law liability due to late providing for different kinds of measures, such as protective shield insolvency filing. This may include the payment of significant proceedings, debtor in possession and insolvency plan proceedings. amounts of damages to third parties as well as to the debtor. In Overall, the insolvency regime is slightly creditor-friendly. addition, directors are personally liable for any unpaid employee social security contributions and wage and value-added taxes. The directors of a company are obliged to continuously monitor its 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal financial status, irrespective of whether a crisis is occurring or not. restructuring and insolvency proceedings, and to what extent are each of these used in practice? 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the Despite EU-requirements to implement a pre-insolvency proceeding action that they can take against the company? For (“Vorinsolvenzliches Sanierungsverfahren”), there is so far no legal example, are there any special rules or regimes which framework for an out-of-court restructuring. There is one exception: apply to particular types of unsecured creditor (such German law bonds can be restructured outside formal insolvency as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your proceedings via a majority vote under the German Bond Act. jurisdiction? Informal work-outs are possible with the consent of all parties involved. Due to recent court rulings, those out-of-court work-outs Apart from the debtor company itself, creditors are the most bear certain risks for the management, creditors and advisors. important stakeholders in the financial crisis of a company. In Formal insolvency proceedings require the involvement of a court particular, only the debtor itself (through its directors) or creditors and an insolvency administrator or custodian. However, they grant may file for insolvency. Without an insolvency filing, insolvency a wide variety of restructuring options, such as a sale of the debtor’s proceedings cannot be initiated against a company. business, an operational restructuring based on an insolvency The debtor may file for insolvency if the company is balance plan where the debtor’s business is continued as well as financial sheet over indebted without a going-concern prognosis, illiquid restructurings. or threatening to become illiquid. For a creditor filing there are additional requirements. The creditor must have a legal interest in the insolvency filing, and must prove its claim against the debtor and the reason for insolvency. This may be difficult to do as the creditor will not have the required internal company information.

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There are no specific rules for certain types of creditors outside of security for business transactions, a number of exceptions formal insolvency proceedings. In principle, a creditor will have to to this provision were included in a reform of the claw-back litigate its claim and show the enforcement was unsuccessful before provisions in April 2017. However, a general claw-back filing for insolvency. However, even if a creditor successfully risk for up to 10 years continues to exist. This especially enforces against a company in financial distress, payments made applies in the event that the debtor is and has been in financial difficulties for an extended period of time. to him may be clawed back by the insolvency administrator under certain circumstances. As soon as insolvency has been filed, enforcement measures by a 3 Restructuring Options single creditor are usually no longer admissible or can be clawed back, unless the creditor had no knowledge of the filing.

Germany 3.1 Is it possible to implement an informal work-out in Secured creditors may under certain circumstances directly enforce your jurisdiction? into their assets (e.g. creditors with a retention of title claim or where assets have been assigned as a security to a creditor). There is no legal framework for informal restructuring work- Shareholders of the debtor will have few rights and influence in the outs under German law. Therefore, they need the consent and insolvency proceedings. They are not entitled to file for insolvency participation of all affected parties. In practice, informal work- (unless all managing directors have resigned in that case the duty outs are the preferred option especially in financial restructurings. to file for insolvency in time shifts to the shareholder with all It is important to note that an out-of-court restructuring requires legal consequences). With few exceptions shareholder loans are a third party restructuring opinion (“Sanierungsgutachten”) to subordinated in a German insolvency. avoid liability for all stakeholders involved should the out-of-court restructuring fail. 2.3 In what circumstances are transactions entered Should the parties not come to an agreement, the German Insolvency into by a company in financial difficulties at risk of Act provides for alternative restructuring options under court and challenge? What remedies are available? administrator or custodian supervision.

The insolvency administrator, in opened insolvency proceedings, 3.2 What formal rescue procedures are available in has a number of possibilities to claw back certain acts (e.g. a your jurisdiction to restructure the liabilities of payment, granting of securities, delivery of goods) and reverse distressed companies? Are debt-for-equity swaps transactions. The intention of the law is to distribute the debtor’s and pre-packaged sales possible? To what extent can assets equally amongst the creditors and avoid preferential creditors and/or shareholders block such procedures transactions. For creditors this bears the risk that acts close to the or threaten action (including enforcement of security) insolvency – specifically the three months preceding the filing – are to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? clawed back. Creditors must act carefully if they have knowledge of financial distress of a business partner. Insolvency proceedings under German law provide extensive tools The consequence of a claw-back is that the insolvency administrator for the rescue of businesses. Both debt-for-equity swaps and pre- can claim back payments, goods delivered or other advantages from packaged sales are possible in the framework of formal insolvency the recipient. If the recipient made a consideration, he may claim proceedings. Secured creditors have rights to prevent detrimental such consideration back from the insolvency estate – however, only outcomes. However, dissenting stakeholders can be crammed down as an unsecured insolvency claim. in an insolvency plan. The insolvency administrator may claw back an act detrimental to Regular insolvency proceedings (as opposed to self-administration the creditors if it was undertaken: (“Eigenverwaltung”)) are opened upon application of the debtor ■ within one month before the insolvency filing, if the recipient or a creditor. An insolvency administrator is appointed, and in was not entitled to receive the obtained, e.g. in cases of early larger insolvencies, a creditor committee, also creditor meetings payment or granting of additional securities; are scheduled. The administrator has to be an individual (not a ■ in the second or third month before filing, if the recipient firm). He or she will assess the debtor’s assets and their value, was not entitled to receive the obtained and the debtor was evaluate whether the assets will cover the costs of the insolvency either illiquid or the recipient had knowledge that the act was proceedings and ask creditors to file their claims. The administrator detrimental to the creditors; will also keep an insolvency table and assess whether it is feasible ■ within a period of three months before filing, if the debtor to continue the debtor’s business and if financing is necessary and was illiquid or had filed for insolvency and the recipient was available. Once the insolvency proceedings are opened, only the aware of the illiquidity, circumstances that indicate illiquidity, or the insolvency filing; insolvency administrator may dispose over the debtor’s assets. The shareholders or the debtor’s managers lose control over the business. ■ within one year before filing, payments on shareholder loans or similar claims, but note that securities granted for Regularly, the insolvency court does not open insolvency shareholder loans can be clawed back for 10 years; proceedings immediately after the filing. There is a preliminary ■ within four years before filing, acts granted without insolvency period of regularly around three months during which consideration (e.g. a donation or a payment or delivery of the wages of the German based employees will be borne by the goods without a fair consideration in return); or German state. ■ within 10 years before filing, if the debtor acted wilfully The administrator (with the consent of the creditor committee or to disadvantage the creditors and the recipient was aware assembly) can arrange a pre-pack sale in the period before the of such an intention. The intention to disadvantage the opening of the proceedings instead of preparing a liquidation of creditors is generally assumed by courts if the debtor acted all assets. During this time the administrator will set up a bidding in the knowledge that it was (imminently) illiquid and the process with the aim of selling the business as a whole on the recipient was aware of the financial distress. To limit claw- opening date. Such sales are usually asset deals as the debtor entity back options for insolvency administrators and thereby grant

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remains intact with the insolvency debt. The business can then be Special proceedings must be applied for within the filing, such continued in a purchaser entity. The administrator will distribute as self-administration, insolvency plan proceedings or protective the sale proceeds to the creditors after deducting the costs of the shield proceedings. insolvency proceedings (“Übertragende Sanierung”). An insolvency filing will only lead to opened insolvency Alternatively, the debtor’s business can be restructured. This would proceedings, if: usually take place in the framework of an insolvency plan. The ■ an insolvency reason exists (illiquidity, imminent illiquidity debtor entity would remain the owner of the business and not be or balance sheet over-indebtedness with no going concern liquidated. prognosis); and Insolvency plan proceedings provide a flexible restructuring of a ■ the assets of the debtor are sufficient to cover the costs of the business supervised by the court. Either the debtor or the insolvency insolvency proceeding. administrator/custodian (for self-administration, see below) may Germany prepare and file an insolvency plan. The plan will contain measures 3.4 Who manages each process? Is there any court to restructure the business, such as waivers, haircuts and payment involvement? deferrals, change of the legal form of the debtor entity, sale of shares, reduction and increase of the share capital (also combined) In preliminary insolvency proceedings (the period between and debt-for-equity swaps. The creditors are divided into groups insolvency filing and opening of the proceedings), the debtor which separately vote on the plan. If the majority of the groups regularly continues to manage its business, albeit with the consent approve the plan, the plan is deemed accepted, thereby cramming of the preliminary insolvency administrator only. down the dissenting voting creditor groups. In opened insolvency proceedings, the insolvency administrator As an alternative to an insolvency administrator managing manages the proceedings and ensures the satisfaction of the creditors the insolvency procedure, the debtor can apply for self- by implementing the tools explained under question 3.2 above. administration. Courts have to allow these proceedings Only in self administration proceedings the debtor itself through unless there are circumstances indicating that this would be its executive directors manages the proceedings. In this case, the disadvantageous for the creditors. In self-administration, the debtor is monitored by a court-appointed custodian who is also debtor remains entitled to dispose of its assets and continues to responsible for actions usually reserved to an administrator (such as manage the business supervised by a court appointed custodian. claw back of transactions). In order to gain further flexibility for business restructuring, in The court is always involved in insolvency proceedings; it supervises 2010 protective shield proceedings were introduced. The debtor the participants and decides on specific issues (i.e. insolvency plan, can apply for protective shield proceedings if it is balance sheet change from self-administration to regular insolvency proceedings). over-indebted and imminently illiquid, but not yet illiquid, and a restructuring is not evidently unfeasible. The application needs to contain a confirmation by an experienced practitioner that these 3.5 What impact does each restructuring procedure have requirements are met. The court can then grant a period of up to on existing contracts? Are the parties obliged to three months in which the debtor is protected from enforcement in perform outstanding obligations? Will termination and set-off provisions be upheld? order to present an insolvency plan. The court will usually appoint a preliminary creditor committee and custodian to supervise the debtor during this period. In practice, the application for a protective shield In principle, insolvency proceedings do not affect contracts. They proceeding will require thorough preparation and consensus with continue to be valid and effective, but special provisions apply to the key stakeholders. some contracts: Shareholder and creditor rights: ■ Certain legal relations are terminated automatically, such as instructions and powers of attorney, profit and loss ■ Shareholders generally lose control over the debtor when agreements. insolvency proceedings are opened. They cannot participate in the insolvency proceedings other than as regular creditors ■ Any contracts which are not fully implemented can either be if they have recognised claims against the debtor other than fulfilled by the insolvency administrator or rejected. If the shareholder loans (in practice, most shareholder claims will administrator rejects fulfilment, any claims of the other party be classified as loans, even if they concern other agreements). are unsecured insolvency claims. ■ Creditors are entitled to vote on material decisions in the ■ In principle, long-term agreements such as property leases, insolvency proceeding, through an appointed creditor remain in force and cannot be terminated by the other party committee. If no committee is appointed, the creditors on grounds of the insolvency only. Claims arising before the decide in the creditor assembly (see below under question 4.4 insolvency opening can only be filed as unsecured claims. for creditor rights). Any claims arising after the opening of the proceedings can be claimed from the insolvency mass as a privileged claim. ■ Secured creditors. Retention of title is unaffected in However, the insolvency administrator may terminate such insolvency proceedings. If a creditor has full title to an asset, agreements early in order to free the insolvency estate from it must be returned to the creditor and the creditor does not disadvantageous liabilities. take part in the insolvency proceedings. Most securities only grant a right to receive the proceeds of their sale which the ■ The possibility of a set-off for a creditor may be affected by administrator takes care of and receives a fee for. Therefore, the opening of insolvency proceedings, depending on when secured creditors have to file their claims with the insolvency the claims subject to the set-off become due and how they administrator and participate in the proceedings. were acquired.

3.6 How is each restructuring process funded? Is any 3.3 What are the criteria for entry into each restructuring protection given to rescue financing? procedure?

Any formal insolvency proceeding requires an insolvency filing. Granting a loan to a company in financial distress bears risk as

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the lender may be liable towards other creditors for delaying its liquidation and creditors have no special rights as all claims will be insolvency filing if it had no chances of a successful restructuring. fully satisfied. Out-of-court rescue funding is therefore only privileged in an In an insolvency proceeding, shareholders generally lose control insolvency proceeding if it is based on a third-party restructuring over the debtor company. The insolvency administrator or custodian opinion (“Sanierungsgutachten”) confirming that the business can takes over the management and disposal of assets completely, be restructured successfully before granting loans. including the realisation of security. The creditor assembly In a formal insolvency proceeding, the insolvency administrator resolves via majority votes on major issues, i.e. it approves acts may take up a loan, if he deems such loan can be paid back from of the administrator with special importance, such as the sale of the insolvency mass. Such loan repayment claims are qualified the business. It can also dismiss the insolvency administrator and as privileged claims. The administrator may take up loans and appoint or dismiss the creditor committee. The creditor committee Germany incur privileged insolvency claims during preliminary insolvency has additional tasks and rights and may request detailed information proceedings with prior authorisation of the court. from the administrator or custodian and actively participate in the The German Employment Agency pays all employee salaries for decision making regarding the management of the debtor. The a period of up to three months between insolvency filing and the creditors therefore have a clear influence on the proceedings and opening of insolvency proceedings. The debtor’s business can be can instruct to, or prevent the administrator from, taking actions that continued without the personnel costs and the costs saved can be used the creditors do not agree with. to restructure the business. As soon as insolvency proceedings are opened, the employee’s claims become privileged claims and have to be borne by the debtor. The insolvency administrator can therefore 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform only continue to employ staff if the insolvency mass is sufficient to outstanding obligations? Will termination and set-off pay the salaries, social security contributions, loan taxes, etc. provisions be upheld?

4 Insolvency Procedures See question 3.5 above.

4.1 What is/are the key insolvency procedure(s) available 4.6 What is the ranking of claims in each procedure, to wind up a company? including the costs of the procedure?

Solvent liquidation can be resolved by the shareholders. The debtor Secured creditors I: Creditors with full title to an asset can claim company is then wound down, i.e. its assets are liquidated and debt for the asset to be separated from the insolvency mass and handed paid. Solvent liquidation is only possible if all liabilities can be met. over to them. They do not have to participate in the insolvency proceedings. This is, for example, the case for creditors with If the debtor does not have sufficient funds for a solvent liquidation, retention of title claims. it must file for insolvency as soon as an insolvency reason exists (see section 3 above). The liquidation of a company is regularly Secured creditors II: Creditors with other security rights (e.g. implemented in a regular insolvency liquidation proceeding by an with a mortgage, security transfer or assignment) participate in the insolvency administrator. insolvency proceedings as creditors. The insolvency administrator will liquidate such assets, separate the proceeds and pay them out to the secured creditor. 4.2 On what grounds can a company be placed into each winding up procedure? Privileged creditors: Creditors which have made agreements with the insolvency administrator, e.g. all liabilities the administrator See section 2 above. The managing directors of a company are incurs while continuing the business, such as wages, new orders obliged to file for insolvency if an insolvency reason exists. Creditors for goods and services made after the opening of the insolvency are also entitled to file for insolvency, but under stricter requirements. proceedings. The insolvency administrator is personally liable for these claims. The costs of the insolvency proceedings, including the administrator’s or custodian’s fees, also fall in this rank. 4.3 Who manages each winding up process? Is there any court involvement? Unsecured creditors: all unsecured claims that originated before the opening of the insolvency proceedings. These claims are In a solvent liquidation, a liquidator is appointed by the shareholders. satisfied from the proceeds of the liquidation of the debtor’s assets This liquidator can be the former managing director of the company. or the continuation of the business. In practice, unsecured creditors The liquidator manages the winding up of the company until no only receive a small quota on their insolvency claims. liabilities remain and it can be deleted from the commercial register Subordinated creditors: These are usually shareholder loans or when it ceases to exist. similar claims as well as claims for interest, etc. In insolvency proceedings, an insolvency administrator or in self- administration, a custodian manages the liquidation of the debtor’s 4.7 Is it possible for the company to be revived in the assets and the distribution to the creditors. The creditor committee future? and creditor meeting approve the important decisions, and the insolvency court monitors the proceedings (see question 3.6 above). In the framework of liquidation procedures, the debtor company is usually liquidated and deleted from the commercial register. After 4.4 How are the creditors and/or shareholders able to deletion, it ceases to exist. influence each winding up process? Are there any However, in insolvency plan proceedings, when the insolvency restrictions on the action that they can take (including the enforcement of security)? plan is fully implemented and no new insolvency reasons exist, the company continues to operate and exist. Shareholders are in full control of the company during a solvent

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If the insolvency reason is removed for other reasons (e.g. a shareholder payment), the company can also continue to operate and 7.2 Is there scope for a restructuring or insolvency the insolvency proceedings are terminated. process commenced elsewhere to be recognised in your jurisdiction?

5 Tax Foreign insolvency procedures can be recognised under EU regulations as well as the German Insolvency Act as foreign main or secondary proceedings. Acts of foreign administrators and receivers 5.1 What are the tax risks which might apply to a can be recognised under such proceedings, including claw back, restructuring or insolvency procedure? set-off and the subordination of claims. These rules are especially relevant in cross-border group insolvencies where intra-group or Germany In principle, tax laws do not provide special provisions for cash pooling claims exist. insolvency. Particularly, there are no exceptions regarding the payment of VAT, wage, income, corporation and capital gains taxes. 7.3 Do companies incorporated in your jurisdiction Especially in insolvency plans, the tax effects have to be restructure or enter into insolvency proceedings in considered carefully to avoid extraordinary restructuring gain other jurisdictions? Is this common practice? (“Sanierungsgewinne”) taxes. Usually in complex proceedings, a tax opinion from the competent tax authority is requested to In large insolvencies and where sufficient connection to another mitigate tax risks, especially those arising in connection with the state exists, it is not uncommon to implement restructuring measures debt restructuring. admissible in other jurisdictions. Specifically, restructuring measures under English law have been used by larger German 6 Employees companies in the past to achieve a financial restructuring (scheme of arrangement). Due to the time and cost effort of such foreign proceedings, as well as increasingly strict court decisions on the 6.1 What is the effect of each restructuring or insolvency requirements for and validity of the restructuring measures, in procedure on employees? practice foreign insolvency proceedings are used only in a very small number of cases. Employment agreements remain valid, irrespective of an insolvency filing or the opening of insolvency proceedings. The insolvency administrator or custodian may terminate employment agreements 8 Groups with a notice period of three months (unless the employment agreement provides for a shorter term). 8.1 How are groups of companies treated on the If the business is continued, the standard rules apply for termination insolvency of one or more members? Is there scope of employment agreements. The German Dismissal Protection Act for co-operation between officeholders? is applicable and employees can only be terminated if the required criteria apply (“social selection”). Also, works councils have to be On 20 April 2018, new provisions in the German Insolvency Act involved. When mass terminations are necessary, the insolvency regarding group insolvencies came into force. Before that, in group administrator must negotiate and agree on a social plan for the insolvencies each entity was treated separately, a separate court was employees which will usually provide for compensation payments to be competent and different insolvency administrators could be to the employees (privileged claims). appointed which were obliged only regarding the respective entities In a business transfer, all employees of a business automatically insolvency proceedings. There was no obligation (or right) to share transfer to the acquirer. Only the employer, not the acquirer, can information or align specific actions. object to such a transfer. This provision is also applicable in a Under the new provisions, a group debtor can apply for joint company’s insolvency. Social plans can provide for employees jurisdiction of all concerned group entities at the same insolvency to be transferred to a special transfer vehicle where employees are court. If one of the group debtors files for insolvency and the court trained and transferred to new employers. However, such vehicles declares itself competent, other insolvency proceedings for entities are costly, and the acquirer will likely have to bear a large part of of the same group will be opened at the same court and judge. the costs. The new group insolvency rules contain further provisions on the interaction of the parties to the group insolvency proceedings. Insolvency administrators of the same group (if one administrator 7 Cross-Border Issues not is appointed for several entities) are obliged to co-operate and keep each other informed. The same applies to creditor committees. 7.1 Can companies incorporated elsewhere use A group creditor committee can be appointed. restructuring procedures or enter into insolvency Special group co-ordination proceedings can be opened upon proceedings in your jurisdiction? application of a debtor, a (preliminary) insolvency administrator or a (preliminary) creditor committee. The court will then appoint Insolvency proceedings can only be initiated in Germany, if an a group co-ordinator independent of the other parties to the entity has its COMI – centre of main interest – in Germany. Courts proceedings who shall ensure the aligned administration of the will review the question of COMI carefully. It is not uncommon for insolvencies. The co-ordinator can also present a co-ordination German courts to pull insolvency proceedings of foreign entities to plan to the group insolvency court, which is not binding for the Germany if the entity’s COMI is deemed to be located in Germany insolvency proceedings of each entity. by the court, especially in group insolvencies. For groups with foreign entities, the rules explained under section 7 above apply.

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government. Furthermore an expert commission has been 9 Reform established last year to review the effects of the German insolvency law reform in 2012. 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or 9.2 Are there any other governmental proposals for reducing the involvement of the courts in the laws reform of the corporate rescue and insolvency regime of your jurisdiction, which are intended to make in your jurisdiction? insolvency processes more streamlined and efficient?

The introduction of an out-of-court restructuring procedure is Yes – the new German coalition treaty provides for a “higher required by the EU-regulation and discussed in the German literature

Germany digitalisation of insolvency courts” as one goal of the new and practice, but no formal draft law has been published as yet.

Dr. Thomas Hoffmann Isabel Giancristofano Noerr LLP Noerr LLP Börsenstraße 1 Tower 42 60313 Frankfurt am Main 25 Old Broad Street Germany London EC2N 1HQ United Kingdom Tel: +49 69 971477161 Email: [email protected] Tel: +44 20 75624338 URL: www.noerr.com Email: [email protected] URL: www.noerr.com

Dr. Thomas Hoffmann is partner at Noerr and Co-Head of the Isabel Giancristofano is an associated partner in Noerr’s London firm’s Restructuring & Insolvency Group. He advises companies office and member of Noerr's Corporate Department and the firm's in distressed situations and during insolvency proceedings. His Restructuring & Insolvency Group. clients include creditors and investors, and also companies and She specialises in complex cross-border transactions, particularly their representatives. Typical matters are bridging and restructuring with German-UK aspects. Isabel regularly advises on international financing in pre-insolvency distressed situations, as well asthe insolvency and restructuring cases as well as issues relating to the restructuring of receivables in consortium loans or bonds. In court launch of new businesses in Germany and the co-ordination of multi- proceedings, Thomas advises on the implementation of restructuring jurisdiction matters. Isabel has good knowledge of the German, UK measures in pre-insolvency and self-administration proceedings and and Iberian markets. in regular insolvency proceedings regarding the assertion of rights against the insolvency administrator, the realisation of securities and the contesting of claw-back claims. Dr. Thomas Hoffmann is also a managing director of Team Treuhand GmbH, a Noerr affiliated company which offers special services in distressed situations, e.g. acting as a restructuring shareholder in a dual-benefit trust or as a joint representative of bond creditors under the German Bonds Act.

Noerr stands for excellence and entrepreneurial thinking. With well-versed teams of strong characters, Noerr devises and implements solutions for the most complex and sophisticated legal matters. United by a set of shared values, the firm’s 500+ professionals are driven by one goal: the client’s success. Listed groups and multinational companies, large and medium-sized family businesses as well as financial institutions and international investors all rely on the firm. As one of the top European law firms, Noerr is also well established internationally. With offices in eleven countries and a global network of top- ranked “best friends” law firms, Noerr is able to offer its clients truly cross-border advice. In addition, Noerr is the exclusive member firm in Germany for Lex Mundi, the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide. Offices: Alicante; Berlin; Bratislava; Brussels; Bucharest; Budapest; Dresden; Düsseldorf; Frankfurt; Hamburg; London; Moscow; Munich; New York; Prague; and Warsaw.

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Greece Emmanuel Mastromanolis

Zepos & Yannopoulos Danai Eirini Falconaki

60% of total claims, including at least 40% of the claims secured by 1 Overview securities in rem or a pre-notation of mortgage or holding a special lien, providing for the restructuring of the debtor’s debts with 1.1 Where would you place your jurisdiction on the the aim that the debtor remains operational after the ratification. spectrum of debtor to creditor-friendly jurisdictions? However, this process cannot be deemed informal since it involves the ratification by the competent court of the relevant rehabilitation As a general principle, winding up proceedings (bankruptcy) agreement. are less creditor-friendly than pre-bankruptcy rehabilitation and reorganisation proceedings, which give leeway to creditors to apply 2 Key Issues to Consider When the for their initiation or to contribute to negotiations with the debtor, while being subject to stricter completion deadlines as opposed to Company is in Financial Difficulties winding up. Also, pre-bankruptcy rehabilitation and reorganisation proceedings, special administration, and recently, out-of-court 2.1 What duties and potential liabilities should the workout contribute to the maximisation of going concern value of the directors/managers have regard to when managing a business of debtors and are subject to the “no worse off principle”, in company in financial difficulties? Is there a specific application of which creditors may not be found in a worse financial point at which a company must enter a restructuring position in comparison with the level of their satisfaction in the or insolvency process? context of bankruptcy. Directors managing a company in financial distress may be held liable: a) in case they do not meet their obligation to file a timely 1.2 Does the legislative framework in your jurisdiction application for bankruptcy; or b) in case they have intentionally allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to caused the cessation of payments of the company, i.e. the insolvency. what extent are each of these used in practice? The cessation of payments is the objective requirement in order to be declared insolvent; the cessation of payments shall constitute In principle, the legislative framework in Greece does not allow for a general and permanent inability of the company to meet its informal work-outs; however, there are two specific insolvency- outstanding monetary obligations in a serious and consistent manner related processes available to debtors, which, although not informal, and such inability should demonstrate lack of creditworthiness. Such can inherently boast certain scintilla of informality. liability applies also to the persons who influenced the directors (i.e. shareholders, non-executive members, etc.). In addition, the GBC The new extrajudicial debt settlement mechanism called “Out provides for the directors’ criminal liability for certain practices, of the Court Workout” (“OCW”) introduced by virtue of law which took place during a particular period. Nevertheless, directors 4469/2017. OCW allows for the extrajudicial settlement of amounts will be held liable towards social security organisations and tax due by a debtor to any creditor by submitting an online application authorities for certain company debts, while they may also be held before the Special Secretariat of Private Debt Management until liable for any tortious acts or omissions that took place during their 31.12.2018 via a special electronic platform held on the latter’s management or representation of the company. In particular: official website. The proceeding may be also initiated bythe creditors (Greek state, Social Security Funds, Public Law Legal a) Undue delay of bankruptcy (GBC art. 98 par. 1): According to the GBC, the management (directors, administrators) Entities or financial institutions) by inviting in writing the debtor to be of the debtor company is obliged to file a bankruptcy submitted to the OCW. Law 4469/2017 provides for the possibility application within 30 days from the point of time when it (and not the obligation) of the Settlement Agreement’s judicial ceased its payments. Unreasonable (wilful) delayed filing ratification (by means of a court ruling). The judicial ratification of a bankruptcy application may cause further damage to is required in order for the Settlement Agreement to legally bind the company, the creditors and the market as a whole, as it the non-contracting creditors. The court decision ratifying the allows the continuation of a business which is not capable Settlement Agreement constitutes an ex lege enforcement title. to pay its creditors while its debts are increasing. In that case, the directors of that company will be found jointly The pre-bankruptcy Rehabilitation process provided for by and severally liable towards the company’s creditors for not art. 99-106f GBC. The core of this process is the – private – filing the bankruptcy application within the aforementioned rehabilitation agreement which is contracted by and between the timeframe either because they knew or they wilfully ignored debtor and a qualifying majority of its creditors, i.e. a majority of the cessation of payments. Such liability applies even if the

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delay is caused due to efforts to place the company under a restructuring programme (unless the restructuring efforts 2.2 Which other stakeholders may influence the flourish and there is no damage). However, any management’s company’s situation? Are there any restrictions on the efforts made in good faith aiming to avoid the insolvency (i.e. action that they can take against the company? For due to the fact that the management subjectively considered example, are there any special rules or regimes which the restructuring of the company possible) will be taken into apply to particular types of unsecured creditor (such consideration for liability mitigation purposes. To be noted as landlords, employees or creditors with retention that due to the difficulty to prove the actual facts, in practice, of title arrangements) applicable to the laws of your it has been really difficult to substantiate the directors’ jurisdiction? liability on above grounds. The shareholders of a company are not deemed creditors; therefore, Greece b) Causing the cessation of payments (GBC art. 98 par. 2): In case the cessation of payments is attributed to the they are not able to influence a company’s situation, nor can they management’s wilful misconduct or gross negligence, the proceed with a relevant action against the company. In general, directors will be held liable jointly and severally towards the any action taken against the company is associated with the company’s creditors for the damage caused. In substance, enforcement measures and therefore there is a distinction among the directors will be liable for mismanagement, false business secured and unsecured creditors. Creditors secured in rem are able decision-making, frivolous risk undertaking, competitive to initiate enforcement proceedings against the debtor, whereas, actions to the detriment of the company, and in general any all enforcement proceedings against the debtor are suspended for action or omission harming the company’s creditors. To unsecured creditors as of the time of such declaration. However, the be noted that when examining the extent of the directors’ law grants a general ranking privilege to employees (art. 154 par. 1 wilfulness, the “business judgment rule” (art. 22a of Greek law 2190/1920) shall not apply. The liability for causing the (b)), while there is a particular regime regarding: a) the right of third cessation of payments shall be distinguished from the case in parties to retrieve their objects that are in the debtor’s possession which the company was already in financial difficulties and (known as “Separation Right”); b) the right of third parties to seek the management just aggravated the situation. In the latter their goods which were delivered to the debtor in order to be resold case, the general rules of the Greek corporate law regarding (known as “Bankruptcy Claim”); and c) the preservation of the the administrative liability will apply. bilateral and employment agreements, retention of title agreements c) Criminal liability (art. 171 GBC): In case the directors and set-off arrangements (art. 28 GBC et seq.) (please refer to cause the cessation of payments, even though the company question 4.5 below). objectively would not have reached, without their acts and/or omissions, a general, permanent, and not transitory, inability to pay its commercial debts when they fall due, then the 2.3 In what circumstances are transactions entered directors of the company might be found criminally liable and into by a company in financial difficulties at risk of be sentenced to the payment criminal fines or imprisonment challenge? What remedies are available? of a minimum duration of two (2) years (art. 171 GBC). The GBC provides for certain illegal practices which may be used Art. 41 GBC provides that certain transactions which were made by the directors and lead to a false cessation of payments within the timeframe of the cessation of payments of the debtor such as the following: (a) concealing or compounding assets and the declaration of insolvency and can be detrimental for the belonging to the bankruptcy estate of the company contrary creditors’ group must be revoked. The law also provides for certain to the rules of wise financial administration; (b) conclusion of transactions which may be revoked. risky, detrimental or speculatory agreements contrary to the rules of wise financial administration or spending extremely According to the provisions of art. 42 GBC, the following high amounts on betting; (c) sale of goods at extremely low transactions entered into by a company may be considered to be prices contrary to the rules of wise financial administration; detrimental to the creditors of the company and must be mandatorily (d) false presentation of the company as a debtor of third revoked by the receiver: parties or false recognition of inexistent third party rights; ■ repayment of debts which are not yet due; (e) compounding, hiding or destroying of the fiscal books and documents of the company in order to prevent the ■ repayment of due debts by means other than cash or the examination of the financial status of the company; (f) failing agreed performance; and to draft the annual financial statements of the company; or ■ the provision of a security in rem, including registration of (g) decreasing the company’s estate by any means. Such a pre-notation of mortgage or provision of other securities practices are also illegal as such, i.e. irrespectively of the fact of contractual nature for pre-existing obligations, for which whether they lead or not to a cessation of payments status, the debtor has not undertaken a relevant obligation or in when they are adopted during the suspect period or within six order to secure new obligations undertaken by the debtor in (6) months prior to the declaration of bankruptcy. replacement of formerly existing obligations. Directors may also be held personally criminally liable (facing up Under the provisions of Art. 43 GBC, every payment by the debtor to two years of imprisonment) for favourable treatment of creditors with respect to outstanding debts that was made after the cessation while the company face a situation of cessation of payments or of payments and before the declaration of liquidation bankruptcy by of a threatened inability to regularly meet outstanding monetary the competent court (i.e. liquidation) may be revoked, if the counter obligations, satisfy creditors’ claims, provide security or knowingly party was aware at that time that the debtor was in a cessation of favor a creditor against other creditors and in case of receiving in payments status and such act was detrimental for the other creditors. advance payments exceeding those provided for in the company’s Furthermore, Art. 44 GBC provides that any transaction of the debtor articles of association. that has been effected intentionally (by the debtor) to the detriment of its creditors during the last five (5) years prior to the declaration of insolvency (i.e. liquidation/receivership) by the competent court, must be recalled and reversed, to the extent that such third parties were aware of the fraudulent intent of the debtor.

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■ the capitalisation of such obligations, the arrangement of the 3 Restructuring Options relationships among different creditors, especially following the capitalisation of the company debtor’s obligations; 3.1 Is it possible to implement an informal work-out in ■ the “haircut” of the creditors’ claims; your jurisdiction? ■ the suspension of the creditors’ individual actions for the satisfaction of their claims following the ratification of the Considering that an “informal work-out” has the notion of a process agreement; not taking place before the court, reference should be made to the ■ the assignment of the business of the company debtor to a two specific insolvency-related processes described above under third party; and

question 1.2. However, in both cases, in order for the agreement ■ the divestiture of the company’s assets of the company’s Greece entered into (as the case may be) to be legally binding erga omnes business en bloc or of parts thereof, etc. and to have any enforcement power, this should be ratified by a The Rehabilitation Agreement may also include inter-creditors court decision. agreements regulating the sequence and priority of satisfaction of the claims of each of the creditors or of each creditor’s class, while the 3.2 What formal rescue procedures are available in transfer to the debtor’s business in whole or in part as a restructuring your jurisdiction to restructure the liabilities of tool can be also agreed upon in the Rehabilitation Agreement (Art. distressed companies? Are debt-for-equity swaps 106d GBC). In particular, such transfer of business can be effected and pre-packaged sales possible? To what extent can in two ways: a) either by means of the Rehabilitation Agreement creditors and/or shareholders block such procedures in which the acquiring party shall by a signatory as well; or b) by or threaten action (including enforcement of security) a separate (subsequent) agreement, concluded in execution of the to seek an advantage? Do your procedures allow you Rehabilitation Agreement. In addition, the GBC provides that, to cram-down dissenting stakeholders? while the assets of the company debtor can be transferred as a whole (unless otherwise agreed), the liabilities are not transferred, unless In general, the Greek bankruptcy legal framework provides for otherwise agreed. Non-transferred debt is repaid by the purchase a number of rescue proceedings aiming at the satisfaction of price of the business transfer or is written off or is capitalised (Art. the business’s creditors and the restructuring of the liabilities 106d para. 1 GBC). The debtor’s business can be transferred to: of distressed companies. Below is a brief summary of the pre- a) any third party; or b) by way of a contribution in rem to a Greek bankruptcy rescue procedures available under Greek law. Société Anonyme especially established by the creditors or to any A. The Rehabilitation Proceeding (art. 99 GBC et seq.): The core other (existent or newly established) company. rescue (pre-bankruptcy) procedure provided by the GBC is the B. The Special Administration Process (Greek law 4307/2014): rehabilitation proceeding (in Greek: “προ-πτωχευτική διαδικασία An attempt-to-rescue pre-bankruptcy procedure provided by εξυγίανσης”) (the “Rehabilitation Proceeding”) the main purposes Greek law 4307/2014 is the special administration process (the of which are: a) for a company debtor to secure the viability of “Special Administration Process”), which is more of a liquidation its operations while avoiding the implications and constraints of nature than of a restructuring one. In particular, no restructuring statutory bankruptcy (including but not limited to the alienation of amendments are provided therein, nor any debt arrangements the company debtor from the management of its property and the or relevant. Instead, it aims at maintaining and divestiture of the latter’s submission to the powers of the bankruptcy administrator); business, if possible, as a whole. It is a fast track procedure pursuant and b) for creditors to avoid the absolute freezing of their claims to which shall either succeed within a timeframe of one year (a (subject to the ipso facto suspension effects of rehabilitation and success is considered to be the divestiture of 90% of the assets) or the potential order of provisional measures by the bankruptcy court, fail in which case the business is driven to bankruptcy. while achieving an “à la carte” satisfaction of those claims, other than according to the ranking and the timeframe provided by the C. The Out-of-Court Work Out Mechanism (“OCW”) (Greek law GBC for statutory bankruptcy. In the context of the rehabilitation 4469/2017): OCW allows the extrajudicial settlement of amounts proceeding, the company debtor concludes an “early” agreement due by a debtor to any creditor by submitting an online application with its creditors (the “Rehabilitation Agreement”) in order before the Special Secretariat of Private Debt Management until to rescue and restructure its operations at the pre-bankruptcy 31.12.2018 via a special electronic platform held on the latter’s (insolvency) stage; the pattern, timing and conditions of satisfaction official website. OCW aims at the conclusion of a debt settlement of creditors are regulated by the – freely negotiated – “pre-packaged” agreement through the involvement of a coordinator who is in charge Rehabilitation Agreement that becomes valid and enforceable upon of notifying all creditors of the debtor referred to in the application. its ratification by the bankruptcy court. Creditors representing 50% of all claims should participate in order for the settlement to proceed. The Rehabilitation Agreement is, in principle, a settlement agreement, with no mandatory minimum content, whereas the parties may freely The debt settlement agreement is concluded between the debtor negotiate and agree on its terms and is concluded between the debtor and specific majorities of the participating creditors (i.e. 3/5 of all and its creditors representing specific percentages of the debtor’s claims and 2/5 of secured claims). The parties may decide freely obligations (creditors holding 60% of the total debts of the company on the terms of the debt restructuring agreement subject to certain debtor including 40% of any in rem secured debts). Although the restrictions, the most important of which are: agreement may provide any arrangement of the debtor’s assets (a) the creditors must be no worse off under the out-of-court and liabilities towards the viability and the restructuring of the settlement that what they would have been if the debtor’s business, the law provides for indicative content which may be freely assets were liquidated through the enforcement procedure of negotiated and agreed upon between the debtor and the creditors. By the Code of Civil Procedure; and way of indication, the agreement may provide for: (b) restrictions regarding the write-off and/or settlement of the claims of the Greek State and the social security funds; for ■ the adjustment or alteration of the conditions and timing of the calculation of such amounts and considerations, the payment of the company debtor’s financial obligations (e.g. following are deducted from the creditors’ claims: (i) the the change of the interest rate, etc.); aggregate amounts of interest due for late payment; (ii) 95%

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of the claims of the Greek State stemming from fines imposed debtor and the creditors. Otherwise, in case of an agreement only by the tax administration; and (iii) 85% of the claims of the among creditors, the ratification application may be filed only by Greek State and the social security funds stemming from any of the creditors. To be filed by creditors, the Rehabilitation increases and interests for late payments. Agreement must relate to a debtor company that is already in The relevant legislative framework provides for the option (and cessation of payments (i.e. neither in a status of threatened inability not the obligation) of the debt restructuring agreement’s judicial or of likelihood of insolvency, as above). ratification by means of a court ruling. The judicial ratification B. The Special Administration Process: The going concern is required in order for the settlement agreement to legally bind businesses to which such mechanism refers to must be domiciled in the non-contracting creditors. The court decision ratifying the Greece, pursue a commercial scope and must be unable to fulfil their Settlement Agreement constitutes an ex lege enforcement title. overdue financial obligations in a general and permanent manner. Greece In view of the above and the brief outline of the available distress Corporations (and capital companies in general) can also be placed rescue tools, the current legislative framework provides for a wide under special administration, if the conditions for their placement range of restructuring measures mostly freely negotiable among the under liquidation or under corporate law are met for two consecutive involving parties. fiscal years (i.e. when either the corporation does not havethe minimum capital provided for by the law, or the shareholders’ equity From Hold-out to Cram-down is less than 1/10 of the nominal share capital and the general meeting Due to the fact that a company’s restructuring measure usually of shareholders does not take any measures to cure the shortfall). requires a shareholders’ consent or approval, in the context of the The special administration process is initiated by an application Rehabilitation Proceeding, there is a measure explicitly provided filed by lender(s) representing at least 40% of the debtor’s aggregate in the GBC in case shareholders fail to cooperate by providing obligations, among which at least one is a financial institution, a their required consent to the restructuring measure or obstruct financial leasing company or a factoring company. the relevant measure (the “Hold-Out”). In case one or more C. The OWC Mechanism: Individuals who may be declared debtor’s shareholders declare that they will not participate in the bankrupt according to the Greek Bankruptcy Code, i.e. merchants General Shareholders’ Meeting or that they will countervote the – natural or legal persons – and associations of persons with legal relevant item of the agenda, and they actually do so, the court, if personality, which pursue economic purpose; and legal entities deems such approach abusive, may appoint a special representative which earn income from business activity pursuant to the Greek Tax empowered to exercise the standing and voting rights of the debtor’s Income Code and have a tax residence in Greece, are considered shareholders who do not cooperate in making the required decisions eligible debtors and can submit an application until 31.12.2018 in for the implementation of the Rehabilitation Agreement, subject to a order to be placed under the beneficial provisions of the relevant law, prior application by the debtor or a creditor. provided that any of the following main conditions are met: (a) as of Nevertheless, once a Rehabilitation Agreement or an OWC debt 31.12.2018: (i) the debtor had outstanding debts towards financial settlement agreement has been ratified by the court, it binds all institutions arising from loans or credits in arrears for at least ninety creditors, even those who have dissented in the proceeding or did not (90) days; (ii) the debtor had debts settled after 01.07.2016; (iii) the debtor had outstanding debts towards tax authorities or social participate in (the “Cram-down effect”); however, their claims are security funds or other public law entities; (iv) the debtor had issued regulated therein, which means also that provisional (suspension) checks that have been confirmed as bounced; or (v) payment orders measures provided under the rehabilitation agreement are binding or court judgments for outstanding debts had been issued against on non-consenting creditors, but only for a three-month period as the debtor; (b) the total debts to be settled exceed €20,000; and of the ratification. (c) for debtors keeping double-entry accounting books, the debtor must have positive EBITDA or positive equity at least in one of 3.3 What are the criteria for entry into each restructuring the three financial years preceding the submission of the application procedure? and for debtors keeping single-entry accounting books, the debtor must have positive net EBITDA in at least one of the three years All procedures analysed above under question 3.2 can be initiated preceding the submission of the application. by any eligible under the GBC (merchants and association of persons with legal personality that pursue an economic purpose) 3.4 Who manages each process? Is there any court while independent professionals who are not eligible under the involvement? GBC may exceptionally and under certain circumstance (not yet fully regulated thereof) initiate the OWC procedure. In particular: In general, the Greek court is involved in all restructuring A. The Rehabilitation Proceeding: a debtor company is eligible to procedures. While in the context of the Rehabilitation Proceeding file a ratification application, if it can establish a current or future and the OWC debt settlement agreement the court’s involvement, (threatened) inability to meet its non-contingent and outstanding inter alia, lies in the ratification of the relevant agreements rendering monetary debts. Such inability must be of a general nature and them binding erga omnes, in the special administration process the relate to all or the vast majority of the company’s outstanding debt. court intervenes in two stages in order: a) to accept the respective The inability should nevertheless not be necessarily durable (i.e. application and appoint the special administrator; and b) to approve nonreversible), because, should this be the case, it would amount the special administrator’s report on the highest bidder for the sale to a “cessation of payments” justifying the opening of a bankruptcy of the debtor’s assets. proceeding (rather than a pre-bankruptcy rehabilitation proceeding). Nevertheless, each restructuring procedure has or may have a Alternatively, the rehabilitation proceeding can also be initiated competent individual managing the respective process. In particular, when actual inability of the debtor to meet its obligations, as they in the context of the OCW, the coordinator (the “Coordinator”) is fall due, is yet not present but there is a likelihood of insolvency of appointed by the competent authority by a coordinators’ registry the debtor and the bankruptcy court considers that its insolvency held therein and is in charge of supervising the overall proceeding. could be avoided through the recovery proceeding. Nevertheless, Similarly, in the Special Administration Process, an administrator is any contracting creditor may file as well the ratification application appointed by the court with a mandate to liquidate the debtor’s asset with the court, in case there is an agreement between the company by conducting a public auction for at least 90% of the book value

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of the debtor’s business and assets (the “Special Administrator”). to wind up a company is “bankruptcy” (the term “bankruptcy” can Whereas the Rehabilitation Proceeding does not provide for a relate both to the legal status and to the procedure – the latter being particular person supervising the pre-ratification process, the court the case for this analysis), which is regulated by art. 1-98 GBC. pursuant to the ratification ruling of the agreement and following Insolvency is commenced by virtue of a Court decision, whereas the a debtor’s or creditor’s application, may appoint a special proxy satisfaction of certain both subjective and objective conditions is a in order to safeguard the debtor’s assets, to proceed with certain prerequisite for the issuance of the decision declaring bankruptcy. administrative actions and the overall supervision of the agreement’s Persons entitled to file for a bankruptcy application (art. 5 GBC) perfection (the “Special Proxy”). are (i) the debtor’s creditors bearing lawful interest, i.e. having an existing and legally enforceable monetary or pecuniary claim, (ii)

3.5 What impact does each restructuring procedure have the eligible debtor itself, (iii) the Attorney General on public interest Greece on existing contracts? Are the parties obliged to grounds, or even (iv) other third persons (e.g. the foreign bankruptcy perform outstanding obligations? Will termination and administrator of the main bankruptcy proceedings who may opt for set-off provisions be upheld? the opening up of secondary insolvency proceedings in Greece, if the debtor is domiciled in another EU country, has been declared The rationale of the Rehabilitation Procedure aims at the bankrupt in that other country and has an establishment in Greece). preservation, exploitation restructuring and recovery of the debtor Upon the declaration of bankruptcy, a bankruptcy administrator business, without the impairment of the creditors’ collective (syndikos) is appointed by the Court and is responsible for the satisfaction. To this effect, the debtor is expected to continue its administration of the debtor’s assets for the purposes of liquidating business and, subject to the terms of the Rehabilitation Agreement, to maintain its contractual relationships. In practice, Rehabilitation and distributing the proceeds of such liquidation to the creditors, in Agreements may provide for the continuation of certain contractual accordance with their respective rights of priority. In line with the relationships considered beneficial for the debtor’s business and the pro rata satisfaction of creditors, their claims may be only partly termination of others. satisfied. With regard to the Special Administration Process and the OCW One of the most important consequences of the declaration of Mechanism, the respective legal frameworks explicitly provide that bankruptcy is the suspension of enforcement proceedings against the fact that a debtor enters into such a procedure does not constitute the debtor for unsecured creditors as of the time of such declaration; grounds for the termination of existing contracts. Also, in case a no suspension is provided in the case of secured creditors. However, transfer of business is agreed in the context of the above procedures, if the secured assets are closely connected with the debtor’s contracts may be transferred as well, regardless of any transfer business, enforcement measures on them by the secured creditors restriction, to the extent such transfer is favourable to the creditors are temporarily suspended, too. If the business is sold as a whole and the debtor’s counterparty agrees. by the bankruptcy liquidator, the above suspension applies until completion of the sale of the business.

3.6 How is each restructuring process funded? Is any protection given to rescue financing? 4.2 On what grounds can a company be placed into each winding up procedure? In general, entering into a restructuring process is not subject to the available debtor’s assets to cover the relevant costs. However, The decision declaring a company bankrupt will be issued if the insufficient funds will render each process unfruitful. In any case, following subjective and objective conditions – besides the typical the satisfaction of creditors (depending on their ranking) comes prerequisite of the lawful filing of the respective application – are after the repayment of any restructuring costs which will be met: covered from the proceeds of any agreed restructuring measures i. Subjective condition: According to art. 2 GBC, the debtor (in the case of the Rehabilitation Agreement and the OCW debt shall have a commercial status as per art. 1 of the Commercial settlement agreement) and the divestiture of the debtor’s assets Code or constitute “an association of persons bearing legal (plus any applicable financing available) transfer (in the case of personality and having an economic objective”. A person the Special Administration Process). Regarding the safeguards – natural or legal or association of persons with legal available in order to secure financing in order to enter into one of the personality – has a commercial status if it professionally restructuring processes described above, this is mostly either agreed carries out commercial activities or objectives or when it among the parties pursuant to the agreements. can be attributed such status automatically by virtue of the law (ex. a limited company, a limited liability company, a However, only in the context of the Special Administration Process private capital company, a shipping company, a partnership, there is an explicit reference to the financing necessary to be sought etc.). Single member and foreign EU companies may be also by the Special Administrator for the purposes of the business declared bankrupt. continuation. In particular, the law states that in order for the ii. Objective conditions: 1. According to art. 3 GBC, (a) a debtor Special Administrator to be able to operate the business and to cover who is unable to fulfil his pecuniary obligations as they the relevant costs (including his fees), he may receive financing. become due in a general and permanent manner (cessation What is of importance is the general privilege granted to the creditor of payments) is declared bankrupt, (b) a threatened inability providing such financing in accordance with art. 154 par. 1(a) GBC. of a debtor to fulfil its pecuniary obligations, as they come, constitutes grounds for bankruptcy, provided that the debtor itself files the bankruptcy application, and (c) the likelihood 4 Insolvency Procedures of insolvency constitutes grounds for bankruptcy provided that the debtor itself files the bankruptcy application along with a proposed restructuring plan as per art. 107 GBC et seq. 4.1 What is/are the key insolvency procedure(s) available 2. The Court presumes – based on the provided financial data to wind up a company? – that the debtor’s assets suffice for covering the expenses of the bankruptcy procedure. The key insolvency procedure available in the Greek jurisdiction

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Continuous contracts (or contracts with consecutive repeated 4.3 Who manages each winding up process? Is there any considerations) maintain their force, unless otherwise specified (art. court involvement? 31 par. 1 GBC). The administrator does not have to declare their performance and no permission by the rapporteur judge is needed. A bankruptcy administrator (syndikos) is appointed by the However, continuous contracts may be terminated pursuant to the bankruptcy Court and is responsible for the administration of the respective provisions in the Greek Civil Code. debtor’s assets for the purposes of liquidating and distributing the However, there are certain exceptions to the above, which can proceeds of liquidation to the creditors, in accordance with their be grouped as follows: (i) certain exceptions provided by the respective rights of priority. law (for example, art. 40 of PD 34/1995 on the commercial lease The declaration of bankruptcy is an in-court procedure since it takes

Greece agreements provides that bankruptcy constitutes an ex lege cause for place by virtue of a decision issued by the competent multimember termination); (ii) personal contracts, which are ex lege terminated Court of the place of the centre of the debtor’s main business upon the declaration of a counterparty as bankrupt; and (iii) interests. The Court in its bankruptcy declaring decision also (i) contractual clauses that may provide for termination of the contract appoints the rapporteur judge and the bankruptcy administrator, in case of bankruptcy of one of the contracting parties. Last, it should (ii) orders the sealing of the debtor’s property, (iii) incorporates be mentioned that certain provisions (art. 34 GBC) apply in case of provisions on the convocation of the assembly of creditors, and employment contracts and that financial contracts contemplating the (iv) defines the exact time on the when the cessation of payments provision of banking, security and investment services are excluded presumably commenced. This decision is valid erga omnes. and therefore can be automatically terminated.

4.4 How are the creditors and/or shareholders able to 4.6 What is the ranking of claims in each procedure, influence each winding up process? Are there any including the costs of the procedure? restrictions on the action that they can take (including the enforcement of security)? The ranking of claims is depicted in the respective table composed by the bankruptcy administrator as per the provision of both the The shareholders of the company are not creditors; therefore, they GBC and the Greek Civil Procedure Code (“GCPC”); the table are not able to influence the bankruptcy process. The only influence contains debts that have been announced and confirmed during it can be deemed they have on the bankruptcy proceedings is bankruptcy and is declared enforceable by the rapporteur judge. associated with their participation in that general meeting, which The ranking is as follows: will resolve on the filing of the bankruptcy application with the Court (provided that the company, under its capacity as the debtor, ■ Group debts and expenditures (art. 154 GBC). The GBC does not specifically define these debts, which indicatively files the application itself). can refer to court expenses, expenses for the administration of To assess the restrictions imposed on the creditors of the company, the bankruptcy property, etc. In case the auction is enforced such restrictions being first and foremost associated with the by a creditor secured in rem, group debts will cumber only suspension of enforcement proceedings, a primary distinction the group and not those creditors secured in rem; however, among secured and unsecured ones shall be made. The secured in they will be paid on priority, unless they are privileged as per rem creditors are able to initiate enforcement proceedings against GCPC (ex. employment claims created after the declaration the debtors, whereas, all enforcement proceedings against the of bankruptcy). debtor are suspended for unsecured creditors as of the time of such ■ Claims bearing general privileges (art. 154 and 21 point declaration. However, if the secured assets are closely connected b. GBC). These claims are ranked in a specific order as per with the debtor’s business, enforcement measures on them by the art. 975 GCPC. This category includes indicatively claims stemming from the funding of the debtor’s business for secured creditors are temporarily suspended, too. If the business is securing continuation of business and payments, its rescue, sold as a whole by the bankruptcy liquidator, the above suspension the maintenance or increment of assets strictly as per the applies until completion of the sale of the business. rehabilitation or restructuring plan. It should be noted that this privilege is valid regardless of the non-ratification of the rehabilitation plan and that it does not concern contribution 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform by the shareholder in case of a share capital increase. outstanding obligations? Will termination and set-off ■ Creditors secured in rem with claims bearing special provisions be upheld? privileges and collateral securities (art. 155 and 21 point c. GBC). These claims are ranked in a specific order as per art. The general rule is that existing contracts remain in force despite 976 GCPC. These are claims associated with expenditures for the preservation of the assets or the collection of their the declaration of a debtor’s bankruptcy (art. 28 GBC). However, a proceeds deriving during the six-month period prior to distinction between instant and continuous contracts shall be made. bankruptcy and the capital and its interest accrued during the Upon bankruptcy, instant contracts become inactive, i.e. they are last two years corresponding to claims with pledge, mortgage not terminated (subject to provisions in the contract or the law to or pre-notation of mortgage (in case of real estate). the contrary), but their performance is put on hold. The bankruptcy It should be noted that art. 156 GBC as well as new art. 156A administrator has an option to decide on their performance or non- GBC recently introduced by law 4512/2018 deal with the – performance on business criteria (art. 29 GBC). Should the contract usually encountered – case of concurrence of the privileges be deemed beneficial to the creditors or the administrator wishes to set forth in art. 154 and 155 GBC and/or non-privileged transfer the whole contractual relationship, then the latter, following claims and set out their respective ranking of satisfaction. a permission by the rapporteur judge, may service a performance ■ Ordinary/unsecured and book creditors (art. 21 point a. statement (for the whole and not part of the contract); otherwise, the GBC). Claims that are not in rem secured or do not bear a administrator may reject such contract in whole either explicitly or privilege fall under this category. These claims are ranked implicitly by not responding within the deadline the counterparty pari passu within said category. may have set.

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■ Remaining or bottom-tier creditors (art. 21 point d. Art. 154 (d) GBC provides that claims that arose within the last GBC). These claims are satisfied provided that all other two years before the declaration of insolvency, for the provision of claims (as set forth above) have been satisfied and there has salaried work and compensation claims due to the termination of the been a remainder of the liquidation proceeds. employment agreement, are placed in the fourth place of the priority The costs of the procedure vary; therefore a rough estimate claims of the classification list drafted by the syndic, right after could be misleading. claims of creditors of any kind of the company, claims for funeral or hospital treatment of creditors and claims regarding provision of first aid needs such as food supplies necessary for the creditor, if 4.7 Is it possible for the company to be revived in the future? such claims arose during the last six months as from the declaration of the insolvency. Greece The former version of the GBC contained provisions on the On the other hand, claims of the employees that are born after the restoration of the debtor that had been declared bankrupt or was declaration of insolvency due to the continuation of the employment about to be declared so. The effects of the repealed institution of agreements are considered as collective claims of the creditors. restoration have been transferred as regards natural persons to the The recently adopted law 4512/2018 provides for an addition in mechanism of declaring such person excusable (art. 167 par. 4 respect to the privileged classification of employees’ claims that GBC) and as regards legal persons to the final ratification of the arose before the declaration of insolvency; more specifically, it restructuring plan (art. 164 par. 2 GBC). Should the restructuring provides that claims arising before the declaration of insolvency and plan be finally ratified by the Court, then, provided that all bankruptcy pertaining to unpaid salaries under dependent labour spanning up to creditors have been paid off, the company can be revived according six months and up to the equivalent of the product of the monthly to the legal provisions set forth in company law. salary payable per employee entitled to the statutory minimum salary provided by law for employees over 25 years of age multiplied by 275%, are given priority over any other claim (enhanced preference 5 Tax right), after deduction of any court expenses, insolvency estate management expenses, including any provisional and final retainer 5.1 What are the tax risks which might apply to a fees of the insolvency administrator and any collective creditors’ restructuring or insolvency procedure? claims arising under the liquidation procedure, as the case may be.

The GBC provides for certain tax exemptions. In the regime of 7 Cross-Border Issues insolvency (bankruptcy), art. 133 GBC provides that all contracts and deeds that are entered into pursuant to the GBC provisions (art. 135–145) on the sale of the debtor’s business as a whole, as well as 7.1 Can companies incorporated elsewhere use any transfers, transcriptions with the land registries, etc. by virtue restructuring procedures or enter into insolvency of said contracts and deeds are exempted from the imposition of proceedings in your jurisdiction? any taxes, stamp duties or any rights of the State or third parties, excluding VAT. This exemption applies ipso iure. The initiation of insolvency proceedings in Greece follows the rule On the contrary, the above exemption does not apply in the context of Art. 4 of the GBC, according to which Greek courts are competent of restructuring. to hear an insolvency case only as long the COMI (centre of main interests) of the debtor is located in Greece. COMI is designated by the location of which the debtor administers its interests, in a 6 Employees manner recognisable by third parties. For companies, there is a presumption that COMI coincides with their statutory seat. In light of the above, only debtors established in Greece are subject 6.1 What is the effect of each restructuring or insolvency procedure on employees? to insolvency proceedings under the GBC, save for companies that have their statutory seat in other third countries, but still their COMI is located in Greece. According to art. 31 par. 1 GBC, contracts of “durable performance” (e.g. employment agreements, lease agreements) remain valid as from the declaration of bankruptcy. However, any contract 7.2 Is there scope for a restructuring or insolvency can provide for a termination right in the event of declaration process commenced elsewhere to be recognised in of insolvency of one of the parties to the contract. Automatic your jurisdiction? termination is nevertheless not possible, even if it is provided in a contractual clause. In the case of debtors having their COMI in an EU Member State Art. 34 GBC stipulates that the employment agreements are not (other than Denmark), Regulation EU 848/2015 comes into play, terminated due to the declaration of insolvency. The receiver and insolvency proceedings initiated in the Member State where (syndic) may terminate an employment agreement of indefinite the COMI of the debtor is located are automatically recognised in time if the employer is the debtor. In case there are chances for Greece, without any further formalities or requirements. Greek the viability of the company, the syndic and the debtor may ask for court jurisprudence on the issue is scarce, although the principle the maintenance of the necessary employment contracts until the of automatic recognition has been occasionally confirmed by both approval of the rejection of the reorganisation plan. a lower court (decision 166/2012 of the Court of First Instance of Rethymno) and the Supreme Court (decision 838/2015). Likewise, Claims of the employees against their employer (debtor) that were the initiation of secondary insolvency proceedings in Greece born before the declaration of insolvency are considered as claims (pursuant to Article 34 of Regulation 848/2015) has been ordered within the insolvency procedure for which the employees can be by Greek courts (see, e.g., Athens First Instance Court decision satisfied according to the privileged s claim provided in Art. 154 32/2104). By contrast, if the Regulation does not apply, recognition GBC. of non-Greek insolvency proceedings is only possible if the COMI

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of the debtor is located in a country signatory of the UNCITRAL Model Law on cross-border insolvencies (in which case, however, 9 Reform recognition is not automatic but is subject to an approving Greek court decision, pursuant to Article 15 of law 3858/2010, having 9.1 Have there been any proposals or developments in implemented the UNCITRAL Model Law in Greece). your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make 7.3 Do companies incorporated in your jurisdiction insolvency processes more streamlined and efficient? restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? The newly introduced law 4469/2017 on the business debt settlement Greece extrajudicial mechanism or out-of-court workout(hereinafter the Foreign insolvency of debtors established in Greece should depend “OCW Law”), seeks to address matters that remain unresolved on the applicable laws of the country where the initiation of each under article 99 GBC (rehabilitation proceedings) and Greek proceeding is sought. Law 3869/2010 (debt settlement of non-traders natural persons), in the context of a time-barred, lax, flexible and less burdensome 8 Groups alternative. For details on the OCW Law please refer to question 3.2 above and http://www.keyd.gov.gr/. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders? 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime Under Greek law, a separate insolvency proceeding applies for each in your jurisdiction? company of a group. However, when the centre of main interests of each of the companies of the same group are located in different Other than the most recent reforms introduced by virtue of law EU Member States, arts. 56–77 of Regulation 848/2015 apply: 4512/2018, on “Arrangements for the implementation of the therefore, local administrators for each company are under the duty Structural Reforms of the Economic Adjustment Programme and to co-operate among each other, as also different bankruptcy courts other provisions” which came into force on 17.01.2018, there are no in each Member State, where individual insolvency proceedings specific upcoming proposals for the reform of the corporate rescue have been initiated for companies of the group. and insolvency regime.

Acknowledgment The authors would like to thank Messrs. Antonis Giannakodimos (Associate, LL.M.), George Vavatsioulas (Associate, LL.M.) and Magdalini Goulakou (Trainee Lawyer), of Zepos & Yannopoulos for their contributions to the chapter.

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Emmanuel Mastromanolis Danai Eirini Falconaki Zepos & Yannopoulos Zepos & Yannopoulos 280 Kifissias Av., 15232 280 Kifissias Av., 15232 Halandri Halandri Athens Athens Greece Greece

Tel: +30 210 696 7000 Tel: +30 210 696 7000 Email: [email protected] Email: [email protected] URL: www.zeya.com URL: www.zeya.com Greece Emmanuel Mastromanolis is a partner of the corporate commercial Danai Falconaki is a member of our corporate commercial practice. practice and head of the competition/anti-trust practice and insolvency She was admitted to the Athens Bar in 2015 and joined our firm in practice. He was admitted to the Athens Bar in 1991 and joined our 2017. firm in 1998. Danai focuses on corporate, commercial, anti-trust, M&A and Emmanuel focuses on corporate, commercial, antitrust, trademarks, bankruptcy law. She regularly advises and assists domestic corporate distribution and bankruptcy law, as well as in mergers and acquisitions clients and international businesses operating in Greece in their (M&A). day-to-day corporate commercial practices and their regulatory compliance. Danai’s practice covers a wide range of multinational Emmanuel gives advice regarding a wide area of issues arising M&A transactions, assisting as well in competition related matters. following the enactment of the new bankruptcy laws, especially She is also engaged in carrying out legal due diligences, drafting those involving Greek or foreign credit institutions and novel financial and negotiating transactional documentation and handling Greek products, covered or not with collateral. Concurrently with his law formalities required for the completion of acquisitions. She also professional practice, he also represents clients before bankruptcy assists in advising on a wide array of legal issues related to bankruptcy courts. Emmanuel is Assistant Professor of Commercial Law at the regulation. Faculty of Law of the University of Athens, teaching a wide array of subjects, including Competition Law, Bankruptcy Law and Corporate Danai is admitted before the Court of First Instance and works in Law. His scholarly publications relate to Commercial Law. Greek, English and French.

The global recession has proved challenging for many companies leaving them with shrinking asset values and heavy debt burdens. This combined with the Eurozone crisis and the recent developments in Greece’s financial situation made restructuring and insolvency cases more and more common and finally a well-established core practice area for Zepos & Yannopoulos. Our restructuring and insolvency team comprises experienced lawyers who operate with an in-depth knowledge of the local legal, regulatory and commercial environment within which they work. We are involved in many insolvency and reorganisation cases, and we advise our clients on setting up viable claim recovery strategies vis-à-vis their ailing debtors, lying in the vicinity of insolvency. In the context of pre-insolvency claim recovery, we are often involved in so-called “rehabilitation” procedures under Article 99 of the Greek Bankruptcy Code. We structure petitions for the initiation of such procedures and we represent clients before courts adjudicating under Article 99. Our advisory work covers cutting-edge and novel insolvency law matters, such as set-off in the context of complex financial structures, consequences of insolvency in ISDA arrangements and, finally, personal liability of members of the administration of ailing entities.

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Hong Kong Nick Gall

Gall Ashima Sood

company approaches insolvency, a director has a duty to take into 1 Overview account the interests of the company’s creditors. If he/she breaches those duties, he/she may be ordered to compensate the company 1.1 Where would you place your jurisdiction on the for any loss or damage that has been suffered as a result of those spectrum of debtor to creditor-friendly jurisdictions? breaches or repay, restore or account for the money or property appropriated or acquired. Hong Kong’s insolvency regime, like its commonwealth Misfeasance counterparts, has always been very creditor-friendly. In the Where a director has breached his duties to the company by right circumstances, courts even have the power to exercise their misapplying or retaining any money or property, the court can compel discretion to wind up foreign companies. Although the statutory repayment of money or restoration of property or contribution by rescue procedure under the Companies Ordinance of Hong Kong way of compensation by that director. by way of a scheme of arrangement is designed to provide a Fraudulent Trading debtor company with more control than the traditional insolvency proceedings, the scheme is still required to be approved by the A director may be personally liable if he/she was knowingly involved company’s creditors and the court. in carrying on any business of the company with the intent to defraud its creditors. The court may make an order that the director be personally liable for all or any of the debts and liabilities of the 1.2 Does the legislative framework in your jurisdiction company. He is also exposed to criminal liability and potentially allow for informal work-outs, as well as formal liable to a fine and imprisonment. restructuring and insolvency proceedings, and to what extent are each of these used in practice? Disqualification A director may be disqualified for a period of up to 15 years if he/ The Companies Ordinance of Hong Kong provides for the she: engages in fraudulent trading; is unfit to be concerned in the following formal restructuring and insolvency procedures for management of a company; is convicted of an indictable offence companies in financial difficulties: in connection with the promotion, formation, management, or (1) a members’ voluntary liquidation; liquidation of any company such as falsifying company’s books; or (2) a creditors’ voluntary liquidation; is found guilty of any other misconduct in relation to the company. (3) a compulsory liquidation; Whether or not a company must enter a restructuring or insolvency (4) appointment of a receiver; and process will depend on various factors, including whether it is solvent or not. A solvent company will be able to restructure using (5) a scheme of arrangement. schemes of arrangement at any time. In practice, most restructurings take place by way of informal work- outs, compositions and arrangements essentially made by agreement of the parties concerned. 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For 2 Key Issues to Consider When the example, are there any special rules or regimes which apply to particular types of unsecured creditor (such Company is in Financial Difficulties as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific Insolvency point at which a company must enter a restructuring In a creditors’ voluntary liquidation and a compulsory liquidation, or insolvency process? generally the creditors have the most significant influence on the company’s situation. In a compulsory liquidation, the creditors General/Common Law Duties initiate the process and are also responsible for nominating and voting As a general rule, the director of a company has certain fiduciary for the appointment of a liquidator, and a committee of inspection duties towards the company and its members. However, as a to supervise the liquidator in the conduct of the liquidation. In a

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creditors’ voluntary liquidation, the liquidator nominated by the A transaction will be considered extortionate if, having regard to the creditors will normally prevail in the event of a conflict with the risk accepted by the person providing the credit, the terms require liquidators appointed by the shareholders and creditors. grossly exorbitant payments in respect of the provision of credit or Secured creditors stand outside the liquidation as they are generally grossly contravene ordinary principles of fair dealing. entitled to be paid out of the proceeds of their security ahead of all other claims. Every disposition of the company’s property made with the intent to Unsecured creditors have limited rights in any liquidation as they defraud the creditors is voidable and may be set aside by the court. The are ranked the lowest amongst all creditors. An unsecured creditor exceptions are those made in good faith for valuable consideration would not rank higher than other creditors even if leave was granted and without notice of the intent to defraud creditors. The transfer of in his favour to proceed with or commence an action against the property must have been made with the deliberate intention of trying

company in compulsory liquidation and that action was ultimately to put the company’s assets beyond the reach of the creditors. The Hong Kong successful. court may infer an intention to defraud in circumstances where the A landlord would not be allowed to distrain for rent due before the transaction was for little or no consideration. winding up commenced in respect of which he is a creditor of the Floating Charges company, but will need to prove his debt. A floating charge created in favour of a person who is connected with Employees would be considered unsecured creditors of the the company two years prior to the commencement of a winding up company, except in respect of any statutory claims arising under the will be invalid unless the company was solvent immediately after Companies Ordinance, which would constitute preferential debts. the charge was created or new consideration was provided for the Creditors with lien would have the right to hold the assets of the charge. For floating charges created in favour of persons who are debtor, although this right would not generally extend to the power not connected with the company, the relevant clawback period is of sale (which should be sought from the Court). 12 months. Generally, an unpaid vendor with a retention of title arrangement Disposition of Property after Presentation of Petition and Transfers would be entitled to retain possession of goods which he has sold after Commencement of Voluntary Winding Up but not delivered to an insolvent purchaser. In a compulsory liquidation, any disposition of the company’s Restructuring property (including transfer of shares) after a winding up petition is presented, will be void, unless otherwise approved by the court. In a restructuring (whether formal or not), it is again the creditors The court may make a validating order where a proposed sale of a who have the most significant influence on the company’s situation. company’s assets would be beneficial not only for the company but As there are no provisions of moratorium, the fact that a company also for its secured creditors. However, if the transaction involves is in the process of restructuring does not prevent an individual an arrangement between a number of classes of creditors and the creditor from suing the company, seizing the company’s property or company, it will be wrong for the court to grant the order. presenting a winding up petition. In a voluntary liquidation, any transfer of shares (other than transfer made to or with the sanction of the liquidators) and any alteration in 2.3 In what circumstances are transactions entered the status of the members of the company after the commencement into by a company in financial difficulties at risk of of a voluntary winding up, will be void, unless it was made with the challenge? What remedies are available? sanction of the liquidator.

Transactions at an Undervalue and Unfair Preferences A transaction at an undervalue takes place when the company makes 3 Restructuring Options a gift or enters into a transaction with a person without receiving any consideration, or enters into a transaction for a consideration, the 3.1 Is it possible to implement an informal work-out in value of which is significantly less than the value of the consideration your jurisdiction? provided by the company. The liquidator may challenge the validity of any such transactions which took place five years prior to the Yes. Most restructurings in Hong Kong take place by way of commencement of the winding up. informal work-outs, compositions and arrangements essentially An unfair preference occurs where a payment has been made made by agreement of the parties concerned. by the company to a creditor when it is insolvent, but before the commencement of its winding up, with the effect of putting the 3.2 What formal rescue procedures are available in creditor in a better position than it would otherwise have been your jurisdiction to restructure the liabilities of in the liquidation of the company. The liquidator may challenge distressed companies? Are debt-for-equity swaps the validity of any such transactions which took place two years and pre-packaged sales possible? To what extent can prior to the commencement of the winding up if the creditors are creditors and/or shareholders block such procedures ‘associates’ (e.g. director or employee) or six months for any other or threaten action (including enforcement of security) creditor. If the challenge is successful, the court may restore the to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? position to what it would have been if the company had not entered into the relevant transaction. There are no formal procedures available to achieve a restructuring Extortionate Credit Transaction of the company’s debts in Hong Kong. The only exception is a The court may set aside any extortionate credit transactions entered scheme of arrangement. The Companies Ordinance of Hong into three years before the commencement of a voluntary winding Kong provides for procedures for court-sanctioned schemes of up, the date on which a special resolution was passed to wind up the arrangements which may be entered into by a company with its company or on the date of the winding up order made by the court. creditors or members, or both and for companies’ amalgamation (as among group companies).

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A debt-for-equity swap arrangement may form part of a restructuring contracts of a company. The insolvency regime in Hong Kong does of a company. This will generally involve the dilution or elimination not provide for any set-off in schemes of arrangements. of existing shareholders’ equity in the company. Unlike many jurisdictions, there are no statutory provisions on 3.6 How is each restructuring process funded? Is any pre-packaged insolvencies in Hong Kong, or any arrangement protection given to rescue financing? whereby the business of the company is carried on under a new and separate special corporate vehicle. That said, it is nevertheless not A consensual restructuring on an informal basis can be achieved uncommon for companies to be restructured under a pre-packaged through a debt-for-equity swap, which involves the creditors arrangement. exchanging some or part of their debt for shares in the company, the The fact that a company is in the process of negotiating a work-out issuance of convertible notes at a low rate of interest with an option

Hong Kong or putting in place a scheme of arrangement does not prevent an of converting into shares, and/or through ‘white knight’ investors. individual creditor from suing the company, seizing the company’s Currently, there is no legislation granting any protection to rescue property or presenting a winding up petition. Some (often smaller) financing. creditors will deliberately take such actions once they know: (a) they are not getting a better deal from the proposed scheme of arrangement or even paid off in full; and 4 Insolvency Procedures (b) that major creditors are in favour of the scheme of arrangement. 4.1 What is/are the key insolvency procedure(s) available The only way of cramming down dissenting creditors is in a to wind up a company? sanctioned scheme of arrangement. If a scheme of arrangement is sanctioned by the court, it becomes binding on all creditors and, as a The key insolvency procedures available to wind up a company are result, the rights of creditors may change. Until that point, however, as follows: unsecured creditors may take any enforcement actions available to (1) a members’ voluntary liquidation (it should be noted that this them against the company. is a solvent liquidation); (2) a creditors’ voluntary liquidation; and 3.3 What are the criteria for entry into each restructuring (3) a compulsory liquidation. procedure? 4.2 On what grounds can a company be placed into each There are no specific criteria to be met by a company before winding up procedure? negotiating a work-out or a scheme of arrangement. That being said, restructuring arrangements have to be agreed by, and made binding A members’ voluntary liquidation is only available where the on, all creditors, otherwise a dissenting creditor may frustrate the company is solvent. Having made a full inquiry into the company’s rescue plan and petition for a winding up. affairs, the directors must have also formed an opinion that the company will be able to pay all its debts within 12 months of the 3.4 Who manages each process? Is there any court commencement of the winding up and sign a certificate of solvency involvement? to that effect. The shareholders must also pass a special resolution to wind up in a General Meeting. A work-out is managed by the creditor(s) and the management of A creditors’ voluntary liquidation will occur where the company the company. decides to place itself into voluntary liquidation but the directors are unable to certify the solvency of the company (i.e. the company On the contrary, a scheme of arrangement is substantially supervised is insolvent), or the liquidator is at any time of the opinion that the by the court, although the management of the company remains company will not be able to pay its debts in full within the specified in place throughout the restructuring process. Once a proposal period. has been devised and presented to the shareholders and creditors, an application is made to the court to convene meetings of the A compulsory winding up order may be made by the court where: respective classes of shareholders and creditors. (1) the company has passed a special resolution for winding up by the court; After the court makes an order that the meetings of the respective classes of creditors and shareholders can be convened, notice of the (2) the company has failed to commence its business within one year from its incorporation, or suspends its business for a date and time of these meetings is advertised. At these meetings: (a) whole year; a majority of 75 per cent in value; and (b) 50 per cent in number is (3) the company has no members; required to approve the proposed scheme. (4) the company is unable to pay its debts as and when they fall After approval, a petition for sanction must be issued and, at the due; hearing of such petition, the court will consider whether or not to (5) the event, if any, occurs if the memorandum and articles sanction the scheme. If the scheme is sanctioned by the court, a provide that the company is to be dissolved; or copy of the relevant court order must be filed with the Companies (6) the court is of the opinion that it is just and equitable that the Registry in Hong Kong. company be wound up.

3.5 What impact does each restructuring procedure have 4.3 Who manages each winding up process? Is there any on existing contracts? Are the parties obliged to court involvement? perform outstanding obligations? Will termination and set-off provisions be upheld? A voluntary liquidation is managed by the directors of the company A work-out or a scheme of arrangement has no effect on the until the appointment of the liquidator.

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A compulsory winding up is commenced by issuing a petition (2) preferential debts; against the company. The court will hear the petition and make an (3) any preferential charge on distrained goods; order for compulsory winding up if it is satisfied that grounds for (4) the company’s general creditors; and winding up have been established. It is managed by a provisional (5) shareholders. liquidator, Official Receiver or the liquidator, as the case may be.

4.7 Is it possible for the company to be revived in the 4.4 How are the creditors and/or shareholders able to future? influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)? In a voluntary liquidation, the company will be permanently dissolved three months after the liquidator files the final account and Hong Kong On the appointment of a liquidator in a members’ voluntary return with the Companies Registry in Hong Kong following the liquidation, all the powers of the directors cease, although a final meeting of creditors. liquidator or the shareholders in a General Meeting can sanction In a compulsory winding up, the liquidator can apply to the court for their continuance. Similarly, in a creditors’ voluntary liquidation, an order to permanently dissolve the company once the affairs of the the powers of the directors will also cease. However, the committee company have been completely wound up. Dissolution brings the of inspection or, if there is no committee, the creditors, can sanction company to an end. their continuance. In contrast, appointments of directors, agents and employees are automatically terminated when the court makes a winding up order under a compulsory winding up. 5 Tax The rights of the shareholders will also lapse, although it is worth noting that the shareholders may still vote in a General Meeting for 5.1 What are the tax risks which might apply to a the continuance of the directors’ powers in a members’ voluntary restructuring or insolvency procedure? liquidation. Unsecured creditors have limited rights in any liquidation as they If the company continues to trade or sells its assets, it would be are ranked the lowest amongst all creditors. When a winding up subject to tax on its profits. order has been made or a provisional liquidator has been appointed, creditors must seek leave from the court to continue with, or commence proceedings against, the company. An unsecured 6 Employees creditor would not be ranked higher than other creditors even if leave was granted in his favour to proceed or commence an action 6.1 What is the effect of each restructuring or insolvency against the company in compulsory liquidation and the action is procedure on employees? successful. On the other hand, secured creditors stand outside the liquidation as Restructuring they are entitled to be paid out of the proceeds of their security ahead A work-out or a scheme of arrangement has no effect on employees. of all other claims. That said, if the security created is a floating Insolvency charge, the preferential debts (e.g. sums owing to employees and the government) must be paid before the floating charge holder. On a compulsory winding up, all employment contracts will be automatically terminated, unless the court orders otherwise. On the other hand, the commencement of a voluntary liquidation does not 4.5 What impact does each winding up procedure have on automatically terminate the service contracts of employees. In the existing contracts? Are the parties obliged to perform event an employee’s contract is terminated, that employee becomes outstanding obligations? Will termination and set-off provisions be upheld? a of the company in respect of their unpaid wages, severance payments, etc. They could expect to receive ex gratia payments out of the Hong Kong Protection of Wages on See the answer to question 2.3 above in respect of avoidance of Insolvency Fund if the company which employed them was put into disposition of property after a presentation of petition and avoidance liquidation. of transfers after commencement of a voluntary winding up. As explained in question 2.3 above, the liquidator also has the power to avoid or set aside certain transactions to ‘clawback’ assets of the 7 Cross-Border Issues company in order to increase the funds available to distribute to creditors. Set-off applies in liquidation where there have been mutual credits 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency or mutual debts or other mutual dealings between the company and proceedings in your jurisdiction? the creditor before a winding up order is made. Whilst the United Nations Commission on International Trade 4.6 What is the ranking of claims in each procedure, Law (UNCITRAL) has adopted the Model Law on Cross-Border including the costs of the procedure? Insolvency, there are no statutory provisions in Hong Kong to implement the UNCITRAL Model Law. Notwithstanding this, The order of payment in a liquidation is generally as follows: a foreign liquidator may initiate a new liquidation in Hong Kong (1) expenses of the winding up, including the liquidator’s against the foreign company. However, the court will only exercise remuneration. The order of priority of the costs in a winding its discretion to make a winding up order against a foreign company up is set out in rule 179 of the Companies (Winding up) Rules if, amongst other requirements, there is sufficient connection within (Cap. 32H); the jurisdiction of Hong Kong.

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7.2 Is there scope for a restructuring or insolvency 9 Reform process commenced elsewhere to be recognised in your jurisdiction? 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or A foreign liquidator may be able to protect assets of a foreign debtor reducing the involvement of the courts in the laws in Hong Kong where the foreign winding up order is extraterritorial of your jurisdiction, which are intended to make (i.e. extends to assets situated in Hong Kong) and is fair (i.e. does insolvency processes more streamlined and efficient? not depart from the pari passu rule for treating all creditors equally). In order to achieve this, the foreign liquidator may commence The Companies Amendment Ordinance which came into effect in proceedings in Hong Kong seeking a declaration regarding the February 2017 introduces significant amendments to streamline Hong Kong effect of the foreign insolvency proceedings and to recover debts. the winding up process, including allowing the liquidator to communicate electronically with creditors and members of the 7.3 Do companies incorporated in your jurisdiction committee of inspection, allowing the committee of inspection restructure or enter into insolvency proceedings in members to attend meetings remotely, allowing for costs/charges other jurisdictions? Is this common practice? of liquidator-appointed agents to be approved by the committee of inspection without taxation, enabling the liquidator to appoint Although it is common for Hong Kong companies to have assets a solicitor without court sanction by giving seven days’ notice to and operations elsewhere, there are obvious difficulties in dealing the committee of inspection, or alternatively where there is no with insolvencies of such companies in jurisdictions other than committee of inspection, to the creditors, and most importantly, Hong Kong, especially while safeguarding and realising the assets. prescribing a form of statutory demand to help avoid disputes over validity of the demand.

8 Groups 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime 8.1 How are groups of companies treated on the in your jurisdiction? insolvency of one or more members? Is there scope for co-operation between officeholders? The key proposals for reform in the current insolvency regime include, inter alia, the introduction of: Hong Kong does not have the concept of a group liquidation. (1) provisional supervision rescue provisions for companies with Generally, in a winding up of a group company/companies, each minimum court involvement; company of the group is treated as a separate legal entity and the (2) a moratorium on creditors’ claims; interest of a single company is not sacrificed for the larger interest (3) provisions relating to payment of outstanding wages and of the group. To secure co-operation and also for practical reasons, benefits to employees; and the court may permit the same liquidator to take control of insolvent (4) stringent provisions for insolvent trading in order to companies within a group, subject to any conflict of interest. encourage directors to initiate provisional supervision at an early stage. The above proposed reforms have not been included in the Amendment Ordinance and it, therefore, remains to be seen whether these changes will be brought about in Hong Kong’s insolvency regime in the near future.

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Nick Gall Ashima Sood Gall Gall 3/F, Dina House, Ruttonjee Centre 3/F, Dina House, Ruttonjee Centre 11 Duddell Street, Central 11 Duddell Street, Central Hong Kong Hong Kong

Tel: +852 3405 7688 Tel: +852 3405 7688 Email: [email protected] Email: [email protected] URL: www.gallhk.com URL: www.gallhk.com

Nick Gall is Senior Partner and head of the insolvency practice at Gall. Ashima Sood is an Associate at Gall. She has experience in general Hong Kong His practice areas cover commercial litigation, insolvency, fraud and commercial and corporate litigation and contentious insolvency asset tracing, regulatory/criminal and employment matters. matters. Ashima’s contentious insolvency experience includes: advising and assisting clients in respect of shareholders’ and directors’ Nick has extensive experience in a range of contentious insolvency disputes; identification, protection and realisation of assets in insolvent and bankruptcy proceedings where he has acted for liquidators, estates; security enforcement; corporate and personal debt recovery; receivers, creditors and directors. He advises on the appointment of and cross-border insolvency issues. provisional liquidators, the identification, protection and realisation of assets in insolvent estates, investigations and examinations, security enforcement, corporate and personal debt recovery and cross-border insolvency issues.

Gall is a leading dispute resolution law firm in Hong Kong. We specialise in handling highly complex disputes, many of which involve multi- jurisdictional litigation. Our lawyers have a wealth of experience in a wide variety of litigation, mediation and arbitration. Our core practice areas include commercial litigation, fraud and asset tracing, employment disputes, restructuring and insolvency, obtaining emergency injunctive relief remedies, regulatory and criminal matters, family matters and China-related matters. Gall has a highly respected insolvency practice noted particularly for its expertise in high-profile, cross-border contentious insolvency matters. We deal with all areas of contentious insolvency including: advising appointment takers such as liquidators; provisional liquidators and receivers; applications for the appointment of provisional liquidators; the identification, protection and realisation of assets in insolvent estates; investigations and examinations; security enforcement; corporate and personal debt recovery; and cross-border insolvency issues. Our clients also include appointment takers, creditors, bondholders, financial institutions, investment funds, distressed companies and company directors and practitioners in Hong Kong.

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Hungary Dr. Eniko Vida

Kovács Réti Szegheő Law Firm Dr. Attila Kovács

1 Overview 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For 1.1 Where would you place your jurisdiction on the example, are there any special rules or regimes which spectrum of debtor to creditor-friendly jurisdictions? apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention Hungary is a creditor-friendly jurisdiction. of title arrangements) applicable to the laws of your jurisdiction?

1.2 Does the legislative framework in your jurisdiction There are no special rules or regimes which apply to particular types allow for informal work-outs, as well as formal of unsecured creditors. restructuring and insolvency proceedings, and to what extent are each of these used in practice? 2.3 In what circumstances are transactions entered Informal work-outs are not regulated in the Insolvency Act, into by a company in financial difficulties at risk of however, the parties often try to agree with each other before they challenge? What remedies are available? initiate the formal restructuring and insolvency proceeding, which are regulated in the Act XLIX of 1991 on Bankruptcy Proceedings The creditor, and on behalf of the debtor, the liquidator may file and Liquidation Proceedings (hereinafter referred to as “Insolvency for legal action before the court within 120 days from the time of Act”). gaining knowledge or within a one-year limitation period from the date of publication of the notice of liquidation to contest: ■ contracts concluded by the debtor within five years 2 Key Issues to Consider When the preceding the date when the court received the petition for Company is in Financial Difficulties opening liquidation proceedings or thereafter, or his other commitments, if intended to conceal the debtor’s assets or to defraud any one creditor or the creditors, and the other 2.1 What duties and potential liabilities should the party had or should have had knowledge of such intent; directors/managers have regard to when managing a ■ contracts concluded by the debtor within three years company in financial difficulties? Is there a specific preceding the date when the court received the petition point at which a company must enter a restructuring or insolvency process? for opening liquidation proceedings or thereafter, or his other commitments, if intended to transfer the debtor’s assets without any compensation or to undertake any The managers/directors shall exercise their management functions commitment for the encumbrance of any part of the in the interests of creditors in the wake of any situation carrying a debtor’s assets, or if the stipulated consideration constitutes potential danger of insolvency. A situation is considered to carry unreasonable and extensive benefits to a third party; potential danger of insolvency as of the day when the managers ■ contracts concluded by the debtor within 120 days were able to foresee, or had reasonable grounds to foresee as is preceding the date when the court received the petition for expected from persons in such positions, that the company will not opening liquidation proceedings or thereafter, or his other be able to satisfy its liabilities when due. The court shall declare commitments, if intended to give preference and privileges the debtor insolvent upon the debtor’s failure to settle or contest his to any one creditor, such as the amendment of an existing previously uncontested and acknowledged contractual debts within contract to the benefit of a creditor, or to provide financial 20 days of the due date, and failure to satisfy such debt upon receipt collateral to a creditor that does not have any; and of the creditor’s written payment notice. ■ contracts concluded by the debtor within three years before the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if made for the purpose of transfer of ownership by way of guarantee, or the assignment of a right or claim by way of a guarantee or exercising a collateralised option to buy, where the beneficiary exercised such acquired right by failing to fulfil his obligation of accounting toward

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the debtor, or did so improperly, and/or failed to pay the amount remaining after the secured claim is satisfied; if 3.5 What impact does each restructuring procedure have the right-holder did not have the acquisition of ownership, on existing contracts? Are the parties obliged to or the assignment of a right or claim by way of a guarantee perform outstanding obligations? Will termination and registered in the collateral register, or his buy option in the set-off provisions be upheld? real estate register, the conditions for lodging a contest shall be presumed to exist. At the debtor’s request, provided that it is not rejected outright, the court shall – within one working day – provide for the publication of the request itself, and of the temporary stay of payment with 3 Restructuring Options immediate effect in the Cégközlöny (Company Gazette) by way of the means described in specific other legislation. Hungary 3.1 Is it possible to implement an informal work-out in Under the duration of the stay of payment (with several exceptions): your jurisdiction? ■ set-off may not be applied against the debtor; ■ payment orders may not be satisfied from the debtor’s It is not possible. accounts, and payment orders may not be submitted against the debtor; 3.2 What formal rescue procedures are available in ■ the enforcement of money claims against the debtor, shall be your jurisdiction to restructure the liabilities of suspended, and the enforcement of such claims may not be distressed companies? Are debt-for-equity swaps ordered; and pre-packaged sales possible? To what extent can ■ no satisfaction may be sought on the basis of a lien on the creditors and/or shareholders block such procedures debtor’s asset; moreover, the debtor may not be called to or threaten action (including enforcement of security) honour any security pledged before the time of the opening to seek an advantage? Do your procedures allow you of bankruptcy proceedings; to cram-down dissenting stakeholders? ■ with the exception of the claims defined specially, the debtor cannot effect any payment for claims existing at the time of In Hungary, the bankruptcy procedure is the proceeding where the opening of bankruptcy proceedings, and the creditor may the debtor is granted a stay of payment with a view to seeking an not demand such payments; arrangement with creditors, or attempts to enter into a composition ■ the debtor shall be allowed to undertake any new commitment arrangement with creditors. This procedure is a court procedure subject to the consent of the administrator; which may be initiated only by the debtor. If no composition is ■ payments may be made from the debtor’s assets subject to arranged (because the creditors do not accept the reorganisation plan authorisation by the administrator, including for the liabilities and the composition proposal of the debtor), or if the arrangement assumed with a view to continuing the debtor’s economic fails to comply with the relevant regulations, the court shall dismiss activity; and the bankruptcy proceedings and shall consequently declare the ■ a contract concluded with the debtor may not be avoided, and debtor insolvent ex officio in the liquidation proceedings. it may not be terminated on the grounds of the debtor’s failure There are no debt-for-equity swaps, and pre-packaged sales. There to settle during the term of the stay of payment its debts are no procedures allowed to cram-down dissenting stakeholders. incurred before the term of the temporary stay of payment.

3.3 What are the criteria for entry into each restructuring 3.6 How is each restructuring process funded? Is any procedure? protection given to rescue financing?

The directors of a debtor company may submit an application for the The duty on bankruptcy Proceedings shall be 50,000 forints, while opening of bankruptcy proceedings at the court of law. for unincorporated business associations the duty on bankruptcy proceedings shall be 30,000 forints. No rescue is available. The debtor may not file a petition for bankruptcy if already adjudicated in bankruptcy, or if a request for its liquidation has been submitted, and a decision has already been adopted in the first 4 Insolvency Procedures instance for the debtor’s liquidation. The debtor may not file another petition for bankruptcy: 4.1 What is/are the key insolvency procedure(s) available ■ before the satisfaction of any creditor’s claim that existed at to wind up a company? the time of ordering the previous bankruptcy proceedings or that was established by such proceedings; In Hungary there is only one court procedure – the Liquidation ■ inside a period of two years following the time of publication of the final and definitive conclusion of the previous proceeding – which shall mean the proceedings aimed to provide bankruptcy proceedings; or satisfaction, as laid down in this Act, to the creditors of an insolvent debtor upon its winding up without succession. ■ if the court ex officio refused the debtor’s request for the previous bankruptcy proceedings pursuant to Subsection (4) of Section 9, and if inside the one-year period following the 4.2 On what grounds can a company be placed into each time of publication of the final ruling thereof. winding up procedure?

3.4 Who manages each process? Is there any court The court shall declare the debtor insolvent: involvement? a) upon the debtor’s failure to settle or contest his previously uncontested and acknowledged contractual debts within 20 It is a court procedure. days of the due date, and failure to satisfy such debt upon receipt of the creditor’s written payment notice;

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b) upon the debtor’s failure to settle his debt within the deadline If the debtor provides financial collateral under a financial collateral specified in a final court decision or order for payment; arrangement to secure a claim before the time of the opening of c) if the enforcement procedure against the debtor was liquidation proceedings, the collateral taker shall be able to realise unsuccessful; this financial collateral directly, irrespective of whether liquidation d) if the debtor did not fulfil his payment obligation as stipulated is opened or not, and shall refund any excess collateral to and settle in the composition agreement concluded in bankruptcy or accounts with the liquidator. If the collateral taker fails to exercise liquidation proceedings; his right to direct satisfaction within three months following e) if it has declared the previous bankruptcy proceedings publication of the opening of liquidation, he may seek satisfaction terminated; or as lien holder in accordance with the regulations set out in Section f) if the debtor liabilities in proceedings initiated by the debtor 49/D of the Insolvency Act.

Hungary or by the receiver exceed the debtor’s assets, or the debtor Where a lien was filed prior to the opening of liquidation proceedings, was unable and presumably will not be able to settle its debt the liquidator shall be allowed to deduct from the proceeds from the (debts) on the date when they are due, and in proceedings sale of the pledged property only the costs specified in the Act on opened by the receiver the members (shareholders) of the debtor economic operator fail to provide a statement of Insolvency. The sum remaining after the deductions shall be used commitment – following due notice – to guarantee the funds to satisfy the claim (principal, interest and other charges) for which necessary to cover such debts when due. such property was pledged.

4.3 Who manages each winding up process? Is there any 4.5 What impact does each winding up procedure have on court involvement? existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? It is a court procedure.

The liquidator as the representative of the debtor shall have powers 4.4 How are the creditors and/or shareholders able to to terminate, with immediate effect, the contracts concluded by influence each winding up process? Are there any the debtor, or to rescind from the contract if neither of the parties restrictions on the action that they can take (including rendered any services. From the time of the opening of liquidation the enforcement of security)? proceedings, employer’s rights shall be exercised and obligations shall be fulfilled by the liquidator. Anyone who did not register as a creditor in the liquidation proceedings may not enforce their claims, in the event of a composition agreement, subsequent to the closing of the proceedings. 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? All debts of the debtor company shall be deemed payable (due) at the time of the opening of liquidation proceedings. The economic operator’s debts shall be satisfied from its assets that For pecuniary debts, the following can be enforced: are subject to liquidation in the following order: a) contractual interest up to the date of the original due date; and a) liquidation costs described in the Act; b) default interest and late charges, as well as surcharge and b) the part of a claim secured by a pledge that were not satisfied penalty and similar claims from the original due date through according to Subsections (1)–(2a) of Section 49/D of the the date of settlement, or up to the closing date of the final Insolvency Act before the time of the opening of liquidation liquidation balance sheet at the latest. proceedings up to the amount of the proceeds from the sale of From the time of the opening of liquidation proceedings, the the pledged property; liquidator respresents the debtor against third persons. c) alimony and life-annuity payments, compensation benefits, In a liquidation proceeding, with regard to the debtor’s claims, right income supplement to miners, which are payable by the of setoff may be exercised only with respect to such creditor’s claims economic operator, furthermore, monetary aid granted to which have been registered by the liquidator as acknowledged members of agricultural cooperatives in lieu of household and have not been assigned subsequent to the date when the court land or produce, for which the beneficiary is entitled for his/ received the petition for opening liquidation proceedings, or, if the her lifetime; claim has occurred at a later date, subsequent to its occurrence. d) with the exception of claims based on bonds, other claims of private individuals not originating from economic activities The executive officers and senior management of the debtor (in particular, claims resulting from insufficient performance, company, their close relatives and their domestic partners, compensation for damages or restitution, also including the furthermore, any member (shareholder) of the debtor company with amount of the guarantee obligations ordinarily expected in the majority control over the debtor or the economic operator in which given trade, as calculated by the liquidator), claims of small and the debtor has majority control (or the member in the case of single- micro companies and small-scale agricultural producers, and member companies, the owner in the case of sole proprietorships, or the receivables of the Szövetkezeti Hitelintézetek Tőkefedezeti the foreign-registered company in the case of Hungarian branches) Közös Alapja (Common Capital Fund of Cooperative Credit may not set off their claims against the debtor. Institutions) originating from the Szövetkezeti Hitelintézetek Tőkefedezeti Közös Alapja subrogating to the rights and From the time of the opening of liquidation proceedings, any obligations of covered depositors; pecuniary claim against the economic operator in connection with e) debts owed to social security funds, taxes and outstanding any assets to be liquidated may only be enforced in the framework public dues enforced as taxes, sums payable to the State of liquidation. The creditor – in the proceedings brought by the established in criminal proceedings, repayable State aid and economic operator – may enforce his claim existing at the time financial aids from the European Union and other international of the opening of liquidation proceedings against the economic resources by virtue of international agreement, as well operator as a set-off claim, provided, however, that the beneficiary as public utility charges and condominium maintenance of the claim was the same creditor at the time of the opening of fees, and the claims not mentioned in Paragraph d) of the liquidation proceedings as well. Szövetkezeti Hitelintézetek Tőkefedezeti Közös Alapja;

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f) other claims; 7 Cross-Border Issues g) irrespective of the time and grounds of occurrence, default interests and late charges, as well as surcharges and penalty and similar debts; and 7.1 Can companies incorporated elsewhere use h) claims, other than wages and other similar benefits if below restructuring procedures or enter into insolvency double of the prevailing minimum wage or, in the case of proceedings in your jurisdiction? employees whose wages are paid on the basis of performance only, double of the guaranteed salary specified in the Labour Only if the COMI of the company is in Hungary. The Fővárosi Code, and if it does not exceed six months’ average earnings Törvényszék (Budapest Metropolitan Court) shall have competence held by: and jurisdiction to open and conduct main insolvency proceedings

1) any member (shareholder) of such economic operator instituted against an economic operator covered by Regulation Hungary with majority control; 2015/848/EU, established in a place other than Hungary. 2) any executive officer of the economic operator; 3) any executive employee referred to in Subsection (1) of 7.2 Is there scope for a restructuring or insolvency Section 208 of the Labour Code; process commenced elsewhere to be recognised in 4) the close relatives and domestic partners of the persons your jurisdiction? mentioned in Subparagraphs 1–3); 5) an economic operator under the debtor’s majority control; If any restructuring or insolvency process had been commenced in and another jurisdiction, it shall be recognised. 6) a body (person) benefiting from the debtor’s gratuitous commitments. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in 4.7 Is it possible for the company to be revived in the other jurisdictions? Is this common practice? future? It is not a common practice; however, it is possible, of the COMI of Following a period of 40 days subsequent to the publication of the the Hungarian company in another jurisdiction. ruling ordering liquidation, the creditors and the debtor may, at any time, conclude a composition agreement before the final liquidation balance sheet is submitted. If a composition agreement is made 8 Groups by the parties, the court shall confirm the agreement by way of a ruling, also providing for the conclusion of liquidation, the fee of the 8.1 How are groups of companies treated on the liquidator, the bearing of costs, and on the satisfaction of the claims insolvency of one or more members? Is there scope of creditors excluded from the agreement. for co-operation between officeholders? The court shall terminate the liquidation proceedings if all registered debts, recognised or uncontested, of the debtor had been satisfied There are not special rules in connection with the groups of and if the debtor provides guarantees for contested claims and for companies. the liquidator’s fee. 9 Reform 5 Tax

9.1 Have there been any proposals or developments in 5.1 What are the tax risks which might apply to a your jurisdiction regarding the use of technology or restructuring or insolvency procedure? reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient? No special tax risks.

No proposals or developments regarding the use of technology or 6 Employees reducing the involvement of the courts in the laws are available now.

6.1 What is the effect of each restructuring or insolvency 9.2 Are there any other governmental proposals for procedure on employees? reform of the corporate rescue and insolvency regime in your jurisdiction? The bankruptcy procedure does not have any effect on the employees. No governmental proposals for reform of the corporate rescue and From the time of the opening of liquidation proceedings, employer’s insolvency regime is available now. rights shall be exercised and obligations shall be fulfilled by the liquidator. If the company terminates, the labour relationship of the employees will be also terminated.

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Dr. Eniko Vida Dr. Attila Kovács Kovács Réti Szegheő Law Firm Kovács Réti Szegheő Law Firm 1121 Budapest 1121 Budapest Zugligeti út 41 Zugligeti út 41 Hungary Hungary

Tel: +36 1 275 2785 Tel: +36 1 275 2785 Email: [email protected] Email: [email protected] URL: www.krs.hu URL: www.krs.hu

Hungary Dr. Eniko Vida Attorney-at-law, Legal expert in European Business Dr. Attila Kovács graduated from the Faculty of Law of Eötvös Loránd Law. University in 1996. After having gained professional experiences at Hungarian and German law offices, he is a member of Kovács Eniko Vida is specialised in Bankruptcy and liquidation, Enforcement Réti Szegheő Attorneys-at-law and from 2004 onwards managing Law, Labour Law, Litigation. Her native language is Hungarian and partner thereof. He is an arbitrator at the Arbitration Court attached she is fluent in German and English. Eniko Vida graduated from ELTE to Hungarian Chamber of Agriculture, chairman of the Insolvency University, Faculty of Law, in 2006. She passed the Budapest Bar Practice Group of the Geneva Group International and chairman of the exam in 2010. She attended a Legal Expert in European Business Supervisory Board of Zugliget Voluntary Pension Fund. He speaks Law course in 2013. Hungarian, English and German and his primary areas of practice are bankruptcy law, real estate and corporate law.

We believe that in order to meet the complex and rapidly changing challenges of our globalised business world all business organisations need to revise their strategies and plans of actions regularly, while focusing on legal, economic and especially tax issues. KRS Law Firm has been therefore specialising in business law, including in-house tax advising for more than 25 years. We believe that in today’s globalised business world, all of our clients need a competent, reliable and trustworthy legal counsel, who can think globally but acts locally by providing its clients with personalised advice and business-oriented, effective solutions. We enhance our international expertise for the benefits of our clients. We believe that thanks to our widespread international network, our intensive industrial know-how and expertise, our flexible and efficient office structure and our highly qualified, dedicated and creative staff we are able to provide first-class legal advice even in the most complex cases.

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India

Dhir & Dhir Associates Alok Dhir

These non-statutory informal mechanisms of restructuring were 1 Overview widely prevalent in India and were used as a tool for restructuring the debt of a Corporate Debtor before proceeding to the formal 1.1 Where would you place your jurisdiction on the mechanism. However, with a view to harmonise and simplify the spectrum of debtor to creditor-friendly jurisdictions? framework for the resolution of stressed assets, the RBI vide its recent circular dated 12.02.2018, has withdrawn the non-statutory The present legal framework in India to deal with the Insolvency informal mechanisms and has directed the commercial banks to and Bankruptcy situation is legislated in the provisions of the identify the stress in the account and classify it as Special Mention Insolvency and Bankruptcy Code, 2016 (IBC, 2016 or the Code). Accounts (SMA). The provisions of the Code are focused on a ‘Creditor in Possession’ At the same time, RBI has also given a window of 180 days to regime wherein from the admission of the application by the these commercial banks to formulate and agree on a resolution plan Adjudicating Authority (AA) until the time a resolution plan is which may include any actions/plans/reorganisation including, but sanctioned by the AA, the creditors of the Corporate Debtor, through not limited to, regularisation of the account by payment of all over their appointed Resolution Professional (RP), remain in custody and dues by the borrower entity, sale of the exposures to other entities/ control of the assets of the Corporate Debtor. investors, change in ownership, or restructuring, failing which the The Company continues to be run and controlled by the Resolution account is to be referred to the Insolvency Court. Professional until a resolution plan is sanctioned by the AA or a The formal restructuring and insolvency proceedings are being liquidation order is made to that effect by the AA. For making largely governed by the Insolvency and Bankruptcy Code, 2016, any decision during the Corporate Insolvency Resolution Process which covers a wide range of restructuring, viz. re-organisation (CIRP) of the Corporate Debtor, the consent of members of through a scheme for compromise, arrangements and reconstruction Committee of Creditors (COC) with 75% or more of the voting or financial, capital and business restructuring. Failure to reach an share is mandated under the Code. The voting share is deduced on understanding/resolution with the creditors under the Code shall the basis of the admitted claims of the respective member of CoC. lead to liquidation of the Corporate Debtor. The Code further provides that, upon the liquidation order being passed, the Resolution Professional continues to perform the duties of a liquidator for the sale of the liquidation estate of the Corporate 2 Key Issues to Consider When the Debtor and distribution of proceeds thereof amongst the creditors in Company is in Financial Difficulties a manner as provided in the Code. As such, it can be safely concluded that the present legislation in our country, to deal with the insolvency and bankruptcy of corporate/ 2.1 What duties and potential liabilities should the non-corporate entities, is a creditor-friendly jurisdiction. directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring 1.2 Does the legislative framework in your jurisdiction or insolvency process? allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to The directors, managers and all the key managerial personnel of the what extent are each of these used in practice? Corporate Debtor are required to act honestly, without negligence and in good faith in the bona fide best interests of the company. The legislative framework in India presently provides only for formal Directors are further expected to make proper use of their powers, restructuring and insolvency proceedings. However, until recent not to fetter their discretion for any reason whatsoever, and must times, there have been several non-statutory informal mechanisms not place themselves in a position in which their personal interest led by: Bilateral Restructuring; Corporate Debt Restructuring or duties to other persons may conflict with their duties towards the (CDR); Joint Lenders’ Forum (JLF); Flexi Restructuring Scheme; company, except in case of an informed consent of the company. Change of Management through a Strategic Debt Restructuring (SDR); and Change of Management outside of SDR and Scheme for In terms of the Companies Act, 2013, there is no restraint on the Sustainable Structuring of Stressed Assets (S4A), which were based directors in continuing to trade, albeit with bona fide intentions, on various circulars and guidelines issued by the Reserve Bank of whilst a company is in financial difficulties. India (RBI), the banking regulator which laid the modalities and However, in terms of the provisions of the Code, upon admission requisites to carry out the restructuring of debts. of the application by the AA for initiation of CIRP against the

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Corporate Debtor, the management of the affairs of the Corporate Debtor vests with the Interim Resolution Professional (IRP), the 2.3 In what circumstances are transactions entered powers of the Board of Directors or the partners of the Corporate into by a company in financial difficulties at risk of challenge? What remedies are available? Debtor, as the case may be, are suspended and the same vest with the IRP and all the officers and managers of the Corporate Debtor are obligated to report to the IRP and provide access to such documents Under the IBC 2016, the Resolution Professional appointed and records of the Corporate Debtor as may be required by the IRP. by the Adjudicating Authority at the time of admission of the application filed by the Financial Creditor or Operational Creditor In case of non-co-operation or submission of false information/ or the Corporate Debtor for initiation of the Corporate Insolvency concealment of facts, etc. by the officers/managers of the Process against the Corporate Debtor is, inter alia, India Debtor, there are certain penal provisions, including imprisonment, obligated to manage the affairs of the Corporate Debtor and to embedded in Chapter VII of the Code. collect all information relating to the assets, finance and operations Filing of an application for initiation of the CIRP against a Corporate of the Corporate Debtor and the financial and operational payments Debtor, under the Code, is not mandatory. Instead it is discretionary for the previous two years. and upon the occurrence of a default of an amount for or in excess If during the course of verification of the transaction it comes of One Lac Rupees, any Financial Creditor/Operational Creditor or to the knowledge of the Resolution Professional or if he is of the Corporate Debtor itself may file an application before the AA for the opinion that the Corporate Debtor has undertaken certain initiation of CIRP against the Corporate Debtor. preferential transactions or entered into an undervalued transaction or extortionate credit transaction or any other transaction which may have the effect of defrauding the creditors, during the relevant time 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the (a period of two years in case of transaction with related parties and action that they can take against the company? For a period of one year in other cases), the Resolution Professional may example, are there any special rules or regimes which approach the Adjudicating Authority with an application seeking apply to particular types of unsecured creditor (such appropriate orders, including reversal of such transactions. as landlords, employees or creditors with retention Transactions as defined in the Code include: transfer of property of title arrangements) applicable to the laws of your or an interest thereof of the Corporate Debtor for the benefit of a jurisdiction? creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the The provisions of the Code empower any creditor of a Corporate Corporate Debtor which has the impact of putting such creditor or Debtor, irrespective of it being a Financial or Operational Creditor a surety or a guarantor in a more beneficial position than it would or secured or unsecured creditor, to file an application before the AA have been in the event of a distribution of assets; gifts to a person; for initiating the Corporate Insolvency Resolution Process against and undervalued transactions and extortionate credit transactions. the Corporate Debtor in the event of there being a default by the In addition, once a secured creditor issues a notice under Section Corporate Debtor in making payment of the dues for an amount of 13(2) of the SARFAESI Act, there is a suo moto restraint on transfer Rs. 1.00 Lac or more. of the secured assets by sale, lease or otherwise and any attempt Under the provisions of the IBC, 2016, immediately upon admission to enter into transactions in respect of the secured assets of the of the application by the Adjudicating Authority, a moratorium is company can be annulled by the appropriate court of law. declared under Section 13 of the Code with regard to matters Any other transaction entered into by a company, in financial contained under Section 14 of the Code; i.e. there is a restraint on difficulty, to carry out its normal course of business or activities continuation of any coercive recovery proceedings, including: suits; is otherwise not susceptible to any limitation in the absence of any execution of any judgments, decrees or orders in any court of law, restraining order. or other authority; restriction or transfer, encumbrance, alienation or disposal by the Corporate Debtor of any of its assets or any legal right or beneficial interest therein; and a prohibition 3 Restructuring Options on any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including 3.1 Is it possible to implement an informal work-out in any action under the SARFAESI Act. your jurisdiction? Only financial and operational creditors are recognised under the Code to be eligible to initiate a CIRP against a Corporate Debtor as As stated in question 1.2 above, it is possible to implement an such unsecured creditors such as landlords, employees or creditors informal mechanism of restructuring. Prior to the circular issued by with retention of title arrangements can also initiate CIRP in their RBI on 12.02.2018, the restructuring was done based on one of the capacity as either a Financial or Operational creditor. There is no restructuring tools such as Bilateral Restructuring, CDR, JLF, Flexi special treatment/status which is accorded to them under the Code. Restructuring Scheme, Change of Management through a SDR, Recently, a Public Interest Litigation (PIL) was filed by one of the Change of Management outside of SDR and S4A. Home Buyers in the matter of Jaypee Infratech Limited wherein However, all these non-statutory informal mechanisms have been the Hon’ble Supreme Court observed that there were several Home withdrawn by the Regulator and it has directed the lenders to have Buyers who had invested their hard-earned money into the real distinct policies approved by their respective Boards in respect estate projects; however, they were neither considered as a Financial of resolution of the stressed assets including the timelines for the Creditor nor as an Operational Creditor under the Code. resolution. Further, it has directed the lenders that as soon as there In order to tackle the issue of home buyers, the Insolvency and is a default by the borrower entity, necessary steps shall be initiated Bankruptcy Board of India in the month of August 2017 issued a to cure such default. The resolution plan may involve any actions/ circular by creating a new FORM-F for the home buyers so that their plans/reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale issues are also addressed. of the exposures to other entities/investors, change in ownership, or restructuring.

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and Bankruptcy Code, 2016 with regard to matters contained 3.2 What formal rescue procedures are available in under Section 14 of the IBC, 2016, i.e. there is a restraint on the your jurisdiction to restructure the liabilities of continuation of any coercive recovery proceedings including: suits; distressed companies? Are debt-for-equity swaps execution of any judgment, decree or order in any court of law, and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures tribunal or other authority; restriction or transfer, encumbrance, or threaten action (including enforcement of security) alienation or disposal of by the Corporate Debtor of any of its assets to seek an advantage? Do your procedures allow you or any legal right or beneficial interest therein; and a prohibition on to cram-down dissenting stakeholders? or any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property, including

The formal procedure for restructuring encompasses, within its any action under the SARFAESI Act. India ambit, schemes of reconstruction, takeovers, mergers, demergers, transfer of undertakings and restructuring of debts as provided in 3.3 What are the criteria for entry into each restructuring Section 230–240 of the Companies Act, 2013 by way of which the procedure? liabilities of the distressed companies can be restructured. Further, in the event of initiation of a Corporate Insolvency Resolution Process Under the provisions of the Insolvency and Bankruptcy Code, 2016, against the Corporate Debtor under IBC 2016, the Resolution any of the Financial/Operational Creditor or the Corporate Debtor Professional shall invite resolution plans from the prospective itself may initiate filing of an application before the Adjudicating Resolution Applicants, which plans may also be based on one or Authority for initiation of the Corporate Insolvency Resolution more mechanisms as discussed above and also in accordance with Process in the event of default by the Corporate Debtor in payment the various mechanisms laid under Regulation 37 of Insolvency to its Financial or Operational Creditors for a sum of Rs. 1.00 Lac or and Bankruptcy Board of India (Insolvency Resolution Process for more. Unlike the previous legislations, the filing of an application Corporate Persons), Regulations, 2016 subject to the compliance of in the event of default of Rs.1.00 Lac or more is not mandatory the conditions as laid down under Section 30(2) of the IBC, 2016. under the provisions of the IBC, 2016 but instead depends on the A company can choose a pre-packaged sale with the consent discretion of the Financial/Operational Creditor(s) whose debts of the majority of its secured creditors and the manner in which remain unpaid, or the Corporate Debtor. repayments are to be made to them and, accordingly, place a A scheme of compromise or arrangement can be filed under Section scheme of arrangement as provided under Sections 230–231 of the 230 of the 2013 Act by a company, its creditors or shareholders in Companies Act, 2013, for the approval of the court. the event of reorganisation of the company’s share capital by the Debt-for-equity swaps can be used as a tool for restructuring as duly consolidation of shares of different classes or by the division of recognised/provided for in restructurings undertaken under Sections shares into shares of different classes or both. 230–231 of the 2013 Act as well as the resolutions plans that In case of restructuring by opting for an informal mechanism, the may be submitted by the Resolution Applicants to the Resolution Regulator has directed the lenders to have policies approved by their Professional for onward consent of the Committee of Creditors respective Boards and to classify the stressed assets into Special and thereafter the approval of the Adjudicating Authority. The Mention Accounts (SMA). It has further given a window of 180 motive behind such an option is to bring the debt to a sustainable days from the date of default to come up with a resolution plan, level either by waiver of excess debt or conversion into equity, or a failing which the matter is to be referred to the Insolvency Court. combination of both. A. For accounts having an aggregate exposure of Rs. 2,000 Apart from the above, the Asset Reconstruction Companies set crores or more, following timelines have been set: up under the statutory provisions of the SARFAESI Act may ■ the Reference Date is March 1, 2018 or date of first also acquire the Non-Performing Assets (NPAs) of the Corporate default, whichever is earlier; Debtor(s) from the lending Banks/FIs and subsequently restructure ■ there needs to be an approved resolution plan within 180 the same in post discussions and arrangement with the debtor. The days from the date of default, or else the account needs to provisions of SARFAESI also empower the lenders/ARCs to effect be referred to the Insolvency Court; a change in management as a restructuring mechanism. ■ if the Resolution plan is accepted, there should not have In case of a scheme of arrangement as per the Companies Act 2013, been any default in such account during the specified the consent of three-quarters of the members and/or creditors (in period. Such specified period is up to the date by which value) of each class is necessary and the minority creditors who have at least 20% of the principal debt including the interest less than 25% exposure in the dues of the company can be crammed capitalised is paid; however, it cannot be a period less than down and directed to fall in line with the majority of creditors. a year from the date of making the first payment; and ■ any default in payment after the expiry of the specified In the case of a restructuring under the IBC, 2016, a resolution plan period shall be reckoned as a fresh default. can only be sanctioned by an Adjudicating Authority if such plan is consented by members of the Committee of Creditors (COC) with B. For accounts having an aggregate exposure below Rs. 75% or more of the voting share as deduced on the basis of the 2,000 crore and above Rs. 100 crore: admitted claims of the respective member of CoC., and it provides ■ The Regulator is yet to announce, over a two-year period, for payments to Operational Creditors of at least such amount which reference dates for implementing the Resolution Plan they shall receive in the event of a liquidation of the Corporate to ensure a calibrated, time-bound resolution of all such accounts in default. Debtor. As such, the majority of members of the Committee of Creditors are able to influence the restructuring under the IBC, 2016, thereby forcing the minority creditors to accept the settlement 3.4 Who manages each process? Is there any court terms as consented to by the majority creditors. involvement? However, under the provisions of the IBC, 2016, immediately upon admission of the application by the Adjudicating Authority, The Code provides for an Interim Resolution Professional/ a moratorium is declared under Section 13 of the Insolvency Resolution Professional (IRP/RP) who shall, immediately upon

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admission of the application by the Adjudicating Authority, take made by a person other than the Corporate Debtor, the cost of the charge of the management of affairs of the Corporate Debtor. public announcement shall be borne by the applicant, which may It is the IRP/RP who takes control and custody of the assets of the be reimbursed by the COC to the extent that it ratifies the same. Corporate Debtor during the continuation of the CIRP. The IRP/RP, Further, all insolvency resolution process costs, as defined under being an appointed officer of the court, on behalf of the creditors, Section 5(13) of the IBC 2016 read with Regulation 31 of the runs the complete process of the CIRP of a Corporate Debtor and in Insolvency and Bankruptcy Board of India (Insolvency Resolution case there is any discrepancy/difficulty being countered by him due Process for Corporate Persons) Regulations, 2016, which, inter alia, to any action/inaction of the Corporate Debtor or any Key personnel includes interim finance raised and the expenses incurred for raising of the Corporate Debtor, he may approach the Adjudicating such interim finance shall have the first priority in payments under a India Authority with an application seeking appropriate directions. resolution plan or from the sale proceeds of the liquidation of assets of the Corporate Debtor, in case of liquidation. Hence, there is not much intervention by the court and its role is only to expedite the entire process as the CIRP is based on a resolution plan duly approved by the COC with a super majority vote, i.e. by 4 Insolvency Procedures 75% or more of the voting rights.

4.1 What is/are the key insolvency procedure(s) available 3.5 What impact does each restructuring procedure have to wind up a company? on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? Under the provisions of the IBC, 2016, the period for the corporate insolvency resolution process has been fixed at 180 days from the insolvency commencement date (extendable by another 90 days The initiation of the restructuring process does not result in ipso upon an application being made at the behest of the COC). In case facto termination of all pending contracts, and the company is free to no resolution plan is received by the Adjudicating Authority within perform its obligations under the contract if the situation so permits. the maximum period permitted for completion of the CIRP or if the However, if the contractual terms amongst the parties provide for Adjudicating Authority rejects the resolution plan on grounds of its termination of the contract upon commencement of any of the stated non-compliance with the requisites of the Code, then it shall, inter procedures, then the contractual obligation may be terminated at the alia, pass an order for liquidation of the Corporate Debtor. discretion of the other party. Further, even before the expiry of the maximum period permitted As per the provisions of the Insolvency and Bankruptcy Code, for completion of the CIRP, if the Resolution Professional informs 2016, the Resolution Professional in the exercise of his powers with the Adjudicating Authority regarding the decision of the COC to regard to management of the operations of the Corporate Debtor as liquidate the Corporate Debtor, then the Adjudicating Authority a going concern, has the authority to amend or modify the contracts shall pass an order for liquidation of the Corporate Debtor. Further or transactions which were entered into before the commencement in terms of Section 59 of the IBC, 2016, a corporate person who of the Corporate Insolvency Resolution Process, if he deems it fit intends to liquate itself voluntarily may initiate voluntary liquidation in order to protect and preserve the value of the property of the proceedings under the Code, provided it has not committed any Corporate Debtor and maintain continuity of operations of the default and further subject to compliance with such condition and Corporate Debtor as a going concern. procedural requirements as may be specified by the Board. The set off provisions contained in terms of the contract if the same, There are provisions under the Companies Act, 2013 relating to in the opinion of the Resolution Professional, are not prejudicial to compulsory winding up by the courts upon the occurrence or non- the interest of the Corporate Debtor, shall be upheld. occurrence of events as prescribed under the Act. If the IRP/RP, upon examination, determines that there is a transfer of property or an interest thereof of the Corporate Debtor for the 4.2 On what grounds can a company be placed into each benefit of a creditor or a surety or a guarantor for or on account of winding up procedure? an antecedent financial debt or operational debt or other liabilities owed by the Corporate Debtor, and: the transfer has the effect of As discussed in question 4.1 above, in case no resolution plan is putting such creditor or a surety or a guarantor in a more beneficial received by the Adjudicating Authority within the maximum period position than it would have been in the event of a distribution of permitted for completion of the CIRP or if the Adjudicating Authority assets; certain transactions were made during the relevant period rejects the resolution plan on grounds of its non-compliance with the which were undervalued; and the Corporate Debtor is a party to requisites of the Code, then it shall, inter alia, pass an order for the an extortionate credit transaction involving the receipt of financial liquidation of the Corporate Debtor. or operational debt during the period of two years preceding the insolvency commencement date, then upon an application by the Further, even before expiry of the maximum period permitted for IRP/RP to that effect, the Adjudicating Authority may pass orders completion of the CIRP, if the Resolution Professional prompts for reversal of such transactions entered into by the Corporate the Adjudicating Authority regarding the decision of the COC to Debtor. liquidate the Corporate Debtor, then the Adjudicating Authority shall pass an order for liquidation of the Corporate Debtor. Voluntary liquation can be initiated only by a solvent corporate 3.6 How is each restructuring process funded? Is any debtor who has not committed any default and subject to making protection given to rescue financing? a declaration under an affidavit from a majority of the directors stating that either the company has no debt or it will be able to In case an application for the initiation of the corporate insolvency pay its debt in full from the proceeds of the assets to be sold and resolution process is made by the Corporate Debtor, the cost of that the liquidation process is not being initiated with the intent to the restructuring process is to be funded by the Corporate Debtor defraud any person. Further, within four weeks of the declaration, itself either through loans, internal accruals or infusion of funds by a special resolution of the members of the company shall be passed, promoter/management/strategic investors. In case an application is

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requiring the company to be liquidated voluntarily and appointing proceeds from the sale of assets by the liquidator or to stay outside an insolvency professional to act as a liquidator. the liquidation process and recover their dues by enforcement of The circumstances under which a company can be wound up by their security interest. tribunal, on grounds other than an inability to pay debts, have been clearly stated under Section 271 of Companies Act, 2013, being: 4.5 What impact does each winding up procedure have on (i) passing of a special resolution to that effect; existing contracts? Are the parties obliged to perform (ii) acting against the sovereignty and integrity of India, security outstanding obligations? Will termination and set-off of state, public relations with a foreign state, public order, provisions be upheld? decency or morality; (iii) conducting its affairs in a fraudulent manner; Subject to the directions of the Adjudicating Authority, the India liquidator shall, inter alia, have the power to carry on the business (iv) default in filing the financial annual returns with the Registrar of the Corporate Debtor for its beneficial liquidation as he considers of Companies for the immediately preceding five financial years; and necessary. The liquidation process does not result in ipso facto termination of all pending contracts. However, if the contractual (v) if the tribunal is of the opinion that it is just and equitable that the company should be wound up. terms amongst the parties provide for termination of the contract upon commencement of any of the stated procedures, then the contractual obligation may be terminated at the discretion of the 4.3 Who manages each winding up process? Is there any other party. court involvement? If the liquidator upon examination, determines that there is a transfer of property or an interest thereof of the Corporate Debtor for the In the event of an order for liquidation in respect of a Corporate benefit of a creditor or a surety or a guarantor for or on account of Debtor, the Adjudicating Authority appoints the RP as the liquidator an antecedent financial debt or operational debt or other liabilities for the purposes of liquidation unless he is replaced by another owed by the Corporate Debtor, and: the transfer has the effect of liquidator appointed by the Adjudicating Authority. putting such creditor or a surety or a guarantor in a more beneficial Upon his appointment, all the powers of the Board of Directors, Key position than it would have been in the event of a distribution of Managerial Personnel or the Partners of the Corporate Debtor cease assets; certain transactions were made during the relevant period to have effect and vest with the liquidator. which were undervalued; and the Corporate Debtor is a party to Throughout the liquidation process until such time as the assets an extortionate credit transaction involving the receipt of financial are realised and the sale proceeds are distributed, in the manner as or operational debt during the period of two years preceding the envisaged in the Code, the liquidator may approach the Adjudicating insolvency commencement date, then upon an application by the Authority for such orders or directions as may be necessary for the liquidator to that effect, the Adjudicating Authority may pass orders liquidation of the Corporate Debtor. for reversal of the transactions entered into by the Corporate Debtor. In addition to the above, the liquidator is obligated to furnish a progress report periodically to the Adjudicating Authority in the 4.6 What is the ranking of claims in each procedure, manner as prescribed under the provisions of the IBC, 2016, read including the costs of the procedure? with the relevant regulations. Upon a liquidation order being made in respect of a Corporate Debtor, the proceeds from the sale of the assets comprised in the 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any liquidation estate of the Corporate Debtor shall be distributed in the restrictions on the action that they can take (including following order of priority: the enforcement of security)? ■ the insolvency resolution process costs and the liquidation costs paid in full; Under the provisions of the IBC 2016, there is no term such as ■ equal ranking between workmen’s dues for a period of 24 “winding up”, instead it talks about “liquidation”. All the provisions months preceding the liquidation commencement date and contained in the erstwhile laws with respect to initiation of the debts owed to a secured creditor in the event such secured liquidation proceedings against the Corporate Debtor by its creditors creditor has relinquished security; on account of its inability to pay its debts or its shareholders in case ■ wages and any unpaid dues owed to employees other than of a voluntary winding up are now being dealt with in accordance workmen for a period of 12 months preceding the liquidation with the relevant provisions of IBC, 2016. The manner in which the commencement date; creditors may initiate CIRP or the Corporate Debtor may initiate a ■ financial debts owed to unsecured creditors; voluntary liquidation has already been dealt with in questions 4.1 ■ equal ranking between any amount due to the Central and 4.2 above. Government and the State Government in respect of whole or A compulsory winding up by the court shall only be in the any part of the period of two years preceding the liquidation commencement date and debts owed to a secured creditor for circumstances mentioned under Section 271(a) to (e) of the any amount unpaid following the enforcement of security Companies Act, 2013. Upon initiation of the liquidation process, interest; no suit or other legal proceeding may be instituted by or against ■ any remaining debts and dues; the Corporate Debtor; however, the liquidator may initiate a suit or other legal proceedings on behalf of the Corporate Debtor subject to ■ preference shareholders, if any; and prior approval of the Adjudicating Authority, but there shall be no ■ equity shareholders or partners, as the case may be. restriction on any legal proceeding in relation to such transactions as may be notified by the Central Government in consultation with 4.7 Is it possible for the company to be revived in the any financial sector regulator. future? Upon commencement of the liquidation process, the secured creditors have two options for the recovery of their dues, i.e. either to Once a liquidation order is passed by the Adjudicating Authority relinquish their security interest to the liquidation estate and receive

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and a liquidator is appointed, there is no provision under the IBC, 2016 for submission of any resolution plan before the Adjudicating 7 Cross-Border Issues Authority for the revival of the Corporate Debtor. The liquidator is obligated to take control and custody over the assets (liquidation 7.1 Can companies incorporated elsewhere use estate) of the Corporate Debtor, and liquidate the same for the restructuring procedures or enter into insolvency benefit of all the creditors. The liquidator is obligated to follow proceedings in your jurisdiction? the procedure of law and realise the liquidation estate and utilise the proceeds from the sale of the liquidation estate of the Corporate The provisions of the IBC, 2016 do not have any extraterritorial Debtor for distribution in the order of priority as prescribed under jurisdiction and as such they are not applicable for companies

India Section 53 of the Code. incorporated outside India. However, a company incorporated in a foreign country may be 5 Tax wound up as an unregistered company as per the provisions of Sections 375–376 of the 2013 Act, if it has its office and assets in India, and the pendency of a foreign liquidation does not affect the 5.1 What are the tax risks which might apply to a jurisdiction to make winding up orders. restructuring or insolvency procedure?

7.2 Is there scope for a restructuring or insolvency There is no exemption from applicability of any tax liabilities either process commenced elsewhere to be recognised in directly or indirectly during any of the procedures. However, upon your jurisdiction? the consent of the respective tax authority, relief may be granted by the Adjudicating Authority from the applicability of tax on As per the provisions of Section 234 of the IBC, 2016, the Central waivers of principal/interest, etc., and if the restructuring envisages Government may enter into an agreement with the government any merger/de-merger as a revival mechanism, the tax implications of any country outside India for enforcing the provisions of this thereof shall be in accordance with the applicable tax laws in force Code. Further, the Code also provides that the Central Government at the material time when the resolution plan is approved by the may by notification in the official gazette direct the application of Adjudicating Authority. provisions of the IBC, 2016 in relation to assets or property of the The company is legally duty bound to pay all applicable statutory Corporate Debtor, including the personal guarantor of a Corporate dues viz. Excise Duty, Customs Duty, GST, Income Tax, Capital Debtor, situated at any place in a country outside India with which Gain Tax, other duties and levies, etc., arising even during the reciprocal arrangements have been made, subject to such conditions pendency of any of the procedures. The entire restructuring as may be specified. Accordingly, the Adjudicating Authority may procedure and the resolution plan must be in compliance with all issue a letter of request to a court or an authority of such country applicable laws in force at the time of sanction of the plan. competent to deal with such request.

6 Employees 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 6.1 What is the effect of each restructuring or insolvency procedure on employees? Indian companies may enter into restructuring of their foreign debts with foreign lenders on a bilateral basis, subject to compliance In accordance with the provisions of Section 33(7) of the IBC, 2016, with the provisions of Foreign Exchange Management Act, 1999 a liquidation order passed under the Code shall be considered to be and the regulations made there under and RBI procedures. Further, a notice of discharge to the officers, employees and workers of the the proceedings from sale of assets of Indian companies in other Corporate Debtor except when the liquidator continues to carry on jurisdictions will be subject to the law of the respective land. the business of the Corporate Debtor during the liquidation process. In such circumstances, the workmen shall file their claims with the liquidator and in accordance with the provisions of the Code, the 8 Groups workmen’s dues for a period of 24 months preceding the liquidation commencement date shall be paid on a pari passu basis along with 8.1 How are groups of companies treated on the the dues of the secured creditors. Similarly, employees may also insolvency of one or more members? Is there scope file their claims with the liquidator and their dues for a period of 12 for co-operation between officeholders? months preceding the liquidation commencement date shall be paid in priority over any payments to be made to unsecured creditors in Each entity in the group company is a separate legal entity and accordance with the waterfall mechanism as prescribed under the initiation of the insolvency proceedings in one of the group of Code. companies does not adversely impact the operations in the other However, in case of a Corporate Debtor undergoing CIRP where group entities and there is no pooling of assets of the subsidiaries or a resolution plan is prepared and approved, the workmen and the parent company. However, if there is an established liability of a employees may be retained, rationalised or they may opt for an group company to the entity undergoing the insolvency proceedings, amicable settlement or voluntary retirement, etc. the same shall have to be discharged and if there is an amount recoverable from the entity undergoing the insolvency proceedings

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then the necessary claim for the same shall be required to be filed the difficulties being faced during the CIRP of a Corporate Debtor. before the RP/liquidator, as the case may be, and the amount shall The said amendments/developments, inter alia, being: be distributed as per the waterfall mechanism as prescribed under (a) With an intent to prevent unscrupulous, undesirable persons the Code. from misusing or vitiating the provisions of the Code and further to keep out such persons who have wilfully defaulted, are associated with non-performing assets, or are habitually 9 Reform non-compliant and, therefore, are likely to be a risk to the successful resolution of insolvency of a Corporate Debtor, section 29A has been inserted to the Code. The provisions of 9.1 Have there been any proposals or developments in the section lay certain criteria, rendering a person ineligible your jurisdiction regarding the use of technology or to be a Resolution Applicant, viz. Un-discharged insolvent, India reducing the involvement of the courts in the laws wilful defaulter, having an account being NPA for more than of your jurisdiction, which are intended to make a year, conviction of any offence with imprisonment for more insolvency processes more streamlined and efficient? than two years, disqualification to act as a director under the Companies Act, 2013, connected persons, etc. are some of In order to make the insolvency process more streamlined and the parameters. Any person falling under any of the criteria efficient, the Government has been taking proactive steps, one of laid under section 29A of IBC, shall not be considered as an them being establishment of Information Utility (IU), an entity eligible Resolution Applicant. which shall help the Insolvency Court in taking quick decisions. (b) Which Determination of the fair value of a Corporate Debtor The IU’s shall have all the authenticated and verified financial and Non-Disclosure of the liquidation value in the Information Memorandum so as to get a higher value for resolution of the information to be provided by the financial creditors, operational debts of the Corporate Debtor by the prospective Resolution creditors and/or Corporate Debtor so that: Applicant(s). (a) lenders can make informed decisions about the credit (c) In order to ensure more transparency the regulations transactions; have been amended to, inter alia, include creation of an (b) debtors will be more cautious since the credit information ‘Evaluation Matrix’ specifying the relevant parameters and will be available with the IU; and the respective weights to each parameter,on the basis of which (c) information available with the IU can be used each Resolution Plan shall be evaluated by the Committee of as evidence in the cases undergoing insolvency. Creditors for its approval. Presently, only one IU has been set-up, however, with the (d) Easing of the norms by the Income Tax Department in respect passage of time, more IU’s will be established thereby using of levy of Minimum Alternate Tax (MAT) on companies the technology to ease and speed up the insolvency process. undergoing insolvency. In terms of sub-rule 4 of Rule 10 of the Insolvency & Bankruptcy (e) Exemption granted by the Ministry of Corporate Affairs, (Application to Adjudicating Authority) Rules, 2016, even the rules Government of India waiving the requirement for obtaining prescribe filing of the applications in an electronic form. Hence, specific approval of the shareholders/members under the in times to come, a larger focus will be on digitised media which Companies Act, 2013 in case of approval of a resolution plan would reduce the paperwork and also expedite the process. by the Adjudicating Authority. Further, as stated in question 1.2 above, RBI, in line with the preamble as set out in the Code, has withdrawn all the non-statutory 9.2 Are there any other governmental proposals for informal mechanisms and has simplified the mode of resolving the reform of the corporate rescue and insolvency regime in your jurisdiction? distressed situation in the banking system. It is well demonstrated that the Government and RBI are pushing The recent developments, amendments and measures initiated by the lenders to be more proactive towards the restructuring of stressed Central Government and the Reserve Bank of India are undertaken assets, wherever possible, and have been making amendments from in order to address the mammoth growth of stressed assets in the time to time to cope-up with the situations. banking system. After having seen the Code for more than a year Although the Code is itself in its initial phase of development, and with the aim to improve and remove the gaps in the Code, however, it lays down a robust framework and time-bound road the Central Government has come up with certain amendments. map to deal with the distressed entities, a welcome contrast from the These amendments have been incorporated in the Code and the earlier seemingly never-ending process. Regulations made therein from time to time in order to overcome

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Alok Dhir Dhir & Dhir Associates D-55, Defence Colony New Delhi-110024 India

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Alok Dhir is the Founder and Managing Partner of Dhir & Dhir Associates, a leading full-service law firm in India established in 1993. He is a Chartered Accountant, Lawyer and Insolvency Professional. He has extensive experience of over 35 years in corporate commercial and civil law with expertise on Corporate and Financial Restructuring, Insolvency Laws, Takeovers, M&A, Banking Law, Real Estate, PE transactions, turning around of financially stressed entities and issues related to Asset Reconstruction & Securitisation. He has also founded IRR Insolvency Professionals Private Limited, India’s first Insolvency Professional Entity and Alchemist Asset Reconstruction Company Ltd, one of the first private sector ARCs licensed by the Reserve Bank of India. He has been consistently recognised as the leading lawyer for ‘Restructuring & Insolvency’ in the country by global legal rankings including The Legal 500, Chambers & Partners, Asia Law Profiles, IFLR1000 and India Business Law Journal.

Established in 1993, Dhir & Dhir Associates is a leading full-service law firm in India. The firm has a pan-India presence with offices in the prime cities of New Delhi, Mumbai, Hyderabad and Bengaluru with an international presence in Japan. With over 100 engaging experienced professionals, which include Lawyers, CAs, CS, IP, MBAs and Engineers, the firm is adept in delivering seamless solutions to intricate legal, financial and commercial concerns with cross-border and industry focused support that clients seek to ensure success in the existing competitive scenario. The team helps maximise recovery, protect business or investment, preserve critical relationships and minimise write offs and if a distressed situation is not resolved through a recovery platform, then it further works to formulate strategies, which can guide the clients through the process of insolvency. Over the years, the firm has evolved as pioneers in offering diversified legal solutions to multiple sectors and verticals under Corporate & Commercial laws, Dispute Resolution, Banking & Finance, Capital Markets, Projects Finance, Intellectual Property Rights, Labour & Employment, Telecom, Media, Entertainment, Transportation, Manufacturing, Energy and Real Estate. The firm excels in the realm of Restructuring & Insolvency, Financial Management, Interim Management, Turnaround Management, Recovery matters, Liquidation, Fund Syndication, Mergers, Takeovers and Amalgamation and General Corporate Advisory.

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Indonesia Theodoor Bakker

Ali Budiardjo, Nugroho, Reksodiputro Herry Kurniawan

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties

1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly 2.1 What duties and potential liabilities should the jurisdictions? directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring Restructuring and insolvency proceedings in Indonesia are regulated or insolvency process? under Law No. 37 of 2004 concerning Bankruptcy and Suspension of Payments (“Bankruptcy Law”); the term used is bankruptcy and In bankruptcy procedures, upon the declaration of the company’s suspension of payments. bankruptcy, the directors lose the power to manage the company. We would consider the Bankruptcy Law to be creditor-friendly, The power is transferred to the court-appointed receiver, who then subject to proper implementation of the law; in both bankruptcy and manages the bankruptcy estate and the settlement of the company’s suspension of payments proceedings, the creditors play key roles to debts. determine/decide on key issues, which substantially affect the result of such proceedings. Whether or not bankruptcy or suspension In suspension of payments procedures, the company is still entitled of payments proceedings could be successfully concluded will be to carry on its business activities. The directors of the company, subject to the agreement and participation of the creditors, including jointly with the court-appointed administrator and supervised by the but not limited to the following: supervisory judge, run the management of the company. 1. the creditors have the right to file a petition for bankruptcy or Directors are personally liable for the losses suffered by the a petition for suspension of payments against the debtor; company if both: 2. if the company proposes a composition plan, the creditors a) the company is declared bankrupt and the bankruptcy is the have voting rights to approve or reject the composition result of the directors’ fault or negligence; and plan. In the event of rejection, the company will be declared b) the company’s assets are not sufficient to cover the company’s bankrupt (in suspension of payment procedures) and declared obligations. insolvent (in bankruptcy procedures); and There is no specific point at which a company must enter a 3. if deemed necessary, the creditors may request the supervisory restructuring or insolvency procedure. judge to establish a creditors’ committee to work with the administrator or the receiver. 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For 1.2 Does the legislative framework in your jurisdiction example, are there any special rules or regimes which allow for informal work-outs, as well as formal apply to particular types of unsecured creditor (such restructuring and insolvency proceedings, and to what extent are each of these used in practice? as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Indonesian law allows for informal work-outs to restructure a company’s debt through mutual agreement between the company There is no other stakeholder who may influence the company and the creditor(s). situation during the suspension of payments or bankruptcy As for formal restructuring and insolvency proceedings, the procedures. During the bankruptcy and suspension of payments Bankruptcy Law provides two procedures for companies having procedures, there should be no action that the creditors take against financial difficulties, namely: the company. a. bankruptcy procedures; and There are no special rules or regimes applicable to particular types b. suspension of payments procedures. of an unsecured creditor. The Bankruptcy Law does not differentiate Formal restructuring and insolvency proceedings are particularly specific unsecured creditors. used when the company and the creditor(s) could not mutually agree on the informal work-outs.

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2.3 In what circumstances are transactions entered 3.2 What formal rescue procedures are available in into by a company in financial difficulties at risk of your jurisdiction to restructure the liabilities of challenge? What remedies are available? distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can Certain transactions favouring one creditor over other creditors, creditors and/or shareholders block such procedures or threaten action (including enforcement of security) entered into before the bankruptcy declaration, can be set aside to seek an advantage? Do your procedures allow you under the fraudulent conveyance (actio pauliana) principles set out to cram-down dissenting stakeholders? in the Bankruptcy Law. For a pre-bankruptcy transaction to be set aside, all of the following requirements must be met: The suspension of payments procedure is the formal procedure ■ The transaction was voluntary. This means that the Indonesia to achieve a restructuring of debts. The suspension of payments transaction did not arise from a contractual obligation. procedure is provided for a company that faces temporary liquidity Examples of voluntary transactions include: problems and is unable to pay its debts but may be able to pay them ■ the granting of security to one particular creditor; some time in the future. It gives the company temporary relief in ■ the payment of a debt that is not yet due and payable; and order for it to reorganise and continue its business, and ultimately to ■ the sale of an asset against non-cash payment or with set- satisfy the creditors’ claims. off of the purchase price against a debt. A debt-for-equity swap is possible to be offered by the company in a ■ The transaction harmed creditors’ interests. This includes composition plan to be agreed by the creditors in the suspension of most situations where the condition of the bankrupt estate payment procedure. The debt-for-equity swap requires the approval would have been better if the transaction had not been entered of the existing shareholders, and thus the approval is required to be into, for example: obtained before the debt-for-equity swap proposal is offered to the ■ a sale of goods below their fair market value; or creditors. The proposal itself must be approved by the creditors in ■ transactions resulting in the increase of the company’s the creditors meeting. liabilities (for example, the granting of a guarantee or Pre-packaged sale is also a possible scheme. An approval from other form of security by a subsidiary for the debt of its the supervisory judge (who supervises the suspension of payments parent company). procedure) is required for the sale of the company’s assets. ■ The company and the contracting party had knowledge Creditors’ Influence of the harm caused to other creditors. Knowledge of harm The creditors play substantial roles in a suspension of payment to other creditors is presumed in a number of circumstances. procedure, as follows: Generally, there is a rebuttable presumption of knowledge where the following categories of transaction are performed a. the creditors can file a suspension of payments petition less than one year before the bankruptcy: against the company with the Commercial Court; and ■ transaction for which the value received by the company b. the creditors have voting rights to agree or not with the is substantially less than the value of the asset sold; proposal/composition plan offered by the company; the rejection of the composition plan by the creditors will result ■ payment of a debt that is not yet due and payable, or in a bankruptcy declaration by the company. granting security for such debt; The secured creditors could not enforce its security right during the ■ transaction between the company and related parties (that stay period in bankruptcy procedure. is, relatives or companies controlled by relatives, insiders and legal entities belonging to the same group); and Unsecured creditors who vote against the composition plan are ■ donations. crammed down if the composition plan is approved by the secured and unsecured creditors and ratified by the Commercial Court. The payment of a debt that was due and payable can also be set aside if it is shown that either: Shareholders’ Influence ■ the recipient of the payment knew that, at the time of The Bankruptcy Law does not specifically discuss the powers of the receipt, a bankruptcy petition had been submitted; or shareholders during the suspension of payment procedure, but it is ■ payment was the result of a consultation between the understood that the shareholders are still entitled to pass resolutions company and the creditor with the intention of preferring with respect to the company’s matters except for those which pertain that creditor over other creditors. It is generally believed to assets and management. Moreover, shareholders’ approval that this requirement is only fulfilled if some measure of is required for voluntary filing on the petition for suspension of collusion between the parties is established. payment and for the debt-for-equity swap.

3 Restructuring Options 3.3 What are the criteria for entry into each restructuring procedure?

3.1 Is it possible to implement an informal work-out in The company or the creditors can apply for a suspension of payments your jurisdiction? if the debtor either cannot pay its debts or foresees that it will not be able to pay its debts. Yes. It is possible to implement an informal work-out in Indonesia.

3.4 Who manages each process? Is there any court involvement?

Yes, there is court involvement in suspension of payments procedure. The directors of the company, jointly with the court- appointed administrator and supervised by the supervisory judge, will manage the process and run the management of the company.

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company shall be declared insolvent. Where the company becomes 3.5 What impact does each restructuring procedure have insolvent, the bankruptcy procedure shall be concluded with the on existing contracts? Are the parties obliged to liquidation and dissolution of the company. perform outstanding obligations? Will termination and set-off provisions be upheld? 4.2 On what grounds can a company be placed into each The granting of a suspension of payment does not change the validity winding up procedure? of a contract which has been validly entered into by the company; it only stays the obligations of both parties for a maximum period A company can be placed in bankruptcy or suspension of payments of 270 days. Therefore, except during the stay period, the company if it passes all tests or conditions as described in question 4.1 above. is still obligated to continue performing its obligations under the Indonesia contract. 4.3 Who manages each winding up process? Is there any Notwithstanding the foregoing, if the contract expressly stipulates court involvement? that the contract will be expired or terminated in the event of company is granted suspension of payments, then such provision The receiver manages the bankruptcy process after declaration of will prevail. bankruptcy by the Commercial Court. The administrator, together In a suspension of payments procedure, the creditors can set off with the directors of the company, manages the suspension of sums owed by them to the company against amounts owed by payments process after the granting of suspension of payments by the company to them. However, the said set-off right can only be the Commercial Court. exercised if: (i) the claim and the debt already existed prior to the suspension of payments proceedings; or (ii) the claim and the debt 4.4 How are the creditors and/or shareholders able to exist as a result of transactions/actions carried out by the company influence each winding up process? Are there any before the suspension of payments proceedings. restrictions on the action that they can take (including A person who has taken over the debt or receivables from a third the enforcement of security)? party prior to the pronouncement of suspension of payment cannot exercise a set-off if: (i) the taking over of the debt and receivables Creditors’ Influence was not based on good faith; and/or (ii) the taking over of the debt In a bankruptcy procedure, the creditors are entitled to submit a or receivables was done after the initiation of the suspension of petition for bankruptcy against the company with the Commercial payment process. Court. If, after the declaration of bankruptcy, the company proposes a 3.6 How is each restructuring process funded? Is any composition plan, then the unsecured creditors are entitled to protection given to rescue financing? approve or reject the composition plan. Secured creditors are not entitled to take the vote regarding the composition plan and are not The costs incurred in a suspension of payments procedure, including affected by the result of the vote. If the majority of the unsecured but not limited to the administrator’s fees, must be paid by the creditors reject the composition plan, then the company becomes company. With prior approval from the administrator, the company insolvent and the bankruptcy procedure shall be concluded with the in suspension of a payments process may obtain loan or credit from liquidation and dissolution of the company. any third party for the sole purpose of increasing the value of the Shareholders’ Influence company’s estate. However, if the company intends to obtain a The Bankruptcy Law does not specifically discuss the powers of the secured loan, it should be previously approved by the supervisory shareholders during the bankruptcy procedure, but the shareholders judge. Also, security rights can only be encumbered over the are still entitled to pass resolutions with respect to the company’s company’s asset which has not been encumbered with any security matters, except for those which pertain to assets and management. The rights. The creditor providing the above-described loan shall be shareholders’ approval is required for the voluntary filing of a petition treated the same as the other creditors involved in the suspension of for bankruptcy by the company and for a debt-for-equity swap. payment process.

4.5 What impact does each winding up procedure have on 4 Insolvency Procedures existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 4.1 What is/are the key insolvency procedure(s) available to wind up a company? The bankruptcy of a company, in principle, does not change the validity or the terms of a contract which has been validly entered The insolvency procedure available to wind up a company facing into by the company. The rights and obligations of the parties to financial difficulties is the bankruptcy procedure. such contracts remain unchanged. However, the receiver does not The bankruptcy shall be pronounced by the Commercial Court if it have the obligation to perform the contract. If the receiver confirms fulfils the following requirements: (i) the company has at least two performance, he must guarantee performance; if he confirms creditors (plurality of creditors); and (ii) at least one of the two debts cancellation, the other party will have to submit a damages claim as could not be paid by the company when it becomes due and payable. an unsecured creditor. If, following its bankruptcy declaration, (i) no composition plan is The Bankruptcy Law stipulates that in a bankruptcy procedure, the submitted by the company to the creditors, (ii) a composition plan creditors can set off sums owed by them to the company against is submitted but subsequently rejected by the creditors, or (iii) a amounts owed by the company to them. However, the said set-off composition plan is submitted and subsequently approved by the right can only be exercised if: (i) the claim and the debt already creditors but is not ratified by the Commercial Court, then the existed prior to the declaration of bankruptcy; or (ii) the claim

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and the debt exist as a result of transactions carried out before the declaration of bankruptcy. 6 Employees These rules make a creditor’s set-off right in an event of bankruptcy more favourable than its set-off right outside of a bankruptcy 6.1 What is the effect of each restructuring or insolvency procedure, since there is no requirement for the debts to be currently procedure on employees? due and payable. However, there is uncertainty as to whether the receiver must approve an intended set-off. Claims of employees fall into the classification of estate creditors, and as such they are entitled to payments in full of their claim on the basis of the employment contract. 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? If the employer is declared bankrupt, termination of employment Indonesia may be conducted by the employer, which triggers payment of the In bankruptcy and suspension of payment procedures, the ranking of severance package for the employees. creditors’ claims is as follows: ■ Preferred creditors (kreditur preferen). Preferred creditors 7 Cross-Border Issues are entitled to receive payment in full from the bankruptcy estate. Preferred claims are tax claims and post-bankruptcy/ suspension of payments claims, such as: 7.1 Can companies incorporated elsewhere use ■ fees of the receiver/administrator; restructuring procedures or enter into insolvency ■ fees of experts appointed by the supervisory judge; proceedings in your jurisdiction? ■ costs of liquidation of the bankruptcy estate or costs incurred during the suspension of payments process; Yes, companies which conducts his profession or business in the territory of the Republic of Indonesia, even if incorporated elsewhere ■ post-bankruptcy/suspension of payments financing; can use the bankruptcy/suspension of payments procedure in ■ lease of the bankrupt’s house or offices; and Indonesia. ■ employees’ wages. ■ Secured creditors (kreditur separatis). These are the 7.2 Is there scope for a restructuring or insolvency creditors holding security rights over some or all of the assets process commenced elsewhere to be recognised in of the company. your jurisdiction? ■ Unsecured creditors (kreditur konkuren). Unsecured creditors rank as follows: No, the Bankruptcy Law adopts the principle of territoriality ■ specific statutorily preferred creditors whose preference and does not recognise cross-border bankruptcy or suspension relates only to specific assets; of payment cases. Moreover, foreign court judgments cannot be ■ general statutory priority creditors; and enforced in Indonesia. Therefore, any court judgments, orders, or ■ non-preferred unsecured creditors. reliefs made during foreign bankruptcy or suspension of payment ■ Shareholders. Generally, the shareholders of the company proceedings cannot be enforced in Indonesia and shall not affect the rank behind all other creditors in the distribution of the proceeds status of assets situated in Indonesia. of the bankruptcy estate. Any distribution they receive is proportional to the shares that they hold in the company, if there are remaining assets after distribution to other creditors. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 4.7 Is it possible for the company to be revived in the future? No, the Commercial Court does not recognise bankruptcy/ insolvency and suspension of payments/rescue procedures in other Yes, it is possible. The bankrupt company can be revived if the jurisdictions; insolvency proceedings outside Indonesia cannot composition plan proposed by the company is agreed by the affect the status of assets located in Indonesia. creditors and ratified by the Commercial Court, or if the claims of the creditors have been fully satisfied by the bankruptcy estate. 8 Groups 5 Tax 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope 5.1 What are the tax risks which might apply to a for co-operation between officeholders? restructuring or insolvency procedure? The Bankruptcy Law does not recognise the bankruptcy or Tax risks will depend on the approach and actions taken during the suspension of payment proceedings of a corporate group. Petition procedure. Tax liabilities are ordinarily incurred during each of the for bankruptcy or suspension of payment may only be submitted procedures if the business is continued during each procedure. The against an individual or legal person, and the bankruptcy of a written-off amounts in haircuts and debt write-offs are subject to company does not affect the status of other companies within the income tax on the part of the company. group. There is no scope for co-operation between officeholders.

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9 Reform 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws There are currently no governmental proposals for the reform of the of your jurisdiction, which are intended to make corporate rescue and insolvency regime in Indonesia. insolvency processes more streamlined and efficient?

Acknowledgment There are currently no proposals or developments for the use of technology or reducing the involvement of the courts in the laws The authors would like to thank their colleague, Ridzky Firmansyah Indonesia of Indonesia. Amin, for his invaluable assistance in the preparation and finalisation of this chapter.

Theodoor Bakker Herry N. Kurniawan Ali Budiardjo, Nugroho, Reksodiputro Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga, 24th Floor Graha CIMB Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Jakarta 12190 Indonesia Indonesia

Tel: +62 21 250 5125 Tel: +62 21 250 5125 Email: [email protected] Email: [email protected] URL: www.abnrlaw.com URL: www.abnrlaw.com

Mr. Theodoor Bakker graduated from Leiden University in the Mr. Herry N. Kurniawan joined ABNR as an associate in 1999 and Netherlands, is admitted to the Amsterdam Bar and is a registered became a partner on 1 January 2012. His specified areas of Foreign Lawyer under the Indonesian Advocates Law. He has practice are mergers and acquisitions, foreign investment, project worked in Southeast Asia since 1984, over time building up extensive and corporate finance, restructuring and bankruptcy, in which fields experience in: direct foreign investment; project finance work, he has both intensive and extensive regulatory knowledge. He was including private power and petrochemical projects; aircraft finance; involved in the project for the monitoring of the implementation of the infrastructure development; and general manufacturing investment. Indonesian Bankruptcy Law in 1999, which gave him further in-depth During the Asian financial crisis, he was involved in many aspects of regulatory knowledge in bankruptcy and suspension of payments restructuring and insolvency, and has advised on foreign law issues of matters. He co-writes various articles and publications on bankruptcy, bankruptcy reform in Indonesia. His practice now also encompasses mergers and acquisitions, and speaks in seminars and workshops on capital market transactions, structured finance, and mergers and bankruptcy and suspension of payments, as well as on investment, acquisitions. He has published various articles on insolvency and and mergers and acquisitions. He has also acted as counsel in cross-border investment issues and teaches at the Faculty of Law of numerous bankruptcy/suspension of payments and commercial University of Indonesia and at the Ministry of Law and Human Rights. litigation/arbitration.

Ali Budiardjo, Nugroho, Reksodiputro, usually abbreviated to ABNR, was established in Jakarta in 1967 as a partnership of legal consultants in Indonesian business law. The firm is one of Indonesia’s largest independent full-service law firms. The commitment we make to clients is to provide broad-based, personalised service from top-quality teams of lawyers with international experience that includes groundbreaking deals and projects. ABNR’s reputation has been recognised around the world by independent industry surveys and law firm guides. ABNR was selected, based on its high level of integrity and professionalism, to be the sole Indonesian member of the world’s largest law firm association Lex Mundi and of the prestigious Pacific Rim Advisory Council (PRAC).

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Ireland Tony O’Grady

Matheson Karen Reynolds

or its secured creditors may resort to appointing a receiver to the 1 Overview secured assets.

1.1 Where would you place your jurisdiction on the 2 Key Issues to Consider When the spectrum of debtor to creditor-friendly jurisdictions? Company is in Financial Difficulties Irish corporate law and, in particular, restructuring and insolvency law, is both creditor-friendly and flexible, featuring processes that 2.1 What duties and potential liabilities should the facilitate rescue and restructuring of corporate groups with complex directors/managers have regard to when managing a structures. The corporate recovery and insolvency framework in company in financial difficulties? Is there a specific Ireland balances the need for creditors to have effective enforcement point at which a company must enter a restructuring or insolvency process? rights, and certainty regarding enforcement process and procedure, with the requirement for the rights of debtors to be adequately protected. The Irish Legal Framework provides a broad range There is no obligation under Irish law on a company or its of remedies for creditors, and, in particular, the rights of secured directors to take any steps to wind up the company or to put it into when a company is insolvent. Directors of an creditors are protected. Irish courts will generally observe statutory insolvent company (or a company which is likely to imminently and/or contractual rights to ensure that debtors are adequately become insolvent) do, however, have a duty to act in the interests of protected when their loans have been acquired by third parties. the creditors of the company. It therefore follows that as soon as a director is aware or apprehends that there is no reasonable prospect 1.2 Does the legislative framework in your jurisdiction of avoiding insolvent liquidation, he/she, with the other directors, allow for informal work-outs, as well as formal must take action and would be well advised to seek professional restructuring and insolvency proceedings, and to advice. Directors must exercise caution not to incur further credit what extent are each of these used in practice? or increase borrowings at a time where there is a risk of the company not being able to repay such debts. The legal framework in Ireland contains a broad range of procedures Whilst the fact of insolvency and/or trading a company whilst it is which are available to insolvent companies. In the event that insolvent, solely of themselves, do not give rise to criminal or civil a company which is in financial distress is unable to reach a liability for directors, very serious consequences may follow for the consensual arrangement with its creditors, there are a number of directors if an examiner or liquidator is appointed to an insolvent statutory insolvency processes available. The main corporate company. restructuring and insolvency procedures available in Ireland are An element of an examiner’s or liquidator’s investigation into an receivership, liquidation, and examinership. In addition, under the insolvent company will include (but will not be limited to) a review Companies Act 2014, Ireland offers new procedures to merge and of the actions of the company’s directors prior to and at the time of divide, as well as retaining established mechanisms for reorganising his appointment, whether such actions contributed to the company’s companies, namely court-sanctioned schemes of arrangement and insolvency and whether the directors acted honestly and responsibly the compulsory acquisition of minority shareholdings. in exercising their duties. Examinership is a court-managed process which provides an A number of actions may be taken against a director of an insolvent insolvent company with court protection for a limited period to company under the Companies Act 2014. A director may be subject enable it to negotiate with its creditors and to obtain investment. to a fraudulent/reckless trading action, or an action for failing to An insolvent company can enter liquidation either by a resolution keep proper books and records, pursuant to which personal liability of the shareholders (known as a creditors’ voluntary liquidation) or may be imposed on the directors, including, if appropriate in the by an order of the court following a petition by the creditors, the circumstances, for the debts of the company. A director of an company itself or the company’s members. insolvent company may also have restriction or disqualification Receivership is the appointment of a receiver by a secured creditor proceedings initiated against them, which, if upheld by the court, for the purpose of realising the secured assets. would have serious consequences for their ability to act as directors in the future. A company may seek to avail of examinership to resolve its financial issues, failing which it may then avail of liquidation and/

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2.2 Which other stakeholders may influence the 3 Restructuring Options company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which 3.1 Is it possible to implement an informal work-out in apply to particular types of unsecured creditor (such your jurisdiction? as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your In Ireland, it is possible to implement informal work-outs between jurisdiction? debtors and creditors. Informal schemes of arrangements are implemented outside the ambit of the courts. A company under financial strain can also be influenced byits

An informal work-out process will require consensus of all creditors Ireland creditors, both secured and unsecured, and its shareholders. and stakeholders in order to be successful. As the company cannot If a company is placed under the protection of the court and an avail of court protection, or a mandatory moratorium in respect of examiner is appointed to the company, the creditors of the company creditor enforcement action, during this period, any creditor may are prevented from taking any action to enforce their security or to take action to seek to recover its debt, including, for example, take enforcement action of any kind against the company during this issuing judgment proceedings and/or if it has security, seeking to period (which can last for a maximum of 100 days). In situations enforce its rights by way of appointment of a receiver. There is also where the appointment of an examiner may be imminent, secured a possibility of a winding up petition being issued. If, therefore, a creditors may take steps to quickly appoint a receiver to enforce company perceives a threat of liquidation or receivership, it could their security. However, a receiver can be removed if a petition be preferable to seek to avail of examinership under the Companies for the appointment of an examiner is filed within three days of Act 2014. the appointment of the receiver. Outside this period, the court will refuse to hear a petition to appoint an examiner. 3.2 What formal rescue procedures are available in A petition to wind up the company may be presented by the company your jurisdiction to restructure the liabilities of itself, its creditors or the Director of Corporate Enforcement. The distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can Central Bank of Ireland has similar powers in respect of certain creditors and/or shareholders block such procedures companies subject to its regulation. A petition to wind up the or threaten action (including enforcement of security) company cannot be brought if an examiner has been appointed to to seek an advantage? Do your procedures allow you the company. to cram-down dissenting stakeholders? In relation to “special rules”, as further outlined in question 6.1, certain claims by employees which cannot be met by an insolvent Ireland has a flexible corporate rescue process, which international company will be paid out of a government-funded insolvency corporates will recognise as similar to the Chapter 11 procedure in payments scheme. Additionally, creditors with retention of title the US. Examinership is a court-supervised process available to arrangements will be able to subsequently repossess their property insolvent companies which have a reasonable prospect of survival if the retention of title clause in the contract of sale constitutes a as a going concern. The procedure is commenced by way of presentation of a petition to the court seeking the appointment of valid retention of title. The validity of retention of title clause will an examiner (usually an insolvency practitioner, nominated by the depend on (a) the type of clause used by the seller, and (b) the facts petitioner). Upon presentation of the petition for the appointment of each case (i.e. what happened to the goods once they came into of an examiner, the company is placed under the protection of the the possession of the company). Irish High Court for up to 100 days. The examiner and the company attempt to formulate proposals for a scheme of arrangement with its 2.3 In what circumstances are transactions entered creditors and to procure new investment, thus securing the future into by a company in financial difficulties at risk of viability of the company. If one class of creditors votes in favour challenge? What remedies are available? of the proposals, by way of simple majority in number and value, the examiner puts the proposals before the Irish High Court for Generally, it is the liquidator who may challenge certain transactions approval. Court approval of the proposals is binding on all creditors which an insolvent company has completed. If a challenge is and shareholders and typically results in shareholder equity being successful, the transactions in question may be set aside. diluted or eliminated entirely. Transactions in favour of a creditor taking place within six months The directors retain control and executive power of the company prior to the commencement of a winding up (or within two years if – similar to the US Chapter 11 “debtor-in-possession” concept. in favour of a connected person) made with a view to preferring such The court is empowered to direct, upon application made, that the a creditor are referred to as unfair preferences under the Companies examiner assumes some or all of these functions for the period of Act 2014 and are liable to also be set aside on application by the examinership (although this is not a commonly used provision). liquidator to the High Court. The examiner may obtain court approval to dispose of property subject to a fixed or a floating charge on the basis that this would A liquidator (or a creditor) can also apply to the High Court for facilitate the survival of the company (subject to certain conditions the return of assets where they show that the transfer of the assets to protect the rights of the secured creditor). The liabilities of a in question perpetrated a fraud on the company, its creditors or secured creditor can in certain circumstances be crammed down. members. During an examinership, no proceedings may be commenced The court may also order former directors of a company to repay against guarantors or other third parties liable in respect of the debts money or contribute sums to the assets of the company by way of of the company. Additionally, specific rules govern the enforcement compensation in respect of any misapplication, retainer, misfeasance of guarantees in an examinership and certain steps must be taken or other breach of duty. by the secured creditors in order to preserve their rights under the guarantees.

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There is also a mechanism whereby a company can propose A company in examinership may, however, repudiate any contract a compromise or arrangement between itself and its members under which some element of performance other than payment and creditors with the assistance of the court (section 450 of the remains to be rendered by both parties, provided such repudiation is Companies Act 2014 (previously section 201 of the Companies approved by the court. In recent years, this provision has frequently Act 1963). However, in practice, this is rarely used, most likely been availed of by tenant companies to repudiate onerous leases. because there is no automatic protection afforded to a company Any person who suffers loss as a result of the repudiation (for with this process and the threshold for approval of the proposals is example, the landlord) would become an unsecured creditor in the considerably higher than with examinership. examinership and the court may assess the value of his loss. Debt-for-equity swaps and pre-packaged sales do occur in Ireland. With regard to set-off provisions, notwithstanding the company is in The usage of pre-pack insolvency sales is less developed in Ireland

Ireland examinership, these will be upheld. than in other jurisdictions, but there has been an increasing number of asset sales structured through pre-pack receiverships in recent 3.6 How is each restructuring process funded? Is any times. However, there is no current legislative basis for a pre- protection given to rescue financing? packaged sale.

The costs of examinership are usually significant. Where a 3.3 What are the criteria for entry into each restructuring successful investment is concluded, the examiner’s proposals will procedure? generally provide for the payment of his agreed remuneration, costs and expenses from such investment. The criteria for entry into examinership are: If an examinership is unsuccessful, the question of what priority is ■ the company is, or is likely to be, unable to pay its debts; afforded to the examiner’s remuneration, costs and expenses arises. ■ no resolution has been passed, nor has any order been made, Section 554(3) provides that the remuneration, costs and expenses to wind up the company; and of the examiner which have been sanctioned by the court shall be ■ there is a reasonable prospect of survival of the whole or part paid before any other claim, secured or unsecured, out of the assets of the business as a going concern. of the company. Save in exceptional circumstances, an application for the appointment With regard to rescue funding, no specific protection exists under of an examiner must be accompanied by an independent expert’s Irish law for any new finance provided to a company by way of report verifying that the company has a reasonable prospect of rescue funding. survival as a going concern.

4 Insolvency Procedures 3.4 Who manages each process? Is there any court involvement? 4.1 What is/are the key insolvency procedure(s) available The examinership process is commenced by way of petition to to wind up a company? the High Court (or the Circuit Court, in some circumstances). The court remains involved throughout the process. During the An insolvent company may be wound up by way of an official examinership period, the directors of the company remain in place liquidation (also referred to as a court liquidation) or by way of a and the company continues to trade while the examiner analyses creditors’ voluntary liquidation. the company’s finances, establishes which parts of the business A petition may be presented to the Irish High Court where the can be rescued and negotiates with: (i) investors in terms of new company is unable to pay its debts. The petition can be presented by investment being injected in the company; and (ii) creditors and a number of parties including the company itself and/or any creditor. shareholders to prepare proposals for a scheme of arrangement In other circumstances, contributories and the Director of Corporate which, if implemented, will facilitate the company’s survival. Enforcement are entitled to present a petition. In the majority of cases, Once the examiner has formulated his proposals, he must convene a creditor of the company petitions to have the company liquidated. and preside at meetings of each class of creditor who may vote in A company may also be placed into a creditors’ voluntary liquidation. favour of or against the proposals. A report is then prepared by the Only the company’s members can commence a creditors’ voluntary examiner which is filed in court. The scheme will only become liquidation. The process is commenced by the members passing binding on the members and creditors of a company if the court an ordinary resolution that the company cannot by reason of its makes an order confirming the proposals. It may only do soif liabilities continue on its business. at least one class of impaired creditors has voted in favour of the proposals. The court will also not approve a scheme if its purpose Strictly speaking, a receivership is not an insolvency process, but the is to avoid tax or if it is unfairly prejudicial to any class of creditors. enforcement by a secured creditor of its contractual rights pursuant to its security. The most common type of company receiver is the receiver appointed pursuant to the terms of a debenture (which 3.5 What impact does each restructuring procedure have can, generally, incorporate both fixed and floating charges over the on existing contracts? Are the parties obliged to assets of the company). The receiver typically takes control of, and perform outstanding obligations? Will termination and set-off provisions be upheld? realises, the assets to apply the proceeds towards the repayment of the debt owed to the debenture holder. Although most contracts provide that examinership activates a right A solvent company can be dissolved by way of a members’ voluntary of termination, examinership does not of itself operate to terminate liquidation. As part of this process, the directors of the company are contracts which the company has entered. However, where a required to make a declaration that the company will be able to pay company is under court protection following a petition to court, its its liabilities in full within a period not exceeding 12 months from creditors are prevented from exercising certain rights against the the commencement of the liquidation, commonly referred to as a company in respect of pre-petition debts. declaration of solvency.

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authorising the payment of the liquidator’s remuneration, costs and 4.2 On what grounds can a company be placed into each expenses. A creditor is also authorised to bring an application for winding up procedure? directions to the High Court where it is dissatisfied with the conduct of the liquidation. A company can be placed into official liquidation by the High Court The rights of secured creditors are unaffected by the liquidation of a on a number of grounds including if the company is unable to pay its company. A secured creditor may decide to appoint a receiver over debts, or it is just and equitable or within the public interest that the the secured assets or may be satisfied for the liquidator to realise company be wound up. The most common ground for petitioning its security, discharge its costs from the security and account to the High Court is where the company is unable to pay its debts. This the secured creditor for the proceeds of sale of the secured assets. is typically established where the company has failed to pay a debt However, preferential creditors must be paid in priority to the exceeding €10,000 within 21 days of a demand in writing being secured creditor where the assets are realised from a floating charge. Ireland made on the company by a creditor.

A creditors’ voluntary liquidation may be initiated by the company 4.5 What impact does each winding up procedure have on in a general meeting resolving by way of an ordinary resolution that existing contracts? Are the parties obliged to perform it cannot by reason of its liabilities continue its business. outstanding obligations? Will termination and set-off A members’ voluntary liquidation is commenced by a special provisions be upheld? resolution of the members. The effect of liquidation on a contract depends on the terms of the contract. Whether insolvency amounts to a breach of contract is 4.3 Who manages each winding up process? Is there any governed by the terms of the contract. The commencement of a court involvement? liquidation may constitute a breach of contract, may frustrate a contract or a contract may expressly provide how the commencement Each form of liquidation results in the appointment of a liquidator of a liquidation will affect the contract. who takes control of the company, realises its assets and distributes A liquidator has the power to apply to the High Court within 12 the proceeds among the creditors and/or, where there is any surplus, months after the commencement of the liquidation to disclaim an the members of the company. Under the Companies Act 2014, the onerous contract. The other party interested in the property or High Court’s supervisory role in an official liquidation has been contract can compel the liquidator to make up his mind whether to significantly reduced, although there is jurisdiction for a number of disclaim by applying in writing to the liquidator, following which specified parties (including the liquidator and any creditor) to apply the liquidator has 28 days to decide on the matter. to the High Court to determine any question arising in the winding A party entitled to the benefit or subject to the burden of a contract up. The Companies Act 2014 makes provision for the supervision of may apply to the court for an order rescinding the contract on such the liquidation by a committee of inspection (comprising not more terms as to payment as the court thinks fit. than eight members with a majority representing the creditors of the company) to which the liquidator must report during the course Where a company is in liquidation, there are specific set-off rules of the liquidation. The committee of inspection plays an important which apply where there are mutual credits and debts between the company in liquidation and any person claiming as a creditor. role in supervising the exercise of certain powers of the liquidator. Where no committee is formed, all the creditors of the company oversee the liquidation. 4.6 What is the ranking of claims in each procedure, A creditors’ voluntary liquidation is supervised by a committee of including the costs of the procedure? inspection or, where no such committee is formed, the company’s creditors. The committee supervises, in a similar manner to a The general rule in insolvency law is that creditors of an insolvent court liquidation, the exercise of certain powers of the liquidator. company are to be paid pari passu, so if the realised assets of the Similarly, jurisdiction is given to specified parties (including the company are not sufficient to pay any class of creditors in full, they liquidator and any creditor) to apply to the High Court to determine are paid in equal proportion to their debts. any question arising in the winding up. Not all assets realised by a liquidator may be available for distribution to the creditors (e.g. assets subject to a fixed charge, A members’ voluntary liquidation is managed and supervised by assets held in trust, monies that must be set off, etc.). Once these the company’s members as the ultimate beneficiaries where the assets are dealt with, priority of distribution in a liquidation is as company is solvent. follows: (1) the costs, charges and expenses incurred in a winding up; 4.4 How are the creditors and/or shareholders able to (2) preferential creditors (which includes employees, the influence each winding up process? Are there any Revenue Commissioners); restrictions on the action that they can take (including the enforcement of security)? (3) floating charge holders; (4) unsecured creditors; and In an official liquidation the petitioning creditor is entitled to (5) members and contributories. nominate the liquidator. The court has the power to appoint an The remuneration, costs and expenses of an examiner appointed alternative liquidator. prior to the liquidation of the company must be paid in full before In a creditors’ voluntary liquidation, the liquidator is initially any other claim in the liquidation. nominated by the members. However the creditors are entitled to nominate an alternative liquidator at the creditors’ meeting, and a 4.7 Is it possible for the company to be revived in the vote of the creditors takes place where more than one alternative future? liquidator is nominated. The creditors or the committee of inspection have a role in Where a company has been dissolved by way of a liquidation, the supervising the exercise by the liquidator of certain powers and court may within a period of two years following the dissolution

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make an order declaring the dissolution to have been void. The Ireland to permit eligible employees to recover such amounts from application can be made by the liquidator or any interested party. the insolvency payments scheme where their employment has been terminated because of an employer’s insolvency. The insolvency payments scheme is backed by the government and the relevant 5 Tax Minister responsible is then entitled to claim as a preferential creditor in the liquidation (or receivership) for the sums paid out to employees. 5.1 What are the tax risks which might apply to a Specific legislation exists regarding the transfer of an undertaking, restructuring or insolvency procedure? business or part of a business from one employer to another and may result in the automatic transfer of employees (and their liabilities)

Ireland Although there are no tax liabilities associated with insolvency to the purchaser where this occurs as part of an insolvency process. proceedings, of themselves, a restructuring or insolvency process will not protect a company from incurring tax liabilities in the usual way, such as stamp duty, VAT, corporation tax and capital gains tax. 7 Cross-Border Issues Upon appointment, a liquidator or receiver will register for tax. In a liquidation or receivership, liabilities to the Revenue 7.1 Can companies incorporated elsewhere use Commissioners will be dealt with in the ordinary course of the restructuring procedures or enter into insolvency liquidation or receivership and such liabilities will usually have proceedings in your jurisdiction? preferential status. Tax liabilities can be included in the debts which are subject to a Pursuant to the European Insolvency Regulation (recast), where a scheme of arrangement approved by the court in an examinership; company has its “centre of main interests” (“COMI”) in Ireland, however, such a scheme will not be approved by the court if whether that company is incorporated in Ireland or not, winding it is unfairly prejudicial to a creditor, including the Revenue up and examinership proceedings must be commenced in an Irish Commissioners. court. A company’s COMI is generally the place where it conducts the administration of its interests on a regular basis as ascertainable by third parties. It is also possible, in certain circumstances, for 6 Employees a company incorporated in a country which is not subject to the provisions of the Insolvency Regulation to be wound up by the Irish Court. 6.1 What is the effect of each restructuring or insolvency procedure on employees? 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in With regard to employees’ contracts of employment, the effect your jurisdiction? of insolvency may be dealt with expressly or impliedly in such contracts. Otherwise, the effect on employees depends on the nature Where the European Insolvency Regulation (recast) applies to the of the insolvency process. proceedings, such proceedings will be recognised automatically in In a receivership, the appointment of a receiver does not of itself Ireland. If the proceedings are not recognised by the Irish courts automatically terminate contracts of employment. The sale of automatically, the insolvency officeholder (e.g. liquidator, receiver, the business, a new agreement with the employee or where the administrator) can make an application to the Irish High Court for particular role of the employee is inconsistent with the role of an order recognising the proceedings. a receiver may affect contracts of employment. Employees are afforded preferential status in a receivership (e.g. arrears of wages, holiday pay, unfair dismissal) in respect of claims arising prior to 7.3 Do companies incorporated in your jurisdiction the receiver’s appointment, where the receiver has been appointed restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? under a floating charge.

The effect of a liquidation depends on whether it is an official Companies incorporated in Ireland avail of the insolvency and or voluntary liquidation. In an official (i.e. court) liquidation, restructuring processes available in Ireland. It is uncommon for an the making of the winding up order of the company operates as Irish incorporated company to enter into insolvency proceedings in a dismissal of the company’s employees. On the other hand, another jurisdiction. the passing of a resolution to commence a creditors’ voluntary liquidation does not necessarily automatically terminate contracts of employment and regard must be had to the facts of the particular 8 Groups case. A liquidator has the power to recommence and carry on the company’s business as may be necessary for the beneficial winding up of the company and contracts of employment may be continued 8.1 How are groups of companies treated on the by the liquidator for a limited period of time. insolvency of one or more members? Is there scope for co-operation between officeholders? In an examinership, the appointment of the examiner should not bring an end to contracts of employment as the examinership process Typically an Irish company will be wound up as a separate legal is designed to facilitate the continuation of the company’s business entity and while the court has an inherent jurisdiction to pierce the and a key aim of the process is the preservation of employment. corporate veil, this is most likely to occur only in exceptional cases. Employees are afforded preferential status in respect of certain Company law in Ireland grants a liquidator certain powers to swell entitlements (e.g. arrears of pay, holiday pay and pay in lieu of the assets of the company in liquidation from the assets of related statutory notice and a range of other entitlements that might be companies. owed to employees by the employer) and legislation exists in

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A contribution order permits the court on the application of the are now permitted to take certain steps without seeking consent of liquidator or a creditor to order that a company related to the the court, reducing the need for court involvement. The reduction company being wound up contribute to the debts provable in the of the court’s supervisory role in favour of increased creditor winding up. involvement in court-ordered liquidations has allowed for the A pooling order permits the court on the application of the liquidator reduction of costs associated with such liquidations. The reduction or a creditor to order that two or more related companies be wound has also provided creditors with more direct influence in respect of up together as if they were one company. the important decisions in the liquidation process. In making a pooling and contribution order, the court is required to take a number of factors into consideration in deciding whether it is 9.2 Are there any other governmental proposals for just and equitable to do so and in practice pooling and contribution reform of the corporate rescue and insolvency regime Ireland orders are rarely invoked. in your jurisdiction? Where the court appoints an examiner to a company, it may also There are no current governmental proposals for reform of the appoint an examiner to a related company where this would be likely corporate recovery and insolvency regime in Ireland. to facilitate the survival of the company or the related company or both. In 2017, Irish insolvency law was amended by the enactment of the Companies (Accounting) Act 2017 (the “2017 Act”). The most significant change relates to preferential creditors. The 2017 Act 9 Reform provides that claims for preferential creditors will now rank in priority to holders of floating charges. In the context of a winding- up or receivership, this priority will apply irrespective of the 9.1 Have there been any proposals or developments in crystallisation of the floating charge prior to their commencement. your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws It should also be noted that a receiver appointed under a floating of your jurisdiction, which are intended to make charge which has crystallised must now ensure that any claims made insolvency processes more streamlined and efficient? by preferential creditors are paid in priority to charge holders.

The laws relating to corporate rescue and insolvency were Acknowledgment modernised and consolidated in the Companies Act 2014. The Companies Act 2014 provides for the harmonisation of the different Julie Murphy O’Connor and Brendan Colgan are partners in modes of winding-up. This streamlined approach has led to greater Matheson’s Corporate Restructuring and Insolvency Group and also consistency between the laws governing voluntary windings up and contributed to the preparation of this chapter. court-ordered windings up. Liquidators in all classes of liquidations

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Tony O’Grady Karen Reynolds Matheson Matheson 70 Sir John Rogerson's Quay 70 Sir John Rogerson's Quay Dublin 2 Dublin 2 Ireland Ireland

Tel: +353 1 232 2128 Tel: +353 1 232 2759 Email: [email protected] Email: [email protected] URL: www.matheson.com URL: www.matheson.com Ireland Tony O’Grady is head of the Corporate Restructuring and Insolvency Karen Reynolds is a partner in the Commercial Litigation and Dispute Group and the Commercial Litigation and Dispute Resolution Resolution Department at Matheson. Department at Matheson. He advises on all aspects of corporate Karen has a broad financial services and commercial dispute resolution restructuring and insolvency law matters and represents a number practice. She advises clients in relation to corporate restructuring and of financial institutions, public and private companies and insolvency insolvency matters, contentious regulatory matters, investigations, office-holders. white collar crime and corporate offences, and commercial and Tony is a member of INSOL, R3 and the Insolvency Lawyers financial services disputes. Association. He lectures frequently on corporate restructuring and Karen has substantial experience in corporate restructuring and insolvency law matters. He has spoken at conferences organised insolvency law matters, and has had a lead role in some of the most by many professional bodies and other organisations including the high profile corporate rescue transactions of the last 10 years. American Bankruptcy Institute and other insolvency related matters. He has written widely on the subject.

Established in 1825 in Dublin, Ireland and with international offices in London, New York, Palo Alto and San Francisco, more than 650 people work across Matheson’s five offices, including 84 partners and tax principals and over 350 legal and tax professionals. Matheson services the legal needs of internationally focused companies and financial institutions doing business in and from Ireland. Our clients include over half of the world’s 50 largest banks, seven of the world’s 10 largest asset managers and we have advised the majority of the Fortune 100 companies. We work closely with some of the world’s largest tech multinationals and high-profile start-ups and we advise seven of the top 10 global technology brands. Our strength in depth is spread across in excess of 30 practice groups, including Finance and Capital Markets, Corporate, International Business, Mergers and Acquisitions, Technology and Innovation, Intellectual Property, Insolvency and Corporate Restructuring, EU and Competition, Asset Management and Investment Funds, Employment, Pensions and Benefits, Commercial Real Estate, Litigation and Dispute Resolution, Healthcare, Insurance, Tax, Private Client, Energy and Infrastructure, FinTech and Life Sciences. We work collaboratively across our practice areas, reinforcing a client first ethos among our people, and our broad and interconnected spread of industry and sectoral expertise allows us to provide the full range of legal advice and services our clients need, when they need it.

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Italy

Pirola Pennuto Zei & Associati Massimo Di Terlizzi

Bankruptcy Law) that can be aimed to rescue the company or 1 Overview to wind up the company; and iii. bankruptcy (“fallimento” – art. 5 et seq. of the Bankruptcy Law), 1.1 Where would you place your jurisdiction on the bankruptcy agreements (“concordato fallimentare” – art. 124 spectrum of debtor to creditor-friendly jurisdictions? et seq. of the Bankruptcy Law) and compulsory administrative liquidation (“liquidazione coatta amministrativa” – art. 124 et seq. of the Bankruptcy Law). With the first Italian bankruptcy law (R.D. 267/1942 “the Bankruptcy Law”), bankruptcy in Italy was considered an indelible There are also special procedures provided by Legislative Decree social stain and the returning in bonis was considered difficult to 270/1999 (so-called “Prodi-bis”), as amended by the “Marzano Decree”, that involve large companies. implement and socially unacceptable. As a result, the legal system was primarily aimed at the liquidation of the debtor and not at the recovery of the debtor. 2 Key issues to Consider When the It is only with the reforms starting from 2003 that the focus of the Company is in Financial Difficulties legislator turned to the recovery of the debtor by emulating the mechanism of the so-called “second chance”, born in the US. 2.1 What duties and potential liabilities should the The subsequent reforms, until 2012, had as their primary aim the directors/managers have regard to when managing a recovery of the debtor’s productive capacity through compositions company in financial difficulties? Is there a specific with creditors, also in “blank”, which facilitated the continuation point at which a company must enter a restructuring of the business activity, with the further possibility, through these or insolvency process? compositions, to split the debtors into classes. In addition, the legislator implemented the so-called “certified” There are different possible scenarios of liabilities of the directors: restructuring plans and debt restructuring agreements that are i. for not having promptly detected the symptoms of the crisis independent of the jurisdictional control during the formation phase. or not having reacted promptly; The reforms from 2013 to 2015 introduced instruments aimed at ii. for having caused or aggravated the company’s crisis; the interests of the creditors in the context of the compositions with iii. for having badly used the necessary or useful tools in order to creditors, such as minimum payment thresholds, “concurrent bids” deal with the crisis or limit its effects; and/or and specific informational obligations, in particular in the “blank” iv. for not having guaranteed the “par condicio creditorum”. compositions. The crisis of a company depends not necessarily on behaviours In light of the last reform of 2017, the system in its complex seems performed by the directors, but it may happen that the directors, due to have reached a point of balance between the protection of the to the improper capacity to manage the company, can take decisions interests of creditors and interests of the debtor in the continuation that, even though are firstly finalised to face the status of crisis, have of the business activity. the effect to delay or aggravate the crisis of the company. In principle, the decisions taken by the directors remain unquestionable by the court (“business judgment rule”), unless the 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal decisions taken by them are manifestly non-economic, imprudent or restructuring and insolvency proceedings, and to risky for the company. what extent are each of these used in practice? The directors must prepare organisational tools that allow them to know as soon as possible any status of financial crisis suitable to According to the Italian legal system, it is possible to distinguish lead to insolvency. In other words, they must be able to ascertain between: whether a company can continue its business or not, due to the i. pre-bankruptcy procedures: a certified restructuring plan financial situation of the company and its capacity to make profit. (“piano di risanamento” – art. 67 of the Bankruptcy Law) and There are also potential criminal liabilities for directors as a result of a debt restructuring agreement (“accordo di ristrutturazione actions or omissions that have led to the insolvency of the company. del debito” – art. 182bis of the Bankruptcy Law); There is not a specific moment in which it can be identified when a ii. procedures that are not yet bankruptcy: composition with company enters into financial crisis. However, it is important to pay creditors (“concordato preventivo” – art. 160 et seq. of the attention to the symptoms of financial crisis of a company, such as

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delay or non-payment of withholdings, taxes, social contributions Transactions entered into by a company in financial difficulties may or repayment of mortgage or the receipt of injunctions notified by also be clawed back under the rules governing the ordinary claw- the creditors. back actions. In order to avoid “claw-back” actions and the related responsibility 2.2 Which other stakeholders may influence the of the company, the counterpart and any other third parties, involved company’s situation? Are there any restrictions on the in such transactions, transactions are made according to pre- action that they can take against the company? For bankrupcty procedures provided by the law, which are suitable and example, are there any special rules or regimes which considerable in nature and amount. apply to particular types of unsecured creditor (such

Italy as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your 3 Restructuring Options jurisdiction?

The other stakeholders may influence the company’s situation 3.1 Is it possible to implement an informal work-out in through the filing of legal actions or executive actions against the your jurisdiction? company in order to obtain the repayment of their credits. There are no special rules applicable to unsecured creditors; in the case There is the possibility to enter into informal work-out agreements that a company is not able to face the legal actions of the creditors, between the debtor and its creditors being understood that these the latter can also claim the court for the declaration of bankruptcy agreements i) are freely negotiable between the parties, and ii) of the company. are binding only for the parties who have entered into them. Nevertheless, what often occurs is that such agreements are finalised Furthermore, in some proceedings involving the restructuring of to hide – and so postpone, a financial crisis. the companies (such as in case of a certified restructuring plan or debt restructuring agreement), the main creditors (often the banks) These work-out agreements, in case of subsequent default of the may ask for a change in the governance, especially regarding the company, may have consequences in terms of claw-back actions and management, selecting the new director to whom they assign the criminal liabilities, too; therefore, it is preferable to enter into the process of business turnaround. restructuring agreements provided by the law.

2.3 In what circumstances are transactions entered 3.2 What formal rescue procedures are available in into by a company in financial difficulties at risk of your jurisdiction to restructure the liabilities of challenge? What remedies are available? distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures In case of transactions entered into by a company in financial or threaten action (including enforcement of security) difficulties during the so-called “suspect period” (i.e. the period to seek an advantage? Do your procedures allow you preceding the declaration of insolvency), the Italian legal system to cram-down dissenting stakeholders? provides for the possibility of “claw-back” actions underlying such payments by the following terms and conditions: In order to restructure the liabilities of distressed companies, the i. the payments made by the debtor, within the suspicious Italian system provides the following options: period of two years, in order to settle debts that would have ■ CERTIFIED RESTRUCTURING PLAN (“piano di expired in the period following the declaration of bankruptcy risanamento” – art. 67 of the Bankruptcy Law) may be clawed-back; It is a private agreement between the debtor and its creditors ii. the “abnormal” transactions listed in Bankruptcy Law that and it is named “certified restructuring plan” since it has to took place within the suspicious period of one year or six be “certified” by an independent expert, who guarantees the months – depending on the type of transaction – may be feasibility and truthfulness of the plan. In this process the clawed-back if the other party does not prove that they were court is not involved. unaware of the debtor’s insolvency status; Only the payments and, in general, the transactions made in iii. the “normal” transactions listed in Bankruptcy Law that accordance with the certified plan, are not subject to claw- took place within the suspicious period of six months prior back actions. to the declaration of insolvency can be clawed-back if the ■ DEBT RESTRUCTURING AGREEMENTS (“accordo di bankruptcy trustee proves that the other party knew of the ristrutturazione del debito” – art. 182bis of the Bankruptcy insolvency of the debtor; Law) iv. the Bankruptcy Law also provides cases in which claw- These agreements are aimed at allowing a debtor in financial back actions cannot be exercised (e.g. payments for goods and services that can be included: in the normal course of difficulties to restructure its debts and obtain protection business with standard terms; payments due to employees; against creditors, through the validation by the court of an acts and payments made or securities granted on debtor’s agreement made with at least 60% of its creditors. assets on the basis of a certified restructuring plan, a debt This is a private negotiation between the debtor and restructuring agreement or a composition with creditors; sale its creditors; the court is involved only at the end of or preliminary contracts of sale of real estate at a fair price; the negotiation process to obtain the validation of the and payments on a bank account when they not permanently restructuring agreement. reduce the debtor exposure); and The application for the validation must include a fairness v. in addition, transactions entered into between companies of the same group may be clawed-back under the rules opinion by an independent expert regarding, among others, governing extraordinary administration proceedings (the the reasonableness of the restructuring agreement to ensure suspect period is extended to three/five years). full payment of any creditor who is not party to the agreement. These creditors have to be paid within i) 120 days from the

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validation of the agreement in case of expired credits, or ii) Debt-for-equity swaps 120 days from the expiring of the credits in case these credits This form of satisfaction of creditors (accepting to receive shares, are not expired at the date of the validation of the agreement. bond and similar in exchange of their credits), initially has been For the companies that have, for the most part, their debts introduced as an alternative form of extraordinary administration with the banks and other financials operators, there is the and then extended to other bankruptcy procedures, but it is not often possibility to enter into an agreement with a part of such used. creditors in order to delay the payment of their credits; such Pre-packaged sales agreements are also binding for the creditors that have not In case of crisis of the company, it is possible to perform pre- entered into them (so-called “stand still agreements”). packaged plans (i.e. providing for the sale or lease of the debtor’s Italy Before the restructuring agreement is signed, it is always assets to a third party). These plans can be performed: i) in possible for the company to block any individual action by accordance with a restructuring procedure (for example, certified the creditors, by filing an application with the court including restructuring plans, debt restructuring agreements and compositions i) the proposal of the restructuring agreement, ii) an affidavit with creditors) and in this case it is not subject to claw-back actions; certifying the ongoing negotiations with creditors, and iii) or ii) out of a restructuring procedure but, in this case, the operation a fairness opinion by an independent expert confirming the can be subject to claw-back actions. suitability of the proposed agreement. After the validation of the agreement, every dissenting 3.3 What are the criteria for entry into each restructuring stakeholder that have not entered into the agreement may file procedure? an opposition against the agreement. ■ COMPOSITION WITH CREDITORS (“concordato ■ DEBT RESTRUCTURING AGREEMENT AND preventivo” – art. 160 et seq. of the Bankruptcy Law) COMPOSITION WITH CREDITORS This procedure involves an agreement between the debtor All the companies that perform commercial activities may and its creditors, subject to the supervision of the court, with enter into a debt restructuring agreement or file a petition the aim of: i) avoiding the bankruptcy by mean of liquidation for a composition with creditors unless the debtors that are of the company (“concordato liquidatorio”); or ii) reaching expressly excluded by the Bankruptcy Law (art. 1). an agreement with its creditors in order to restructure its debts ■ EXTRAORDINARY ADMINISTRATION and continue the business (“concordato con continuità”). For Prodi’s proceedings, it is necessary that the company has The procedure initiates the filing with the Bankruptcy Court more than 200 employees and a total indebtedness of not less of: i) a petition; ii) a plan (that has to provide for the payment than two-thirds of the aggregate of the total assets and the of, at least, 20% of the unsecured creditors and may also revenues of the preceding financial year. provide for the division of the creditors in classes); and iii) an expert’s opinion confirming the feasibility of the plan and the For Marzano’s proceedings, it is necessary that the company truthfulness of the accounting data. has more than 500 employees (also considered in group) and a total indebtedness of not less than 300 million euros. The court is involved in verifying the existence of the legal requirements (for instance, the minimum payment ration of unsecured creditors of 20%) to enter into the procedure but 3.4 Who manages each process? Is there any court the approval is made by the creditors. The composition is involvement? approved with the favourable vote of the unsecured creditors (who will be subject to the partial repayment of their credits) ■ CERTIFIED RESTRUCTURING PLAN (art. 67 of representing the majority of the claims admitted to vote. Bankruptcy Law) Creditors whose rights accrued prior to the date of filing of It is a mechanism completely unrelated to the involvement of the compositions cannot take legal actions against the debtor the court and it is managed by the directors of the company. to enforce their claims until the court’s approval becomes ■ DEBT RESTRUCTURING AGREEMENTS (art. 182bis of definitive; creditors whose rights accrued after the filing of Bankruptcy Law) the composition have the right to be paid before the other admitted creditors (“creditori prededucibili”). The court is involved in the final phase for the approval of the agreement while the execution of the agreement is managed The decision to file a composition with creditors is taken by by the directors of the company. The court has no duty of i) the directors in case of limited companies, and ii) by the supervision on the execution of the agreement. shareholders in case of partnership. ■ COMPOSITIONS WITH CREDITORS ■ EXTRAORDINARY ADMINISTRATION In compositions with creditors, the court is involved in the It is a special insolvency procedure that is: i) supervised by process of the approval of the agreement; the execution the Ministry for Productive Activities; ii) applicable to large of the agreement is assigned to a judicial liquidator who entities with significant indebtedness; and iii) specifically is supervised by a judicial commissioner, both appointed aimed at the restructuring of the company. by the court who then is involved in case of extraordinary It may be implemented through i) the sale of the business run transactions not planned in the agreement. by the company, on the basis of a programme to be completed ■ EXTRAORDINARY ADMINISTRATION in one year, or ii) the restructuring of company’s debt on the basis of a business plan aimed to restore the company in two In Prodi and Marzano’s extraordinary administration years. proceedings, two phases can be identified: in the first one the judicial commissioner, appointed by the court, supervises Once the competent authority admits the debtor to Prodi’s the management of the company and expresses its opinion or Marzano’s extraordinary administration proceedings on the existence of the conditions for the approval of such the creditors, whose rights accrued prior to the date of the procedure; and in the second one, the Ministry of Economic admission, cannot take legal actions against the debtor in Development is involved for the appointment of the order to enforce their claims. extraordinary commissioner who manages the company.

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compositions with creditors; and extraordinary administration 3.5 What impact does each restructuring procedure have (Prodi’s procedures). on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 4.2 On what grounds can a company be placed into each winding up procedure? ■ CERTIFIED RESTRUCTURING PLAN AND DEBT RESTRUCTURING AGREEMENT In the case that the company is in a status of crisis or if the corporate The existing contracts are not affected and they normally purpose is reached or has become impossible to reach, the company perform as ordinary management of the company; the chance can enter into a voluntary winding up process firstly finalised to the Italy to terminate the contract is subject to the decision of the payment of its creditors. parties. In the case of the liquidation of the assets of the company which ■ COMPOSITIONS WITH CREDITORS is able to fully repay its debts, it is not necessary to apply for Regarding the compositions with creditors aimed to an insolvency procedure as, in order to avoid responsibility of restructuring the company (“concordato con continuità”), the directors and to guarantee in the correct way the rights of the existing contracts normally continue, but it provides all creditors, it is necessary that the process of liquidation is run the possibility for the debtor to apply for the suspension according to one of the tools provided by the law. or termination of pending contracts (with an indemnity As abovementioned, once it is verified that the company is not able provided for the counterparty according to the provisions to satisfy all the creditors, it becomes mandatory to wind up the of the contract). The Bankruptcy Law also provides the inapplicability of the above rules to employment contracts, company, according to one of the following insolvency procedures: rental of real estate, preliminary agreement of a real estate, ■ BANKRUPTCY AND ADMINISTRATIVE LIQUIDATION leasing and financing for a specific deal. The commencement of these procedures is mandatory and ■ EXTRAORDINARY ADMINISTRATION the liquidation of the company begins immediately after the declaration by the court (the administrative liquidation The extraordinary commissioner can terminate pending only applies to banks and insurance companies). Regarding contracts not completely performed by both parties. the case of bankruptcy, the liquidation process can also be In any case, the counterparty (contraente in bonis) could performed and closed through a bankruptcy agreement terminate unperformed contracts according to the Italian (concordato fallimentare) in which a creditor or a third party Civil Code rules about the breach of contracts. can propose a plan aimed at full or partial reimbursement of Set-off operations are possible, according to Italian the creditors. Bankruptcy Law, if both credits arose before the filing for ■ COMPOSITIONS WITH CREDITORS, DEBT declaration to the court, even if the creditor’s title has not yet RESTRUCTURING AGREEMENTS AND CERTIFIED expired. Compensation is excluded in the following cases: RESTRUCTURING PLANS i. the creditor’s unexpired credit was purchased by the inter The commencement of these procedures is an opportunity for vivos act after the declaration of bankruptcy or in the the company and the liquidation is activated with the filing previous year (this rule also applies to overdue credits); of the proposal or the subscription of the agreements. These and type of procedures allow to avoid bankruptcy. ii. the credit is subject to certain conditions and this has not yet occurred. 4.3 Who manages each winding up process? Is there any court involvement? 3.6 How is each restructuring process funded? Is any protection given to rescue financing? ■ BANKRUPTCY It is managed by the bankruptcy trustee with the supervision In general the restructuring procedures are aimed at the of the court and the creditors’ committee. reimbursement of the credits of the company but it may happen that, ■ BANKRUPTCY AGREEMENTS in order to perform the targets provided in the plan, the debtors need Once the agreement is approved by the court, the execution of new financing. the agreements is performed by the directors and supervised by the appointed judge, bankruptcy trustee and creditors’ This new financing has to be included in the plan and the independent committee. expert must give an opinion about the possibility to reimburse this ■ ADMINISTRATIVE LIQUIDATION new financing. It is the Public Authority that manages the procedure In the event of subsequent bankruptcy of the company, the credit and authorises the extraordinary acts proposed by the arose further to this new financing is satisfied with preference on extraordinary commissioner, who is appointed by the the other creditors (“prededucibile” according to Bankruptcy Law). Ministry and who is entrusted with the management of the company. ■ COMPOSITIONS WITH CREDITORS AND DEBT 4 Insolvency Procedures RESTRUCTURING AGREEMENTS See answer to question 3.4. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any According to Italian jurisdiction, there are i) procedures only restrictions on the action that they can take (including aimed at the winding up of the company: bankruptcy; bankruptcy the enforcement of security)? agreements; and compulsory administrative liquidation, and ii) procedures that can be aimed also to the winding up of the Regarding the insolvency procedures, the creditors cannot influence company: certified restructuring plan, debt restructuring plan; the winding up process; they simply have to file a petition to the

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court through the bankruptcy trustee, in order to request to be is sold in a prospective of business continuity, so that the company included in the list of the creditors. continues its activity as a different entity. Starting from the admission of the debtor to any of the winding up procedures, the creditors cannot take executive legal actions 5 Tax individually. The creditors assisted by general or special privilege (also by pledge or mortgage) have no right to perform individual executions; they simply have the right to be satisfied, with preference 5.1 What are the tax risks which might apply to a respecting the other unsecured creditors, with the sum obtained by restructuring or insolvency procedure? the sale of the secured assets. In the case that the sum obtained is Italy lower than the value of the credits, for the remaining debts, such In the context of restructuring and insolvency procedures, the tax creditors will be treated as the unsecured creditors. liabilities are included into the debts of the company with privileged nature. 4.5 What impact does each winding up procedure have on Regarding tax risks (i.e. arisen by future and eventual tax existing contracts? Are the parties obliged to perform assessment), the art. 14 paragraph 5bis of Legislative Decree outstanding obligations? Will termination and set-off 472/1997 (Italian law related to tax penalties and fines) provides that provisions be upheld? in the case of a sale of business of a company, performed according to a restructuring procedure (art. 67 and art. 182bis of Bankruptcy ■ BANKRUPTCY AND COMPULSORY ADMINISTRATIVE Law) or insolvency procedure, the buyer is not responsible for the LIQUIDATION tax liabilities of the seller (except the case of fraud). There is a general rule that the declaration of bankruptcy of a company determines the suspension of the execution of the contract until the bankruptcy trustee, upon the approval 6 Employees of the creditors’ committee, decides whether to perform or terminate it. The Bankruptcy Law also provides some exceptions for 6.1 What is the effect of each restructuring or insolvency contracts that automatically perform (such as: rental contracts procedure on employees? and insurance contracts) or terminate automatically (such as: banking contracts or proxy contracts). In case of “certified” restructuring plans, debt restructuring Finally, contracts are provided which perform automatically agreements and compositions with creditors aimed to restructuring but the bankruptcy trustee can decide about their termination the company (“concordato in continuità”), there are no specific (such as a rental contract with the insolvency of the renter) or effects on the employment contracts. contracts which terminate automatically but the bankruptcy trustee can decide about their performance (such as: tender). The procedures of bankruptcy, compulsory administrative liquidation or extraordinary administration are not causes for The same rules apply for compulsory administrative liquidation. dismissal but, from the commencement of these procedures, the performance by the employees is suspended until the bankruptcy ■ COMPOSITIONS WITH CREDITORS AND DEBT trustee or the commissioner decide for their performance or RESTRUCTURING AGREEMENTS termination. In this period the employees are entitled to receive a See answer to question 3.5. social contribution aimed to integrate their salary (so-called, “cassa Anyway the counterparty (contraente in bonis) could integrazione guadagni”). In case of bankruptcy, the credits of terminate unperformed contracts according to the Italian employees towards the company are satisfied by the National Social Civil Code rules about the breach of contracts. Welfare Institution. Furthermore in bankruptcy and in compulsory administrative liquidation, set-off operations are possible, according to the Italian Bankruptcy Law. Please see the answer to question 7 Cross-Border Issues 3.5.

7.1 Can companies incorporated elsewhere use 4.6 What is the ranking of claims in each procedure, restructuring procedures or enter into insolvency including the costs of the procedure? proceedings in your jurisdiction?

The ranking of claims is the following: The EC Regulation 1346/2000 and the EU Regulation 848/2015 i. costs of the procedure (“crediti prededucibili” according to introduced the concept of COMI (Centre Of a debtor’s Main Interest) Bankruptcy Law); according to which the declaration of the principal insolvency ii. privileged creditors in order of priority provided by law (e.g. procedure (that involves all the assets of the debtor) must be filed employees, artisans, professionals, taxes, contributions, etc.); before the court of the state in which the company has the centre of iii. creditors secured by guarantees (in case that the value of the its interests (for the companies it is presumed that the COMI has to secured property is lower than the credit, the remaining part be identified with the place in which there is the registered office). of the credit is admitted as unsecured); and It is also possible to open secondary procedures in other EU States iv. unsecured creditors. in which the debtor has a form of dependence, limited to the assets located in those other states. 4.7 Is it possible for the company to be revived in the The concept of COMI is especially useful in resolving bankruptcy future? proceedings of groups of companies with offices in different Member States. Despite there being no specific provision in Italian law, it is possible that a company will revive in the future in the case that its business

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iii. the appointment of a sole court (giudice delegato) and a sole 7.2 Is there scope for a restructuring or insolvency bankruptcy trustee; process commenced elsewhere to be recognised in iv. the exchange of information and the improvement of your jurisdiction? collaboration between the management bodies of the different procedures; and The EC Regulation 1346/2000 and, from June 2017, the EU v. the introduction of new declaratory obligations and group Regulation 848/2015, provide that the judgment is automatically financial statements to be drafted by the companies ofa recognised in all other Member States from the moment in which it group, for the purpose of informing about any existing group produces its effects in the State in which the procedure was opened, links.

Italy without needing for judicial intervention and this effect is produced even if the debtor, according to the national law of another Member State, cannot be subject to insolvency proceedings. 9 Reform The effects that the recognition of the procedure involves in every other Member State are those “provided for by the law of the State 9.1 Have there been any proposals or developments in of opening”, unless a secondary procedure is opened in another your jurisdiction regarding the use of technology or States. Such second procedure (that anyway is not compulsory) if reducing the involvement of the courts in the laws opened, produces its effects only in the State in which is opened. of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient? In case of procedures opened in States outside the EU, the relevant effects are regulated by the Italian law 218/1995. Law 155/2017 on the reform of the Bankruptcy Law provides for new measures of simplification and reorganisation for the electronic 7.3 Do companies incorporated in your jurisdiction process, as well as for the bankruptcy court. In particular, the restructure or enter into insolvency proceedings in notification to the debtor (professional or company) of the deeds of other jurisdictions? Is this common practice? bankruptcy proceedings must be made at the certified e-mail of the debtor resulting from the register of companies or from the national Companies incorporated in Italian jurisdiction can restructure or index of certified e-mail addresses (INI-PEC) and the hearings for enter into insolvency proceedings according to EU Regulations the examination of the credits can be hold in a web form. for others Member State’s jurisdictions, while in the case of States In Law 155/2017, mechanisms are proposed aimed at obtaining outside Europe, it depends on the specific treaties or legal rules an overall more efficient and speedy system in responding to provided by the foreign jurisdictions. Although this possibility is the requests of the parties. In particular, there are the alert provided by law, such rules did not have an effective execution in systems, borrowed from the French system, which will allow the the past, since these types of rules are mostly suitable in the case of management of the corporate crisis away from the court and close to insolvency of a large company. the Chambers of Commerce, where a “alert and crisis organisation” will be established. 8 Groups 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime 8.1 How are groups of companies treated on the in your jurisdiction? insolvency of one or more members? Is there scope for co-operation between officeholders? With Law 155/2017, a process of reform of insolvency and business crisis has begun. The reform will be completed with the legislative It is firstly necessary to specify that in the Bankruptcy Law, organic decrees that the Government will have to issue by November 2018. discipline is not provided regarding the insolvency of a group of The key points are: companies. The latter is regulated from a corporate point of view according to the Italian Civil Code and from an insolvency standpoint i. the replacement of the term “bankruptcy” with “judicial according to the special discipline of Prodi’s and Marzano’s laws liquidation”; (this special discipline only applies in presence of certain conditions ii. the introduction of a definition of the state of crisis, as the and therefore it cannot be applied to the generality of companies). probability of future insolvency; Only the doctrine and jurisprudence try to realise a discipline able to iii. the subjection to the procedure of crisis or insolvency of each category of debtor: natural or legal person; collective guarantee a unitary treatment of the group. body; consumer; professional or company carrying out The recently reformed Law 155/2017 (incorporating the guidelines a commercial; or agricultural or craft activity, with the of EU Regulation 848/2015) is oriented to provide for forms of exclusion of public bodies only regulating the different coordination between the bodies of insolvency procedures within possible outcomes separately; the group of companies, aimed at encouraging integrated procedures iv. the incorporation of the EU concept of the debtor’s “centre of in order to obtain more efficient results in the management of main interests” (COMI); insolvency. The key points of the reform regarding the group of v. the introduction of the notion of group of companies; companies concern: vi. the integration of the discipline of debt restructuring i. the provision of a normative definition of the concept of a agreements and recovery plans; “group of companies”; vii. the complete reorganisation of the provisions of the ii. the possibility for companies in groups to file a sole petition compositions with creditors and the “new” bankruptcy for the admission to bankruptcy and compositions with (judicial liquidation); and creditors; viii. some changes to the compulsory administrative liquidation.

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Massimo Di Terlizzi Pirola Pennuto Zei & Associati Via Vittor Pisani no. 20 Milan 20124 Italy

Tel: +39 02 66 99 52 03 Email: [email protected] URL: www.pirolapennutozei.it Italy

Massimo Di Terlizzi was born in Milan on 30 October 1960. Admitted to the roll of Lawyers of the Italian Court and to the roll of Solicitors of the Senior Courts of England and Wales. Registered with the Italian Register of Certified Tax Advisors and the Italian Register of Certified Public Statutory Auditors. Equity Partner, Member of the Executive Committee and of the Board at Pirola Pennuto Zei & Associati (Milan). Equity Partner and Managing Partner at Pirola Pennuto Zei & Associati UK LLP (London). Chairman at Pirola Consulting China Co. Ltd (Beijing and Shanghai). Chairman at Pirola Corporate Finance SpA (Milan). Knowledge of and experience with corporate, commercial and tax law, M&A, Private Equity and restructuring. Member of Boards of Directors and Statutory Auditor of Italian companies and Italian subsidiaries of foreign multinational groups.

Pirola Pennuto Zei & Associati was established as an association of professionals in the early 1980s by its founders who, from the 1970s have been engaged in providing tax and statutory consulting services to companies and multinational groups. It is currently one of the leading independent Firms in Italy. Pirola Pennuto Zei & Associati, through the experience and high professionalism of over 500 professionals who integrate technical and specialist skills, provide a wide range of tax, corporate and statutory consulting services, both nationally and internationally, using advanced methodologies and an extensive network of correspondents. Pirola Pennuto Zei & Associati is an authoritative partner in business, academic and professional circle, with offices in Milan, Rome, Turin, Bologna, Padua, Verona, Naples, Brescia, Florence, Parma, London, Shanghai and Beijing.

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Japan Yoshinori Ono

Nishimura & Asahi Hiroshi Mori

The SMTSC and the TADR are used by companies in financial 1 Overview difficulty with creditors who are financial institutions. The debtor and the creditors conduct negotiations for debt restructuring with 1.1 Where would you place your jurisdiction on the guidance from neutral special advisors. These procedures are not spectrum of debtor to creditor-friendly jurisdictions? open to the public and serve as a kind of private restructuring process for financial institutions as creditors. A financial support plan (e.g. We think that Japan is a debtor-friendly jurisdiction in light of the amendment of the conditions of repayment, release of debt and debt-for-equity swap) is decided with the unanimous acceptance of following systems. Under Japanese insolvency and restructuring financial institution creditors. laws, the debtor is not obligated to file a petition for a bankruptcy or restructuring process in court even when it is insolvent (except in (b) Formal Court Proceedings case of a liquidator of a stock company). The relevant laws provide The court procedures in Japan for companies facing financial for a voluntary filing for restructuring and insolvency processes. difficulties are categorised into: (I) the rehabilitation process, According to a report by the Japan Federation of Bar Associations consisting of (a) Civil Rehabilitation Proceedings, and (b) in 2014, more than 96% of the natural persons who filed for Corporate Reorganisation Proceedings; and (II) the liquidation bankruptcy proceedings received relief from debt obligations in process, consisting of (c) Bankruptcy Proceedings, and (d) Special the bankruptcy process. In addition, it is quite uncommon for a Liquidation Proceedings ((a), (b), (c) and (d), collectively: “Court bankrupt person to be punished in connection with the bankruptcy Procedures”). process. However, there is an exception for cases where a person has The main characteristics of these procedures are as follows. committed fraudulent bankruptcy acts specified in the Bankruptcy (1) Civil Rehabilitation Proceedings (“Civil RP”): Debtor- Act. Also, there is a special bankruptcy process for an individual in-possession proceedings with the purpose of reducing person or small/midsize company at many Japanese courts where a creditors’ claims through a rehabilitation plan that is approved bankruptcy filing is permitted with a small deposit (e.g. JPY200,000) by the creditors’ meeting and confirmed by the court in order (Small Amount Trustee System). Under the Civil Rehabilitation Act to rehabilitate the debtors’ business. (See question 3.5 as to the conditions for approval by a creditors’ meeting.) (enforced in April 2000), it is possible for individuals and business enterprises to restructure their debts expeditiously. (2) Corporate Reorganisation Proceedings (“Corporate RP”): Rehabilitation proceedings for stock companies which are Moreover, there are several private methods for restructuring debts mainly conducted by a trustee appointed by the court. owed to financial institutions without using a court process. Such (3) Bankruptcy Proceedings (“BP”): Liquidation proceedings procedures include, among others, the procedures conducted by the conducted by a bankruptcy trustee appointed by the court. Small and Medium-sized Turnaround Support Committee and the (4) Special Liquidation Proceedings (“SLP”): Debtor-in- procedures under Turnaround Alternative Dispute Resolution. possession liquidation proceedings for a stock company conducted by a liquidator. The directors of the company become its liquidators unless otherwise determined by the 1.2 Does the legislative framework in your jurisdiction articles of incorporation or the shareholders’ meeting. This allow for informal work-outs, as well as formal procedure is aimed for the distribution of the liquidation restructuring and insolvency proceedings, and to company’s assets by agreement among the debtor’s creditors what extent are each of these used in practice? according to the rules under the Companies Act. (a) Informal Work-outs For the purpose of restructuring a company’s debt, it is possible 2 Key Issues to Consider When the to reduce the amount of debt with the unanimous consent of all Company is in Financial Difficulties of the company’s creditors under Japanese law. In addition, there are formal procedures established by law to obtain each creditor’s 2.1 What duties and potential liabilities should the consent. Such procedures include, among others, the procedures directors/managers have regard to when managing a conducted by the Small and Medium-sized Turnaround Support company in financial difficulties? Is there a specific Committee (“SMTSC”) and the procedures under the Turnaround point at which a company must enter a restructuring Alternative Dispute Resolution (“TADR”). These procedures or insolvency process? are available to achieve a restructuring of a company’s debts and conducted without court supervision. Directors of stock companies who continue to trade while the stock

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company has financial difficulties should note the following issues concerning their potential liability: 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of (1) if a director neglects his/her duties as a company director, he/ challenge? What remedies are available? she will be liable to the company for damages arising as a result of such neglect. If a director acts with wilful intent or The trustee in Corporate RP or BP (“Trustee”) or the supervisor in with gross negligence in neglecting such duties, such director Civil RP (“Supervisor”) may exercise the right of avoidance against is liable to third parties for damages arising as a result of such certain acts as listed below. Note that there is no right of avoidance neglect. In addition, if a director causes damages to third under Special Liquidation Proceedings. parties in the course of business by negligence or intentionally,

(1) Fraudulent Act Japan he/she is also liable to third parties for such damages; (a) An act conducted by the debtor that is detrimental to (2) if a director commits an act of malfeasance, there is a its creditors while the debtor has knowledge that it is possibility that such director will be criminally liable for detrimental (this does not apply where the person who breach of trust stipulated in the Criminal Code or aggravated has benefited from such act did not know that the act was breach of trust stipulated in the Companies Act; and detrimental to the debtor’s creditors). (3) there are specific procedures for pursuing a director’s liability (b) An act conducted by a debtor that is detrimental to its in an expedited process in Civil RP, Corporate RP, BP and creditors after suspension of payments or the filing SLP. A petition for an assessment of director’s liability can be of a petition for commencement of any of the Court Procedures (collectively, a “Suspension of Payments”) filed in such proceedings asserting damages to the company took place (this does not apply where the person who has by an illegal act by a director. benefitted from such act did not know that a Suspension of Under Japanese law, it is possible for a stock company to file a Payments had taken place or that the act was detrimental petition for restructuring or insolvency court proceedings when its to the debtor’s creditors). financial conditions meet certain conditions stipulated under the (c) An act to extinguish debt in exchange for giving property law. However, filing such a petition is not mandatory except when a if the value of property exceeds the amount of the debt liquidator of a stock company which is going through a liquidation extinguished and such act satisfies either of conditions (a) and (b) above. Such act may be avoided only for the process under the Companies Act finds that the company may be portion of the property which exceeds the value of the insolvent. In such a case, the liquidator is obligated to file a petition cancelled debt. for a special liquidation process supervised by the court. (d) Any gratuitous act conducted by the debtor within six months prior to, or after, a Suspension of Payments. 2.2 Which other stakeholders may influence the (2) Disposal of Assets with the Intention to Conceal the Proceeds company’s situation? Are there any restrictions on the An act of disposal of property (in exchange for reasonable action that they can take against the company? For value) from another party in which both of the following example, are there any special rules or regimes which conditions apply: apply to particular types of unsecured creditor (such (i) The act creates an actual risk that the debtor may conceal as landlords, employees or creditors with retention or otherwise dispose of the property in a manner which of title arrangements) applicable to the laws of your is detrimental to creditors (“Concealment”) by changing jurisdiction? real property to cash or any other manner. (ii) The debtor had the intention of conducting a Concealment A creditor may file a petition to commence BP at court by providing and the other party knew of this intention. prima facie evidence to show (i) the existence of the creditor’s claim, (3) Preferential Act concerning Provision of Security or and (ii) the fact constituting the grounds for commencement of BP Extinguishment of Debt for the debtor. A creditor may file a petition to commence Civil RP (a) An act to provide security or extinguish debt after the in court by providing prima facie evidence to show the existence debtor becomes unable to pay its debts, or a petition for of (i) the creditor’s claim, and (ii) the risk that facts constituting commencement of any of the Court Procedures has been grounds to commence BP of the debtor will occur. filed. In addition, as to a stock company: (i) a creditor who holds claims (b) An act to provide security or extinguish debt within 30 that account for one-tenth or more of the amount of the stated capital days prior to the date when the debtor becomes unable of the stock company; and (ii) a shareholder who holds one-tenth or to pay its debts if such act is not based upon the debtor’s more of the voting rights of all shareholders of the stock company, legal obligation. may file a petition to commence Corporate RP at court by providing (These do not apply where the creditor did not know the prima facie evidence to show the existence of (i) the creditor’s relevant fact as mentioned above.) claim, and (ii) the risk that facts constituting grounds to commence (4) Perfection BP of the debtor will occur. An act of perfection to assert the establishment, transfer or modification of a right against a third party (including a A creditor, liquidator, company auditor or shareholder may file a provisional registration) may be avoided if (a) the perfection petition in court to commence SLP. action occurs after a Suspension of Payments, (b) the Unsecured claims by landlords and employees have certain priorities perfection action occurs 15 or more days after the date of over unsecured claims. Claims by creditors with retention of title establishment, transfer or modification of the right, and (c) arrangements are regarded as secured claims over the applicable the perfection action was attempted with a knowledge of the Suspension of Payments. property. The Trustee and Supervisor may exercise the right of avoidance in court. Depending on the type of voidable action (as described above), the right of avoidance would allow them to petition the court for a court judgment for restoration of the estate of the debtor (e.g. return of property or payment or cancellation of mortgage which may be avoided under the applicable law).

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(Notes: (a) “Cramdown” is permitted by the law. Even if 3 Restructuring Options one creditor group disapproves of the reorganisation plan, the court may approve the reorganisation plan by creating new provisions to the plan which protect the interest of the creditor 3.1 Is it possible to implement an informal work-out in group who disapproved the plan; and (b) in exceptional cases your jurisdiction? where a Corporate RP is used for a company which is not insolvent, consent of the shareholders who hold the majority Under Japanese law, it is possible to implement an informal work-out of shares is also required.) in addition to restructuring or insolvency court proceedings. In an A debt-for-equity swap (Debt-Equity Swap or “DES”) is permitted informal work-out, creditors that are financial institutions participate as one of the restructuring schemes. DES reduces debt and provides Japan in the process. In certain cases, business entities who are major creditors with an opportunity to obtain capital gains and income trade creditors also participate in the process. In order to achieve a from the equity after the rehabilitation of the company. successful work-out, unanimous consent of all creditors is necessary. A “pre-packaged sale” is also possible. It refers to a type of procedure where a debtor selects its potential sponsor before the 3.2 What formal rescue procedures are available in commencement of Civil RP or Corporate RP. By such arrangement, your jurisdiction to restructure the liabilities of it is possible to avoid the impairment of the debtor’s business distressed companies? Are debt-for-equity swaps due to announcement of insolvency procedure by publication and pre-packaged sales possible? To what extent can of the existence of the sponsor after Civil RP or Corporate RP is creditors and/or shareholders block such procedures or threaten action (including enforcement of security) commenced. to seek an advantage? Do your procedures allow you When Civil RP or Corporate RP is commenced, creditors may to cram-down dissenting stakeholders? file objections with the court if any of the conditions forthe commencement of such procedures under the relevant statute has As explained in question 1.2 above, a company with financial not been satisfied. difficulties may utilise Civil RP or Corporate RP in orderto In Civil RP, secured creditors can enforce their security interests restructure the liabilities. outside of the proceedings. However, upon petition by the debtor, In Civil RP or Corporate RP, if the proposed rehabilitation plan the court may cancel the security interests in exchange for the is approved at a creditors’ meeting, the court will examine the payment of the fair value of the subject property which is essential pertinent conditions required by law and approve the rehabilitation for continuance of the debtor’s business even if the amount of the plan. Upon the approval of the rehabilitation plan, the reduction creditor’s claim exceeds such fair value of the subject property. It of debts will become effective and the debtor shall pay the debts is a common practice for a debtor in Civil RP to negotiate and enter according to the plan. into an agreement with its key creditor who has security over the The requirements for approval of a proposed reorganisation plan by core property of the debtor’s business (e.g. its factory) whereby the creditors meeting are as follows: the creditor shall refrain from enforcing the security in exchange for instalment payments of the fair value of the property agreed to (1) Civil RP between the parties. (a) Consent of the majority (by number of creditors who In Corporate RP, secured creditors cannot enforce their security exercise a vote), and (b) consent of creditors who hold claims outside of the proceedings. Their claims may be paid pursuant to the in an amount not less than a half (½) of the total amount of reorganisation plan with priority. However, if the subject property is claims owed by the debtor. clearly unnecessary for the reorganisation of the debtor’s business, a (2) Corporate RP secured creditor can enforce its security outside of the proceedings Approval of both (a) the unsecured claim creditors’ group, after obtaining court approval. and (b) the secured claim creditors’ group are necessary as per the conditions below: 3.3 What are the criteria for entry into each restructuring (a) unsecured claims: consent of the persons who hold more procedure? than half of the total amount of unsecured claims; and (b) secured claims: conditions for approval varies according As a common practice in Japan, when a company has financial to the content of the proposal as set forth below. difficulties, an informal work-out is conducted with creditors that are (i) A proposed reorganisation plan which provides for financial institutions without involving other types of creditors, such the extension of the terms of secured claims: consent as trade creditors. In such cases, it is possible for the company to of the secured creditors who hold secured claims that continue to conduct its business during the work-out process whereby are not less than two-thirds (⅔) of the total amount of the company can avoid the damages to its business which would be the secured claims. caused if the company goes through Civil RP or Corporate RP. (ii) A proposed reorganisation plan which provides for On the other hand, in the case of Civil RP and Corporate RP, all the reduction and release of debts for secured claims types of creditors are involved. The grounds for commencement or provides for measures that may affect the rights of of these procedures are (a) when there is a risk that grounds for secured creditors other than the extension of terms: commencement of BP will occur to a debtor (see question 4.2), and consent of secured creditors who hold secured claims (b) when it is extremely difficult for a debtor to continue its business that are not less than three-fourths (¾) of the total if the debtor pays its debts that are due. amount of the secured claims. (iii) A proposed reorganisation plan which aims for 3.4 Who manages each process? Is there any court the discontinuation of the entire business of the involvement? reorganisation company: consent of secured creditors who hold secured claims that are not less than nine- In the case of an informal work-out, the executive directors of the tenths (9/10) of the total amount of the secured claims. company continue to manage the company. Such directors also

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control the informal work-out process with assistance from legal counsel specialised in insolvency cases. 4.2 On what grounds can a company be placed into each winding up procedure? In case of Civil RP, the executive directors of the company continue to manage the company and control the Civil RP under The grounds for commencement of BP are (a) the debtor is unable the supervision of the court. On the other hand, as a basic rule to pay its debts, or (b) the debtor is insolvent. In addition, when a in Corporate RP, a trustee appointed by the court takes over the debtor has suspended payments, the debtor is presumed to be unable positions of the executive directors and control the management of to pay its debts. the company and the process of the Corporate RP. In case of SLP, the grounds for commencement of the procedures

are: (a) that implementation of ordinary liquidation procedures Japan 3.5 What impact does each restructuring procedure have would be extremely difficult due to certain circumstances which on existing contracts? Are the parties obliged to apply to the company; or (b) the company is suspected of being perform outstanding obligations? Will termination and set-off provisions be upheld? insolvent.

In principle, even if Civil RP or Corporate RP have commenced, 4.3 Who manages each winding up process? Is there any contracts between the company and others will not be terminated court involvement? merely because of the commencement of proceedings. If a debtor is a party to an executory contract at the commencement In BP, a trustee appointed by the court has the power to manage of Civil RP or Corporate RP, the debtor may choose (i) to reject the and dispose of the assets of the company and manage the BP under contract in which case it is terminated and the counterparty may the supervision of the court. In most cases of SLP, the executive seek damages as a rehabilitation creditor and demand the return of director of the company may become the liquidator and manage the what the counterparty has provided to the debtor under the contract, process under the supervision of the court. or (ii) to assume the contract in which case the company must perform its obligations and may demand performance by the other 4.4 How are the creditors and/or shareholders able to party. When a debtor chooses to assume a contract, further claims influence each winding up process? Are there any by the counterparty shall take priority over other creditors. restrictions on the action that they can take (including Under Japanese law, it is necessary for the debts of two parties the enforcement of security)? to become due in order to be eligible for set-off. In Civil RP and Corporate RP, creditors can exercise the right of set off subject to In BP, the trustee will distribute the remaining cash to the creditors the exceptions under the relevant law. The exceptions for set-off are on a pro rata basis after the liquidation of the assets of the debtor (i) where the person has acquired another person’s claim after the and payment of the claims with priorities. Therefore, the creditors commencement of such proceedings, and (ii) where the person has and the shareholders are not able to influence the BP. acquired a claim after the company became unable to pay debts, the In SLP, a liquidation agreement may be proposed in a creditors’ company suspended payments, or the petition for commencement meeting. The requirements for approval of a liquidation agreement of such proceedings was filed, and the person knew, at the time of by the creditors’ meeting is: (i) consent of the majority of creditors acquisition of the claim, of such fact. In addition, creditors can (by the number of creditors who exercise a vote); and (ii) consent exercise the right of set off only within the period for the filing of their of the creditors who hold claims that are not less than two-thirds claims specified by the court. (⅔) of the total amount of unsecured claims owed by the debtor. If the liquidation agreement is approved at the creditors’ meeting, the court will examine the pertinent conditions required by law 3.6 How is each restructuring process funded? Is any protection given to rescue financing? and approve the agreement. According to the approved liquidation agreement, the reduction of debts, payment of debts and liquidation of the company will be implemented. In SLP, it is also possible and The expenses for the restructuring process are paid by the debtor. In common for a company to enter into separate settlement agreements case of Civil RP and Corporate RP, (a) the debtor pays the expenses with each of the creditors with court approval instead of holding a for the process to the court before the process is started, and (b) creditors’ meeting. court approval (Corporate RP) or the consent of the supervisor (Civil RP) is required in order for the company to borrow funds to In BP and SLP, secured creditors can enforce their securities outside finance the proceedings. The claims arising from such financing of the proceedings. with court approval or with consent of the supervisor are treated as priority claims under Corporate RP or Civil RP. 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off 4 Insolvency Procedures provisions be upheld?

In principle, even if a winding up procedure has commenced, 4.1 What is/are the key insolvency procedure(s) available to wind up a company? contracts between the company and others will not be terminated merely because such procedure has commenced. However, the Civil As explained in question 1.2 above, BP and SLP are available to Code provides for automatic termination of (a) an agent’s authority wind up an insolvent company. in case of bankruptcy of the agent, and (b) a mandate contract in case of bankruptcy of the engaged party or the engaging party.

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If a debtor is a party to an executory contract at the commencement liability for corporate income tax and consumption tax regarding of BP, the debtor may choose (i) to reject the contract in which the acts conducted by the company. It should be noted that if a case it is terminated and the counterparty may seek damages as a debtor is released of its debt to a creditor, the debtor will be subject bankruptcy creditor and demand the return of what the counterparty to tax liability for deemed income equal to the amount of forgiven has provided to the debtor under the contract, or (ii) to assume the debt. Therefore, if the debtor has no deductible expenses applicable contract, in which case the company must perform its obligations to such income, the debtor may be subject to additional corporate and may demand performance by the other party. When a debtor income tax. chooses to assume a contract, further claims by the counterparty Tax claims which arise after the commencement of each procedure shall take priority over other creditors. are recognised as follows:

Japan In SLP, there are no such rules which enable the company to assume (a) Civil RP, Corporate RP, and SLP: Claims with general or reject the contracts. priority. If a contract provides that (i) the contract shall be automatically (b) BP: Subordinate claim which is paid only after full terminated, and (ii) the monetary obligations of both parties shall payment of ordinary claims which exist at the time of the be automatically set off upon commencement of BP or SLP, such commencement of proceedings. The creditor usually may not clauses are effective. receive any dividends for such subordinate claim. However, tax claims which fall within the scope of expenses regarding management, realisation and distribution of a bankruptcy 4.6 What is the ranking of claims in each procedure, estate are regarded as priority claims and are paid outside the including the costs of the procedure? procedure.

(1) BP (a) The following types of claims are paid with priority outside of 6 Employees BP. Namely, these creditors are not subject to the restrictions under BP and the debtor has to pay the debt when it is due. 6.1 What is the effect of each restructuring or insolvency (x) Common benefit claims: procedure on employees? (i) Expenses for court proceedings performed for the common interest of creditors. In rehabilitation procedures such as Civil RP and Corporate RP, (ii) Expenses for the administration and disposition of the employment relationships will not be directly affected by the debtor’s business and assets after the commencement commencement of the procedures. However, employees are of proceedings. often dismissed according to a restructuring plan approved within (y) Claims with general priority. the procedures. In liquidation procedures such as BP and SLP, (z) Claims with priority under other laws. For example, a tax all employees will be dismissed eventually because the company claim or a claim to wages. will continue to exist only for a short time for the purposes of the (b) Creditors may execute claims secured by security interests liquidation proceedings. outside of the procedure. In each procedure, employees will be reimbursed for their rights to (c) Claims with general priority other than those stated in (1) wages with priority. (a) above have preferential status within the procedure for dividend distribution. (d) Claims other than those above will be paid on a pro rata 7 Cross-Border Issues basis. (2) SLP (a) Claims as stated in (1)(a) above are paid with priority outside 7.1 Can companies incorporated elsewhere use of the procedure. restructuring procedures or enter into insolvency proceedings in your jurisdiction? (b) Creditors may execute claims secured by security interests outside of the procedure. A foreign company incorporated in a country other than Japan may (c) Claims other than those above will be paid on a pro rata basis. file a petition for commencement of BP or Civil RP at Japanese court if such company has a business office, other office or property in Japan. A foreign company may also file a petition for 4.7 Is it possible for the company to be revived in the commencement of Corporate RP if it has a business office in Japan. future?

A stock company shall be dissolved upon the commencement of BP 7.2 Is there scope for a restructuring or insolvency under the Companies Act. SLP are applicable to a stock company process commenced elsewhere to be recognised in your jurisdiction? which has been dissolved and insolvent. Upon the completion of BP or SLP, the stock company ceases to exist. There is no legal system which makes it possible for such a company to revive in the future. According to the Act on Recognition of and Assistance for Foreign Insolvency Proceedings, the power and authority of a foreign trustee in foreign insolvency proceedings may be recognised in 5 Tax Japan through the recognition process in the Tokyo District Court (“TDC”).

5.1 What are the tax risks which might apply to a If a debtor has a domicile, residence, business office or other restructuring or insolvency procedure? office in the country where the foreign insolvency proceedings are petitioned against the debtor, a foreign trustee or the debtor (only if After the commencement of each procedure, a debtor will incur tax there is no trustee) may file a petition with the TDC for recognition of the foreign insolvency proceedings.

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If such a petition meets the requirements prescribed in law, the court will issue an order for the recognition of foreign insolvency 8 Groups proceedings. The court may dismiss the petition if there are grounds for dismissal which include, among others, the following: (a) it is 8.1 How are groups of companies treated on the obvious that the effect of the foreign insolvency proceedings does insolvency of one or more members? Is there scope not extend to the debtor’s property in Japan; (b) it is contrary to for co-operation between officeholders? public policy in Japan to render a disposition of assistance for the foreign insolvency proceedings pursuant to the Act on Recognition Even in case of a group of companies, restructuring or insolvency of and Assistance for Foreign Insolvency Proceedings; or (c) it is proceedings are conducted for each company as a separate court obviously unnecessary to render a disposition of assistance for the case. However, it is common practice that the same person is Japan foreign insolvency proceedings. appointed as trustee or supervisor so that such court cases for a The court may, when it finds it necessary in order to achieve the group of companies may proceed simultaneously and efficiently. purpose of recognition and assistance, give an order such as (i) an order to stay other court procedures, (ii) an order prohibiting the 9 Reform disposition of property, as well as prohibiting payments and other dispositions, (iii) an order to stay procedures to exercise security interests, (iv) an order prohibiting compulsory execution, (v) an 9.1 Have there been any proposals or developments in order permitting the disposition of property by the debtor, and (vi) your jurisdiction regarding the use of technology or an administration order to appoint a “recognised trustee” who has an reducing the involvement of the courts in the laws exclusive power to administer the business and assets of the debtor of your jurisdiction, which are intended to make within Japan. A recognised trustee may move the assets of the insolvency processes more streamlined and efficient? debtor out of Japan after obtaining court approval. Such approval may be given by the court if the court recognises that there is no risk There are no such proposals as of January 2018. that the interests of creditors in Japan would be harmed. 9.2 Are there any other governmental proposals for 7.3 Do companies incorporated in your jurisdiction reform of the corporate rescue and insolvency regime restructure or enter into insolvency proceedings in in your jurisdiction? other jurisdictions? Is this common practice? Japan experienced a long-term depression in the 1990s after We understand that it is quite uncommon for a company incorporated the “bubble economy” of the 1980s. During this long-term in Japan to enter into restructuring or insolvency proceedings in depression, one of the most important problems facing Japan was other jurisdictions. However, it is common practice for Japanese the restructuring and liquidation of many companies facing financial companies to apply for recognition of Japanese insolvency difficulties. In order to cope with the situation, the Japanese proceedings in a foreign court in order to deal with assets existing in government implemented a fundamental reform of the insolvency a foreign country or contracts with a foreign party. laws. As the first step of such reformation, in April 2000, the Civil Rehabilitation Act came into force. In April 2003, a fundamental amendment to the Corporate Reorganisation Act was implemented. Then, the Bankruptcy Act was materially amended in January 2005. The Special Liquidation Process was also fundamentally amended when the Companies Act was newly enacted in May 2006. Because these fundamental reforms took place in relatively recent years, it is not expected for Japan to enact new reform of its corporate restructuring and insolvency regime in the near future.

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Yoshinori Ono Hiroshi Mori Nishimura & Asahi Nishimura & Asahi Otemon Tower, 1-1-2 Otemachi Otemon Tower, 1-1-2 Otemachi Chiyoda-ku, Tokyo 100-8124 Chiyoda-ku, Tokyo 100-8124 Japan Japan

Tel: +81 3 6520 6200 Tel: +81 3 6520 6200 Fax: +81 3 6520 7200 Fax: +81 3 6520 7200 Email: [email protected] Email: [email protected] URL: www.jurists.co.jp URL: www.jurists.co.jp Japan

Yoshinori Ono is a partner of Nishimura & Asahi. Since he started Hiroshi Mori is a partner of Nishimura & Asahi. He has been practising practising law in 1986, he has been advising foreign clients on various in an extensive range of corporate reorganisation cases and finance aspects of corporate restructuring cases and insolvency cases matters. Mr. Mori has acted as a court-appointed trustee in many under Japanese law. He has deep experience and knowledge as a corporate liquidation proceedings. He frequently advises clients bankruptcy trustee in bankruptcy cases and as a supervisor in civil with respect to private corporate rehabilitation and civil rehabilitation rehabilitation cases appointed by the Tokyo District Court. His practice issues. He was involved in the first case in Japan in which a company focuses on cross-border matters including corporate restructuring/ in civil rehabilitation proceedings had its listing stayed on the stock insolvency, business crime, antitrust/antimonopoly, cross-border market. His background as a practitioner is unique in that, prior to investment/licensing, joint ventures, mergers and acquisitions, labour entering private practice, he worked for a Japanese government bank issues, real estate investment and cross-border dispute resolution. for 16 years and for a Japanese government agency for two years. Mr. Ono is a graduate of the University of Tokyo (LL.B., 1981) and was Mr. Mori graduated from the University of Tokyo (LL.B.) and Duke admitted to practise law in Japan in 1986. University School of Law (LL.M.).

Nishimura & Asahi is one of Japan’s premier full-service law firms, covering all aspects of domestic and international business and corporate activity. The firm currently has more than 500 Japanese and foreign lawyers and employs over 500 support staff, including tax accountants, and one of the largest teams of paralegals in Japan. Offices: Tokyo; Nagoya; Osaka; Fukuoka; Bangkok; Beijing; Shanghai; Hanoi; Ho Chi Minh City; Jakarta*; Singapore; Yangon; Hong Kong**; and Dubai. Key areas of practice: Corporate: General Corporate; M&A; Compliance; Start-up Businesses; Labour Law; and Real Estate/Environmental. Finance: Banking; Capital Markets; Asset Management; Structured Finance/Securitisation; Asset Finance; Acquisition Finance; Insurance; and PFI/Project Finance. Restructuring/Insolvency: Restructuring/Insolvency. Cross-Border Practice: International Transactions; International Trade; International Disputes; and International Taxation. Dispute Resolution: Civil & Commercial Disputes; Administrative Disputes; and Specialised Disputes. IT/IP: IP Disputes; IP Transactions; Venture Capital/Entrepreneurial Services; and Telecommunications/Media. Corporate Crisis Management: Corporate Crisis Management. Antitrust: Antitrust. Tax: Tax Counselling; and Tax Controversy and Litigation. Trusts & Estates. Natural Resources and Energy. Managing Partner: Mr. Masaki Hosaka. Languages: Japanese; English; Chinese (Mandarin); and French. Total number of lawyers: 569. Email: [email protected] *Associate Office **Affiliate Office

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Korea Thomas P. Pinansky

Barun Law LLC Joo Hyoung Jang

b) Work-out procedure under the CRPA 1 Overview There is a work-out procedure governed by the CRPA and it may be commenced by a resolution of a committee composed of creditors 1.1 Where would you place your jurisdiction on the who own financial credits (upon the consent of at least 75% of the total spectrum of debtor to creditor-friendly jurisdictions? financial credits). This is a more formal process than the Voluntary Agreement because the Korean Financial Services Commission (the Restructuring proceedings available in Korea allow debtors to “FSC”) may impose corrective measures or administrative fines for recover and perform normal economic activities. Insolvency failure to proceed the work-out according to the requirements and the proceedings available in Korea are procedures in which a debtor provisions under the CRPA. The CRPA was enacted as a temporary whose economic condition is unlikely to be recovered in the future statute, and it is set to expire on June 30, 2018. The authorities are is dissolved and liquidated after distributing its assets equitably currently discussing the extension of the expiration date. to its creditors. Korea is more debtor-friendly in the sense that, B. Formal proceedings under the DRBA except for certain restrictions on creditors’ rights to exercise their a) Rehabilitation proceeding claims and on debtors’ rights to manage the business and dispose ■ Commencement of its assets, there aren’t many restrictions and each proceeding has several measures that aim to achieve the above goals. Under the DRBA, a company may restructure its debts through a court-supervised rehabilitation proceeding, in which the company’s debts are restructured according to a 1.2 Does the legislative framework in your jurisdiction rehabilitation plan approved by the interested parties (e.g., allow for informal work-outs, as well as formal creditors) and the court. restructuring and insolvency proceedings, and to When a debtor that is unable to pay its debts when due what extent are each of these used in practice? without a significant impact on the continuity of its business or its total debt is larger than its total assets, the debtor may The legislative framework in Korea allows informal work-outs, as apply for a rehabilitation proceeding under the DRBA. A well as formal restructuring and insolvency proceedings. creditor who has credits in the amount of at least 10% of the debtor’s equity or a shareholder of the debtor who owns at Informal work-outs include (a) Voluntary Agreements, and (b) Work- least 10% of the debtor’s ownership interests may also apply outs under the Corporate Restructuring Promotion Act (“CRPA”). for this proceeding. Formal proceedings available under the Debtor Rehabilitation ■ Overview of the process and Bankruptcy Act (“DRBA”), which are supervised by the courts, include (a) rehabilitation proceedings, and (b) bankruptcy When the court renders a decision to commence a rehabilitation proceeding, the court will order a receiver proceedings. to submit a rehabilitation plan if the court determines that Since each procedure has different levels of court intervention and the debtor’s continuing value is larger than the debtor’s creditor autonomy, appropriate procedures are used depending on liquidation value. Once the court and the interested parties the circumstances of a debtor company and creditor’s judgment. approve the rehabilitation plan submitted by the receiver, the A. Informal work-outs receiver implements the restructuring of the debtor’s debts according to the rehabilitation plan. a) Voluntary Agreement A receiver owes a fiduciary duty when performing his/her Upon the debtor’s request for financial support, its creditors that duties and functions in a rehabilitation proceeding. Typically, are financial institutions will review whether the debtor could be the courts appoint the debtor’s representative director as rehabilitated in the future. Based on such review, a Voluntary a receiver in order to ensure that a person who is familiar Agreement may be entered into among the debtor and creditor- with the debtor’s business is involved in the rehabilitation financial institutions. Based on the Voluntary Agreement, the proceeding. creditor-financial institutions can relieve the debtor’s financial stress b) Bankruptcy proceeding by, for example, extending the term of the loan. This is considered ■ Commencement the most flexible work-out programme, given that the restructuring A debtor or the debtor’s creditor may petition for a bankruptcy procedures proceed voluntarily by a group of creditors composed of in case the debtor is unable to pay its debts when due or its the debtor’s creditors that are financial institutions. total debt is larger than its total assets. Also, the court may at its discretion declare the debtor bankrupt if a debtor’s continuing value is less than its liquidation value.

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■ Overview of the process When the court declares the debtor bankrupt, the debtor’s 2.3 In what circumstances are transactions entered debts are examined and the debtor’s assets, after being into by a company in financial difficulties at risk of challenge? What remedies are available? monetised, are distributed to its creditors. A trustee who is appointed by the court implements the bankruptcy procedures with a fiduciary duty. A creditor may petition to the court for cancellation of a debtor’s legal action according to the Civil Code. Also, prior to the commencement of a rehabilitation proceeding or declaration of 2 Key Issues to Consider When the bankruptcy under the DRBA, a receiver for the rehabilitation Company is in Financial Difficulties proceeding or a trustee for the bankruptcy proceeding may petition Korea to the court for cancellation of the debtor’s legal action. A. Creditor’s right to challenge 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a A creditor may petition to the court for cancellation of a debtor’s company in financial difficulties? Is there a specific legal action and a restitution of the relevant assets as a fraudulent point at which a company must enter a restructuring conveyance if such action has reduced the debtor’s assets and the or insolvency process? debtor committed such action knowing that such action would impair the creditor. Under the Civil Code, a director is obligated to perform his/her B. Receiver’s (rehabilitation proceeding) or trustee’s duties with a fiduciary duty. One of the director’s fiduciary duties (bankruptcy proceeding) right to challenge recognised by the Supreme Court of Korea includes a director’s duty Prior to the commencement of a rehabilitation proceeding or to monitor the adequacy of another directors’ performance under declaration of bankruptcy under the DRBA, a receiver for the the relevant laws, regulations and articles of incorporation and a rehabilitation proceeding or a trustee for the bankruptcy proceeding director’s duty to take necessary measures to prevent illegitimate may petition to the court for the cancellation of the debtor’s legal activities. actions and restitution of the relevant assets under one of the Also, if a company suffers damages or loss due to a cause attributable following cases: to a director’s wilful misconduct or negligence in performing his/her (1) the debtor’s acts would be detrimental to other creditors at the foregoing duties, the director is responsible for compensating such time such acts were taken, provided that the beneficiary was damages to the company under the Commercial Code and the Civil aware that such acts would be detrimental to other creditors; Code and could potentially be subject to criminal penalties for a (2) the debtor’s acts would be detrimental to other creditors breach of fiduciary duty. or repay any debt or provide collateral after a suspension As explained above, duties and potential liabilities of directors are of payment or the filing of rehabilitation proceedings determined based on whether the directors fulfilled their fiduciary (collectively, the insolvency event), provided that the payee duties. There is, however, no law, regulation or precedent to date or the secured party was aware that the insolvency event that explicitly requires a director to petition for a rehabilitation or a had occurred or that such acts would be detrimental to other bankruptcy proceeding when the company is in financial distress. creditors; (3) the debtor’s acts that repay debt or provide collateral after or within 60 days prior to an insolvency event when the 2.2 Which other stakeholders may influence the insolvent debtor was not obliged to do so at such time, company’s situation? Are there any restrictions on the provided that the payee or secured party was aware that the action that they can take against the company? For insolvency event had occurred or that such acts will prejudice example, are there any special rules or regimes which the equal treatment of the insolvent party’s creditors; and apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention (4) the debtor’s acts that took place after or within six months of title arrangements) applicable to the laws of your of the occurrence of an insolvency event and that conferred jurisdiction? benefits on the beneficiary in exchange for no or nominal compensation. ■ A debtor may enter into a Voluntary Agreement with its creditor-financial institutions or may petition for a 3 Restructuring Options rehabilitation proceeding or a bankruptcy proceeding. ■ Creditor-financial institutions may enter into a Voluntary Agreement or may commence a work-out procedure 3.1 Is it possible to implement an informal work-out in according to the CRPA. your jurisdiction? ■ A creditor who has credits in the amount of at least 10% of the debtor’s equity value may petition for a rehabilitation As explained above in question 1.2, there are two types of informal proceeding, and any creditors may petition for a bankruptcy work-outs in Korea: (1) Voluntary Agreement among the debtor proceeding. and the creditor-financial institutions; and (2) work-out procedures ■ A shareholder of a debtor who owns at least 10% of the under the CRPA. debtor’s ownership interest may petition for a rehabilitation The benefits of these informal work-out procedures include their proceeding, and any shareholder may petition for a bankruptcy proceeding. flexibility, as the procedures are supervised by creditors (not by the courts), and their relatively minimal impact on the debtor’s credit ■ The exercise of rights of unsecured creditors (such as rating. landlords, employees or creditors with retention of title arrangements) is not restricted solely because the financial situation of the debtor company is difficult, unless informal work-outs or formal proceedings has been initiated.

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court-supervised rehabilitation proceeding in which the company’s 3.2 What formal rescue procedures are available in debts are restructured according to a rehabilitation plan approved by your jurisdiction to restructure the liabilities of the interested parties (e.g., creditors) and the court. distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can A rehabilitation proceeding under the DRBA may be voluntarily creditors and/or shareholders block such procedures applied to the court by a debtor that is unable to pay its debts when or threaten action (including enforcement of security) due without a significant impact on the continuity of its business or to seek an advantage? Do your procedures allow you its total debt is larger than its total assets. This proceeding may also to cram-down dissenting stakeholders? be involuntarily applied by a creditor who has credits in the amount of at least 10% of the debtor’s equity or a shareholder of the debtor

As explained above in question 1.2, a formal rescue procedure who owns at least 10% of the debtor’s ownership interests. Korea available in Korea to restructure the liabilities of distressed companies is a rehabilitation proceeding under the DRBA. Both debt-for-equity swaps and pre-packaged sales are possible. 3.4 Who manages each process? Is there any court involvement? Of the two, the debt/equity swap whereby creditors’ rehabilitation credits are swapped into the debtor’s equity according to the A. Informal work-outs rehabilitation plan is commonly used. This is a commonly used Informal work-outs are supervised and implemented by creditors restructuring method because, from the creditor’s perspective, it is without the court’s involvement. However, the FSC may impose more beneficial to receive in stocks (which may later be monetised) corrective measures or administrative fines for failure to proceed than to reduce its credit amounts. From the debtor’s perspective, with the work-out according to the requirements and the provisions such restructuring method could prevent repaying the debts out of under the CRPA. its own pocket. B. Formal proceeding (rehabilitation proceeding) Based on the August 30, 2016 amendment to the DRBA, pre- packaged sales were adopted. According to the amended DRBA, A court-appointed receiver has the authority to manage the debtor’s a creditor (who owns at least 50% of the debtor’s debts) or a debtor affairs and to dispose its assets. Typically, the court appoints the (who obtained consent from such creditor) may submit a plan to the debtor’s representative director as the receiver in order to ensure court before the commencement of a rehabilitation proceeding and that a person who is familiar with the debtor’s business is involved the court may expedite the process based on the plan. However, so in the rehabilitation proceeding. far, it is rarely used in practice. A creditor who has credits in the amount of at least 10% of the 3.5 What impact does each restructuring procedure have debtor’s equity value may petition for a rehabilitation proceeding on existing contracts? Are the parties obliged to and any creditors may petition for a bankruptcy proceeding. A perform outstanding obligations? Will termination and set-off provisions be upheld? shareholder of a debtor who owns at least 10% of the debtor’s ownership interest may petition for a rehabilitation proceeding. A. Informal work-outs Also, creditors and shareholders participate in the rehabilitation There is no impact on the existing contracts entered into by the plan approval process. At least ⅔ of the rehabilitation creditors’ debtor. However, the Voluntary Agreement and/or the corporate consent, at least ¾ of secured creditors’ consent and at least ½ of restructuring plan under the CRPA may have an impact on the rights the shareholders’ consent are required to approve a rehabilitation and obligations of the debtor’s existing contracts. plan; provided, however, that, in case the approval requirement of any of the stakeholders is not satisfied, the court may nevertheless B. Formal proceeding (rehabilitation proceeding) approve the rehabilitation plan with safety measures protecting the a) General rule stakeholder who did not consent. In principle, there is no impact on the existing contracts entered into For your information, a secured creditor is a creditor who by the debtors (even in the event of a rehabilitation proceeding). has a security interest in the debtor’s assets at the time of the b) Exceptions commencement of the rehabilitation proceeding. The secured According to the DRBA, an executory contract that has not been creditor may be repaid its credit by exercising its security interests completely performed by the debtor and the counter-party at the within the umbrella of the rehabilitation proceeding. On the other time of the commencement of the rehabilitation proceeding may be hand, secured creditors under the bankruptcy proceeding may revoked or terminated by the receiver, and the receiver may demand exercise its security interests outside the umbrella of the bankruptcy the counterparty to perform its obligations after completing the proceeding. debtor’s obligations. The counterparty may demand the receiver to confirm its position as to whether the receiver will revoke/ 3.3 What are the criteria for entry into each restructuring terminate the contract or to perform the contract and the receiver procedure? will be deemed to have waived its revocation/termination right if the receiver fails to provide his/her position within 30 days after A. Informal work-outs receipt of the notice. A Voluntary Agreement is entered into among the debtor and its creditor-financial institutions when the creditor-financial institutions 3.6 How is each restructuring process funded? Is any recognise that there is a chance that the debtor may recover in the protection given to rescue financing? future. The work-out under the CRPA may be commenced by a resolution of a committee composed of creditors who own financial A. Informal work-outs credits (consent of at least 75% of the total financial credits). Typically, a debtor funds the restructuring process. However, it may B. Formal proceeding (rehabilitation proceeding) be otherwise agreed under the Voluntary Agreement or the corporate Under the DRBA, a company may restructure its debts through a restructuring plan under the CRPA.

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B. Formal proceeding (rehabilitation proceeding) 4.5 What impact does each winding up procedure have on The person who petitions for a rehabilitation proceeding must pay existing contracts? Are the parties obliged to perform the costs prescribed by the court in advance. On the other hand, in outstanding obligations? Will termination and set-off case a stakeholder other than a debtor petitions for a rehabilitation provisions be upheld? proceeding, the petitioner may be reimbursed for the costs paid by the debtor out-of-pocket in case the court decides to commence the A. General rule rehabilitation proceeding. In general, the declaration of bankruptcy does not impact the obligations, terms and effects of the pre-existing contracts involving the debtor.

Korea 4 Insolvency Procedures B. Exceptions However, this general rule may not apply to the following cases: 4.1 What is/are the key insolvency procedure(s) available to wind up a company? a) DRBA Under the DRBA, if both the debtor and the other party to a bilateral The key insolvency procedure in Korea is bankruptcy proceedings contract have yet to fulfil the contract at the time of bankruptcy under the DRBA, which are led and supervised by the court. declaration (the “Executory Contract”), the bankruptcy trustee may elect to rescind or terminate the Executory Contract or require the fulfilment of the other party’s obligations after fulfilling the 4.2 On what grounds can a company be placed into each winding up procedure? debtor’s obligations. Since the decision to rescind or terminate the Executory Contract is made by the bankruptcy trustee, the other party may demand the trustee to provide a definitive answer as to If a debtor company cannot repay its debts when they become due whether the Executory Contract is to be rescinded, terminated or or has more liabilities than the total amount of its assets, either upheld. In such cases, when the bankruptcy trustee fails to provide the debtor or a creditor may file an application for a bankruptcy a definitive answer within a reasonable time from the date on which proceeding. Further, the court has the authority to declare such trustee is so notified, the relevant Executory Contract shall be bankruptcy of the debtor during the rehabilitation proceedings deemed to have rescinded or be terminated by the relevant trustee. without the relevant application from the debtor or creditor if the value of the continuation of debtor’s business is deemed to be lesser b) Civil Code than the value of it when it is liquidated. If a lessee has been declared bankrupt, either the lessor or the bankruptcy trustee may terminate the relevant lease agreement. If the lessor has been declared bankrupt, the bankruptcy trustee 4.3 Who manages each winding up process? Is there any court involvement? may terminate the relevant lease agreement if the lessee does not meet the requirements to claim against a third party. In the case of employment agreements, the employee or the bankruptcy trustee The court-appointed bankruptcy trustee plays the pivotal managing may terminate the employment agreements of the bankrupted role in the bankruptcy procedure including, but not limited to, employer. The contractor or the bankruptcy trustee may terminate exercising the avoidance power, managing and disposing the the contract for work when the person who ordered the contracted debtor’s properties, and monetising such properties into cash to work has been declared bankrupt. make distribution to creditors. c) Commercial Code A person who is appointed as the bankruptcy trustee cannot be dismissed without justifiable grounds, he/she must perform her or his The insurance contract shall lose its effect upon the lapse of three duties with the fiduciary duty, and he/she may receive remuneration months after the declaration of bankruptcy of the insurance company and expenses from the debtor’s property in the amount determined and the policyholder may terminate her or his insurance contract by the court. once the relevant declaration is made. Further, the bankruptcy trustee may terminate the insurance contract if the insurer has been declared bankrupt. 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including 4.6 What is the ranking of claims in each procedure, the enforcement of security)? including the costs of the procedure?

As discussed in question 4.2, the creditor may apply for a In Korea, the creditors may be categorised into three different groups bankruptcy proceeding, and the relevant bankruptcy proceeding is based on the priority of their claim: A. the holder of the right to commenced if the competent court which received the creditor’s enforce outside bankruptcy proceeding (the “Secured Creditor”); B. application declares the debtor bankrupt. However, once the the estate creditor; and C. the bankruptcy creditor. The bankruptcy bankruptcy proceeding is commenced, the creditor cannot influence creditors may be further divided into the following three categories: the bankruptcy proceeding and is only entitled to the payments bankruptcy creditors with preferred claims; bankruptcy creditors pursuant to the respective credit amounts. with general unsecured claims; and bankruptcy creditors with Still, a holder of the security interests over the debtor’s properties subordinate bankruptcy claims. which has a right to enforce outside bankruptcy may enforce the A. Secured creditors security for the fulfilment of its obligations without resorting to the The Secured Creditor who holds the security right over the debtor’s bankruptcy proceeding. properties is generally deemed as the highest priority creditor in relation to the secured subject property, since the Secured Creditor may enforce the security for the fulfilment of its obligation without resorting to the bankruptcy proceeding.

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B. Estate creditors 6 Employees Estate creditors are creditors with estate claims, such as costs of judicial proceedings, tax claims, wage and severance claims, management expenses incurred in connection with management, 6.1 What is the effect of each restructuring or insolvency liquidation and distribution of the bankruptcy estate, or other claims procedure on employees? arising from the administration of the bankruptcy estate. These estate claims shall be reimbursed prior to the bankruptcy claims at A. Wages and severance payments any time without resorting to the bankruptcy proceeding. The wages and severance payment of the debtor’s employees shall C. Bankruptcy creditors constitute either priority claims or estate claims in the rehabilitation

A bankruptcy claim is a property claim that accrues before the debtor and bankruptcy proceeding, respectively, which shall be reimbursed Korea is declared bankrupt and it shall not be exercised without resorting in preference to other claims. to bankruptcy proceedings. During bankruptcy proceedings, the B. Dismissal bankruptcy claims shall be repaid in proportion to the amount of The commencement of a rehabilitation or a bankruptcy proceeding each claim. While the bankruptcy claims with preferential rights itself may not constitute a justifiable ground to dismiss the employee under the relevant Acts shall take precedence over other general of the relevant employer. Instead, the employer must satisfy the bankruptcy claims, the claims for any interest accrued after the following conditions set out in the Labour Standard Act in order to declaration of the bankruptcy or any damages caused by the failure properly and legitimately dismiss its employees: (1) there is an urgent to comply with any obligation after the declaration of the bankruptcy managerial need; (2) the employer shall make every effort to avoid shall be deemed subordinate to the general bankruptcy claims. dismissal; (3) the employer shall establish and follow reasonable and fair criteria for choosing employees subject to dismissal; (4) 4.7 Is it possible for the company to be revived in the the employer shall inform and consult with the labour union or the future? representative of employees regarding intended dismissal; and (5) an employer that intends to dismiss more than 10% of its total employees A. Discontinuation of the bankruptcy proceeding shall report such intention to the Minister of Employment and Labor. The debtor may request the discontinuation of the bankruptcy proceeding if all bankruptcy creditors agree or if the debtor provides 7 Cross-Border Issues securities to the creditors from whom the debtor fails to obtain the consents. The court decision to discontinue the bankruptcy proceeding invalidates the relevant bankruptcy procedure. 7.1 Can companies incorporated elsewhere use B. Revocation of the declaration of the bankruptcy restructuring procedures or enter into insolvency proceedings in your jurisdiction? The creditors or debtors may contest in relation to the declaration of the bankruptcy within 14 days from the date of notification Under the CRPA, the companies established under the laws of regarding the relevant bankruptcy if the facts leading to bankruptcy foreign nations shall not be subject to the work-out procedures do not or no longer exist. If the court revokes its declaration of the under the CRPA. bankruptcy, the relevant declaration becomes void. However, under the DRBA, foreigners and the companies established C. Commencement of the rehabilitation procedure under the laws of foreign nations shall have the same status as that If the decision on commencement of rehabilitation proceeding is of peoples and corporations of Korea. Further, the district court made prior to or after the declaration of the bankruptcy, the relevant is deemed to have jurisdiction over the place of business of the bankruptcy proceeding shall be suspended. When the rehabilitation foreign company as well as the location of its property. Thus, a plan is approved, the suspended bankruptcy proceeding loses its effect. foreign company which has its property in Korea may utilise the rehabilitation and bankruptcy proceeding of Korea without having an office in Korea. 5 Tax

7.2 Is there scope for a restructuring or insolvency 5.1 What are the tax risks which might apply to a process commenced elsewhere to be recognised in restructuring or insolvency procedure? your jurisdiction?

The commencement of the restructuring or insolvency procedure Under the DRBA, a foreign bankruptcy proceeding may be itself does not give rise to special tax liabilities. Still, tax claims in recognised if there is a relevant petition and decision to approve the the rehabilitation proceedings receive different treatment based on foreign bankruptcy proceeding. their timing. In other words, if the liabilities for the tax were incurred A. Application for approving foreign bankruptcy proceeding before the commencement of the rehabilitation proceeding, the The representative of the foreign bankruptcy proceeding may file an related tax claims shall be deemed to constitute rehabilitation claims. application with the following statements with the Seoul Bankruptcy In such case, the relevant repayments shall be made according to the Court for approving the foreign bankruptcy proceeding: rehabilitation proceeding. Alternatively, the liabilities for the tax incurred after the commencement of the rehabilitation proceeding ■ a written statement concerning the legal basis and a summary shall constitute priority claims, and shall be reimbursed without of the overall foreign bankruptcy proceeding; resorting to the rehabilitation proceeding. On the contrary, the ■ a written statement attesting to the commencement of the liabilities for the tax incurred prior to the commencement of the foreign bankruptcy proceeding; bankruptcy proceeding is different from that of the rehabilitation ■ a written statement attesting to the qualification and authority proceeding, since they shall constitute estate claims which shall be of the representative of the foreign bankruptcy proceeding; repaid in preference to other bankruptcy claims without resorting to ■ a written statement concerning the main points of the foreign the relevant bankruptcy proceeding. bankruptcy proceeding for which an application is filed for

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their approval (including statements of creditors, the debtor who lend new funds were strengthened to help debtors secure new and interested parties); and funds more smoothly; (2) the protection of commercial creditors ■ a written statement concerning all other foreign bankruptcy was strengthened to help debtors who use the rehabilitation process proceedings over the debtor, which are known to the secure funding and continuity of business through continuous representative of the foreign bankruptcy proceeding. commercial transactions; (3) the Korean Pre-packaged plan (P plan), B. Approval decision of the Seoul Bankruptcy Court a system in which creditors and debtors adjust debt relationships The court shall decide whether to recognise and confirm the foreign and establish a rehabilitation plan in advance so that the court bankruptcy proceeding within one month from the date on which can expedite the rehabilitation process by just approving the pre- the relevant application is filed, and the court shall dismiss such arranged rehabilitation plan, was introduced; and (4) the rights of creditors to participate in the rehabilitation process were expanded. Korea application in any of the following cases: ■ where expenses determined by the court are not prepaid; ■ where each written statement provided is not submitted or the 9.2 Are there any other governmental proposals for establishment and contents of any such written statement is reform of the corporate rescue and insolvency regime not bona fide; or in your jurisdiction? ■ where approving the foreign bankruptcy proceeding is contrary to the good public morals and social order of Korea. In 2016 and 2017, there were several proposals to reform or modify the CRPA as well as the DRBA, and multiple amendments were made in order to reflect and incorporate those proposals. The CRPA 7.3 Do companies incorporated in your jurisdiction will remain in effect until June 30, 2018, but the extension of the restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? CRPA is under discussion among the relevant authorities. There is no scheduled revision on the DRBA regarding corporations in 2018. We are of the opinion that it is not common for companies A. CRPA incorporated in Korea to restructure or enter into insolvency The previous CRPA expired on December 31, 2015, but the demand proceedings in other jurisdictions. for the work-out procedure has not been diminished, especially in Still, a domestic bankruptcy proceeding and a foreign bankruptcy the vulnerable sectors. proceeding for the same debtor may be jointly and simultaneously Thus, the current CRPA was enacted as of March 31, 2016, to pending in the court of Korea and foreign courts in order to protect facilitate constant corporate restructuring, promote the stabilisation the debtors in foreign countries. In such case, close coordination of financial markets and the development of the national economy. between the two proceedings are required. When a domestic Unlike the previous CRPA, the scope of companies subject to the bankruptcy proceeding and a foreign bankruptcy proceeding for the current CRPA was expanded to all companies, and the creditors same debtor are jointly and simultaneously pending in the Korean participating in the work-out procedures was expanded from the court and foreign courts, the DRBA stipulates that the court shall credited financial institutions to any person who has a financial coordinate the progression of multiple proceedings in order to make claim. The current CRPA shall be effective until June 30, 2018. The sure that the domestic bankruptcy proceeding plays a central role. authorities are still discussing whether to extend the current CRPA, For example, the Korean court has been leading the rehabilitation and there is a debate between the opinions that the extension is and bankruptcy proceedings in connection with Hanjin Shipping, necessary and that a new law which combines the work-out process but the relevant proceedings are simultaneously pending in the and the court receivership should be enacted. courts of the USA, UK, Singapore, Germany and six other countries. B. DRBA Since the global financial crisis in the late 2000s, there are constant 8 Groups needs for the restructuring of debtors due to the economic stagnation. In response to the demands of creditors and debtors who want to implement fair and efficient restructuring procedures, the relevant 8.1 How are groups of companies treated on the procedures were modified and improved. insolvency of one or more members? Is there scope In order to secure constant stream of new funds to the debtor in for co-operation between officeholders? the rehabilitation proceeding, the rights of the creditors who have provided new funds have been strengthened to induce new The DRBA does not stipulate a combined rehabilitation or bankruptcy fund support to the debtor, the Korean pre-package system was proceeding for multiple debtors; thus each procedure must be conducted introduced, and the Bankruptcy Court was newly established. individually. In other words, each company must file an application for commencement of rehabilitation proceeding or, for a bankruptcy proceeding, the court shall make a decision on commencement of Acknowledgment rehabilitation proceeding or declaration of bankruptcy and appoint a The authors would like to thank the following people for their bankruptcy trustee or conductor for each debtor. invaluable assistance in the preparation of this chapter. Rieu Kim, Foreign Attorney 9 Reform Tel: +82 2 3479 5768 / Email: [email protected] Jungmin Hong, Associate 9.1 Have there been any proposals or developments in Tel: +82 2 3479 7880 / Email: [email protected] your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws Inhyuk Yoo, Foreign Attorney of your jurisdiction, which are intended to make Tel: +82 2 3479 2667 / Email: [email protected] insolvency processes more streamlined and efficient?

In 2016, to improve the rehabilitation process, the following amendments were made to the DRBA: (1) the rights of creditors

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Thomas P. Pinansky Joo Hyoung Jang Barun Law LLC Barun Law LLC Barun Law Building, 92 gil 7 Barun Law Building, 92 gil 7 Teheran-ro, Gangnam-gu Teheran-ro, Gangnam-gu Seoul 06181 Seoul 06181 Korea Korea

Tel: +82 2 3479 7517 Tel: +82 2 3479 7517 Email: [email protected] Email: [email protected] URL: www.barunlaw.com URL: www.barunlaw.com Korea

Mr. Pinansky is the Senior Foreign Attorney (Partner) at Barun Law. Mr. Joo Hyoung Jang is a partner attorney of Barun Law LLC. His He plays a leading role in the firm’s international practice and advises practice focuses on cross-border transactions, M&As, reorganisation an extensive number of international and Korean clients on business proceedings, and general corporate matters. Particularly, he has and legal issues arising in the context of international operations, accumulated a broad range of experience and expertise in the fields including international transactions, reorganisation proceedings, and of cross-border acquisitions and M&As in reorganisation proceedings. cross-border disputes. Mr. Pinansky has been involved in over 200 He graduated from Seoul National University (LL.B.) and Columbia cross-border M&A transactions and in over 120 international arbitration Law School (LL.M.). matters, either as an arbitrator or as counsel. Mr. Pinansky recently completed a three-year term as a Vice Chairman of the American Chamber of Commerce in Korea. He serves on the Board of the Canadian Chamber of Commerce in Korea and as Special Advisor to the Kiwi Chamber of Commerce in Korea. He was appointed as the “Honorary Ambassador” of the US State of Maine to Korea. He served two terms as the Chairman of the Asia- Pacific Council of American Chambers of Commerce, an organisation comprised of over 25 American Chambers of Commerce throughout the Asia-Pacific Region. Prior to joining Barun Law, Mr. Pinansky was the Senior Foreign Attorney and Member of the Executive Committee at Kim, Shin & Yu, Seoul, Korea, and he also practised at Vinson & Elkins in Austin, Texas and Hogan & Hartson (now Hogan Lovells) in Washington, DC. Mr. Pinansky graduated from Harvard College, magna cum laude, and the University of Pennsylvania Law School.

Barun Law LLC is Korea’s fastest growing and most dynamic full-service law firm. Founded in 1998 and named after the Korean word for righteous or just, Barun Law has quickly taken its place among Korea’s top, full-service law firms. Conveniently located in Seoul’s Gangnam Business District, next to one of Asia’s largest and most prestigious convention centre complexes, Barun Law LLC is comprised of more than 200 attorneys who, together with highly qualified support staff, provide a full range of legal services. The firm’s partners include some of the most prominent and well-respected members of the Korean Bar, while a sophisticated and highly experienced team of foreign lawyers adds international savvy and recognised expertise, creating a substantial comfort factor for international clients.

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Luxembourg Anne-Marie Nicolas

Loyens & Loeff Luxembourg Véronique Hoffeld

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly 2.1 What duties and potential liabilities should the jurisdictions? directors/managers have regard to when managing a company in financial difficulties? Is there a specific Luxembourg is generally perceived as a secured creditor-friendly point at which a company must enter a restructuring jurisdiction, especially in light of the very wide implementation or insolvency process? under Luxembourg law of the financial collateral arrangements directive. Under Luxembourg law, the directors of a company may generally Luxembourg financial collateral arrangements cover any pledge or be liable for (i) the non-execution of their mandate, (ii) any assignment of financial instruments and receivables (including most misconduct in the management of the company’s affair, and (iii) any types of shares and bonds). Any such security is “bankruptcy proof” damages caused by their fault or negligence (torts). as well as very cost effective, subject to few formalities and easy to The directors/managers of an insolvent company must file put in place and to enforce. for bankruptcy within one month of the date on which it has Luxembourg courts have, for instance, held that a Luxembourg ceased to pay its debts, provided that company has also lost its financial collateral arrangements can be enforced: creditworthiness (cumulative insolvency criteria). The loss of creditworthiness criteria is a very important addition to other more ■ where the debtor has failed to pay its debts when due, and standard insolvency tests as it would allow a company to not be without the condition of an acceleration under the underlying financing documentation having to be fulfilled; and insolvent as long as it is, for instance, in restructuring talks with its creditors. ■ regardless of the existence of a criminal attachment. Not filing for bankruptcy within the statutory timeframe constitutes Finally, courts have also held that they cannot impose provisional serious misconduct, which could lead the court to recognise the measures that could interfere with the enforcement of financial director’s civil or criminal liability and order the directors to bear all collateral arrangements. or part of the liabilities of the company.

1.2 Does the legislative framework in your jurisdiction 2.2 Which other stakeholders may influence the allow for informal work-outs, as well as formal company’s situation? Are there any restrictions on restructuring and insolvency proceedings, and to the action that they can take against the company? what extent are each of these used in practice? For example, are there any special rules or regimes which apply to particular types of unsecured Contrary to many other civil law jurisdictions, Luxembourg has not creditor (such as landlords, employees or tried to adopt more efficient recovery proceedings such as the (pre- creditors with retention of title arrangements) pack) administration, the scheme of arrangement or US Chapter 11 applicable to the laws of your jurisdiction? type proceedings. Instead, it has three traditional formal recovery procedures consisting of the controlled management (gestion In bankruptcy proceedings, the court assesses in its sole discretion contrôlée), the composition with creditors (concordat préventif de whether the conditions for bankruptcy are met and, if so, appoints faillite) and the suspension of payments (sursis de paiement). a bankruptcy receiver to be in charge of liquidating the assets. In None of these procedures are much used in practice due to the lack principle, creditors and shareholders have no say or control over of flexibility, cost and/or publicity that they entail. the procedure (except that creditors may initiate the bankruptcy procedure) or the decisions made but the receiver may decide to As regard to the insolvency proceedings, bankruptcy proceedings involve them, at its discretion. There is no credit bidding process (faillite) are the most common proceedings filed against insolvent provided under Luxembourg law. commercial companies in Luxembourg. These proceedings aim at winding up a company’s assets in the best interests of the estate and Employees, tax and social security authorities are super-privileged its creditors. creditors in a bankruptcy scenario.

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Also, a reservation of title clause allows an unpaid seller to retain title ■ Controlled management (gestion contrôlée) which entitles to the sold assets (non-fungible movable assets) until the purchaser a commercial company to either reorganise and restructure its has paid the full purchase price. In the same vein, a retention right debts and business or to realise its assets in the best interest of provides a creditor with the right to keep goods for as long as its due creditors. In practice, this procedure is very rarely used. and payable claim regarding such goods is outstanding. A retention ■ Composition with creditors (concordat préventif de faillite) right is only effective if the creditor has actual possession of the allows a debtor facing financial difficulties to negotiate a goods. settlement or a rescheduling of its debts with its creditors, which must be approved by the court to avoid bankruptcy proceedings. In practice, this procedure is very rarely used. 2.3 In what circumstances are transactions entered Each of these formal rescue procedure can be challenged by the into by a company in financial difficulties at risk of creditors. A majority of creditors will be needed in order to make challenge? What remedies are available?

the rescue procedure a binding procedure and cram down other Luxembourg creditors. The Luxembourg Commercial Code sets out the conditions in which certain transactions made by the debtor can be declared null and Debt-for-equity swaps are possible but not provided by statute. void. The court first determines the occurrence of the cessation Financial collateral security may be enforced no matter the opening of payments and the duration of the hardening period or période of an insolvency proceeding generally. suspecte (the period between the cessation of payments and the declaratory judgment of bankruptcy). The hardening period 3.3 What are the criteria for entry into each restructuring must not date back more than six months as from the date of the procedure? declaratory judgment of bankruptcy. Some specific transactions may be set aside or declared null and Suspension of payments procedures can be initiated upon the void, if so requested by the bankruptcy receiver. These include, debtor’s request and can be granted if either the debtor’s temporary among others: financial difficulties are due to extraordinary and unexpected ■ The granting of a security interest for antecedent debts. circumstances and the debtor has sufficient means to pay off all its ■ The payment of debts that have not fallen due. creditors; or the debtor is in a situation where the re-establishment ■ The payment of certain debts that have fallen due entered into of a proper balance between assets and liabilities appears likely. during the hardening period (or the 10 days preceding it). The suspension of payments requires the consent of a majority of creditors representing 75% of the debtor’s liabilities and the However, security interests qualifying as financial collateral approval of the relevant court. arrangements are not affected by the suspect period, as these are “bankruptcy remote”. Controlled management (gestion contrôlée) can be initiated by the debtor who must file an application before the district court sitting In addition, the insolvency receiver can challenge any fraudulent in commercial matters and can be granted to a commercial company payments and transactions made before the bankruptcy, without any where the company is acting in good faith and either suffers from time limit. a loss of creditworthiness or faces difficulties in meeting all of its commitments and its creditors wish to proceed with enforcement 3 Restructuring Options 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. 3.1 Is it possible to implement an informal work-out in Composition with creditors (concordat préventif de faillite) can your jurisdiction? be initiated on the debtor’s request before the district court sitting in commercial matters. The debtor must be unable to meet its Luxembourg does not expressly provide for a formal or informal engagements or have lost all creditworthiness. In addition, the out-of-court restructuring framework and has, in this respect, not applicant must be deemed unfortunate and acting in good faith followed the European trend to implement more effective and (débiteur malheureux et de bonne foi), as determined by the court at flexible recovery proceedings based on UK schemes of arrangement, its discretion. To be successful, the application requires the consent (pre-pack) administrations and/or US Chapter 11 proceedings. of a 75% majority of the creditors, must meet the relevant legal requirements and must not be deemed contrary to the public interest 3.2 What formal rescue procedures are available in your or the interests of the creditors by the court. jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what 3.4 Who manages each process? Is there any court extent can creditors and/or shareholders block involvement? such procedures or threaten action (including enforcement of security) to seek an advantage? Do Formal insolvency proceedings (whether bankruptcy or a your procedures allow you to cram-down restructuring proceeding) are all heavily court-lead in Luxembourg. dissenting stakeholders? Debtors and creditors will in principle only have very limited intervention rights or influence on the process. Luxembourg provides three formal rescue procedures in order to restructure the liabilities of distressed companies: 3.5 What impact does each restructuring procedure have ■ Suspension of payments (sursis de paiement) which allows on existing contracts? Are the parties obliged to a commercial company who faces temporary liquidity perform outstanding obligations? Will termination and difficulties to apply for a suspension of payments until its set-off provisions be upheld? financial liabilities can be met. This procedure is mainly used in respect of regulated entities. Once placed under controlled management, the debtor cannot,

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without the court-appointed commissioners’ prior approval and debtor’s assets and distributing the proceeds to the creditors, under under penalty of nullity, dispose of its assets or take any actions, the supervision of a supervisory judge. The receiver, together with including granting mortgages, making commitments or payments, the supervisory judge, decides how to liquidate the assets of the borrowing money or receiving funds. The commissioners can also bankruptcy estate. compel the company to perform a given action.

As regard to composition with creditors, during the proceedings and 4.4 How are the creditors and/or shareholders able to up to the date of the ratification of the composition, the debtor cannot influence each winding up process? Are there any dispose of its assets, grant mortgages or make any commitments restrictions on the action that they can take (including without the authorisation of the delegate judge. Once the plan is the enforcement of security)? adopted, the debtor must act within the frame of the latter. Finally, concerning the reprieve from payments, the debtor cannot, Individual legal actions by privileged and unsecured creditors Luxembourg without the court appointed commissioners’ prior approval, dispose against the debtor are suspended once the company has been of its assets or take any actions, including granting mortgages, declared bankrupt for the entire duration of the bankruptcy. making payments, borrowing money or receiving funds. Creditors must file a proof of claim (déclaration de créances) with the court. “Bankruptcy proof” secured creditors holding financial collateral security can however freely take enforcement actions 3.6 How is each restructuring process funded? Is any regardless of the opening of bankruptcy proceedings. protection given to rescue financing?

There is no statutory protection or privilege given to new 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform money. However, Luxembourg case law recognises contractual outstanding obligations? Will termination and set-off subordination, which is enforceable against the parties having provisions be upheld? accepted the subordination of their claims (usually to new money claims). Equitable subordination is not implemented nor applied In bankruptcy proceedings, contracts will automatically continue in Luxembourg. (except for intuitu personae contracts and contracts whereby bankruptcy is a termination event) following the opening of a 4 Insolvency Procedures bankruptcy proceeding. The receiver cannot, in principle, reject or disclaim a contract after the judgment opening the insolvency proceeding and must comply with its terms. However, upon 4.1 What is/are the key insolvency procedure(s) available establishing that it is in the interest of creditors, the receiver may to wind up a company? request that the insolvency judge authorises the termination of an agreement to which the debtor is a party. See also question 2.3 They key insolvency procedure is the bankruptcy proceeding above on actions during the suspect period. which is the most common proceeding filed against commercial companies in Luxembourg. These proceeding aims at winding up a 4.6 What is the ranking of claims in each procedure, company’s assets in the best interests of the estate and its creditors. including the costs of the procedure? Luxembourg law does not cater for insolvent liquidations. The state prosecutor can file an application for compulsory “Bankruptcy proof” secured creditors (such as creditors benefiting liquidation which then has to be ordered by the court if a commercial from security interests under the financial collateral law and company has pursued illegal activities or has seriously infringed mortgagees) are outside the bankruptcy process (hors masse), the provisions of, among other things, the Commercial Code, the meaning that they are not, in principle, subject to ordinary domiciliation law or the company law. distribution and priority rules. These creditors can enforce their security and do not have to wait for the distribution of the assets by 4.2 On what grounds can a company be placed into each the bankruptcy receiver. winding up procedure? For other creditors, the order of priority payments during a bankruptcy proceeding (faillite) is as follows: A commercial entity may be declared bankrupt by the court when ■ Creditors of the bankruptcy. These are bankruptcy expenses the following two criteria are met: (the bankruptcy receiver’s fees or procedure costs) and have a ■ the company has ceased payments and is unable to meet its preferential status over all other claims. commitments (cessation des paiements) that is, the company ■ Preferred creditors of the bankrupt estate. Preferred cannot, or does not, fully pay its due, certain and liquid debts creditors include: as they fall due; and ■ preferred creditors by law (créanciers privilégiés), such ■ the company has lost its creditworthiness (ébranlement de as employees in respect of certain debts owed to them and crédit) that is, the company is unable to obtain credit (i.e., tax authorities; and new money, waivers, maturity extension, grace periods, ■ creditors with a non-bankruptcy proof contractual standstills, etc.) from any source. or judicial security (créanciers ayant une sûreté conventionnelle ou judiciaire), ranking behind preferred 4.3 Who manages each winding up process? Is there any creditors by law. court involvement? ■ Ordinary unsecured creditors (créanciers chirographaires). These are paid pro rata out of the Once a bankruptcy procedure is opened, the directors/managers remaining assets, if any. are removed from their functions and a bankruptcy receiver is Shareholders are treated as subordinated creditors unless they have appointed by the court. The receiver is responsible for realising the other contractual arrangements in place as creditors (Luxembourg

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law does not recognise the concept of equitable subordination) and may receive any surplus from the liquidation (boni de liquidation), 7.2 Is there scope for a restructuring or insolvency if any, in proportion to their shareholding. process commenced elsewhere to be recognised in your jurisdiction?

4.7 Is it possible for the company to be revived in the Judgments regarding insolvency procedures introduced in a non-EU future? Member State or not covered by the Regulation (EU) 848/2015 on insolvency proceedings (recast) (Recast Insolvency Regulation) are, Yes but the revival process is very rarely admitted by the courts in principle, recognised in Luxembourg (which recognises the principle since the insolvency state is assessed by the court on the day of the of universality of bankruptcy) without the need for a further order for judgment. enforcement of the award, subject to the following conditions:

■ The judgment must be rendered by a competent court. Luxembourg 5 Tax ■ Due process must be complied with. ■ The foreign court must have applied the appropriate Luxembourg conflict of law rules. 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? ■ The foreign judgment must not contravene Luxembourg public policy. The claim of the tax authorities are super privileged in case of ■ The foreign insolvency law which has been applied must have extra-territorial scope. bankruptcy. They may hold a preferential right over a specific asset or a general preferential right over all of the debtor’s assets. Also, in terms of restructurings, having creditors waive part of their 7.3 Do companies incorporated in your jurisdiction claims against a Luxembourg debtor may create taxable income for restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? that debtor.

It is relatively common practice for Luxembourg holding and 6 Employees treasury companies to restructure their debt or enter into rescue proceedings in other jurisdictions. The most frequently seen proceedings are UK schemes of arrangements and Chapter 11 6.1 What is the effect of each restructuring or insolvency in the US or elsewhere. procedure on employees?

Employment contracts are terminated with immediate effect upon 8 Groups the declaration of entry into bankruptcy by the company. Save for the case of the bankruptcy receiver deciding to let the company continue its activities, employees of a bankrupt company are 8.1 How are groups of companies treated on the entitled to: insolvency of one or more members? Is there scope for co-operation between officeholders? ■ the salary for the month in which the declaration is made and for the following month; and Except in certain cases of shadow directorship, fraud co-mingling ■ compensation of 50% of their monthly salary for the notice of assets, etc. Luxembourg law generally treats each company and period to which they are statutorily entitled to. bankruptcy estate separately so that a company may be put into The amount owed to employees for the last six months of work and bankruptcy without necessarily affecting its affiliates. all compensation due as a result of termination of the employment Under the Recast Insolvency Regulation, in case insolvency contracts, up to an amount equal to six times the minimum salary, proceedings are opened in relation to several companies of a same must be paid prior to any payments to secured creditors. group, the courts and the office-holders appointed will have to cooperate and communicate with each other. Luxembourg law does 7 Cross-Border Issues not specifically cater for this issue but very often in practice the Luxembourg receiver will cooperate with the foreign insolvency professionals appointed for other group entities. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? 9 Reform

Pursuant to the Recast Insolvency Regulation (as defined below), a foreign EU Member State debtor whose COMI is located in 9.1 Have there been any proposals or developments in Luxembourg, may enter into restructuring or insolvency proceedings your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws in Luxembourg. of your jurisdiction, which are intended to make Luxembourg courts generally hold that courts in the jurisdiction insolvency processes more streamlined and efficient? (outside of the EU Member State and thus of the scope of the Recast Insolvency Regulation) of the principal establishment of a company No, there have not. have jurisdiction to decide on matters of insolvency regarding that company.

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New measures include, in particular, the decriminalisation of 9.2 Are there any other governmental proposals for fraudulent bankruptcy, an accelerated administrative dissolution reform of the corporate rescue and insolvency regime procedure without liquidation and an easing of the conditions in your jurisdiction? required for a debt contribution action.

On 1 February 2013, the government filed a draft bill No. 6539 on the preservation of business and modernisation of bankruptcy Acknowledgment law. This draft bill includes various preventive, repressive, The authors would like to acknowledge the invaluable assistance of restorative and social provisions which aim to reduce the number Richard Steichen in the preparation and finalisation of this chapter. of bankruptcies in Luxembourg. It was heavily redrafted in March 2018 and is currently under discussion. Luxembourg

Anne-Marie Nicolas Véronique Hoffeld Loyens & Loeff Luxembourg Loyens & Loeff Luxembourg 18-20, rue Edward Steichen 18-20, rue Edward Steichen L-2540 L-2540 Luxembourg Luxembourg

Tel: +352 466 230 314 Tel: +352 466 230 232 Email: [email protected] Email: [email protected] URL: www.loyensloeff.com/en-us URL: www.loyensloeff.com/en-us

Anne-Marie Nicolas, attorney-at-law, is a partner in the banking and Véronique Hoffeld is a member of the Management Committee of finance practice of Loyens & Loeff Luxembourg. She specialises in Loyens & Loeff Luxembourg and heads the Luxembourg Litigation banking and finance law and acts for banks, financial institutions, & Risk Management Practice Group. Her main areas of focus are corporates and investors in various types of cross-border finance commercial law (negotiation of contracts), insolvency, litigation and transactions, including debt (re)structuring. She also advises on arbitration. regulatory, insolvency and corporate governance matters. She has experience in national and multi-jurisdictional insolvencies. Anne-Marie holds Master’s in French and German law from the She also advises companies or their stakeholders in debtor protection university of Paris I-Pantheon-Sorbonne and the Universität zu Köln proceedings. Véronique is recognised for advising on a broad range and an LL.M. in American law from Boston University. of complex, high-value multi-jurisdictional litigations and arbitrations, in proceedings before the civil courts and arbitration tribunals. Anne-Marie is a member of the Luxembourg directors association (ILA), the Luxembourg Bankers’ Association (ABBL) and the Véronique is a member of the International Association of Luxembourg association of bank lawyers (ALJB) and is an active Restructuring, Insolvency & Bankruptcy (INSOL). member of several working groups related to the financial services Véronique has been a member of the Luxembourg Bar since 1996. and restructuring industry. She has published a number of articles on restructuring and corporate governance related issues. Anne-Marie is admitted to the Luxembourg Bar and to the New-York Bar.

Loyens & Loeff is a leading independent Luxembourg law firm which provides comprehensive and fully integrated legal and tax advice on corporate and commercial law, tax law, banking and finance, investment management, M&A, private equity, real estate and litigation. Our clients include private companies, family offices, financial institutions, investment funds and individuals. The close cooperation between legal and tax specialists within a single firm places us in a unique position both in our home market, the Benelux and Switzerland, and internationally, and benefits our clients by facilitating an approach to issues from different angles, creating synergies and increasing efficiency. Loyens & Loeff’s culture is characterised by a strong sense of independence, entrepreneurship, high-quality services and involvement. The principles of quality, transparency and short-line communication form the foundation for an informal and inspiring culture, which stimulates the search for pragmatic but secure solutions to complex legal and tax issues. Loyens & Loeff pays particular attention to education and training, and to creating an exciting and challenging work environment. This enables the firm to attract outstanding young talent and to guarantee the highest standards of service.

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Mexico Fernando Pérez Correa

SOLCARGO F. Abimael Hernández

6. If they order or accept to register false data in the Company’s 1 Overview accountancy. 7. If they destroy, modify or order the modification of the 1.1 Where would you place your jurisdiction on the Company’s accountancy. spectrum of debtor to creditor-friendly jurisdictions? 8. If they modify or order the modification of the active or passive accounts of the Company or the agreements Neutral jurisdiction. One of the objectives of the Commercial subscribed by the Company conditions, as well as register inexistent expenses of the Company. Insolvency Law (CIL) is to procure the conservation and operation of the debtor, but also to protect the interest of the creditors. These conducts can be only reported by the company, not by the creditors or a third party, and the penalty is limited to the payment of damages in favour of the company. 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to 2.2 Which other stakeholders may influence the what extent are each of these used in practice? company’s situation? Are there any restrictions on the action that they can take against the company? For Yes. However, informal work-outs is not a practice used by example, are there any special rules or regimes which apply to particular types of unsecured creditor (such debtors in Mexico. Formal restructuring is only used by complex as landlords, employees or creditors with retention companies. The CIL was enacted in 2000 and since that date there of title arrangements) applicable to the laws of your have been only 706 insolvency proceedings in Mexico. jurisdiction?

2 Key Issues to Consider When the Some types of creditors may affect in a very important way a company’s situation. For example: Tax creditors may have the Company is in Financial Difficulties capacity to seize all the bank accounts of a company; and Labour creditors (employees) may initiate a strike against the company and 2.1 What duties and potential liabilities should the to attach all the assets of a company even if it is under an insolvency directors/managers have regard to when managing a proceeding. There are no restrictions for these creditors to act company in financial difficulties? Is there a specific during an insolvency proceeding. Also, there are no special rules for point at which a company must enter a restructuring unsecured creditors. Creditors with right of retention are considered or insolvency process? privileged creditors in Mexico. The Court may dictate ex officio or by petition of the creditors for The director or board of directors and key personnel can be held numerous provisional and special remedies, including: liable for a company’s insolvency in the following circumstances: ■ prohibition against payments of obligations due before the 1. If they voted or decided about a matter concerning the date of admittance of the petition of a commercial insolvency company’s properties and assets knowing they had a conflict proceeding; of interest regarding the matter. ■ suspension of any enforcement proceeding against the assets 2. If they intentionally favour a shareholder or group of and rights of the company; shareholders injuring or prejudicing the rest of the ■ prohibition against the company’s performance of sales, shareholders. transfers or encumbrances of the principal assets of its 3. When, without a legitimate cause and because of their enterprise; position or job, obtain an economical benefit for themselves ■ attachment of assets; or a third party, including a group of shareholders. ■ appointment of a judicial administrator; 4. If they generate, spread, publish, provide or order information, knowing it is false. ■ prohibition against performance of transfers of funds or securities in favour of third parties; and 5. If they order or provoke that the Company’s operations do not get registered, if they modify or order the modification of the ■ arrest warrants in respect of the company manager for the registries to hide the true nature of the operations, affecting sole purpose of not allowing the manager to leave his or her the Company’s statement of account. place of residence without issuing an attorney in fact with sufficient instructions and funds.

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The debtor and the majority of its secured and unsecured 2.3 In what circumstances are transactions entered creditors can file for an insolvency proceeding with an established into by a company in financial difficulties at risk of restructuring plan. If it fulfils all the legal requirements, the Court challenge? What remedies are available? will declare the debtor bankrupt and approve the plan. Reorganisation procedure Irrespective of the date on which they have been performed (except for the general commercial rule that sets the statute of limitations Debtors may file a voluntary petition for reorganisation at any time at ten (10) years), acts in fraud of creditors are those that meet the before bankruptcy adjudication. Admission of the petition requires following requirements: (i) were performed prior to the declaration the filing of evidence showing that the debtor is in payments of commercial insolvency; (ii) through them creditors were cessation at the time of filing.

Mexico knowingly defrauded; and (iii) the third party involved in the act The debtor enjoys a 185-day period, extendable up to 180 additional was aware of the fraud. days from the date of the Court’s resolution admitting the debtor’s The following are acts that are considered as committed in fraud of petition, during which it must formulate a reorganisation plan and creditors, so long as they have been performed within the date of obtain the consent of the required majorities of creditors. retroaction (270 days prior to the date of the judgment declaring the The plan must receive the consent of more than 50% of: company under insolvency): (i) gratuitous acts; (ii) acts and sales in ■ all unsecured creditors; and which the debtor pays a price with a clearly higher value or receives ■ secured creditors that signed the reorganisation agreement. a price with a clearly lower value to the considerations offered by its counterpart; (iii) transactions performed by the debtor in which Once the plan is endorsed and performed, the Court will issue conditions or terms are established that are significantly different a resolution declaring the reorganisation to be concluded and to the prevailing conditions of the market in which they have been finalising the intervention of the conciliator. performed, on the date of their performance, or from commercial Creditors cannot block any insolvency procedure or threaten action, practices and uses; (iv) debt remittances; (v) payments of unmatured but they can seek enforcement of collaterals. obligations; among others. Finally, insolvency procedures in Mexico only allow to cram The CIL deems that the performance of any of these acts inherently down dissenting stakeholders if those dissenters form a majority of includes the bad faith of the person performing it, both of the creditors. debtor and the other parties involved therein. In all those cases, the transaction will be declared null and void by petition of any of the 3.3 What are the criteria for entry into each restructuring parties (creditor, comptroller, conciliator, liquidator). procedure?

3 Restructuring Options In Mexico the eligibility criteria for initiating a restructuring procedure are based on proving that the company has failed to fulfil its payment obligations in a general manner. 3.1 Is it possible to implement an informal work-out in The CIL considers that a company is in a general state of non- your jurisdiction? performance if there exists a payment default to two or more creditors. One of the two following conditions should exist if the Yes. However, companies recur to formal work-outs because the insolvency petition is filed by the company and both conditions if company do not need the approval of all the creditors, only 50% the insolvency petition is filed by the creditors: of them. Another benefit is that a reorganisation agreement is ■ Insolvency – 35% or more of the company’s payment mandatory for all unsecured creditors, even for those who did not obligations are at least 30 days past maturity on the date that sign the agreement. the restructuring proceeding is filed. ■ Lack of liquidity – The company has insufficient assets to 3.2 What formal rescue procedures are available in fulfil at least 80% of its matured payment obligations on the your jurisdiction to restructure the liabilities of date that the restructuring proceeding is filed. distressed companies? Are debt-for-equity swaps In addition, the CIL foresees several events that constitute a and pre-packaged sales possible? To what extent can presumption that a company is in a general default of payment of creditors and/or shareholders block such procedures or threaten action (including enforcement of security) its obligations (e.g. the non-existence or insufficiency of assets over to seek an advantage? Do your procedures allow you which enforcement may be brought in the case of an attachment). to cram-down dissenting stakeholders? 3.4 Who manages each process? Is there any court Out-of-court restructuring involvement? Out-of-court restructuring will be entered into with all or a portion of the debtor’s creditors. Non-party creditors are not bound by the Yes, the Bankruptcy Court (Federal Court) is the director of the restructuring terms, which do not therefore affect their original debt process, therefore it is involved in all the restructuring proceedings terms and conditions. As a result, out-of-court restructuring has no supervising the conciliator’s performance, and it must resolve all practical effect or use. petitions of the creditors and debtor. Pre-packaged restructuring Also, the Court will determine whether a debtor must be declared The CIL provides for two restructuring schemes: insolvent. The court must issue a ruling declaring the ranking and priority of all the creditors. The court issues a judgment approving ■ formal proceeding (reorganisation), which is similar to the reorganisation procedure regulated under Chapter 11 of the the reorganisation agreement entered into by the company and its US Insolvency Code; and creditors. ■ pre-packaged restructuring. In general, the court conducts the restructuring proceeding and resolves all motions filed by the parties and the conciliator.

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3.5 What impact does each restructuring procedure have 4 Insolvency Procedures on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 4.1 What is/are the key insolvency procedure(s) available to wind up a company? As a general rule, the validity of the contracts is not affected by the restructuring procedure. However, the CIL makes a casuistic Out-of-court liquidation – Out-of-court liquidation does not require classification: the filing of a complaint or evidence to demonstrate that the debtor is in payments cessation. Shareholders of the company may agree ■ the validity of the agreements concerning only personal goods on a voluntary dissolution of the company. Such resolution shall be will not be affected, as well as inalienable goods, those exempt Mexico approved at a partners’ meeting (dissolution meeting), in which one of attachment and those not subject to a statute of limitation; or more liquidators are to be appointed. ■ preparatory and definitive agreements must be complied with by the company, unless the liquidator considers that it will Winding up proceedings begin immediately after the company’s harm the estate; dissolution minutes have been duly registered with the Public ■ the seller can oppose delivering goods or property regarding Registry of Commerce. purchase agreements in which the company is the buyer, The sole manager must provide all corporate and accounting unless the company pays the full price agreed by the parties documents, information and books to the liquidator, which must be or guarantees the payment of the goods; registered in an inventory. The liquidator is entitled to act on behalf ■ deposit agreements, loan agreements and commission and of the company, acting as legal representative of the partnership, agency agreements will not be terminated for the liquidation therefore having all the obligations, responsibilities and limitations, procedure, unless the liquidator considers it necessary; as well as the authority and powers of attorney and of a legal ■ existing account agreements will be terminated, unless the representative. company states its continuation with the consent of the Unless the dissolution minutes or law provides otherwise, the liquidator; liquidator is obliged to: ■ securities repurchase agreements will be terminated; ■ wind up the outstanding transactions and operations; ■ lease agreements will not be cancelled by the liquidation ■ collect due payments and pay debts; procedure, unless the company is the lessee and the liquidator considers it necessary, in which case the receiver must pay ■ sell the assets; the penalty agreed in the contract or three months’ rent for the ■ distribute the remaining assets proportionately to their anticipated termination; partnership interest; ■ personal service agreements will not be cancelled; ■ draft the liquidation balance sheet; and ■ lump-sum construction contracts will be cancelled, unless ■ hold the partnership’s documents and corporate and the company agrees to comply with the agreement with the accounting books in deposit for 10 years following the date liquidator’s authorisation; and of the partnership’s winding up. ■ insurance contracts will not be cancelled if the company The final liquidation balance sheet must be approved by partners in is the insured party, but if the company is the insurer, the a winding up meeting. Liquidators may then proceed to: insured party can choose to terminate the contract. ■ pay partners’ equity against their corresponding partnership Regarding repurchase, securities loans, futures and derivatives interests; transactions, the declaration of commercial insolvency will lead to ■ give notice of the liquidation to the Ministry of Finance and the early termination of those transactions, provided that: Public Credit; and ■ the debts and credits resulting from these transactions are ■ request the cancellation of the taxpayers’ registry and offset; partnership’s registry in the Public Registry of Commerce. ■ the outstanding balance that may result from the set-off Partners will decide during the winding up meeting on the against the debtor may be claimed by the corresponding distribution of the remaining assets (distribution agreement) once counterpart by means of the acknowledgment of the credits the liabilities have been paid or their amount has been deposited procedure; and whenever payment is not possible. The liquidator will determine ■ in the case of a balance in favour of the debtor, the counterpart the amount or assets that each partner is entitled to receive as final will be bound to pay the conciliator for the benefit of the estate payment for its ownership interest. within a term not exceeding 30 calendar days, calculated from the date of the declaration of commercial insolvency. Simplified Out-of-court liquidation – A recent Reform of the General Law of Business Entities (that will come into force on July 25th, 2018) has introduced two innovations for the winding up and 3.6 How is each restructuring process funded? Is any liquidation procedure of companies: protection given to rescue financing? ■ First, it establishes that a judicial resolution or administrative decision by a Court is ground for dissolution, in accordance to During the restructuring process, the company is able to obtain the tendency set by the legislator to recognise these grounds further credit or take out additional secured loans during an for dissolution in the case of Simplified Stock Companies. insolvency procedure. The debtor can request authorisation from ■ Second, and most importantly, is the addition of Articles 249 the Court in order to obtain further credit (DIP Financing) and bis and 249 bis 1 to the General Law of Business Entities, of secure loans during the insolvency procedure, if the resources are which enact a simplified winding up procedure, without the strictly necessary to maintain company operation. need to notarise the dissolution and winding up of meetings. Other costs, such as payment of salaries, taxes and all ordinary Pursuant to Article 249 bis, business entities can conduct the expenses of the company (rents, utilities, etc.) are funded by the simplified winding up procedure if, and only if, the entity complies assets of the company while it is in operation. with the following requirements:

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■ if they are comprised exclusively by partners and shareholders that are individuals; 4.4 How are the creditors and/or shareholders able to ■ if they do not operate illegally or habitually commit illicit influence each winding up process? Are there any restrictions on the action that they can take (including acts; the enforcement of security)? ■ it must publish in the Secretary of the Economy’s electronic system its Special Book of Partner or its Stock Registry with Regarding out-of-court liquidation, shareholders decide if the the current share structure as of 15 business days from the date of the meeting in which the winding up was agreed company will enter in a dissolution and winding up process, and upon; creditors can act reluctantly and seek enforcement of security. ■ it has not undertaken any operations or emitted any electronic Regarding court liquidation when it is requested by the company, Mexico invoices during the last two years; it is mandatory for the shareholders to sign a letter accepting that ■ it has complied with all of its tax, labour, and social security the company is going under bankruptcy itself, in the case that the obligations; bylaws of the company do not request additional requirements. ■ it has not imposed any monetary obligations on third parties; Also, secured creditors may seek enforcement of their collateral in a different lawsuit, generally in a State Court. ■ none of its legal representatives are a part in criminal investigations for possible financial or property crimes; ■ it is not insolvent; and 4.5 What impact does each winding up procedure have on ■ it is not an entity within the financial system. existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off Court liquidation – The debtor company may voluntarily file an provisions be upheld? insolvency proceeding requesting the liquidation of all its assets, properties, goods and rights. The Federal Institute of Commercial The effects are the same as in the restructuring procedure. The Insolvency (IFECOM) will appoint a receiver (liquidator) to manage general rule is that the contracts entered into by the company the company and sell the assets and rights of the company in order to (debtor) will continue to be valid, except when the liquidator rejects pay the debts recognised in favour of the creditors. them in the best interest of the estate. The compulsory liquidation will take place when the company creditors request that the court liquidate the assets, or if the 4.6 What is the ranking of claims in each procedure, company and creditors do not reach a reorganisation agreement including the costs of the procedure? during the conciliation stage of the insolvency proceeding (365 days maximum). Claims are divided into two categories: The only regulatory difference between voluntary liquidation and ■ Those filed before the judgment issued by the Court declaring compulsory liquidation is that if the compulsory liquidation is filed the company in insolvency; in that case, the claim will be by the creditors, the company may reject such petition and the followed by the company with the supervision of the insolvency proceeding will begin from the conciliatory stage. conciliator. ■ Those filed during the insolvency proceeding, where the 4.2 On what grounds can a company be placed into each lawsuits do not have to be accumulated to the insolvency. winding up procedure? ■ The costs of those procedures will be assumed by each party.

Out-of-court liquidation – It will suffice that the company (debtor) 4.7 Is it possible for the company to be revived in the proves that it is facing general, economic or financial difficulties. future? Court liquidation – The liquidation procedure may be initiated: ■ if the debtor company applies for an insolvency proceeding Yes. if a company is declared in liquidation (bankruptcy) that does in the liquidation stage; or not mean that the company will lose its capacity to continue in ■ if two or more creditors request the liquidation stage. operations in the future when new sources of financing are found, if all creditors are paid. In both cases, it must be demonstrated that the company has defaulted in the payment of its obligations in a general manner. In order to prove this condition of general non-performance, a payment 5 Tax default to two or more creditors should exist alongside the following conditions: ■ at least 35% of all company obligations are at least 30 days 5.1 What are the tax risks which might apply to a past maturity; and restructuring or insolvency procedure? ■ the company has insufficient liquid assets to satisfy at least 80% of its matured obligations on the date of the petition. The CIL has foreseen that all tax credits will continue to cause fines and accessories that correspond to pursuant applicable regulations. In case of reaching a reorganisation agreement, the fines and 4.3 Who manages each winding up process? Is there any accessories caused during the conciliation stage will be cancelled. court involvement? However, the issuance of a judgment of bankruptcy will not be sufficient cause to interrupt payment of taxes and social security The out-of-court liquidation is managed by the shareholders and contributions of the company, for being considered as indispensable directors of the company. The court liquidation is managed by the for the operation of the company. Bankruptcy Court.

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From the judgment of insolvency and until the end of the period ■ a foreign court or representative request for assistance for the conciliation stage, all administrative procedures for the from the Mexican courts regarding a foreign insolvency execution of tax credits will be suspended, even though the tax proceeding; authorities may continue any process to determinate the tax credits ■ when the insolvency proceeding takes place in Mexico and a of the company. foreign country; and ■ when foreign creditors ask for an insolvency proceeding to be initiated in Mexico. 6 Employees

7.3 Do companies incorporated in your jurisdiction

6.1 What is the effect of each restructuring or insolvency restructure or enter into insolvency proceedings in Mexico procedure on employees? other jurisdictions? Is this common practice?

Employees have to still be paid since insolvency procedure is not Yes, it is common for global companies with a branch or subsidiary a justification to interrupt payments of wages. Employees will be in Mexico. ranked as creditors against the estate (first ranking) when the labour claim has a connection with unpaid salaries for the last two years. But when the credit of an employee comes from a different concept, 8 Groups then the ranking will be equal to tax creditors without collateral. During insolvency procedures, any attachment of assets is forbidden 8.1 How are groups of companies treated on the for all creditors, with the exception of when the attachment is insolvency of one or more members? Is there scope requested by a Labour Court for concept of unpaid salaries for the for co-operation between officeholders? last two years. The commercial bankruptcy proceedings of a company that integrates a corporate group will be accumulated, but will follow 7 Cross-Border Issues its own proceeding.

7.1 Can companies incorporated elsewhere use 9 Reform restructuring procedures or enter into insolvency proceedings in your jurisdiction? 9.1 Have there been any proposals or developments in If a foreign company does business in Mexico or has agencies your jurisdiction regarding the use of technology or or offices in our country, under Mexican law it is considered a reducing the involvement of the courts in the laws merchant under the Mexican Commercial Code and the court with of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient? jurisdiction in the place where the foreign company does business can order the insolvency proceedings or liquidation of the foreign company’s agencies and offices. However, it will be limited to the No, there have not. rights, goods, assets and properties located in Mexico. 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime 7.2 Is there scope for a restructuring or insolvency in your jurisdiction? process commenced elsewhere to be recognised in your jurisdiction? No, there are not. Yes. Mexican Courts recognise the validity of foreign insolvency proceedings when:

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Fernando Pérez Correa F. Abimael Hernández SOLCARGO SOLCARGO Avenida Insurgentes Sur 1602 Avenida Insurgentes Sur 1602 Floor 11, Office 1102 Floor 11, Office 1102 Crédito Constructor, Delegación Benito Juárez Crédito Constructor, Delegación Benito Juárez Ciudad de México Ciudad de México Mexico Mexico

Tel: +52 55 5062 0050 Tel: +52 55 5062 0050 Email: [email protected] Email: [email protected] URL: www.solcargo.mx URL: www.solcargo.mx Mexico Fernando Pérez-Correa is a lawyer with 20 years of experience in Francisco Abimael Hernández is a lawyer with more than 13 years dispute resolution, commercial contests, litigation, arbitration and of experience in civil and commercial litigation (domestic and mediation. He is admitted to practise in New York and in the federal international) including enforcement and annulment of arbitration courts of the 2nd Circuit of States. He is a mediator before the Superior awards and foreign judgments. He has participated in different Court of Justice of Mexico City, and since 2005 has been registered commercial and investment arbitration proceedings. He has vast as conciliator and trustee (receiver) before the Federal Institute of experience in claims for damages against private entities, as well as Specialists in Commercial Contests (IFECOM). Since 1998 he has public authorities. In the last six years, he has focused and specialised been the managing partner of the dispute settlement area. He has on commercial insolvency proceedings, bankruptcy and restructuring. experience as a party lawyer in more than 25 international commercial During 2010 and 2012 he worked in the law firm O’Melveny & Myers, arbitrations and in four investment arbitrations. He is listed in LLP at Newport Beach, California, USA, and in 2013 he achieved classifications such as Chambers and Partners, The Legal 500 and a Masters of Law at UCLA. He is also listed and recommended in Latin Lawyer. classifications such as Chambers and Partners and The Legal 500 Latin America.

Founded in 1995, SOLCARGO is a top-tier law firm in Mexico, with a highly qualified, internationally educated team with working experience in tier 1 law firms across the world. The firm is capable of implementing efficient legal solutions, while taking into consideration its clients’ business rationale. SOLCARGO performs corporate engagements for Fortune 500, large multinational companies, ambitious middle market and emerging growth companies, and capital market participants including public and private investment organisations, investment banks, commercial lenders and other financial institutions. SOLCARGO is recognised as a leader in the private equity, venture capital, Chapter XI NAFTA Arbitration, litigation, mediation, restructuring and bankruptcy, IP and pharmaceutical industries. SOLCARGO adopts a multidisciplinary approach in counselling its clients and draws upon the firm’s unparalleled resources, including creation of firm-wide task forces to address important industry and topical client needs.

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Netherlands R.M. Vermaire

Wijn & Stael Advocaten F.B. Bosvelt

The unsecured creditors are usually offered a percentage of the 1 Overview outstanding amount. The Tax Authorities have developed a policy from which it follows that in many cases it agrees to receive double 1.1 Where would you place your jurisdiction on the the percentage an unsecured creditor receives. In some cases, spectrum of debtor to creditor-friendly jurisdictions? consent by reluctant creditors to an informal composition with creditors is compelled in a court action. The Netherlands has two types of statutory insolvency proceedings, Dutch law has statutory insolvency proceedings for suspension of namely winding up and suspension of payment. Winding up is payment. Suspension of payment is a useful instrument during mainly for the purpose of liquidation. Suspension of payment is which a composition can be reached with the unsecured creditors, aimed at debt restructuring. certainly if suspension of payment is sought in a timely manner. In The Dutch jurisdiction is primarily creditor-friendly. It is relatively many cases, in practice, suspension of payment is only a gateway to simple to establish collateral security (pledge and mortgage rights). a liquidation order pronounced within a few days afterwards. As a rule, pledgees and mortgagees can also continue exercising Winding up is the most frequently occurring statutory insolvency their rights during the winding up process or during suspension of proceeding and is generally used to restructure a company by way of payment. A temporary exception is made if a cooling down period has an assets transaction. Winding up can, however, also end by means been announced. Apart from that, a pledgee must take into account of a composition. that the claim of the Tax Authorities can take precedence over his/her pledge, in so far as established on machinery and equipment. 2 Key Issues to Consider When the Creditors can exert influence in winding up proceedings by way of requests to the supervisory judge. In addition, at the request of Company is in Financial Difficulties creditors, the court can form a creditors’ committee or preliminary creditors’ committee. After judgment in winding up proceedings, 2.1 What duties and potential liabilities should the the decision on this is up to the court. A creditors’ committee or directors/managers have regard to when managing a preliminary creditors’ committee is usually formed only in the event company in financial difficulties? Is there a specific of substantial liquidation. The creditors themselves can decide that point at which a company must enter a restructuring a definite creditors’ committee will be formed only if a verification or insolvency process? meeting is organised during liquidation. Furthermore, suspension of payment only works for unsecured There is no specific time under Dutch law at which a managing creditors and these unsecured creditors ultimately decide on director is required to start insolvency proceedings. Nevertheless, the definite granting of suspension of payment and a possible many rules apply which a managing director of a company in composition. A sufficient majority of creditors can force the financial difficulties has to take into account. minority to go along with their decision. A managing director under the articles of association can be held In principle, unanimity is necessary in the Netherlands for a liable for the entire negative balance of the insolvent company if composition with creditors separate from winding up or suspension there was mismanagement and such mismanagement was a major of payment proceedings. This is based on the parties’ freedom of cause of the insolvency. If the requirement to keep records or contract. Only in the event that refusal by an individual creditor the filing obligation – in the Netherlands there is an obligation to constitutes abuse of authority can this creditor be forced in a court publish the annual accounts of a company in a timely manner – action to agree to an out-of-court composition with creditors. has been breached, it will be irrefutably established that there was mismanagement and this is presumed to have been a major cause of the insolvency. This legal presumption can be refuted if it can be 1.2 Does the legislative framework in your jurisdiction demonstrated that other major causes led to the insolvency. Besides allow for informal work-outs, as well as formal managing directors under the articles of association, those who have restructuring and insolvency proceedings, and to actually managed the company are also subject to such liability. what extent are each of these used in practice? In addition, a managing director can be liable to the company for Most of the workouts in the Netherlands take place informally. losses resulting from a failure in the performance of his/her duties This means that, in principle, the consent of all creditors is needed. if the managing director can be seriously reproached for this. Such liability exists in the event of an unmistakable, clear failure.

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Furthermore, a creditor of the company can base the liability of a managing director on a wrongful act. It follows from case law that a 2.3 In what circumstances are transactions entered managing director is liable to a specific creditor if obligations were into by a company in financial difficulties at risk of challenge? What remedies are available? entered into at a time that the managing director knew or should have known that the company would no longer be able to comply with those obligations, and would not provide for any recovery If a non-obligatory legal act is performed that prejudices creditors, owing to losses resulting from this. Liability can ensue from and the contracting party knew or should have known that such an acts or omissions with respect to a creditor if a managing director act would result in the prejudicing of creditors, transactions are can be seriously reproached personally. Such a serious reproach nullifiable. Statutory evidentiary presumptions apply to certain will exist if it has been established that the managing director transactions. This is the case, for example, when a company sells knew or reasonably should have understood that his/her course of assets below their value, security is provided for a debt not yet due

Netherlands action would result in the company no longer complying with its and payable, or transactions are conducted with (formerly) affiliated obligations and not being able to provide for any recovery either parties. Objectified financial information is important in order to of losses resulting from this course of action. Cooperation in an conduct a responsible transaction. This information can be used act that results in prejudicing the creditors can also lead to liability. to refute the presumption of knowledge of prejudice. It should be noted that the mere fact that a good price has been paid for certain In addition, liability can ensue from distributions of dividends. assets does not provide certainty that a transaction will not be The shareholder(s) can pass a resolution to distribute dividends. A considered prejudicial to creditors. managing director is, however, expected to check prior to payment whether the dividend distribution is responsible. If the company The settlement of due and payable debts, also including a pledge cannot continue to pay its due and payable debts after a distribution, for which a previous obligation existed, can be nullified as well if the directors who knew or should reasonably have foreseen this at the party who received the payment or right of pledge knew that the the time of the distribution will be jointly and severally liable to liquidation of the debtor had already been petitioned, or because the company for the shortfall due to the distribution. A managing the payment was the result of consultation between the debtor and director who proves that he/she is not to blame for the distribution creditor for the purpose of favouring the latter over other creditors taking place and proves that he/she was not negligent in averting the by way of that payment. negative consequences of the distribution will not be liable. A special liability regime applies with respect to the tax debts. If a 3 Restructuring Options company cannot comply in time with a payment of a tax obligation, the managing director must notify the Tax Authority in good time of the inability to pay. In the absence of timely notification, it will be 3.1 Is it possible to implement an informal work-out in presumed that the non-payment is the result of manifestly improper your jurisdiction? management. As a rule, the consent of all creditors is needed for an informal workout. There is no relevant legal framework in the Netherlands. 2.2 Which other stakeholders may influence the In an informal workout, the creditors are usually offered a company’s situation? Are there any restrictions on the percentage of the outstanding amount, whereby the creditor has to action that they can take against the company? For example, are there any special rules or regimes which remit the remainder. The Tax Authorities have developed policy apply to particular types of unsecured creditor (such from which it follows that in many cases it agrees to receive double as landlords, employees or creditors with retention the percentage that an unsecured creditor receives. In some cases, of title arrangements) applicable to the laws of your agreement by a reluctant creditor is compelled in proceedings. This jurisdiction? is possible only in case of abuse of rights. Sometimes a debt-for- equity swap also takes place in the context of an informal workout. Each stakeholder can influence the situation.

It is particularly the case that in the Netherlands, the financiers, 3.2 What formal rescue procedures are available in mostly the banks, usually with pledges on all assets, are important your jurisdiction to restructure the liabilities of stakeholders which can influence the situation. Because of the distressed companies? Are debt-for-equity swaps financier’s security rights, a restructuring often cannot succeed and pre-packaged sales possible? To what extent can without the financier’s consent. Moreover, in practice, banks often creditors and/or shareholders block such procedures control liquidity. or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you There is also a risk that (other) creditors will impose attachment, will to cram-down dissenting stakeholders? demand payment in advance or will take a position as an essential supplier. The possibility to do so is unlimited, barring abuse. Suspension of payment is the statutory insolvency proceeding Creditors can also petition for winding up. Attachment or winding aimed at restructuring unsecured debts. In suspension of payment, up petitions often trigger a contractual termination clause in current a debt-for-equity swap is also possible. Suspension of payment is contracts and make it possible for the other party to terminate a only applicable to unsecured creditors. The creditors must decide current contract. This is otherwise only in the exceptional case that by a certain majority on the definite granting of suspension of an abuse of rights is involved in the termination. payment and a scheme of arrangement. Suspension of payment In addition, suppliers can also invoke their retention of title or the does not work for preferential creditors and insolvency creditors, right of reclamation. Retention of title can be established in a very so that unanimous consent must be obtained from those parties, broad sense. It enables them to reclaim goods they delivered if barring forced consent due to abuse of rights. Within the category invoices have not been paid. of unsecured creditors, the majority can compel the minority to The possibility of dismissing employees outside winding up consent. proceedings are limited. This is also one of the main reasons why In recent years, a practice not yet regulated by law has developed many informal restructurings do not succeed. in the Netherlands by which the court already indicates before the

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suspension of payment is granted or the liquidation order issued or income, the restructuring debts (fee of the administrator and whom they will appoint as administrator in the suspension of advisers) are paid first. payment or receiver in a liquidation. In the period before the start Rescue finance is not protected if it was obtained before the start of of the formal insolvency proceedings, such a future administrator/ insolvency proceedings. In some cases the financier or shareholder receiver is informed about the asset deal the management has provides the insolvent company with a preferential loan during prepared and which should take place right after the court declared insolvency proceedings. Such a preferential loan has a high rank the company bankrupt. This non-statutory procedure is also called and is indeed protected. a pre-pack. Relevant legislation is in the making; see below under section 9. Pre-packs hardly take place anymore due to a recent judgment of the European Court of Justice concerning the 4 Insolvency Procedures liquidation of Estro, because there is a great risk that in an asset

deal, the purchasing party will get all employees of the insolvent Netherlands company in its employment ipso jure as a result of rules of European 4.1 What is/are the key insolvency procedure(s) available law relating to the transfer of an undertaking. to wind up a company?

Winding up is the most frequently used insolvency proceeding. 3.3 What are the criteria for entry into each restructuring procedure? During winding up, the plenary employees are usually dismissed and leases in which the insolvent company is the lessee are terminated. In addition, the receiver or the mortgagee/pledgee sells the assets. Only the company can apply for suspension of payment, which is immediately granted provisionally by the court if a company states that it is unable to continue paying its due and payable debts. 4.2 On what grounds can a company be placed into each winding up procedure? 3.4 Who manages each process? Is there any court involvement? A winding up petition can be filed if a company is in a situation in which it has ceased to pay. A minimum requirement for this is that In a suspension of payment, the court-appointed administrator is there are several debts. Moreover, one of those debts must be due responsible, together with the management board, for managing and payable. The winding up petition can be filed by the company the company. A delegated judge from the court is usually involved itself or by one or more creditors. as well. The delegated judge can advise the administrator and An administrator in suspension of payment must also file a winding has certain powers, such as the power to examine witnesses. up petition if the debtor is guilty of bad faith in administering the Under certain circumstances, creditors can make requests to exert liquidation assets in the course of the suspension, or during the influence. It is also important that the court sometimes requires an suspension of payment the condition of the assets proves to be such administrator in suspension of payment to file a winding up petition; that maintaining the suspension of payment is no longer desirable, see below under question 4.2. Lastly, creditors can also file an or the prospect that the debtor will be able to satisfy its creditors in application at the court in which they request withdrawal of the the course of time proves not to exist. suspension of payment.

4.3 Who manages each winding up process? Is there any 3.5 What impact does each restructuring procedure have court involvement? on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? During the winding up, the court appoints a receiver. The receiver is under the supervision of a delegated judge appointed by the The starting point is that suspension of payment has no influence court and needs advance authorisation from the delegated judge for on existing contracts. Consequently, contractual possibilities for certain acts. The delegated judge must, for example, authorise: termination and set-off continue to exist. Reliance on a termination ■ The termination of leases and employment contracts. clause therefore cannot succeed only if it constitutes abuse of rights. ■ Private sale of assets. In a suspension of payment, broader statutory possibilities for set- ■ Starting court proceedings. off apply in addition to any contractual possibilities for set-off. ■ Entering into settlement agreements. If both the debtor and its other party have not performed a reciprocal In addition, the delegated judge can examine witnesses or directors contract at all or have only performed it partially at the start of or give an order that the receiver must perform a certain act or omit suspension of payment, and the debtor and administrator do not an intended act. state that they are willing to perform their part of the contract within a reasonable time set in writing by the other party for them to do so, they will lose the right on their part to claim performance of 4.4 How are the creditors and/or shareholders able to the contract. If the debtor and administrator do state that they are influence each winding up process? Are there any willing to perform the contract, if asked they must provide security restrictions on the action that they can take (including for such performance. the enforcement of security)? In addition, there are broader possibilities in suspension of payment to terminate leases and employment contracts. Shareholders usually have little influence if a liquidation order has been issued. A resolution of the shareholders’ meeting is, however, necessary for the company to file a petition for its own liquidation. 3.6 How is each restructuring process funded? Is any In practice that is sometimes the reason that the management board protection given to rescue financing? files an application for the granting of suspension of payment in cases where the shareholders are unwilling to cooperate in a In general, the debtor finances the restructuring. From its assets liquidation, because no shareholders’ resolution is needed to apply

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for suspension of payment. A liquidation order is usually still issued Secured pre-insolvency debts: Pledgees and mortgagees can in by a quick conversion of the suspension of payment into liquidation. principle recover from the collateral as if there were no liquidation; Creditors can exert influence by eliciting an order from the see above under question 4.4. delegated judge that the receiver must perform a certain act or omit Preferential pre-insolvency debts: The most frequently occurring an intended act. In practice, however, unsecured creditors show preferential creditors are the tax debts and employees with a claim little interest because in most liquidations the ample possibilities from before the liquidation date. Preference can only ensue from for pledge, the possibility for a party entitled to security to seek the law. Preferential claims must be submitted to the receiver for recovery from the property given as security as if there were no verification. liquidation at all, and higher-ranking debts preclude payments to Unsecured pre-insolvency debts: These are claims that already unsecured creditors. Pre-liquidation creditors cannot exercise their existed at the time of the liquidation order or arise directly from legal rights during the liquidation and can only submit their claims to the

Netherlands relationships already existing on the date of the liquidation order. receiver for verification. If the debtor offers the unsecured creditors These claims must be submitted to the receiver for verification. The a composition, the unsecured creditors then vote on it. A certain unsecured creditors share the amount pro rata that remains after majority can compel the minority to go along with this. execution of the security by the secured creditors and after payment Creditors with rights of pledge or mortgage have a lot of influence of all estate debts and preferential pre-insolvency claims. because, barring a cooling down period, they can in principle Post-insolvency debts: These are claims that arise only after the exercise their rights as if there were no liquidation at all. The liquidation order and are not insolvency debts. These claims are not receiver can set a reasonable time for the pledgees and mortgagees subject to validation and not enforceable during the liquidation, but to exercise their rights. If the collateral is not sold within this time, do remain payable by the debtor. This also holds for interest that which may possibly be extended by the delegated judge, the receiver falls due after the liquidation order. These claims are relevant only can then claim and sell the assets given as security. In that case, if the debtor continues to exist after liquidation (see below under however, the pledgee or mortgagee takes precedence with respect question 4.7). to the proceeds, but it must contribute to the winding up costs of the liquidation (see below under question 4.6) and then receives less than the entire proceeds. 4.7 Is it possible for the company to be revived in the future?

4.5 What impact does each winding up procedure have on Theoretically, liquidation can end because all debts have been paid. existing contracts? Are the parties obliged to perform The company then revives. In addition, the company can continue outstanding obligations? Will termination and set-off to exist after the court has approved a composition. In most cases, provisions be upheld? liquidation will nevertheless mean the end of the company. The starting point is that a liquidation has no influence on existing contracts. Consequently, contractual possibilities for termination 5 Tax and set-off continue to exist. Reliance on a termination clause therefore cannot succeed only if it constitutes abuse of rights. In a liquidation broader statutory possibilities for set-off apply in 5.1 What are the tax risks which might apply to a addition to any contractual possibilities for set-off. restructuring or insolvency procedure? If both the debtor and its other party have not performed a reciprocal contract at all or have only performed it partially at the time of An informal workout or formal insolvency proceedings do not make the liquidation order, and the receiver does not state that he/she any changes to the tax liabilities. The tax status is indeed important is willing to continue the contract within a reasonable time set in in the event of restructuring and winding up. On the one hand, it is writing by the other party for him/her to do so, the receiver will lose important that the Tax Authorities have developed a policy within the right on his/her part to claim performance of the contract. If the which it cooperates in a judicial or out-of-court composition; see receiver does state that he/she is willing to perform the contract, the above under question 3.1. On the other hand, remission of claims receiver must provide security for such performance on making that by creditors, for example, in the context of an informal workout, can statement. have tax consequences. Profits can be made by way of remission. In addition, remission can have the consequence that VAT deducted In addition, there are broader possibilities in a liquidation to as input tax has to be repaid. Paying attention to the relevant tax terminate leases and employment contracts. aspects is important in all restructuring processes.

4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 6 Employees

The following debts can be distinguished in a liquidation. 6.1 What is the effect of each restructuring or insolvency Estate debts: The highest ranked debts are the insolvency debts. procedure on employees? These include the receiver’s fee, the debts the receiver has incurred, for example, for experts engaged, debts resulting from acting If an employer is in a state of liquidation, with authorisation from contrary to an obligation to which the receiver is subject, the wages the delegated judge, the receiver can terminate the employment of employees during the period after the liquidation order and rent contracts with a notice period of six weeks at most. In the event for the period after the liquidation order. Insolvency creditors are of mass dismissal, additional conditions may apply. Under the immediately entitled to the liquidation assets and, depending on wage guarantee scheme, the Employee Insurance Agency (UWV) the quantity of liquidation assets and their mutual ranks, can claim guarantees 13 weeks’ arrears of pay to employees. In addition, immediate payment. the UWV also guarantees wages during the notice period with a maximum of six weeks. By paying those amounts to employees,

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the UWV succeeds to the rights of the employees and it submits a group company is settled separately. A consolidated settlement claim to the receiver. is only possible in exceptional cases. This is the case if it is very In the event of suspension of payment, the administrator and the difficult or impossible to determine different group companies’ own debtor can dismiss employees together. The notice period for this rights and obligations. can vary. In case of suspension of payment, the wage guarantee The same receiver or receivers are often appointed for different does not apply. group companies. If, however, there is a conflict of interests, If an asset sale takes place during liquidation, the European rules different receivers can be appointed. A statutory obligation for on the transfer of an undertaking are not applicable. This can be receivers of the various group companies to cooperate with one different in liquidations preceded by a pre-pack; see question another does not exist. 3.2. Due to a recent judgment of the European Court of Justice concerning the liquidation of Estro, pre-pack procedures hardly ever 9 Reform Netherlands take place anymore because there is a great risk of the purchasing party in an asset deal getting all employees of the insolvent company in its employment ipso jure. 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws 7 Cross-Border Issues of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient?

7.1 Can companies incorporated elsewhere use A legislative proposal for the modernisation of insolvency restructuring procedures or enter into insolvency proceedings is pending. proceedings in your jurisdiction?

For admission to winding up or suspension of payment schemes, it 9.2 Are there any other governmental proposals for is required that the centre of main interest (COMI) is located in the reform of the corporate rescue and insolvency regime Netherlands. in your jurisdiction?

In the context of the legislative programme for the reassessment of 7.2 Is there scope for a restructuring or insolvency insolvency law, the following developments can be mentioned. process commenced elsewhere to be recognised in your jurisdiction? 1) Since 1 July 2016, the Directors Disqualification under Civil Law Act (Wet Civielrechtelijk bestuursverbod) has been in force. Under this Act, it is possible to claim a director’s The formal starting point is that foreign insolvency proceedings are disqualification to act as a director in general. not recognised in the Netherlands. In practice, however, there is 2) On 1 July 2017, the Official Receiver (Extended Powers) Act a virtually automatic effect. This effect can be limited only with (Wet Versterking Positie Curator) entered into effect. Under reliance on the public order exception under private international this Act, the receiver extended powers to demand information law. Insolvencies in other EU Member States, except for Denmark, and cooperation from directors and third parties. are indeed recognised pursuant to the EU Insolvency Regulation. 3) The legislative proposal for court approval of private compositions is pending. Much is expected from this Act. 7.3 Do companies incorporated in your jurisdiction This legislative proposal is intended to make it simpler for restructure or enter into insolvency proceedings in companies in financial need to enter into a composition other jurisdictions? Is this common practice? with their creditors, by which debts are restructured and liquidation can be prevented. This Act is intended to make a practice possible that resembles the United States Chapter In the past few years there have been examples in which restructuring 11 and the English Scheme of Arrangement. Under this or insolvency proceedings were applied to Dutch companies in legislative proposal the rights of parties entitled to security foreign countries. But this is not very common. and shareholders may also be changed. 4) A legislative proposal to provide a legal basis for the pre-pack 8 Groups practice is pending. It is still unclear at present what effects the Estro judgment of the European Court of Justice will have on this legislative proposal. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?

There is no statutory scheme for the settlement of insolvencies of group companies. The starting point is that each insolvency of each

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R.M. Vermaire F.B. Bosvelt Wijn & Stael Advocaten Wijn & Stael Advocaten Postbus 354 Postbus 354 3500 AJ Utrecht 3500 AJ Utrecht Netherlands Netherlands

Tel: +31 30 232 08 88 Tel: +31 30 232 08 81 Email: [email protected] Email: [email protected] URL: www.wijnenstael.nl URL: www.wijnenstael.nl

Remco Vermaire is managing partner at Wijn & Stael. Remco has Ferdinand Bosvelt joined Wijn & Stael in 2011. He has wide-ranging Netherlands worked at Wijn & Stael since 2002, specialising in leasing, financing, experience as a lawyer in insolvency law and business law. His security interests and insolvency law. He advises executive boards excellent legal knowledge, strong numerical skills and practical of businesses, banks and lease companies on financing and security, approach enables him to give good advice to businesses in financial with an emphasis on pre-bankruptcy and bankruptcy matters, and difficulties as well as other parties who risk becoming involved in extensive restructuring. Remco had been an administrator and a bankruptcy proceedings or a moratorium. He is regularly asked by the trustee in bankruptcy for many years and had also worked at a large district court to act as receiver or administrator. financial institution. As a lawyer, Remco is conscientious and precise. He enjoys winning legally complex cases for his clients during negotiations or proceedings, and he is tireless in helping devise effective legal solutions for entrepreneurs, financiers and potential takeover companies.

Wijn & Stael is a leading ambitious law firm based in the historical centre of Utrecht (40 minutes from Amsterdam Airport). We act on behalf of large and mid-size companies, financial institutions, healthcare institutions, government bodies, non-profit organisations and aggrieved civil parties in class actions. Our clients are based inside and outside the Netherlands. We are well-known for our excellent quality of work in highly complex cases and our strong client relations. We are a multi-niche law firm with a strong focus on restructuring & insolvency, corporate & financial litigation, Supreme Court litigation, M&A, real estate and employment law.

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Nigeria Jennifer Douglas-Abubakar

Miyetti Law Oluwole Olatunde

On informal work-outs, under CAMA, companies can legitimately 1 Overview propose the following work-outs: ■ relinquish securities to creditors; 1.1 Where would you place your jurisdiction on the ■ allow creation of a prior charge or a pari passu charge; spectrum of debtor to creditor-friendly jurisdictions? ■ request to pay creditors off before a reconstruction; ■ request creditors to take up shares in the company in Nigeria is a creditor-friendly country based on a plethora of laws satisfaction of the debt owed them; or governing creditor realisation of loans and securities. These laws are ■ to take up part shares and part cash to liquidate the debt. The Companies and Allied Matters Act (CAMA), Banks and other Financial Institutions Act (BOFIA), Investment and Securities Act Any scheme chosen must be registered with the Corporate Affairs (ISA) Central Bank of Nigeria Act (CBN), Nigeria Deposit Insurance Commission (CAC). Members of a company may still, by Corporation Act (NDIC), the Failed Bank (Recovery of Debts and special resolution, approve voluntary winding up and a liquidator Financial Malpractices in Banks Acts 2004, Movable Assets Acts is appointed to sell assets and undertaking of the company, in 2017). The laws give creditors powers to recover their loans and wind consideration of debentures. up debtor companies. In aggregate, the laws provide for a speedy and There are no mandatory provisions on informal work-outs and liberal process to recover both loans and interest, and the normal rules informal restructuring within the law as these are considered of recovery under the Evidence Act are suspended. Procedurally, business judgment decisions and considerations for the Board when a creditor issues a demand for settlement of a debt and the and shareholders in Nigeria. Consequently, informal work-outs company (including Banks and Insurance Companies) fail to comply are common practice in Nigeria by companies seeking to avoid with the demand, the creditor has the right to petition for the winding winding up proceedings and comply with recapitalisation demands. up of the company. A winding up petition under CAMA. This practice was used by many Nigerian Banks in 2015 to meet CBN’s recapitalisation directives. This has stimulated promotion of ISA creates an Investors Protection Fund (IPF) to cater for losses corporate recovery through restructuring the company’s operations suffered by independent capital market investors as a result of and workforce redundancy schemes or other options available to insolvency, bankruptcy, negligence and defalcation committed by companies in distress, in response to financial crises. For informal intermediaries. insolvency proceedings, CAMA has provided guidelines for NDIC Act in ss. 16 & 21 mandate insurance of banking deposits companies in financial distress. with the NDIC. To further protect creditors, special protections and priority in ranking for account holders/depositors in Failed Banks under ss. 20 & 21 of the NDIC Act and s. 54 of BOFIA exist. 2 Key Issues to Consider When the Company is in Financial Difficulties 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal 2.1 What duties and potential liabilities should the restructuring and insolvency proceedings, and to directors/managers have regard to when managing a what extent are each of these used in practice? company in financial difficulties? Is there a specific point at which a company must enter a restructuring In Nigeria, several enactments have been made to regulate formal or insolvency process? restructuring and insolvency proceedings, notable amongst them are CAMA, ISA, SEC Rules 2013 and BOFIA. Similarly, the The Directors of companies in distress continue to owe the ailing NDIC Act regulates deposit insurance liabilities in relation to company fiduciary and non-fiduciary responsibilities/duties which licensed banks and other financial institutions, to protect depositor’s include duty of care and skill, duty to keep proper books of records, interests against a bank’s financial difficulties. Under these laws, duty not to enter into certain new transactions, duty not to accept new deposit liabilities of banks have priority over all other liabilities of loans or other financially obligating ventures and duty to observe the bank. Also, The Assets Management Corporation of Nigeria utmost good faith towards their companies in all transactions. Act establishes the Assets Management Corporation of Nigeria Furthermore, the directors/managers must not abdicate from their (AMCON) to resolve banks’ non-performing loans/assets whilst responsibilities, allow their personal interests to conflict with their The Bankruptcy and Insolvency Act and Bankruptcy Rules regulate duties, make secret profit or other benefits and must not misuse bankruptcy proceedings. corporate information or property in their possession.

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The Failed Banks Act (FBA), and CAMA, allow the courts to hold obtaining credit on behalf of the company without realistic prospect officers, members and employees of failed banks who are connected of repayment. In such cases, the remedies readily available include to debts and loans to be jointly and severally liable, where the recovery through actions like Mareva Injunctions to prevent debtor security is impossible to locate or the debtor is non-existent, fake or from misuse of assets or absconding, recovery of commission/ fictitious. Both laws provide that a company becomes insolvent if it interests in an International Sales Representation Agreement, is indebted to its creditors in a sum exceeding N2,000 and is unable attachment of movable or immovable properties and Appointment to pay same upon service of three weeks’ (six weeks by CAMA) of Receiver/Manager. statutory notice demanding for payment or to secure or compound In addition, CAMA and BOFIA specifically provide for lifting the debt satisfaction. the veil of the incorporation to hold the directors and other errant officers personally liable for crime and civil breaches. Other

Nigeria Under s. 650 of CAMA, an insolvent person is defined as any person in Nigeria who, in respect of any judgment, decree or court order remedies available include rescission of the transactions, damages, against him, is unable to satisfy execution or other process issued and criminal indictment and conviction. thereon in favour of a creditor, and the execution or other process However, a receiver is empowered to borrow money on the security remains unsatisfied for not less than six weeks. In practice, once of the property in his possession, upon approval of the court. The a company’s liabilities exceed its assets, it can be said to be due creditor of such loan is protected to the extent of the claim having for business restructuring or rescue. For Banks, the CBN’s report priority over debenture holders who initiated the appointment of the on the financial health of the bank is sufficient proof of insolvency. receiver. Thereupon, the FBA prohibits any disposition of property and all outward payments on debtors account are halted. 3 Restructuring Options Outside the banking industry, once there is a resolution of member’s voluntary winding up, the winding up process is deemed to have commenced. 3.1 Is it possible to implement an informal work-out in your jurisdiction?

2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the Informal work-outs in Nigeria, termed Business Rescue action that they can take against the company? For Arrangements, are common in the financial services and hotel example, are there any special rules or regimes which business sectors. Essentially, the companies involved seek to avoid apply to particular types of unsecured creditor (such being wound up, or to pull out of Nigeria due to general unfavourable as landlords, employees or creditors with retention economic conditions. of title arrangements) applicable to the laws of your The schemes used involve reorganisation of the company’s jurisdiction? ownership/management, review of core business operations, change in business strategy or structure, review of the economies of scale Stakeholders who can influence the company’s situation include the and scope, merging of departments, bail outs, debt restructuring Receiver, members/shareholders, creditors, trustees in bankruptcy, and asset stripping. To implement labour force, downsizing the a contributory, regulatory agencies like NDIC, CAC and the CBN. provisions of the Labour Act on skills obsolescence and LIFO (Last S. 209 CAMA also allows an interested person by court order to In First Out) are applied. appoint a Receiver/Manager where the security is at risk. The remedies available to unsecured creditors include: applying to the court for the judicial sale of the company’s assets; applying to the 3.2 What formal rescue procedures are available in court for the appointment of a receiver; and commencing recovery your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps proceedings for the principal debt and interest. After court judgment, and pre-packaged sales possible? To what extent can repayment may be enforced on the moveable and immovable assets creditors and/or shareholders block such procedures of the debtor. or threaten action (including enforcement of security) CAMA provides for preferential payment of all local rates and to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? charges due, payable, assessed taxes, Pension Fund contributions, wages and salaries, employee holiday remuneration. However, this priority ranking is in conflict with BOFIA which gives priority of Internal Options: liquidation expenses over all other liabilities including over legal a. alteration of share capital, e.g. recapitalisation; mortgages or crystallised debentures. b. conversion of debt into shares (partial and full); c. arrangement on sale; 2.3 In what circumstances are transactions entered d. scheme of Arrangement or compromise; amending class into by a company in financial difficulties at risk of rights and preference shares to pay accrued unpaid dividends; challenge? What remedies are available? and e. management buy-out. Under CAMA, BOFIA and NDIC Act, companies in financial External Options: crisis are barred from embarking on new transactions unless their a. mergers; debt status is reversed. Transactions commenced by distressed b. acquisition; organisations are usually termed Fraudulent/Reckless Trading, c. takeovers; and misfeasance, undervalue transactions or wrongful trading. Fraudulent trading arises to defraud creditors, while Misfeasance d. purchase and assumption. consists in the misuse of company’s property, misapplication of Under CAMA mergers and acquisitions are a type of insolvency company’s funds for non-company purposes, or making illegal/ which involves voluntary dissolution of an existing company and unauthorised payments. Undervalue transactions are share transfers absorption of its liabilities into a new entity without formal winding and transactions at undervalue, and Wrongful Trading involves up process. S. 122 ISA.

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3.3 What are the criteria for entry into each restructuring 4.2 On what grounds can a company be placed into each procedure? winding up procedure?

The criterion for entering the internal restructuring option is based on I. Winding up by the court: the principle of corporate democracy. The shareholders or owners a. the company has by special resolution resolved that the can resolve to survive and maintain its and good company be wound up by the court; will by modifying its capital structure, debt profile obligations or b. default is made in delivering the statutory report to the class rights. Commission or in holding the statutory meeting; The criteria or objective for external restructuring includes possible c. the number of members is reduced to below two; Nigeria expansion of business, elimination of competition, customer d. the company is unable to pay his debts; and satisfaction, reduction of operating costs, compliance with statutory e. the court is of the opinion that it is just and equitable that requirements, or enhanced profitability plan. the company should be wound up. II. Voluntary winding up: 3.4 Who manages each process? Is there any court a. This procedure occurs upon the expiration of the duration involvement? fixed by the articles of a company, if any, or upon the happening of certain events stated in the articles of the The internal options for restructuring are managed by the company, i.e. company, if any that the company is to be dissolved. The the General Meeting/members, Board of Directors and any relevant company, in a general meeting, can pass a resolution creditor or contributory Trustee/Receiver/Manager depending on the requiring the company to be wound up. scheme. The external options are managed by SEC, Creditor Banks, b. The company can resolve by special resolution that the CAC, AMCON, NDIC, NAICOM and the Federal High Court. company be wound up, voluntarily. III. Winding up subject to the supervision of the court: Where a company passes a resolution for voluntary winding 3.5 What impact does each restructuring procedure have up, the court may approve the resolution subject to its on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and supervision. set-off provisions be upheld? 4.3 Who manages each winding up process? Is there any Restructuring procedures do not affect existing contracts unless court involvement? the contract itself makes the event of restructuring of the company a condition for premature termination. The restructure exercise Winding up processes are managed by appointed Liquidators or of the company normally will also affirm the validity of parties’ Receiver/Managers; the powers of the directors to manage the obligations. company cease are subject to the General meeting and liquidator continuing certain actions. For banks where there are no Receiver/ 3.6 How is each restructuring process funded? Is any Managers, the CBN or NDIC can appoint a person to coordinate protection given to rescue financing? the process. The Federal High Court is vested with the exclusive powers to wind up a company. Internal Options for restructuring are funded by the company except the Management Buy-out option which is funded by the 4.4 How are the creditors and/or shareholders able to management. influence each winding up process? Are there any External Options are funded thus: restrictions on the action that they can take (including the enforcement of security)? a. Mergers – Funded by all companies involved. b. Acquisition – Funded by all companies involved. A Creditor can initiate winding up proceedings by presenting a c. Takeovers – Funded by the company taking over. petition to the court where it has served on the company a statutory d. Purchase and assumption – Funded by the solvent company. demand of debt owed by the company that exceeds N2,000 and the company fails to pay its debt after the expiration of the demand notice of not less than three weeks. 4 Insolvency Procedures Creditors can also effect a stay of winding up proceeding in court where they satisfy the court that such proceeding ought to be stayed. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform Under CAMA, the procedures are as follows: outstanding obligations? Will termination and set-off a. winding up by the Court; provisions be upheld? b. voluntary winding up; and c. winding up subject to the supervision of the court. Upon initiation of winding up proceedings, all existing contracts remain valid. However, as the company is exempt from enforcement For other companies, an application by an interested person showing proceedings, the contracts may not be enforceable. Any monetary a company’s inability to pay its debts of over N2,000 for three weeks benefits already earned by the company shall be repaid from realised triggers the process of winding up by the court. assets of the company. Once the company becomes wound up, all contracts become terminated, as the company ceases to exist.

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Once winding up has commenced, certain transactions of the company may be declared void, i.e. sale of company’s property, 6 Employees transfer of shares, attachment, sequestration, distress or execution. 6.1 What is the effect of each restructuring or insolvency procedure on employees? 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? Restructuring All expenses properly incurred in the winding up processes, When a company undergoes restructuring, employees may be including the remuneration of the liquidator, are to be paid first terminated or transferred to a new undertaking. In Nigeria, there

Nigeria out of the assets of the company before any other claim. This is generally exist no laws which mandate companies to retain all provided by BOFIA, the NDIC Act and Failed Banks Act. existing employees following a restructuring exercise. However, the CAMA provides that taxes, deductions under the Pension Reform Labour Act states that trade unions and worker’s representatives (in Act, wages or salary of any workers in respect of services rendered strategic sectors without unions) must be informed of redundancy to the company and accrued holiday remuneration of workers would and severance packages. The allowances, benefits and terminal have priority over any claims by debenture holders. benefits and pension allowances of disengaging staff must be paid before the cessation of the employment. Prior to approving a restructuring scheme, it is mandatory that 4.7 Is it possible for the company to be revived in the future? SEC will consider the effect of the restructuring on the company’s employees. On conclusion of the restructuring, the company is required to submit to SEC evidence of settlement of severance benefits A company which is still under liquidation can be revived. Where of redundant employees. Furthermore, the NSE Rulebook requires the company has been dissolved, the law provides for the voiding listed companies who intend to restructure to include a statement of the dissolution order by the court within two years, upon the on the impact of the intended acquisition on its employees and the application of the liquidator or any interested party (s. 524 CAMA). continuity of the business. The information is to be disseminated by circulars submitted to the NSE and distributed to shareholders. 5 Tax Insolvency When a company initiates insolvency proceedings in Nigeria, the 5.1 What are the tax risks which might apply to a services of the employees are no longer required and are terminated. restructuring or insolvency procedure? Under CAMA, their wages or salaries, pension allowances, accrued holiday remunerations and Employee Compensation rights are When a company initiates an insolvency procedure, there are usually given preferential treatment and are paid in priority to all other no tax risks to the company. The company must, however, pay all creditors. Employees who are terminated due to insolvency cannot accrued tax liabilities before the insolvency proceeding, e.g. Capital bring an action for wrongful termination but can institute an action Gains tax, Companies Income tax and Value Added Tax. regarding unpaid entitlements. Restructuring Procedure: The NDIC Act and FBA give priority to liquidation costs, therefore the priority of employees’ emulations operate outside the Banks. In a restructuring procedure, the company remains an ongoing concern and the tax that applies to the restructuring procedure depends on the type of restructuring the company undertakes. When 7 Cross-Border Issues the restructuring procedure relates acquisitions, the company must first seek the direction of Federal Inland Revenue Services and obtain clearance in respect of any capital gains tax due. The tax 7.1 Can companies incorporated elsewhere use implications during this restructuring procedure depend on whether restructuring procedures or enter into insolvency proceedings in your jurisdiction? it is an asset acquisition, shares acquisition or cross-border deal. a. For asset acquisition, the purchaser is liable to pay stamp There is a paucity of authorities in Nigeria regarding cross-border duties of 1.5% of the consideration on instruments executed regarding the transfer. A Value Added Tax of 5% on the insolvencies. However, Nigerian Courts will seek to coordinate consideration is payable for such assets (if asset is not both local and foreign insolvency proceedings and give effect to the statutorily exempted). The seller is also liable to pay 10% respective orders. capital gains tax realised from the sale of assets. Where The laws governing insolvency proceedings in Nigeria are contained the asset is land, other fees like Governors’ consent fees, in CAMA. There is presently no Insolvency Act in Nigeria. registration fees, stamp duties and capital gains tax on the Nevertheless, the same restructuring procedures and insolvency fair market value of the property, are also applicable. proceedings which apply to local companies in Nigeria would apply b. Where the restructuring is a share acquisition deal, stamp to companies incorporated elsewhere. duty, Value Added Tax and capital gains tax will not apply on the share transfer instrument. However, the share purchase A Nigerian Court can wind up a foreign company under s. 407 of agreement will attract stamp duty. CAMA as the Federal High Court has power to wind up relevant c. In cross-border deals, there are generally no special tax companies whether registered or not, that have registered office or considerations. head office within the jurisdiction of the Court, six months preceding the presentation of the petition for winding up. If restructuring results in a merger and there is an increase in share capital, the company must pay stamp duties. Section 53 of The Bankruptcy Act Cap 30, 1990 provides that a bankrupt possessed of property outside Nigeria is required to join the trustee in selling such assets for the benefit of the creditors. This provision has been utilised as a debt recovery tool.

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7.2 Is there scope for a restructuring or insolvency 9 Reform process commenced elsewhere to be recognised in your jurisdiction? 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or Foreign insolvency processes, judgments and orders may be reducing the involvement of the courts in the laws enforced in Nigeria if they comply with s. 10 of the Foreign of your jurisdiction, which are intended to make (Reciprocal Enforcement) Act (Cap F35, Laws of the Federation of insolvency processes more streamlined and efficient? Nigeria, 2004). This section requires the existence of a wholly or partly satisfied foreign monetary judgment debt. The operation of To reduce the involvement of courts, companies may adopt the the provision of this law is largely dependent on the reciprocity of voluntary winding up procedure. If no creditor opposes the Nigeria treatment of similar judgments in the original jurisdiction. voluntary winding up, a company can be successfully wound up without recourse to the courts. This process is leveraged by 7.3 Do companies incorporated in your jurisdiction technology in that meetings and resolutions can be achieved by restructure or enter into insolvency proceedings in video conferencing without physical meeting of private companies. other jurisdictions? Is this common practice? Recently, stakeholders have advocated that parties involved in insolvency proceedings adopt out-of-court options. The call is In Nigeria, there is no legislation dealing specifically with the largely for the adoption of arbitration mechanisms in resolving recognition and enforcement of cross-border insolvency procedures. bankruptcy and insolvency issues. The insolvency jurisprudence There are also no frameworks or institutions set up to deal with in Nigeria is heavily tilted towards the liquidation of a company. issues of cross-border insolvencies. The Courts may apply the legal With arbitration, parties may arrive at a compromise that would or equitable rules governing the recognition of foreign insolvency ensure payment of the debtor’s debt and save the company from orders and assist foreign representatives, provided this is consistent liquidation. with the Bankruptcy and Insolvency (Repeal and Re-enactment) Act 2016. 9.2 Are there any other governmental proposals for Domestic courts, however, apply the guiding principles of the reform of the corporate rescue and insolvency regime Unidroit Convention on substantive rules for intermediated in your jurisdiction? securities, 2013, which deal with international and cross-border approaches on substantive rules. The Rules are clear that domestic Proposed amendments to CAMA in this regard relate to alternative procedures and substantive laws of Nigeria prevail. insolvency procedures like administration and company voluntary CAMA, however, requires that where aliens hold shares in companies arrangements, but are pushed forward by private and professional undergoing arrangements or compromises, SEC approval must be bodies. obtained. Beyond this scope, the practice is therefore non-existent. Also, there are proposals for harmonisation with international rules on priority of debt securities under CAMA, NDIC, BOFIA Act and Unidroit Rules. 8 Groups There are also proposals for CAMA to be amended on the need for certificated securities and legal titles and registration and priorities 8.1 How are groups of companies treated on the to allow uncertificated securities. insolvency of one or more members? Is there scope The proposals are timely because the insolvency framework under for co-operation between officeholders? the current laws is predicated on the backdrop that the company is failing and the business is beyond recovery. This is in contrast Members of a group of companies in insolvency proceedings are with the modern insolvency law trend which leans towards business treated as distinct corporate legal personalities. As such, where rescue. insolvency proceedings are instituted against members of a group, it will be through separate and unconsolidated actions. Nigerian laws do not make room for group insolvency proceedings. Acknowledgment However, companies in a group may voluntarily decide to appoint The authors would like to thank their colleagues Oluwole Olatunde, the same insolvency officeholders over the insolvency proceedings Nzube Ezidi, Chikaodili Okoye, Umar Nalado and Ifedolapo of member companies in the group, to save costs and avoid Oladimeji for their invaluable assistance in the preparation of this multiplicity of processes. chapter.

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Jennifer Douglas-Abubakar Oluwole Olatunde Miyetti Law Miyetti Law 1 Nwaora Close Off Gana Street 1 Nwaora Close Off Gana Street Maitama, Abuja FCT Maitama, Abuja FCT 900271 900271 Nigeria Nigeria

Tel: +234 809 020 5901 Tel: +234 809 020 5905 Email: [email protected] Email: [email protected] URL: www.miyettilaw.com URL: www.miyettilaw.com Nigeria Jennifer Douglas-Abubakar is the Managing Partner at Miyetti Law Oluwole Olatunde is the Practice Group Leader of Miyetti Law’s in Nigeria. Her practice focuses on corporate financing transactions Corporate Law Department. His practice focuses on Corporate Law, and transnational asset recovery. Jennifer provides strategic counsel Debt Recovery/Asset Tracing, Business and Financial Services and and general advisory to governments, domestic and international Intellectual Property. corporations navigating the regulatory environment in Nigeria. Jennifer is also the Editor-in-Chief of the Miyetti Quarterly Law Review.

Miyetti Law is a boutique law firm providing representation to individuals and organisations worldwide. With over a decade of collective experience, our lawyers provide representation to foreign and local business organisations in corporate, energy, financial and other related sectors. Our team of lawyers and legal specialists approach complex legal problems using expert knowledge of the current domestic legal environment and international resources. At Miyetti Law, our lawyers have real-world business experience and are ready to work with individuals and organisations to ensure that the legal advisory provided helps clients meet their short-term objectives and long-term goals. Miyetti Law adopts an inventive approach to handling different clients’ issues via a multi-disciplinary approach to legal advisory, this approach incorporates solutions from the legal field and public policy, business sector and expert partnerships to mention a few. We provide customised solutions in the areas of and complex corporate litigation, international law, private client and government relations.

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Poland Karol Tatara

Tatara & Partners Restructuring & Insolvency Law Firm Mateusz Kaliński

the cooperation of the debtor and expert appraiser. Pre-pack is more 1 Overview and more popular among debtors and creditors. However, still most popular are formal restructuring and insolvency 1.1 Where would you place your jurisdiction on the proceedings, held in Courts, mainly because they are highly spectrum of debtor to creditor-friendly jurisdictions? regulated, and under strict and ongoing supervision of the trustee as well as the Bankruptcy/Restructuring Court. Poland’s system of regulations related to insolvency was quite recently significantly amended because ofi.a. lack of effectiveness in recovery rates for creditors and an insufficient number of successful 2 Key Issues to Consider When the restructuring procedures – bankruptcy with the possibility to make Company is in Financial Difficulties an arrangement.

After the reform of 2016, there are now four new restructuring 2.1 What duties and potential liabilities should the proceedings, and a new legal institution – pre-packaged liquidation/ directors/managers have regard to when managing a administration, based on British and American regulations – so company in financial difficulties? Is there a specific called a “pre-pack”. All these new legal instruments create a point at which a company must enter a restructuring framework which places Poland as both beneficial for debtor and or insolvency process? active creditors; however, the Restructuring Law significantly improved the situation for the debtor with relation to previous Yes, under Article 299 of the Commercial Companies Code (for law provisions, and – what is even more important – introduced limited liability companies), as well as Article 21 Para 3 of the pre-packaged sale which is a new legal institution, beneficial for Bankruptcy Law (both limited liability companies and joint-stock all involved parties – insolvent debtors, creditors, investors, the companies), the Board Members may be sued and personally liable economy and the judiciary. to creditors, when not filing bankruptcy motion (or not opening restructuring procedure) in the right time.

1.2 Does the legislative framework in your jurisdiction The right time is described as 30 days from when the insolvency allow for informal work-outs, as well as formal premises are met, and those that lost the ability to fulfil matured restructuring and insolvency proceedings, and to pecuniary liabilities and, independently, when pecuniary obligations what extent are each of these used in practice? of the debtor are in excess of the value of its assets, and this state of facts persists throughout a period exceeding 24 months. In Poland, after the important reform of 2016, provisions of law There are also criminal liabilities for not filing for bankruptcy in the allow for informal work-outs as well as formal, under Court’s right time, as well as the possibility to ban economic activity and supervision, restructuring and insolvency proceedings. managing of the board members (or even shadow directors) for up The first possibility of – up to some extent – informal work-outs to 10 years. is a proceeding to approve the arrangement, regulated in the Restructuring Law. In such a proceeding, the debtor files the motion 2.2 Which other stakeholders may influence the to approve the arrangement, which was previously negotiated and company’s situation? Are there any restrictions on the voted over creditors. The Court’s role is to control compliance with action that they can take against the company? For legal provisions and formal aspects. One can observe the growing example, are there any special rules or regimes which popularity of this instrument. apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention Additionally, another less formal proceeding is pre-pack, of title arrangements) applicable to the laws of your regulated under amended Bankruptcy Law. In this proceeding, the jurisdiction? Bankruptcy Court declares bankruptcy and approves sale conditions of an enterprise as a going concern, organised part of an enterprise Personal creditors of an insolvent company may file for bankruptcy, or important assets of the debtor. The main accent is put on earlier as well as for a remedial proceedings. Other restructuring stages, when the debtor files for bankruptcy together with the proceedings (proceedings to approve the arrangement; accelerated motion to approve sale conditions within a pre-pack procedure. The arrangement proceedings and arrangement proceedings) can be motion should be accompanied with expert valuation of the subject initiated solely by the debtor. of the pre-pack, which can be made properly practically only with

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however, as an exception, in bankruptcy proceedings there is also a 2.3 In what circumstances are transactions entered possibility to vote and adopt an arrangement. into by a company in financial difficulties at risk of challenge? What remedies are available? One of the most interesting new rescue proceedings is a pre- packaged sale (pre-pack), regulated in the Bankruptcy Law. A pre- pack is yet not as popular as, for example, in the USA or UK, where Under the Bankruptcy Law, transactions (acts in law, also Court around 25 per cent of all administration is pre-pack, and one of the settlement, admission of an action, and waiver of a claim) performed highest value acquisitions are made within pre-packaged liquidation within one year before filing a motion to declare bankruptcy have procedures. However, there are solid grounds to predict that also no effect on the bankruptcy estate if performed gratuitously, or for in Poland the pre-pack sale should be very popular, because when a consideration but with the value of the bankrupt’s performance

Poland acquiring in a pre-pack, the investor enjoys execution sale effect, being drastically in excess of that received by the bankrupt, or of which means that the investor is not liable for old liabilities and that reserved for the bankrupt or for a third party. commitments of the debtor, the transaction is really quick and Moreover, security and payment of non-mature debt done by the the investor acquires an enterprise that is an already functioning debtor within six months before filing a motion to declare bankruptcy company, ready to continue to conduct business. A pre-pack sale is shall also have no effect on the bankruptcy estate. also possible to affiliated entities, however, the price cannot be less Also, acts in law performed within six months before filing a motion than stated by the Court’s appraiser. The Court’s decision whether to declare bankruptcy with affiliate entities may be pronounced by a to approve sale-purchase conditions is made by the Bankruptcy Judge-Commissioner with no effect on the bankruptcy estate. Court, together with the decision regarding declaring bankruptcy. Similarly abovementioned situations are regulated in remedial The main feature of a pre-pack sale is the possibility to sale insolvent proceedings under the Restructuring Law; however, they are not at debtor’s assets to investor, within bankruptcy proceedings, without stake with reference to other restructuring proceedings. auction or tender. A pre-pack is intended for selling enterprise as a going concern, with execution sale effect, meaning that the investor Remedies against the abovementioned can be based upon challenging is not liable for old liabilities and commitments of the debtor. premises of the legal institutions – i.e. equivalent remuneration for the act in law, or the situation when no other creditors are injured as Creditors can vote against an arrangement and thus pretend to block a result of a contested act in law. restructuring proceedings. There is a possibility to cram-down dissenting groups. Also, creditors have the right to file an appeal to several Court’s decisions, where the most important decision is to 3 Restructuring Options approve an arrangement. Shareholders, who are not creditors, do not have voting rights and it is controversial whether they can file an appeal to a Court’s decision to approve an arrangement. 3.1 Is it possible to implement an informal work-out in your jurisdiction? 3.3 What are the criteria for entry into each restructuring An informal work-out can be implemented by its recognition and procedure? approval within proceeding to approve the arrangement, regulated under the Restructuring Law. In this proceeding, the Court’s role For each restructuring proceeding, the debtor may file upon is to verify compliance of the arrangement concluded between a insolvency situation or threat of insolvency. For proceedings to debtor and creditors with law, as well as to formal aspects – required approve the arrangement and accelerated arrangement proceedings, majority of votes, etc. there is an additional premise, namely these proceedings may be Other informal work-outs are possible, based upon an agreement conducted if the sum total of disputed receivable debts giving the between a debtor and his creditors, but in such case they are right to vote on arrangement does not exceed 15 per cent of the sum governed by civil law, without implication to Restructuring Law or total of receivable debts giving the right to vote on an arrangement, Restructuring Court. while for arrangement proceedings, the sum of disputed claims exceeds 15 per cent of the total.

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of 3.4 Who manages each process? Is there any court distressed companies? Are debt-for-equity swaps involvement? and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures In proceedings to approve the arrangement, an appointed supervisor or threaten action (including enforcement of security) is arranged, who files a opinion with regard to collecting votes by the to seek an advantage? Do your procedures allow you debtor and compliance of the arrangement with law requirements. to cram-down dissenting stakeholders? The Court is involved to approve the arrangement.

Under the Restructuring Law, there are four restructuring In accelerated arrangement proceedings and arrangement proceedings: proceeding to approve the arrangement, accelerated proceedings, the Court supervisor is appointed, who exercises arrangement proceeding, arrangement proceeding and remedial control over more important acts in law by the debtor. Under certain proceeding. conditions, the Court supervisor proposed by the debtor or majority of creditors shall be appointed. The Court is involved to make In addition, there is also a possibility of partial arrangement, related certain decisions during the proceedings. to selected objective criteria creditors, not all of the creditors – partial arrangement is allowed (in principal) in proceeding to approve the In remedial proceedings, the Court appoints a receiver, who arrangement and accelerated arrangement proceeding. administrates remedial estate, but the Court may grant this right to the debtor himself. The Court’s involvement is very similar to their In all restructuring proceedings there is a possibility to restructure involvement in bankruptcy proceedings. liabilities in various forms, including debt-for-equity swap. Also,

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approve certain acts of the debtor and also have the right to impact 3.5 What impact does each restructuring procedure have the trustee – and even replace the trustee (in such case, unanimity on existing contracts? Are the parties obliged to of three members Council or four/five majority – in a five-member perform outstanding obligations? Will termination and Council – is required). set-off provisions be upheld? Enforcement in respect of a property included in the bankruptcy Restructuring proceedings, in principle, do not affect an existing estate, initiated prior to the day of the declaration of bankruptcy, contracts performance, but in remedial proceedings, some provisions shall be suspended by the virtue of law on the day of the declaration may have no effect, and the receiver may renounce mutual contracts. of bankruptcy. These proceedings shall be discontinued by virtue of law after the ruling on the declaration of bankruptcy has become There is also a ban on termination of certain contracts, such as a

final and valid. Following the day of the declaration of bankruptcy, Poland lease or a loan. no enforcement shall be instituted against property forming part of the bankruptcy estate and no ruling on securing or on ordering the 3.6 How is each restructuring process funded? Is any creation of a security on the bankrupt’s assets shall be enforced, protection given to rescue financing? except security for maintenance or alimony claims and claims for pension in compensation for causing an illness, incapacity to work, To some extent, the new financing enjoys preferential treatment, disability or death, and for the conversion of rights covered by the especially when restructuring is unsuccessful and the case leads to substance of the right of annuity into a pension for life. bankruptcy. 4.5 What impact does each winding up procedure have on 4 Insolvency Procedures existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 4.1 What is/are the key insolvency procedure(s) available to wind up a company? Declaring bankruptcy stipulates immediate maturity of obligations of the debtor, and certain legal provisions are meant for availability After the reform of 2016, there is a liquidation in bankruptcy of deduction, lease, contracts of mandate, and contract of agency. proceedings, regulated in the Bankruptcy Law. To wind up a The trustee may also renounce mutual contracts, prior to the Judge- company, one can go into liquidation regulated in the Commercial Commissioner’s consent. Companies Code, but this situation is not directly related to Furthermore, the provisions of a contract which provide, in the event insolvency; however, if the Bankrutpcy Court dismisses the case of filing a bankruptcy petition or of the declaration of bankruptcy, for because of the observation that the assets of the insolvent debtor do a revision or for the termination of a legal relationship to which the not suffice to cover the costs of the proceedings or suffice merely bankrupt is a party, shall be invalid, as well as a provision of a contract to cover those costs, the Court may ascertain whether the material to which the bankrupt is a party, of which a provision renders the accumulated in the matter provides grounds for dissolution of the achievement of the goal of the bankruptcy proceedings impossible or subject entered in the National Court Register without conducting difficult and will be ineffective against the bankruptcy estate. any formal liquidation.

4.6 What is the ranking of claims in each procedure, 4.2 On what grounds can a company be placed into each including the costs of the procedure? winding up procedure? A ranking of claims was recently amended (in 2016) and now its The legal premise for declaring bankruptcy is insolvency, regulated regulated in the Bankruptcy Law as follows: as a situation when the debtor has lost the ability to fulfil his matured ■ the first category – receivables under employment pecuniary liabilities or when (with regard to companies) the debtor’s relationships attributable to the period prior to the declaration pecuniary obligations are in excess of the value of its assets, and this of bankruptcy (with exception for remuneration of the state of facts persists for a period exceeding 24 months. debtor’s management board), dues under maintenance and alimonies and pensions by way of indemnity for causing an illness, incapacity to work, disability or death and pension 4.3 Who manages each winding up process? Is there any by way of conversion of rights covered by the substance court involvement? of the right to annuity into a pension for life, social insurance premiums, due for the last three years before the Administration of the bankruptcy estate is conducted by the trustee declaration of bankruptcy, receivables arisen in the course of and the Court is highly involved in practically every stage of the restructuring proceedings due to actions of the receiver, or proceeding. receivables arisen due to actions of the debtor taken after the opening of restructuring proceedings, which actions did not require permission of the Creditor’s Council or consent of 4.4 How are the creditors and/or shareholders able to the Court supervisor, or which were taken with permission influence each winding up process? Are there any of the committee of creditors or consent of the Court restrictions on the action that they can take (including supervisor as well as receivables under credits, loans, bonds, the enforcement of security)? guarantees or letters of credit, or other financing provided for in the arrangement adopted in the course of restructuring Shareholders have very limited rights with regard to bankruptcy proceedings and granted in connection with the performance proceedings, but they may appoint board members of the debtor and of the said arrangement if bankruptcy was declared after thus influence the process. examination of the bankruptcy petition filed no later than three months after the arrangement was validly set aside; Creditors have much more to say as they are a party of the proceedings and – by acting in the Creditor’s Council – they may

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■ the second category – other receivables if they are not subject to satisfaction in other categories, in particular taxes and 7.2 Is there scope for a restructuring or insolvency other public tributes, and the remaining receivables under process commenced elsewhere to be recognised in social insurance premiums; your jurisdiction? ■ the third category – interest on receivables included in higher categories in the order in which the principal is subject to Within the EU, there is an automatic recognition of restructuring satisfaction, as well as judicial and administrative penalties of or insolvency proceedings, and this issue may be regulated also in fine and receivables in respect of donations and legacies; and international agreements. In other situations, a legal framework in ■ the fourth category – receivables of shareholders under a loan Poland allows recognition of foreign proceedings. or another act in law of similar effects, in particular supply of

Poland goods with deferred due date made to the bankrupt being a company in the period of five years before the declaration of 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in bankruptcy, along with interest. other jurisdictions? Is this common practice? Costs of the proceedings, as well as other liabilities of bankruptcy estate are paid before the abovementioned ranking. When the centre of main interest of the company is located in Poland, the main restructuring or insolvency proceeding should be 4.7 Is it possible for the company to be revived in the conducted in Poland. Therefore, it is a very rare situation when future? Polish companies seek for bankruptcy/restructuring outside of Poland. A company which is bankrupt, after the proceedings ceases to exist, therefore cannot be revived in the future; however, if the proceeding is discountinued, the company is still operating. 8 Groups Arrangement is also possible within bankruptcy proceedings and in such a situation, the company may further operate on the market. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders? 5 Tax Polish law does not regulate insolvency of groups of companies, but the Courts sometimes appoint the same trustee or Judge- 5.1 What are the tax risks which might apply to a Commissioner in such cases. restructuring or insolvency procedure? On the other side, affiliated companies do not have voting rights Tax risks connected with restructuring or insolvency proceedings with regard to the arrangement, and this may apply to a group of may be observed with regard to a debt-to-equity swap, possible as companies. a proposal for arrangement, as well as for treating certain taxes as a cost of a proceeding or other liabilities of the estate. 9 Reform

6 Employees 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws 6.1 What is the effect of each restructuring or insolvency of your jurisdiction, which are intended to make procedure on employees? insolvency processes more streamlined and efficient?

In general, both restructuring and insolvency proceedings do not Currently, in Poland we have a proposal for very broad use of the affect an employee’s situation, nor lead to termination or dissolution internet with regard to restructuring and insolvency procedures, but of employment contracts. Employees are preferentially treated this proposal is not yet implemented. with regard to ranking of claims (in insolvency proceedings) and they should give consent to be covered by the arrangement (in restructuring proceedings). 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 7 Cross-Border Issues Proposal for a reform can be observed within the consumer bankruptcy, which can have an impact on corporate proceedings, 7.1 Can companies incorporated elsewhere use especially for the banking and financial sector – as creditors, as restructuring procedures or enter into insolvency well as for the efficiency of Bankruptcy Courts, which are in Polish proceedings in your jurisdiction? legal system the same Courts for both complex insolvency and restructuring proceedings, and consumer bankruptcy cases. Such possibility exists, upon determining that a company incorporated elsewhere has a centre of main interest (COMI) in Poland. Regulations of EU apply to such a situation. Also, when the property of an abroad company is located in Poland, secondary proceedings may be open in Poland, with effects to the property located within Polish territory.

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Karol Tatara Mateusz Kaliński Tatara & Partners Restructuring & Tatara & Partners Restructuring & Insolvency Law Firm Insolvency Law Firm ul. Filipa Eisenberga 11/1 ul. Filipa Eisenberga 11/1 31-523 Kraków PL 31-523 Kraków PL Poland Poland

Tel: +48 12 634 52 92 Tel: +48 12 634 52 92 Email: [email protected] Email: [email protected] URL: www.tatara.com.pl URL: www.tatara.com.pl Poland Karol Tatara – Attorney-at-Law, a licensed insolvency practitioner and Mateusz Kaliński, LL.M. – Lawyer is an Associate at a law office liquidator, as well as a curator of business entities. Karol graduated focused on bankruptcy law, in various aspects, especially corporate. from Jagiellonian University, where he also completed the School of He graduated from the Jagiellonian University in Krakow, as well as American Law, organised by the Catholic University of America and from the Catholic University of America in Washington, D.C., where he the JU. obtained his Master of Laws (LL.M.). Karol Tatara has significant professional experience, as a lawyer in Mateusz handles complex bankruptcy and restructuring proceedings – law offices (including Investment Fund) and as an in-house lawyer. domestic as well as international. He specialises in bankruptcy and restructuring proceedings, including He also specialises in dispute resolution (including directors’ and advice with regard to the first pre-pack (prepared liquidation) in officers’ liability issues), real estate law, corporate and commercial law. Poland, as well as legal advice within all new proceedings introduced by the Restructuring Law. Mateusz is a Secretary of the Insolvency Law Committee of the Allerhand Institute. Karol Tatara is a lecturer of bankruptcy law for the attorney-at-law’s trainee programme organised by Krakow District Chamber of Attorney’s -at-law. He is also a Vice-president of the Insolvency Law Committee of Allerhand Institute, as well as a member of INSOL Europe and Pro- dean of the Polish Chamber of Restructuring Advisors. Karol Tatara is an expert of the World Bank within the Doing Business report.

Tatara & Partners Restructuring & Insolvency Law Firm specialises in restructuring and insolvency law, with a particular focus on pre-packaged sale/ administration. We advise both entrepreneurs facing financial difficulties and optimising or developing their business. Our services include legal advice for owners of the business, members of the Management and Supervisory Boards, and ensuring legal security. Within the last eight years, we created a team of lawyers and other professionals, who are able to carry on the most complicated and complex projects in Poland. Acquired knowledge and experience enable us to offer top-level legal services, tailored to the client’s needs, including a deep understanding of a business and personal context of each case. We successfully advised in many of the most innovative, precedential and highest in value projects, including well-known public companies, listed on the main market of the Warsaw Stock Exchange. We conducted the very first pre-pack sale in Poland and drafted a report on the functioning of this legal institution: http://tatara.com.pl/oferta/pre-pack/pre-packaged-liquidation- english/. Our high-quality services are confirmed by independent sources, such as Rzeczpospolita Daily Ranking of Law Firms – since 2015, Rising Stars – Lawyers, Leaders of tomorrow 2014, or Professionals of Forbes – public trust occupations 2013.

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Romania Stan Tîrnoveanu

Zamfirescu Racoți & Partners Attorneys at Law Cătălin Guriță-Manole

management bodies of a company shall cease their activity. The 1 Overview court appoints a provisional official receiver, proposed either by the creditors or by the debtor, and this summons the debtor’s 1.1 Where would you place your jurisdiction on the shareholders who shall appoint a special administrator in the spectrum of debtor to creditor-friendly jurisdictions? shortest time possible as of the procedure opening date. This will have all the management powers and duties, under the supervision The Romanian legislation on insolvency is a balanced one, of the official receiver and with the creditors’ intervention where the especially starting from 2014, when the last major amendments law provides so and under the legality control of the syndic judge of the law became effective. The purpose of the insolvency law when certain matters on which this must rule are referred to him. A is to institute a collective procedure for covering the liabilities of company must request the opening of an insolvency procedure in a distressed debtors, obviously by relating to their capacity to meet maximum term of six months as of the date when payments cease, their obligations by the assets at their disposal, and by granting, and the sanction may be even one of a criminal nature, failure to when possible, the chance to recover. Thus, on the one hand, the declare insolvency in the legal term being possible to be considered Romanian legislation on insolvency grants debtors the necessary as the crime of simple bankruptcy in certain conditions. Of course, protection to recover, and, on the other hand, institutes for creditors there is also the risk of civil liability. certain rights allowing them to participate in the decision-making process regarding the opportunity-related aspects. At the same time, 2.2 Which other stakeholders may influence the to guarantee the conducting of a legal and balanced procedure, the company’s situation? Are there any restrictions on the law sets forth clear mechanisms by which the courts of law control action that they can take against the company? For the legality of the measures taken either by debtors or creditors or by example, are there any special rules or regimes which the official receivers or liquidators. apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your 1.2 Does the legislative framework in your jurisdiction jurisdiction? allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to Any creditor holding a certain, liquid and exigible receivable for what extent are each of these used in practice? more than 60 days and that is higher than Lei 40,000 may request the insolvency of a company. If these conditions are met, the law The Romanian legislation provides for the possibility to initiate does not impose other restrictions. Also, in what is regarded as the procedures to prevent insolvency that may lead to understandings capacity of the creditors that may request the opening of a procedure with the creditors in a regulated framework, where reference here of insolvency of a company, the law does not distinguish depending is to the procedure of arrangement with creditors and an ad hoc on the commercial relations this may have with the debtor, the mandate. Nevertheless, although provided at a legislative level and existence of the debt in the above-mentioned conditions being very well regulated, the procedures to prevent insolvency are rarely sufficient. used. Most often, distressed companies resort to insolvency trying to take the path of judicial restructuring. 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of 2 Key Issues to Consider When the challenge? What remedies are available? Company is in Financial Difficulties The insolvency law regulates in detail the possibility to challenge the deeds concluded by the debtor in the two years prior to the 2.1 What duties and potential liabilities should the opening of the procedure. The law provides seven situations directors/managers have regard to when managing a in which these deeds can be challenged if either the interests of company in financial difficulties? Is there a specific creditors were frauded by the transfer of the debtor’s assets or if point at which a company must enter a restructuring the fair treatment of the creditors in the insolvency procedure is or insolvency process? affected by preferential payments or debt recoveries performed within those deeds. Transfers of assets made by the debtor in the As of the date of opening of an insolvency procedure, the statutory normal course of its current business or deeds concluded in good

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faith in the application of the pre-insolvency procedures (ad hoc supervision of the official receiver. Exceptionally, the company’s mandates and arrangements with creditors) are exempted from this management may belong also to the official receiver in certain procedure requesting annulment. conditions provided by the law, but such situations are rare. The syndic judge exercises a legality control when interested persons refer to him certain disputable matters, and in the absence of filed 3 Restructuring Options claims, the court receives periodically the activity reports containing the ordered measures and the stage of execution of the reorganisation plan. 3.1 Is it possible to implement an informal work-out in your jurisdiction? 3.5 What impact does each restructuring procedure have Yes, it is possible, in the procedures of prevention of insolvency. on existing contracts? Are the parties obliged to Romania Thus, in the procedure of arrangement with creditors, an agreement perform outstanding obligations? Will termination and is virtually concluded by and between the debtor and the creditors set-off provisions be upheld? holding at least 75% of the value of the accepted and uncontested receivables. Such an agreement must be homologated by the syndic When the insolvency procedure is opened, the ongoing agreements judge. In other words, outside an insolvency procedure, the debtor in which the debtor is a party are maintained, any contractual clauses proposes a plan for recovery and collection of the receivables to of cancellation of the ongoing agreements, of forfeiture of a right those creditors, and these accept to support the debtor’s efforts to to be granted a term or of declaration of anticipated exigibility for overcome the difficulty this is in. the reason of opening of the procedure being null. For maximising the debtor’s estate, the official receiver is the one entitled to decide to maintain or terminate an ongoing agreement, which right may 3.2 What formal rescue procedures are available in be exercised in three months from the opening of the insolvency your jurisdiction to restructure the liabilities of procedure – nevertheless, an agreement executed essentially distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can may not be terminated, as there is always the risk of payment of creditors and/or shareholders block such procedures compensations. The same is the term also for the co-contracting or threaten action (including enforcement of security) party to exercise its right to notify the official receiver to decide to to seek an advantage? Do your procedures allow you maintain or terminate the agreement. In the absence of an answer to cram-down dissenting stakeholders? in a term of 30 days, the agreement being considered terminated. The insolvency law provides for a series of special rules applicable As a formal means of recovery of the companies in insolvency, to certain categories of ongoing agreements: credit agreement; the Romanian legislation provides for judicial reorganisation, employment agreement; lease agreement; a series of variations of based on a plan that may be proposed by the debtor, creditors or the sale-purchase agreement; the leasing agreements and the utility by the official receiver. The reorganisation plan may provide both supplier agreements having a special status and at the same time for debt-for-equity swaps, and pre-packaged sales, as the means termination and set-off of the receivables may be applied; and if an of organisation provided by the law in general. A company’s agreement is not terminated, the parties shall fulfil their assumed entering into reorganisation may be blocked by its creditors obligations. only by the exercise of a negative vote in the creditors’ meeting. Stakeholders may exercise their rights recognised by law through the special administrator who is appointed by them and who may 3.6 How is each restructuring process funded? Is any protection given to rescue financing? file contestations. As a principle, our legislation provides for the possibility to reduce the receivables of some of the creditors, but not The financing sources in the reorganisation period may vary, and the individually, the receivables of a certain category (e.g. unsecured law does not provide for certain restrictions, the essential condition creditors, budgetary creditors, creditors who are employees) may being that these are to be provided by the reorganisation plan. Yes, be reduced. Thus, all creditors from a certain category cover their the financing obtained by the company in the insolvency is returned receivables in an equal percentage. with priority, the Romanian law actually instituting a super priority to the financers from the insolvency period. 3.3 What are the criteria for entry into each restructuring procedure? 4 Insolvency Procedures In principle, any company against which a general insolvency procedure has been opened may enter into a judicial reorganisation 4.1 What is/are the key insolvency procedure(s) available procedure, provided that it has not been subject to an insolvency to wind up a company? procedure in an interval of five years prior to the opening of the insolvency procedure. At the same time, to be allowed, a Bankruptcy is the procedure applying to the debtor for the liquidation reorganisation plan must be viable, voted by at least half of the of its estate to cover the liabilities, this being followed by the classes of creditors, and the creditors who accept the plan must hold debtor’s deregistration from the registry with which it is registered. at least 30% of the total value of the receivables admitted in the final table. 4.2 On what grounds can a company be placed into each winding up procedure? 3.4 Who manages each process? Is there any court involvement? After the insolvency procedure opening date, a period named the observation period follows, in which the official receiver analyses The reorganisation procedure, after a plan is confirmed, is usually the legal situation and estate of the company to determine whether managed by the debtor by the special administrator, under the

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there are real perspectives to rescue the company based on a 5. the budgetary receivables; reorganisation plan or if bankruptcy should be entered into. This 6. the unsecured receivables; and may order also directly the opening of the simplified procedure 7. the subordinated receivables (of the shareholders). of bankruptcy if a series of conditions expressly provided by the law are met (lack of assets, lack of reorganisation chances). At the same time, the bankruptcy procedure may be opened also as a 4.7 Is it possible for the company to be revived in the future? consequence of failure of a reorganisation plan.

It is not possible as at the date of closing of the bankruptcy procedure 4.3 Who manages each winding up process? Is there any that the company is deregistered. If following the winding up the court involvement? receivables are fully covered and assets or amounts of money Romania remain, these will go to the shareholders. When the bankruptcy procedure is opened, the debtor’s administration right is withdrawn by the Court, the official receiver being the company’s representative from that date. The special administrator’s 5 Tax rights are reduced to only representing the shareholders’ interests. Consequently, the entire procedure is managed by the official 5.1 What are the tax risks which might apply to a receiver, the opportunity measures are approved by the creditors, and restructuring or insolvency procedure? the syndic judge has legality control powers and duties. In the insolvency period, the company must pay its tax obligations 4.4 How are the creditors and/or shareholders able to like any other company as long as it conducts business. In case the influence each winding up process? Are there any restructuring plan stipulates a reduction of the receivables the debtor restrictions on the action that they can take (including that does not registers any losses will have to make provisions within the enforcement of security)? the plan and within its cash-flow to pay the taxes associated with this reduction of receivables otherwise it will go bankrupt. Regarding From the date of opening of an insolvency procedure, any individual the budgetary receivables prior to the opening of the procedure, a enforcement shall be stayed. Creditors may request, for example, special means of verification of all tax obligations in a term of 60 during a reorganisation plan that the debtor enter into bankruptcy days from the insolvency opening date is regulated. if the debtor fails to fulfil its obligations assumed by the plan. Subsequently, once bankruptcy is declared, the creditors (and we include here also the shareholders having their own receivables 6 Employees to recover, subordinated receivables) decide on the opportunity aspects, such as the means of sale of the assets. 6.1 What is the effect of each restructuring or insolvency procedure on employees? 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform After the opening of the procedure, the employees’ employment outstanding obligations? Will termination and set-off agreements are maintained, but their fate is decided depending on provisions be upheld? the debtor’s intention to submit a reorganisation plan or not. If reorganisation is pursued, a detailed analysis will be conducted, From the date when bankruptcy is declared, debtors may no longer following which analysis it will be decided to maintain or to conclude new agreements, and their activity is going to be restricted terminate employment agreements depending on the specific to those measures leading to winding up. At the same time, the character of the activity and on the workforce costs. If reorganisation agreements may be terminated and set-offs may be made between is not pursued or the bankruptcy procedure is opened, the chances to receivables arisen after the opening of the procedure. maintain the employment agreements are almost null, as the debtor ceases to conduct its business. The insolvency law contains specific provisions referring to the termination of the individual employment 4.6 What is the ranking of claims in each procedure, agreements, as well as to collective redundancies. Thus, after the including the costs of the procedure? insolvency opening date, the individual employment agreements of the debtor’s personnel may be terminated urgently by the official The amounts obtained from the sale of encumbered (mortgaged) receiver/liquidator, the dismissed personnel being granted only the assets must be distributed as follows: first the expenses related to legal term of prior notice. In case of collective redundancy, the the sale, including related duties; the necessary expenses for the terms provided by the special laws are reduced to half. preservation and administration of those assets; and the procedure expenses (including the liquidator’s fee) must be paid. Afterwards, the secured creditors’ receivables arisen during the procedure, 7 Cross-Border Issues then the secured creditors’ receivables prior to the opening of the procedure must be paid. The amounts obtained from the assets free 7.1 Can companies incorporated elsewhere use of any encumbrances must be distributed as follows: restructuring procedures or enter into insolvency 1. the procedure expenses, including the expenses incurred for proceedings in your jurisdiction? the preservation of the assets; 2. the receivables of the creditors who have financed the debtor Companies can resort to the insolvency procedures regulated in in the insolvency period; Romania but only if they have their headquarters here. Otherwise 3. the employees’ receivables; the insolvency procedure opened in Romania will be subordinated to the insolvency procedure opened in the state where their 4. the receivables arisen after the date of opening of the insolvency procedure and not paid; headquarters are.

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the insolvency practitioners to cooperate as much as possible with 7.2 Is there scope for a restructuring or insolvency each other based on a protocol for the integrated performance of process commenced elsewhere to be recognised in the economic, legal and operational activities at the group’s level, your jurisdiction? as well as by the granting of the right to participate in the creditors’ meetings or the creditors’ committees of any of the members of the Yes, if such company has assets in Romania. group. Such measures may lead to the improvement of the economic decisions made in the insolvency procedures and to the avoidance 7.3 Do companies incorporated in your jurisdiction of contradictory decisions at the level of the group of companies. restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?

9 Reform Romania There have been some cases, but this is not common practice, although the legislation regulates it. 9.1 Have there been any proposals or developments in your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws 8 Groups of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient?

8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope At the moment, there are no proposals or measures taken by the for co-operation between officeholders? government in this regard.

Regulation in the area of insolvency of the group of companies 9.2 Are there any other governmental proposals for relies on rules providing for the “consolidation” of the insolvency reform of the corporate rescue and insolvency regime procedures opened against the members and provisions regarding in your jurisdiction? their “coordination”. Consolidation implies that all procedures opened against the companies that are part of a group reunite in At the moment, there are discussions with regard to the proposal front of one single court and the same insolvency practitioner of European directives regarding the increase of the companies’ administering the group’s insolvency be appointed. The second reorganisation chances. component implies the regulation of mechanisms of cooperation and coordination of the insolvency procedures started against several members of the group of companies. The insolvency law encourages the communication of information and even obliges

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Stan Tîrnoveanu Cătălin Guriță-Manole Zamfirescu Racoți & Partners Zamfirescu Racoți & Partners Attorneys at Law Attorneys at Law 12 Plantelor Street 12 Plantelor Street 023974 District 2 023974 District 2 Bucharest Bucharest Romania Romania

Tel: +40 21 311 0517 Tel: +40 21 311 0517 Email: [email protected] Email: [email protected] URL: www.zrp.ro URL: www.zrp.ro

Romania Stan Tîrnoveanu is a Senior Partner and founder of Zamfirescu Racoti Cătălin Guriţă-Manole, Managing Associate of the Insolvency & & Partners Attorneys at Law. He leads the Restructuring & Insolvency Restructuring team of Zamfirescu Racoti & Partners, has relevant practice as well as the Banking Litigation practice, being one of practice experience in insolvency & restructuring and banking the most reputed lawyers in Romania in the area of liquidation and & finance law, including, but not limited to, negotiations of credit reorganisation in the banking system. agreements, guarantees and annulment of fraudulent agreements concluded by debtors, enforcement procedures, debt recovery, but Tîrnoveanu, with over 32 years’ experience as a lawyer and over 18 also civil and commercial litigation cases for international or local years’ experience as an insolvency practitioner, has broad expertise in companies, including contractual disputes. representing clients in insolvency and bankruptcy, debt recovery and dispute resolution. He ensures legal assistance and representation for Cătălin regularly advises international and local financial institutions both creditors and debtors in the insolvency procedure. in disputes pending in the Romanian courts of law. Recent projects include assistance and representation of the Bank of Cyprus, BRD- Tîrnoveanu has been involved in the legislative process of the New Groupe Societe Generale, Raiffeisen Bank SA, Unicredit Bank Insolvency Code, being one of the members of the Legal Commission Romania S.A., Unicredit Leasing Corporation IFN S.A., Immigon of the Chamber of Deputies that has worked on the new law. He has Austria, Marfin Bank Romania, Garanti Bank Romania S.A., Credit also published a significant number of articles in legal publications on Agricole Bank Romania S.A. in the insolvency procedures against the amendments of the new law. Tîrnoveanu holds the position of Vice debtors, including, but not limited to: relationship management with President of the National Union of Romanian Insolvency Practitioners. the judicial liquidators/official receivers; representation of the clients His banking practice covers the wide array of financing and funding in front of the Courts, the authorities and the creditors’ committees; transactions, trade finance facilities, collaterals system and credit negotiation of debt restructuring; takeover of assets/loan portfolios; securities issues. complex banking transactions; and legal opinions on restructuring activities. Stan Tîrnoveanu is a member of the European Association for Banking and Finance Law, Romania Branch and deputy editor of the Banking and Finance Law Magazine.

Zamfirescu Racoți & Partners’ excellent reputation in insolvency work has built up over many years, through acting for companies in difficulties but also advising creditors, insolvency practitioners and other parties involved when a company is in financial difficulty. Banking and corporate issues often arise within insolvency procedures, which often require legal advice and knowledge from other specialised departments of the law firm. We have a focused interdisciplinary team of attorneys who bring extensive experience from many practice areas of the firm, particularly in the field of finance, financial regulation, corporate and commercial law and dispute resolution. We ensure legal assistance and representation both for the debtors and for the creditors in the insolvency procedure. Within such activities, we advise and propose strategies to the clients depending on the legal assessment made, assist and/or represent them in the specific claims of such procedure, but also in actions related thereto, including objections to the decision of the creditors’ meeting, measures ordered by judicial liquidators, annulment claims, objections to debt claims, liability claims submitted against former debtors’ administrators, fraud matters, etc.

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Russia Artem Kukin

INFRALEX Stanislav Petrov

recent amendments allow formulating a closed, and at the same time, 1 Overview a broad range of work-outs which can be applied towards banks. An obligation to perform informal work-outs relies on the managing 1.1 Where would you place your jurisdiction on the bodies of a company, its shareholders and persons entitled to give spectrum of debtor to creditor-friendly jurisdictions? binding instructions to the debtor (referred to as “Controlling Persons”). Such an obligation arises at the moment when the first The amendments which have modified the Federal Law No. signs of deterioration of the financial state of a company appear. 127-FZ “On insolvency (bankruptcy)” of 26 October 2002 (the Measures provided for banks can serve as informal work-outs: “Bankruptcy Law”, which is the principal law on insolvency (i) to achieve financial rehabilitation, the following measures in Russia) improved the positions of creditors by providing more can be taken: protection over their interests in bankruptcy proceedings. ■ provision of financial support by the participants ofa Previously it could be said that the provisions of the Bankruptcy company and other persons; Law were more of a debtor-friendly nature. For instance, by ■ change of the assets and liabilities structure, including initiating the bankruptcy proceedings, the debtor was entitled but not limited to, sale or transfer of the company’s assets to appoint the bankruptcy manager and thus get de facto control bringing no revenue, reduction of company’s expenses, over the supervision stage because of the strengthened authority of inter alia, for the company’s management or debt the temporary manager. Nowadays, the debtor loses the ability to servicing; initiate bankruptcy proceedings with the appointment of a friendly ■ change of the organisational structure of the company bankruptcy manager. Therefore, the debtor cannot retain control which can be made by way of modifying the composition of of the bankruptcy proceedings, which in previous years has been employees and their number or by altering the company’s detrimental to the creditors. In this case, the court on its own will structure, or by other means securing elimination of the choose the self-regulatory organisation, from among the members causes of the necessity to take measures for insolvency of which a bankruptcy manager will be chosen. The provisions restoration; and thereby secure the independence of such a person from others ■ increase of the authorised capital of a company. participating in the proceedings, which will have a positive impact (ii) company’s reorganisation; and on the position of the creditors. (iii) other measures which can be applied in relation to the banks. The creditors’ right to file a petition to contest the transactions of the All the aforesaid measures can also be applied in relation to the debtor and to hold the persons controlling the debtor subsidiary liable companies in the extrajudicial order. Therewith, their list is not can be recognised as one of pro-creditor nature. The mechanism limited by law and can be different if so agreed by the parties. In recently introduced into the Bankruptcy Law for holding the person addition, below are listed some other types of work-outs which can controlling the debtor liable is aimed to significantly increase the be applied towards the companies: proprietary risks of the controlling persons connected with the (i) Renegotiation. The creditors and the distressed company can actions contradicting the creditors’ interests. Such a mechanism amend the terms of existing loan documentation to provide will allow to return into the bankruptcy estate the property of the the following accommodations to the borrower: debtor which was illegally alienated in favour of the third persons ■ delay or rescheduling of payments; and to distribute the funds received between the creditors as a result ■ decrease of the indebtedness amount; of its sale. ■ temporary relief from payments; and ■ waiver of financial and other covenants. 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal (ii) Changes in the capital structure of the distressed company, restructuring and insolvency proceedings, and to those being: what extent are each of these used in practice? ■ substitution of the debt by the rights of property; ■ debt-for-equity swaps and equity financing when the In Russia, informal work-outs applied prior to filing a bankruptcy creditors obtain an equity stake in the debtor as a part of petition to court have been embodied in legal provisions as measures exchange of existing debtor’s shares or the newly issued for prevention of bankruptcy. While the list of such work-outs in shares for forgiveness or in connection with funding being relation to organisations is not provided by the Bankruptcy Law, the invested into the debtor;

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■ mergers; and meetings. The creditors’ meeting has exclusive competence to ■ divestments. determine the type of bankruptcy procedure it asks the court to introduce. Informal work-outs with government support are the most successful, in particular, in relation to strategic companies and The recent judicial practice has been particularly considering banks. This situation is due to two circumstances. Firstly, such the status of the shareholders of the debtor who provided a loan entities play a significant role for the economy and employment of to the debtor when it was in a poor financial situation and claim the state. Secondly, there is detailed regulation of the informal work- for its recovery in terms of bankruptcy proceedings. The courts outs in the legislation. Besides, as for the other types of informal have been of a position that financing a company is an obligation work-outs, they are not commonly used by the creditors, mainly, of its participants, and unreasonable actions of loan provision by

Russia since the provisions of the Bankruptcy Law give risk of challenging the shareholders aimed at artificial creation of the debt cannot be a the methods of an informal work-out. ground for inclusion of such persons’ claims into the registry along with the claims of other creditors. Banks and state authorities are in a special position in terms of filing 2 Key Issues to Consider When the a bankruptcy petition. These entities unlike other applicants are Company is in Financial Difficulties entitled to file such a petition having no final and binding judicial act in confirmation of the validity of their claims based on the debtor’s facility obligations or obligations to pay mandatory payments. 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific 2.3 In what circumstances are transactions entered point at which a company must enter a restructuring into by a company in financial difficulties at risk of or insolvency process? challenge? What remedies are available?

When the actions or instructions of the director, shareholders and Transactions entered into by a company in financial difficulties may Controlling Persons infringe the property rights of the creditors and be challenged either on a general basis or on the basis of specific the debtor’s assets are insufficient to settle all the creditors’ claims, grounds under the Bankruptcy Law. The Bankruptcy Law provides these persons will bear subsidiary (additional) liability for the for the avoidance of suspicious and preferential transactions. debtor’s unsettled monetary obligations. The court can declare invalid suspicious transactions entered into by If there is unambiguous evidence that the company will become a company within either: bankrupt, its director is obliged to file an application with a court to ■ one year of acceptance of the debtor’s bankruptcy petition or have that company declared bankrupt within one month of the first thereafter if transactions were made for unequal consideration signs of bankruptcy. If he fails to submit the bankruptcy application, and on disadvantageous terms; or he is liable for all obligations accruing thereafter. ■ three years of acceptance of the debtor’s bankruptcy petition If the director initiates bankruptcy proceedings, he must send or thereafter if transactions were aimed at causing harm to notifications to the debtor’s shareholders about the risks of bankruptcy debtor’s creditors provided the counterparty was aware of proceedings within 10 days after the director has learned or should this aim. have learned of such risks. A company’s head is obliged to publish Preferential transactions mean transactions that lead or may lead to the information of the company’s difficult financial situation which preferential treatment of a certain creditor over other creditors in the can lead to non-performance of the obligations towards its creditors. settlement of claims including a transaction that: Failing to do this may lead to an administrative prosecution against ■ provides for security to a creditor to secure obligations that the director and the penalty can be a fine or disqualification. arose prior to the transaction; Additionally, the debtor’s director may be subject to administrative ■ changes that may change the order of the statutory priority of and criminal liability in the form of fines, disqualification and claims; imprisonment if he takes or omits to take certain actions relating to ■ has or may result in the settlement of claims that have not yet bankruptcy proceedings. matured, provided that there are other unsettled due claims; and 2.2 Which other stakeholders may influence the ■ results in certain creditors’ claims that arose prior to the company’s situation? Are there any restrictions on the transaction, being preferred or favoured in comparison to the action that they can take against the company? For other creditors’ claims. example, are there any special rules or regimes which Preferential transactions may be challenged if entered into within apply to particular types of unsecured creditor (such one month preceding the court’s acceptance of the bankruptcy as landlords, employees or creditors with retention application or thereafter. Preferential transactions falling within of title arrangements) applicable to the laws of your jurisdiction? both (i) and (ii) above, or cases where the counterparty knew of the debtor’s inability to pay or the insufficiency of debtor’s assets, are subject to a six-month suspect period. The persons who mainly influence the company’s situation in terms of bankruptcy proceedings are the bankruptcy manager and the bankruptcy creditors. 3 Restructuring Options The bankruptcy manager plays a key role in the bankruptcy proceedings; it supervises and controls the actions of the debtor and has the authority to enter the creditors’ claims in the creditors’ 3.1 Is it possible to implement an informal work-out in your jurisdiction? register and convene creditors’ meetings. The creditors influence the debtor’s bankruptcy proceedings by In Russia, it is possible to implement informal work-outs. Pursuant means of resolving most of the critical issues at the creditors’ to the recent legislation amendments, exercising such work-outs

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is a mandatory extrajudicial procedure aimed at the prevention of Apart from that, financial rehabilitation can be introduced if there is bankruptcy. Due to the absence of the legal regulation of informal an expression of will of the persons ready to provide collateral for work-outs exercising in relation to companies, any actions and securing the performance of obligations by the debtor. transactions made for the prevention of bankruptcy will be construed External administration, in its turn, can be introduced if there are not as special pre-bankruptcy mechanisms but as regular actions and grounds to consider that the debtor’s solvency can be restored. transactions, the conclusion and performance of which are regulated by the general civil-law rules. Sanation can be introduced in terms of prevention of the insolvency in case the participants, founders, creditors or other persons are Absence of a specific status of such actions and transactions ready to provide a company which is in a poor financial state with obstructs the spread of informal work-outs due to a lack of special financial support.

remedies applicable in case of their violations. Russia Moreover, the provisions of the Bankruptcy Law allow for a risk of challenging the methods of informal work-out. Any payments to the 3.4 Who manages each process? Is there any court involvement? creditor under an existing facility made within the suspect period may be subject to a claw-back by the debtor. All bankruptcy proceedings are supervised by the court that assigns a significant role to the bankruptcy manager, whose status and powers 3.2 What formal rescue procedures are available in will differ on the stage of the bankruptcy procedure in question. your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps In the course of financial rehabilitation, functions of the company and pre-packaged sales possible? To what extent can management are still performed by its governing bodies but in order creditors and/or shareholders block such procedures to exercise control over the debtor’s compliance with the schedule or threaten action (including enforcement of security) of debt repayment, the court appoints an administrative manager. to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Once the external administration is commenced, the debtor’s management is dismissed and the external manager obtains all There is no special procedure called “restructuring”, but in fact management powers over the debtor. It is also obliged to prepare restructuring may be achieved through either a financial rehabilitation an extern administration plan, implement it upon its approval and plan, external administration plan, settlement agreement or sanation. take all measures aimed at recovery of third parties’ debt towards the debtor. Financial rehabilitation is applied towards the debtor in order to restore its solvency and achieve settlement of creditors’ claims. Settlement of creditors’ claims is made only based on the plan of 3.5 What impact does each restructuring procedure have financial rehabilitation and in compliance with the schedule of debt on existing contracts? Are the parties obliged to repayment. perform outstanding obligations? Will termination and set-off provisions be upheld? External administration is aimed at restoration of the debtor’s solvency and provides for moratorium on debt repayment. Once the bankruptcy proceedings start, all debts under the existing A settlement agreement may be reached at any stage of bankruptcy contracts are deemed to be due and payable, debt recovery by proceedings. That type of agreement specifies the schedule for the creditors is suspended, the creditor may only file a claim in relation debtor for termination of its obligations to certain creditors. to outstanding monetary obligations with the relevant court that is Sanation is a special mechanism of prevention of insolvency considering the bankruptcy case. during a pre-insolvency procedure. The aim of this procedure is to The external manager during external administration has the right provide a debtor with financial assistance in an amount sufficient for to refuse to perform the existing contracts if their performance repayment of its monetary obligations. will impede restoration of the debtor’s solvency or the debtor will Debt-for-equity swaps may be implemented by way of issuing incur losses due to their performance, in comparison to similar additional shares under closed subscription. In essence, debt-for- transactions concluded in comparable circumstances. If a contract equity swaps imply set-off of the creditors’ claims in exchange for is not terminated, both a creditor and a debtor are obliged to perform equity in the debtor. This subscription process includes a number of their obligations under it, including the outstanding ones. stages and is subject to approval by the shareholders. From the day of commencement of supervision, enforcement of set- The decision of the majority creditors will be binding on the minority off provisions is allowed if it does not conflict with the statutory creditors and the debtor cannot influence such a decision. No “cram priority of the creditors’ claims or such discharge does not result in down” is available. Exception can be a case when stakeholders the preferential settlement of claims of one creditor over another. unreasonably fail to make a decision on proceeding the bankruptcy Meanwhile, the termination provisions can be enforced in any time case to the next procedure even after receiving the instructions on during the bankruptcy proceedings. the necessity to make such a decision. The court on its own initiative has to make a decision on introducing the following bankruptcy procedure. This exception is not the only case when the court can 3.6 How is each restructuring process funded? Is any make a decision on its own if stakeholders fail to perform some protection given to rescue financing? actions in violation of the legislative requirements. All the judicial expenses including the expenses for payment of the state duty, publication of the necessary information and payment 3.3 What are the criteria for entry into each restructuring of remuneration to the bankruptcy manager, shall be reimbursed on procedure? account of the debtor’s property. A plan of financial rehabilitation, a plan of external administration, as well as a settlement agreement all must be approved at the creditors’ meeting and may be introduced upon the court’s approval.

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4 Insolvency Procedures 4.6 What is the ranking of claims in each procedure, including the costs of the procedure?

4.1 What is/are the key insolvency procedure(s) available to wind up a company? The Bankruptcy Law requires each creditor to assert claims, so they can be included in the ranking list and discharged as follows: The liquidation is the insolvency procedure that may be applied to ■ claims include those arising from the debtor’s liabilities for wind up a company. personal injury and moral harm; ■ claims arise out of the debtor’s obligation to pay wages and salaries; and Russia 4.2 On what grounds can a company be placed into each ■ claims include all other creditors’ claims included in the winding up procedure? ranking list. Claims which arise after the court has accepted a bankruptcy A company can be placed into liquidation if all of the following petition have super-priority in relation to any other claims. These apply: type of claims need not be included in the ranking list and must be ■ if the court determines that the solvency of the debtor cannot paid according to their terms, subject to the following order: be restored; and ■ judicial expenses, remuneration of the bankruptcy manager; ■ if the creditors’ meeting has requested the court to make the debtor bankrupt and commence the liquidation. ■ wages and salaries of the debtor’s employees; ■ current debtor’s utilities and operational expenses necessary for the debtor’s day-to-day operations; and 4.3 Who manages each winding up process? Is there any court involvement? ■ other current payments.

The liquidation of the company is managed by the liquidation 4.7 Is it possible for the company to be revived in the manager, who replaces the existing management of the debtor and future? assumes the powers of the owners of the debtor’s assets. The level of the court’s involvement is very high. The court takes A company could be revived, and the bankruptcy procedures could the decision to appoint or dismiss a liquidator manager, declare the be terminated under the following grounds: debtor bankrupt and issues rulings on the completion of a liquidation. ■ restoration of a debtor’s solvency; This ruling serves as the ground for making a record of the debtor’s ■ conclusion of a Voluntary Agreement at any stage of liquidation on the Unified State Register of Legal Entities. bankruptcy; ■ waiver of creditors’ claims; or 4.4 How are the creditors and/or shareholders able to ■ settlement of all creditors’ claims. influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)? 5 Tax

As to the shareholders’ influence in a liquidation, the powers of the 5.1 What are the tax risks which might apply to a shareholders’ meeting are terminated, apart from the power to make restructuring or insolvency procedure? decisions on entering into agreements for the provision of funds by a third person or third persons for the purpose of discharging the Restructuring and insolvency procedures do not imply any specific debtor’s obligations. tax risks. However, it should be mentioned that the state authorities In contrast, the decisions of the creditors’ meetings have paramount can require payment for taxes and duties after the date the court importance in terms of liquidation procedure. Creditors vote at accepts a petition for the debtor’s bankruptcy. the creditors’ meeting in proportion to their registered claims. Decisions are generally adopted by a simple majority of votes of creditors attending the meeting provided that not less than half of 6 Employees the registered creditors by claims were present at such a meeting.

6.1 What is the effect of each restructuring or insolvency 4.5 What impact does each winding up procedure have on procedure on employees? existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off The employees own the right to turn to the court for recognition of provisions be upheld? the debtor as bankrupt. The debtor’s director is obliged to notify employees about the introduction of bankruptcy procedures. The Within the liquidation procedure, the bankruptcy manager has the liquidator has the power to dismiss the debtor’s employees. right to refuse to perform any executory debtor’s contract if: ■ the contract will impede restoration of the debtor’s solvency; or 7 Cross-Border Issues ■ the debtor will incur losses from performance in comparison to similar transactions concluded in comparable circumstances. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?

Russian bankruptcy proceedings can generally be commenced only

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in relation to a Russian registered company. Therefore, companies incorporated elsewhere cannot be restructured or bankrupted in the 9 Reform Russian courts. However, foreign companies are entitled to take proceedings against a Russian debtor in the Russian courts and 9.1 Have there been any proposals or developments in participate in such proceedings as creditors. your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make 7.2 Is there scope for a restructuring or insolvency insolvency processes more streamlined and efficient? process commenced elsewhere to be recognised in your jurisdiction? The recent developments in the Russian legislation have already Russia made a step towards more efficient bankruptcy proceedings. For There are no provisions in Russian law relating to recognition instance, now the courts are authorised to consider a petition for of a foreign restructuring or insolvency process. However, the bringing Controlling Persons to subsidiary liability in a separate decisions of foreign courts relating to bankruptcy procedures in proceeding after the completion of the main bankruptcy case, foreign countries are recognised and enforced in Russia based on which allows not to prolong the bankruptcy proceedings in general the international treaties and principles of reciprocity. due to the necessity of considering such a petition in terms of the bankruptcy case. 7.3 Do companies incorporated in your jurisdiction Besides, a lot of information regarding the course of bankruptcy restructure or enter into insolvency proceedings in proceedings has recently become publicly available. The information other jurisdictions? Is this common practice? of the actions which are performed prior to and in course of the bankruptcy case which used to be not subject to publication now The bankruptcy proceedings against the Russian companies are not must be published on the website of the Unified Federal Registry to be commenced in any court of any other jurisdiction. Still, if such of Bankruptcy Information. Therefore, all the interested parties are proceedings against a Russian company are initiated, the bankruptcy kept informed of the initiation and the course of bankruptcy case awards issued in terms of such proceedings will not be enforced in and are able to perform all required actions without delay, making Russia. thereby the bankruptcy proceedings more streamlined.

8 Groups 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope Currently, the State Duma is considering the draft law which provides for co-operation between officeholders? for the mechanism of implementation of the debt restructuring procedure in relation to legal entities which has been positively Russian law does not provide provisions relating to the bankruptcy used in foreign jurisdictions. Pursuant to the draft law, a plan of regime for corporate groups or any specific requirement for corporate debt restructuring may provide for such measures as coordinating the bankruptcy procedures of the companies of one replacing the debtor’s assets, novation of its obligations, termination corporate group. of the pledge, debt-for-equity swaps, etc.

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Artem Kukin Stanislav Petrov INFRALEX INFRALEX Capital City Tower, b.8, str.1 Capital City Tower, b.8, str.1 Presnenskaya nab. Presnenskaya nab. Moscow, 123112 Moscow, 123112 Russia Russia

Tel: +7 495 653 82 99 Tel: +7 495 653 82 99 Email: [email protected] Email: [email protected] URL: www.infralex.ru URL: www.infralex.ru Russia Artem Kukin graduated from the law department of Lomonosov Stanislav Petrov graduated with honours from the All-Russian Moscow State University in 1995 with a 1994 internship at the University of Justice. Now Stanislav carries out postgraduate research Columbia University School of Law. Artem is an attorney and has in the area of bankruptcy. In 2017, Stanislav became the Head of a Candidate of Legal Sciences degree. In 2014, Artem became the Bankruptcy Practice of INFRALEX. Managing Partner of INFRALEX. Stanislav is an acknowledged expert in bankruptcy law, corporate law Artem has been practising bankruptcy law since 1996. Over 20 and contractual relations. years, Artem has provided services for the successful completion of With over eight years of experience, Stanislav provides legal options hundreds of complex bankruptcy cases. and experienced counsel to clients in the complexities of bankruptcy In 2013, Artem was marked by the international IFLR 1000 as one of law and corporate law. Stanislav successfully represents clients’ the leaders in the field of bankruptcy proceedings. interests in court in cases of disputes in the sphere of bankruptcy proceedings, corporate law and contractual relations. Artem is listed among the leading lawyers in bankruptcy law by Legal Experts EMEA. Since 2009, Artem has been recommended by Stanislav has authored articles on bankruptcy law and corporate law Best Lawyers as one of the best Russian specialists in the fields of and has given lectures on mediation and litigation at the All-Russian “Arbitration & Mediation” and “Litigation”. According to The Legal 500 University of Justice. EMEA, Artem “always sees the bigger picture and is an asset to every transaction”.

INFRALEX is a national law firm with a large firm’s experience and resources. The firm provides legal counselling and expert services for clients and represents their rights and interests in courts. The staff lawyers of INFRALEX are leading professionals in bankruptcy law, corporate law, contract law, tax law, competition law, etc. The firm has dealt with a wide range of complex legal issues and the firm’s lawyers have approached complex, cross-border deals with efficiency and integrity. The firm has handled a broad array of complex legal precedent-setting cases and has a record number of positive results for their clients. INFRALEX has been ranked by the national rating of law companies (“Pravo.Ru-300”) and by the international rating The Legal 500 EMEA in categories such as bankruptcy, dispute resolution in commercial courts, corporate law and competition law. The Partners of INFRALEX are recommended by Best Lawyers, IFLR 1000 and Legal Experts EMEA.

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Singapore Ashok Kumar

BlackOak LLC Darius Tay

company or achieving a more advantageous realisation of the 1 Overview company’s assets than would be possible on a winding up. Given that the effect of a judicial management order is to displace the 1.1 Where would you place your jurisdiction on the company’s existing management, judicial managements are often spectrum of debtor to creditor-friendly jurisdictions? creditor-driven rather than debtor-driven. In practice, judicial management is used somewhat sparingly, and often as a prelude 2018 marks a significant phase in Singapore’s transition into a to liquidation. According to the Report of the Insolvency Law jurisdiction that is more conducive and facilitative of restructuring. Review Committee in 2013, 124 companies applied for judicial Amendments to the Singapore Companies Act enhancing Singapore’s management between 2001 and 2010. Of the 105 cases reviewed, debt restructuring and corporate rescue framework came into force in the court granted the judicial management application in 27 cases. May 2017 (the “2017 Amendments”), which will see more debtors Judicial management can also be undertaken concurrently with a utilising the legal infrastructure put in place by the amendments. scheme of arrangement, by having the scheme of arrangement form part of the judicial manager’s proposals at the creditors’ meeting. The legislative framework in Singapore strikes a comfortable balance between corporate rehabilitation on the one hand, and the Both the scheme of arrangement and judicial management regimes safeguarding of creditors’ interests on the other. For debtors to avail have been strengthened by the 2017 Amendments, with provisions themselves of the corporate rescue provisions, they must ensure for rescue financing, amongst others, introduced to facilitate work- that creditors remain protected by complying with the statutory outs. requirements imposed by these provisions. 2 Key Issues to Consider When the 1.2 Does the legislative framework in your jurisdiction Company is in Financial Difficulties allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a The legislative framework does not interfere with informal company in financial difficulties? Is there a specific work-outs. Both debtors and creditors are not constrained by the point at which a company must enter a restructuring legislative framework from pursuing a work-out without reference or insolvency process? to the courts. There is no bright line test for when a director must commence As for formal restructuring, parties may choose between adopting an insolvency or restructuring process. However, a refusal to do a scheme of arrangement or a judicial management process, with so when said process is the only way to preserve the company’s the scheme of arrangement procedure being more popular. As for interests might render the director liable under one of the headings insolvency processes, a company may be wound up voluntarily or below. Practically speaking, it is important to engage restructuring by order of the court. professionals when early signs of distress are present. A scheme of arrangement sanctioned by the court allows the Under the common law, directors owe a duty to act bona fide in company to restructure its debt and equity without obtaining the company’s best interests. Where the company is in a parlous unanimous consent, which would otherwise usually be a significant financial state, the directors must take the unsecured creditors’ impediment to a successful informal work-out. Schemes of interests into consideration. If this duty is breached, the liquidator arrangement are debtor-driven; they have become the preferred may claim against the directors in the name of the company for choice for formal restructuring, because they allow the existing losses resulting from the breach. management to remain in control of its operations, as opposed to ceding control to a court-appointed officer. We are increasingly As for statutory liabilities, s 339(3) of the Companies Act stipulates seeing large and medium-sized enterprises using the scheme of that an officer of a company is criminally liable if he is a knowing arrangement to restructure not only financial debts, but also trading party to the contracting of a debt when he had no reasonable grounds debts. to expect that the company would be able to repay the debt. The officer may also be civilly liable to the company for losses incurred In a judicial management, the court appoints a manager to take if a criminal prosecution is successfully brought against the director charge of the company’s affairs, with a view to rehabilitating the (s 339(3) read with s 340(2)).

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S 340(1) of the Companies Act stipulates that a person who is The powers of a liquidator in winding up in relation to avoiding knowingly a party to the carrying on a business with the intent to transactions at an undervalue and those constituting unfair defraud creditors shall be civilly liable for any losses incurred. preferences are likewise available to a judicial manager in judicial management. The court has the discretion to apply the rest of the avoidance provisions, and is likely to do so when this fulfils the 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the objectives of the judicial management. The pari passu and anti- action that they can take against the company? For deprivation rules do not apply in judicial management. example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention 3 Restructuring Options of title arrangements) applicable to the laws of your Singapore jurisdiction? 3.1 Is it possible to implement an informal work-out in your jurisdiction? A variety of stakeholders may influence the company’s situation. For example, secured creditors may appoint a receiver. This remedy Yes, this is possible in Singapore. is not precluded by the liquidation moratorium but is precluded by the judicial management and scheme of arrangement moratoria. That said, a holder of a floating charge with the right to appoint a 3.2 What formal rescue procedures are available in receiver and manager over substantially the whole of the company’s your jurisdiction to restructure the liabilities of undertaking may veto a judicial management order at the hearing of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can the application. This is subject to the court’s determination of the creditors and/or shareholders block such procedures relative prejudice that would be caused to the holder of the floating or threaten action (including enforcement of security) charge and the unsecured creditors if the order was made. to seek an advantage? Do your procedures allow you Under the 2017 Amendments, the judicial management and to cram-down dissenting stakeholders? scheme of arrangement moratoria has also been broadened to encompass creditors such as landlords, creditors with retention of The formal rescue procedures available in Singapore are the scheme title arrangements, chattels leasing agreement and hire-purchase of arrangement and the judicial management process. agreements. Debt-equity swaps can be achieved via a scheme of arrangement Although unsecured creditor claims are caught by the moratoria that involves both shareholders and creditors. For a scheme in all formal insolvency procedures, essential trade creditors of arrangement to be sanctioned, creditors have to be properly can sometimes assert indirect pressure to compel payment, e.g. classified for the purposes of voting on the scheme, and the scheme withholding crucial supplies unless payment is made. Depending must obtain the approval of a majority of the creditors in number in on the circumstances, such payments may contravene the avoidance each class, holding three-quarters of the total value of debt in that provisions in the Companies Act, or the pari passu rule of class. distribution. Cramdown provisions have also been introduced into the scheme of arrangement regime under the 2017 Amendments. This empowers 2.3 In what circumstances are transactions entered the court to cram down on dissenting classes of creditors if: (a) at least into by a company in financial difficulties at risk of one class of creditors voted in favour of the scheme; (b) a majority in challenge? What remedies are available? number of creditors representing three-fourths in value of creditors meant to be bound by the scheme voted in favour of the scheme; and In winding up, the liquidator may apply to have the following (c) the scheme does not discriminate unfairly between the classes of transactions avoided: creditors, and is “fair and equitable” to each dissenting class. ■ actions that unfairly prefer specific creditors; The 2017 Amendments have also enhanced the scheme of ■ transactions at an undervalue; arrangement regime by providing for the possibility of a pre- packaged sale. S 211I of the Companies Act permits the court to ■ charges not registered within the stipulated time; approve a scheme of arrangement without the company having ■ floating charges for which consideration has not been given; to convene creditor meetings, thereby significantly shortening ■ dispositions of property after the commencement of winding the timeline for formal restructurings. The court will have to be up; and satisfied that the requisite statutory majority would have approved ■ credit transactions on extortionate or grossly unfair terms. of the scheme had the creditors’ meeting been summoned. Apart from the avoidance regime, certain common law rules are also On the other hand, the judicial management process involves the relevant: court appointment of a judicial manager, who makes proposals to ■ the anti-deprivation rule, which may apply to avoid revive the company, or to sell the assets of the company as a going arrangements that deprive the company of its assets upon the concern. These proposals must be approved by the majority in onset of insolvency, e.g. priority flip clauses; and number and value of the creditors, and by the court. ■ the pari passu rule, which may apply to avoid arrangements Provisions have also been introduced to facilitate rescue financing. that detract from a rateable distribution of the company’s This is dealt with in more detail at question 3.6 below. assets to all its unsecured creditors, e.g. direct payment clauses. The most common remedy involves avoiding the transaction. 3.3 What are the criteria for entry into each restructuring procedure? Where third parties are involved, they may be compelled to return the property or money. The proceeds of unfair preference and actions go to the pool of assets to be A company may apply to court for leave to summon and convene distributed to the unsecured creditors. a meeting to propose and approve a scheme of arrangement. The

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company must make full and frank disclosure of the relevant facts In a scheme of arrangement, the company appoints and pays the (for example, the proposal that the company intends to make to scheme manager as well. the creditors and information about the liabilities of the company) To facilitate ailing companies’ access to rescue financing, the 2017 in order for the court to determine if the proposal has a viable Amendments now enable the court to grant ‘super-priority’ for debts possibility of being accepted. incurred in certain circumstances. Rescue financing is defined as With regard to judicial management, the company may make an financing which is necessary either for the survival of the company, application to court if the company is insolvent, and the court is or to achieve a more advantageous realisation of the company’s satisfied that the judicial management is likely to achieve oneof assets than in a winding up. the following: There are various levels of ‘super-priority’ that the court can confer. ■ rehabilitating the company; These includes: (a) treating the debt arising from rescue financing ■ preserving all or part of its business as a going concern; and/ as part of the costs and expenses of the winding up, and therefore Singapore or as a debt payable prior to other unsecured creditors; (b) treating the ■ the interests of creditors would be better served than by debt as having priority over all preferential debts and unsecured resorting to a winding up. creditors; (c) securing the debt on the property of the company that is either not subject to any security interest, or on a subordinate security interest on a property that is subject to an existing security 3.4 Who manages each process? Is there any court interest; and (d) securing the debt on property of the company that involvement? is equivalent in priority, or of higher priority, to an existing security interest. The effect of the court order granting ‘super-priority’ is The administration of a scheme of arrangement is done by a scheme that in the event the restructuring fails, the rescue financier may be manager appointed either by the company or the court. That said, repaid in priority to other unsecured creditors. This would encourage the process is still largely debtor-driven. Two court hearings are rescue financiers to extend fresh credit to the company, significantly required. At the first hearing, the judge must consider whether improve its restructuring prospects (s 211E of the Companies Act). to order the creditor meetings and give provisional approval of a proposed classification of creditors. The scheme manager must then In November 2017, the Singapore High Court released its first put the scheme to the creditor meetings for the requisite approval. decision on the new rescue financing provisions. The court Thereafter, the scheme is subject to final court approval at the disallowed the debtor’s application for super priority, noting that second hearing. such status should only be granted where “strictly necessary”. The debtor must adduce evidence of reasonable efforts at securing The court is involved in approving the application for judicial alternative financing before resorting to the rescue financing management and appointing the judicial manager. In practice, provisions. the court will take the applicant’s nomination into consideration. Thereafter, the judicial manager takes charge of the company and the judicial management process. The manager also formulates the 4 Insolvency Procedures proposals to be presented at the creditor meetings.

4.1 What is/are the key insolvency procedure(s) available 3.5 What impact does each restructuring procedure have to wind up a company? on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? There are three: (1) members’ voluntary liquidation; In both judicial management and a scheme of arrangement, the (2) creditors’ voluntary liquidation; and moratorium prevents creditors from suing the company for failing (3) compulsory voluntary liquidation. to perform its outstanding obligations (see question 2.2). This affects existing contracts by preventing creditors from taking legal action against the company until the moratorium is lifted. Such 4.2 On what grounds can a company be placed into each winding up procedure? moratorium may be expressed by the court to extend to apply to any act of any person within the jurisdiction of the court, whether the act Members’ voluntary liquidation takes place in Singapore or elsewhere. The general meeting must resolve for the winding up of the However, the commencement of restructuring procedures does not company by special resolution. The directors must also provide a affect existing contractual rights such as the right to terminate the declaration of solvency to the effect that the company will be able contract. There is no mechanism preventing the operation of ipso to pay its debts in full within a period not exceeding 12 months after facto clauses on existing contracts where a scheme is proposed or a the commencement of the winding up. moratorium is granted. The scheme of arrangement may therefore affect the parties’ obligation to perform the outstanding obligations, Creditors’ voluntary liquidation and such right to set-off or terminate, depending on the precise Where the directors are unable to provide a declaration of solvency, terms of the contract. the company must proceed by way of creditors’ voluntary liquidation. Where the company proceeds by way of members’ 3.6 How is each restructuring process funded? Is any voluntary liquidation, but the liquidator later forms the opinion protection given to rescue financing? that the company is insolvent, the process must be converted to a creditors’ voluntary liquidation. Generally, the company bears the costs of the restructuring process. Compulsory liquidation In judicial management, any fees or debts incurred by the judicial Creditors or the company may apply to have the company wound manager is to be charged on and paid out of the company’s property. up by the court on any of the grounds in s 253 of the Companies

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Act. The most commonly invoked ground is the insolvency of the set-off. Upon the winding up application, mutual credits and debits company (gauged on a cash flow test or balance sheet test). between the company and creditor will automatically be set off. The rights underlying each claim will be merged, and the creditor may prove for the balance amount. Insolvency set-off displaces any 4.3 Who manages each winding up process? Is there any court involvement? contractual rights to set-off. Where the liquidator incurs liabilities on pre-insolvency contracts In every type of winding up, the liquidator conducts the process. for the benefit of the insolvent estate, these liabilities rank as However, the degree to which the court is involved differs. liquidation expenses. On the other hand, the liquidator also has the power to unilaterally disclaim onerous pre-insolvency contracts. Members’ voluntary liquidation The creditor may claim for the loss caused by the disclaimer in

Singapore In the members’ voluntary liquidation, the directors must appoint a liquidation. This loss is calculated as damages normally would be provisional liquidator immediately after the declaration of solvency for a breach of contract. is made. The provisional liquidator manages the winding up process Apart from disclaiming onerous contracts, the liquidator can simply until a permanent liquidator is appointed by the general meeting. decline to perform contracts that are not in the best interests of the The liquidator operates with less court oversight in a members’ insolvent estate. If the creditor has a claim for non-performance, voluntary winding. Most significantly, the liquidator may exercise the creditor may prove for the sums due to him in winding up. He certain powers with the approval of the general meeting, where the cannot commence legal action due to the moratorium. exercise of such powers would require court or creditor approval in other types of winding up. Creditors’ voluntary liquidation 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? In the creditors’ voluntary winding up, both the company and creditors nominate the liquidator, although the creditors’ choice will The ranking of claims in liquidation is broadly as follows: prevail. Many of the liquidator’s powers may only be exercised with court or creditor approval. (1) secured creditors and quasi-security holders; (2) super priority for rescue financing if any, pursuant to the Compulsory liquidation recent legislative amendments; In the compulsory winding up, the applicant usually appoints the (3) preferential debts pursuant to s 328(1) of the Companies Act, liquidator. If no liquidator is appointed, the court may appoint the which consists of: liquidator. If the court declines to appoint the liquidator, the Official ■ liquidation expenses; Receiver functions as the default liquidator. Many of the liquidator’s powers may only be exercised with court or creditor approval. ■ wages and salaries; ■ ex gratia and retrenchment benefits; ■ compensation under the Work Injury Compensation Act; 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any ■ Central Provident Fund contributions; restrictions on the action that they can take (including ■ remuneration in respect of vacation leave; and the enforcement of security)? ■ Goods and Services Tax. (4) floating charge holders; In a members’ voluntary winding up, the unsecured creditors may (5) unsecured creditors; prove in the winding up, and are entitled to a rateable distribution of the company’s assets. Upon the application for winding up, the (6) deferred creditors pursuant to s 250(1)(g) of the Companies company may apply for an interim moratorium, which prevents Act (unpaid declared dividends); and unsecured creditors from commencing legal proceedings to recover (7) shareholders. their debts. When the winding up order is granted, this moratorium automatically takes effect. The shareholders are involved in 4.7 Is it possible for the company to be revived in the appointing the liquidator, and granting approval to the liquidator for future? the exercise of certain powers. The shareholders may also approve the continuance of the directors’ powers, and remove the liquidator. A winding up cannot be undone; the only way a company being In a creditors’ voluntary winding up or a compulsory winding wound up can be put back into its former state is by way of a court up, the liquidator requires either the approval of the court, or the order staying the winding up proceedings. Such a stay takes effect committee of inspection (nominated by the creditors) to exercise from the date of the pronouncement of the stay and is not backdated some of his or her powers. The shareholders are not involved, apart to the date of the compulsory winding up order or the date that from possessing a residual claim on the company’s assets. voluntary winding up commences. The stay does not undo the In any winding up process, secured creditors and quasi-security actions of the liquidator but operates only to halt the proceedings holders are not caught by the moratorium. Secured creditors may and thenceforth to permit the officers of the company to continue enforce their security, while quasi-security holders may assert title in control. to property in the company’s possession. 5 Tax 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off 5.1 What are the tax risks which might apply to a provisions be upheld? restructuring or insolvency procedure?

The commencement of winding up per se does not affect pre- The various steps undertaken during restructuring or insolvency insolvency rights and liabilities, with the exception of insolvency procedures in Singapore will need to be analysed in order to

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determine the tax implications for the company. Factors such as the Law on Cross-Border Insolvency (the “Model Law”), which allow nature of the debt (e.g. trade or non-trade) may be relevant. foreign restructuring or insolvency proceedings to be more easily recognised in Singapore. Foreign restructuring or insolvency proceedings will be recognised in Singapore upon an application 6 Employees by the foreign representative, provided that the foreign state in which proceedings are carried out is the centre of the company’s 6.1 What is the effect of each restructuring or insolvency main interests or is in a state where a company has an establishment. procedure on employees? The explanatory note to the Model Law makes it clear that ‘foreign proceedings’ is broad enough to cover debtor-in-possession type Winding up arrangements. Where the Model Law does not apply, the usual

principles applicable to the recognition of foreign judgments come Singapore If the insolvent company owes the employee any outstanding wages, into play. Central Provident Fund contributions, or sums in lieu of vacation leave, these are preferential debts for which the employee may Even before Singapore’s adoption of the Model Law, the Singapore prove for in liquidation, subject to a cap on the preferential debt. court has already taken an internationalist approach towards cross- Judicial management border issues. In Re Opti-Medix Ltd (in liquidation) and another matter [2016] SGHC 108, the Singapore court recognised the The commencement of judicial management has no effect on appointment of a foreign liquidator from a jurisdiction other than the employment contracts. However, the judicial manager has the place of incorporation of the company, accepting the centre of main discretion to retrench employees if this would further the purposes interest as a basis for recognition. In Re Gulf Pacific Shipping Ltd of judicial management. If the judicial manager decides to retain (in creditors’ voluntary liquidation) and others [2016] SGHC 287, employees, he or she risks assuming personal liability for adopting the Singapore court recognised liquidators appointed in a foreign any employment contracts. Thus, judicial managers tend to disclaim voluntary liquidation, finding that there ought not be a distinction personal liability at the outset. between voluntary and compulsory liquidations. Scheme of arrangement The 2017 Amendments also abolished the ring-fencing rule which Whether a scheme of arrangement affects the employees depends required the foreign company’s assets in Singapore to be applied on its precise content. If downsizing were part of the scheme, some to discharge liabilities owed to Singaporean creditors, before they employees would likely be made redundant. Where the scheme can be remitted to the foreign liquidator. The ring-fencing rule now is purely concerned with debt and equity restructuring, this would only applies to ‘relevant companies’, which includes banks, finance likely not affect employees. companies, and other similarly regulated companies.

7 Cross-Border Issues 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? It is possible for companies incorporated in Singapore to pursue insolvency proceedings in jurisdictions where it has assets. This is Foreign companies may be wound up in Singapore if they have a common where the Singapore-incorporated company has places of “substantial connection with Singapore”. A foreign company has business or assets outside the jurisdiction. a “substantial connection” with Singapore if: (a) Singapore is the centre of main interests of the foreign company; (b) the foreign company is registered under the Companies Act; (c) the foreign 8 Groups company is carrying on business in Singapore or has a place of business in Singapore; (d) the foreign company has substantial 8.1 How are groups of companies treated on the assets in Singapore; (e) the foreign company has chosen Singapore insolvency of one or more members? Is there scope law as the law governing a loan/transaction, or the law governing for co-operation between officeholders? the resolution of a dispute arising out of or in connection with a loan/transaction; or (f) the foreign company has submitted to the Companies are treated as separate legal entities. Therefore, the jurisdiction of the Singapore court for the resolution of one or more creditors of an insolvent company cannot make claims against dispute relating to a loan/transaction. Such winding up cannot be other solvent members of the group. While creditors may “pierce made voluntarily by the foreign company itself. the corporate veil” to treat the companies in question as a single The 2017 Amendments have also extended the scope of the corporate entity, the grounds for doing so are narrow, and typically restructuring procedures (judicial management and scheme of involve the insolvent company being a sham or facade for the other arrangement) to foreign companies. Foreign companies may be solvent companies. subjected to the restructuring procedures in Singapore if they It is not uncommon for the insolvency of related companies to be are “liable to be wound up” in Singapore utilising the test above. deemed as an event of default. Thus, the insolvency of one company However, the Singapore court may not grant an order for judicial within the group could potentially trigger the group’s insolvency in management if the judicial manager will not be able to discharge his a series of cross-defaults. Where multiple companies within a group duties outside Singapore. enter into liquidation or an insolvency process, there is some scope for coordination between officeholders, but only on an informal 7.2 Is there scope for a restructuring or insolvency basis. process commenced elsewhere to be recognised in your jurisdiction? Pursuant to the 2017 Amendments, the scope of the scheme of arrangement moratorium may be extended beyond the subject company to its subsidiary, holding company or ultimate holding The 2017 Amendments gives effect to the UNCITRAL Model

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company (the “related company”). The court may grant such an were carried out on an ad hoc basis and it was difficult to ensure order if the related company plays a necessary or integral role to different courts are fully aware of what was happening in other the compromise or arrangement relied on by the subject company jurisdictions. Court orders may even conflict and hinder proceedings making the scheme application, and the court is satisfied that the that were taking place in other jurisdictions. The Guidelines will creditors of the related company will not be unfairly prejudiced undoubtedly make insolvency processes more streamlined and by the making of such the moratorium order. This facilitates the efficient. restructuring of group companies. 9.2 Are there any other governmental proposals for 9 Reform reform of the corporate rescue and insolvency regime in your jurisdiction? Singapore 9.1 Have there been any proposals or developments in The 2017 Amendments have provided for: your jurisdiction regarding the use of technology or ■ expanded moratoria for judicial management and schemes of reducing the involvement of the courts in the laws arrangement; of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient? ■ super priority of rescue financing in judicial management and schemes of arrangement; The Singapore court has, together with the United States ■ cramdown and pre-packaged arrangement provisions for schemes of arrangement; and Bankruptcy Court for the District of Delaware, in February 2017 formally implemented the Guidelines for Communication and ■ the adoption of the UNCITRAL Model Law for cross-border Cooperation between Courts in Cross-Border Insolvency Matters insolvency. (the “Guidelines”). Since then, the Guidelines have been adopted The Singapore Government has also announced that a new law by the United State Bankruptcy Court for the Southern District of to consolidate Singapore’s personal bankruptcy and insolvency New York, the Supreme Court of Bermuda, and the High Court of regimes into an omnibus Insolvency Act will be introduced in 2018 England & Wales (Media Release by the Singapore Supreme Court to further boost Singapore’s status as a leading centre for cross- on May 2017). border debt restructuring. The Guidelines provide a common framework for courts to communicate and coordinate with each other in cross-border Acknowledgment insolvency matters on a global level, which includes a structure for joint hearings (including the use of video conferences to The authors would like to thank Aaron Loh, Prapti Acharya, and conduct contemporaneous hearing), enabling 2 or more courts to Cynthia Andriana from Transaction Advisory Services of Ernst and simultaneously record evidence and hear arguments. Prior to the Young Solutions Singapore for their assistance with the tax section implementation of the Guidelines, communications between courts of this chapter.

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Ashok Kumar Darius Tay BlackOak LLC BlackOak LLC One George Street, #12-01/02 One George Street, #12-01/02 Singapore 049145 Singapore 049145

Tel: +65 6521 6750 Tel: +65 6521 6750 Email: [email protected] Email: [email protected] URL: www.blackoak-llc.com URL: www.blackoak-llc.com

A lawyer with more than 20 years of experience, Ashok’s core Darius’ work focuses on special situations, including both contentious Singapore practice is in corporate restructuring and insolvency (“CRI”). He has and non-contentious aspects of restructuring and insolvency, banking been consistently ranked as a leading lawyer in this practice area and finance as well as mergers and acquisition for special situations. in Chambers Asia Pacific, IFLR1000, The Legal 500 Asia Pacific, He has been listed as a Next Generation Lawyer (in the restructuring AsiaLaw Profiles, and Best Lawyers. Ashok handles both contentious and insolvency space) by The Legal 500 (2018), was a finalist for ALB and non-contentious aspects of CRI practice both domestic and South East Asia’s young lawyer of the year 2018 and was also listed international. as an Up and Coming Lawyer (in the restructuring and insolvency space) by Chambers and Partners Asia-Pacific (2018). Ashok sits on the Law Reform Committee of the Singapore Academy of Law, the Insolvency Practice Committee of the Law Society of Darius holds a B.C.L. from University of Oxford and LL.B. (with Singapore, and the INSOL Jakarta Membership Committee. He is a 2nd Major in Accounting) (Magna Cum Laude) from Singapore a Director of the Insolvency Practitioners Association of Singapore Management University where he graduated amongst the top student and is also a Director of the Turnaround Management Association, of his class and was awarded a number of scholarships along the way. Singapore Charter. He is also an adjunct lecturer at the Singapore Management University on various topics, including Company Law and the Law of Equity and Trusts.

BlackOak is Singapore’s only dedicated distress and special situations legal practice, formed to meet the challenges of a changing financial landscape. With capabilities in both corporate transactional work and dispute resolution, the team transits seamlessly from boardroom to courtroom, representing a gamut of stakeholders including insolvency professionals, debtors, creditors, funds, and white knights. The BlackOak team works closely alongside other industry professionals to provide business-driven and context-specific legal solutions in complex commercial situations, and has been pushing new frontiers in almost every headline distress deal or transaction in the recent years, especially in the shipping and resources industries. Within the distress space, the team is known for its involvement in high-profile cases such as the judicial management of Swiber Holdings, the restructuring of Jurong Aromatics Corporation, the restructuring of PT Bumi Resources Tbk, the restructuring of bonds issued by Trikomsel Pte Ltd, the restructuring of bonds issued by Bakrie Group’s BLDI Investment Pte Ltd and the restructuring of Rickmers Maritime Trust.

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Spain Antonia Magdaleno Carmona

SUE Abogados, S.L.P. Julián Chamizo Renau

may be reached or not, and before that period ends, if the agreement 1 Overview is not possible, the company (the managers) have to submit a claim asking to declare itself in an insolvency proceeding. 1.1 Where would you place your jurisdiction on the If the deadlines are not fulfilled and the company (the managers) do spectrum of debtor to creditor-friendly jurisdictions? not apply for the insolvency proceeding in time, the managers may incur in liability. This consequence and its effects may vary from The Spanish jurisdiction used to be a creditor-friendly jurisdiction, case to case and it is decided in a specific part of the insolvency regarding the aim of the latest Act on Insolvency. However, during proceeding. In that part of the proceeding it may be taken into the recent economic crisis, the Spanish Act on Insolvency was account if the managers of the company have missed to fulfil other modified several times, making it even more creditor-friendly, legal obligations. especially regarding natural person insolvency cases. 2.2 Which other stakeholders may influence the 1.2 Does the legislative framework in your jurisdiction company’s situation? Are there any restrictions on the allow for informal work-outs, as well as formal action that they can take against the company? For restructuring and insolvency proceedings, and to example, are there any special rules or regimes which what extent are each of these used in practice? apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your When a company is in an insolvency situation, it may arrange an jurisdiction? agreement with all of its creditors, thus allowing it to carry on its economic activity, but this requires the consent of all or most of the The bankruptcy court proceeding may be also started by any creditor. main creditors. There are not any special restrictions. In order to submit, the action This agreement may be “informal”, regarding that it may be reached is needed to prove the insolvency situation of the company and that by the debtor with his creditors without the need of declaring a the claimant is an actual creditor. formal insolvency proceeding before the trade courts. This kind of For rental contracts and similar to those where there are obligations agreement may be also be approved by the court, which gives them for both parties in the contract, in the case where the creditor wants more legal security. to terminate the agreement, the court may decide to keep it in force However, the current situation of most of the bankrupt companies if it is necessary for the activity of the company, but all the credits did not allow even to fulfil the terms of an agreement acceptable by have to be paid. their creditors, so the most used in practice are the formal insolvency proceeding before the trade court. 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available? 2 Key Issues to Consider When the Company is in Financial Difficulties Those transactions entered into by a company in the two previous years before it is declared officially by a court in a bankruptcy proceeding are those with a higher risk of challenge by special 2.1 What duties and potential liabilities should the th directors/managers have regard to when managing a action specifically ruled at the Spanish Act 22/2003, dated9 company in financial difficulties? Is there a specific July, on Insolvency (Spanish Act on Insolvency). However, the point at which a company must enter a restructuring transactions from the four previous years may be also challenged by or insolvency process? a civil action (actio pauliana). Certain transactions may not be challenged if they fulfil all the When a company in financial difficulties may not (or foresees that it requirements ruled at the Spanish Act on Insolvency, if: will not) be able to pay its debts due to a lack of treasury, managers have ■ The transactions belong to the professional activity of the to start the legal proceeding to declare the company officially bankrupt company and are carried on in normal terms. before the competent trade court. Before this legal proceeding, the ■ The transactions are ruled by special laws of payment systems, company may communicate to the court that it is trying to reach an compensations, securities and derivative instruments. agreement with its creditors and get four months where the agreement

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■ Warranties are issued for public credits and those issued ensure payments of the guaranteed salary fund. 3.5 What impact does each restructuring procedure have ■ The refinancing agreements with the conditions set forth in on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and article 71 bis from the Spanish Act on Insolvency. set-off provisions be upheld?

3 Restructuring Options Existing contracts remain enforced when the restructuring proceeding starts. They may be terminated expressly or the other part – different to the debtor – will be obliged to perform its 3.1 Is it possible to implement an informal work-out in obligations. However, some kind of contracts or obligations that your jurisdiction? Spain were assumed by the debtor and had to be performed before the proceeding was started, may not be enforceable. An agreement between debtor and its creditors may be subscribed If a part of the company or the company as a whole is transferred, the before in the terms abovementioned, in order to reduce the debt or contracts referring to the part transferred will be in force being the settle new terms of payment. However, once the legal proceeding is debtor changed by the acquirer unless the contracts are terminated declared by the trade court, the company has to follow all the steps of it is specified that the acquirer does not want them, as set forth in and terms set forth in the Spanish Act on Insolvency. article 146 of the Spanish Act on Insolvency.

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of 3.6 How is each restructuring process funded? Is any distressed companies? Are debt-for-equity swaps protection given to rescue financing? and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures The cost of the Insolvency Administration is paid by the debtor, or threaten action (including enforcement of security) regarding that these fees are born after the insolvency proceeding to seek an advantage? Do your procedures allow you is started and they have to be paid with the current treasury of the to cram-down dissenting stakeholders? company. There is no protection system in force yet, so in some cases, the fees are not paid. The payment and the quantification of the The insolvency proceeding may end with an agreement with creditors fees is regulated in the Royal Decree 1860/2004, dated 6th September. (propositions for write-down of debts or moratorium of payments, or both may be accumulated and also debt-for-equity swaps) or winding up the company. During the court proceeding, a part of 4 Insolvency Procedures the company, certain assets, may be sold with a court authorisation. Before this authorisation is rendered by the court, stakeholders can do allegations/objections before the court. Shareholders of the 4.1 What is/are the key insolvency procedure(s) available to wind up a company? bankrupt company have almost no option, however, creditors decide in the creditors meeting if they accept the proposed agreement or the winding up of the company. Creditors with in rem securities may The debtor itself can decide to wind up the company from the execute them after a certain deadline. beginning of the proceeding or it can be winded up if a creditors’ agreement is not approved. It is possible for the debtor to reach an agreement with the financial creditors where a minimum quorum is required – at least 51% of Once the winding up of the company is accepted by the court, it financial creditors – that with certain conditions, will be binding for will declare the suspension of exercise of the rights of management the other financial creditors. and disposal of his estate that will be managed completely by the Insolvency Administration. After this, the Insolvency Administration shall provide the court 3.3 What are the criteria for entry into each restructuring a plan to dispose of the properties, goods and rights forming the procedure? aggregate assets. After its approval, assets, goods and rights from the debtor will be sold in order to pay creditors. The debtor has to be a natural person or a private legal person, in a current or foreseeable insolvent situation with at least two or more If the company has no assets, the same court that declares the creditors. A lying heritage may be also in a restructuring procedure opening of the insolvency proceeding may itself declare its closing except state organisations, public organisms and other public legal and the wind up of the company if certain circumstances are met. entities. 4.2 On what grounds can a company be placed into each winding up procedure? 3.4 Who manages each process? Is there any court involvement? The company may be wound up if the creditors’ agreement is not The proceeding is managed by the Insolvency Administration approved, if it is decided by itself, and/or if it has no assets. appointed by the judge. The court may render authorisations for special sales of assets, process the amendment of collective 4.3 Who manages each winding up process? Is there any working conditions, collective relocations, collective suspensions or court involvement? dismissals of contracts, celebration of creditors’ meeting and certain auctions of assets. The winding up process is managed by the Insolvency Administration and the court approves the winding up plan. After this, the winding up operations are carried on by the Insolvency Administration with regard to the approved winding up plan.

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The court authorises certain sales (when privileged creditors rules are breached, managers may be found liable for are involved) and process the amendment of collective working company’s debts, including tax and social security debts. conditions, collective relocations, collective suspensions or On the other hand, when part of the company or the whole assets are dismissals of labour contracts. sold and there are working contracts in force, the acquirer will be liable for social security debts. 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including 6 Employees the enforcement of security)?

Spain 6.1 What is the effect of each restructuring or insolvency When the winding up phase is opened, the Insolvency Administration procedure on employees? has to provide the winding up plan to the court, where the parties may make remarks or proposals of amendment. Working contracts are enforced until they are subrogated by an Shareholders rarely have any chance to influence in the winding up acquirer or dismissed. If the company or part of it is transferred, as process. well as the related working contracts to those parts. Creditors with secured credits may execute their warranties On the other hand, sometimes it is necessary to implement – mortgage loans – once a year elapses from the opening of the proceedings for material amendment of collective working insolvency proceeding without the winding up having commenced. conditions, collective relocations, suspension, collective dismissal Other creditors whose right is born after the insolvency proceeding or reduction of the working day in order to reduce expenses. is declared, may ask for the payment of their credits if they are not paid in time. The insolvency administration has to render a report about the 7 Cross-Border Issues winding up operations every three months. 7.1 Can companies incorporated elsewhere use 4.5 What impact does each winding up procedure have on restructuring procedures or enter into insolvency existing contracts? Are the parties obliged to perform proceedings in your jurisdiction? outstanding obligations? Will termination and set-off provisions be upheld? They may be, in the case where the debtor has the centre of his main interest in Spain. Existing contracts are kept in force during the winding up until they If a company is incorporated in another state, but their main assets are terminated or subrogated by other parties. are in Spain, Spanish courts will be competent to declare the If a contract is not necessary for the debtor, it may be terminated by a insolvency proceeding. specific procedure in order to avoid raising the debt of the company. If some assets from the company or a part of it is transferred, and 7.2 Is there scope for a restructuring or insolvency there are contracts relating to this assets, the may be kept in force process commenced elsewhere to be recognised in with the acquirer of those. your jurisdiction?

4.6 What is the ranking of claims in each procedure, There may be the possibility of an insolvency proceeding including the costs of the procedure? commenced elsewhere, and the competence may be in dispute and declared the competence of Spanish courts if it is declared that the There is no specific ranking of claims. It will depend on the number centre of his main interest is in Spain. of creditors and assets of the bankrupt company. The “bigger” it is, the more claims can be submitted. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in 4.7 Is it possible for the company to be revived in the other jurisdictions? Is this common practice? future? Most of the Spanish companies only have domestic establishments, If the insolvency proceeding has ended, the company is technically so it is not common for the companies to enter into insolvency “closed”. The proceeding may be re-opened if new assets or rights that proceedings in other jurisdictions. may be used to pay credits appear, and after paying them, it is closed However, in some cases where a group of companies goes bankrupt again. However, that does not mean that the company is revived. and the subsidiaries are in foreign countries, the subsidiaries enter However, sometimes a big part of the company keeps working and into insolvency proceedings in other jurisdictions. its assets are acquired by another company that also owns his brands or trademarks, but this does not mean technically that the company is revived. 8 Groups

5 Tax 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders? 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? Generally, the insolvency of a group of companies is controlled by the same insolvency administration or there is a coordination among If the insolvency proceeding is not applied in time or certain

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them. When a group of companies is declared bankrupt, they may administration have to be made via e-mail, but there isn’t any be declared so within the same court procedure, each company proposal or development regarding the use of technology or situation is treated separately but in coordination with the others. In reducing the involvement of the courts in the laws. rare cases, the group of company insolvency proceeding is treated as it would be a single legal unit. 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime 9 Reform in your jurisdiction? During the last year there have been several amendments to the 9.1 Have there been any proposals or developments in Insolvency Act, but currently there are no other proposals. Spain your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws of your jurisdiction, which are intended to make insolvency processes more streamlined and efficient?

Currently it is established at the Spanish Insolvency Act that a major part of the communications between creditors and the Insolvency

Antonia Magdaleno Carmona Julián Chamizo Renau SUE Abogados, S.L.P. SUE Abogados, S.L.P. C/ Roger de Lauria nº 24 – 1º C/ Roger de Lauria nº 24 – 1º 46.002 Valencia 46.002 Valencia Spain Spain

Tel: +34 963 215 740 Tel: +34 963 215 740 Email: [email protected] Email: [email protected] URL: www.sueabogados.com URL: www.sueabogados.com

Antonia Magdaleno is the managing partner of SUE Abogados, S.L.P. Julián Chamizo Renau is a senior associate within the Corporate law Prior to establishing this law firm in 2011, she was partner of another team of SUE Abogados, S.L.P. since January 2013, where he advises national law firm in Spain and belonged to the litigation and bankruptcy in Corporate, M&A, finance, restructuring & insolvency and intellectual department between 1999 and 2011. property matters. Listed by legal directory Best Lawyers under the “Insolvency and He has a degree in Law from Valencia University and has studied in a Reorganization Law”, directory by IFLR1000 and Chambers and LL.M. from Ghent University in Belgium, and a specialisation course in Partners Europe. restructuring & insolvency at ESUE Business School. Teacher in the Litigation Law Department of the Faculty at Law of the Julián has advised an important number of companies in restructuring University of Valencia between 2007 and 2013. & insolvency matters, and managed insolvency proceedings, having participated actively at the biggest insolvency proceeding of Martinsa Arbitrator and Chair of the Committee of Arbitrators, experts in Fadesa as assistant delegate of the Insolvency Administration. commercial and corporate arbitration of the European Arbitration Association. Julián is author of the chapter “Competition law in the European market and latest events. Analysis of Google Shopping case, the Bankruptcy administrator appointed by different commercial courts biggest sanction”, within the legal review of the valencia region ed. in Spain and she has participated in leading bankruptcies such as Tirant lo Blanch, 2018. He has published several articles in financial Llanera, Urazca, Martinsa Fadesa, Viajes Marsans, Supermercados newspapers and academic law magazines. Madrid and Grupo Industrial Hierros Sopena, as well as being designated in the Fergo Aisa bankruptcy, appointed by the CNMV.

SUE Abogados is a top law firm specialising in Commecial and Corporate Law, M&A, Intellectual Property, Litigation, Arbitration, Banking & Finance, Employment law and Restructuring & Insolvency. We have offices in Valencia, Madrid and Bilbao, established under a very dynamic structure and a size that ensures close relationships with clients and highly personalised treatment, whilst permitting us to work and respond to their problems with a wide scope of agility and flexibility. We are experts in Business Law, especially in Insolvency Law. The law firm, as well as its partners and associates, have been appointed as Insolvency Administrators in the most important bankruptcy proceedings in Spain (Martinsa Fadesa, Llanera, Viajes Marsans, Urazca, etc.). Our proficiency has been very appreciated not only by the Spanish Courts but also by most clients, thus allowing the law firm to act as consultants for companies voluntarily applying for bankruptcy proceedings such as Reyal Urbis (the second-most important bankruptcy proceeding in Spain).

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Sweden Paula Röttorp

Hannes Snellman Attorneys Ltd Carolina Wahlby

in accordance with the Business Reorganisation Act. In case of a 1 Overview negotiated agreement being made during a formal restructuring, the administrator is generally involved. 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2 Key Issues to Consider When the Sweden has elements of offering a debtor-friendly procedure – Company is in Financial Difficulties company restructuring and protecting over-indebted debtors from its creditors in order to recover the business. At the same time, 2.1 What duties and potential liabilities should the company restructurings cannot go on forever (a bit more than one directors/managers have regard to when managing a year is the maximum) and no write down of debt will occur unless a company in financial difficulties? Is there a specific qualified majority of creditors vote in favour of it. point at which a company must enter a restructuring or insolvency process? The second procedure – the bankruptcy processes – is a creditor- friendly procedure where the administrator shall strive to achieve the best possible outcome for the creditors. The board of a limited liability company is obliged to prepare a control balance sheet if the board members have reason to believe In general, when it comes to insolvency proceedings, we would that the net assets of the company are less than half of the share place Sweden on the more creditor-friendly end of the scale. capital or if an attempt of levy of execution (Sw. utmätning) has Please note that our answers below are only taking into account taken place without there being sufficient assets. debtors as limited liability companies and do not include the special Upon preparing the control balance sheet, the board must promptly provisions that apply for companies under the supervision of the summon an extraordinary general meeting (referred to as the first Swedish Financial Supervisory Authority. control general meeting) at which the shareholders shall decide whether to liquidate the company or not. If no liquidation decision 1.2 Does the legislative framework in your jurisdiction is made despite the first control balance sheet showing that less than allow for informal work-outs, as well as formal half of the share capital was intact, a second control balance sheet restructuring and insolvency proceedings, and to must be prepared and a second control general meeting must be held what extent are each of these used in practice? within eight months from the first general meeting. Should the share capital then not be fully restored, the shareholders are obliged to The Business Reorganisation Act (Sw. lag (1996:764) om resolve to liquidate the company. Absent such decision, the board företagsrekonstruktion) provides for formal proceedings involving members are obliged to initiate the liquidation process themselves. a court, and is used in practice. The intention of the legislator Should the board fail to take any of the required measures in a timely has been that the reorganisation would be used at an early stage manner and incur further liabilities, the board members become of the financial difficulties, but in practice companies tend to then personally and jointly liable for all such liabilities incurred from the try to find solutions through informal out-of-court restructurings date they should have taken the relevant action until doing so. The while applying for a formal reorganisation procedure first when the same applies to any representative of the company or a shareholder difficulties are rather advanced. The reason for this is often to avoid of the company that is aware of the board’s failure and nonetheless the publicity that the formal reorganisation procedure entails. participates in incurring further liabilities. There is no legislative framework for informal out-of-court There is no obligation to enter any reorganisation proceeding or restructurings. However, informal debt write-downs and extensions to apply for bankruptcy. However, the board members should be involving only the main creditors are commonplace. Informal aware of the risk of becoming personally liable for tax payments elements may also occur within formal insolvency proceedings, as (see question 5.1 below). Further, not initiating an insolvency some creditors may be willing to accept a renegotiation of terms to proceeding may under certain circumstances have consequences. enable the company to continue as a going concern. For example, the Swedish Penal Act (Sw. brottsbalken) comprises If the parties involved in an informal work-out so agree, they certain criminal acts jointly referred to as crimes against creditors, can amend existing agreements between them. However, it will of which one is to continue to run a business, utilising thereby only bind the parties involved. To also bind non-consenting considerable means without a corresponding benefit to the company, parties, the company will have to initiate a formal reorganisation although the representatives of the company are aware that the

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company is insolvent or is in manifest danger of becoming insolvent. debtor has transferred within a hardening period is annulled unless it In addition thereto, the general provisions regarding liability for was provided when the debt was created or was transferred without damages by negligence are stipulated by the Swedish Companies delay after the creation of the debt. Act (Sw. aktiebolagslagen (2005:551)) which will apply. It is not a general requirement that the transaction was made with actual intent to defraud creditors, and some clawback provisions 2.2 Which other stakeholders may influence the can be applied even if the company was not insolvent or became company’s situation? Are there any restrictions on the insolvent as a result of the transaction but thereafter entered into action that they can take against the company? For company restructuring or bankruptcy. example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention 3 Restructuring Options Sweden of title arrangements) applicable to the laws of your jurisdiction? 3.1 Is it possible to implement an informal work-out in Counterparties, employees and creditors may try to influence the your jurisdiction? company’s situation within the boundaries of their agreement with the company. Once it is suspected that the company may be in See question 1.2 above. financial difficulties, most counterparties and creditors will start to investigate what actions they may take to limit their losses in case 3.2 What formal rescue procedures are available in a formal insolvency procedure would follow. Counterparties and your jurisdiction to restructure the liabilities of creditors should in their interactions with the company be aware of distressed companies? Are debt-for-equity swaps the clawback risks (see question 2.3 below). and pre-packaged sales possible? To what extent can A creditor may try to collect a claim through the Swedish Enforcement creditors and/or shareholders block such procedures or threaten action (including enforcement of security) Authority or apply for the debtor to be put in bankruptcy (or, very to seek an advantage? Do your procedures allow you rarely, company restructuring). to cram-down dissenting stakeholders? There are no special rules or regimes which apply to particular types of unsecured creditor prior to entering into any formal insolvency The key restructuring procedure is reorganisation in accordance with proceeding. the Business Reorganisation Act. The purpose of such procedure is to give companies in financial difficulties a possibility to avoid 2.3 In what circumstances are transactions entered bankruptcy, by, for example, providing protection from certain into by a company in financial difficulties at risk of enforcement actions from creditors or giving a grace period in challenge? What remedies are available? respect of payments of debts that had arisen before the reorganisation was initiated. Further, one common reason to apply for company Once in a formal reorganisation procedure (provided that it involves restructuring is to try to achieve a debt write-down. Provided that debt composition proceedings) or in a bankruptcy, an administrator a qualified majority has approved thereof, all unsecured debt will may seek to challenge transactions taken by the company prior to be written down pro rata and the company shall be given a grace proceedings initiated by way of clawback, upon which a transaction period of up to one year. A debt composition proposal, which yields is recovered to the company or the bankruptcy estate. at least 50 per cent of the amount of the unsecured debt, shall be deemed to be accepted by the creditors, where three-fifths of the Generally, a prerequisite for clawback is that the transaction has creditors voting have accepted the proposal and their claims amount adversely affected the creditors and the purpose of a clawback is to three-fifths of the total amount of claims held by the creditors that the clawback shall return the financial position of the relevant entitled to vote. Where the debt composition percentage is lower, company to as if the challenged transaction had not taken place. the debt composition proposal shall be deemed to be accepted where The time limits (the hardening periods) range from between three three-fourths of the creditors voting have approved the proposal months to eternity, depending on the type of transaction, but and their claims amount to three-fourths of the total amount of the transactions between related parties are generally easier to claw claims held by the creditors entitled to vote. back than transactions with third parties. During the reorganisation process, the management continues to The general clawback provision stipulates that any action whereby control the business and to run the daily operations of the relevant a creditor is unduly put in a better position than other creditors, or company, and the board of directors have full capacity to represent assets of the debtor are being deprived from the creditors or the the company. However, an administrator is appointed by the court debts of the debtor are increasing, may be clawed back if the debtor to supervise all activities. The company may not assume new legal was or, as a result (directly or indirectly) of the action, has become obligations, nor may it transfer, pledge or grant a third party any insolvent. However, this shall only apply if the counterparty knew, rights to property which is of substantial importance to the business or should have known, about the debtor’s insolvency and the operations without the consent of the administrator. Furthermore, circumstances that made the action undue. It is assumed that related the company is prohibited from paying, or granting security for, parties have such knowledge. any debt that occurred prior to filing for company reorganisation Further, a payment of a debt which has been made prior to initiating without the consent of the administrator. However, the absence of a formal insolvency proceeding and which was made by other than such consent does not affect the validity of the transaction. ordinary means of payment, or prior to the due date or with such As a main rule, a reorganisation may not continue for more than a amount that the financial situation of the debtor became considerably year. worse, may be clawed back if the circumstances under which the payment was made do not make it an ordinary payment. Swedish law does not as such recognise a “pre-pack” as an instrument. However, Swedish law does not explicitly prohibit Other clawback provisions relate to, inter alia, gifts, salaries or entities from taking steps and measures prior to a bankruptcy, such other remunerations. Another example is that security that the as finding suitable buyers for assets, which can be implemented in

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the bankruptcy. Which pre-pack measures may be taken must be decided on a case-by-case basis. 3.6 How is each restructuring process funded? Is any protection given to rescue financing? Debt-for-equity swaps may be made both by shareholders and by third parties if the shareholders approve of the equity issue. Third Most suppliers will start to require advance payments or payments parties who acquire distressed debt may use it to gain an equity upfront in order to deliver goods needed, wherefore the company interest in the debtor. will need cash at hand during the reorganisation. During the reorganisation, secured creditors may still enforce certain The state wage guarantee (see question 6.1 below) will provide some types of security. Other enforcement measures may only take place support, but a company is often dependent on contributions from its in respect of the debtor if there are special reasons to believe that shareholders or external funding in order to be able to continue to

Sweden the rights of a creditor are jeopardised. The court may then take run the business. appropriate measures to safeguard such rights. Although not provided for by law, in practice an administrator takes Upon request by a creditor, the court may appoint a creditors’ control of the funds of the company by having them transferred committee who the administrator should consult with during the to an escrow account controlled by the administrator during the reorganisation. A creditors’ committee may consist of a maximum reorganisation. of three creditors, and if the company has more than 25 employees, it is entitled to appoint a fourth member. 4 Insolvency Procedures 3.3 What are the criteria for entry into each restructuring procedure? 4.1 What is/are the key insolvency procedure(s) available to wind up a company? A prerequisite for entering into a reorganisation process pursuant to the Business Reorganisation Act is that the company is The key insolvency procedure is bankruptcy in accordance with incapable of paying its debts, or that such incapacity presumably the Bankruptcy Act (Sw. konkurslag (1987:672)), providing for all will occur in the near future. Further, an application to enter into assets of the debtor to be fairly distributed to the creditors and for a reorganisation shall be dismissed if there is no reason to expect the company to be subsequently dissolved. Further, the Companies that the reorganisation will be successful. In practice, courts often Act entails certain provisions regarding mandatory liquidation. approve an application for reorganisation so that an administrator is appointed and can investigate this further. 4.2 On what grounds can a company be placed into each winding up procedure? 3.4 Who manages each process? Is there any court involvement? A company can apply for bankruptcy voluntarily or be forced into bankruptcy upon the application of a creditor, if the company is A court approval is required in order to enter a reorganisation and considered insolvent. A company is considered insolvent if it cannot the court will also make the decision to terminate the reorganisation. pay its debts as they fall due and this incapacity is not temporary. A As described in question 3.2, an administrator is appointed by the statement by a company that it is insolvent is assumed to be correct, court to supervise the activities of the company. unless there are circumstances giving the court reason to believe that this is not the case. 3.5 What impact does each restructuring procedure have In case a creditor files for bankruptcy, it would have to provide on existing contracts? Are the parties obliged to evidence as to why the company would be insolvent or would perform outstanding obligations? Will termination and set-off provisions be upheld? have to rely on certain stipulated presumption rules. A creditor cannot force a company into bankruptcy if its claim is protected by sufficient security. A reorganisation provides protection to the company, as it prevents counterparties from terminating agreements by sole reason of the A mandatory liquidation must be initiated, inter alia, when the company’s late payments or performance (or anticipated delays of solidity is below the levels stipulated by the Companies Act (see such nature) if the company (with the consent of the administrator) question 2.1 above). upon request by the counterparty informs the counterparty that it wishes the agreement to continue in force. A provision in a contract 4.3 Who manages each winding up process? Is there any that a party may be entitled to terminate the agreement due to the court involvement? insolvency of the company may be unenforceable. If the contract stipulates that it is time for the counterparty to perform An application for bankruptcy must be submitted to the district its obligation under the contract, the counterparty may require that court, which should then make a prompt decision on the matter. The the company performs its obligations (e.g. pays) simultaneously, bankruptcy is managed by one or more administrators appointed by or that the counterparty receives security for such performance. the court who have the special insight and experience required and A counterparty may also in other situations be entitled to request are otherwise appropriate for the assignment, and the work of the security if necessary, in order to protect it from making a loss. administrator is supervised by the Swedish Enforcement Authority Set-offs will be accepted, with a few exceptions. A set-off is not (Sw. kronofogdemyndigheten). permitted if the debt was acquired (from someone else not having A liquidation will be administrated by a liquidator proposed by the the right of set-off) within a three-month period starting from when company and approved by the court or the Companies Registration the reorganisation was initiated or if the creditor reasonably should Office (Sw. bolagsverket) (the former if the liquidation is a part of have known about the insolvency. a court proceeding).

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Securities Depositories and Financial Instruments Accounts Act 4.4 How are the creditors and/or shareholders able to (SFS 1998:1479), security interests based upon mortgages granted influence each winding up process? Are there any in ships, or shipbuilding, or aircraft and reserve parts for aircraft. restrictions on the action that they can take (including Thereafter would be a creditor having received security in the the enforcement of security)? form of business mortgages or security in the form of real property mortgages. During the reorganisation, secured creditors may still enforce security if the creditor has the security assets in its possession, i.e. Thereafter there are claims of general priority, i.e. in the following excluding, for example, business mortgages and security obtained order of priority: costs for filing for bankruptcy; the costs for a through registration. previous reorganisation process; costs arising with the consent of a reorganisation administrator (in case there has been a preceding Levy of execution (Sw. utmätning) may not take place in respect of Sweden reorganisation procedure) provided that it has clearly arisen in the the debtor other than if the creditor has priority rights in respect of best interests of the creditors; audit costs; and employees’ salaries its claims (see question 4.6 below). and remunerations. Lastly, all other unsecured creditors will share the remaining funds 4.5 What impact does each winding up procedure have on (if any) pro rata between themselves and if all unsecured creditors existing contracts? Are the parties obliged to perform have been fully paid, the surplus will be paid to the shareholders. outstanding obligations? Will termination and set-off provisions be upheld? 4.7 Is it possible for the company to be revived in the The bankruptcy estate may choose to not honour existing future? agreements, and the counterparty will then have a claim on the company. However, there are no unified rules that apply to While the company is typically dissolved after its assets are the contracts of a company in bankruptcy. If there are specific liquidated, assets of the company, such as the brand name or provisions set out in any legal act, those will, however, override any business model, may be acquired for use in a new venture. If there clause in the agreement. Hence, all contracts will not automatically is a surplus after a bankruptcy, the company itself must, however, terminate and a clause stipulating that a counterparty may terminate not be liquidated, but this is a rather unlikely scenario. the agreement due to the bankruptcy may be unenforceable. If not regulated by law, the terms of the contract will apply. 5 Tax One law limiting the right to terminate an agreement is the Sales of Goods Act, but that provision is also invoked analogously in other contractual relationships. The creditor (or supplier or similar) may 5.1 What are the tax risks which might apply to a not terminate the agreement before giving the bankruptcy estate restructuring or insolvency procedure? the opportunity to step into the contract. If the estate decides to do so and the performance by the creditor is due, the creditor may Generally, a restructuring or insolvency procedure does not give rise demand that the estate completes its performance as well or, under to any further tax risks, but the procedure may result in forfeiture certain circumstances, that the estate provides security if necessary of tax losses. However, taxable income may crystallise in case of in order to protect him against loss. If the estate does not step into informal work-outs. the agreement or grant security in accordance with the aforesaid, the A failure to apply for a restructuring or insolvency procedure when creditor may terminate the agreement. a company becomes unable to pay all taxes in a due manner may As regards set-offs, please see question 3.2 above. result in the board members incurring personal liability for the tax payments of the company. Hence, it is important that all taxes are duly paid. 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 6 Employees The Bankruptcy Act prioritises all costs of the bankruptcy procedure and debt arising after the time of bankruptcy. Any surplus thereafter shall be distributed to the creditors in accordance with the Priority 6.1 What is the effect of each restructuring or insolvency Rights Act (Sw. förmånsrättslag 1970:979). If, however, the procedure on employees? creditor enforces a security on its own, which is possible for certain so-called possessory (see question 4.4 above), the costs of the A bankruptcy or reorganisation does not automatically cause the bankruptcy estate cannot be taken from such proceeds. employments to be terminated. If a Swedish company is insolvent According to the Priority Rights Act, first debts secured by and therefore unable to pay salaries due to its employees, the state specific property are paid out of the proceeds of the sale ofthat wage guarantee (Sw. lönegaranti) will be triggered. A prerequisite specific property, including, inter alia, (in the order of priority as for the guarantee to be applicable is that the company has been listed): maritime liens and aircraft liens; international interests in declared bankrupt or is in a company reorganisation procedure and aircraft and aircraft engines which are registered pursuant to the the total amount per employee that can be paid out corresponds to International Interests (Mobile Equipment) Act (2015:860); pledges four base income amounts (Sw. prisbasbelopp), which for 2018 adds and rights to retain possession of personal property as security for up to a total of SEK 182,000. All different categories of employees a debt (possessory liens); as well as grants of security interests are covered, excluding, however, independent contractors. As a made on the basis of registration or notice pursuant to the Central general rule, the guarantee only covers salary claims that have fallen due within three months prior to the date of the bankruptcy filing.

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7 Cross-Border Issues 8 Groups

7.1 Can companies incorporated elsewhere use 8.1 How are groups of companies treated on the restructuring procedures or enter into insolvency insolvency of one or more members? Is there scope proceedings in your jurisdiction? for co-operation between officeholders?

For members of the EU (other than Denmark), the new Regulation From a legal point of view, each entity is treated separately from (EU) 2015/848 of the European Parliament and of the Council of 20 one another. Notwithstanding the aforesaid, it is commonplace that May 2015 on insolvency proceedings (the Insolvency Regulation), members of the group file at the same time and request that the same Sweden which came into force on 26 June 2017, provides that the courts administrator should be appointed for all Swedish members of the of the EU Member State within the territory of which the centre group. of the debtor’s main interests is situated shall have jurisdiction The new Insolvency Regulation (see question 9.1 for further to open insolvency proceedings (main insolvency proceedings). details) includes provisions to enable an administrator to request the The centre of main interests shall be the place where the debtor opening of group coordination proceedings if one or more members conducts the administration of its interests on a regular basis and of a group are in bankruptcy proceedings in different jurisdictions. which is ascertainable by third parties. However, if a company has If the request is approved, a coordinator will be appointed and may an establishment within the territory of another Member State, the make recommendations to the administrator. courts of such Member State may open insolvency proceedings in respect of such assets (territorial proceedings). Generally, territorial proceedings may not be opened if main insolvency proceedings 9 Reform have been initiated, but there are certain exceptions to this general rule. 9.1 Have there been any proposals or developments in As regards situations where the Insolvency Regulation does not your jurisdiction regarding the use of technology or apply, a Swedish court may initiate insolvency proceedings to the reducing the involvement of the courts in the laws extent it deems that the centre of main interests of the company is of your jurisdiction, which are intended to make located in Sweden, if the company has assets in Sweden or in a insolvency processes more streamlined and efficient? limited number of other scenarios. There are no such proposals or developments.

7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in 9.2 Are there any other governmental proposals for your jurisdiction? reform of the corporate rescue and insolvency regime in your jurisdiction? The main rule is that foreign insolvency proceedings will not be recognised or enforced in Sweden. Notwithstanding the aforesaid, The Insolvency Regulation came into force on 26 June 2017, and Swedish authorities must recognise restructuring and insolvency will further harmonise the insolvency proceedings in the EU. proceedings initiated in accordance with the Insolvency Regulations In 2010 the Swedish government published an investigation on a (see question 7.1 above). Further, the Nordic countries have agreed possible reform of the legal framework governing insolvency and on the Convention between Denmark, Finland, Norway, Sweden and corporate restructurings (SOU 2010:2) according to which it has Iceland on Bankruptcy which continues to apply between all Nordic been proposed that reorganisations and bankruptcies should be countries except between Sweden and Finland (as the Insolvency governed by the same regulation and be a combined proceeding. Regulation supersedes the convention). A need to make the insolvency proceedings more efficient was identified, but the proposals made in the investigations have not 7.3 Do companies incorporated in your jurisdiction yet resulted in a proposition to amend the legal framework for restructure or enter into insolvency proceedings in insolvencies. other jurisdictions? Is this common practice?

It would be unusual for a Swedish company to restructure or enter into an insolvency proceeding in a jurisdiction other than Sweden.

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Paula Röttorp Carolina Wahlby Hannes Snellman Attorneys Ltd Hannes Snellman Attorneys Ltd Kungsträdgårdsgatan 20 Kungsträdgårdsgatan 20 SE-103 96 Stockholm SE-103 96 Stockholm Sweden Sweden

Tel: +46 760 000 060 Tel: +46 760 000 070 Email: [email protected] Email: [email protected] URL: www.hannessnellman.com URL: www.hannessnellman.com Sweden The Managing Partner of the Stockholm office, Paula Röttorp has Carolina Wahlby is a managing associate in the Finance team, and vast experience of finance-related work, including restructurings specialises in financing, including providing advice on restructurings and insolvencies. She has experience of representing a variety of and bankruptcies, where she has acted as counsel on all sides of the different parties, including debtors, distressed financial institutes, proceedings. syndicates of banks and other creditors and counterparties, and has Her more recent experience includes representing groups with also been a member of creditors’ committees appointed by the court. insolvency procedures in their Swedish subsidiaries, representing a She is experienced both in formal and informal reorganisations, and creditor considering a pre-pack in relation to the bankruptcy of one of of providing advice in cases in simultaneous proceedings in several its key counterparties as well as representing clients in debt-to-equity jurisdictions. In addition thereto, she advises clients on transactions swap discussions. involving purchase of debt and debt-for-equity swaps. Examples of her previous experience include representing Kaupthing Bank when entering financial difficulties, and she has represented a syndicate of banks in the cross-border reorganisation of the publicly listed Nordic Mines.

Hannes Snellman is a premier Nordic law firm focusing on significant business transactions and complex dispute resolution. We serve our clients with commitment, creativity and quality. Hannes Snellman is a key player in the Nordic financial centre with the capacity and specialist know-how to handle any demanding local or cross- border transaction or dispute. Hannes Snellman’s restructuring and insolvency practice provides a broad range of legal, strategic and commercial advice, with extensive experience in domestic and international restructuring and insolvency matters, to navigate clients through the turmoil of situations involving financially distressed companies. Our insolvency practice represents debtors, creditors, bondholders, investors, boards of directors, auditors, and creditors’ committees in complex corporate restructurings, bankruptcies, work-outs and in bankruptcy planning, negotiations and litigations. The insolvency team works closely with the corporate, finance, tax and litigation practices to provide a complete and comprehensive service to the Firm’s clients.

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Switzerland Tanja Luginbühl

Lenz & Staehelin Dr. Roland Fischer

1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a The recovery and insolvency of companies incorporated in company in financial difficulties? Is there a specific Switzerland is governed by the Swiss Code of Obligations (CO) and point at which a company must enter a restructuring the Swiss Debt Enforcement and Bankruptcy Act (DEBA). The CO or insolvency process? and the DEBA provide for a fair balance of rights and obligations of both debtors and creditors. The CO provides for various inalienable and non-transferable In 2014, the DEBA was amended to make in-court restructuring responsibilities of the directors of a Swiss company that specifically options more appealing to debtors. Based on our experience so apply in financial distress. The regime is identical for the far, this seems to have slightly shifted the balance but it is yet to be corporate forms most frequently used in practice, i.e., corporations seen how the most recent revision of the DEBA will influence the (Aktiengesellschaften/sociétés anonymes) and limited liability restructuring practice. In turn, the trigger events set forth in the CO companies (Gesellschaften mit beschränkter Haftung/sociétés à to initiate insolvency proceedings are currently under review and it résponsabilité limitée). is to be expected that the focus will shift from balance sheet triggers If, based on the last financial statements, half of the share capital and to liquidity triggers. the legal reserves of the company are no longer covered by its assets (article 725 par. 1 CO, Kapitalverlust/perte de capital) the directors, 1.2 Does the legislative framework in your jurisdiction inter alia, have to convene an extraordinary shareholders’ meeting allow for informal work-outs, as well as formal and to propose appropriate restructuring measures. If a Swiss restructuring and insolvency proceedings, and to company is over-indebted (überschuldet/surendetté) within the what extent are each of these used in practice? meaning of article 725 par. 2 CO, i.e., if its assets no longer cover its liabilities, the board of directors must notify the court without There are two main types of formal insolvency and restructuring delay unless certain creditors are willing to subordinate their claims proceedings in Switzerland: bankruptcy (i.e., liquidation) proceedings to those of all other company creditors in an amount sufficient to (Konkursverfahren/faillite); and composition proceedings cover the capital deficit and any losses anticipated to be incurred in (Nachlassverfahren/concordat). Whereas in bankruptcy proceedings the next 12 months. Notification of the court will typically lead to a company is eventually wound up, composition proceedings can the opening of bankruptcy proceedings. Furthermore, bankruptcy either: (i) be used to liquidate and realise the debtor’s assets in a proceedings have to be initiated if a meeting of shareholders resolves more flexible manner than in bankruptcy (composition agreement on the dissolution of the corporation as a result of its illiquidity with assignment of assets); (ii) result in a debt restructuring (be it (zahlungsunfähig/insolvable) pursuant to article 191 DEBA. through a debt-rescheduling or a dividend agreement or a combination thereof); or (iii) be used as a mere restructuring moratorium, which As an alternative to filing for bankruptcy, a company (or a creditor may be terminated without the need to reach a composition agreement entitled to request the opening of bankruptcy proceedings) may or to open bankruptcy liquidation proceedings if the debtor can be apply for the postponement of bankruptcy (Konkursaufschub/ successfully restructured during the moratorium. Further, Swiss ajournement de faillite) or the opening of composition proceedings. law provides for the possibility of an informal work-out; please see However, it is not required for the admissibility of composition question 3.1 below for more details. Special insolvency regimes exist proceedings and the grant of a moratorium that the company is over- for certain types of companies, most notably banks, securities dealers, indebted within the meaning of article 725 CO, i.e. if its assets no insurance companies and other players in the financial industry. longer cover its liabilities, or if it is unable to pay its debts within the meaning of article 190 par. 1 section 2 DEBA. Still, the debtor It is fair to say that although both types of formal proceedings are used in practice, bankruptcy proceedings are opened significantly must make it plausible to the court that over-indebtedness and/or more frequently than composition proceedings. Due to the higher illiquidity are likely to occur in the near or more distant future unless costs linked to the latter, they are primarily (albeit not exclusively) a restructuring is pursued under the protection of a moratorium. used by major companies in financial distress. Furthermore, court precedents hold that a company which is over- indebted may continue to trade if there are good prospects that the

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company can be restructured within a short period of time. The available enforcement actions under the DEBA are the same timeframe available to the directors is typically viewed to be in for all unsecured creditors. This notwithstanding, the claims of the range of four to six weeks from the determination of over- certain creditor categories such as employees or social security indebtedness. insurances are privileged in the context of insolvency proceedings Directors’ liability typically arises in bankruptcy. The general (cf. also question 4.6 below) and some creditors may have additional legal basis as regards the civil liability of directors (Haftung für contractual rights vis-à-vis the debtor under Swiss substantive laws Geschäftsführung/responsabilité dans la gestion) is article 754 CO, (e.g. the right of termination of the landlord in case of non-payment pursuant to which the members of the board of directors and any person of the rent). A particular constellation in this context consists in entrusted with the management or the liquidation of a corporation the so-called lien of the landlord (Retentionsrechts des Vermieters) shall be liable for damages “caused by wilful or negligent violation which, under certain circumstances, provides that the inventory of their duties”. Accordingly, the liability of a director requires: (i) a kept in the premises leased under a commercial lease shall secure Switzerland breach of the director’s duties; (ii) damages caused to the corporation outstanding rent payments for a period of up to a year-and-a-half. If or a particular creditor; (iii) a wilful or negligent conduct (fault); the lessee is declared bankrupt or otherwise liquidated by means of and (iv) a causal link between the breach and the damage. Damages formal insolvency proceedings, the landlord would need to register typically cover the increase of loss that occurred between the moment its claims and the pertaining lien – subject to a number of limitations the directors should have known of the corporation’s distressed and requirements – in the course of such proceedings. Whether or situation and failed to take appropriate actions and the moment the not such claims and the lien would then be admitted to the schedule bankruptcy was actually declared (Konkursverschleppung/retard de of claims is decided by the receiver in bankruptcy, with other la prononcé de la faillite). According to the above, courts have held creditors being able to contest both the existence and amount of the directors who failed to take the steps required by law by not notifying claim itself as well as the lien. the court about the over-indebtedness of the company liable. Further Finally, with regard to retention of title arrangements in general, liability risks may arise in the context of transactions that are at risk it should be noted that while Swiss law in theory allows for such of being challenged (see question 2.3). arrangements to be established, the pertaining formal requirements Several provisions of the Swiss Criminal Code (CrimC) may also are rather cumbersome and the retention of title does not apply in the context of the activity undertaken by a director. Article protect against the bona fide acquisition of title by a third party. 165 CrimC punishes debtors whose acts of mismanagement have Consequently, such constellations are of very little relevance and do caused the company’s bankruptcy (Misswirtschaft/gestion fautive). not confer any additional creditor rights in insolvency proceedings. This criminal provision expressly refers to the case of the debtor who, by means of an insufficient capital endowment, causes or 2.3 In what circumstances are transactions entered aggravates its over-indebtedness before being declared bankrupt. into by a company in financial difficulties at risk of Special attention must also be paid to article 167 CrimC, which challenge? What remedies are available? deals with the issue of the advantages granted to certain creditors by an insolvent debtor who is subsequently declared bankrupt According to the DEBA, certain preferential or fraudulent acts (Bevorzugung eines Gläubigers/avantages accordés à certains made by the debtor within certain suspect periods may become créanciers). As for disqualification (Berufsverbot/interdiction subject to challenge. The avoidance regime set forth in articles d’exercer une profession) issues, article 67 par. 1 CrimC (which is 285 et seq. DEBA provides for three different avoidance actions in fact very rarely implemented) provides that the court may prevent (Anfechtungsklage/action révocatoire), i.e.: (i) the action to avoid a convicted person from exercising their profession for a period gratuitous transactions (Schenkungsanfechtung/révocation des extending from six months to five years if this person has been libéralités) which targets, in particular, all gifts and all dispositions punished either by an imprisonment sanction exceeding six months made by the debtor without any, or without adequate, consideration or a fine exceeding 180 day rates for an offence committed within during the year prior to the opening of bankruptcy proceedings, the the exercise of a profession when the circumstances give reason to granting of a moratorium or the seizure of assets; (ii) the voidability fear new abuses from the convicted person. of certain specified transactions during the year prior to the opening of bankruptcy proceedings, the granting of a moratorium or the seizure of assets while the debtor is already over-indebted 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the (Überschuldungsanfechtung/revocation en cas de surendettement) action that they can take against the company? For i.e., the granting of a security interest for existing debts without example, are there any special rules or regimes which being, by prior agreement, contractually obligated to create the apply to particular types of unsecured creditor (such relevant security interest, the settlement of a monetary claim in a as landlords, employees or creditors with retention manner other than by usual means of payment, or the payment of a of title arrangements) applicable to the laws of your debt which was not yet due, in each case provided that the recipient jurisdiction? is unable to prove that it was unaware and must not have been aware of the debtor’s over-indebtedness; and (iii) the avoidance for intent The company’s statutory auditors (Revisionsstelle/organe de (Absichtsanfechtung/révocation pour dol) which targets dispositions révision) must notify the court if the company is over-indebted and and other acts made by the debtor within a period of five years the board of directors fails to notify the court itself. In addition, prior to the opening of bankruptcy proceedings, the granting of creditors may petition the court to open bankruptcy proceedings a moratorium or the seizure of assets if the disposition was made or composition proceedings in respect of the company under by the insolvent with the intent to disadvantage its creditors or to certain circumstances. As long as no such proceedings have been prefer certain creditors to the detriment of other creditors and if the opened by the court, creditors may take the same debt enforcement privileged creditor knew or should have known of such intent. For all actions against a company in financial distress as they may against challenges, it is further required that the challenged transaction has a company in good standing. Also, there are no special rules caused damages to other creditors of the debtor. The rules regarding and regimes applicable to particular types of unsecured creditors avoidance for intent as well as avoidance of gratuitous transactions as far as the enforcement of their claims is concerned, i.e. the provide for an inversion of the burden of proof whenever these

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transactions are entered into by related parties (including affiliated as a consequence of such debt-rescheduling or dividend agreement entities). Accordingly, in such cases the benefiting party must prove and once such agreement has been adopted by the required quorum of that it could not have been aware of the disproportion between creditors and the competent court, the debtor would have full power performance and consideration (in case of avoidance of gratuitous to manage the company’s affairs. The composition agreement must transactions) or of the intention of the insolvent debtor to prefer be approved by a majority of creditors. These are rarely used to certain creditors over others (in case of avoidance for intent). restructure large companies. If all prerequisites are met, the court orders the defendant to return Debt-for-equity swaps and/or composition agreements the specific assets to the estate. If the return of a specific asset is no with incorporation of a company (Nachlassvertrag mit longer possible, the court may order the defendant to compensate Gesellschaftsgründung/concordat avec constitution de société) are the estate in cash. In recent case law, the Swiss Federal Supreme admissible in Switzerland. In a typical debt-for-equity swap creditors Court has shown a tendency to apply rather low standards for a receive interests in the debtor in proportion to their recognised claims. Switzerland successful avoidance for intent. Under a composition agreement with incorporation of a company, the debtor undertakes to assign its assets to a newly created company in which the creditors obtain interests in proportion to their recognised 3 Restructuring Options claims. Furthermore, pre-packaged sales are possible under Swiss law. Such sales may require the consent of the court-appointed administrator (Sachwalter/commissaire) and the court. 3.1 Is it possible to implement an informal work-out in your jurisdiction? Specific rules apply to debt-for-equity swaps for certain entities that are subject to a special insolvency regime, most notably to banks. In case of a loss of capital (Kapitalverlust/perte de capital), the During the moratorium, creditors of claims are not entitled to board of directors must convene an extraordinary shareholders’ commence or continue debt enforcement proceedings (Betreibung/ meeting and propose appropriate restructuring measures (article 725 poursuite). This restriction does not apply to creditors whose par. 1 CO, see question 2.1). No court needs to be involved for the claims are secured by real estate who are, however, precluded from proposition or implementation of such measures. foreclosing on the real estate. While, according to article 725 par. 2 CO, there is a general obligation As soon as a draft composition agreement (Nachlassvertrag/ to notify the court in case of over-indebtedness (Überschuldung/ concordat) is proposed, the administrator convenes a creditors’ surendettement), court precedents hold that a brief informal work- meeting. Only creditors who have filed claims in time are given the out may be carried out without court involvement in case of good right to vote in the creditors’ meeting. Other than the right to vote in prospects of success (see question 2.1). Furthermore, the court the creditors’ meeting, creditors are generally not able to influence may, at the request of the board of directors or a creditor, postpone composition proceedings. the adjudication of bankruptcy, provided that there is the prospect Approval of the proposed composition agreement requires an of a financial reorganisation (Konkursaufschub/ajournement de la affirmative vote by a quorum of either (i) a majority of creditors faillite). Such reorganisation may occur under the supervision of an representing two-thirds of the total debt, or (ii) one-quarter of the administrator, which is instated by the court. That said, the opening creditors representing three-quarters of the total debt. Creditors of composition proceedings (see question 3.2 below) is requested with privileged claims and secured creditors (to the extent that more frequently in such instances. their claims are covered by the estimated liquidation proceeds of the collateral) will not be entitled to vote on the composition agreement. After approval by the creditors, the composition 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of agreement requires confirmation by the composition court. With distressed companies? Are debt-for-equity swaps the court’s confirmation, the composition agreement becomes and pre-packaged sales possible? To what extent can valid and binding upon all creditors of claims subject to the creditors and/or shareholders block such procedures composition agreement, whether or not they have participated in or threaten action (including enforcement of security) the composition proceedings and irrespective of their non-approval to seek an advantage? Do your procedures allow you of the composition agreement. It is, thus, possible to cram down to cram-down dissenting stakeholders? dissenting creditors in such proceedings. As opposed to the creditors, shareholders have no voting rights over Formal rescue procedures are available in the form of composition court-adjudicated composition agreements. The DEBA, though, proceedings. The restructuring of liabilities may be achieved in two provides that in order for an ordinary composition agreement to be ways, with or without a cram-down element: approved by the court, the equity holders must make an appropriate First, composition proceedings may be used as a mere restructuring contribution to the restructuring efforts. moratorium (article 296a DEBA). A termination is only possible if it can be established before the court that the debtor is restructured (without the need for a debt rescheduling or a dividend agreement). 3.3 What are the criteria for entry into each restructuring An individual agreement must be reached with each single creditor procedure? who is expected to make a concession. Composition proceedings are typically initiated by the debtor. No Second, where it is not possible to receive consent from each single specific trigger event exists which must have occurred for the debtor creditor, a composition agreement may be proposed. In a debt- to be entitled to request the opening of composition proceedings. In rescheduling agreement (Stundungsvergleich/concordat moratoire) addition, both creditors entitled to request the opening of bankruptcy the debtor offers the creditors full discharge of their claims according proceedings and the bankruptcy court may request the opening of to a fixed time schedule and, hence, the contractual terms and composition instead of bankruptcy proceedings. conditions of the credits are modified. In a dividend agreement (Prozent- oder Dividendenvergleich/concordat dividende), the debtor Upon receipt of a request to this effect, the court grants a provisional moratorium (provisorische Nachlassstundung/sursis provisoire) offers the creditors only a partial payment of their claims in connection of up to four months. Furthermore, a provisional administrator with a creditors’ waiver of the remainder. The debtor is not wound-up

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(provisorischer Sachwalter/commissaire provisoire) may be against full indemnification of the counterparty if the continuing appointed by the court to permit an assessment of the prospects of a existence of these contracts would defeat the restructuring purpose successful reorganisation or of a composition agreement. (article 297a DEBA). If the court finds that there are reasonable prospects fora successful reorganisation or that a composition agreement is 3.6 How is each restructuring process funded? Is any likely to be concluded, it must grant a definitive moratorium protection given to rescue financing? (definitive Nachlassstundung/sursis concordataire) for a period of four to six months and appoint an administrator (Sachwalter/ Costs triggered by composition proceedings qualify as debts of commissaire). Upon application by the administrator, the duration the estate (Masseverbindlichkeiten/dettes de la masse) and have of the moratorium may be extended to up to 12 and in particularly to be paid with priority from funds available at the outset of the complex cases, 24 months.

proceedings, trading results or realisation proceeds. External Switzerland funding is possible. An administrator will carefully analyse whether external funding is appropriate. 3.4 Who manages each process? Is there any court involvement? As to rescue financing, whether or not the provision of such financing is given protection depends on the individual circumstances of the If the provisional moratorium is made public, it is not compulsory restructuring context. In particular, a distinction needs to be made (but customary) to appoint an administrator during the provisional between rescue financings made available prior to the opening moratorium. An administrator must always be appointed for the of insolvency proceedings and loans granted in the context of duration of the definitive moratorium. In addition, the court may composition proceedings. As a result of the most recent revision of appoint a creditors’ committee (Gläubigerausschuss/commission the DEBA, transactions made during composition proceedings with des créanciers) to supervise the administrator and the proceedings the approval of the competent court or – if applicable – the creditors’ in general. committee are explicitly exempted from the scope of avoidance actions as described in question 2.3 above and, thus, benefit from The debtor may continue its business activities under the claw-back protection. In addition, any claims arising out of such supervision of the administrator and the court. The composition transactions qualify as debts of the estate (Masseverbindlichkeiten/ court may, however, direct that certain acts shall require the dettes de la masse) which are paid with priority before any administrator’s participation in order to be legally valid, or authorise distributions are made to other creditors. the administrator to take over the management from the debtor. Without the authorisation of the composition court or the creditors’ In light of the most recent court precedents, it is not clear if – and committee (if appointed), the debtor is prohibited from divesting, on what conditions – rescue financing granted prior to the opening encumbering or pledging certain assets and to grant guarantees or of insolvency proceedings (so-called Sanierungsdarlehen/prêt to make gifts. accordés dans un but d’assainissement) may benefit from claw-back protection. As a consequence of such unclear and ambiguous case Major steps in the composition proceedings require the involvement law, pre-insolvency rescue financing presents a rather high risk for of the court. This holds true for the opening of composition potential lenders. proceedings, the appointment of an administrator, the approval of certain transactions involving the debtor and, finally, the approval of the composition agreement. 4 Insolvency Procedures

3.5 What impact does each restructuring procedure have 4.1 What is/are the key insolvency procedure(s) available on existing contracts? Are the parties obliged to to wind up a company? perform outstanding obligations? Will termination and set-off provisions be upheld? The key insolvency procedure which leads to the winding up of a company is bankruptcy. Additionally, composition proceedings can Contractual relationships between the debtor and its counterparties be used to liquidate and realise the debtor’s assets in a more flexible generally continue to be effective unless (i) there is a specific statutory manner than in bankruptcy (composition agreement with assignment provision under applicable contract law providing for an automatic of assets, Nachlassvertrag mit Vermögensabtretung/concordat par termination of the relevant agreement or a termination right upon abandon d’actif) but with the same result, i.e., winding up of the the grant of a moratorium, or (ii) the specific contract provides for company. an automatic termination or a termination right upon the grant of a moratorium. If so, the termination would generally be valid and enforceable vis-à-vis the Swiss debtor and the administrator from a 4.2 On what grounds can a company be placed into each winding up procedure? Swiss insolvency law perspective. Notwithstanding the foregoing, there are certain restrictions (see question 3.4) which may prohibit A company may be placed into bankruptcy proceedings by the the debtor from disposing of its assets or continuing its business. competent court: (i) if a creditor whose claim has not been settled Further, the administrator has the authority to order conversion of but upheld within the course of debt enforcement proceedings has a performance owed by the debtor in kind into a monetary claim of successfully requested for the opening of bankruptcy proceedings corresponding value, which will then become subject to the terms (Konkursbegehren/réquisition de faillite); (ii) upon a debtor’s request of the composition agreement. Set-off rights are modified upon the by declaring to the court that it is insolvent; (iii) upon a creditor’s grant of a moratorium in much the same way as upon the opening of request if the company has committed certain acts to the disfavour bankruptcy proceedings (see question 4.5 below). of its creditors or if it has ceased payments or if certain events have Finally, with the consent of the administrator, the debtor happened during composition proceedings; or (iv) upon a notification may extraordinarily terminate long-term contracts of the court by the board of directors (or the statutory auditors) of the (Dauerschuldverhältnisse/contrats de durée) during the moratorium company that the company is over-indebted within the meaning of

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article 725 par. 2 CO. As to the opening of composition proceedings creditors and the court, private realisation of collateral is available with the intention of concluding a composition agreement with for movable assets on the basis of article 324 DEBA. assignment of assets, see question 3.3 above.

4.5 What impact does each winding up procedure have on 4.3 Who manages each winding up process? Is there any existing contracts? Are the parties obliged to perform court involvement? outstanding obligations? Will termination and set-off provisions be upheld? Bankruptcy proceedings are opened by the competent court and, within the course of bankruptcy proceedings, the insolvent company Whether existing contracts are terminated upon the initiation is represented exclusively by the bankruptcy administration. If of winding up procedures is primarily governed by substantive

Switzerland the rules for ordinary bankruptcy proceedings apply (summary contract law and the specific terms of a contract, which are generally proceedings are ordered if the proceeds of the bankrupt’s assets are upheld in a Swiss winding up proceeding. Under Swiss contract unlikely to cover the costs of ordinary proceedings or in non-complex law, certain types of contracts are terminated ex lege, whereas others circumstances), the bankruptcy estate is administered as follows: can be terminated immediately by one party in case of bankruptcy the bankruptcy administration publishes a notice of bankruptcy of the other. instructing all creditors and debtors to file their claims and debts If contracts are not terminated, the contracting party would generally within one month and inviting creditors to a first creditors’ meeting. have to perform its obligations in kind but it would be bound to The first creditors’ meeting may appoint a private bankruptcy accept a dividend rather than full payment or specific performance. administration acting instead of the state bankruptcy office as well However, should the bankruptcy administration elect in its sole as a creditors’ committee which has certain supervisory (and limited discretion to pursue the performance of a contract which was not or decisive) competencies. A second creditors’ meeting is convened was only partially fulfilled at the time of opening of the bankruptcy to pass resolutions as to all important matters, including the proceedings, the counterparty may demand that security be provided, commencement or continuation of claims against third parties and and it may further expect full performance by the bankruptcy the method of realisation of the assets belonging to the bankruptcy administration. The right of the bankruptcy administration to elect estate (the actual realisation, however, is reserved to the bankruptcy administrator). Following distribution of the proceeds (according to performance of the contract is excluded in the case of financial question 4.6 below), the bankruptcy administration submits its final future, swap, option and similar strict deadline transactions, if the report to the bankruptcy court. If the court finds that the bankruptcy value of the contractual performance can be determined based on proceedings have been completely carried out, it declares them market or stock exchange prices at the time of the opening of the closed. For composition proceedings with assignment of assets bankruptcy. The bankruptcy administration and the contractual please refer to question 3.4 above. Once a composition agreement partner are each entitled to claim the difference between the agreed with assignment of assets has been approved and confirmed by the value of the contractual performance and the market value at the creditors and the court, the liquidator would take over the realisation time of the opening of the bankruptcy proceedings. of the assets. Special insolvency rules apply to long-term contracts. Even if they are not terminated upon the opening of bankruptcy procedures, future claims arising under such long-term contracts will only be admitted to 4.4 How are the creditors and/or shareholders able to the schedule of claims if they cover the period until the next possible influence each winding up process? Are there any restrictions on the action that they can take (including termination date (calculated from the opening of bankruptcy) or until the enforcement of security)? the end of the fixed duration of a contract. If the bankruptcy estate has made use of performances under the long-term contracts, article Once bankruptcy proceedings have been opened, all debt 211a DEBA provides for the indemnification thereof to be a claim enforcement proceedings come to an end and creditors may not against the bankruptcy estate (Masseverbindlichkeiten/dettes de la commence new debt enforcement proceedings against the debtor. masse) and, thus, to be paid with priority. Apart from attending the creditors’ meetings (see question 4.3 above), Set-off rights are also available in bankruptcy but the substantive unsecured creditors have no individual rights to enforce their claims. set-off rules are subject to certain modifications in bankruptcy. First, Secured creditors have to (i) notify the bankruptcy administrator if a distinction needs to be made between (i) claims of the insolvent they are holding assets owned by the debtor within 30 days as from party forming part of the insolvency estate and claims against the the public announcement of the opening of bankruptcy proceedings, insolvent party (Konkurs- oder Nachlassforderungen/créances dans and (ii) hand in the collateral to the bankruptcy administrator. As a la faillite ou le concordat) to be satisfied with dividend payment out rule, contractual or statutory rights to privately realise such collateral of the proceeds of the insolvency estate on the one hand, and (ii) are no longer enforceable in bankruptcy. Notable exceptions exist claims of, and against, the insolvency estate (Masseforderungen und with respect to individual assets, most importantly for certain -verbindlichkeiten/créances et dettes de la masse) which are mainly intermediated securities. Furthermore, the restrictions do not apply characterised by the fact that they have come into existence only to certain types of security interests involving an outright transfer after the opening of insolvency proceedings with the consent of the of title. In any event, the secured creditors keep their preferential insolvency administration. As a rule, set off is only possible between rights with respect to the collateral and will be satisfied out of the claims of the same category. In addition, set off of claims of the first net proceeds of the sale of such collateral in priority to any other category is not admissible if (i) the debtor of the insolvent party creditors. Real estate mortgages are only realised and proceeds paid became a creditor of the latter only after the opening of bankruptcy out to creditors if their claims against the debtor are due; claims proceedings or the grant of a moratorium, respectively, or (ii) secured by real estate mortgages that are not yet due are transferred the creditor of the insolvent party did not become a debtor of the to the acquirer of the real property. insolvent party or the insolvency estate until after the opening of the For composition proceedings with assignment of assets, please bankruptcy proceedings or the grant of a moratorium, respectively. refer to question 3.5 above. Once a composition agreement with Furthermore, set off is voidable if a debtor of the insolvent party assignment of assets has been approved and confirmed by the acquires a claim against the latter prior to the opening of bankruptcy

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proceedings or the grant of a moratorium, respectively, but in prior years. The forgiveness of debt granted by shareholders is, under awareness of the insolvency in order to gain an advantage for certain circumstances, treated as a contribution for no remuneration himself or a third party to the detriment of the insolvency estate. and is subject to an issuance stamp duty (Emissionsabgabe/timbre d’émission) of 1 per cent, as is the case with respect to an increase of capital. The same analysis prevails in case of a reduction of the 4.6 What is the ranking of claims in each procedure, share capital followed by an increase of the share capital or the including the costs of the procedure? contribution for no remuneration (“Harmonika”). However, in case of a financial restructuring, a company may apply for a waiver of Secured claims (pfandgesicherte Forderungen/créances garanties issuance stamp duty to the extent that the increase of share capital, par gage) are satisfied directly out of the proceeds from the the contribution for no remuneration or the forgiveness of debt does realisation of the collateral. Should the proceeds not be sufficient to not exceed CHF 10,000,000 and further provided that such amount satisfy the claim of a secured creditor, such creditor shall rank as an covers losses of the company. In addition, even if such threshold is Switzerland unsecured and non-privileged creditor for the outstanding amount exceeded, a waiver of stamp duty can be obtained if levying such of its claim. duty would be excessively harsh for the company. Unsecured claims are ranked within three classes of claims. Leaving aside claims which are irrelevant in a corporate context, the 6 Employees classes are composed as follows: the first class consists of claims of employees (i) derived from the employment relationship which arose during the six months prior to the opening of bankruptcy 6.1 What is the effect of each restructuring or insolvency proceedings and which do not exceed the maximum insurable procedure on employees? annual salary as defined by the Federal Ordinance on Accident Insurance (which is currently CHF 148,200), (ii) in relation to Employment agreements are not automatically terminated upon the restitution of deposited security, and (iii) derived from social the declaration of bankruptcy of the employer. In case the compensation plans which arose during the six months prior to the employer becomes insolvent, though, an employee may terminate opening of the bankruptcy proceedings. The first class also includes the employment relationship without notice unless such employee claims of the assured derived from the Federal Statute on Accident is provided security for claims arising from the employment Insurance and from facultative pension schemes, as well as claims of relationship. Subject to such termination rights, the bankruptcy pension funds against employers. The second class includes claims administration may decide to maintain some employment contracts. of various contributions to social insurances. All other claims are The administration may also, as it happens in the majority of cases, comprised in the third class. Claims in a lower ranking class will cease the business and therefore decide to terminate the work only receive dividend payments once all claims in a higher ranking contracts. When doing so, it has to comply with the applicable notice class have been satisfied in full. Claims within a class are treated period. Unpaid salaries have to be claimed and scheduled. on a pari passu basis. Although there are some unsettled legal controversies, composition The costs incurred during the bankruptcy proceedings are debts of proceedings have a legal effect that is similar to bankruptcy with the estate (Masseverbindlichkeiten/dettes de la masse) and have to respect to employment contracts. be paid with priority, i.e., before any other creditor is paid. 7 Cross-Border Issues 4.7 Is it possible for the company to be revived in the future? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency This is generally not possible. Following distribution of the proceedings in your jurisdiction? proceeds, the bankruptcy administration submits its final report to the bankruptcy court. If the court finds that the bankruptcy proceedings have been completely carried out, it declares them Pursuant to the DEBA, bankruptcy and composition proceedings closed. The company ceases to exist and will be removed from the may only be opened in respect of companies incorporated in Switzerland, meaning that such company must be registered commercial register. However, in case previously unknown assets with the Swiss commercial register (Handelsregister/register of the insolvent are discovered after the bankruptcy proceedings du commerce). A Swiss court is not competent to order the have been closed, the bankruptcy administration distributes the bankruptcy or composition of a company with registered seat proceeds of such assets without further formalities. outside of Switzerland, even if such company has substantial trade and business activities in Switzerland. A company incorporated 5 Tax outside of Switzerland may, thus, only restructure or enter into insolvency proceedings in Switzerland after such company has re-domiciled to Switzerland. This notwithstanding, in case a 5.1 What are the tax risks which might apply to a debtor incorporated outside of Switzerland operates a branch restructuring or insolvency procedure? in Switzerland, Swiss insolvency proceedings may be opened against such debtor in the jurisdiction where the Swiss branch is As a rule, companies in financial difficulties do not benefit from located (Niederlassungskonkurs/faillite de la succursale). Such any special tax treatment under Swiss law. In particular, dissolving proceedings, however, are limited to obligations incurred by the hidden reserves or the forgiveness of debt granted by third parties branch (article 50 DEBA). is generally considered a taxable profit. However, a company in In particular, it should be noted that Switzerland is not an EU Member financial difficulties has generally incurred losses in previous years State and, thus, the centre of main interest (COMI) principle laid that can be set off against these profits. In this context, one must note down in EU Regulation 2015/848 on insolvency proceedings is not that Swiss tax law enables set off with reported losses of the seven applicable in cross-border cases involving Switzerland.

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7.2 Is there scope for a restructuring or insolvency 8 Groups process commenced elsewhere to be recognised in your jurisdiction? 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope In bankruptcy matters, Switzerland follows the principle of for co-operation between officeholders? territoriality. Accordingly, a foreign bankruptcy or any similar proceeding has no effect in Switzerland unless it has been Swiss insolvency law is based on the principle of “one company one recognised. The recognition of foreign proceedings (Anerkennung/ proceeding”. Hence, in case multiple members of the same corporate reconnaissance) is governed by a special chapter in the Swiss Private group request the opening of insolvency proceedings there will be International Law Act (PILA). The conditions for recognition are separate insolvency proceedings for each group member. The group Switzerland as follows: (i) the bankruptcy decree must have been rendered in itself is not subject to insolvency. This principle notwithstanding, the state of the debtor’s domicile; (ii) the petition for recognition pursuant to article 4a DEBA, Swiss bankruptcy authorities have to may only be introduced by the bankruptcy’s administrator or by coordinate their actions to the extent possible in a group insolvency a creditor, but not by the debtor itself; (iii) the bankruptcy decree scenario. As this provision was introduced only recently, there is must be enforceable in the state where it was rendered; (iv) the little guidance available with regards to how such coordination is bankruptcy must not be inconsistent with Swiss public policy and the handled in practice. fundamental principles of Swiss procedural law; and (v) reciprocity This duty to cooperate does not extend to foreign insolvency (Gegenrecht/reciprocité) is granted by the state in which the decree proceedings of group members outside of Switzerland. In practice, was rendered. Pursuant to this latter requirement, the Swiss court however, Swiss bankruptcy authorities in charge of liquidating must examine if the foreign jurisdiction would also recognise, under a Swiss group member often enter into mutual agreements with similar circumstances, a Swiss decree, under conditions that are foreign insolvency administrations, settling mutual claims amicably. not sensibly less favourable than the conditions prevailing under Swiss law for the recognition of a foreign bankruptcy decree. As soon as the petition for recognition has been filed, the court may, 9 Reform on application of the petitioner, order conservatory measures. In principle, once the recognition is granted, the foreign bankruptcy decree has the same effects as a Swiss bankruptcy decree with 9.1 Have there been any proposals or developments in regard to the debtor’s assets located in Switzerland. The foreign your jurisdiction regarding the use of technology or reducing the involvement of the courts in the laws bankruptcy is not extended in Switzerland, but gives rise to an of your jurisdiction, which are intended to make ancillary bankruptcy that can be viewed as a sort of procedure for insolvency processes more streamlined and efficient? judicial legal assistance. Moreover, pursuant to article 172 par. 1 PILA, only certain claims may be included in the schedule of There have been some developments in Switzerland with regard admitted debts, i.e., the claims secured by pledged assets located to the use of technology in insolvency proceedings, most notably in Switzerland according to article 219 pars. 1 to 3 DEBA, and the in debt enforcement proceedings (Betreibung/poursuite). Such unsecured but privileged claims of creditors having their domicile in developments, however, are limited to the technical implementation Switzerland according to article 219 par. 4 DEBA (first and second of certain enforcement actions, e.g. the request for the issuance of a classes). After the satisfaction of these creditors, any remaining payment order which is the first step a creditor needs to undertake balance is remitted to the foreign bankruptcy estate (article 173 par. at the outset of debt enforcement proceedings. Furthermore, a new 1 PILA). This transfer, which represents the result of the Swiss provision was introduced to the DEBA in early 2017 which, subject ancillary bankruptcy, requires, however, the prior recognition of to the adherence to certain (rather strict) formal requirements, the foreign schedule of claims, whereby the Swiss courts review, allows for the electronic submission of requests and legal briefs in particular, whether the creditors domiciled in Switzerland were with the bankruptcy and debt enforcement authorities. However, fairly treated in the procedure and were granted an opportunity to none of these developments are intended to reduce the involvement be heard. Special provisions exist for banks and other financial of courts in insolvency proceedings under Swiss law and there is institutions where foreign insolvency proceedings can be recognised currently no legislative activity which would aim at such reduction. by the Swiss Financial Market Supervisory Authority FINMA under a more flexible regime. 9.2 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? There are currently no proposals to amend the DEBA. However, a change to articles 725 et seq. CO, currently dealing, inter alia, As stated in question 7.1 above, Swiss courts have exclusive with the issue of loss of capital (see question 3.1 above), is being jurisdiction on companies registered in Switzerland for the opening contemplated. It is intended to lower the current triggering threshold of insolvency proceedings. The fact that a company domiciled of loss of capital and add additional thresholds which would trigger and registered in Switzerland has already requested the opening of certain additional obligations of the directors of a Swiss company at insolvency proceedings outside of Switzerland would not prevent an earlier stage of financial distress. The purpose of this reform is the Swiss court from opening separate Swiss proceedings. In fact, to induce the directors to take countermeasures as early as possible the Swiss authorities would not accept any proceedings outside of in times of financial difficulties. These amendments are subject to Switzerland in such instances. Accordingly, companies domiciled parliamentary discussion and may still change or be discarded entirely. in Switzerland and registered with the Swiss commercial register do Moreover, a project to revise the PILA is currently being debated in not, in practice, restructure or enter into insolvency proceedings in the Swiss parliament. Pursuant to the draft bill, the strict principle other jurisdictions. of territoriality (see question 7.2 above) may be substantially softened. In particular, an amendment of the conditions for

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recognition of foreign proceedings as described in question 7.2 ancillary bankruptcy proceedings in Switzerland provided that there above are being contemplated as follows: (i) not only bankruptcy is no need for protection of Swiss creditors. As a result, assets of a decrees rendered in the state of the debtor’s domicile but also foreign debtor could be handed over to the foreign bankrupt estate. decrees rendered in the state where the debtor has its centre of The consultation process regarding the new PILA provisions has main interest (COMI) shall be recognisable; (ii) the petition for ended in February 2016. The explanatory statement of the Swiss such recognition may additionally be introduced by the debtor Federal Council (Botschaft/message) was published in May 2017; itself; and (iii) the requirement of reciprocity shall no longer Swiss scholars and practitioners do not except the draft to change be required. Further, it shall no longer be mandatory to conduct substantially in the further course of the legislative process.

Tanja Luginbühl Dr. Roland Fischer Switzerland Lenz & Staehelin Lenz & Staehelin Brandschenkestrasse 24 Brandschenkestrasse 24 CH-8027 Zurich CH-8027 Zurich Switzerland Switzerland

Tel: +41 58 450 80 00 Tel: +41 58 450 80 00 Email: [email protected] Email: [email protected] URL: www.lenzstaehelin.com URL: www.lenzstaehelin.com

Tanja Luginbühl is a partner in the corporate, M&A and insolvency Dr. Roland Fischer is a partner in the Zurich office of Lenz & Staehelin group of the Zurich office of Lenz & Staehelin. She studied lawat and specialises in domestic and cross-border insolvency law, finance the University of Zurich, and is a graduate of the LL.M. programme at and restructurings. He graduated from the University of Zurich and the New York University School of Law (1999), USA. Tanja Luginbühl obtained an LL.M. degree (Corporate Law) from New York University specialises in the area of insolvency and restructuring, corporate, M&A (2007). He has extensive experience in counselling creditors and and secured financing. She has been involved in various insolvency debtors in insolvency and restructuring situations, and advises cases and advises banks, rating agencies, creditors and companies in banks and corporates on finance transactions of all types and related situations of financial distress. enforcement matters.

Lenz & Staehelin is one of the leading law firms in Switzerland, having offices in Zurich, Geneva and Lausanne. The firm comprises more than 200 lawyers and has a strong and long-standing practice in insolvency and restructuring matters. The firm regularly represents creditors, as well as debtors in debt collection, bankruptcy or reorganisation cases pending before Swiss courts. We advise Swiss and international clients in the context of official or out-of-court debt restructurings.

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Turkey

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1 Overview 2 Key Issues to Consider When the Company is in Financial Difficulties 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a Under Turkish law, the collection of receivables, bankruptcy and company in financial difficulties? Is there a specific restructuring procedures are mainly governed by the Execution point at which a company must enter a restructuring or insolvency process? and Bankruptcy Law (Law No. 2004) (the “EBL”) (published in the Official Gazette dated June 19, 1932 and numbered 2128). In the event of suspicion that a company is in debt, the board of The EBL provides provisions tending to balance the interest of the directors must prepare an interim balance sheet. Pursuant to Article creditor and the debtor. We may give as examples of such tendency 179 of the EBL and Article 376 of the Turkish Commercial Code that while the creditor may initiate an execution proceeding (Law No. 6102) (published in the Official Gazette dated February against the debtor without basing its claims over any document 14, 2011 and numbered 27846) (“TCC”), in case the liabilities or court judgment, the debtor may suspend such proceeding by of the company exceed its assets and/or it is understood from the merely raising an objection. Article 85 of the EBL provides that interim balance sheet that the company is deeply in debt, the board the execution officer must equilibrate the interests of both parties. of directors must apply to the commercial court with a bankruptcy The EBL sets forth provisions aiming to prevent the immoderate request. As per Article 377 of the TCC, the members of the board or violation of the debtor’s right of property, such as certain assets of a creditor may also request concordat restructuring during the trial the debtor necessary for the conduct of the debtor’s business and process of bankruptcy at the court. his house which is proper to his financial situation which cannot be Article 345/a of the EBL provides that in case the authorised attached. individuals of a company fail to apply for bankruptcy, they must be punished with imprisonment for up to three months upon the 1.2 Does the legislative framework in your jurisdiction complaint filed by one of the company’s creditors. The board of allow for informal work-outs, as well as formal directors shall be liable for the damages arising from such failure. restructuring and insolvency proceedings, and to what extent are each of these used in practice? 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the The financial restructuring may be conducted in an informal way action that they can take against the company? For with an agreement executed between the debtor and its creditors. example, are there any special rules or regimes which Such a financial restructuring would not be binding on creditors who apply to particular types of unsecured creditor (such are not parties to such agreements. The agreements must not be as landlords, employees or creditors with retention executed to hide assets from other creditors, which shall prevent of title arrangements) applicable to the laws of your them from collecting their receivables and cause them to incur jurisdiction? losses. The debtor who executed agreements with the intention to cause his creditors damages before and after his bankruptcy shall When a joint stock company suffers losses, which reduce its paid-up be considered as fraudulent bankrupt and shall be punished as share capital by two-thirds, the board of directors is required to call per the Turkish Criminal Code (Law No. 5237) (published in the an extraordinary general assembly meeting. At this meeting, the shareholders must resolve either to compensate the company in cash Official Gazette dated October 12, 2004 and numbered 25611). for the accumulated loss or to decrease the company’s paid up share Both informal work-outs and formal restructuring and insolvency capital to one-third of its existing share capital. If the shareholders proceedings are widely used in practice. do not take one of these steps, the board of directors is required to file a lawsuit before the relevant Commercial Court for bankruptcy. Please also see question 4.2. There are special debt collection procedures available for some creditors such as landlords, creditors with retention of title arrangements, banks, and creditors bearing negotiable instruments. There are also special rules for a speeded- up trial process for employees.

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shall be suspended. Preliminary injunctions shall not be applicable. 2.3 In what circumstances are transactions entered Foreclosure proceedings, mortgage claims and commercial pledges into by a company in financial difficulties at risk of may be initiated/continued provided that protective measures cannot challenge? What remedies are available? be taken by creditors and the sale of pledged property cannot be performed. The hardening period is a key concept in insolvency and bankruptcy Amicable restructuring is applicable for the capital stock companies proceedings, providing that a transaction entered into during a and cooperatives. If a company is not able to pay its debts or its hardening period may be deemed invalid by a Court. During the debt receivables are not enough to recover its debts or if the company is collection and liquidation process, the transactions of the insolvent/ under the threat of facing with these steps, such company may apply bankrupt completed prior to its insolvency/bankruptcy, particularly to a Commercial Court in order to request the amicable restructuring. transactions within the hardening period, shall be considered and Turkey With respect to debt-for-equity swaps, as is known, the principal reviewed, which may result in the cancellation of such transactions element of any debt-for-equity swap is a restructuring of the provided that such fall within the scope of Articles 278, 279 and 280 balance sheet of a corporate debtor so that the relevant participating of the EBL stating three different hardening periods. creditors receive equity interests in a reorganised capital structure The one-year hardening period applies to (i) security interests if such in consideration for reducing their debt claims against the company. security interest is created to secure an existing debt and the security Pursuant to Article 329 and Article 602 of the TCC, joint stock collateral provider has not committed to provide security interest companies and limited liability companies are liable for their debts at the time of incurring a debt, (ii) payments made via instruments only by their assets owned as a legal entity. It is not possible to other than cash or ordinary payment instruments, (iii) payments impose an attachment on a shareholder’s shares due to a debt of made before their due date, and (iv) certain annotations to the title the company as a legal entity. Pursuant to Article 133 of TCC, deed registries. In order for these transactions to be annulled, such in equity companies, in the event the creditors have a receivable should have been made within one year prior to the bankruptcy of from a shareholder, the relevant creditors are entitled to request the debtor or attachment of its assets. that the shares owned by the debtor shareholder be attached as per The two-year hardening period applies to donations or gifts. the relevant provisions of the EBL regarding movable assets and The five-year hardening period applies to transactions made by the request that such be sold and converted into cash. debtor with one of its creditors with the aim of harming its other For all trade companies, the creditors are also entitled to obtain their creditors provided that the creditor with whom the transactions are receivables out of the receivables of the debtor shareholder from the made is aware of the insolvency and the aim of the debtor at the time company and also impose an attachment for such. Please also note of the transaction. that the abovementioned provision does not hinder the creditors to apply to the assets of the debtor shareholders out of the company. In order for the aforementioned transactions to be annulled, they should have been made within five years prior to the initiation of With respect to pre-packaged sales, under Turkish Law, a pre- bankruptcy or execution proceedings. packaged sale is possible in terms of Article 538 of the TCC. Pursuant to the said Article, unless decided otherwise by the general assembly, the liquidator can perform sale of the active 3 Restructuring Options assets of the company by way of negotiation. If the subject of the sale constitutes a wholesale of a significant amount, then a general assembly resolution is required. The sale shall then be conducted 3.1 Is it possible to implement an informal work-out in by the liquidators. your jurisdiction? Concerning the concord restructuring, in case the Court does not approve the concord or cancels the concord period, it will Please see question 1.2. immediately decide for the bankruptcy of the debtor upon the report of the concord commissar. Creditors may apply to the Court for the 3.2 What formal rescue procedures are available in termination of the concord restructuring if it is found that the debtor your jurisdiction to restructure the liabilities of acted in bad faith in having the restructuring proposal approved or distressed companies? Are debt-for-equity swaps that the debtor breaches the provisions of the concord. and pre-packaged sales possible? To what extent can Concerning the amicable restructuring, if the restructuring project creditors and/or shareholders block such procedures or threaten action (including enforcement of security) is successful, the debtor will continue to operate. If the company to seek an advantage? Do your procedures allow you breaches the terms of the amicable restructuring, the company should to cram-down dissenting stakeholders? seek to agree with creditors and to have an amendment approved by the Court to the restructuring proposal. In the absence of an Under Turkish law, the main types of restructuring are concord agreement, a creditor may apply to the Court for the termination of restructuring and amicable restructuring. the restructuring. In case the Court realises that the company did not fulfil its obligation arising from the amicable restructuring, it will Concord restructuring is proposed by the debtor or a creditor to decide for the bankruptcy. compromise certain liabilities in accordance with a plan. The key There are no other cram-down provisions in the Turkish insolvency fact is presenting a probable success through a concordat plan, legislation. Concord and amicable restructuring may include terms with no intention to cause any damage or loss to the creditors. The that provide for the cram-down of creditors as a whole. restructuring can be implemented in three different ways: as the ordinary concordat; the concordat in bankruptcy; and the concordat through asset abandonment. Some restrictions are imposed on 3.3 What are the criteria for entry into each restructuring creditors enforcing their rights over companies under a temporary procedure? period and a precise period of concordat. During the temporary period and precise period of concordat, no proceedings may be filed Concord restructuring is regulated under Articles 285–309 of against the company and any proceedings previously initiated are the EBL targeting the liquidation of the debts by protecting both suspended. Prescription periods and statute of limitations deadlines the debtors in poor financial standing and his creditors. Concord

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restructuring may be proposed (i) by the debtor where the debtor legal ground for a termination shall not be enforceable. In the will submit a concord pre-plan to the Court together with documents absence of such a provision, it is legally not possible to terminate evidencing his financial status, the list of creditors and privileged an agreement by referring to concord as a termination reason. creditors, a chart comparing the amount to be provided to creditors Agreements bearing perpetual liabilities may be terminated by with concord restructuring and the amount the creditors may receive the debtor in case such agreements create a risk for the successful upon a bankruptcy, financial analysis reports issued by independent completion of the concord with the positive view of the commissar audit companies authorised by Capital Markets Bard, a petition stating and approval of the court. A set-off performed with an aim to damage the reason for its request, or (ii) by a creditor, having the right to the rights of the creditors may be subject to objections before a court request bankruptcy by submitting its petition, stating the reason for its and the date of the temporary period shall be considered. Please concord request. also see question 3.2. Turkey The Court shall grant a temporary period by appointing a commissar With respect to the amicable restructuring, the restructuring project’s and taking all necessary measures for the protection of the debtor’s terms will override all agreements executed with creditors affected assets. The concord request will then be announced and within by the project. The following rules in agreements will not apply, seven days following the announcement, creditors can object the regardless of whether the agreements were concluded with creditors concord request. that are affected by the project: Should the Court consider the concord plan viable and upon the ■ Rules that could lead to the amendment or termination of the positive report of the concord commissar, it may grant to the company project. that the concord will be accepted. The Court shall grant a precise ■ Rules providing that a debtor’s use of restructuring is an act one-year concord period with the appointment of a commissar and a of default or breach of the agreement. creditors board if it would be necessary. In case the Court does not approve the concord or cancels the precise concord period, it will decide for the bankruptcy. 3.6 How is each restructuring process funded? Is any Amicable restructuring is applicable for the capital stock companies protection given to rescue financing? (excluding banks and insurance companies) and cooperatives. The company shall submit its restructuring plan which has been As per Article 285 of the EBL, the court expenses and charges shall previously negotiated and accepted by the creditors who are affected be deposited in advance by the applicant. Pursuant to the Annex 1 by the terms of the plan. The creditors, who are invited to the of the Law of Charges, a fixed charge shall be paid while applying negotiation of the restructuring plan, are also deemed creditors who for a concord request. Moreover, 11.38 per mille of the amount are affected by the terms of the plan. The Court holds a hearing determined to be distributed among the creditors shall also be paid in which opposing creditors can state their case. For the plan to as a pro rata charge. become effective, it shall be accepted by half of the total number of Expert examination, announcement expenses, concord commissar the creditors and by a two-thirds majority by value of creditors who expenses and other service expenses shall also be paid by the participated to the voting of the plan. An amicable restructuring applicant in advance. plan must be approved by the Court.

3.4 Who manages each process? Is there any court 4 Insolvency Procedures involvement? 4.1 What is/are the key insolvency procedure(s) available Concerning concord restructuring, the concord commissar is liable to wind up a company? to supervise the acts of the debtor, report to the court and inform the creditors regarding the concord period (Article 290 of the EBL). The insolvency procedure types provided by the EBL are: voluntary The creditors board shall supervise the acts of the commissar and bankruptcy; and bankruptcy. has the right to request a new appointment of a new commissar from the court when and if necessary. Concerning amicable restructuring, if the court takes measures 4.2 On what grounds can a company be placed into each to protect the debtor’s assets until its decision on ratification or winding up procedure? rejection of the amicable restructuring plan, the creditors and debtor – or, if the same fail to agree on one, the court – can appoint one Voluntary Bankruptcy or more mid-term auditors to assume responsibility for directing, When a joint stock company suffers losses, which reduce its paid- managing and supervising the debtor’s activities from the date of up share capital by two-thirds, the board of directors is required to appointment until the court’s ratification or rejection of the plan call an extraordinary general assembly meeting. At this meeting, (Article 309(ö) of the EBL). the shareholders must resolve either to compensate the company in In the event that the plan is ratified by the court, it may in its cash for the accumulated loss or to decrease the company’s paid up ratification decision appoint one or more plan supervisors, who share capital to one-third of its existing share capital. Otherwise, will have the authority to supervise and monitor whether the plan is the board of directors is required to file a lawsuit before the relevant being fulfilled and to report on the situation to the creditors (Article Commercial Court of First Instance for bankruptcy. If the board of 309(p) of the EBL). directors does not file a voluntary bankruptcy lawsuit, each director shall be personally and jointly and severally liable for any and all real damages, incurred by the creditors and the shareholders. 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to Bankruptcy perform outstanding obligations? Will termination and Ordinary Bankruptcy set-off provisions be upheld? Ordinary bankruptcy involves a creditor bringing bankruptcy The provisions of agreements accepting concord claims as a valid proceedings against a debtor. Bankruptcy can only apply to merchants (that is, an entity or a person engaged in the purchase

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and sale of commodities for profit), in relation to their unpaid (and mortgaged assets will be sold in the earliest and appropriate time by due) debts. the bankruptcy administration and the proceeds will be paid to the Special Bankruptcy pledgee/mortgagee without waiting for the end of the liquidation. A creditor who holds negotiable instruments (cheques, bonds or The pledgee/mortgagee may initiate an execution by way of promissory notes) can bring special bankruptcy proceedings for foreclosure of the pledge/mortgage against the bankruptcy estate following the declaration of the bankruptcy. If the pledged/ negotiable instruments against the debtor. mortgaged property is insufficient to discharge the debt, the pledgee Direct Bankruptcy is an unsecured creditor for the remainder. Direct bankruptcy is possible where the debtor’s liabilities are Pursuant to Article 245 of the EBL, in case a claim of the greater than its current assets. Individuals authorised to manage and

bankrupt was deemed as unnecessary to pursue by the bankruptcy Turkey represent those companies or co-operatives, or any of the creditors, administration, such claim may be transferred to any requesting can apply for the debtor’s bankruptcy. A separate direct bankruptcy creditor. If the latter succeeds in such claim, the amount to be reason is foreseen in law for companies, which occurs when the obtained will be received by the relevant creditor after deducting liabilities of a company is more than its assets. the expenses.

4.3 Who manages each winding up process? Is there any 4.5 What impact does each winding up procedure have on court involvement? existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off Following the bankruptcy decision, the court notifies such decision provisions be upheld? to the Bankruptcy Office, which prepares a list of assets, takes the necessary measures and calls a first creditors’ meeting. The effect of the opening of bankruptcy on the existing contracts of the bankrupt is a very comprehensive issue depending on the type At the first creditors’ meeting, the candidates for the bankruptcy and conditions of the contract. Some of the existing contracts might managers are notified to the Execution Court. Accordingly, the be deemed as terminated upon opening of bankruptcy. For instance, Execution Court appoints the bankruptcy managers which constitute contracts related to usufructuary lease, financial lease, mandate, the bankruptcy management. commission, agency, ordinary partnership and current account Within one month after the declaration of the bankruptcy, the might be deemed as automatically terminated upon bankruptcy. On creditors shall register to the bankruptcy management. After the other hand, some of the existing contracts are not terminated the registry period provided for the creditors has expired and despite the bankruptcy. For instance, contracts related to sale, barter, the bankruptcy management has been elected, the bankruptcy donation, ordinary lease, commodatum, mutuum, employment, management examines the registrations, and prepares a list of construction, insurance and surety might still be deemed as not creditors, stating the orders of the creditors for the payment, submits terminated despite the opening of bankruptcy. the relevant list to the bankruptcy office, and notifies the creditors While it is possible to continue the business operation for the by way of announcement. management of the company until the bankruptcy decision is The Bankruptcy Administration, after determining the creditors, rendered, after the opening of the bankruptcy, since the management shall invite to the second meeting the creditors whose claims are will have no disposal and/or representation authority, continuance of accepted by the bankruptcy administration in part or in whole and the business operation by the management is not legally possible. who have filed a suit for inclusion in the schedule of ranking, and Following bankruptcy, the bankruptcy administration will be accepted to attend the meeting. entitled to continue (to execute) the existing (not yet executed/ The powers of the second creditors’ meeting are more extensive performed) contracts but is not obliged to do so (Article 198 of the than the first meeting. The second meeting of creditors decides as EBL). If execution of the contract (performance of the bankrupt’s to whether the bankruptcy administration shall continue its work obligation arising from the contract) is more beneficial for the or not, claims of ownerships, whether the suspended lawsuits shall bankrupt’s estate, the bankruptcy administration shall prefer to execute the contract. Otherwise, the subject of the contract will be continue or not, sale of certain goods by bargaining and the concord converted into money and registered as bankruptcy receivable on offer made by bankruptcy. the bankruptcy estate. The bankrupt’s estate shall be sold and distributed by the bankruptcy administration. The administration shall request the closing of bankruptcy by presenting a final report and the Commercial Court, 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? which has commenced the bankruptcy, has to decide on closing as well. The Bankruptcy Office shall distribute the amount as per Articles 206 and 207 of the EBL. Receivables of preferred creditors are 4.4 How are the creditors and/or shareholders able to firstly taken into consideration by the Bankruptcy Office. Ordinary influence each winding up process? Are there any creditors shall be paid only after the preferred creditors are fully restrictions on the action that they can take (including satisfied. Concerning a receivable arising out from a contract, the enforcement of security)? please kindly note that such receivable is in principle an ordinary receivable unless it is secured by a pledge or mortgage. Any proceedings that were started against the debtor for debt The liabilities of the estate are determined by schedule of ranking. recovery before its bankruptcy are suspended on the commencement The accepted portion and rank of every credit registered to the estate of bankruptcy (that is, the judgment of the court) and terminated and every claim other than ownership claims shall be shown in a when the bankruptcy decision becomes conclusive (that is, after the schedule of ranking. finalisation of the appeal process). Once the costs of procedure are paid, property that is pledged/ A creditor with a prior perfected pledge/mortgage has a preferential mortgaged forms part of the bankruptcy estate and a party with right to the proceeds of the pledged property. The pledged/ a prior perfected pledge/mortgage has a preferential right to the

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proceeds of the pledged property. The pledged/mortgaged assets process which is regulated under Article 17 of the Corporate Income will be sold in the earliest and appropriate time by the bankruptcy Tax Code (the “CIT Code”) (Law No. 5520) (published in the administration and the proceeds will be paid to the pledgee/ Official Gazette dated June 21, 2006, and numbered 26205). The mortgagee without waiting until the end of the liquidation. liquidation period shall be considered instead of the fiscal period. The pledgee/mortgagee may initiate an execution by way of According to subparagraph (a) of Article 17 paragraph (1) of the foreclosure of the pledge/mortgage against the bankruptcy estate CIT Code, the liquidation process starts on the registration date following the declaration of the bankruptcy. of the General Assembly resolving that the company goes into the If the pledged/mortgaged property is insufficient to discharge the liquidation and such process is completed on the registration date of debt, the pledgee is an unsecured creditor for the remainder. the liquidation resolution.

Turkey The receivables secured but not covered by a pledge/mortgaged In cases where the liquidation is closed with loss, the liquidation or unsecured receivables are registered in order to be paid in the result shall be corrected towards the previous liquidation periods following order: and the taxes overpaid in the previous periods shall be refunded to ■ First Rank: the taxpayer. ■ Receivables of the employees including severance and If the liquidation process starts and concludes within the same notice pays arising from the employment relation and calendar year, the liquidation tax return shall be submitted to the accrued for the year before the opening of the bankruptcy affiliated tax office within 30 days following the date on which the together with the severance and notice pays they earn liquidation is concluded. If those are realised in different calendar due to the termination of the employment relation due to years, the liquidation tax return for each liquidation period shall bankruptcy. be submitted to the tax office from the first day until the evening ■ The debts of the employers to the foundations and of the 25th day of the fourth month following the month when the institutions which had been established in order to form liquidation period is closed. provident fund or other aid institutions for the employees and in order to perpetuate such. As per Article 17 paragraph (4) of the CIT Code, the tax base of a ■ All sorts of alimony receivables arising from family law corporation which goes into the liquidation shall be the liquidation which had accrued for the year before the opening of the profit. The liquidation profit is the positive difference between the bankruptcy. value of the assets at the end of the liquidation period, and the value ■ Second Rank: Receivables of the persons whose properties of the assets as at the date of the commencement of the same. are entrusted to the debtor because of parentship and During the calculation of the liquidation profit: appointed guardianship. ■ any and all kinds of payments that were made to the ■ Third Rank: Receivables which had been determined as shareholders or to the owners of the corporation as advanced preferential receivables. or otherwise shall be added to the value of the assets which is ■ Fourth Rank: Unprivileged claims. calculated at the end of the liquidation; and All the creditors in a category must be satisfied before creditors ■ the payments that were made by the shareholders or the in the following category are paid. If the remaining money is not owners of the corporation in addition to the current capital, sufficient for the unprivileged receivables, it will be distributed and the earnings and the proceeds obtained during the between those creditors in proportion to their receivables. liquidation, which were exempt from tax, shall be added to the value of the assets which is calculated at the beginning of The expenses of the Bankruptcy Office or Bankruptcy Administration the liquidation period. can be requested from the bankrupt’s estate. Expenses regarding During the calculation of the liquidation profit, related provisions of announcement of the bankruptcy decision, protection of the assets, the CIT Code in relation to the deductible expenses, loss deduction, fees of the liquidators, etc., constitute some examples of these other deductions and non-deductible expenses shall be taken into expenses. The payments regarding estate debts have priority over bankruptcy receivables. consideration. Upon calculation of the net liquidation profit, the corporate income tax at the rate of 20 per cent shall be declared and paid over such profit. 4.7 Is it possible for the company to be revived in the Without setting aside a provision in accordance with the Article 207 future? of the EBL for i) taxes already accrued on behalf of the company, ii) taxes calculated according to the liquidation tax returns, and As per Article 547 of the TCC, if it is determined that the liquidation iii) other disputed tax assessments, liquidation officers cannot pay was not duly accomplished, and an additional liquidation must to the creditors stated in Article 206 of the EBL and cannot make be performed, upon the request of the board members, creditors, distribution to the shareholders. shareholders or liquidation officers, the competent commercial court may decide that the company be restituted for an additional From any and all kinds of tax assessments and tax penalties owed liquidation. The shareholders may cancel a liquidation decision by companies who have been already liquidated and the legal before the commencement of the distribution of assets between the personality of whom have been cancelled from the trade registry, shareholders. those which pertain to the pre-liquidation period shall be imposed on behalf of one of the liquidator officers, and those which pertain to the liquidation period shall be imposed on behalf of the legal 5 Tax representatives as they will be held as severally liable. For the public receivables which are pertaining to the pre-liquidation 5.1 What are the tax risks which might apply to a period, shareholders of limited companies shall be held liable restructuring or insolvency procedure? limited to the proportion of the share capital that they invested to the company. The liquidation officer’s liability is limited with the A corporation which goes bankrupt shall be subject to the liquidation amount distributed as a result of the liquidation.

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pertains to the matter of public order, Turkish authorities do not 6 Employees recognise or execute bankruptcy procedures and bankruptcy judgments of other jurisdictions granted for Turkish entities. 6.1 What is the effect of each restructuring or insolvency Therefore, it is not a common practice for Turkish companies to enter procedure on employees? into insolvency or restructuring proceedings in other jurisdictions.

In all procedures, credits arising from the compensations to be 8 Groups paid by the employers regarding the employment agreements are determined to be the first rank of unsecured credits. Please also see our explanations under question 4.6. 8.1 How are groups of companies treated on the Turkey insolvency of one or more members? Is there scope for co-operation between officeholders? 7 Cross-Border Issues There is no specific provision pertaining to the insolvency of the 7.1 Can companies incorporated elsewhere use members of groups of companies and co-operation in this regard. restructuring procedures or enter into insolvency proceedings in your jurisdiction? 9 Reform Pursuant to Article 154 of the EBL, the competence of the commercial court at the place where the debtor’s business centre 9.1 Have there been any proposals or developments in is located pertains to the matter of public order and is exclusive. your jurisdiction regarding the use of technology or Pursuant to Articles 285 and 309/m of the EBL, the commercial reducing the involvement of the courts in the laws court at the place where the debtor’s business centre is located of your jurisdiction, which are intended to make has jurisdiction over the concord restructuring and amicable insolvency processes more streamlined and efficient? restructuring applications. Therefore, the companies incorporated abroad cannot enter into insolvency proceedings in Turkey. Due to the postponement of bankruptcy provisions, concordat restructurings have not been actively implemented for a long while. However, postponement of bankruptcy provisions are abolished by 7.2 Is there scope for a restructuring or insolvency the Law No. 7101 (published in the Official Gazette dated March process commenced elsewhere to be recognised in 15, 2018 and numbered 30361) amending the EBL. We believe your jurisdiction? that concordat restructuring regulated as a speedier process with the recent amendments shall be widely used in the future. Please refer to question 7.1. Turkish authorities do not recognise and execute bankruptcy judgments of other jurisdictions granted for a Turkish entity. A decision given for a foreign entity may be 9.2 Are there any other governmental proposals for enforced in Turkey following the enforcement and recognition reform of the corporate rescue and insolvency regime process. in your jurisdiction?

There are no other governmental proposals. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?

As explained above under question 7.2, since the competence of Turkish courts over the bankruptcy and restructuring proceedings

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Gokben Erdem Dirican Dirican | Gozutok | Bagci Nispetiye Caddesi. 4/1 Besiktas, Levent Istanbul Turkey

Tel: +90 212 278 3170 Email: [email protected] URL: www.dgb-law.com Turkey Recognised by European Legal Experts as one of the few top-tier litigators in Turkey and by The Legal 500 as a leading individual, Gökben is the co-founder of Dirican | Gozutok | Bagci. Gökben represents mainly international clients in matters of litigation, arbitration and alternative dispute resolution. She is also a well-known specialist with more than a decade’s experience advising multinationals and financial institutions on complex cross-border transactions in a variety of industries. She has advised extensively on the legal and regulatory regimes and corporate structures. She has been named by The Legal 500 Hall of Fame as an attorney who has “received constant praise by their clients for continued excellence” and is “at the pinnacle of the profession”. Her knowledge of the Turkish legal system, strategic approach and ability to see the bigger picture regarding the sector in question, as well as the political and business environments, ensure she attains successful results.

Dirican | Gozutok | Bagci is a full-service law Firm established in Istanbul. The Firm boasts a wealth of experience in handling numerous proceedings and has unique experience in dispute resolution spanning mediation, arbitration and litigation. Its highly regarded Partners advise clients in all types of disputes before courts and arbitration tribunals, in domestic and international matters. The Firm advises and represents major banking and financial institutions with its experience and insight in all aspects of banking operations bringing efficiency to any transactional need. The Firm advises clients on their general corporate and commercial advisory needs, including those relating to the incorporation of companies and company acquisitions. In response to the complex requirements of local and international transactions, the Firm brings together the knowledge, skills and experience of different practice areas to form focused, creative and hands-on teams for specific transactions. For more information, visit: www.dgb-law.com.

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USA Alan W. Kornberg

Paul, Weiss, Rifkind, Wharton & Garrison LLP Elizabeth R. McColm

directors are those of care and loyalty. The duty of care requires a 1 Overview director to discharge duties with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The 1.1 Where would you place your jurisdiction on the duty of loyalty requires directors to act in the best interests of the spectrum of debtor to creditor-friendly jurisdictions? corporation; it prohibits self-dealing and the usurpation of corporate opportunities by directors. Ordinarily, decision-making by directors The United States can most accurately be described as reorganisation- is protected by the business judgment rule, even when a company is friendly. On the one hand, the United States could be considered insolvent. Civil liability may arise if the directors fail to adhere to debtor-friendly as compared to some regimes in that management is their duties of loyalty or care. typically permitted to retain operating control of the business, there In general, when a company becomes insolvent, the directors must is a very broad stay of creditor enforcement actions, debtors have exercise their fiduciary duty in the best interests of the corporation, exclusive authority to propose a plan of reorganisation at the outset taking into account the interests of, among others, creditors. Upon of a case, and debtors are given powers, such as the option to reject insolvency, creditors may under certain circumstances bring unprofitable contracts, that they are not afforded outside of a formal derivative claims on behalf of the corporation against directors. insolvency proceeding. On the other hand, the United States could Causes of action for breach of fiduciary duty, fraud and fraudulent also be considered creditor-friendly as compared to some jurisdictions conveyance may be appropriate to challenge the wrongful actions of in that the process is designed to be public and transparent, creditors directors of insolvent corporations. are given a voice in the restructuring process, and creditors are In addition, directors may be criminally or civilly liable under afforded significant protection by the Bankruptcy Code. federal and state laws for failure to comply with certain disclosure obligations or for insider trading, or for the company’s failure to pay 1.2 Does the legislative framework in your jurisdiction certain taxes and wages, among other things. allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice? 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For While informal out-of-court restructurings are commonplace and example, are there any special rules or regimes which are typically implemented by contract by and among the relevant apply to particular types of unsecured creditor (such parties, there is no specific legislative framework to sanction such as landlords, employees or creditors with retention work-out procedures. The relevant statute, the Bankruptcy Code, of title arrangements) applicable to the laws of your provides for formal court-supervised proceedings, although the jurisdiction? Bankruptcy Code has several provisions which encourage pre- petition restructuring negotiations. While in financial difficulty, but prior to a bankruptcy filing, a company’s creditors, contract counterparties, employees, and interested acquirers, among others, may all attempt to influence 2 Key Issues to Consider When the the company’s situation within the bounds of whatever contractual Company is in Financial Difficulties agreements may exist and applicable law. For this reason, and to make any potential insolvency process smoother, a company in financial distress will oftentimes seek to engage its stakeholders in 2.1 What duties and potential liabilities should the restructuring discussions prior to beginning an insolvency process. directors/managers have regard to when managing a company in financial difficulties? Is there a specific The Bankruptcy Code also prescribes special rules for certain point at which a company must enter a restructuring categories of creditors. For example, certain types of prepetition or insolvency process? claims (such as domestic support obligations, employee wages up to $12,850 per individual and certain tax obligations) are entitled Directors are not personally liable for continuing to trade while the to priority over other general unsecured claims. Additionally, company is in financial distress. while claims incurred after the petition date are often entitled to The fiduciary duties of a company’s directors are defined by the law administrative priority status and are payable upon consummation of the state of the company’s incorporation. The primary duties of of the plan, the debtor also must timely perform post-petition

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obligations arising under commercial real property leases. The a foreign insolvency or restructuring proceeding and for conducting debtor must also assume any unexpired commercial leases by no an ancillary proceeding in the United States. Ancillary proceedings later than 120 days after the petition date (subject to extension), are those in aid of a “foreign proceeding” administered by a foreign otherwise such leases are deemed rejected. representative and designed to foster cooperation between US and foreign courts.

2.3 In what circumstances are transactions entered Debt-for-equity swaps are possible both in-court and out-of-court. into by a company in financial difficulties at risk of Depending on the terms of the debt-for-equity swap, existing challenge? What remedies are available? equity may be substantially diluted or, if the valuation supports it, eliminated altogether. USA Transactions entered into by an entity in financial distress may be “Pre-packaged” sales may be achieved either by means of (i) a pre- attacked as an actual or constructive fraudulent transfer or as a packaged chapter 11 plan, which the Bankruptcy Code is designed preference under the Bankruptcy Code and/or state law. to facilitate, or (ii) a sale under section 363 of the Bankruptcy Code Under the Bankruptcy Code, a transfer may be avoided as fraudulent which has been negotiated by the parties and documented prior to if it occurred within two years before the bankruptcy filing, and the the chapter 11 petition being filed. debtor made the transfer with actual intent to defraud creditors, The filing of a bankruptcy petition automatically operates as a stay regardless of whether the debtor was insolvent. In addition, a trustee that enjoins secured and unsecured creditors from taking most (or debtor in possession) may recover a transfer as constructively actions against the debtor or property of the estate absent further fraudulent that occurred within two years before the bankruptcy order of the court. The stay of actions against the debtor’s property filing if the debtor received less than reasonably equivalent value in continues until such property is no longer property of the estate or exchange for such transfer, and (i) was insolvent, (ii) was engaged the case is closed or dismissed. in business for which the debtor was insufficiently capitalised, (iii) A chapter 11 restructuring aims to foster cooperation between intended or believed it would incur debts beyond its ability to repay, management (which may include significant shareholders) and the or (iv) made such transfer to, or for the benefit of, an insider under Company’s creditors to agree on a value-maximising path forward an employment contract and not in the ordinary course. Bankruptcy for the Company. Shareholders and creditors alike are welcome to trustees (or debtors in possession) can also invoke state fraudulent propose transactions that could lead to the Company’s emergence transfer laws, which may have longer reach-back periods, to recover from bankruptcy; however, only the company has the right to transfers for the benefit of the estate. propose a plan of reorganisation and solicit its acceptance for at A transfer of an interest of the debtor in property made on account least the first 120 days following the date of the filing; such time of an antecedent debt, while the debtor was insolvent and within the period is often extended beyond 120 days by the court but may not 90 days prior to a bankruptcy filing (or within one year before the be extended beyond 18 months following the date of the filing. bankruptcy filing if the transferee was an insider) that enables the Secured creditors have certain special rights, however. A secured creditor to receive more than it would have received in a liquidation, creditor may be entitled to adequate protection in the form of cash can be avoided as a preference. There is a rebuttable presumption that payments, replacement liens or the “indubitable equivalent” of the a debtor is insolvent during the 90 days before the bankruptcy filing. value of its collateral to the extent such value is depreciating as a Transactions determined to be preferential or constructively result of the stay or the debtor’s use of such collateral. If secured fraudulent can be avoided or reversed so as to return the parties creditors are oversecured, they have the right to receive post-petition to their original positions. This can be effectuated through the interest generally at the applicable contract rate. Secured creditors recovery of payments or unwinding of entire transactions. may also be well-positioned to provide debtor-in-possession financing, which may provide the secured creditor greater influence over the reorganisation process. Secured creditors generally are 3 Restructuring Options also afforded the right to credit bid in a sale of their collateral. Cramdown 3.1 Is it possible to implement an informal work-out in In a chapter 11 case, a dissenting class of creditors or interests may your jurisdiction? be crammed down if (i) at least one class of impaired claims has voted to accept the plan, and (ii) the plan (a) does not discriminate While out-of-court restructurings are commonplace and are typically unfairly, and (b) is “fair and equitable”. implemented by contract by and among the relevant parties, there It is generally understood that a plan does not unfairly discriminate is no procedure by which a court will sanction such work-outs. if the dissenting class receives relatively equal value under the plan To receive the sanction of a court, a case must be filed under the as compared to similarly situated classes. Bankruptcy Code. It is generally understood that a plan does not unfairly discriminate if the dissenting class receives relatively equal value under the plan 3.2 What formal rescue procedures are available in as compared to similarly situated classes. your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps A plan is fair and equitable if it complies with the absolute priority and pre-packaged sales possible? To what extent can rule. With respect to secured creditors, members of the class must: creditors and/or shareholders block such procedures (i) retain their liens and receive deferred payments with a value or threaten action (including enforcement of security) equal to the allowed amount of their secured claims, valued as of to seek an advantage? Do your procedures allow you the effective date of the plan; (ii) receive the proceeds from the to cram-down dissenting stakeholders? sale of their collateral, if such property is to be sold, including the right to a credit bid at any such sale; or (iii) receive the “indubitable Chapter 11 is the primary procedure by which companies restructure; equivalent” of their secured claims. although it may also be used for the purposes of an orderly liquidation. Chapter 15 provides the procedure for recognition of A plan is fair and equitable with respect to unsecured creditors if the members of the class receive property of a value equal to the

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allowed amount of their unsecured claims, or if such class is not debtor. The debtor may not assume a contract where applicable law paid in full, no junior class will receive any estate property under excuses the counterparty to the contract from accepting performance the plan. from, or rendering performance to, an entity other than the debtor, such as a personal services contract.

3.3 What are the criteria for entry into each restructuring A debtor may reject a contract where it determines that performance procedure? of the contract would be unduly burdensome. Rejection of an executory contract or unexpired lease constitutes a breach and generally gives rise to a general unsecured claim for damages. Insolvency is not a prerequisite for chapter 11 relief. A company may file a voluntary case under chapter 11 if the company has a If a contract or lease has been assumed, the debtor usually may USA domicile, place of business or property in the United States. assign it, notwithstanding a provision in the contract that prohibits or conditions such an assignment. An involuntary case may be commenced under chapter 11 by three or more creditors that hold non-contingent, undisputed claims against The Bankruptcy Code generally preserves a creditor’s non- the company. The creditors (or an indenture trustee representing bankruptcy set off rights. A claim for set off is treated as a secured them) must hold claims that aggregate $15,775 more than the value claim and a creditor seeking to exercise such right must first obtain of any collateral securing the creditors’ claims. If there are fewer relief from the automatic stay. However, creditors that possess set than 12 creditors, a single creditor may file the petition. If the case off rights under certain types of repurchase agreements and other is not timely controverted, the court will order relief. However, if specified financial contracts may exercise such rights without the petition is controverted, the creditors must establish that the violating the stay. debtor is generally not paying its debts as they come due unless such debts are disputed, or that a custodian was appointed within 3.6 How is each restructuring process funded? Is any 120 days of the petition date. Involuntary petitions filed in bad faith protection given to rescue financing? may result in damages awarded against the petitioning creditor(s). A trustee or debtor in possession may use free cash in the ordinary course of business without notice or a hearing, unless the court 3.4 Who manages each process? Is there any court involvement? orders otherwise. The debtor may not use encumbered cash unless each entity with an interest in the cash collateral consents or the court authorises such use upon a finding of adequate protection. Under chapter 11, management retains control, remains “in possession”, and continues to run the daily business operations of A trustee or debtor in possession may also obtain unsecured the debtor company, subject to oversight by the company’s board of financing in the ordinary course of business that will be allowed as directors. A chief restructuring officer or similar professional often an administrative priority expense to pay the actual and necessary is added to the management team. Transactions which are not in costs of preserving the estate, including the payment of wages and the ordinary course of business require bankruptcy court approval. salaries after the commencement of the case, as well as taxes. Official and unofficial committees generally consult with the debtor If the trustee or debtor in possession is unable to obtain unsecured concerning the administration of the estate, may investigate conduct, financing that would be allowed as an administrative priority expense, assets and liabilities of the debtor and participate in the formulation the Bankruptcy Code contains a framework for permitting other of a plan. A chapter 11 trustee may be appointed where there has types of debtor-in-possession financing, including: (i) unsecured been gross mismanagement or fraud. financing allowed as a “superpriority” expense with priority over The court closely supervises proceedings under chapter 11. all other administrative priority expenses; (ii) financing secured by unencumbered estate property; (iii) financing secured by a junior lien on previously encumbered estate property; and (iv) financing secured 3.5 What impact does each restructuring procedure have by an equal or priming lien on previously encumbered property on existing contracts? Are the parties obliged to (so long as the trustee or debtor in possession is unable to obtain perform outstanding obligations? Will termination and financing otherwise and each holder of a lien on such property is set-off provisions be upheld? adequately protected).

A chapter 11 debtor may assume or reject most executory contracts or unexpired leases, subject to the court’s approval. Subject to time 4 Insolvency Procedures limits applicable to commercial real estate leases, the debtor may assume or reject a contract or lease at any time before confirmation of a plan, but the court may order the debtor to act within a shorter 4.1 What is/are the key insolvency procedure(s) available to wind up a company? time. In most cases, the counterparty to the contract must continue to perform until the debtor assumes or rejects the contract; a contract Chapter 7 provides the procedure for liquidation of a company. As term that provides for termination upon a bankruptcy filing is noted above, although chapter 11 is the primary procedure by which typically unenforceable under the Bankruptcy Code, though there companies restructure, it may also be used for the purposes of an are exceptions. orderly liquidation. If a debtor chooses to assume the contract or lease, it will be bound by the contract’s terms. The debtor may not assume such contract or lease unless it: (i) cures or provides adequate assurance that it will 4.2 On what grounds can a company be placed into each winding up procedure? cure any default; (ii) compensates, or provides adequate assurance that it will compensate, the counterparty for any actual pecuniary losses resulting from the default; and (iii) provides adequate Insolvency is not a prerequisite for chapter 7 or chapter 11 relief. assurance of future performance under the contract or lease. A company may file a voluntary case under chapter 7 or chapter 11 However, a debtor does not have to cure a default that arises because if the company has a domicile, place of business or property in the of a provision in the contract conditioned on the insolvency of the United States.

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The grounds for commencing an involuntary case under chapter 7 are liquidated, assets of the company, such as the brand name or are the same as the grounds for commencing an involuntary case business model, may be acquired for use in a new venture. under chapter 11. See question 3.3 for further detail. 5 Tax 4.3 Who manages each winding up process? Is there any court involvement? 5.1 What are the tax risks which might apply to a In chapter 7, a trustee is appointed to marshal the assets of the restructuring or insolvency procedure? company, reduce them to cash and pay creditors. Officers and USA directors are displaced. Courts closely supervise the chapter 7 The bankruptcy process does not, in itself, impose additional tax process. As discussed in question 3.4, management generally risks on the debtor. Day-to-day tax liability is incurred during the remains in possession during a chapter 11 case, even if the company pendency of a bankruptcy case and claims for such liability are is liquidated during such case. generally paid as administrative expenses. While cancellation of indebtedness typically gives rise to taxable income under United 4.4 How are the creditors and/or shareholders able to States tax law, debt cancelled in a chapter 11 or chapter 7 case is not influence each winding up process? Are there any included as taxable income. restrictions on the action that they can take (including the enforcement of security)? 6 Employees Secured creditors are prevented from enforcing their security in the same manner in chapter 7 as they are in chapter 11. See question 6.1 What is the effect of each restructuring or insolvency 3.2 for further detail. Unsecured creditor interests are most often procedure on employees? represented by an official committee. While shareholders have standing to be heard, they generally have less influence in a chapter 7 case because the company is set to be liquidated by the trustee In chapter 11, the company may continue to employ its workers and rather than restructured. to pay their salaries and wages in the ordinary course of business. To the extent the company owes pre-petition salaries and wages, claims therefor will be entitled to priority status but only to the 4.5 What impact does each winding up procedure have on extent of $12,850 for each individual earned within 180 days before existing contracts? Are the parties obliged to perform the bankruptcy filing. outstanding obligations? Will termination and set-off provisions be upheld? The Bankruptcy Code restricts payments to “insiders”. Before a company incurs an obligation to retain such a person, the A chapter 7 trustee or chapter 11 debtor may assume or reject most court must determine, among other things, that the obligation is executory contracts or unexpired leases, subject to the court’s essential because such person has received a job offer at the same approval. See question 3.5 for further detail. or greater rate of compensation and that the obligation incurred is In chapter 7, the trustee must assume a contract or lease within 60 not greater than 10 times the amount of an obligation incurred to days of the order for relief or it will be deemed rejected, unless an non-management employees. A severance payment to an “insider” extension of time is granted by the court within such 60-day period. officer or director may not be allowed or paid unless the payment is part of a programme generally applicable to all full-time employees and the amount of the payment is not greater than 10 times the mean 4.6 What is the ranking of claims in each procedure, amount of severance pay provided to non-management employees. including the costs of the procedure? A chapter 7 trustee will likely terminate most employees. They Claims of secured creditors are entitled to priority with respect to will hold administrative priority claims for post-petition labour and their interests in collateral and are secured only to the extent of such lower priority claims for any pre-bankruptcy filing wages owing to interests. If a creditor is undersecured to some extent, such portion the extent described above. is treated as a general unsecured claim. The Bankruptcy Code confers priority on various categories of 7 Cross-Border Issues claims. All claims in a higher priority must be paid in full before claims with a lower priority may be paid. First priority is reserved for unsecured claims for certain domestic support obligations (if 7.1 Can companies incorporated elsewhere use the debtor is an individual). Second priority is conferred on claims restructuring procedures or enter into insolvency for expenses incurred in connection with the administration of the proceedings in your jurisdiction? estate. Administrative priority expenses include wages and salaries for employees for post-petition services rendered and compensation A company may file a voluntary case under chapter 7 or chapter 11 for professionals retained in the case, including a chapter 7 trustee. if the company has a domicile, place of business or property in the Lower priority categories include claims for certain pre-petition United States. Such company may also commence a chapter 15 case wages and employee benefit plan contributions and pre-petition tax in the United State for recognition of a judicial or administrative claims, among others. General unsecured claims generally rank proceeding in a foreign country. equally with each other.

7.2 Is there scope for a restructuring or insolvency 4.7 Is it possible for the company to be revived in the process commenced elsewhere to be recognised in future? your jurisdiction?

While the company as an entity is typically dissolved after its assets Yes. Chapter 15 cases are commenced by a foreign representative

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filing a petition for recognition of a foreign proceeding inaUS must file its own case under the Bankruptcy Code. In practice, bankruptcy court. A foreign proceeding is a collective judicial or however, group members usually file cases at the same time, in administrative proceeding in a foreign country in which the assets the same court, and are often represented by the same professional and affairs of a debtor are subject to control or supervision by a advisors. In addition, their cases generally are jointly administered foreign court for the purposes of reorganisation or liquidation. In for procedural purposes. chapter 15, the foreign representative may use such proceedings to There is scope for court supervised cooperation between groups request assistance from the US court for such relief as entry of a stay of companies and their officeholders. In fact, it is typical for the to protect property located in the United States. first day of a bankruptcy case to be devoted to motions designed to A bankruptcy court will recognise the foreign proceeding if: (i) maintain the “status quo” during the pendency of the case or cases; the foreign proceeding qualifies as a “foreign main proceeding” (a courts often grant motions to continue a group cash management USA foreign proceeding pending in the country where the debtor has the system, group shared services agreements and other inter-group centre of its main interests) or “foreign non-main proceeding” (a arrangements during these so-called “first-day hearings”. foreign proceeding pending in a country where the debtor conducts non-transitory operations); (ii) the foreign representative applying for recognition is a person or body authorised to administer the 9 Reform reorganisation or liquidation of the debtor; and (iii) the petition is accompanied by sufficient evidence of the commencement 9.1 Have there been any proposals or developments in of the foreign proceeding and of the appointment of the foreign your jurisdiction regarding the use of technology or representative. reducing the involvement of the courts in the laws Once the court has entered a recognition order concerning a foreign of your jurisdiction, which are intended to make main proceeding, several provisions of the Bankruptcy Code take insolvency processes more streamlined and efficient? effect automatically, including the automatic stay and provisions governing the use, sale or lease of property of the debtor in the US, Bankruptcy courts encourage and sometimes require the use and other relief may be available upon request to the court. While of electronic filing systems for filing proofs of claim and other such relief is not automatically available with respect to a foreign pleadings to streamline the administrative process. Additionally, non-main proceeding, the court has discretion to grant similar relief. pre-packaged, pre-negotiated, and pre-arranged cases – whereby the key constituents negotiate the terms of (and, with respect to pre-packaged cases, vote on) the restructuring plan prior to 7.3 Do companies incorporated in your jurisdiction the bankruptcy filing – are becoming increasingly popular. By restructure or enter into insolvency proceedings in conducting negotiations and voting on the restructuring plan prior other jurisdictions? Is this common practice? to the petition date, the debtor can reduce its time in bankruptcy.

It would be unusual for a company incorporated in the US to enter into plenary insolvency proceedings in other jurisdictions, although 9.2 Are there any other governmental proposals for this has occurred from time to time. reform of the corporate rescue and insolvency regime in your jurisdiction?

8 Groups There are currently no official legislative proposals for reform of the corporate rescue and insolvency regime. The American Bankruptcy Institute (the “ABI”), a private group comprised of insolvency 8.1 How are groups of companies treated on the practitioners and market participants, released a proposal for the insolvency of one or more members? Is there scope comprehensive reform of chapter 11 in 2014 that aimed to update for co-operation between officeholders? the more than 35-year-old regime to fit modern market needs and practices. While the ABI proposal has sparked conversation and Each member of a group of companies is treated as a separate entity debate by and among practitioners and observers, it has not spurred by the Bankruptcy Code. The insolvency of one group member legislative action. has no formal legal effect on other group members; each entity

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Alan W. Kornberg Elizabeth R. McColm Paul, Weiss, Rifkind, Wharton & Garrison LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas 1285 Avenue of the Americas New York, NY 10019 New York, NY 10019 USA USA

Tel: +1 212 373 3209 Tel: +1 212 373 3524 Email: [email protected] Email: [email protected] URL: www.paulweiss.com URL: www.paulweiss.com USA

Co-chair of the Bankruptcy and Corporate Reorganization Department A partner in the Bankruptcy and Corporate Reorganization of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Alan Kornberg Department, Elizabeth McColm specialises in the areas of handles chapter 11 cases, cross-border insolvency matters, out-of- corporate restructurings and bankruptcy. She has been involved in court restructurings, bankruptcy-related acquisitions and insolvency- major domestic and cross-border restructurings and bankruptcies sensitive transactions and investments. Alan’s recent assignments representing debtors, creditors and acquirers of assets. Her recent cover a diverse range of clients and matters, including representing engagements include representing: (i) Bon-Ton Stores in connection subsidiaries of CGG in their pre-negotiated chapter 11 cases; ad hoc with its restructuring efforts; (ii) Noranda Aluminum in its chapter 11 committees in the Tidewater and Texas Competitive Electric Holdings case; (iii) ad hoc debtholder groups in the Pacific Drilling, Armstrong chapter 11 cases and the Pacific Exploration and Production cross- Energy, Ultra Petroleum and SquareTwo chapter 11 cases and Oro border restructuring; EnQuest in its chapter 15 case; and The Winding- Negro restructuring; (iii) the Official Committee of Unsecured Creditors up Board of Glitnir hf. in the former Icelandic bank’s chapter 15 case. of Quicksilver Resources; (iv) Oaktree in the Excel Maritime and TMT Procurement chapter 11 cases; and (v) agents for two lending Alan has been recognised as a “Most Highly Regarded Individual” syndicates in the Genco Shipping and Trading Limited chapter 11 by Who’s Who Legal for restructuring and insolvency. He has been case. The Legal 500 recognised that Elizabeth “has an art for handling selected as a leading lawyer by Chambers US, Chambers Global, The difficult personalities to reach consensus” and IFLR1000 recognised Legal 500 and IFLR1000, and was chosen by his peers for The Best her as a “Leading Lawyer” in restructuring and insolvency. Lawyers in America. Alan is a Conferee of the National Bankruptcy Conference.

Diversity of experience, senior-level attention and seamless delivery of multidisciplinary services are the foundations of the Paul, Weiss Bankruptcy & Corporate Reorganization Department. We possess a thorough knowledge of every aspect of bankruptcy law, coupled with perspectives earned from representing every type of client. Our domestic and cross-border representations include debtors, official and unofficial committees of creditors and shareholders, secured and unsecured creditors and equity sponsors in chapter 11 cases, corporate reorganisations and workouts, non-bankruptcy insolvency proceedings and litigations and transactions involving financially distressed companies. We also represent purchasers of the assets, debt and securities of distressed companies. Our Bankruptcy Department fields large, multidisciplinary teams that leverage the resources of our firm as a whole. By drawing on the expertise of our Corporate, Finance, Securities, Tax, Litigation, Employee Benefits, Real Estate and Environmental Departments, we are able to tailor our efforts to the specific business challenges that our clients face.

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