Restructuring & Insolvency 2020

A practical cross-border insight into restructuring and insolvency law 14th Edition

Published by Global Legal Group, in partnership with INSOL International and the International Insolvency Institute (III), with contributions from:

Allen & Gledhill LLP Indrawan Darsyah Santoso Paul, Weiss, Rifkind, Wharton & Garrison LLP Cleary Gottlieb Steen & Hamilton LLP INSOL International Pirola Pennuto Zei & Associati De Pardieu Brocas Maffei A.A.R.P.I. International Insolvency Institute (III) SCA LEGAL, SLP Deloitte Kosova Sh.p.k. Kennedys Schindler Rechtsanwälte GmbH Deloitte Legal Sh.p.k. Lennox Paton SOLCARGO Dhir & Dhir Associates Lenz & Staehelin Stibbe Dirican | Gözütok Macfarlanes LLP Synum ADV ENGARDE Attorneys at law Miyetti Law Vassilev & Partners Law Firm Gall Mori Hamada & Matsumoto Waly & Koskinen Attorneys Ltd. Gilbert + Tobin Noerr LLP ISBN 978-1-83918-040-8 ISSN 1754-0097

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59 Tanner Street London SE1 3PL United Kingdom Restructuring & Insolvency 2020 +44 207 3 67 0720 [email protected] th www.iclg.com 14 Edition

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Senior Editor Contributing Editor: Sam Friend Jat Bains Head of Production Suzie Levy Macfarlanes LLP

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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. Table of Contents

Editorial Chapters

INSOL’s Role in Building Cross-Border Collaboration 1 Julie M. Hertzberg, INSOL International

International Insolvency Institute – An Overview 4 Debra Grassgreen, International Insolvency Institute (III)

Expert Chapters

Restructuring in the Next Recession 7 Simon Beale & Tim Bromley-White, Macfarlanes LLP

Dynamic Trends in Chapter 15 12 Cleary Gottlieb Steen & Hamilton LLP

Q&A Chapters

Albania Italy 19 Deloitte Legal Sh.p.k.: Erlind Kodhelaj & Zhuljeta 113 Pirola Pennuto Zei & Associati: Massimo Di Terlizzi Mena Japan Australia 122 Mori Hamada & Matsumoto: Daisuke Asai & Dai 25 Gilbert + Tobin: Dominic Emmett & Alexandra Katagiri Whitby Kosovo Austria 128 Deloitte Kosova Sh.p.k.: Ardian Rexha & Vegim Kraja 33 Schindler Rechtsanwälte GmbH: Martin Abram & Florian Cvak Mexico 134 SOLCARGO: Fernando Pérez Correa Camarena & Bahamas Zulima González García 39 Lennox Paton: Sophia Rolle-Kapousouzoglou Netherlands Belgium 141 Stibbe: Job van Hooff & Daisy Nijkamp 45 Stibbe: Pieter Wouters & Paul Van der Putten Nigeria Bermuda 148 Miyetti Law: Dr. Jennifer Douglas-Abubakar, 51 Kennedys: Nick Miles & Lewis Preston Ikiemoye Ozoeze & Zada Amede Oputa

Bulgaria Russia 61 Vassilev & Partners Law Firm: Konstantin Vassilev 154 Synum ADV: Alexander Zadorozhny & Artem Kazantsev England & Wales 67 Macfarlanes LLP: Jat Bains & Paul Keddie Singapore 161 Allen & Gledhill LLP: Edward Tiong & Kenneth Lim Finland 74 Waly & Koskinen Attorneys Ltd.: Tuomas Koskinen & Spain Sami Waly 167 SCA LEGAL, SLP: Pedro Moreira & Isabel Álvarez

Switzerland France 175 80 De Pardieu Brocas Maffei A.A.R.P.I.: Joanna Lenz & Staehelin: Tanja Luginbühl & Dr. Roland Gumpelson & Philippe Dubois Fischer

Germany Turkey 184 88 Noerr LLP: Dr. Thomas Hoffmann & Isabel Dirican | Gözütok: Gökben Erdem Dirican & Ali Giancristofano Gözütok

Hong Kong Ukraine 191 95 Gall: Nick Gall, Ashima Sood & Kritika Sethia ENGARDE Attorneys at law: Dmytro Donenko & Artem Parnenko India 101 Dhir & Dhir Associates: Sachin Gupta & Varsha USA 198 Banerjee Paul, Weiss, Rifkind, Wharton & Garrison LLP: Alan W. Kornberg & Elizabeth R. McColm Indonesia 107 Indrawan Darsyah Santoso: Immanuel A. Indrawan & Eric Pratama Santoso Welcome

Preface

Welcome to the 2020 edition of ICLG – Restructuring & Insolvency. Macfarlanes is delighted to continue to serve as the publication’s contributing editor. The economic landscape against which we operate, as well as the world at large, has altered significantly for the worse since the time much of this publication was written. For example, we have seen in the UK, that a quarter of businesses have suspended normal trading as a consequence of COVID-19, causing significant hardship for individuals and businesses alike. Further, whilst it is easy to see the inter-connected nature of business operations across borders when one considers sectors such as retail, automotive and leisure to name a few, it is much less easy to navigate the myriad insolvency laws which might apply to those operations in a worst-case scenario. I expect, therefore, that this book should be of even greater value to those of you who are having to manage the financial distress arising from COVID-19, both in respect of yourselves and your counterparties, across multiple jurisdictions. Indeed, it would appear that the piece written by my colleagues Simon Beale and Tim Bromley-White, thinking ahead to how restructuring processes may differ in the next recession, will be tested as to the accuracy of its predictions much sooner than we expected. We look forward to reporting back on this next year. This year’s edition contains contributions from many leading practitioners, including an insight into the issues in restructuring and insolvency across 27 jurisdictions. We are very grateful for their support and we trust that you will find it valuable. In many, if not all, jurisdictions, measures are being taken by governments to update, suspend and/or enhance laws in order to protect individuals and businesses from the effects of the economic turmoil that they are currently facing. We also expect further change to follow as the unforeseen consequences of the first rounds of law reform, and the consequences of the first waves of distress, become better known. Please do get in touch with relevant contributors directly, should you need to understand the most recent developments in any particular place. I hope that you keep well.

Jat Bains Macfarlanes LLP Contributing Editor ICLG – Restructuring & Insolvency 2020 Welcome Chapter 1 1

INSOL’s Role in Building Cross-Border Collaboration

INSOL International Julie M. Hertzberg

Introduction question and answer panel, which featured an array of market experts and was chaired by broadcast journalist Rico Hizon. At a time of global uncertainty, I am pleased to be asked to Conferences like this remind all of us how cooperation is critical contribute to this publication and discuss INSOL International’s to establishing seamless cross-border insolvency and restruc- role in building cross-border collaboration. Globally, we are turing regimes which encourage lending and better global busi- being confronted with unprecedented changes and creating ness practices. newfound solutions to problems we never could have antici- Our global programme of one-day seminars was also highly pated we would encounter in our lifetimes. This is not unique successful in 2019, attracting over 850 delegates from 34 coun- to our industry; however, as professionals within the crisis tries at seven individual seminars. We held our second Nordic management and restructuring community, we are accustomed European seminar with great success in Stockholm in May to approaching each new hardship as a challenge and I have 2019, focusing on specific regional restructuring issues and been filled with pride to see the manner in which my peers and the EU Directive. In June, we hosted our annual Channel colleagues have come together and risen to meet the COVID-19 Islands seminar, this year held in Guernsey and attracting well challenge. Like you, we at INSOL International are approaching over 100 delegates. Four seminars were organised in Eastern these circumstances with increased dedication and focus. Be Asia throughout October and November, beginning in Beijing assured that INSOL will grow from the trials we are facing. and Shanghai. INSOL returned to Hong Kong for its second We will become more creative about online learning, find new annual seminar there, which was also accompanied by a panel ways to connect with our colleagues around the world and be a session specifically aimed for financiers based in the Asia- reminder of why it is so essential that we all pull together to help Pacific region. Our final seminar in this region was held in rebuild the global economy. Tokyo in early November and, along with the other events in As I write this, I am nearing the end of my first year as this regional series, received great feedback for the interesting President of INSOL International. It has been energising range of region-specific topics and selection of relevant and and inspiring to work with the Board and staff at INSOL and high-profile speakers. Finally, in December, we finished the build on the successes of my predecessor, Adam Harris. My year with our Offshore (Bahamas) seminar. Held in associa- presidency began in Singapore at the conclusion of our annual tion with our member association RISA Bahamas, this event conference which attracted over 950 participants from 69 coun- welcomed 135 delegates. A notable highlight of this seminar tries. Approximately 112 judges from those countries partici- was the very well-received keynote address from the Hon. pated in a closed-door Judicial Colloquium, brainstorming ways Judge Kevin Carey. to enhance cooperation within cross-border legal disputes. The conference formed part of a constructive roster of INSOL events Education in 2019, each one bringing together peers and colleagues from around the globe, facilitating the sharing of ideas and building The value of education can never be underestimated, and our of cross-border relationships. I would like to take this oppor- strategic review identified a growing need for an entry-level tunity to reflect not only on the success of those events, but to introductory cross-border training course, particularly in the celebrate all of the achievements made in the past 12 months, to developing world. This need ushered in an initiative that led to remind ourselves of the great things we are capable of when we two years of research, planning, and hard work, undertaken by a all pull together. dedicated committee brought together to create a wholly online solution, now known as the postgraduate Foundation Certificate Events in Insolvency Law. The course has already attracted 119 students from 35 countries. With the course beginning in September Singapore was host to INSOL’s annual conference in April 2019. 2019, candidates are required to complete eight modules which The conference saw filled-to-capacity ancillary programming can be chosen to suit the interests and local needs of each indi- for the Judicial and Academic Colloquia, the offshore, small vidual, with three compulsory elements to ensure a core under- practice and younger members meetings, and the fifth annual standing of international insolvency law. The online nature of INSOL Fellows forum, in addition to a well-rounded and highly this course makes it highly accessible and cost-effective and will relevant technical programme built on the theme of looking help younger practitioners enter the industry. to the future: what to expect and how to prepare. Professor The Global Insolvency Practice Course (GIPC), celebrated its Richard Susskind provided an excellent and thought-provoking 10th year in 2019. In the last decade, it has seen 171 professionals keynote session and the conference was closed with a dynamic achieve the accreditation of Fellow, INSOL International, and

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 2 INSOL’s Role in Building Cross-Border Collaboration

we are very proud of this and of our fellows who continue to Asia Hub prove themselves to be highly engaged individuals helping to shape INSOL’s future. In 2019, we welcomed 25 professionals It was a great personal honour to have been able to launch during from 13 countries and I am sure they will contribute just as my presidency the INSOL Asia Hub, in August 2019. The crea- much in the years to come as those INSOL Fellows before them. tion of our INSOL Asia Hub is the realisation of another initiative resulting from INSOL’s strategic review. The INSOL Asia INSOL International Technical Publications Hub (located in Singapore) provides a presence in the region that will enable INSOL to increase its engagement with existing Our technical library, which can be found on the INSOL members and other key stakeholders, providing an on-the-ground website, is a worthwhile point of reference for any professional platform to assist in the development of best practices for insol- concerned with insolvency and restructuring. The publications, vency and restructuring systems in Asia, and strengthen rela- whether in the form of books, special reports, and technical tions with government agencies, regulators, the judiciary, and papers, cover an array of topics and cutting-edge developments. global agencies. I am happy to say the response to this initiative These publications could not be produced without the knowl- has been unanimously positive and we look forward to what it edge and experience of those members who have contributed, will achieve in the future. for which we are so grateful. Looking ahead, and conscious of the shadow COVID-19 2019 has seen the publishing of books covering issues such is casting across the world, I say with confidence that INSOL as current employee entitlements and bank resolution. Special International is dedicated to ensuring it remains forward-focused reports have been published that have covered highly topical and relevant to its members and the global insolvency and restruc- areas such as artificial intelligence and cryptocurrency, and tech- turing industry at large. We will look to distribute more content nical papers have included aircraft repossession upon a default, and training on an online basis, using technology to ensure we and the new bankruptcy laws in Morocco and Bahrain amongst can deliver to our members, whatever the impact brought on by many others. Furthermore, we have added three additions to external forces beyond our control. 2020 will be a difficult year our small practitioners’ technical paper series. for all and certainly challenging for INSOL, but I am filled with pride to consider the depth of our membership of approximately 10,000 professionals through over 40 Member Associations. Historically, INSOL’s success has been the result of an engaged membership willing to contribute their time, intellect and expertise, and I believe their support will help us weather the storm of these challenging and uncertain times.

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London INSOL International 3

Julie M. Hertzberg is the founder of Alvarez & Marsal’s Case Management Services group, which is a division within the North American Restructuring practice. With more than 19 years of experience in bankruptcy and restructuring advisory work, Ms. Hertzberg has supervised and advised in all phases of Chapter 11 case management. Ms. Hertzberg has advised clients across a range of industry sectors, including financial services, automotive, retail, wholesale, manufacturing, real estate, and healthcare. Ms. Hertzberg’s group’s case experience includes Lehman Brothers Holdings, Inc., iHeart Media, Financial Management Oversight Board for Puerto Rico, Boy Scouts of America, Dean Foods, Seadrill, Exide Technologies, The Chicago Tribune, Hawker Beechcraft, Visteon Automotive, Lear Corporation, LightSquared Inc, Blockbuster Inc, Aleris International, Tronox Incorporated, SIRVA Corporation and over 40 oil and gas companies. Ms. Hertzberg also sits on the Executive Committee for A&M’s North America Restructuring practice and is a member of IWIRC and the ABI. Ms. Hertzberg maintains a bar licence in Michigan and New Mexico.

Alvarez & Marsal Tel: +1 248 936 0850 755 W. Big Beaver Rd Email: [email protected] Suite 650 URL: www.alvarezandmarsal.com Troy, Michigan, 48084 USA

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. There are currently over 40 Member Associations worldwide 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. ©2019 Copyright INSOL INTERNATIONAL. All Rights Reserved. Registered in England and Wales, No. 0307353. INSOL, INSOL INTERNATIONAL, INSOL Globe are trademarks of INSOL INTERNATIONAL. www.insol.org

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 4 Chapter 2

International Insolvency Institute – An Overview

International Insolvency Institute (III) Debra Grassgreen

Introduction The board consists of members with a good cross-section of geographic, gender and professional backgrounds. It meets While most have expected some form of downturn/correc- monthly, and all major decisions have to be approved by the board. tion in a number of global markets either towards the end of The Executive Committee consists of the President, the imme- 2019 or in the early part of 2020, only few may have expected diate past-President and four Vice-Presidents. The President that it would be a virus that would turn our world upside down is Debra Grassgreen of Pachulski Stang Ziehl & Jones, San and would make organisations like the International Insolvency Francisco (USA) and the immediate past-President role is Institute (“III”) and others ever more important to ensure that represented by Alan Bloom of EY, London (UK). The Vice- we will recover. With most countries in shut-down, it will be Presidents are: John Martin of Norton Rose Fulbright, Sydney the restructuring and insolvency professionals that will ensure (AUS); Pekka Jaatinen of Castren & Snellman Attorneys, that we will recover in a more or less orderly fashion. This Helsinki (FIN); Justice Ramesh Kannan of the Supreme Court is an unprecedented time for all of us and it will make both of Singapore; and Hon. Shelley Chapman of the U.S. Bankruptcy in-court and out-of-court restructurings and insolvency ever Court in Southern District of New York. more important and ensure that there is maximum cooperation The Executive Committee and other committees are supported between those representing enterprises in different jurisdictions by a small, experienced team of senior administrators. and the judges who preside over estates that are subject to multi- The III’s operational committees consist of three types: jurisdictional proceedings. ■ Four Regional Committees representing: USA/Canada The III is dedicated to this and through our activities, our and the Caribbean; EMEA; Asia; and Latin America. sponsorship of projects, conferences, academic and judicial ■ Four core committees: Partnerships; Programs and meetings and regional activities, we seek to develop thinking in Meetings; Projects; and Law and Practice Reform. the area of cross-border insolvency and to support international ■ Various specialist committees such as: the Academic organisations and in some cases, individual countries or their committee; the Judicial committee; and the NextGen judiciary that are looking to develop and/or implement legisla- committee. tion which furthers cross-border insolvency. Each of the Regional Committees has co-chairs and between The III is now 20 years old and has undergone some consid- five and 10 members. The role of the regional committees is erable governance changes over the last few years in order to principally to: ensure its operations and the breadth of its activities. ■ identify suitable new members; The organisation has approximately 400 members with a cap ■ identify new candidates for the NextGen programme; on membership of 500. Membership is currently: 40% North ■ organise regional activities including meetings, webinars, American and the Caribbean; 32% Europe, Middle East and etc.; and Africa; 18% Asian; and 10% Latin American. We have a stated ■ consider projects for submission to the Projects Committee. objective to increase representation from jurisdictions with less The Partnerships Committee ensures that the III is working mature insolvency regimes and therefore less well-developed closely with other like-minded organisations in a positive and insolvency professions and judiciary. proactive way and collaborating on projects and joint-ventures Our membership is currently 81% male and 19% female, where appropriate. with a clear and stated intention of increasing the percentage of The Programs and Meetings committee oversees the work of female members. our annual conference committees, ensures that we present the Finally, on membership, we have: 17% judges; 14% academics; best possible conferences and learn from the lessons of previous 65% legal practitioners; and 5% financial advisory practitioners. events to ensure quality, consistency and continuity. It is also We have a keen interest in increasing the number of financial advi- responsible for looking at future destinations for the annual sory members across the full range of financial advisory activities. conference and ensuring that each of the regional meetings are As membership is by invitation through full member sponsor- dovetailed with other activities within the Institute. ship, we have a network of individuals, as part of our member- The Projects Committee is responsible, in liaison with the ship committee, who liaise with the existing membership to Academic Committee, for helping to generate ideas for new establish a pipeline of candidates who are to be considered for projects and approving any proposed projects before they are membership. sanctioned by the Executive Committee and the Board. In terms of governance, the organisation is accountable to The Law and Practice Reform Committee is looking at oppor- its members, through a Board, an Executive Committee and a tunities to use the skill base of the III membership to support series of operating committees.

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London International Insolvency Institute (III) 5

initiatives either cross-border or within countries, to develop These meetings, usually followed by lunch or dinner, tend to insolvency/bankruptcy regimes and to support the development involve no more than 50 to 60 members and sometimes as few of a suitably skilled judiciary. as 10 to 20. They represent an opportunity to deal with signif- The Academic Committee meets on the day before each icant issues of the day and, with relatively few involved, there annual conference and part of the meeting is open for any of is the opportunity to dive deeper and engage more fully in the our members to attend. It provides a forum for the discussion topics presented. and debate on key topics and its work often results in the gener- In order to cope with social distancing, we have initiated ation of new project ideas, as well as input to our regional and COVID Coffee Breaks within the regions so our members can annual events. still exchange current issues in legal and regulatory changes in The Judicial Committee also meets the day before our annual an informal matter. conference. Unlike the Academic forum, the Judicial forum is not open to non-judges and it serves to stimulate debate and influ- Webinar ences the subject matter for projects, wider forums and future conferences, for example on court-to-court communication. Last November, we ran our second webinar on issues arising At the Barcelona Annual Conference last June, there was again from the new EU Directive on Restructuring and Insolvency an opportunity for the academics and judges to get together and with comparative views from the Netherlands, France, Germany discuss issues of mutual interest. and the Czech Republic. The event was a great success and The NextGen membership consists of approximately 85 allowed access to a much wider group of participants without current members and approximately 30 alumni. The NextGen the cost and time commitment of travelling. I fully expect that group organise their own conference, with a completely sepa- the III will do more of these in the future. We will start to rate tailor-made programme which they develop, which takes use the virtual meeting platforms also for our leadership meet- place the day before each annual conference. There is an ings and are considering running our first annual membership open invitation for full members to participate. NextGen also meeting virtually. organise their own social programme. Increasingly, NextGen members support and participate in the work of the full member Ian Fletcher Moot Competition committees. In a strong collaboration with INSOL International, we have Finally, we have subcommittees looking at issues such as created a branded moot competition in honour of Professor Ian intellectual property rights in insolvency, sovereign debt restruc- Fletcher. turing and UNCITRAL liaison. Running for the fourth time after Sydney (2017) and The creation of these committees and the increased level of Vancouver (2018), the third took take place in Singapore (2019) governance have meant that there is far more activity at the III and the fourth in London in February 2020, coinciding with the than ever before, with many more opportunities for members to III strategic meeting mentioned earlier. participate. A few highlights from the past year and from the The quality of submissions and the prominence of the judges programme for the next few months represent a major change in make this a very impressive, now annual, event. The III and the scale of opportunities for our members to get involved and INSOL International are committed to this for the foreseeable significantly greater platforms for the Institute and its members. future and we are currently preparing for the next moot court to be held in San Diego, coinciding with the Judicial colloquium Annual Conference that forms part of the INSOL International Annual Conference. Our next conference was to be held in Hong Kong in June 2020. Due to the uncertain political circumstances, the III has decided Academic Events/Panels to reallocate its conference to New York. At this time of writing, In September 2019, the III held a Scholars Work-in-Progress due to the COVID-19 pandemic, the annual conference has been Workshop at Brooklyn Law School. The gathering, of many further postponed to later in the year 2020. We are currently of the leading lights from academia and professional practice as assessing all options. The venue for 2021 is already confirmed well as upcoming bright scholars, has been recorded in a series and, for the second time after 2014 in Mexico City, we will host of papers. our Annual Conference Latin America in Sao Paolo from 13–15 In November 2019, the Second International Comparative June. The venue for 2022 will be Hong Kong from 12–14 May. Insolvency Law Symposium was held at the University of Miami, which was attended by a number of leading academics Strategic Meeting in the field. In February 2020, the III leadership met in London for their In February 2020, the Third Secured Transactions strategic meeting. All members of the Executive Committee, Coordination Conference took place in Cartagena, Colombia. the Board and all co-chairs of the Regional and Operational The event coincided with an UNCITRAL event about secured Committees were invited to discuss and review the governance transactions in Latin America. changes since the last strategic meeting in January 2017. The III also ran panels at other organisations’ events: at the During the meeting, the participants discussed the terms ABI International symposium in Paris; at the NCBJ confer- of reference of the committees, their activities and room for ences; and in conjunction with the International Committee of further development. the ACB.

Regional Meetings Support for Law and Practice Reform During the course of the last 12 months and prior to social The III has provided considerable support in terms of members’ distancing, we have held regional meetings in London, time, to the Asian Business Law Institute’s initiative, looking at Amsterdam, Mexico City, Miami, San Diego and São Paulo. the insolvency regimes in a dozen or so Asian jurisdictions, and Further meetings will reconvene after the pandemic. ways in which the various domestic codes can be made more consistent.

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 6 International Insolvency Institute – An Overview

Debra Grassgreen is a partner at Pachulski Stang Ziehl & Jones of San Francisco and President of the International Insolvency Institute from 2019–2021.

Pachulski Stang Ziehl & Jones LLP Tel: +1 415 263 7000 150 California Street, 15th Floor Fax: +1 415 263 7010 San Francisco Email: [email protected] 94111, CA URL: www.pszjlaw.com USA

The International Insolvency Institute is: ■ A non-profit, limited membership organisation. ■ An invitation-only membership of the most senior, experienced and respected practitioners, academics, judges and financial industry professionals in the world. ■ Dedicated to improving international cooperation in the insolvency field. ■ Focused on promoting greater international cooperation and coordination through improvements in the law and in legal procedures. ■ Continually studying, analysing and providing solutions to problems in cross-border insolvencies and reorganisations. ■ Awarded special consultative status to United Nations Agencies. www.iiiglobal.org

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London Chapter 3 7

Restructuring in the Next Recession Simon Beale

Macfarlanes LLP Tim Bromley-White

Introduction as these sponsors offer debt investors the prospect of repeat business and the opportunity to invest large sums in a single Restructuring professionals can be accused by their colleagues transaction. of gloomily, or possibly even gleefully, predicting that the next Whereas a “conventional” loan may contain multiple finan- recession is just around the corner. Nonetheless, in the UK, cial covenants including a cash flow cover ratio and a limit on it has been a decade since the last recession and seems reason- capital expenditure, a cov-lite loan will only have a single finan- able to suggest we are now closer to the start of the next reces- cial covenant, usually a leverage to EBITDA covenant. In addi- sion than the end of the last one. It may therefore be timely to tion, a cov-lite loan does not require the borrower to maintain consider what the next wave of restructurings might look like. compliance on an ongoing basis by testing covenants at regular Here, we should avoid the mindset of an old general plan- intervals. Instead, covenant testing for a cov-lite loan is on an ning to fight the next war in the same way as the last. It should incurrence basis. This means that the financial covenant is not be assumed that restructurings in and after the next down- only tested when the borrower is taking certain actions, such turn will follow the pattern of the restructurings that occurred as making an acquisition or making a distribution, so that the in the aftermath of the global financial crisis of 2007–2008. It is timing of the covenant test is within the borrower’s control. important to consider how loan terms and the loan markets have P.G. Wodehouse tells the story of a golfer who, troubled by developed since then, as it is possible that loans being made now his inability to play his favourite 18-hole course in fewer than will feature heavily in the next wave of restructurings. 100 strokes, devised a series of calculation aids to improve his It is clear that the loan market has become more borrower- tally. For example, he determined that it was no longer neces- friendly. However, the extent to which it has moved in sary to record tee-shots which landed in the lake rather than on borrowers’ favour and the way in which this has developed over the fairway as part of his total. By this ingenious method, he the past decade differs between mid-market borrowers and large finally achieved the double-digit scores he so desired. borrowers. This raises a question as to whether there will be a With similarly inspired practices, the definition of EBITDA knock-on divergence in restructurings between the two market used in the remaining leverage test for cov-lite loans is often segments. heavily skewed in the borrower’s favour with the inclusion of This chapter focuses on leveraged finance rather than so-called “add backs”. For example, “one-off” costs and syner- investment-grade corporate lending. It is difficult to define gies which management subjectively expect to achieve but exactly where the boundary lies between mid-market and large have not actually yet achieved in practice, may be added back borrowers. For the purpose of this chapter we will regard a to inflate EBITDA. The overall effect is that for the purpose mid-market borrower as one with around £75 million in earnings of testing a leverage covenant, the leverage ratio may be much before interest, tax, depreciation and amortisation (“EBITDA”). lower than that calculated by a conventional method. Add backs We appreciate of course that, in reality, there are borrowers who are neither new nor confined to the large-cap lending market. may have lower EBITDA than this who are nonetheless treated However, they are more prevalent there. In the mid-market, add by lenders as if they were a large-cap borrower and vice versa. backs are often subject to greater controls, such as a cap on the overall amount of add backs that may be used or a requirement Cov-Lite Loans that add backs based on projected synergies be certified by the chief financial officer or even by the external auditors. The majority of leveraged loans, in the US and increasingly in The undertakings in loan documents have also been weak- Europe, to large borrowers have been on so called “cov-lite” ened by expanding the range of permitted transactions that can terms. These borrower-friendly terms originated in the US high- be entered into without lenders’ consent. Permitted transac- yield bond market but have spread geographically to Europe and tions covenants will usually feature a stated monetary value, or have migrated across products into loans. The convergence has “basket”, of permissible transactions. The value of a transac- been driven by a common set of institutional investors moving tion, either alone or as part of the aggregate value of transac- from the bond to the loan markets in search of yield and the tions undertaken, must exceed this basket before it ceases to be opportunity to deploy large stockpiles of “dry powder” capital a permitted transaction. Strong borrowers will push for these that they have raised but need to invest. At the same time, low baskets to grow, often in line with EBITDA, the same EBITDA interest rates and an imbalance between the supply of lending that those borrowers have already inflated by including add capital and the demand for loans has pushed the market deci- backs. The interaction between different types of permitted sively in favour of borrowers. This is particularly the case for transaction has also become more complex, which can make it borrowers owned by large, well-known private equity sponsors, difficult for lenders to fully understand exactly what borrowers

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are able to do. Infamously, the retailer J Crew was able to practitioners as special managers to assist the Official Receiver combine various transactions which were each individually by providing additional capacity and expertise. allowed under its loan agreement to transfer most of its intel- The shortage of cash may have been a relevant factor in taking an lectual property, its most valuable asset, to a new subsidiary that appointment as a special manager, with the payment of the special was beyond the reach of its senior lenders. manager’s fees underwritten by the Government, a less risky and more attractive option for the insolvency practitioners involved. Nevertheless, if compulsory liquidation with special managers Impact of weak loan covenants on restructurings becomes the “new normal” for insolvencies of large companies, this could be a blow to the rescue culture. Administration, with The purpose of financial covenants is to serve as an early warning its moratorium on creditor action and ability to continue trading, of a deterioration of the borrower’s financial condition. A breach was supposed to be a key enabler of the rescue culture. In prac- of the financial covenant used to be the main trigger for the start tice, it may be possible to run a liquidation in a manner very of restructuring negotiations, as it would force the borrower to similar to an administration. This appears to have been the case engage with its lenders and give the lenders the leverage to push for British Steel in particular, where its liquidator and special for the necessary changes. Without financial covenants, or with managers have made full use of their limited power to trade in financial covenants that are difficult to breach, the borrower’s a liquidation where it is beneficial for an orderly winding up. management can avoid taking action for longer. They have been able continue British Steel’s business in order By the time a borrower under a cov-lite loan does try to to keep a business sale, rather than simply an asset sale, alive. restructure, it may be much further down the decline curve. At However, this sits uncomfortably with the fact that liquidation this late stage it is likely to have less liquidity. Indeed, an immi- is designed to be a terminal procedure rather a tool for corporate nent shortage of cash may be the factor which has eventually recovery. It has been adopted as a tool for certain large corpo- triggered the attempted restructuring. This inevitably means rate recoveries as a last resort. the company has fewer options available to it and the prospects It does not appear that the trend for compulsory liquidations of a successful corporate recovery are lower. Consequently, we with special managers will apply to insolvencies of mid-market expect to see a greater number of formal insolvencies in the next and smaller companies. These insolvencies are unlikely to have cycle, requiring the skills and experience of insolvency practi- the national economic impact or political saliency that would tioners to a greater extent than may have been the case during make the Government willing to guarantee the costs of a special the previous era of “amend to extend”. manager. Accordingly, administration may retain its popularity The borrowing of cov-lite loans and the issue of similarly as a tool for restructuring medium-sized companies and add cov-loose high-yield bonds is more common among larger to a divergence of restructuring practice with large company companies. This is not to say that mid-market terms have not insolvencies. also weakened over the past decade. However, this is often accomplished by setting financial covenants with increased Transferability of Loans and Loan-to-Own head room to the borrower’s financial base case model, so that a larger deterioration in the borrower’s performance is needed Investors to breach the covenants rather than by removing the financial Before the global financial crisis of 2007–2008, the transfera- covenants entirely or testing them on an incurrence basis only. bility provisions of a facility agreement were usually only lightly Cov-lite terms are occasionally agreed in mid-market lending negotiated and there were few restrictions on how lenders could transactions, but generally the position of lenders is relatively trade their loans. The wave of restructurings that followed in strong in this segment of the loan market so they are able to the immediate aftermath of the global financial crisis taught resist cov-lite terms. Accordingly, the impact that cov-lite loans lenders and private equity sponsors two lessons about transfer- can cause by delaying the start of a restructuring will be dispro- ability provisions. portionately felt in restructurings of larger borrowers. Firstly, the lack of restrictions on the trading of loans meant that in many cases the borrower or an affiliate could purchase Compulsory Liquidation and Special the debt on the secondary market. This offered the borrower Managers both a lever to influence the restructuring negotiations and, where the debt traded at a heavy discount, a cheaper way of The fates of Carillion, British Steel and Thomas Cook, the three reducing its debt than repaying it at its full value. largest insolvencies in the UK of the past two years, may be an This practice caused discontent among lenders who perceived indication of how future insolvencies of large companies that do it as contrary to the pro rata sharing of risk and return among not attempt to restructure promptly could pan out. In the past, members of the syndicate. They viewed lenders who were affili- one may have expected that when such a company became insol- ated with the borrower group unfavourably, as those lenders had vent it would enter administration. Insolvency practitioners interests that were not aligned with those of the rest of the lender appointed as administrators would take over the management group. The opposition from lenders has resulted in changes to of the company. The administrators would have the ability to loan terms which have made debt buybacks by borrowers less continue trading while a moratorium on creditor action provided relevant for future restructurings. This is one of the few areas the breathing space for a restructuring and a return to solvency in loan documentation where the market position has moved or at least a better result for the creditors than a liquidation. in favour of lenders. In Europe, this is in large part due to the In the case of each of the identified insolvencies, no private Loan Market Association’s recommended form of leveraged sector insolvency practitioner was prepared to accept an appoint- finance facilities agreement moving from a form which has no ment as administrator. Instead these companies entered into restrictions on debt buybacks to a form which proposes two compulsory liquidation. As with all compulsory liquidations, alternatives. The first alternative is a prohibition on acquisition the liquidator appointed by the court was the Official Receiver, a of the debt by the borrower or its group. The second alternative civil servant in the Government’s Insolvency Service. However, allows buybacks but only under certain conditions, including: in these cases the court also appointed private sector insolvency i) that there is no default; and ii) that the funding for the debt

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buyback comes from new shareholder funds or excess cash flow. crisis, as explained in more detail below. Overall, it seems likely These are conditions which a distressed company may struggle that the trading in debt and the involvement of distressed debt to meet. investors to force stronger restructuring discussions and offer The second lesson about transferability provisions was one additional funding, particularly on the larger transactions, will that borrowers in particular took to heart. It transpired that also be delayed in comparison with what was seen in the last so-called “loan-to-own” investors were readily able to buy cycle. the debt owed by borrowers. This class of investor sought out distressed debt which was trading at a heavy discount to The Rise of Credit Funds and Unitranche its par value with the ultimate aim of obtaining equity as part Loans of a restructuring. Private equity sponsors generally viewed the appearance of loan-to-own investors among their lenders Until the last recession, banks still dominated mid-market lever- with suspicion. Their concern was that instead of supporting aged finance both in the UK and elsewhere. This dominance a restructuring that would leave the existing shareholders with has now been broken. Among other factors, new capital reserve some value for their equity, the loan-to-own investors would requirements have made risky leverage lending a punitively pursue a strategy to obtain the equity for themselves. Where expensive activity for banks to bear on their balance sheets. As a loan-to-own investor was unable to obtain equity, they were the banks have retreated, credit funds, fuelled by investors in often still able to take advantage of the lender consent provi- search of yield, have stepped forward to take their place. sions in the documents to resist alternative restructuring plans. The success of credit funds has also been linked to the popu- In this case, other stakeholders may have had no alternative to larity of the unitranche loan product. Instead of separate senior paying a premium to the loan-to-own investor in order to get and mezzanine loans, credit funds have offered a single term them to sell their blocking stake. loan with an interest rate positioned between the costs of senior Borrowers, particularly larger borrowers with more negoti- and mezzanine debt. For restructuring professionals this means ating power, have since sought to limit the ability of loan-to-own there are likely to be fewer restructurings involving disagree- and other distressed debt investors to acquire the borrower’s ments between mezzanine and senior lenders. debt without its consent. The new restrictions can take the This does not mean that intercreditor issues have disap- form of blacklists which prohibit transfers of the debt to certain peared. Credit funds are usually unable to provide revolving named investors or white lists which name the specific inves- credit facilities. These are typically still provided by banks on tors to whom the debt can be transferred without the consent of a super-senior basis. The super-senior revolving credit lender the borrower. In the European loan market, although not the and the unitranche lender would rank pari passu for payments in US, borrowers have attempted to impose blanket restrictions on the ordinary course, but in an enforcement scenario the super- any investor that has a reputation for following loan-to-own or senior lender would rank first in the payment waterfall. The distressed debt investment strategies. Typically, such restrictions revolving credit facility in these structures is usually a relatively would still fall away upon the occurrence of an event of default. small proportion of the total debt so intercreditor agreements Nevertheless, some aggressive borrowers have managed to keep will typically give the unitranche lender the ability to control the transfer restrictions in place until there is a major event of the enforcement period. The revolving credit lender would default such as insolvency or non-payment so that even a finan- normally be subject to standstill and restricted from enforcing, cial covenant breach may not make a loan freely transferable. unless there is a major event of default to give the unitranche lender a window of opportunity to implement a restructuring. There is also a prospect of another intercreditor struc- Impact of transferability restrictions ture arising with unitranche loans. The unitranche loan may be re-tranched into a first-out and a last-out tranche. At first Despite the advantages to a borrower in having transferability sight, this may seem like a return to the old senior and mezza- restrictions, they reduce liquidity in the secondary market for nine debt structure. However, where a unitranche loan is loans by trapping in existing lenders and discouraging the entry re-tranched, this is normally achieved by an agreement between of new lenders. This could impede a restructuring. Lenders lenders alone. The borrower will not be party to the agreement who invested at par may be unwilling to support a restructuring and it may not even be aware of its terms, which may impact a which would crystallise their losses. However, a lender that restructuring. For example, there is a strong argument that, as bought into the debt at a low price may have a more supportive the agreement to re-tranche is only between the lenders and as attitude. Even if a restructuring values the debt at less than par there is no difference in the rights each tranche has against the value, it may enhance the value of the debt when compared to borrower, both tranches should be treated as a single class for a the new lender’s purchase price. In addition, certain lenders, UK scheme of arrangement. As with many points arising from including some banks and collaterised loan obligations, may unitranche intercreditor structures, this has not yet been tested be forbidden by regulation or their own constitution and poli- in a restructuring. cies from participating in restructuring steps such as a debt for It is not just unitranche structures that, as yet, remain untested equity swap or the advancing of new loans. Prospective new through a full economic cycle. Most credit funds have not expe- participants may well have cash to deploy. rienced a downturn, at least in Europe, as they were largely The impact of transferability restrictions is again a factor established after the last recession in 2009. Restructuring that disproportionately affects larger borrowers. It is larger professionals who are used to dealing with banks may have to borrowers whose stronger position has allowed them to push make adjustments to the different dynamics of a credit fund. for more transferability restrictions. The trading of loans to For example, compared to banks most credit funds are relatively larger borrowers has historically been more important. In the small and leanly staffed. All but the largest credit funds are mid-market lending space, liquidity in the secondary market unlikely to have a separate work-out department so the orig- has generally been lower in any case. Lenders to mid-market ination team may stay involved throughout a restructuring. borrowers are more likely to hold rather than sell down their Some commentators have expressed concerns that, whereas a loans. This is a pattern that has been reinforced by the entry of bank would hand responsibility over to an internal team with credit funds into that market since the end of the global financial

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the experience and resource to lead or co-ordinate a full-blown to be more creative in finding ways to minimise losses. Credit restructuring, a lack of an equivalent team within a credit fund funds might be viewed as less reliant on the historically common may leave a vacuum in the process. “independent business review” sought by mainstream lenders, However, the mere fact that a credit fund has relatively less and much more willing to form their own view as to whether institutional experience with restructurings will not necessarily any business in restructuring is viable and then act on it. mean that restructurings will become more difficult. A key differentiator of credit funds from banks is that having made Conclusion the effort to raise committed capital, credit funds are keen then to keep it invested. Accordingly, credit funds are more likely It would be wrong to assume that restructuring in and after the to retain their loan commitments rather than syndicate them. next recession will be just like the previous one; not least because This is less true for larger loans which are still widely syndi- loan documents and the loan market have changed signifi- cated by the arranging banks, but for mid-market leveraged cantly. Over the past decade, loan terms have become increas- borrowers the lenders are often all related funds under common ingly borrower-friendly. It has become harder for a borrower management or a small club of lenders. This has the advan- to breach the terms of a loan and any breach that occurs, does tage of limiting the parties that need to be engaged in a restruc- so later. The concern is that by the time a distressed borrower turing. Much of the difficult initial work of a restructuring in is compelled to attempt a restructuring, they will have fewer agreeing standstills and establishing creditors’ committees can options or may even be too late. be avoided when there are effectively only one or two lenders This effect is more pronounced for large borrowers who that the borrower needs to deal with. have benefitted the most from less structured lending terms, It is also worth remembering that, unlike equity, debt invest- resulting from the convergence of the loan market with the ment has a low (and fixed) yield. Provided there are a number high-yield bond market. A divergence in the fortunes and prac- of high-performing investments in a fund which invests in tice of restructuring between large and mid-market borrowers equity, that fund can absorb losses on other, failed investments. could open up. The problems for a restructuring that weaker In a credit fund, however, particularly a smaller fund, a failed lender protections in loan documents are storing up may ulti- investment is a more difficult proposition, and this in itself will mately reduce the chances of a successful recovery by a large incentivise funds to work to avoid an insolvency or even a debt distressed borrower. write-down. This does not mean that mid-market restructurings will not There is therefore an interesting balance of positive and nega- present their own difficulties; restructuring professionals will tive qualities to this lender type. Whilst there may be concerns have to adjust to the dynamics of credit funds and new debt that some players in this market may not have sufficiently expe- structures that have developed in the mid-market during the rienced teams to effectively manage a restructuring scenario, 2010s. However, they should have more options if, as seems there will be fewer lenders to negotiate with and they are likely likely, these restructurings are triggered earlier.

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Simon Beale is the head of the Insolvency practice at Macfarlanes. He has more than 22 years’ experience of advising on corporate restructuring and recovery issues. Simon continues to act both for troubled companies, their directors and shareholders and for the major financial creditors of such entities. His clients also include distressed debt investors, insolvency officeholders and a variety of other parties with an interest, or potential interest, in the troubled company’s business. Simon is the author of the “Insolvency and Restructuring Manual”, which was first published shortly after the 2008 financial crisis. He has most recently co-authored a third edition of that work, published by Bloomsbury Professional Ltd in 2018.

Macfarlanes LLP Tel: +44 20 7849 2237 20 Cursitor Street Email: [email protected] London URL: www.macfarlanes.com EC4A 1LT

Tim Bromley-White advises on a range of financial transactions, with a focus on restructurings, insolvency and debt financings. His experience includes consensual debt restructurings, administrations, liquidations and other formal insolvency processes. His clients include banks, alternative finance providers, corporate borrowers, creditors, insolvency practitioners and the shareholders and directors of distressed companies.

Macfarlanes LLP Tel: +44 20 7849 2796 20 Cursitor Street Email: [email protected] London URL: www.macfarlanes.com EC4A 1LT

From its base in London, Macfarlanes advises many of the world’s We work seamlessly with our finance, M&A, tax, real estate, commercial, leading businesses and business leaders, from multinational compa- antitrust, pensions, employment, regulatory and funds teams, to advise in nies to high-net-worth individuals. We are recognised for the quality of relation to any challenges which may arise on a restructuring. our work, dealing with the full range of corporate and commercial matters. www.macfarlanes.com Our restructuring and insolvency team provides 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.

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Dynamic Trends in Chapter 15

Cleary Gottlieb Steen & Hamilton LLP

Introduction Waiting on the World to Change: Enforcement The primary principles underlying the enactment in 2005 of of Foreign-Approved Plans in the United Chapter 15 of the U.S. Bankruptcy Code were the globalisa- States Pending Resolution of Foreign tion of commerce and cross-border cooperation. Through its Appeals passage, the U.S. Congress sought to effectuate the mandate of the UNCITRAL Model Law on Cross-Border Insolvency Once a debtor has obtained approval of its restructuring plan (UNCITRAL Model Law), with its stated purpose to “provide through its foreign proceeding, it is not uncommon for that effective mechanisms for dealing with cases of cross-border approval to be appealed in whole, or in part, in foreign courts insolvency”.i In furtherance of this goal, Chapter 15’s compre- and for the debtor to nevertheless push forward with seeking hensive legislative framework enables a U.S. court to recog- enforcement of the plan in the United States. This context nise a foreign judicial or administrative insolvency proceeding, implicates the thorny problem of whether the Chapter 15 court thereby providing foreign debtors access to U.S. courts to should delay enforcement in the United States pending an administer assets, resolve claims and take certain other actions ongoing foreign appeal. While two cases from 2018 favoured (e.g., impose a stay over pending litigation or collection) within the speedy enforcement of a foreign-approved restructuring the United States. in spite of pending foreign appeals as long as the foreign Chapter 15 case law is still in the early stages of development lower court decision’s was not stayed pending appeal, a more and U.S. courts continue to grapple with just how far to extend recent opinion in 2019 appears to buck that trend, favouring a the principles of comity and cooperation while staying true to wait-and-see approach that may hinder closing of restructuring the policies and principles embedded in U.S. domestic restruc- transactions. This pattern suggests that courts will perform a turings under Chapter 11 of the U.S. Bankruptcy Code. Through fact-specific inquiry on the question and so counsel to a Chapter that process, a number of trends have emerged in recent U.S. 15 debtor seeking enforcement of its plan over a foreign appeal decisions on recognition and enforcement of foreign insolvency should accordingly be sure to develop a record to support that proceedings, which largely demonstrate U.S. courts’ flexibility relief. in giving effect to foreign insolvency proceedings, rather than a In both cases where the Chapter 15 court enforced the foreign distrust or rejection of such foreign processes and systems. restructuring plan over the pending foreign appeals, the court Initially, following the passage of Chapter 15, a number of emphasised the importance of comity in avoiding the delay of iv bankruptcy court decisions, such as the Second Circuit’s deci- the debtor’s restructuring. In In re Oi SA, a foreign debtor’s sion in In re Barnet,ii (imposing section 109 debtor eligibility restructuring plan was overwhelmingly confirmed by a court requirements in the United States to Chapter 15 foreign debtors) in Brazil. A group of shareholders appealed the plan confir- and the Fifth Circuit’s decision in In re Vitro SAB de CV,iii mation in Brazil without successfully obtaining a stay pending (refusing to grant third-party releases approved by the Mexican appeal, with the appeal still pending when Judge Lane was asked court), seemed to be indicative of a trend of limiting the scope to enforce the Brazilian plan in the United States. In deciding to and access of Chapter 15. However, recent cases have gener- enforce the Brazilian plan despite the appeal, Judge Lane empha- ally taken a more permissive approach, although this trend is sised his broad discretionary authority, including the authority not linear. While most decisions have increased prioritising the to grant relief consistent with principles of comity. The court provision of broad relief to Chapter 15 debtors and have moved reasoned that unstayed foreign appeals should not prevent the jurisprudence away from formalistic procedural delays, U.S. enforcement of a confirmed restructuring plan because doing courts have not adopted per se rules for Chapter 15 recogni- so would “provide the very same stay pending appeal that...[was] v tion and enforcement, which means that jurisprudence in this denied by the Brazilian courts”. vi exciting and dynamic area remains somewhat unsettled. Similarly, in In re Agrokor DD, Judge Glenn refused to delay This chapter discusses several major decisions in the past enforcement of the restructuring and settlement agreement two years, exploring issues relating to the enforcement of a approved by a Croatian insolvency court despite a potential plan of reorganisation in the United States pending resolu- pending dispute in the UK that may alter the enforcement of tion of appeals, determining a foreign debtor’s centre of main the plan with respect to English law-governed debt. Like Judge interests, juggling the appropriate scope of relief in Chapter 15 Lane in Oi, Judge Glenn found that the purposes of Chapter proceedings and establishing appropriate gating requirements 15 required prioritising the debtor’s ability to effectuate its for accessing Chapter 15. restructuring plan in a fair and efficient way without requiring incessant analysis of potential foreign appeals. In that case, Agrokor DD, a holding company of food-related companies,

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reached a settlement agreement with creditors holding 78 per Indeed, QGOG will give renewed steam to dissident creditors cent of claims. Judge Glenn agreed to enforce the terms of who wish to arbitrage between different bankruptcy systems the settlement agreement (with the caveat that he would not and hold up enforcement of a plan by invoking due process enter an order until the settlement agreement became effective concerns. Still, there are important factual differences that may in Croatia), even though there was a possibility for an English have motivated Judge Glenn’s opinion in QGOG. For instance, court to modify the settlement agreement. Although the Judge Glenn noted that the Brazilian proceedings had previ- English court had also recognised the proceeding in Croatia, ously been reversed by appellate decisions and that, unlike in creditors there had argued that the English court should decline Agrokor where no objections to recognition of the foreign plan to enforce the settlement agreement under an English common were raised, several objections were raised before the U.S. court law rule known as the Gibbs Rule, which provides that rights in QGOG. Practitioners navigating this issue should be aware under English-law governed debt can only be adjudicated by that the jurisprudence remains highly unsettled without bright- English laws and cannot be discharged in a foreign proceeding. line rules and factual nuances may be dispositive in a court’s Judge Glenn dismissed that concern, reasoning that a “broader ultimate decision on whether to delay enforcement in the United analysis of comity with respect to every nation involved” is not States based on foreign appeals. required “because the Court’s decision to recognise and enforce the Settlement Agreement is effective within the territorial juris- Where Did You Go? Determining a Debtor’s vii diction of the United States”. To make the point clearer, Judge Centre of Main Interests Glenn further offered a critique of the Gibbs Rule and its territo- rialism as incongruent with the UNCITRAL Model Law’s goal At the start of a Chapter 15 case, the first question a U.S. court for bankruptcy proceedings that are “unitary and universal, must answer is whether the foreign proceeding is a “main recognised internationally and effective in respect of all the proceeding” – a case pending in the country where the debt- bankrupt’s assets”.viii It is worth noting that the Agrokor decision or’s centre of main interests (COMI) is located – or a “non-main was rendered in the context of no creditor opposition to recogni- proceeding” – a case pending in the country where the debtor tion and enforcement of the Croatian plan, which may also have has only an “establishment”.x The determination is important been a factor in Judge Glenn’s decision. because a foreign main proceeding entitles the foreign debtor to While these cases appeared to demonstrate a trend of broader automatic relief, including imposition of the automatic Chapter 15 courts avoiding imposing a delay in enforcement of stay in the United States, whereas such relief is discretionary for an unstayed foreign court-approved plan, a more recent deci- a non-main proceeding. COMI is not defined in the statute, but sion from 2019 shows that courts will not uniformly enforce there is a statutory presumption that the debtor’s COMI lies in unstayed foreign plans. In In re Servicos de Petroleo Constellation the jurisdiction of its registered office. Still, creditors may chal- SA (QGOG),ix Judge Glenn took a decidedly different approach lenge the location of a debtor’s COMI (and thus whether the to resolving this question than he took in Agrokor. There, proceeding is a main proceeding) in order to disrupt or other- Judge Glenn stayed the motion to enforce a confirmed plan in wise limit the reach of the Chapter 15 case. Brazil pending a decision from the Brazilian Court of Appeals. Recent cases suggest that courts are willing to adopt a flex- Crucially, as in Oi, no stay on the effectiveness of the plan was ible approach to determining a debtor’s COMI, in some cases granted in Brazil. But Judge Glenn noted in his decision in ratifying a debtor’s COMI shifting shortly before a Chapter 15 QGOG, that he considered issues raised by a dissenting cred- filing and even granting discretionary automatic stay relief to itor regarding due process and voting issues to be “serious” non-main proceedings. However, this approach is not without enough not to rush recognition of the foreign plan until at least exceptions; courts are often vigilant of bad faith on the part the first level of court of appeals in Brazil had a chance to review of either the debtor or a creditor seeking recognition and may the issues. Judge Glenn reasoned that there was no purpose in restrict the scope of relief accordingly to address inequities. enforcing the confirmed plan in the United States if it were to be substantively reversed on appeal. While noting that a foreign Let it be: flexible approach to determining COMI court-approved plan can be enforced in the exercise of comity, Judge Glenn explained that the interests of creditors, which must also be sufficiently protected, must take precedence even if Two recent decisions by Judge Glenn in the Southern District the result is a delay in enforcement of the restructuring. of New York show a willingness to bend the traditional Interestingly, notwithstanding the apparent inconsistency concept of COMI in order to provide the debtor with Chapter between QGOG and Oi, Judge Glenn underscored his view that 15 relief necessary to its reorganisation. In In re Ocean Rig xi his decision was consistent with his prior opinion from Agrokor, UDW Inc, Judge Glenn considered whether the actions of a where he had declined to enforce the settlement agreement until foreign debtor to shift its COMI to the Cayman Islands, a loca- it became effective in the foreign jurisdiction. However, the tion with debtor-favourable insolvency laws, less than a year two cases may have had important differences in terms of their before commencing insolvency proceedings, constituted legit- practical effects. Agrokor involved a small delay on enforce- imate “COMI migration” or instead bad faith “COMI manip- ment until the settlement agreement became effective abroad, ulation”. The Second Circuit previously held that a court may resulting in a reasonable approach given that the United States find a debtor manipulated its COMI in bad faith to disregard a xii should not accelerate enforcement over a foreign tribunal. On change in where the debtor’s COMI is located. In Ocean Rig, the other hand, the delay in QGOG is more significant and could Judge Glenn found that the debtors had legitimately migrated potentially extend while a Brazilian appellate court reviews the their COMI because the debtors had taken concrete steps for the confirmed plan on a timeline that is, itself, somewhat uncer- “proper purpose” of facilitating a “value maximising restruc- xiii tain. Moreover, the decision in QGOG effectively granted a stay turing”. The court found no evidence of “insider exploita- pending appeal when no such stay was granted in the foreign tion, untoward manipulation, [or] overt thwarting of third-party xiv court, in direct contradiction of the holding in Oi. expectations” indicating bad faith. Those who were hoping that Oi established a bright-line rule In the QGOG case, Judge Glenn could not find that the that foreign appeals absent a stay will not delay U.S. enforce- COMI of a Luxembourg parent of a group of debtors was in ment, will be sorely disappointed by the QGOG decision. Brazil (where the other debtors’ COMIs are located), but still

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granted discretionary automatic stay relief for the resulting possible to limit the scope of recognition relief granted to a foreign non-main proceeding.xv QGOG was a complex restruc- foreign representative who filed in bad faith, but left the issue turing involving multiple Chapter 15 debtors, which required to be determined at a later date. Judge Lane noted, albeit cryp- the court to determine the COMI for each debtor. Judge Glenn tically, that there is a “difference of opinion about legally the found that the location of the ultimate parent holding company’s relevance” of bad faith in determining the scope of recogni- COMI was Luxembourg, but that the debtor-parent had suffi- tion relief.xxi However, Judge Lane allowed broad discovery cient ties to Brazil for recognition of the Brazilian proceeding on whether the Chapter 15 petition was brought in bad faith, as foreign non-main proceeding. For the other debtors, Judge including: Glenn recognised the Brazilian proceeding as the respective ■ whether the Chapter 15 proceeding was brought in an foreign main proceeding. Even so, Judge Glenn granted discre- effort to avoid compliance with an adverse judgment; tionary automatic stay relief for the non-main recognition of the ■ whether there were improper attempts at controlling a Luxembourg parent, noting that the foreign main proceeding foreign representative; and is entitled to “nearly identical relief as the relief afforded to ■ whether the debtor manipulated its COMI in bad faith. the Chapter 15 Debtors whose COMI was determined to be in Because there is limited case law on whether a bad faith filing Brazil”.xvi (absent bad faith COMI manipulation) could justify denying QGOG illustrates that even where COMI analysis did not recognition, Judge Lane’s answer is worth following. result in foreign main recognition, the court may still grant Because a foreign debtor’s COMI is one of the first ques- broad discretionary relief to ensure uniform treatment for the tions that a U.S. bankruptcy court considers in a Chapter 15 debtors and reduce the likelihood of procedural headaches that proceeding, debtors and creditors alike should be cognisant may compromise the restructuring. that, while some judges may favour a flexible approach to COMI, facts suggesting bad faith manipulation on the part of the party seeking recognition could easily derail the efforts Be a good boy: evaluating bad faith seeking recognition.

Nevertheless, this recent trend of flexibility to COMI analysis Do You Want Fries With That? Scope of Relief is not without exceptions. Frequently, courts have refused to give a blank cheque in COMI analysis and will still scrutinise Under Chapter 15 whether the party seeking recognition acted in bad faith. In In re Recognition is only the beginning of the Chapter 15 process. Oi SA,xvii discussed above, Judge Lane addressed COMI issues in Following recognition, a U.S. bankruptcy court has discretion to the context of two competing foreign restructuring proceedings grant “appropriate relief” under section 1521 or provide “addi- of a Dutch subsidiary of a Brazilian conglomerate; one in Brazil tional assistance” pursuant to section 1507. The question of the (the Brazilian Proceeding) and one subsequently commenced by scope of appropriate relief often tests the usefulness of comity a creditor in the Netherlands (the Dutch Proceeding). Judge as a guiding principle. Two recent cases demonstrate that while Lane maintained his finding that the debtor’s COMI was in courts may prioritise comity to grant broad relief under Chapter Brazil, in part because of an objecting creditor’s role in initiating 15 to implement a foreign court-approved restructuring, there the Dutch Proceeding without opposing Chapter 15 relief for the are also limits to comity as a guiding principle. U.S. courts, even Brazilian proceeding. In that case, Judge Lane previously recog- when trying to facilitate the enforcement of a foreign plan, are nised Oi’s Brazilian Proceeding as the foreign main proceeding nevertheless constrained by bedrock principles of U.S. law, both for Oi Brasil Holdings Coöperatief UA (Coop), a Dutch subsid- bankruptcy and otherwise. Those seeking to predict the scope iary, because Coop had limited operations and primarily acted of relief granted by a U.S. bankruptcy court would be wise to as a tax-advantaged financial vehicle for Oi. Certain Coop’s keep in mind these two competing considerations. creditors, unsatisfied with the recognition, commenced legal proceedings against Coop in the Netherlands, which culmi- nated in the competing Dutch Proceeding. The Dutch insol- No party in the USA: enforcement of choice of law provisions vency trustee then asked Judge Lane to instead recognise the Dutch Proceeding as Coop’s foreign main proceeding. In a lengthy opinion following trial, Judge Lane denied the Throughout the relatively short existence of Chapter 15, the petition, finding no basis for the relief sought because the court concept of comity to foreign tribunals has been at its heart. had been fully aware of Coop’s connections to the Netherlands Often, the principle of comity has led U.S. courts to limit their at the time of recognition of the Brazilian Proceeding.xviii involvement (or, as some might call it, interference) in the Interestingly, Judge Lane expressly considered an objecting processes of the foreign proceeding. This trend can be seen in creditor’s role in commencing the Dutch Proceeding as part of a recent case, in which a Delaware bankruptcy court compelled its strategy to block recognition of any Brazilian restructuring a creditor to resolve the priority of its claims through a foreign plan in order to increase its leverage. Judge Lane found that proceeding, even when a choice of law clause pointed to the the objecting creditor’s actions were “at odds with many of the United States. goals of Chapter 15”, including fair and efficient administration In In re Energ y Coal SPA,xxii an Italian debtor entered into a of international insolvencies, and criticised the objecting cred- contract with certain U.S. contractors, which contained a Florida itor for “weapon[ising] Chapter 15 to collaterally attack” the choice of law provision for any dispute. The Italian restruc- Brazilian Proceeding.xix turing was later recognised in the United States as a foreign In a separate case before him, In re BSG Resources Limited,xx main proceeding. The U.S. contractors objected to the enforce- Judge Lane expressed interest in exploring whether a foreign ment of the Italian-court approved plan in the United States, representative filed for Chapter 15 in “bad faith” to avoid an arguing that the plan improperly resolved the priority status adverse judgment. In this case, Vale, the beneficiary of an arbi- of their claims because their contracts required adjudication tral award against the debtor and the debtor’s largest creditor, of all disputes by a Florida court. Judge Silverstein sided with opposed recognition of the foreign proceeding. At a protective the foreign representative, holding that the validity and amount order hearing, Judge Lane suggested that it may be theoretically of the claims could be determined by a Florida court, but any

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dispute over priority and distribution must be resolved in Italy. Getting in the Door: Gating Requirements for In reaching that decision, Judge Silverstein emphasised that enforcement of the restructuring is guided by considerations of Chapter 15 Relief comity and the contractors had provided no basis for the choice While U.S. courts have lowered barriers to debtors seeking of law provisions to “override the comity afforded foreign main Chapter 15 relief in the U.S., there remain some filters and the xxiii proceedings”. Judge Silverstein implicitly recognised that an protections of Chapter 15 are not available for all foreign debtors. adjudication of the priority of a claim in the United States would While cases decided shortly after the enactment of Chapter 15 undermine the legitimacy of the foreign proceeding and create created concerns that the bar for accessing Chapter 15 may have potentially duelling priority schemes, a result that she character- been set improperly high, more recent cases suggest that U.S. xxiv ised as neither “appropriate or sensible”. courts have generally tried to lower the gating requirements for The view of comity taken by the court in Energ y Coal is Chapter 15 relief, specifically, these cases have allowed foreign consistent with a modern, uniform view of cross-border insol- representatives to easily satisfy the “property” requirement vencies, showing U.S. courts are willing cede the power of U.S. under section 109(a) and have adopted a narrow public policy laws to ensure uniform results across jurisdictions. exception, so as not to overly scrutinise the foreign proceeding.

My house, my rules: the limits of comity It doesn’t take a lot: property requirements under section 109(a) Other decisions nonetheless make clear that there are limits to comity as a guiding principle. Take, for instance, In re Platinum The Second Circuit’s Barnet opinion in 2013 required a foreign Partners Value Arbitrage Fund LP,xxv where Judge Chapman had to representative to satisfy the requirements for having a domicile, determine whether to allow discovery in the United States that place of business or property in the United States pursuant to may be impermissible under foreign law. In Platinum, the debtor section 109(a).xxix The opinion was initially met with concerns was a Cayman Islands limited partnership that was placed into that U.S. courts would severely curtail the availability of Chapter liquidation in the Cayman Islands, which proceeding was later 15 relief by imposing onerous property requirements for foreign recognised as a foreign main proceeding. The Cayman liquida- debtors. Recent cases show the exact opposite – courts have set tors were tasked with investigating the business of the debtor the bar so low for a foreign Chapter 15 debtor to satisfy section and sought to get discovery in the United States from an auditor 109(a) that it is barely a limitation at all. who previously provided audit services to the debtor. The For example, in In re BCI Finances Pty Ltd,xxx Judge Lane held auditor opposed the discovery, arguing that much of its docu- that a $1,250 retainer placed in the trust account of the foreign ments were not discoverable under Cayman law. liquidator’s U.S. counsel satisfied the section 109(a) eligibility The Platinum case poses a conundrum. Does comity mean that requirement. Judge Lane relied on prior Chapter 11 decisions a U.S. court cannot grant discovery relief that would be imper- holding that the “property” requirement is satisfied by “even missible in the foreign proceeding? Judge Chapman resolved a minimal amount of property located in the United States”.xxxi this problem by first noting that the auditor failed to establish Separately, Judge Lane also held that breach of fiduciary claims the documents were not discoverable under Cayman law. More against former directors that resided in the United States inde- interestingly, the opinion explained that, even if the documents pendently satisfied section 109(a). were not discoverable under Cayman law, “comity does not The low standard for satisfying section 109(a) means that even require that the relief available in the United States be identical foreign debtors with no concrete property and only litigation to the relief sought in the foreign bankruptcy proceeding”.xxvi claims against parties in the United States can easily seek the Instead, Judge Chapman looked to the policy underpinnings protection of Chapter 15. of Cayman law and concluded that they were not hostile to discovery sought under U.S. laws and, accordingly, “principles of comity decisively weigh in favor of granting” discovery.xxvii Lowering the bar: limited inquiries into foreign proceeding Platinum demonstrates that while the principle of comity suggests that relief granted in the United States should not offend foreign laws, it does not require identical relief as the In another recent case showing that courts have tended to lower foreign court would grant. Indeed, Judge Chapman refused to the gating requirements for Chapter 15, Judge Lane denied adopt a reading of comity that would reduce the U.S. court’s role objecting creditors’ summary judgment motion arguing that: to that of “an avatar for the foreign court” and wished to avoid ■ a foreign debtor failed to satisfy the property requirement; the prospect of having to “engage in a full-blown analysis of ■ the foreign representative was not properly appointed; and foreign law each and every time a foreign representative seeks ■ the debtor’s Indonesian restructuring proceeding (the additional relief”.xxviii Indonesian Proceeding) was manifestly contrary to U.S. While the case only deals with discovery, Platinum’s reasoning public policy.xxxii has potentially broad implications, demonstrating that U.S. On the question of whether the debtor has property in the courts may invoke comity to justify relief that may not otherwise United States, Judge Lane echoed his reasoning in BCI Finance, be allowed in the foreign proceeding. Those who are seeking noting that property can encompass a variety of “intangible additional relief from U.S. courts under Chapter 15 should keep assets” and in this case, the debtor was an obligor on an inden- in mind these two competing considerations; comity favouring ture governed by New York law, which constitutes property in relief in line with what is granted by foreign tribunals but also the United States.xxxiii refusing to abdicate the role of a U.S. court in deciding appro- The dissenting creditors also argued that a director of the priate relief in its jurisdiction. debtor was not properly appointed as the foreign representative

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because his appointment by the debtor’s board did not occur until Endnotes three years after the conclusion of the Indonesian Proceeding and thus did not occur “in” the foreign proceeding pursuant i. See 11 U.S.C. § 1501. to section 1515(a). Here too, Judge Lane emphasised that the ii. 737 F.3d 238 (2d Cir. 2013). threshold “is not an onerous one” and must be “read broadly iii. 701 F.3d 1031, 1042 (5th Cir. 2012). in order to facilitate the purposes of Chapter 15”.xxxiv Section iv. 587 B.R. 253 (Bankr. S.D.N.Y. 2018). 1515(a), which allows a foreign representative “authorised in a v. Id. at 270. foreign proceeding” to file a Chapter 15 application, should be vi. 591 B.R. 163 (Bankr. S.D.N.Y. 2018). read broadly to include foreign representatives appointed after vii. 591 B.R. at 186-87. the foreign proceeding has been closed. viii. Id. at 192. Finally, Judge Lane also rejected the creditors’ motion ix. Case No. 18-13952, ECF No. 123 (Bankr. S.D.N.Y for summary judgment on the grounds that the Indonesian August 1, 2019). Proceeding was manifestly contrary to U.S. public policy. Judge x. See 11 U.S.C. § 1502. Lane started with the proposition that section 1506 of the xi. 570 B.R. 687 (Bankr. S.D.N.Y. 2017). Bankruptcy Code, which provides that a court may refuse to xii. See In re Fairfield Sentry, 714 F.3d 127, 138 (2d Cir. 2013). take action under Chapter 15 if such action would be “mani- xiii. 570 B.R. at 703. festly contrary to the public policy of the United States”, must xiv. Id. at 707. be “read narrowly”.xxxv Holding that summary judgment was xv. 600 B.R. 237 (Bankr. S.D.N.Y. 2019). not appropriate, Judge Lane pointed to lingering questions xvi. Id. at 294. of fact regarding whether the administrator and judge in the xvii. 578 B.R. 169 (Bankr. S.D.N.Y. 2017). Indonesian Proceeding were independent and emphasised that xviii. An appeal of Judge Lane’s decision by one of Coop’s there are procedural safeguards in the Indonesian Proceeding creditors, Aurelius Capital Management, LP, remains sub that the creditors failed to acknowledge. The opinion cited judice before the District Court for the Southern District another recent case from New Jersey, In re Manley Toys,xxxvi where of New York. the court held that the actions of Hong Kong liquidators did not xix. Id. at 242. violate U.S. public policy, even if those liquidators allegedly took xx. Case No. 19-11845 (Bankr. S.D.N.Y. 2019). directions from insiders of the debtor, because the creditors had xxi. Hr’g Tr. 56:22, In re BSG Resources Limited, Case No. ample notice and remedies in the Hong Kong proceeding. 19-11845 (Bankr. S.D.N.Y. July 29, 2019). Both the BCI and PT Bakrie opinions stand in contrast to xxii. 582 B.R. 619 (Bankr. D. Del. 2018). Barnet. Alleviating concerns that U.S. courts would establish xxiii. Id. at 628–29. prohibitive and onerous requirements for seeking Chapter 15 xxiv. Id. at 629. protection, these recent cases are consistent with a recent trend xxv. 583 B.R. 803 (Bankr. S.D.N.Y. 2018). of increasing the availability of Chapter 15 for foreign debtors, xxvi. Id. at 815. and will likely be commensurate with an increase in Chapter 15 xxvii. Id. at 816. filings in the United States, particularly in the Southern District xxviii. Id. at 816. of New York. xxix. 737 F.3d 238 (2d Cir. 2013). xxx. 583 B.R. 288 (Bankr. S.D.N.Y. 2018). Conclusion xxxi. Id. at 293–94. xxxii. In re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. Conflicting trends in recent decisions make it challenging for 2019). practitioners or commentators to identify a single direction xxxiii. Id. at 715. either for or against the comity afforded to foreign insolvency xxxiv. Id. at 717. proceedings under Chapter 15. While some of these holdings xxxv. Id. at 714. are patently in conflict, most can be reconciled by looking to the xxxvi. 580 B.R. 632 (Bankr. D.N.J. 2018). context for the restructuring and creditors’ opposition.

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Luke A. Barefoot (PNB) in the Chapter 11 proceedings of Firestar Diamonds and Luke Barefoot’s practice focuses on bankruptcy litigation, insol- other Nirav Modi subsidiaries in connection with the $2 billion vency, corporate restructuring and related litigation matters, with fraud perpetrated against PNB by Nirav Modi and his associates. a particular focus on cross-border and international bankruptcy Sean has been recognised as an “Outstanding Restructuring disputes. Lawyer” by Turnarounds and Workouts. Additionally, he has been Among others, Luke’s notable representations include repre- recognised by Chambers USA, The Legal 500 U.S. and IFLR 1000 senting: ESL and Eddie Lampert as largest shareholder and cred- for his restructuring work. Most recently, he was recognised as the itor (with over $2.8 billion in claims) in the Sears Holdings Chapter Law360 Bankruptcy MVP. 11 proceedings; Geoffrey LLC, owner and seller of the intellectual property of the Toys R Us group in the restructuring of Jane VanLare the group’s business, including a series of Section 363 sales; the Jane VanLare’s practice focuses on representing investors in Steering Committee of bondholders in the Oi Brasil Holdings distressed assets, large financial institutions, and corporations in Coöperatief (Coop) Chapter 15 cases, including successful trial all matters relating to in- and out-of-court restructurings, bank- victory maintaining recognition of the Brazilian proceeding by the ruptcy, insolvency, and related litigation. U.S. Bankruptcy Court, and entry of order by Chapter 15 court Jane has advised on significant transactions in the bankruptcy enforcing terms of Brazilian plan; Goldman Sachs Mortgage and restructuring space, including acting as counsel to: ModSpace, Company in exit financing facilities in the John Hammonds Trust the largest U.S. provider of temporary and modular office space, Chapter 11 proceedings; and Overseas Shipholding Group Inc., in the restructuring of nearly $1 billion in secured debt through in its Chapter 11 bankruptcy proceedings and successful restruc- a pre-packaged Chapter 11 plan; affiliates of Z Capital Partners turing, including successful defence and resolution of challenges to as stalking horse bidder in Section 363 sale of assets of Real Mex its plan of reorganisation. restaurant chain; Grupo Inbursa, a financial services company Luke has been recognised as a leading lawyer by The Legal 500 for in Mexico and secured lender to multiple entities in the Mossi & his corporate restructuring work. He was named a “Rising Star” Ghisolfi S.p.A. corporate group (M&G), in the M&G Chapter by Law360 and an “Outstanding Young Restructuring Lawyer” by 11 cases; Lion Point Capital as a creditor and DIP lender in the Turnarounds & Workouts. Chapter 11 bankruptcy proceedings of Suniva Inc., a solar panel manufacturer; SMP Ltd, a leading polysilicon manufacturer based Lisa M. Schweitzer in Korea, in connection with its request for Chapter 15 recogni- Lisa Schweitzer is a partner at Cleary Gottlieb Steen & Hamilton. tion of its Korean insolvency proceedings, as well as its adversary Her practice focuses on financial restructuring, bankruptcy and proceeding against SunEdison, Inc.; and an ad hoc group of bond- commercial litigation, including cross-border matters. She has holders in the Chapter 11 proceedings of Arsenal Resources, in extensive experience advising corporate debtors, individual cred- Delaware’s fastest-ever pre-packaged bankruptcy. Other notable itors and strategic investors in both U.S. Chapter 11 proceed- representations include: Overseas Shipholding Group’s successful ings and restructurings in other jurisdictions in North America, restructuring and exit from Chapter 11 bankruptcy protection, Europe and Asia. which IFLR named as “Restructuring Deal of the Year”; Nortel Lisa has served as lead counsel to many companies and creditors Networks in its Chapter 11 proceedings and related litigation; in various bankruptcy cases, including representation of a secured Cascade Investment in the Chapter 11 proceedings of its portfolio lender in the M&G Chemicals case, a shareholder in the PG&E company, Optim Energy; Goldman Sachs in the Lehman Brothers case, strategic lenders and acquirers in various retail cases, and Chapter 11 proceedings, which IFLR named as a “Restructuring Nortel Networks Inc. in its Chapter 11 proceedings. Deal of the Year”; and Truvo Group in its Chapter 11 proceed- She has been recognised by Chambers, Benchmark Litigation, The ings, which IFLR named as an “EMEA Restructuring Deal of Legal 500 U.S., The Best Lawyers in America, IFLR, Euromoney and the Year”. Super Lawyers. Jane has been recognised by the American Bankruptcy Institute as a “40 Under 40” honouree and by Benchmark Litigation on the “Under Sean A. O’Neal 40 Hot List”. Sean A. O’Neal’s practice focuses on corporate restructuring, insolvency, bankruptcy, and related litigation matters. Benjamin S. Beller He regularly assists corporate debtors, creditors, investors, Benjamin Beller’s practice focuses on bankruptcy, restructuring financial counterparties, and other interested parties in and litigation. bankruptcy-related transactions, out-of-court workouts, and Benjamin’s notable representations include: CROSSMARK liability management transactions. Sean also works with investors Holdings, Inc. in an out-of-court restructuring of more than in purchasing assets from, or making investments in, distressed $490 million in debt, as well as an innovative settlement of a class companies. He frequently advises clients on creditors’ rights, debt action; Punjab National Bank (PNB) in the Chapter 11 proceed- instruments, pre-packaged bankruptcies, loan-to-own strategies, ings of Firestar Diamonds and other Nirav Modi subsidiaries in debtor-in-possession financing, exit financing, Chapter 11 rights connection with the $2 billion fraud perpetrated against PNB by offerings, forbearance arrangements, and other matters. Nirav Modi and his associates; Nortel Networks Inc.; The Puerto Sean recently represented ESL Investments Inc., as the largest Rico Electric Power Authority (PREPA); and Tempur Sealy creditor and shareholder of Sears Holdings Corp. with over $2.6 International Inc. as debtor-in-possession lender and purchaser in billion in claims, in its Chapter 11 proceedings, as well as advising the Chapter 11 cases of Innovative Mattress Solutions LLC. on prepetition transactions and related matters; Lion Point Capital, Benjamin has served clerkships with the Honorable Robert E. as DIP lender, in the Chapter 11 proceedings of Suniva Inc. and Gerber of the U.S. Bankruptcy Court, Southern District of New York and related litigation; CROSSMARK Holdings, Inc. in an out-of-court the Honorable Shelley C. Chapman of the U.S. Bankruptcy Court, restructuring of more than $490 million in debt, as well as an Southern District of New York. He joined the firm in 2013. innovative settlement of a class action; and Punjab National Bank

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Cleary Gottlieb is a pioneer in globalising the legal profession. Since 1946, our lawyers and staff have worked across practices, industries, jurisdictions and continents to provide clients with simple, actionable approaches to their most complex legal and business challenges, whether domestic or international. We support every client relationship with intellectual agility, commercial acumen and a human touch. We have a proven track record for serving with innovation. We are fluent in the many languages of local and global business. And we have achieved consistent success in multiple jurisdictions. Global corporations, financial institutions, sovereign governments, local businesses, and individuals come to us for consistently practical and forward-looking advice. Our bankruptcy and restructuring practice advises clients worldwide on matters that cross legal and geographical borders. The deep ties that we form in all of the regions comprising our practice allow our lawyers to understand both the legal and cultural landscapes of highly complex, multijurisdictional restructurings. Clients appreciate the rigour of our approach, with our lawyers employing tough, analytical and outside- the-box thinking to structure creative solutions.

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Albania Albania

Erlind Kodhelaj

Deloitte Legal Sh.p.k. Zhuljeta Mena

12 Overview The Bankruptcy Law provides for two different types of reorganisation: (i) a reorganisation procedure; and (ii) a fast-track reorganisation procedure. 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 22 Key Issues to Consider When the Company is in Financial Difficulties Law no. 110/2016 “On bankruptcy” (the “Bankruptcy Law”) states that the main goal of a bankruptcy proceeding is the collective discharging of debtor’s obligations through reorgan- 2.1 What duties and potential liabilities should the isation of activity or liquidation of all debtor’s assets and distri- directors/managers have regard to when managing a company in financial difficulties? Is there a specific bution of income. point at which a company must enter a restructuring or The bankruptcy legislation has been amended several times insolvency process? and the new law aiming to better regulate insolvency situations was approved in 2016. The main purposes of the new law In case the debtor is a legal entity, any member of the decision- are, inter alia, the improvement of the regulatory framework for an effective bankruptcy procedure, the protection of business making body/ies is obliged to file for bankruptcy within 60 days activity during bankruptcy proceedings, more restrictive meas- from the day he/she becomes aware, or should have been aware, ures for bad faith debtors, and clearer competences for bank- of the state of insolvency. ruptcy administrators. By the definition provided in the Bankruptcy Law, the state of The Bankruptcy Law contains creditor-friendly tools, such as insolvency will be considered to be any state where the debtor is a debtor’s civil liability for late bankruptcy filing, initiation of unableo t pay its obligations in due time and/or a financial situa- bankruptcy proceedings upon request of the creditor, the right tion when the total value of the obligations of the debtor exceeds of creditors to vote on a material decision during bankruptcy the total value of its assets. proceedings, for example, reorganisation plan, etc. If the above-mentioned members fail to file the request for The Bankruptcy Law is relatively new and the experience bankruptcy in due time, the latter shall be personally liable for within the competent courts so far is therefore not substan- the compensation of damages caused to creditors, and subject tial. Based on these considerations, it is too early to declare that to a sanction that may be imposed by the Bankruptcy Court the law and its implementation by the courts has established, in for the prohibition of the directors/managers or the debtor to practice, a creditor-friendly environment. exercise any management duty for a period of one to five years, depending on the scale of the breach. In addition, as per article 65 of the Bankruptcy Law, all direc- 1.2 Does the legislative framework in your jurisdiction tors/managers and other members of administrative bodies of allow for informal work-outs, as well as formal the debtor have the obligation to collaborate with the bank- restructuring and insolvency proceedings, and to what ruptcy administrator or the supervisory administrator appointed extent are each of these used in practice? by the Bankruptcy Court.

The Bankruptcy Law has no specific provisions for informal work-outs and/or restructuring possibilities outside a formal 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the court procedure. action that they can take against the company? For The courts responsible for resolving bankruptcy cases are the example, are there any special rules or regimes which commercial sections of the district courts in the Republic of apply to particular types of unsecured creditor (such Albania (“Bankruptcy Court”). as landlords, employees or creditors with retention The Bankruptcy Law provides that, after the initiation of the of title arrangements) applicable to the laws of your bankruptcy proceeding, the Bankruptcy Court shall appoint a jurisdiction? Are moratoria and stays on enforcement bankruptcy administrator who shall have all the administra- available? tion competences of the administration body/ies of the debtor. Alternatively, the Bankruptcy Court may opt for the appoint- The debtor and creditors are the most important stakeholders in ment of a supervisory administrator who shall be responsible for the financial crisis of a company. In particular, the debtor itself the supervision of the administration body of the debtor. or the creditors may file for bankruptcy.

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Regarding particular types of creditors, article 36 of the of court but rather should be followed and approved by the Bankruptcy Law provides that any individual who has the right Bankruptcy Court. of ownership, recognised by law, over an asset in the possession For further details, please refer to questions 1.2 and 3.3. of the debtor, is entitled to request the exclusion of this asset from the bankruptcy estate. In this case, no stay of enforcement 3.2 What formal rescue procedures are available provisions will apply. in your jurisdiction to restructure the liabilities of Related to the stays on enforcement, it is worth noting that distressed companies? Are debt-for-equity swaps article 69 of the Bankruptcy Law provides that, once the bank- and pre-packaged sales possible? To what extent can ruptcy procedure has started, no further claims may be filed creditors and/or shareholders block such procedures against the debtor and all such claims should be raised in accord- or threaten action (including enforcement of security) ance with the rights of the creditors as per the provisions of the to seek an advantage? Do your procedures allow you Bankruptcy Law. to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? In addition, following the commencement of the bankruptcy proceeding, no new obligatory enforcement procedures may be imposed to the debtor, while the initiated enforcement procedures The Bankruptcy Law is silent in relation to these types of should be suspended. transactions. As per article 70 of the Bankruptcy Law, the bailiff shall deliver Any debt-for-equity swap or pre-packed sale may be performed to the bankruptcy administrator, within five days (upon public pursuant to the provision of the Albanian Civil Code and Law notification of the opening of the bankruptcy proceeding), any 9901, dated 14 April 2008, “On Entrepreneurs and Commercial asset or income obtained from the selling of the debtor’s assets and Companies”, as long as these actions may contribute to the not yet delivered to the creditor, prior to the opening of the bank- avoiding of insolvency and the triggering of the obligation to ruptcy proceeding, in order to include it in the bankruptcy estate. file a bankruptcy request. The suspension will be applied to the extent necessary to assure Creditors may object to such procedures if they prove those the assets for the continuation of the business activity of the debtor. procedures are intended to avoid the fulfilment of the obliga- Lawsuits against the debtor may continue until a final decision tions of the debtor toward them, or in cases when the creditors is awarded. However, any compulsory execution will be subject to require the initiation of the bankruptcy proceeding. the above-mentioned suspension. Once bankruptcy has been initiated, any such transaction may In cases when the court case particularly affects the bank- be part of the reorganisation plan, which should be approved by ruptcy estate or the business activity of the debtor, the bankruptcy the creditors’ committee and the Bankruptcy Court, in which administrator may request the transfer of the court case to the case objections of dissenting classes of stakeholders may be Bankruptcy Court. crammed down.

2.3 In what circumstances are transactions entered 3.3 What are the criteria for entry into each into by a company in financial difficulties at risk of restructuring procedure? challenge? What remedies are available? The initiation of a bankruptcy proceeding requires the filing Article 79 of the Bankruptcy Law defines the right of the of a request which must be approved by the Bankruptcy Court. bankruptcy administrator/supervisory administrator/creditor to As mentioned in question 1.2. above, the Bankruptcy Law oppose any transaction performed by the debtor within a period provides for two options of reorganisation: (i) a reorganisation of two years, prior to the opening of the bankruptcy proceeding, proceeding; and (ii) a fast-track reorganisation proceeding. In if such transactions have caused damage to the debtor’s assets or cases when a reorganisation is not possible, the liquidation of have given an unjustified preference to certain creditors. assets is performed. As per the same article, a damage exists in cases where the debtor executes transactions for which the values (cash or equiv- (i) Reorganisation procedure alent) received are substantially lower than the values given. The Article 104 et seq. of the Bankruptcy Law provides that, after the above may include, without being limited to, donations, transac- opening of the bankruptcy proceeding, depending on the finan- tions with related parties, transactions that give no profit to the cial situation of the debtor, the creditors’ committee may decide debtor, and other cases that may be assessed as damaging by the on the dissolution/liquidation or the reorganisation of the debtor. Bankruptcy Court. In such cases, a plan of reorganisation may be filed with the In view of the above, the Bankruptcy Court may decide to Bankruptcy Court by: return any transferred property or amount to the bankruptcy a) the bankruptcy or supervisory administrator; estate. If such property or amount has been transferred to a third b) creditors with claims representing 20% or more of the party, which is a bona fide buyer, the Bankruptcy Court may order total amount of claims; or the third party to deliver it to the bankruptcy estate along with c) the debtor themselves who may file it, immediately or at the applicable interests, and such third party will have the same any time, along with the request, upon the opening of the right of claim as the other creditors in the bankruptcy proceeding. bankruptcy proceeding. The plan should contain measures to restructure the business, 32 Restructuring Options a general overview of the activity of the debtor and the circumstances causing difficulties, a list of applicable measures for the 3.1 Is it possible to implement an informal work-out in implementation of the plan, data on the amounts and assets to your jurisdiction? be used, a description of the proceedings of selling assets and debt-for-equity swaps, etc. For the purposes of voting, creditors shall be divided into Pursuant to the Bankruptcy Law, even in cases of agreement classes as provided in article 144 of the Bankruptcy Law (please with the creditors, the procedure may not be performed out see question 4.6). In principle, if the majority of claims of the

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creditor (present or represented) vote for the approval of the (i) In the preliminary bankruptcy/reorganisation plan, the latter is deemed accepted, thereby cramming down the proceeding, (the period between the acceptance of the dissenting voting creditors. The reorganisation plan, approved as bankruptcy/reorganisation filing by the Bankruptcy Court stated above, shall be binding to all creditors, even those who have and the opening of the proceedings), the Bankruptcy dissented in the proceeding or did not participate in the meeting. Court may appoint a temporary bankruptcy administrator or temporary supervisory administrator. (ii) Fast-track reorganisation. The temporary bankruptcy administrator assumes the role On the other hand, the Bankruptcy Law (article 122 et seq.) provides of the managing body/ies of the debtor and manages the that the debtor and the creditor may enter into an agreement daily activity of the debtor, guarantees the safety of the drafted out of court, which must be approved by the Bankruptcy debtor’s assets, etc. Court. The supervisory administrator instead acts as supervisor These provisions aim to provide the debtor with the possibility of the actions performed by the managing body/ies of the to overcome an inevitable situation of insolvency through an agree- debtor. ment with the creditors. The agreements may be executed when (ii) After the initiation of the bankruptcy/reorganisa- the parties can objectively foresee that the debtor will not be able tion proceeding, the debtor has the right to manage/ to discharge its obligations in due time for a period of six months. dispose of its assets under the surveillance of the super- Upon execution of the agreement, the debtor is eligible to file a visory administrator. This scenario occurs when the request with the Bankruptcy Court for the approval of a fast-track bankruptcy proceeding is initiated at the debtor’s request. reorganisation proceeding. The management rights and duties will be vested to the The request for a fast-track reorganisation proceeding should bankruptcy administrator, in cases when the bankruptcy include: proceeding is initiated at the creditors’ request. a) a report of the debtor containing the causes of insolvency, (iii) In the reorganisation proceeding, the debtor’s assets financial statements for the last three years, a list of movable may be managed by the bankruptcy administrator or and immovable properties, cash flow and sources of income, the debtor themselves under the surveillance of the a list of debtors and creditors, and a list of all legal proceed- supervisory administrator, based on the decision of the ings in which the debtor is a party; Bankruptcy Court. b) the proposal for reorganisation plan; and (iv) In a fast-track reorganisation proceeding, the debtor c) a notarial declaration evidencing the support of the creditor/ has the right to manage/dispose of the assets of the creditors, representing 30% or more of the total amount of company, unless such actions are considered extraordi- the claims registered in the debtor’s account. nary, and as such will be subject to the approval of the The request shall be examined by the Bankruptcy Court, which supervisory administrator. may decide on its approval to open a fast-track reorganisation (v) In dissolution/liquidation, the debtor loses his right to proceeding and its appointment of a supervisory administrator. manage/dispose of his assets, a right that is vested to the The opening of the fast-track reorganisation proceeding shall bankruptcy administrator. not affect the right of the debtor to manage/dispose of the assets In light of the above, it is clear that the Bankruptcy Court is of the company, unless such actions are considered extraordi- always involved in bankruptcy proceedings. nary, and as such are subject to the approval of the supervisory administrator. 3.5 What impact does each restructuring procedure As per the above provision, the main difference between the have on existing contracts? Are the parties obliged to two reorganisation proceedings is that fast-track reorganisation perform outstanding obligations? What protections proceedings are initiated from the debtor who has obtained the are there for those who are forced to perform their approval of the creditors on the matter. outstanding obligations? Will termination and set-off As the Bankruptcy Law is relatively new, it is not yet possible to provisions be upheld? confirm whether fast-track reorganisation procedures are common in insolvency situations. In principle, the opening of bankruptcy proceedings does not affect contracts already in force, which shall continue to be valid Liquidation and effective. The bankruptcy administrator or the debtor, Apart from the reorganisation plan, the Bankruptcy Court may under the supervision of the supervisory administrator, may decide on the liquidation of the debtor’s assets and dissolution of terminate the contract if this decision benefits the bankruptcy the company. proceeding. Liquidation may be requested by the debtor itself, at any time or In addition, the Bankruptcy Law provides special provisions when the reorganisation plan fails to be enforced, or by the super- for the following contracts: visory or bankruptcy administrator, when commercial activity is a) Lease agreements which cannot be terminated upon the interrupted. opening of bankruptcy proceedings, neither for failure to Following the successful discharge of all obligations of the pay the lease price prior to the opening of the bankruptcy debtor to the bankruptcy creditors, the Bankruptcy Court shall proceeding, nor for the deterioration of the financial situ- decide on the termination of the bankruptcy proceeding and ation of the debtor. resolve the deregistration of the company from the commercial b) Order contracts which affect the bankruptcy estate register. shall be terminated upon the opening of the bankruptcy proceeding. 3.4 Who manages each process? Is there any court c) Public contracts which, as a rule, are not terminated due involvement? to the initiation of bankruptcy proceedings; however, the public administration may terminate the contract when there exists an objective reason to believe that the fulfil- Herein below is a short brief of the management of each process ment of the contract will be at risk. under the Bankruptcy Law:

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3.6 How is each restructuring process funded? Is any debtor upon approval of the supervisory administrator, may protection given to rescue financing? dispose of any collateral as long as the disposal value of such collateral is higher than the obligation. In cases when the value of the collateral is smaller or equal Pursuant to article 30 of the Bankruptcy Law, the bankruptcy or to the obligation toward the secured creditor, the bankruptcy supervisory administrator, together with the debtor, may obtain administrator or the debtor upon approval of the supervi- a loan at any time following the opening of the bankruptcy sory administrator may decide to separate such collateral for proceeding upon prior approval of the creditors’ committee and purposes of payment to the secured creditor. However, even in the Bankruptcy Court. Said loan should be obtained with the this case, the procedure will be under the discretion of the bank- purpose of continuance of the activity of the debtor and in the ruptcy administrator. best interest of the creditors. Before the approval of the loan by the Bankruptcy Court, the latter should notify the secured creditors by defining a five-day 4.5 What impact does each winding up procedure have term to file their claims, if the secured assets shall be adversely on existing contracts? Are the parties obliged to perform affected. outstanding obligations? Will termination and set-off For purposes of approving the loan, the Bankruptcy Court provisions be upheld? shall consider, inter alia, the duration of the bankruptcy proceeding, the debtor’s possibility to successfully restructure, Please see question 3.5 above. and whether the loans will increase that opportunity, etc. A special appeal may be filed by each creditor against the deci- 4.6 What is the ranking of claims in each procedure, sion of the Bankruptcy Court if the cost of the loan exceeds any including the costs of the procedure? benefit arising from such loan.

42 Insolvency Procedures The Bankruptcy Law expressly provides the ranking of claims to be followed in a bankruptcy proceeding, such as below: ■ Secured claims up to the value of the property serving as 4.1 What is/are the key insolvency procedure(s) collateral. available to wind up a company? ■ Claims from preferred creditors (i.e. employee claims for dismissal, work and health matters, alimony, tax obliga- The key procedure available in cases of insolvency in the tions, etc.). Albanian jurisdiction to wind up a company is “bankruptcy”, ■ Unsecured creditors’ claims. which is regulated by the Bankruptcy Law. ■ Final creditors (i.e. penalties as per the Civil Code, As mentioned above, the bankruptcy proceeding is initiated Criminal Code, etc.). by virtue of a written request of the debtors themselves or the ■ Shareholders’ claims. other creditors, which is afterwards approved by a decision of ■ Despite the above ranking, the Bankruptcy Law provides the Bankruptcy Court. that the payment of said creditors, in the quality of the bankruptcy creditors, shall be made, taking into account 4.2 On what grounds can a company be placed into the need to be prioritised from the payment of the cred- each winding up procedure? itors of the bankruptcy proceedings (i.e. creditors for the expenses of the bankruptcy proceeding and administrative expenses of the bankruptcy proceeding, such as court Please see question 3.3 above. expenses, administrator’s remuneration, etc.).

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

Please see question 3.4 above. Upon the final distribution of assets, the Bankruptcy Court shall decide on the termination of the bankruptcy proceeding. 4.4 How are the creditors and/or shareholders able In cases of legal entities, when all creditors are fully to influence each winding up process? Are there any discharged, the full distribution of income after the liquidation restrictions on the action that they can take (including of the assets shall bring the dissolution of the legal entity. In this the enforcement of security)? case, the decision of the Bankruptcy Court should be filed with the commercial register, so the debtor may be removed from In a bankruptcy proceeding, shareholders shall make public any such register and consequently cease to exist. situation related to the bankruptcy proceeding, assist the bankruptcy administrator while fulfilling their tasks, etc. 52 Tax Shareholders do not have the right to vote for a reorganisation plan, unless said plan provides for a change in the structure of 5.1 What are the tax risks which might apply to a the share capital or when they are creditors of the debtor. restructuring or insolvency procedure? Regarding the creditors, the latter has an important role, in particular via the creditors’ committee, which assists and super- The Bankruptcy Law does not provide for any tax implica- vises the activity of the bankruptcy administrator and the right tions arising specifically from bankruptcy proceedings. As to vote for a reorganisation plan, etc. mentioned in question 4.6, tax authorities are ranked by the law With regard to the enforcement of security, as per article 141 as preferred creditors. of the Bankruptcy Law, the bankruptcy administrator or the

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62 Employees (i) a copy of a certificate proving the decision of a foreign court to open a foreign bankruptcy proceeding, or a copy of a certificate issued from the foreign court confirming 6.1 What is the effect of each restructuring or the existence of such proceeding, and the appointment of insolvency procedure on employees? What claims would the foreign representative; employees have and where do they rank? (ii) in the absence of the documents indicated in point (i) here- inabove, any other adequate proof, which shall be accepted Employment contracts shall remain valid irrespective of the by the Bankruptcy Court, proving the existence of the opening of a bankruptcy proceeding. foreign proceeding and the appointment of the foreign After the opening of a bankruptcy procedure, the bank- representative; and ruptcy or supervisory administrator may suggest the termina- (iii) a declaration, to accompany the request, identifying all the tion or amendment of employment contracts. The termina- foreign proceedings and any proceeding under Albanian tion or amendment of employment contracts is governed by the legislation in relation to a particular obligation. Albanian labour legislation. Under the labour legislation, the Upon the successful filing of the above, the court may decide insolvency constitutes an objective economic reason for termi- that the foreign bankruptcy proceeding shall be recognised nating or amending employment contracts. under the Bankruptcy Law, either as a foreign main proceeding The claims related to the termination or amendment of if Albania is the country where the debtor has its centre of main employment contracts are presented to the Bankruptcy Court. interest, or as a secondary proceeding in other cases. The claims of employees deriving from the employment contracts are ranked as privileged credits. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other 72 Cross-Border Issues jurisdictions? Is this common practice?

7.1 Can companies incorporated elsewhere use The Bankruptcy Law does not contain any provision which restructuring procedures or enter into insolvency relates to the possibility of companies incorporated in Albania proceedings in your jurisdiction? to initiate a bankruptcy proceeding in other jurisdictions. The only provision dealing with foreign jurisdictions is article Pursuant to article 11 of the Bankruptcy Law, bankruptcy proceed- 174 of the Bankruptcy Law. Said article stipulates that the ings shall be reviewed and administered by the Bankruptcy Court, bankruptcy administrator shall be authorised to act outside the where the debtor has its centre of main interest. Republic of Albania, on behalf of a proceeding initiated under In principle, the centre of main interest is the place where the Albanian bankruptcy legislation, as permitted by the applicable debtor conducts the administration of its interests on a regular foreign legislation. daily basis. In practice, in case of a company or legal person, the place of the registered office shall be presumed to be the centre 82 Groups of main interest, unless proved otherwise. In light of the above-mentioned provision, in principle, companies incorporated in other jurisdictions may file a bankruptcy 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for filing in Albania only if the debtor has its centre of main interest co-operation between officeholders? in Albania. It should be noted that the Bankruptcy Court where the request is filed will be competent to evaluate if such court has jurisdiction to examine a particular bankruptcy case. The Bankruptcy Law does not set different rules or proce- In addition, the Bankruptcy Law provides that, following the dures regarding groups of companies involved in an insolvency recognition of a main foreign bankruptcy proceeding (please situation. refer to question 7.2), a bankruptcy proceeding may be initiated under Albanian legislation only in cases where the debtor has 92 Reform assets located in Albania. 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in 7.2 Is there scope for a restructuring or insolvency your jurisdiction? process commenced elsewhere to be recognised in your jurisdiction? For the time being, no new reforms of the Albanian corporate As per article 184 of the Bankruptcy Law, in order to recognise a rescue and insolvency regime have been announced. foreign bankruptcy proceeding in Albania, a foreign representative must file a request near the Bankruptcy Court, by submitting the following documents:

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Erlind Kodhelaj is a Senior Managing Associate at Deloitte Legal Sh.p.k. He joined the practice in 2015 from a leading law firm in Albania. Erlind has more than 12 years of experience specialised in commercial/corporate law, legal tax advice, the oil sector, employment law, competition, concessions, public procurement, project financing, real estate, and privatisation. He is the author of several papers and chapters in international legal publications such as ICLG, Global Legal Insights, CEE Legal Matters, etc. He has participated in several projects conducted in Albania, with involvement to project financing regarding PPP, concessions and privatisa- tions in the fields of oil, energy and public infrastructure. He is a member of Albanian Bar Association. Erlind is fluent in Albanian (native speaker), English and Italian.

Deloitte Legal Sh.p.k. Tel: +355 4 451 7906 Rruga Faik Konica Email: [email protected] Ndërtesa nr. 6, Hyrja nr. 7 URL: www.deloitte.com/al Tirana, 1010 Albania

Zhuljeta Mena is an Associate at Deloitte Legal Sh.p.k. and she joined our practice in 2018. She is specialised in commercial/corporate law, employment, migration services, and data protection. Zhuljeta is a law graduate from Tirana University in Albania (2016) and holds a Master’s in Civil Law from Tirana University in Albania (2018). Zhuljeta is a Member of the Albanian Bar Association. Zhuljeta is fluent in Albanian (native speaker), English and Spanish.

Deloitte Legal Sh.p.k. Tel: +355 4 451 7906 Rruga Faik Konica Email: [email protected] Ndërtesa nr. 6, Hyrja nr. 7 URL: www.deloitte.com/al Tirana, 1010 Albania

Deloitte Legal Sh.p.k. is a limited liability company established and organised in accordance with the laws of Albania. Deloitte Legal Sh.p.k. is an affiliate of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu Limited. The firm was established, having as its priority and goal, the imperative of serving with competence and due expertise. The firm works with local and multinational companies and not-for-profit organisations, government bodies and individuals, in areas of law encompassing commercial, employment, banking, tax, competition law, construction and real estate, intellectual property, dispute resolution, etc. Deloitte Legal Sh.p.k. is composed of highly trained professionals with a broad range of experience in legal issues affecting the Albanian market. www.deloitte.com/al

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Australia Australia

Dominic Emmett

Gilbert + Tobin Alexandra Whitby

12 Overview Following the introduction of “safe harbour” protections into Australia’s legislative regime (see question 9.1 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 compa- spectrum of debtor to creditor-friendly jurisdictions? nies time to develop an informal turnaround where a formal insolvency might have otherwise been necessary. Given the real Australia is widely considered to emphasise the rights of credi- exposure directors have to personal liability, which risk is only tors over debtors and as such is recognised as a creditor-friendly mitigated and not eliminated by the safe harbour provisions, it jurisdiction. Whilst there are some limitations on the options is unclear at this stage whether the reforms go far enough to that might otherwise be available to distressed companies and significantly increase the use of informal work-outs. some inflexibility in certain tools available to insolvency practitioners, Australia’s insolvency regime is, for the most part, 22 Key Issues to Consider When the primarily focused towards protecting the rights and interests of Company is in Financial Difficulties creditors over the interests of debtors. For example, Australia’s voluntary administration regime is controlled by creditors to the exclusion of management and members and its purpose 2.1 What duties and potential liabilities should the is designed to maximise creditor returns. Further, unlike the directors/managers have regard to when managing a company in financial difficulties? Is there a specific United Kingdom for instance, receivership is alive and well in point at which a company must enter a restructuring or Australia. insolvency process? Creditors are active participants in all insolvency processes in Australia. They can enforce their rights in each process and, whilst there are some timing limitations placed on their enforce- Directors owe a number of general and specific law duties to the ment rights in a voluntary administration scenario, enforcement company, its shareholders and creditors. These include: rights over secured assets are otherwise unfettered. ■ duties of good faith and due care and diligence; Secured creditors and employees enjoy a statutory priority in ■ to not improperly use the position, or information obtained a distribution of assets and, in some circumstances, unsecured by virtue of the position, to gain personal advantage or creditors can also place themselves in a position of protection. cause detriment to the company; Unlike secured creditors, unsecured creditors are given no legal ■ to keep adequate financial records; right to priority, yet due to a particular relationship that may ■ to take into account the interests of creditors; and exist with a debtor (for example, as a supplier of essential mate- ■ to prevent insolvent trading. rials), they can exercise that power to obtain payment and ensure Compliance with these duties means that directors should future payments as a practical necessity to maximise value and place a company into external administration at such time that keep the debtor business running. the company is cash-flow insolvent or there exists a less than reasonable prospect that the company will remain cash-flow solvent. 1.2 Does the legislative framework in your jurisdiction Australia’s new safe harbour provisions could, in certain allow for informal work-outs, as well as formal circumstances, enable a company to delay a formal insolvency restructuring and insolvency proceedings, and to what appointment where it seeks to pursue a turnaround plan with extent are each of these used in practice? a “better outcome” for the company (see question 9.1 below). If such a plan is being developed, the company must ensure it Informal work-outs and reorganisations can be pursued in meets the criteria to enliven the protection, because as a matter Australia provided adequate attention is paid to the prohibitions of practice, if the turnaround plan is unsuccessful and a formal on insolvent trading. The Corporations Act 2001 (Cth) (the Act) insolvency follows, the safe harbour protection will only be bestows a positive duty on directors to prevent a company from a defence to an insolvent trading claim rather than a positive incurring a debt whilst it is insolvent (or where they suspect it is exception to liability. likely to become insolvent). A breach of this duty exposes the On 22 March 2020, the Australian government announced director(s) to penalties such as personal liability for future debts urgent temporary reform measures to existing insolvency laws incurred, including during any informal workout period. Note, in response to the global health pandemic, COVID-19. Part however, the temporary reform measures referred to in ques- of the reform package provides directors with temporary relief tion 2.1 below. from their duty to prevent insolvent trading with respect to any

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debts incurred in the ordinary course of the company’s business application to the court to declare the following types of trans- and the personal liability that would ordinarily attach to such a actions void: breach. The reform measures are applicable for six months and ■ insolvent transactions (which includes both unfair prefer- will not apply to cases of dishonesty and fraud. ences and uncommercial transactions) if entered into, in Whilst this temporary relief measure may afford directors the case of unfair preferences, during the six-month period some short-term protection, directors will still need to satisfy ending on the relation-back day (the relation-back day is themselves as to the company’s ability to return to solvent generally the date of the appointment of administrators trading at the expiration of the six-month period. prior to the application to wind up the company) or in the case of uncommercial transactions, during the two-year period ending on the relation-back day; 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the ■ unfair loans, which are voidable if entered into any time action that they can take against the company? For before the winding up began; example, are there any special rules or regimes which ■ unreasonable director-related transactions, which are apply to particular types of unsecured creditor (such voidable if entered into during the four years ending on as landlords, employees or creditors with retention the relation-back day; and of title arrangements) applicable to the laws of your ■ transactions entered into for the purpose of defeating, jurisdiction? Are moratoria and stays on enforcement delaying or interfering with creditors’ rights on a compa- available? ny’s winding up, which are voidable if entered into during the 10 years ending on the relation-back day. Stakeholders who have the power to influence a company’s situ- Uncommercial transactions and unfair preferences are void- ation include: able if the company was insolvent at the time of the transaction ■ Secured creditors, who may seek to enforce their security or at a time when an act was done to give effect to the trans- and appoint a receiver to realise the assets of the company. action. Australian Courts have held a transaction is “uncom- ■ Unsecured creditors, where they may have a particular rela- mercial” if a reasonable person in the company’s circumstances tionship with a debtor (e.g. as a supplier of essential mate- would not have entered into it. An unfair preference is one where rials), may exercise that power to obtain future payment of a creditor receives more for an unsecured debt than would have its debts as a practical necessity to keep the debtor business been received if the creditor had to prove it in the winding up. running. The other party to the transaction or preference may prevent it ■ Shareholders. being held void if they can show they became a party in good An automatic moratorium applies in respect of each of the faith, they lacked reasonable grounds for suspecting that the formal procedures, other than receivership, to prevent unse- company was insolvent and they provided valuable considera- cured creditors (including shareholders and landlords) from tion or changed position in reliance on the transaction. enforcing their rights. Whilst no such moratorium exists in Loans to a company have been held to be “unfair” and thus receivership, to the extent an unsecured creditor takes action to voidablef i the interest or charges in relation to the loan were/ enforce their rights, they have no recourse to the assets which are, not commercially reasonable. This is distinct from the loan are secured and in the control of the receivers. simply being a bad bargain. Any “unreasonable” payments The Personal Properties and Securities Act (Cth) in 2009 (PPSA) made to a director or a close associate of a director are also provides a regime for certain unsecured creditors and the protec- voidable, regardless of whether the payment occurred when the tion of a supplier’s title to goods relevantly supplied. A uniform company was insolvent. concept of “security interest” exists under the PPSA to cover all existing forms of security interests under which an interest in 32 Restructuring Options personal property is granted pursuant to a consensual transaction that, in substance, secures the payment or performance of 3.1 Is it possible to implement an informal work-out in an obligation. It also applies to certain deemed security interests your jurisdiction? such as certain types of lease arrangements for certain terms, retention of title arrangements and transfers of debt, regardless of whether the relevant arrangement secures payment or perfor- See question 1.2 above. mance of an obligation. Personal property is defined broadly and essentially includes all property other than land, fixtures 3.2 What formal rescue procedures are available and buildings attached to land, water rights and certain statu- in your jurisdiction to restructure the liabilities of tory licences. distressed companies? Are debt-for-equity swaps To perfect title under the PPSA, suppliers are required to and pre-packaged sales possible? To what extent can register the retention of title arrangements on the Personal creditors and/or shareholders block such procedures or threaten action (including enforcement of security) Property and Securities Register (PPSR). If a security interest to seek an advantage? Do your procedures allow you is not perfected it will, on liquidation of the grantor, vest in the to cram-down dissenting stakeholders? Can you cram- grantor, despite the agreement between the supplier and recip- down dissenting classes of stakeholder? ient that the supplier retains title to those goods until payment is received. There are two processes available to effect a restructure of a company’s debts: 2.3 In what circumstances are transactions entered ■ deed of company arrangement (DOCA); or into by a company in financial difficulties at risk of ■ scheme of arrangement (Scheme). challenge? What remedies are available? DOCA Transactions are only vulnerable to challenge where a company A DOCA takes place in the context of a voluntary administra- is in liquidation. Liquidators have the power to bring an tion (i.e. a formal appointment).

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Once a company is in voluntary administration, a DOCA that a receiver should take in order to comply with the second can be proposed by anyone with an interest in the company. limb of the obligation, which include a market or auction sale A DOCA is effectively a contract or compromise between the process and marketing campaign, which has made “pre-pack” company and its creditors. Whilst it is a feature of voluntary sales difficult for receivers to achieve. administration, it should in fact be viewed as a distinct regime, Due to the impediments described above, pre-packs tend only where the rights and obligations of the creditors and company to be used in circumstances where: differ to those under a voluntary administration. (a) there are limited alternative sale options available to the Approval of a DOCA requires a simple majority (50% of insolvency practitioner appointed and there is evidence to creditors voting in number and value). Where a DOCA is support the assumption that any delay in sale may be fatal approved, it will bind unsecured creditors, the company, direc- to the underlying business; or tors and shareholders and those secured creditors who vote in (b) a market testing sale process has already been undertaken favour of it. Secured creditors who do not vote to approve the prior to the appointment of the receiver or administrator. DOCA retain their rights to enforce their security at any time, Notwithstanding the above, the market may well evolve so including by appointing a receiver. As such, secured creditors that we see more pre-packs if it can be demonstrated clearly that are the only form of stakeholder who cannot be crammed down junior creditors and shareholders are out of the money. under a DOCA. Shareholders have no entitlement to vote on a DOCA but will 3.3 What are the criteria for entry into each be bound by it. 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, mora- DOCA torium of debt repayments, a reduction in outstanding debt and Where a DOCA has been proposed by an interested party, it the forgiveness of all, or a portion of, outstanding debt. will be accepted at the second creditor meeting if the majority of creditors (50% in number and value) vote in favour of it. Scheme A Scheme is a restructuring tool that sits outside of formal insol- Scheme vency. It is a court-approved agreement which binds a compa- A Scheme will be approved where at least 50% in number and ny’s creditors and/or members to some form of rearrangement 75% in value of creditors in each class of creditor vote in favour or compromise of their pre-existing rights and obligations. of it. Schemes typically involve the deleveraging of a business or Final court approval is required. the reduction of outstanding debt in exchange for the issuance of equity. Schemes have also been used to facilitate a subsequent 3.4 Who manages each process? Is there any court proposed (and not mandatory) debt restructuring, rather than to involvement? actually implement it. The approval threshold for Schemes is 50% by number and DOCA 75% by value of the debt held by those creditors voting in The management of the company under the DOCA will depend each class such that it is possible for dissenting creditors to be entirely on its terms. A Deed Administrator may be appointed crammed down. However, given that the approval threshold to control the company and/or management may be reinstated. must be met in each class, dissenting creditors may have a power Court supervision is not mandatory for a DOCA; however, of veto if they can establish that they belong in a separate class should a section 444GA share transfer be contemplated, it is and reach a veto threshold. Classes are determined by reference likely leave of the court will be required for implementation. to commonality of legal rights and only those creditors whose Dissatisfied creditors also have recourse to the court to have rights will be affected need be included. a DOCA set aside. The key element to the success of both restructuring procedures is the willingness of (any) secured creditors to work Scheme with management of the distressed company as well as other The pre-existing management of the company generally stakeholders. The starting point for the negotiation will often continues in that capacity during the Scheme process and involve an agreement or undertaking on a standstill or forbear- approval phases (and, depending on the terms of the Scheme ance period during which the company will look to refinance itself, after implementation). its current debt structure (often through the injection of new The Scheme process is supervised by the court (as well as capital and/or equity). regulatory bodies) and is subject to two hearings. The first court hearing is to approve the convening of the meeting for the Pre-packaged sales relevant class(es) of creditors. At the second court hearing, the The “pre-pack sale” in the traditional English and US tradition court must approve the Scheme prior to implementation. has had limited application in the Australian restructuring environment due to the stringent obligations placed on insolvency practitioners and the protections afforded to creditors under 3.5 What impact does each restructuring procedure both statute and common law. However, the use of pre-packs have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections may increase given the recent introduction of the safe harbour are there for those who are forced to perform their protection. outstanding obligations? Will termination and set-off Attempts to effect a “pre-pack” are also restricted by the provisions be upheld? specific obligations on receivers vis-à-vis the disposal of assets. Section 420A of the Act requires a receiver to, upon the sale of There is no formal insolvency procedure that results in the auto- an asset, either achieve a price not less than market value (if a matic termination of contracts between the debtor and third market exists for the asset), or alternatively the best price reason- parties. ably obtainable. Australian Courts have identified certain steps

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Following appointment, administrators, receivers and liqui- 42 Insolvency Procedures dators can choose not to continue to perform a contract. Any damages flowing to the counterparty from the non-performance of a contract will rank unsecured against the company. However, 4.1 What is/are the key insolvency procedure(s) any contract that an insolvency practitioner continues with may available to wind up a company? result in the practitioner being held personally liable under the Act. Contractual and mandatory set-off will apply in formal insol- A company may be wound up: vency processes, with certain exceptions. Section 553C of the ■ if solvent, voluntarily by its members; or Act provides for a statutory set-off in a liquidation where there ■ if insolvent, by its creditors or compulsorily by order of the have been mutual dealings between the distressed company court. and the relevant creditor. In such circumstances an automatic account is taken of the sum due from one party to the other in 4.2 On what grounds can a company be placed into respect of those mutual dealings, and the sum due from one is each winding up procedure? set off against any sum due from the other. Until 1 July 2018, it was not uncommon for contracts to contain ipso facto clauses allowing a counterparty to terminate or Members’ voluntary winding up renegotiate a contract on the occurrence of any insolvency event A members’ voluntary liquidation is a solvent winding up. It (which can be defined to include any form of restructure). requires the directors of the company to make a declaration of solvency under section 494 of the Act that, in their opinion, Following the introduction of Insolvency Law Reform Act 2016 after an inquiry into the affairs of the company, the company (Cth) (ILRA) and its associated instruments, the ipso facto clause regime underwent significant change, which came into effect will be able to discharge its debts in full within 12 months of the from 1 July 2018. The effect of the regime amendments is to commencement of winding up. This is coupled with a special resolution of the members to wind up the company (at least 75% impose an automatic stay on the enforcement of ipso facto termi- of votes cast by members entitled to vote). nation rights in certain contracts that are triggered simply because a company enters into a formal or informal insolvency or restructuring process. The stay operates during a “stay period”, Creditors’ voluntary winding up the length of which is determined by reference to the length of A creditors’ winding up arises when the company is insolvent. It the relevant restructuring process. There are also circumstances can occur in a number of circumstances, including: in which the stay period will be indefinite. A court will also ■ if the members of the company resolve that the company have the power to lift the automatic stay where it considers it is be wound up and the directors cannot provide a solvency in the interests of justice to do so. declaration; Where the stay operates to prevent a counterparty from exer- ■ where a liquidator is appointed by members, the liquidator cising termination rights, a corresponding stay will also operate forms the opinion that the company is in fact insolvent, to prevent a company from requiring a “new advance of money they will convert the process from a members’ voluntary or credit” from the relevant counterparty. This corresponding winding up into a creditors’ voluntary winding up; and stay is designed to protect counterparties from advancing further ■ a company may also enter into a creditors’ voluntary “money or credit” to a company that has entered an insolvency winding up at the end of an administration if the creditors process. However, the concept of a “new advance of money or resolve to do so at the second creditors’ meeting. credit” is not defined such that its scope is ambiguous and its application (for example, to lenders within the terms of a facility Compulsory liquidation or to suppliers of goods and services under credit) is unclear. A creditor can apply to the court for an entity to be wound up. The full effect of the new regime will take some time to be The most common ground for the application is insolvency, properly understood as it does not operate retrospectively and usually indicated by a failure to comply with a statutory demand only applies to contracts entered into after 1 July 2018. All or judgment debt. Other grounds not related to insolvency are also available, including that it is “just and equitable” to do so or existing contracts as of 1 July 2018 that contain ipso facto termi- because of a deadlock at a shareholder or director level affecting nation clauses will confer rights on the counterparty to enforce those rights in accordance with the terms of the contact. the ability to manage the company. Provisional liquidation 3.6 How is each restructuring process funded? Is any Upon application to the court to wind up a company, the court protection given to rescue financing? can order the appointment of a provisional liquidator.

The costs of a DOCA will be the company’s costs in the admin- 4.3 Who manages each winding up process? Is there istration. Equally, Scheme costs will usually be the costs of the any court involvement? company, unless otherwise negotiated. A debtor can obtain financing and otherwise use its assets as security in a Scheme and informal voluntary reorganisations. Liquidation This is solely a matter for agreement between the company and Following appointment, a liquidator will control the affairs of its creditors. There are no special priorities given to new debt as the company and has the power to realise and distribute assets of right and such priorities have to be negotiated and agreed with to the exclusion of the directors and shareholders. any existing creditors who already hold some form of priority. Court involvement is required in a compulsory winding up, where it will appoint the liquidator. Courts will also consider applications by the liquidator, pursuant to section 480 of the Act, for an order that the liquidator be released and that the company be deregistered after the liquidator has realised all of the property out of the company

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or so much of that property as can be realised (in his or her 52 Tax opinion) without needlessly protracting the winding up, has distributed a final dividend (if any) to the creditors, has adjusted the rights of the contributories among themselves and made a 5.1 What are the tax risks which might apply to a final return (if any). The court must be satisfied that no creditor restructuring or insolvency procedure? will be adversely affected by the order. Tax liabilities (including PAYG and capital gains tax) can Provisional liquidation continue to be incurred during trade-ons in each of the insol- The provisional liquidator controls the affairs of the company vency and restructuring processes. Whilst the tax office is during the provisional liquidation to the exclusion of the direc- not afforded priority, certain tax liabilities are met regularly in tors and shareholders. distressed situations as directors can be rendered personally liable of those certain tax liabilities which are not paid.

4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any 62 Employees restrictions on the action that they can take (including the enforcement of security)? 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would Generally, unsecured claims rank pari passu (with some excep- employees have and where do they rank? tions), with secured creditors afforded a level of priority by virtue of the security arrangements in place. However, the court Receivership has the power (in limited circumstances) to change the rank of A receiver becomes personally liable for the services rendered a creditor’s claim. Section 564 of the Act provides an incen- by an employee to the company. A receiver may choose to tive to creditors to give financial assistance or indemnities to terminate employment contracts and is not personally liable for the liquidator to pursue asset recovery proceedings or to protect accrued entitlements prior to appointment. The claims of the or preserve property. If creditors provide such assistance, the terminated employees (in relation to unpaid entitlements) are liquidator may apply to the court for an order that the contrib- given priority to all other unsecured claims. uting creditors receive a higher dividend from the company’s assets than they would otherwise be entitled to. Voluntary administration After the commencement of a winding up of a company, or The position of an employee under any voluntary administration after the appointment of a provisional liquidator, leave of the will be at the discretion of the administrator. court is required to commence or continue legal proceedings against a company. Secured creditors are generally exempted DOCA from this process, assuming the validity of their security, as they Employees are afforded a level of protection under a DOCA. remain entitled to realise their security despite the liquidation. The statutory priority afforded to employees in liquidation must be the equivalent in a DOCA (unless the employees vote otherwise). 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 Provisional liquidation provisions be upheld? Provisional liquidation does not automatically terminate employees. See question 3.5. Liquidation Employees are afforded a statutory priority ahead of other unse- 4.6 What is the ranking of claims in each procedure, cured creditors, and in some cases, secured creditors, for claims including the costs of the procedure? in relation to unpaid employee entitlements. The position of directors and management is different, and the priority afforded Generally, the statutory waterfall set out in the Act has secured to them is capped significantly. A liquidator that chooses to run creditors paid in priority to unsecured creditors. Secured cred- the business for a short period of time as part of the process itors may contract priority arrangements between themselves if will become personally liable for services provided by individ- there are different levels of secured debt within a company. uals retained or employed during that period. There is an exception to this for employee entitlement claims. During a winding up, the entitlements of employees have priority Scheme over all other unsecured debts and claims in respect of those A Scheme of itself generally does not affect employment. assets subject to a circulating security interest (formerly floating charges). The renumeration, costs and expenses of liquidators are 72 Cross-Border Issues afforded priority over all creditors’ claims, including employees. 7.1 Can companies incorporated elsewhere use 4.7 Is it possible for the company to be revived in the restructuring procedures or enter into insolvency future? proceedings in your jurisdiction?

A company cannot be revived in the future following a winding Companies registered as foreign corporations in Australia could up. Once the company’s assets have been sold, the company is have receivers, administrators or liquidators appointed to them, deregistered with the corporate regulator and ceases as a corpo- but it is rare for this to occur. We are not aware of any foreign rate identity. corporations having initiated a Scheme in Australia.

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7.2 Is there scope for a restructuring or insolvency 92 Reform process commenced elsewhere to be recognised in your jurisdiction? 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in Australian Courts act cooperatively with foreign courts and your jurisdiction? insolvency practitioners and will recognise the jurisdiction of the relevant court where the “centre of main interest” is located. Australia’s corporate insolvency law has been the subject of This approach follows the UNCITRAL “Model Laws” on insol- recent reform. Significant changes have been introduced via vency which was codified into Australian law through the Cross- the ILRA, with many of the reforms either in their infancy or Border Insolvency Act 2008 (Cth). still in the process of being rolled out. To give full effect to There is also scope under different legislation (such as the the ILRA, a number of additional instruments have been intro- Act) for Australian Courts to recognise foreign judgments in duced, including the: Australia. Such recognitions require compliance with the rele- ■ Insolvency Practice Rules (Corporations) 2016, which provides vant court practice and procedure rules. a range of rules regarding the external administration of companies and the registration and discipline of external 7.3 Do companies incorporated in your jurisdiction administrators; restructure or enter into insolvency proceedings in other ■ Corporates and Other Legislation Amendment (Insolvency Law jurisdictions? Is this common practice? Reform) Regulation 2016, which amends the Corporations Regulations 2001 (Cth) and other relevant regulations conse- It is becoming increasingly common for Australian companies quential to the Insolvency Practice Rules; and subject to a formal insolvency process to seek recognition of that ■ instruments to provide for the partial delay of certain process in other jurisdictions (for example, Chapter 15 recogni- ILRA amendments. tion in the United States of America) but it is rare for Australian Whilst the reforms do not make wholesale changes to companies to look to initiate a formal insolvency process or Australia’s current insolvency regime, they will affect the restructure exclusively in a foreign jurisdiction. day-to-day operation of both formal and informal restructuring processes and will bolster creditor information rights. 82 Groups Two of the biggest changes that have resulted from the reforms include: ■ the introduction of a “safe harbour” concept to the insol- 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for vent trading laws (see questions 1.2 and 2.1); and co-operation between officeholders? ■ the operation of the automatic stay on ipso facto termination clauses (see question 3.5). The safe harbour protection has been incorporated by intro- In insolvency proceedings involving corporate groups, a consol- ducing a new section 588GA into the Act which provides idated group is not considered as a single legal entity. Where that section 588G(2), being the provision which makes direc- companies operate as a consolidated group, the starting legal tors personally liable for insolvent trading, will not apply if, position is the “separate personality” principle which prevents after starting to suspect the company is, or may become, insol- creditors of an insolvent company from gaining access to the vent, the director takes steps to develop one or more courses funds of other companies for payment of their debts. Having of action that is “reasonably likely to lead to a better outcome said that, groups of companies often enter into deeds of cross for the company” than the immediate appointment of an insol- guarantee to afford themselves the benefit of consolidated vency practitioner. There are a number of criteria that will financial reporting. In a liquidation scenario, that deed commits be used to assess whether the test has been satisfied so as to the companies a party to it to pay the liabilities of all the other enliven the protection, including the engagement of appropri- companies that are a party to it. ately qualified advisors to provide advice on the restructuring The Act, however, provides for a holding company to be liable plan. The Explanatory Memorandum accompanying the legisla- for the debts of their insolvent subsidiaries in certain circum- tion states that “reasonably likely” requires that there is a chance stances. These provisions enable the subsidiaries’ liquidator to of achieving a better outcome that is not “fanciful or remote”, recover amounts equal to the loss or damage suffered by credi- but is “fair”, “sufficient” or “worth noting”. tors from the parent company if the parent failed to prevent the The safe harbour rule does not provide protection in respect subsidiary from incurring debts while the subsidiary was trading of all debts and only covers debts that are incurred: whilst cash-flow insolvent. ■ in connection with the relevant course of action being Pooling of group funds may occur in limited circumstances, pursued; and as prescribed by Division 8 and Part 5.6 of the Act being sections ■ during the period commencing at the time the course 5.71 to 5.79L. Generally, those circumstances are where there of action is being developed ending at the earliest of a is a substantial joint business operation between members of “reasonable period” following the course of action not the same corporate group and external parties, such members being pursued, when the director ceases to take such of the group are jointly liable to creditors. The liquidator of course of action, when the course of action ceases to be the corporate group makes what is called a pooling determina- “reasonably likely” to lead to a better outcome or the tion, after which separate meetings of the unsecured creditors of appointment of an insolvency practitioner. each company must be called to approve or reject the determi- Care should be taken when relying on the safe harbour prin- nation. The court may vary or terminate any approved pooling ciple as it will not operate to automatically exempt a director determination. from exposure to personal liability; rather it will be relevant to a director seeking to defend an insolvent trading claim.

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Additional reforms in Australia include: ■ was not entered into or done under a Scheme or ■ Corporations Amendment (Strengthening Protections for Employee DOCA or by an administrator, liquidator or provi- Entitlements) Act 2019 (Cth), pursuant to which: sional liquidator; and ■ civil and criminal penalties will apply to persons ■ a director will be exposed to personal liability where (including directors and related entities) that enter into he or she fails to prevent a company from entering transactions which are “reasonably likely” to prevent into a creditor-defeating disposition within the rele- or significantly reduce the recovery of employee enti- vant time periods and the director: tlements; and ■ is reckless as to the result of the disposition, in ■ the court will be able to make an “employee entitle- which case the director will commit an offence ments contribution order” against a (solvent) parent and will also be liable for a civil penalty and/or to company or another entity which has benefitted from pay compensation; or the services of the employees of a company in liqui- ■ knows or ought to know the disposition is a dation where it is “just and equitable” for the order to creditor-defeating disposition, in which case a be made (for example, where the assets of group enti- civil penalty and/or compensation order may be ties have been intermingled and a subsidiary company imposed. has been intentionally left with insufficient assets to In addition to the general insolvency law reform measures discharge its liabilities). set out above, on 22 March 2020, the Australian Government ■ Treasury Laws Amendment (Combating Illegal Phoenixing) Bill announced a series of temporary changes to key parts of existing 2019 (Cth), pursuant to which: insolvency laws to respond to the global COVID-19 health ■ s it i proposed to introduce a new claw-back provi- pandemic. The aim of the reforms is to keep businesses open sion into the Corporations Act to enable a liquidator and to allow them to operate at a time when they would other- to recover a “creditor-defeating disposition”, being a wise be required to enter into an external administration process. disposition of company property: The measures apply for six months and include: ■ where the consideration paid is less than the lesser ■ relief from the duty to prevent insolvent trading. of the market value of the property and the best During the six-month period, directors will be relieved price reasonably obtainable; and from their duty to prevent insolvent trading (see ques- ■ which has the effect (irrespective of intention) of tion 2.1 above) with respect to debts incurred in the ordi- preventing, hindering or significantly delaying the nary course of business. It follows that directors will property becoming available for creditors in the also be relieved from the personal liability that ordinarily event of a winding up, attaches to the duty. This relief will not apply to instances only if the disposition was entered into (or was an of dishonesty or fraud. Directors will need to continue act done for the purpose of giving effect to the to be mindful of the scope of the duty and whether, at disposition): the conclusion of six months, the company is capable of ■ when the company was insolvent or otherwise returning to solvent trading; and caused the company to become insolvent; and ■ higher thresholds and more time to respond to a statu- ■ during the 12 months before appointment of tory demand. Failure to comply with a statutory demand an external administrator; or is a common way for a company to enter into liquida- ■ less than 12 months after the disposition tion (see question 4.2 above). As a result of the tempo- was entered into or was an act done for the rary reform measures, the current minimum threshold purpose of giving effect to the disposition, the for creditors to issue a statutory demand will increase company enters into external administration from A$2,000 to A$20,000. The statutory timeframe as a direct result of the disposition or the act in for a company to respond to a statutory demand will be respect of the disposition; and extended from 21 days to six months.

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Dominic Emmett specialises in non-contentious restructuring and insolvency work for banks and financial institutions, as well as special situation groups and distressed debt funds. His expertise includes: preparing and negotiating standstill and forbearance arrangements; debt restructuring and schemes of arrangement; structured administration and receivership sales; and advice to directors, receivers, administrators and liquidators. Recent and current roles in the resources sector include Bis Industries, Arrium, Emeco, Boart Longyear, Paladin and WICET. Otherwise, Dominic has been involved in a significant if not lead role in the cases of Atlas Iron, Mirabela Nickel, Straits Resources, BrisConnections, RiverCity, Nine Entertainment, Westpoint, Ansett, Billabong, Alinta Energy, I-Med, Centro, Freight Link, Cross City Tunnel, Timbercorp, Walter Construction, MF Global, Top Ryde, Allco Finance, Raptis and FAI.

Gilbert + Tobin Tel: +61 2 9263 4328 Level 35, Tower Two, International Towers Sydney Email: [email protected] 200 Barangaroo Avenue URL: www.gtlaw.com.au Barangaroo, NSW 2000 Australia

Alexandra Whitby practises in insolvency and restructuring disputes as well as non-contentious restructuring and insolvency transactions: ■ Anchorage Capital Partners and other secondary lenders, in their claim against certain former directors and officers of the Arrium Group in relation to the Arrium Group’s collapse. ■ A secured lender, in its objection to a proposed creditors’ scheme of arrangement in Re Boart Longyear Limited. ■ Bis Industries, in relation to a recapitalisation plan to restructure its A$1.17 billion debt. ■ The receivers and managers appointed to the Clem 7 (Airport Link) Tunnel in Brisbane, Queensland (BrisConnections). ■ The receivers and managers appointed to the North-South Bypass Tunnel in Brisbane, Queensland (RiverCity). ■ Nine Entertainment Group, in respect of its A$3.4 billion debt-for-equity restructuring by way of scheme of arrangement. ■ 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 Tel: +61 2 9263 4114 Level 35, Tower Two, International Towers Sydney Email: [email protected] 200 Barangaroo Avenue URL: www.gtlaw.com.au Barangaroo, NSW 2000 Australia

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; Disputes and Investigations; Technology; Media & Telecommunications; Employment; Energy & Resources; Real Estate; and Environment & Projects. www.gtlaw.com.au

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Austria Austria

Martin Abram

Schindler Rechtsanwälte GmbH Florian Cvak

12 Overview (Zahlungsstockung). Generally, it is assumed that where a debtor can pay at least 95 per cent of its due debts it will become liquid again (temporary). A debtor is over-indebted if its assets 1.1 Where would you place your jurisdiction on the (valued at their liquidation and not their book values) would not spectrum of debtor to creditor-friendly jurisdictions? be sufficient to pay off all its debts in a liquidation (rechnerische Überschuldung) and a forecast (Fortbestehensprognose) would show Austria is generally considered a creditor-friendly jurisdiction, that the debtor will not be able to maintain its liquidity for the as it does not provide for UK or US styles of restructuring near future (Primärprognose) and achieve a turnaround within the proceedings. next two to three business years (Sekundärprognose). In case of a failure to timely file for the opening of insolvency proceedings, 1.2 Does the legislative framework in your jurisdiction the managing directors may become liable towards the debt- allow for informal work-outs, as well as formal or’s existing creditors (i.e. creditors who had a claim against the restructuring and insolvency proceedings, and to what debtor before the opening of the insolvency proceedings) for extent are each of these used in practice? the difference between the quota they would have received in case of a timely filing and the lower quota they actually received Austrian law allows for both informal work-outs as well as (Quotenschaden), and towards its new creditors (i.e. creditors (within the framework of the Austrian Insolvency Act) formal who became creditors after the point in time when manage- restructuring and insolvency proceedings, all of which are used ment would have been obliged to file) for the damage suffered in practice. The Austrian Insolvency Act provides for three because they contracted with the debtor assuming that it is not types of insolvency proceedings, namely: insolvent (Vertrauensschaden). ■ restructuring proceedings with self-administration (mit In addition, there is (increased) risk of criminal liability, most Eigenverwaltung) (where the management of the debtor notably on the basis of the following: gross negligent encroach- retains control over the day-to-day business); ment of creditors’ interests; preferential treatment of creditors; ■ restructuring proceedings without self-administration withholding of social security payments; and fraudulent inter- (ohne Eigenverwaltung) (where the court-appointed adminis- vention with creditors’ claims. trator takes control over the day-to-day business); and In response to the current COVID-19 pandemic, the general ■ bankruptcy proceedings (where the court-appointed 60-day back-stop date for the filing was extended to 120 days administrator takes control over the debtor, with the task and the obligation to file on the basis of over-indebtedness of a to realise all assets and pay off the creditors). debtor was suspended until 30 June 2020 if the insolvency has The following chapter solely deals with out-of-court restruc- occurred after 1 March 2020. turings and in-court insolvency proceedings of corporate entities, and not individuals. 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the 22 Key Issues to Consider When the action that they can take against the company? For example, are there any special rules or regimes which Company is in Financial Difficulties apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention 2.1 What duties and potential liabilities should the of title arrangements) applicable to the laws of your directors/managers have regard to when managing a jurisdiction? Are moratoria and stays on enforcement company in financial difficulties? Is there a specific available? point at which a company must enter a restructuring or insolvency process? Shareholders or members of the supervisory board of the debtor (if any) are not entitled to file for the opening of insolvency Managing directors must file for the opening of insolvency proceedings. If they exert their influence to induce manage- proceedings if the debtor is “insolvent” without culpable delay ment not to file for the opening of proceedings, they may be (schuldhafte Verzögerung) and in any event, no later than within exposed to civil and criminal liability for contributing to a delay 60 days of its insolvency. A debtor is considered insolvent if of the filing. Creditors are entitled to (and frequently do) file it is illiquid or over-indebted. A debtor is illiquid if it cannot for the opening of insolvency proceedings; however, they can pay its due debts on a permanent basis and not just temporarily only file for the opening of bankruptcy proceedings, and not for

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the opening of in-court restructuring proceedings. There are 3.2 What formal rescue procedures are available no special rules or regimes applying to particular types of unse- in your jurisdiction to restructure the liabilities of cured creditors with regard to the filing. distressed companies? Are debt-for-equity swaps Moratoria and stays on enforcement may apply in in-court and pre-packaged sales possible? To what extent can proceedings (see question 3.5). creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you 2.3 In what circumstances are transactions entered to cram-down dissenting stakeholders? Can you cram- into by a company in financial difficulties at risk of down dissenting classes of stakeholder? challenge? What remedies are available? As mentioned under question 1.2 above, the Austrian Court-appointed insolvency administrators can challenge trans- Insolvency Act provides for three types of proceedings: two actions that occurred within certain “suspect periods” prior to restructuring proceedings (restructuring proceeding with the opening of the insolvency proceedings if there is prospect self-administration (mit Eigenverwaltung) and restructuring that the recovery of the creditors can be increased thereby and proceeding without self-administration (ohne Eigenverwaltung)); one of the following grounds for challenge can be established: and the bankruptcy proceedings. In addition, the Austrian ■ discrimination against creditors (Benachteiligung) where the Reorganisation Act provides for the restructuring of a company debtor at least accepted the discriminating effect (dolus even- in financial distress which is, however, of little practical relevance, tualis) and the counterpart knew (10-year suspect period) as the completion of such procedure requires the consent of all or negligently failed to know of the debtor’s motivations creditors. (two-year suspect period); Pre-packaged sales (that is a sale pre-agreed pre-filing ■ squandering of assets where the counterpart knew or and completed after filing) are not foreseen by the Austrian negligently failed to know that the transaction constitutes Insolvency Act nor does the Austrian Insolvency Act provide squandering (one-year suspect period); for a forced debt-for-equity swap. What occasionally happens ■ transfers without consideration (unentgeltliche Verfügungen) is that shareholder debt gets waived (and thereby converts into (two-year suspect period); equity). Another method which helps in cases of impending ■ favouring of creditors (Begünstigung) by payment or provi- over-indebtedness is contracted qualified subordination (qual- sion of security: ifizierte Nachrangerklärung). The effect of contracted qualified ■ where the creditor is not entitled to such payment or subordination is that the shareholder (sometimes also other security (inkongruent), no additional prerequisites apply; debt) is not considered debt when determining whether the ■ where the creditor is entitled to such payment or secu- company is over-indebted (see question 2.1). rity (kongruent), the debtor must at least have accepted In in-court restructuring proceedings, creditors can influence the favouring effect (dolus eventualis) and the creditor the process through threatening to withhold their consent to the must have known or negligently failed to know of the restructuring plan. The restructuring plan must be approved debtor’s motivations (one-year suspect period); and by simple majority (by headcount) of the insolvency creditors ■ certain transactions with the (already) insolvent debtor present at the restructuring plan hearing (Sanierungsplantagsatzung), where the counterpart knew or negligently failed to know who must represent at least 50 per cent of the outstanding unse- of the debtor’s insolvency (six-month suspect period). cured debt represented at the hearing and be confirmed by a decision of the court. Insolvency creditors who have acquired 32 Restructuring Options their claims after the opening of the proceedings have no voting right (unless they acquired the claim based on an agreement 3.1 Is it possible to implement an informal work-out in entered into prior to the opening of the proceedings). In prin- your jurisdiction? ciple, the restructuring plan must treat all insolvency creditors equally (Paritätsprinzip) unless (where a group of insolvency creditors is concerned) unequal treatment is approved by a simple As mentioned under question 2.1 above, the managing directors majority (by headcount) of the affected insolvency creditors must file for the opening of insolvency proceedings if the debtor present at the restructuring plan hearing, who must represent is “insolvent” without culpable delay (schuldhafte Verzögerung) at least 75 per cent of the affected insolvency claims represented and in any event, no later than within 60 days of its insolvency. at the hearing or (where an individual creditor is concerned) the Out-of-court restructurings are therefore only an option prior individual creditor has granted his explicit consent. The court to the lapse of the 60-day back-stop period and only as long as decision confirming the restructuring plan releases the debtor the out-of-court restructuring is diligently pursued and there is from his obligation to pay insolvency creditors in excess of the prospect of success. The obvious advantage of an out-of-court agreed quota. If the debtor defaults and fails to come current restructuring is that the proceedings are not registered in the during the requisite cure period, the released claims are rein- insolvency database (Ediktsdatei) (as would be the case with stated and become immediately due. in-court restructuring proceedings), and thus it is less likely Shareholders also have some (albeit less formalised) influ- to become public. The other advantage is that out-of-court ence on the restructuring proceeding since, in most cases, the restructurings tend to offer more flexibility and can be imple- debtor will require additional shareholder funding to (a) service mented quicker as long as all relevant parties contribute. The the estate claims (Masseforderungen), and (b) fulfil the payment disadvantage is that out-of-court restructurings only capture obligations pursuant to the (approved) restructuring plan. The the contracting parties (and not all insolvency creditors) and Austrian Insolvency Act does not provide for a (creditor-initi- in certain situations there may be a risk of voidance where an ated) cram-down of a debtor’s shareholders as a whole or classes agreement is entered into at a time where the debtor is already of a debtor’s shareholders. insolvent and the effect thereof is to potentially dilute the value of the insolvency estate.

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3.3 What are the criteria for entry into each commitments under credit lines are, however, exempt. Where restructuring procedure? no specific termination provision applies and no vital contract is concerned, terminations remain unaffected. Where contractual partners are obligated to continue to perform following The insolvency court will open insolvency proceedings the opening of an insolvency proceeding, claims for services (Insolvenzverfahren) as bankruptcy proceedings (Konkursverfahren) provided after the opening of the proceedings are treated as (only) upon application of the debtor (or its management) or a (preferred) estate claims (Masseforderungen). Set-off provisions creditor of the debtor. The proceedings are opened as bank- will be upheld, however, with modifications: contingent and ruptcy proceedings (Konkursverfahren), unless the debtor has filed undue debt becomes due and non-monetary claims (e.g. for for the opening of the proceedings as restructuring proceedings performance) convert to monetary claims upon the opening of (Restrukturierungsverfahren) and has submitted a viable restruc- the proceedings. The set-off claim must exist at the time of the turing plan (Sanierungsplan). Creditor-initiated proceedings can opening of the proceedings. Moreover, a set-off is excluded if later be converted into restructuring proceedings upon applica- the creditor knew of the insolvency when he acquired the claim. tion of the debtor and a viable restructuring plan. The restructuring plan must provide (i) that the rights of secured creditors (that is, rights of creditors holding an owner- 3.6 How is each restructuring process funded? Is any ship interest in an asset (Aussonderungsgläuber) and the rights of protection given to rescue financing? creditors (Absonderungsgläubiger) holding a security interest in an asset to the proceeds of enforcement into that asset) will not be As mentioned above, the debtor needs to provide proof of affected, (ii) full payment of all estate claims (Masseforderungen) funds to cover the estate claims (Masseforderungen) for a period (see question 4.6), as well as (iii) an offer to pay at least 20 per of 90 days following the application. There are no restrictions cent (or 30 per cent if self-administration is requested) of the on the sources of funding, so funds can be provided by share- claims filed by insolvency creditors within two years of confir- holders, through operating cash flows, through existing unuti- mation of the restructuring plan. Furthermore, the debtor must lised financing lines or through additional new debt financing. provide evidence that he can fund the estate claims for a period of 90 days following the application. 42 Insolvency Procedures

3.4 Who manages each process? Is there any court 4.1 What is/are the key insolvency procedure(s) involvement? available to wind up a company?

In out-of-court restructurings, the debtor retains full control A company is wound up following (i) resolution of its share- and there is no court involvement. In in-court restructurings holders to dissolve and liquidate the company (voluntary liquida- with self-administration (Eigenverwaltung), the debtor retains tion), or (ii) closure of bankruptcy proceedings (Konkursverfahren). control but requires the consent of the administrator for matters outside the ordinary course of business. In addition, the administrator may (on its own initiative) veto matters within the ordi- 4.2 On what grounds can a company be placed into each winding up procedure? nary course of business. In in-court restructurings without self-administration (ohne Eigenverwaltung), control transfers to the administrator. The administrator’s role usually ends upon A voluntary liquidation is initiated by a resolution of the share- acceptance of the restructuring plan by the creditors and confir- holders of a company. In such resolution, a special suffix is mation by the insolvency court. The restructuring plan may, added to the company name to denote that the company is in however, also provide that a trustee is appointed to (i) supervise wind-down. Both the resolution and the change of the company the fulfilment of the restructuring plan by the debtor (in which name have to be notified to the Companies Register. case supervision is similar to that during restructurings with For the preconditions of opening bankruptcy proceedings, self-administration), (ii) take over the estate (übernehmen) with see question 2.1 above. As mentioned above, the debtor can the mandate to fulfil the restructuring plan (Sanierungstreuhand ), apply for a conversion of bankruptcy proceedings into restruc- or (iii) liquidate the estate (Liquidationstreuhand ). turing proceedings.

3.5 What impact does each restructuring procedure 4.3 Who manages each winding up process? Is there have on existing contracts? Are the parties obliged to any court involvement? perform outstanding obligations? What protections are there for those who are forced to perform their A voluntary liquidation is managed either by (all or some of) outstanding obligations? Will termination and set-off provisions be upheld? the managing directors of the company or by newly appointed liquidators, as decided by the company’s shareholders. Court involvement is limited; the liquidators have to make certain Out-of-court restructurings do not have any impact on existing filings with the Companies Register, which are only subject to a contracts and the parties’ performance obligations thereunder. limited review by the court. The liquidators will have to termi- In in-court restructurings, special termination rights apply for nate all existing contractual relationships of the company, settle contracts not (fully) performed by either party, for leases and all outstanding claims and repay the company’s debts before for employment contracts. In addition, vital contracts (that the company can be finally wound down and deleted from the is, contracts which are essential for the success of the restruc- register. turing) can only be terminated for good cause for six months In case of bankruptcy proceedings, the administrator takes following the opening of the proceedings. Default on payments care of the realisation of the assets and the payment of the quota and deterioration of the financial or economic state of the to the insolvency creditors. Then the company is deleted. debtor is not considered good cause for such purposes. Funding

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4.4 How are the creditors and/or shareholders able of practical relevance: claims for labour; services and goods to influence each winding up process? Are there any furnished to the estate post-filing; the costs of the proceedings restrictions on the action that they can take (including (including the remuneration and reimbursement awarded to the the enforcement of security)? creditor’s committee and the Special Creditors’ Rights Protection Associations); any monies advanced by a third party to cover the In a voluntary liquidation, the liquidators need to pay-off all initial costs of the proceedings (to avoid a dismissal of the filing existing creditors of the company, so the creditors are in a strong in limine); and the fees of the administrator), which rank prior to position to demand full repayment of their claims. Shareholders other (unsecured) claims and are shared pro rata amongst them- still retain their influence (to the extent allowed by law), even selves. The remainder of the estate is shared among the insol- after they decided to put the company in liquidation. vency creditors (those are unsecured creditors who filed claims In bankruptcy proceedings, the shareholders do not have any against the estate, which were not contested) on a pro rata basis. noticeable influence on the proceedings. They are, however, Subordinate creditors do not participate in insolvency proceed- entitled to bid for assets of the debtor in the same way as other ings unless asked to do so by the court in circumstances where it creditors. The influence of unsecured creditors is also limited in is likely that a surplus will be available for distribution. A cred- bankruptcy proceedings; certain decisions of the administrator itor may be subordinated by operation of contracted subordina- require the prior consent of the creditors’ committee, where the tion (see question 3.2 above) but also by operation of the law, most various creditors have voting rights depending on the amount of notably the Equity Replacement Act which prohibits payments their (accepted) claims against the debtor. under loans made by qualified shareholders (controlling shareholders and shareholders holding a stake of at least 25 per cent) in a “crisis” for as long as the crisis continues. 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 4.7 Is it possible for the company to be revived in the provisions be upheld? future?

In a voluntary liquidation, the shareholder decision to dissolve Following the completion of the bankruptcy proceedings, the and liquidate the company does, by itself, not have an impact debtor is deleted from the companies register. To the extent on existing contracts. However, quite frequently, counterpar- additional assets of the debtor are discovered at a later stage, the ties will have negotiated a contractual right to terminate their company could be reinstated for as long as it takes to realise and contract for good cause in such cases. Absent a contractual distribute such additional assets to the creditors. termination right, contracts have to be performed. Similarly, the ability to set off is typically not affected by a shareholder 52 Tax decision to dissolve and liquidate the company. In bankruptcy proceedings, the administrator may elect to 5.1 What are the tax risks which might apply to a assume or withdraw from contracts which neither party has restructuring or insolvency procedure? fully performed at the time of the opening of the insolvency proceedings. If the contract is assumed, further claims of the contracting party are (preferred) estate claims (Masseforderungen). The opening of a restructuring or insolvency proceeding itself In case of a withdrawal, any resulting (damage) claims of the does not give rise to tax risks. However, where a restructuring contracting party are ordinary insolvency claims (and thus involves a subordination or waiver of existing shareholder debt, limited to the quota). Where the debtor is a tenant, the admin- the debtor may realise a taxable gain as a result. In most circum- istrator (not the landlord) can terminate the lease, in which case stances, that taxable gain will not be that relevant, as the gain he must only observe the statutory notice period or a shorter can be offset against current losses or loss carry-forwards. contractual notice period (but is not bound by a longer contractual notice period). The six-month limitation for vital contracts 62 Employees referred to under question 3.5 above may also apply in bankruptcy proceedings if the administrator has sufficient funds to 6.1 What is the effect of each restructuring or pay the estate claims and can show that keeping such contracts insolvency procedure on employees? What claims would in place will likely enhance the chances of successfully selling employees have and where do they rank? the business as a going concern during the bankruptcy proceedings for higher sales proceeds. Where the debtor is the landlord, The opening of in-court insolvency proceedings by itself does no special termination rights exist. As regards set-off provi- not affect the employees of the debtor. However, the admin- sions, please see question 3.5 above. istrator has special termination rights in case of a partial or total closure of the business, only requiring the administrator 4.6 What is the ranking of claims in each procedure, to comply with the (mandatory) notice periods under statute including the costs of the procedure? and the applicable collective bargaining agreement (but not the longer contractual notice periods). A similar provision is available to a debtor in a restructuring with self-administration if There are two types of secured creditors: Aussonderungsgläubiger he decides to close part of the business or unit, and continuing (who are entitled to request the return of assets in which they the employment of an employee of that part of the business or hold a property interest); and Absonderungsgläubiger (who are enti- unit would put the restructuring or the business at risk. Such tled to preferred settlement out of the proceeds of enforce- a measure, however, requires the consent of the administrator. ment against the assets subject to their security interest; any Please note that mass lay-offs in connection with restruc- surplus of enforcement goes to the general insolvency estate turing or insolvency proceedings require a 30-day pre-notifica- (Gemeinschaftliche Insolvenzmasse)). Then there are the Massegläubiger tion of the competent branch of the Austrian Labour Market of estate claims (Masseforderungen) (these are, ranked in order Service. During the aforementioned 30-day notice period, no

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termination can be effectively announced – which means that Insolvency proceedings opened outside of EU Member States the notice period is de facto prolonged by the 30-day period. are recognised provided that the COMI of the debtor is located Post-petition salaries of employees as well as the costs for in the country where the insolvency proceedings were opened terminating certain types of employment agreements are estate and the foreign insolvency proceeding is comparable to an claims (see question 4.6). Claims of employees for periods before Austrian insolvency proceeding. Please note that the Insolvency the opening of the proceedings (i.e., back pay, unpaid severance Act does not provide for a formal recognition procedure. payments, etc.) are normal insolvency claims sharing the general Accordingly, the effects of such foreign insolvency proceedings quota. However, Austria maintains an Insolvency Contingency will be decided by Austrian courts primarily when creditors try Fund, where employees receive compensation for back pay and to initiate enforcement actions against the debtor in Austria. other claims from the employment relationship that arose no earlier than six months before the opening of in-court insolvency 7.3 Do companies incorporated in your jurisdiction proceedings (up to a specified maximum amount), in exchange restructure or enter into insolvency proceedings in other for passing on their claims to the Insolvency Contingency Fund; jurisdictions? Is this common practice? as a result of this scheme, the Insolvency Contingency Fund is typically one of the bigger creditors in in-court restructuring Generally, Austrian companies tend to restructure or enter into proceedings. insolvency proceedings in Austria. As opposed to Germany, where several debtors have tried to open insolvency proceed- 72 Cross-Border Issues ings in the UK in the recent past, we have not observed such attempts in Austria. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? 82 Groups

8.1 How are groups of companies treated on the Companies registered in another EU Member State can enter into insolvency of one or more members? Is there scope for insolvency proceedings in Austria if their centre of main interest co-operation between officeholders? (COMI) is in Austria and no insolvency proceedings have been opened in respect of that debtor in another EU Member State Since the 2017 amendment, the Austrian Insolvency Act incor- as a main proceeding according to Council Regulation (EC) No porates the provisions of Council Regulation (EC) No 848/2015 848/2015. Companies registered outside the EU can, in prin- regarding insolvency proceedings for groups of companies. ciple, also enter into insolvency proceedings in Austria, if their These provisions basically provide for increased coordination of COMI is in Austria; however, there is a rebuttable assumption insolvency proceedings for the various group entities. that the COMI is located in its country of registration. 92 Reform 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction? 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? Insolvency proceedings that were opened as main proceedings in another EU Member State have to be recognised in Austria There are currently no proposals for reform. pursuanto t Council Regulation (EC) No 848/2015.

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Martin Abram is a founding partner of Schindler Rechtsanwälte. Prior to that, Martin was a partner at Wolf Theiss. His practice focuses on corporate law, corporate restructurings, mergers and acquisitions and project and real estate financing transactions. He regularly counsels financially troubled companies, their shareholders, management and supervisory boards as well as financing banks and other creditors in dealings with distressed debtors.

Schindler Rechtsanwälte GmbH Tel: +43 1 512 2613 300 Kohlmarkt 8-10 Email: [email protected] A-1010 Vienna URL: www.schindlerattorneys.com Austria

Florian Cvak is a founding partner of Schindler Rechtsanwälte. Prior to that, he co-headed the private equity practice of Schönherr. His practice focuses on private equity, venture capital, mergers and acquisitions, general corporate law, restructuring and insolvency transactions, and corporate finance transactions. He frequently assists financial sponsors and corporates on their investments in distressed debt and businesses in distress, and regularly advises shareholders, management and supervisory boards of financially troubled companies.

Schindler Rechtsanwälte GmbH Tel: +43 1 512 2613 500 Kohlmarkt 8-10 Email: [email protected] A-1010 Vienna URL: www.schindlerattorneys.com Austria

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. www.schindlerattorneys.com

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Bahamas Bahamas

Lennox Paton Sophia Rolle-Kapousouzoglou

12 Overview company’s creditors as soon as it becomes apparent that there is no reasonable prospect that the company will avoid being wound up by reason of insolvency. 1.1 Where would you place your jurisdiction on the Directors should also ensure that the steps taken are within spectrum of debtor to creditor-friendly jurisdictions? the scope of that which a director of a company ought to know or ascertain, and that the general knowledge, skill and experi- The Bahamas is a more creditor-friendly jurisdiction. ence that may reasonably be expected of a director carrying out the same functions are exercised. 1.2 Does the legislative framework in your jurisdiction The test of the general knowledge, skill and experience of allow for informal work-outs, as well as formal a director is generally that which a reasonably diligent person restructuring and insolvency proceedings, and to what would have known, ascertained, reached or taken. extent are each of these used in practice? A company may enter a restructuring or insolvency process if the company appears to be of doubtful solvency or if a company Informal work-outs are available, to the extent that provisional is unable to pay its debts. liquidation and receiverships are available. The test for inability to pay debts is if: a) a creditor (by assign- There is no restructuring procedure in the form of a corpo- ment or otherwise) to which the company is indebted in the rate rescue (e.g., US Chapter 11 proceedings) in the Bahamas. prescribed minimum has served a statutory demand on the However, a Bahamian company in liquidation through its provi- company requiring that it pay the sum due and, for three weeks sional liquidators may cooperate with foreign court-appointed following the demand, the company has neglected to pay the office holders to the extent it is not contrary to public policy to sum or to secure or compound for it to the creditor’s satisfac- facilitate a restructuring. tion; b) the execution of another process issued on a judgment, Under the legislative framework, the primary restructuring decree or order – obtained either in the Court in favour of any procedure is an arrangement involving: the reorganisation or creditor at law or in equity in any proceedings instituted by the reconstruction of a company; the separation of two or more busi- creditor against the company – is returned unsatisfied in whole nesses carried on by a company, where the directors of the company or in part; or c) it is proved to the satisfaction of the Court that determine that it is in the best interests of the company; or the the company is unable to pay its debts. creditors, members or directors, by resolution, approving a plan A company can also be liquidated voluntarily by a majority of arrangement containing details of the proposed arrangement. of its shareholders where the company resolves by resolution to The procedure for insolvency proceedings is provided for under be wound up voluntarily because it is insolvent; or based on the the legislative framework and is the most commonly used. articles of association.

22 Key Issues to Consider When the 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the Company is in Financial Difficulties action that they can take against the company? For example, are there any special rules or regimes which 2.1 What duties and potential liabilities should the apply to particular types of unsecured creditor (such directors/managers have regard to when managing a as landlords, employees or creditors with retention company in financial difficulties? Is there a specific of title arrangements) applicable to the laws of your point at which a company must enter a restructuring or jurisdiction? Are moratoria and stays on enforcement insolvency process? available?

The directors and managers should have regard to any poten- Shareholders may inject capital to prevent a company’s insol- tial exposure due to carrying on insolvent trading, fraudulent vency but once a company has been put into liquidation, share- trading or making payments liable to be set aside as voidable holders’ rights are subordinated to the rights of creditors. preferences if a preference is given to one creditor over others Creditors may seek to enter judgment against a company and and the payment is made during a time period when a company serve a Statutory Demand prior to petitioning the Court to place may be unable to pay its debts. the company into liquidation. Contracts may be rescinded by In order to limit liability, directors should ensure that they the Court and damages may be paid for non-performance of take every reasonable step to minimise potential losses to the the contract.

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There is a preferential charge on goods distrained, and a land- ■ There was no intent to conceal the state of affairs of the lord or other person entitled to receive rent distraining or having company or to defeat the law. distrained on any goods or effects of the company within three ■ The director did not know – or could not have concluded months preceding the date of the winding up order of the debts – that there was a reasonable prospect that the company to which priority is given, have a first charge on the goods or could avoid being wound up by reason of insolvency at any effects so distrained on or the proceeds of sale thereof. time before commencement of the winding up. Employees are treated as preferential creditors in a liquida- ■ After the director first knew – or ought to have concluded tion, subordination, set-off and netting agreements are capable – that there was a reasonable prospect that the company of being enforced notwithstanding the company with whom a could avoid being wound up by reason of insolvency, he or creditor has such an agreement going into liquidation. she took every step reasonably available to minimise the Once a company has been put into liquidation, no proceed- loss to the company’s creditors. ings can be continued or commenced as against a company save for with leave of the Court. A liquidator can apply to stay 32 Restructuring Options proceedings against a company in liquidation. Where a creditor has issued execution against the goods or land of a company 3.1 Is it possible to implement an informal work-out in and the company is wound up, he is not entitled to retain the your jurisdiction? benefit of the execution or attachment against the liquidator unless he has completed the execution or attachment before the commencement of the winding up. A provisional liquidator may be appointed to present a compro- Secured creditors are entitled to enforce their security without mise or arrangement to creditors, while a receiver may continue leave of the Court and without reference to the liquidator. to carry on the business and seek to arrange a sale of the company or its secured assets. Some creditors may also reach a compromise with the 2.3 In what circumstances are transactions entered company, rather than commence liquidation proceedings. into by a company in financial difficulties at risk of challenge? What remedies are available? 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of A transaction may be set aside as a voidable preference. A distressed companies? Are debt-for-equity swaps ‘voidable preference’ is a conveyance or transfer of property, and pre-packaged sales possible? To what extent can or charge, payment obligation or judicial proceeding, which is creditors and/or shareholders block such procedures made, incurred, taken or suffered by a company in favour of a or threaten action (including enforcement of security) creditor at a time when the company is unable to pay its debts, to to seek an advantage? Do your procedures allow you give the creditor preference over other creditors, within the six to cram-down dissenting stakeholders? Can you cram- months before the commencement of liquidation. Such transac- down dissenting classes of stakeholder? tions may be deemed invalid. Transactions made at an undervalue can also be set aside if it Restructuring procedures in the Bahamas are limited to is found that the transaction amounts to a disposition of prop- companies incorporated under the Companies Act and the erty made at an undervalue by or on behalf of the company with International Business Companies Act. As described below, intent to defraud its creditors. restructuring procedures are based solely on a reorganisation of The burden of establishing intent to defraud rests with the a company’s share capital, merger with a subsidiary company or official liquidator. A defence is that the payment was received consolidation with a foreign company. in good faith for valuable consideration by a purchaser, payee or We do not have pre-packaged sales. However, in the context incumbrancer and not in preference to other creditors. of a reorganisation of a company, members may dissent from A director can be held liable for a company’s insolvency where: any proposed arrangement and may be entitled to payment of ■ the company has carried out insolvent or fraudulent trading; the fair value of their shares upon dissenting from a merger, ■ fraud has been committed in anticipation of winding consolidation, sale, transfer, lease exchange or other disposition up, with the intent to defraud the company’s creditors or of more than 50% of the company’s assets or business. contributories, in the 12 months preceding commence- Restructuring plans are formally approved by the direc- ment of the winding up; tors who may, by resolution, approve a plan of arrangement ■ creditors or contributories (i.e., persons liable under the containing details of the proposed arrangement. Upon approval Companies Winding Up Amendment Act to contribute to of the plan, the company applies to the Court for approval of the assets of the company in the event that it is wound up the proposed arrangement. The plan of arrangement is then and every holder of a company’s fully paid-up shares) have executed with the articles. been defrauded in the course of the winding up; or There is no provision for dissenting creditors to be crammed ■ misconduct has occurred in relation to the company’s down. However, members may dissent from any proposed liquidators in the course of winding up, including material arrangement and may be entitled to payment of the fair value of omissions to a company’s statement of affairs. their shares upon dissenting from a merger, consolidation, sale, The following defences are available to a director or parent transfer, lease exchange or other disposition of more than 50% company: of the company’s assets or business. ■ There was no intent to defraud the company’s creditors or A company may also seek to appoint a provisional liquidator contributories. on the grounds that the company intends to present a compro- ■ The director disclosed the relevant information concerning mise or arrangement to its creditors. the company to its liquidators, to the best of his or her knowledge and belief.

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3.3 What are the criteria for entry into each 42 Insolvency Procedures restructuring procedure?

4.1 What is/are the key insolvency procedure(s) Directors are responsible for submitting any relevant plan of available to wind up a company? arrangement once the resolution to do so has been passed. The primary restructuring procedure is an arrangement The primary procedure to liquidate an insolvent company involving the reorganisation or reconstruction of a company, in the Bahamas is either compulsory liquidation or voluntary or the separation of two or more businesses carried on by a liquidation. company, where: the directors of the company determine that it is in the best interests of the company; or the creditors, members or directors, by resolution, approve a plan of arrangement 4.2 On what grounds can a company be placed into containing details of the proposed arrangement. each winding up procedure?

3.4 Who manages each process? Is there any court In a compulsory liquidation, a company is wound up by a cred- involvement? itor of the company if a creditor is owed debts by the company or if the company is unable to pay its debts. The key feature is that, after taking into account the rights of secured and preferred Restructuring plans are formally approved by the directors who creditors, unsecured creditors can recover equally with other may, by resolution, approve a plan of arrangement containing creditors proportionately to the value of their debt, provided details of the proposed arrangement. Upon approval of the plan, that there are sufficient assets to meet their claims. the company applies to the Court for approval of the proposed A compulsory liquidation or winding up commences with a arrangement. The plan of arrangement is then executed with petition being presented to the Court to wind up the company. the articles. The process is then overseen by the Court. The Court may conduct a hearing and permit any interested A company can also be liquidated voluntarily: by majority of persons to appear. It may approve or reject the plan of arrange- its shareholders; where the company resolves by resolution to ment as proposed or with amendments. Creditors may be noti- be wound up voluntarily because it is insolvent; or based on the fied of the proposed arrangement and are permitted to appear articles of association. and approve or reject the plan of arrangement as proposed. A voluntary liquidation commences with the passing of a In the case of an arrangement, the company applies to the shareholders’ resolution to wind up the company voluntarily. Court for approval of the arrangement. The Court may make an A company may also be liquidated voluntarily if a fixed period interim or final order and determine: has terminated or a winding up event has occurred. ■ what notice (if any) of the proposed arrangement must be given to any person; ■ whether approval of the proposed arrangement by any 4.3 Who manages each winding up process? Is there person should be obtained and the manner of obtaining it; any court involvement? and ■ whether any holder of shares, debt obligations or other A compulsory liquidation would be managed by the liquidator securities in the company may dissent from the proposed who would be required to report to the Court. There may also arrangement and receive payment of the fair value of be a creditors committee to whom the liquidator should report. shares, debt obligations or other securities. In a voluntary liquidation, the process may be managed by the liquidator who may be selected by the shareholders of the 3.5 What impact does each restructuring procedure company and if it is a solvent liquidation, there is no require- have on existing contracts? Are the parties obliged to ment for Court involvement. If, however, the voluntary liqui- perform outstanding obligations? What protections dation is insolvent, Court supervision is required and an official are there for those who are forced to perform their liquidator is appointed under Court supervision. outstanding obligations? Will termination and set-off provisions be upheld? 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any When an arrangement is carried out, any transfer of a contract restrictions on the action that they can take (including is treated as a transfer by law. Transfers by law do not constitute the enforcement of security)? breach of contract, as arrangements will also be approved by the Court. In insolvency proceedings, contracts may be rescinded Secured creditors may enforce their security without reference and damages may be awarded if an application to Court is made. to the liquidator and without leave of the Court. As it relates Termination and set-off provisions will be upheld. to unsecured creditors, creditors may be involved in liquidation procedures by joining the liquidation committee which is 3.6 How is each restructuring process funded? Is any appointed at the first creditors’ meeting. protection given to rescue financing? Creditors may also be involved by attending creditors’ meetings. These are held in the first instance within 90 days of the The process is usually by the Shareholders of a Company. winding up order and are thereafter called as the liquidator sees Protection is not given to rescue financing. fit or as otherwise directed by the Court. The Court encourages creditors’ involvement in liquidation procedures and must have regard to the wishes of creditors or

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contributories. It may also call creditors’ meetings and direct up or, in the case of a company ordered to be compulso- that liquidators prepare reports for that purpose. rily wound up and which had not commenced winding up Creditors and contributories may also call meetings, for which voluntarily, the date of the winding up order); notice must be circulated to all known creditors of the company. ■ sums due and payable by the company on behalf of In a voluntary winding up, the liquidator, creditors or contrib- employees in respect of medical health insurance premiums utories may apply to the Court for the determination of any or pension fund contributions; questions arising in the winding up. If the Court considers that ■ sums due by the company to former employees in respect the determination of the question or the required exercise of of severance pay and earned vacation leave, where employ- power is just and beneficial, it may accede wholly or partly to ment contracts have been terminated as a consequence of the application. the company being wound up; and Shareholders’ rights are subordinated to creditors’ rights in a ■ sums due to workers for personal injury accrued before the winding up. relevant date, unless: In a voluntary winding up, shareholders may call contribu- ■ the company has, on commencement of the winding tories’ meetings. Contributories are notified of the winding up up, an insurance contract with rights capable of being proceedings and have the right to be heard. Where there is a transferred to – and vested in – the workers; or solvent liquidation, a liquidation committee is also appointed at ■ the company is being wound up voluntarily merely for the first contributories’ meeting. the purpose of reconstruction or amalgamation with Liquidators report to contributories on the affairs of the another company. company and the manner in which it has been wound up. Liquidators or contributories may convene contributories’ 4.7 Is it possible for the company to be revived in the meetings. future? Contributories may also be part of the liquidation committee where a company is of doubtful solvency. If a company has been dissolved and it is later determined that there are assets remaining which were not liquidated, an appli- 4.5 What impact does each winding up procedure have cation to the Court can be made for the Court to be restored. on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 52 Tax

Existing contracts may be rescinded by the Court when an appli- 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? cation is made by the party entitled to the benefit or subject to the burden of the contract. If a contract is rescinded, damages can be recovered as a debt in the liquidation. Otherwise, an existing The Bahamas is a tax-free jurisdiction so it is therefore unlikely contract may be continued if it is beneficial to the company’s that there would be tax implications in a restructuring or insol- creditors. Some contracts (e.g., contracts of employment) are vency proceeding governed by Bahamian law. automatically terminated on liquidation of the company. Set-off provisions are upheld. 62 Employees

4.6 What is the ranking of claims in each procedure, 6.1 What is the effect of each restructuring or including the costs of the procedure? insolvency procedure on employees? What claims would employees have and where do they rank?

In insolvency proceedings, all creditors’ claims are ranked pari passu (i.e., equally), subject to taking into consideration and Employment contracts are automatically terminated by the giving effect to the rights of preferred and secured creditors, onset of insolvency proceedings. In the case of a voluntary which take priority. The legal rights of creditors with mortgages winding up, the company will cease to carry on its business from or charges over a company’s assets (i.e., secured creditors) are the commencement of winding up, except insofar as it may be unaffected by the ranking of creditors, because secured cred- beneficial for its winding up. Some employees may therefore be itors are entitled to enforce their security without leave of the retained if necessary for the winding up of the company. Court. Employees rank as preferential creditors in an insolvency After the claims of secured creditors have been satisfied, the procedure. order of creditors’ claims in insolvency proceedings is as follows: ■ the expenses of the liquidation, insofar as there are suffi- 72 Cross-Border Issues cient assets to meet them, including the liquidator’s fees and disbursements; 7.1 Can companies incorporated elsewhere use ■ preferential debts, which are all rates, taxes, assessments or restructuring procedures or enter into insolvency impositions imposed or made under the provisions of any proceedings in your jurisdiction? act; ■ sums due by the company to employees – whether The Court has jurisdiction to make winding up orders in employed in the Bahamas or elsewhere – for salaries, respect of a foreign company which: has property located in the wages and gratuities accrued in the four months preceding Bahamas; is carrying on business in the Bahamas; or is registered commencement of the winding up; as a foreign company in accordance with the Companies Act. ■ wages due to any worker or labourer for services rendered The Bahamian Court may make an order recognising the to the company in the two months preceding the rele- right of a foreign representative to act in the Bahamas on behalf vant date (i.e., the date of commencement of the winding of or in the name of a debtor and, at the Court’s discretion, to

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do so jointly with a qualified insolvency practitioner. Once is jurisdiction for the Bahamian companies to enter into insol- recognised, the Court may also make ancillary orders, such as: vency proceedings in other jurisdictions and it is common granting a stay of proceedings or enforcing a judgment against a practice. debtor; requiring certain persons with information concerning the debtor’s business or affairs to be examined or to produce 82 Groups documents; or ordering the turnover of the debtor’s property to the foreign representative. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for 7.2 Is there scope for a restructuring or insolvency co-operation between officeholders? process commenced elsewhere to be recognised in your jurisdiction? Yes, there is scope for cooperation between officeholders where there is a group of companies subject to insolvency proceedings. The Bahamian Court will recognise a ‘foreign representative’ Liquidators have a statutory duty to consider whether to enter (defined as a trustee, liquidator or other official appointed in into international protocols with foreign officeholders where respect of a debtor for the purposes of a foreign proceeding) a Bahamian company in liquidation is the subject of a concur- appointed in a foreign proceeding – including an interim rent bankruptcy proceeding under the law of a foreign country; proceeding – in a relevant foreign country, pursuant to a law or the assets of a company in liquidation located in a foreign relating to liquidation or insolvency, in which the property and country are the subject of a bankruptcy proceeding or receiver- affairs of the ‘debtor’ (defined as the foreign corporation or ship under the law of that country. other foreign legal entity subject to foreign proceedings in the country in which it is incorporated or established) are subject 92 Reform to control or supervision by a foreign Court, for the purpose of reorganisation, rehabilitation, liquidation or bankruptcy of an 9.1 Are there any other governmental proposals for insolvent debtor. 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 Yes, at this time there is a Companies Liquidation Rules jurisdictions? Is this common practice? Committee which has been assembled to propose amendments to the Companies Liquidation Rules. The Bahamian Courts seek to encourage international cooperation and can grant recognition to foreign representatives appointed in foreign proceedings in 142 countries. Yes, there

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Sophia Rolle-Kapousouzoglou is a partner in Lennox Paton’s commercial litigation department. She appears regularly as lead counsel and junior counsel before the Bahamian Supreme Court and Court of Appeal. With a growing reputation in the field of insolvency litigation, she is described by Chambers Global as a ‘solid lawyer’ and ‘a strong performer in contentious insolvency proceedings’. Sophia represents a variety of clients in all aspects of liquidations, receiverships, prominent cross-border cases and multi-jurisdictional matters. She is ranked by Chambers Global (2020), The Legal 500 Caribbean (2020) and Who’s Who Legal – Asset Tracing and Recovery (2019). Sophia is also recognised in Global Restructuring Review’s ‘40 Under 40’ and featured in GRR’s Women in Restructuring 2019. Sophia is a Fellow of INSOL International and has contributed numerous articles to leading publications, has authored several chapters and is regularly called on to speak at international conferences with respect to Bahamian law.

Lennox Paton Tel: +1 242 502 5000 3 Bayside Executive Park Email: [email protected] West Bay Street & Blake Road URL: www.lennoxpaton.com N-4875, Nassau Bahamas

Lennox Paton is a leading offshore, full-service commercial law firm providing services to clients in relation to Bahamian and British Virgin Islands law. Founded in 1986, it is now one of the Bahamas’ largest law firms and covers a comprehensive range of practice areas, standing out as the market leader in many areas. The success of long-term client relationships and landmark cases has earned the firm recognition as one of the top firms in the Bahamas. Members belong to a number of professional associations and serve on governmental and statutory bodies. Additionally, many of the firm’s lawyers are continually ranked amongst the best in the region. Lennox Paton is also a member of Multilaw, a leading global network of independent law firms across more than 100 countries. www.lennoxpaton.com

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Belgium Belgium

Pieter Wouters

Stibbe Paul Van der Putten

12 Overview ■ Directors can, under certain circumstances, incur liability for unpaid social security contributions, corporate tax, or VAT. 1.1 Where would you place your jurisdiction on the ■ Directors will have to fulfil certain duties with regard to spectrum of debtor to creditor-friendly jurisdictions? informing the employees. ■ Directors must timely convene an extraordinary general Belgian restructuring law can be considered to be debtor-friendly meeting of shareholders in case of loss of equity (the finan- for viable business, as well as being creditor-friendly at the same cial threshold depends on the type of company). time as it provides tools for creditors to counter any abuse of this ■ Finally, directors have a statutory duty to file for bank- branch of law by debtors. ruptcy within one month after the company is in the state of bankruptcy, i.e., when it has ceased to pay its debts and 1.2 Does the legislative framework in your jurisdiction its creditworthiness is undermined. A director who did allow for informal work-outs, as well as formal not timely file for bankruptcy can be held liable towards restructuring and insolvency proceedings, and to what the company and third parties for any losses incurred as a extent are each of these used in practice? result of his or her failure to file for bankruptcy. Directors can also be punished under criminal law for certain acts Belgian insolvency law allows for informal work-outs (i.e., and omissions (e.g., not filing for bankruptcy on time or reaching an amicable settlement with two or more creditors), at all) if such acts and omissions are found to have been formal restructuring (i.e., judicial reorganisation procedure committed intentionally to delay the bankruptcy. under court supervision), and insolvency proceedings (i.e., for bankruptcy and liquidation). Formal restructuring and insol- 2.2 Which other stakeholders may influence the vency proceedings are often used in practice. Informal work- company’s situation? Are there any restrictions on the outs are never publicly disclosed. In our experience, informal action that they can take against the company? For work-outs have proven to be useful for several matters. example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention 22 Key Issues to Consider When the of title arrangements) applicable to the laws of your Company is in Financial Difficulties jurisdiction? Are moratoria and stays on enforcement available? 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a Shareholders can decide to put a limited company (“NV / SA”) company in financial difficulties? Is there a specific in liquidation when the company’s net asset value becomes less point at which a company must enter a restructuring or than half or one-quarter of its share capital. insolvency process? The public prosecutor or any party with standing can have a limited company (“NV / SA”) summoned before court and can Directors can be held liable on various grounds when they are seek its liquidation if the company’s net asset value becomes less managing a company in financial difficulties. In summary, than 61,500 euros. However, the court can grant the company directors should consider these specific issues when doing so: time to correct its situation. ■ Any current and former director and all other persons who The public prosecutor, one or more creditors, the temporary had de facto authority to manage and run the company’s administrator who is appointed to oversee the debtor, or the business can be held liable for all or part of the compa- bankruptcy receiver in the main proceedings can petition for ny’s liabilities up to the amount of the shortfall if either the debtor’s bankruptcy. is proven: (i) that a manifest, serious mistake committed If certain conditions are met, the public prosecutor, a cred- by one of them contributed to the bankruptcy; or (ii) the itor or any party that is interested in acquiring the debtor’s busi- directors knew or should have known that there was obvi- ness can seek the opening of a judicial reorganisation procedure ously no reasonable prospect in continuing the activities against the debtor in order to have the debtor’s assets and busi- and in avoiding bankruptcy and that they failed to act as a ness activities transferred under court supervision. reasonable and prudent director who is placed in the same A debtor is protected from a petition for bankruptcy or liqui- circumstances. dation once it has filed an application for the opening of a

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judicial reorganisation procedure. This filing also automatically 32 Restructuring Options suspends any enforcement. However, any seizure of goods that is already in an advanced stage cannot be stayed automatically because of the filing, so the debtor, in such situation, will have 3.1 Is it possible to implement an informal work-out in to request the court to order suspension of such seizure. your jurisdiction? If the court affirms the opening of a judicial reorganisation procedure, the court will grant the debtor a moratorium. Belgian restructuring law gives the debtor the possibility During the moratorium: to conclude an amicable settlement with two or more of its ■ no bankruptcy or liquidation proceedings may be opened creditors. in respect of or pursued against the debtor; The reason for creditors to want to conclude such settlement ■ no means of enforcement (in relation to both moveable with their debtor lies in the fact that such type of agreement and immoveable assets) against the debtor may be used or enjoys protection from certain claw-back rules mentioned under pursued for claims predating the opening of the judicial question 2.3. reorganisation procedure; and ■ no assets of the debtor may be seized for claims predating 3.2 What formal rescue procedures are available the opening of the judicial reorganisation procedure unless in your jurisdiction to restructure the liabilities of the seizure is in an advanced stage and the court did not distressed companies? Are debt-for-equity swaps suspend it. and pre-packaged sales possible? To what extent can The prohibition of enforcement during the moratorium creditors and/or shareholders block such procedures prevents the enforcement of recovering actual security inter- or threaten action (including enforcement of security) ests (e.g., a pledge or mortgage) or enforcement sought by cred- to seek an advantage? Do your procedures allow you itors benefitting from a statutory lien. However, it is allowed to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? to enforce: (i) any specific pledge over claims; and (ii) financial collateral created under the Act of 15 December 2004 on financial collateral (on the condition that the debtor is in default). A debtor can opt for a reorganisation procedure under court supervision. The purpose of undergoing such judicial reorganisation procedure is to preserve the continuity of all or part of 2.3 In what circumstances are transactions entered the company or of its viable business activities. A pre-packaged into by a company in financial difficulties at risk of sale is not allowed. challenge? What remedies are available? A judicial reorganisation procedure can be initiated with an aim to: In case of bankruptcy, certain transactions may be declared (i) Conclude an amicable settlement with two or more cred- ineffective against third parties if concluded or performed by itors (this is similar to the amicable settlement mentioned the debtor during the so-called “hardening period” (a period under question 3.1, but it is concluded under court supervi- of a maximum of six months before the date of the bankruptcy sion). The amicable settlement cannot affect third parties’ order, except in the case where the bankruptcy order relates to rights. a company that was dissolved more than six months before the (ii) Implement a debt restructuring plan. The reorganisa- date of the bankruptcy order in circumstances suggesting an tion plan can contain the conversion of debt into equity. intent to defraud its creditors). The restructuring plan will be submitted for voting at a The transactions entered into or performed during the hard- meeting attended by the creditors and will only be adopted ening period which may be declared ineffective against third if (i) the majority of the creditors attending the meeting, parties include, among others, (i) gratuitous transactions and (ii) the majority share of the total value of the debt entered into at an undervalue or on extremely beneficial terms claims (the principal sum) vote in favour of such plan. for the counterparty, (ii) payments for debts which are not due, The creditors are not divided into classes, but the plan can (iii) payments other than in cash for debts due, and (iv) security provide for a differential treatment of creditors. provided for pre-existing debts. If the creditors meeting votes in favour of such plan, the In addition, the court may, at the request of the trustee and court will ratify it, and the plan will then bind all the debt- at its discretion, declare ineffective against third parties other or’s creditors. transactions entered into or performed during the hardening (iii) Selling all or part of its assets and activities to a third party. period provided that the counterparty was aware of the debtor’s Upon completion of the sale, the creditors are entitled to cessation of payments and the court determines that this decla- exercise their rights on the sale proceeds. Any remaining ration would benefit the bankruptcy estate. part of the company can then be submitted to either bank- The above provisions have been made inapplicable to a large ruptcy or a voluntary liquidation. extent with regard to financial collateral and with regard to Any party with standing can demand early termination of a certain transactions that have taken place within the framework judicial reorganisation procedure if the debtor can no longer of a judicial reorganisation procedure. ensure the continuity of its activities in accordance with the aim So-called “fraudulent transactions”, i.e., abnormal trans- of the procedure. actions entered into with the knowledge that the transaction would prejudice the creditors of a company, are also ineffective in the subsequent bankruptcy of that company. This is so even 3.3 What are the criteria for entry into each if the transaction dates back from before the hardening period. restructuring procedure?

An out-of-court amicable settlement can be concluded as soon as this is necessary for reorganising the debtor’s business.

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A debtor can request the opening of a judicial reorganisation 42 Insolvency Procedures procedure if the debtor’s continuity is threatened in the short- or long-term. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? 3.4 Who manages each process? Is there any court involvement? There are two types of liquidation procedures under Belgian law: bankruptcy; and voluntary or judicial liquidation. An out-of-court amicable settlement is managed by the directors and without court involvement. A judicial reorganisation procedure with a view to concluding 4.2 On what grounds can a company be placed into an amicable settlement or implementing a debt restructuring each winding up procedure? plan is managed by the directors under court supervision. A judicial reorganisation procedure with a view to selling all A company that has ceased to pay its debts persistently as they or part of the debtor’s assets is managed by a judicial adminis- become due and that is no longer in a position to obtain credit trator acting under court supervision. However, the directors can be declared bankrupt. remain on board to manage the company. Voluntary liquidation of a company results from a decision Under certain circumstances, the court can appoint a judicial made by the general shareholders’ meeting. administrator to assist or to replace the directors. A company can be placed in judicial liquidation on various grounds. The most common ones are: ■ failure to file its annual accounts with the National Bank 3.5 What impact does each restructuring procedure of Belgium; have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections ■ removal of the company from the Crossroads Bank for are there for those who are forced to perform their Enterprises; outstanding obligations? Will termination and set-off ■ failure to appear when summoned before the chamber for provisions be upheld? companies in difficulty; and ■ impairment of the company’s net equity capital as a conse- A judicial reorganisation procedure does not terminate any quence of accumulated losses. contract, and contractual provisions that allow for early termination or acceleration of the contract to be triggered by the 4.3 Who manages each winding up process? Is there initiation or opening of a reorganisation procedure are null. A any court involvement? creditor may not terminate a contract on the basis of a debtor’s default that occurred prior to the reorganisation procedure if the The bankruptcy procedure is managed by one or more court- debtor remedies such default within 15 days from the date of the appointed bankruptcy receivers. The court also appoints a default notice. Subject to certain conditions, close out netting bankruptcy judge who supervises the procedure. provisions can be upheld. Liquidation is managed by a liquidator who is appointed by As an exception to the general rule of continuity of contracts, the shareholders (but such appointment must be approved by the debtor may cease performance of a contract during the reor- the court if the balance sheet shows that third parties will not be ganisation proceedings if the debtor notifies the creditor about paid in full) in case of a voluntary liquidation, and appointed by it and the decision to cease performance is necessary for the the court in case of a judicial liquidation. The court will have to reorganisation of the business. The debtor’s exercise of this approve the payment distribution plan that describes the distri- right to cease performance does not preclude the creditor from bution of funds if not all creditors will be paid. suspending, on its turn, the performance of its own obligations under that contract. Claims arising during the judicial reorganisation procedure 4.4 How are the creditors and/or shareholders able will be treated preferentially over all other creditors’ claims in to influence each winding up process? Are there any the event of a subsequent bankruptcy or liquidation. Moreover, restrictions on the action that they can take (including the enforcement of security)? claims arising after the opening of the judicial reorganisation procedure are not subject to the moratorium and can thus be enforced. They can also be set off. As a general rule, the enforcement rights of individual creditors are suspended once the court declares the opening of bankruptcy proceedings. And only after this declaration is the bank- 3.6 How is each restructuring process funded? Is any ruptcy receiver allowed to take any actions against the debtor protection given to rescue financing? and liquidate its assets. However, such suspension does not apply to any pledge of financial instruments or cash held on Belgian law explicitly allows the debtor to provide new secu- account, which falls under the scope of the Act of 15 December rity interest for both existing and new debts (e.g., bank credits, 2004 on financial collateral. factoring, etc.) during the moratorium as long as doing so will For creditors whose debt claims are secured by certain sustain the continuity of the business. Any new collateral movable assets, such suspension would normally be limited to granted during the moratorium cannot be challenged in a subse- the period required for the first verification of the debt claims. quent bankruptcy. For creditors whose debt claims are secured by immovable Claims arising after or relating to services rendered after the assets, the intervention of the bankruptcy receiver is necessary opening of the restructuring proceedings are regarded as an to pursue the sale of the assets. A first ranking mortgagee will estate’s debts in the event of subsequent liquidation proceed- generally be entitled to pursue the enforcement of its mortgage ings. Estates’ debts have the highest priority over all claims, and after the first verification of the debt claims if the enforcement rank higher than any other type of debt claim. procedure was already in an advanced stage.

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In case of liquidation, unsecured creditors and creditors There is a possibility, however, to appoint a bankruptcy with a general privilege on all assets lose their enforcement receiver ad hoc or to reopen the liquidation if assets are discov- rights, save to the extent that the enforcement would not prej- ered after the closing of the bankruptcy/liquidation. udice other creditors or the proper course of the liquidation. Furthermore, and as from the closing of the liquidation, cred- Creditors whose debt claims are secured by certain movable itors have five years to still initiate proceedings against the liqui- assets or immovable assets do not lose their enforcement rights. dated company. If the liquidation was closed while fraudulently disregarding the interests of a creditor, such creditor can seek to have the closing of the liquidation declared null. If such claim is 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform granted by the court, the liquidation will be reopened. outstanding obligations? Will termination and set-off provisions be upheld? 52 Tax

The declaration of bankruptcy or opening of a liquidation 5.1 What are the tax risks which might apply to a does not in itself cause the termination of existing contracts. restructuring or insolvency procedure? However, two exceptions apply: ■ the parties to a contract may contractually agree that the A creditor who has filed a debt claim in the bankruptcy is enti- occurrence of a bankruptcy/liquidation constitutes an tled to record that claim immediately as loss and to request the early termination or acceleration event; and refund of VAT, insofar as it is applicable. ■ intuitu personae contracts (i.e., contracts whereby the identity The opening of a judicial reorganisation procedure does not of the other party constitutes an essential element of the affect the debtor’s tax obligations. contract conclusion) are automatically terminated. Debt reductions or waivers granted by creditors in the frame- In case of a bankruptcy, the bankruptcy receiver may elect not work of a collective restructuring plan approved by the court is to perform the obligations of the bankrupt party that are still not regarded as a taxable gain for the debtor. outstanding after the bankruptcy if such decision is necessary for the management and the liquidation of the bankrupt estate. 62 Employees The counterparty may not seek injunctive relief or specific performance of the contract. Subject to certain conditions, close out netting provisions can 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would be upheld. employees have and where do they rank?

4.6 What is the ranking of claims in each procedure, An employment contract is considered an ongoing contract and including the costs of the procedure? does not end when bankruptcy proceedings pertaining to the employer are opened. The bankruptcy receiver is the one who In case of bankruptcy (or deficit liquidation), the debts will must terminate the employment contracts. However, the law generally be priority-ranked according to a complex set of rules. sets out a simplified procedure for the bankruptcy receiver to Here is a general overview of these rules: dismiss employees. Estate’s debt: All costs and debt incurred by the bankruptcy No specific rules apply to employee dismissals in the event of receiver/liquidator during the bankruptcy/liquidation proceed- the employer’s liquidation, so the liquidator needs to comply with ings are known as “estate’s debts”, and these have ultimate labour law provisions on the dismissal of employees. priority.n I addition, if the bankruptcy receiver/liquidator has Unpaid salaries and severance pay benefit from a privilege right contributed financially towards the selling and enforcement of on all movable assets of the debtor-employer. It is important to secured assets, such contribution will be refunded to the receiver note that in certain circumstances, Belgian law gives dismissed as priority, which will be paid out from the proceeds from the employees the right to a (capped) financial contribution from the assets sold before the rest of the proceeds are distributed to the Indemnity Fund for the closing-down of firms. secured creditors. In case of judicial reorganisation procedure, employment Security interests: Creditors that hold a security interest have a contracts are not affected and remain in full force. Belgian law, priority right over the secured asset (whether by means of appro- just as the law in most EU countries, allows the employer the priation of the asset or from the proceeds generated from the possibility to dismiss employees for economical or other specific asset’s sale). reasons as part of a social plan. In case of a judicial reorganisation Privileges: Creditors may have a particular privilege right on procedure with a view to selling all or part of the debtor’s assets certain or all assets (e.g., tax claims, claims for social security and activities, the parties involved will have to abide by a specific premiums, etc.). Privilege rights on specific assets rank higher Collective Bargaining Agreement (i.e., CBA no. 102) which, in than privilege rights on all of the assets of the debtor. short, entitles the buyer to decide on how many employees should Pari passu: Once all of the estate’s debts are settled and once be transferred and even to renegotiate to some extent the indi- the creditors holding security interests and privilege rights are vidual terms of employment with the employees concerned. The satisfied, the sale proceeds from the remaining assets will be CJEU has, however, decided that the right to choose the number distributed among the unsecured creditors who are ranked pari of employees violates Council Directive 2001/23/EC. passu (unless a creditor agrees to be subordinated).

4.7 Is it possible for the company to be revived in the future?

No, it is not possible to revive a company once the bankruptcy procedure/liquidation has been closed.

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72 Cross-Border Issues 82 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 for proceedings in your jurisdiction? co-operation between officeholders?

In situations to which Regulation (EU) 2015/848 of the Belgian insolvency law does not contain regulatory provisions European Parliament and of the Council of 20 May 2015 on regarding groups of companies. It is possible, however, for a insolvency proceedings (“European Insolvency Regulation”) group of companies to have the same insolvency practitioner does not apply, Belgian private international law states that appointed. companies incorporated elsewhere can use restructuring proce- In an international context, Belgian insolvency law contains dures or enter into insolvency proceedings if its principal estab- provisions that give effect to the group insolvency provisions lishment is located in Belgium. In most cases, the concept of under the European Insolvency Regulation. It also contains “principal establishment” will be aligned with the concept provisions on co-operation in case of an international insol- of “centre of main interests”, which is used in the European vency that falls outside the scope of the European Insolvency Insolvency Regulation. Regulation. If the establishment is not the principal establishment, secondary insolvency proceedings can be opened that will affect 92 Reform the Belgian establishment only. 9.1 Are there any other governmental proposals for 7.2 Is there scope for a restructuring or insolvency reform of the corporate rescue and insolvency regime in process commenced elsewhere to be recognised in your your jurisdiction? jurisdiction? Belgium has not yet implemented Directive (EU) 2019/1023 of In situations to which the European Insolvency Regulation does the European Parliament and of the Council of 20 June 2019 on not apply, Belgian private international law states that foreign preventive restructuring frameworks, on discharge of debt and judgments with regard to restructuring or insolvency proceed- disqualifications, and on measures to increase the efficiency of ings can be recognised in Belgium if all conditions for recogni- procedures concerning restructuring, insolvency and discharge tion are met (e.g., the judgment (i) does not contravene certain of debt, and amending Directive (EU) 2017/1132 (Directive on provisions regarding applicable law, public order, the right of restructuring and insolvency). This Directive must be imple- defence, (ii) does not contravene another judgment, and (iii) mented by 17 July 2021. does not attempt to escape or deviate from mandatory law, etc.).

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

Yes, this has been so for some Belgian companies because they are members of an international group, but it is not common practice.

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Pieter Wouters handles disputes mainly regarding insolvency law, security interests, company law, banking law, law of obligations, and usual contracts. Pieter has built up extensive expertise in the field of insolvency law by regularly assisting clients in various types of important insolvency matters. In addition, he has acquired specialised expertise in liquidations by assisting in the finalisation stage of liquidations. Pieter is also often sought to assist liquidators when they encounter complex legal issues in liquidation procedures. Pieter graduated in Law from the University of Antwerp (2004) and subsequently obtained a diploma of specialised studies (DES) in International and European Law from the Université catholique de Louvain (2005). He was a part-time assistant of Professor S. Stijns at the Instituut voor Verbintenissenrecht of the Katholieke Universiteit Leuven law faculty (from 2007 to 2010). He is a Member of INSOL Europe, a European organisation for professionals specialising in insolvency and restructuring.

Stibbe Tel: +32 2 533 53 36 Rue de Loxum – Loksumstraat 25 Email: [email protected] Brussels, 1000 URL: www.stibbe.com Belgium

Paul Van der Putten primarily handles complex litigation in the field of contract law and obligations, banking law, security interest, and enforcement. He also specialises in insolvency and restructuring (bankruptcy, composition, and liquidation). He has extensive experience as a liquidator of wound up companies. Furthermore, Paul assists a broad range of international and national clients with their distribution contracts, including the drafting, interpretation and related litigation. Paul has also built substantial expertise in advising global manufacturers in the field of product safety and product recall. Paul graduated from the Free University of Brussels (“Vrije Universiteit Brussel”) in 1982 and has been with Stibbe since its inception, subsequently becoming a partner in the general commercial and litigation and arbitration practice group in 1998. He is a member of a European organisation for professionals specialising in insolvency and restructuring.

Stibbe Tel: +32 2 533 52 95 Rue de Loxum – Loksumstraat 25 Email: [email protected] Brussels, 1000 URL: www.stibbe.com Belgium

Stibbe is a leading, internationally oriented Benelux law firm that provides As an independent law firm, Stibbe cooperates closely with other interna- its clients with legal services covering all branches of commercial law. Our tional top-tier firms for cross-border matters outside their home jurisdic- main offices are located in Amsterdam, Brussels and Luxembourg, and our tions. These relationships are non-exclusive and enable us to assemble branch offices in Dubai, London, and New York. a tailor-made, integrated team of lawyers with the best expertise and Our dedicated teams have become longstanding and trusted legal advi- contacts for every specific matter. sors to our clients from all corners of the world, which range from multi- www.stibbe.com national and national companies and financial institutions to government organisations and other public authorities. We handle their transactions, disputes, and projects across a broad spectrum of sectors. Our understanding of our clients’ commercial objectives, their position in the market, and their sector or industry allows us to always provide them with timely, effective, and appropriate advice on their complex local and cross-border legal challenges.

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Bermuda Bermuda

Nick Miles

Kennedys Lewis Preston

12 Overview There are various statutory provisions relevant to the taking of security in Bermuda, including, for example, section 19(d) of the Supreme Court Act 1905, section 1 of the Bonds and 1.1 Where would you place your jurisdiction on the Promissory Notes Act 1874, and section 2 of the Charge and spectrum of debtor to creditor-friendly jurisdictions? Security (Special Provisions) Act 1990. With this legislative background in mind, Bermuda can be Bermuda is a self-governing British Overseas Territory. The described, for the most part, as a very creditor-friendly juris- systems of law administered in Bermuda are local Bermudian diction. Secured creditors can generally enforce their security legislation, Bermudian common law (as developed from English outside of the insolvency process, and the insolvency legisla- common law), and UK legislation expressly made applicable to tion is highly pro-creditor. It provides, in particular, for the Bermuda. right of an unsecured creditor with an unpaid debt to apply for Bermuda has its own Court system, including a desig- an order that the corporate debtor be compulsorily wound up nated Commercial Court which is part of the Supreme Court and its assets applied in satisfaction of its debts, and there is of Bermuda, with rights of appeal to the Court of Appeal for no statutory corporate rescue regime beyond the ‘Scheme of Bermuda, and then the Privy Council in London. Arrangement’ (‘scheme’), discussed below. Nevertheless, the The formal procedures available for companies in financial Supreme Court has developed an insolvency practice, through difficulties are principally contained in the Companies Act 1981 the appointment of ‘soft touch’ provisional liquidators, which (the winding up provisions of which are substantially modelled is designed to support formal and informal restructuring plans on the UK’s Companies Act 1948). Some provisions of the that have credible prospects of success, and the support of the Bankruptcy Act 1989 are also applied to companies, by virtue majority of creditors. In appropriate circumstances, therefore, of section 235 of the Companies Act 1981, and there is some the Court does have the power to approach corporate insolven- scope for debate as to the applicability of certain provisions of cies in a ‘debtor-friendly’ manner, with a view to achieving a the Bankruptcy Act 1989 to corporate partnerships. There are corporate restructuring. also specific provisions relating to insurance companies in the Insurance Act 1978 and relating to segregated accounts compa- 1.2 Does the legislative framework in your jurisdiction nies and their general and segregated accounts in the Segregated allow for informal work-outs, as well as formal Accounts Companies Act 2000. There are also specific provi- restructuring and insolvency proceedings, and to what sions relating to banks in the Banking (Special Resolution extent are each of these used in practice? 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- The rules relating to compulsory winding up of companies outs. However, informal work-outs are common in Bermuda, and are contained in the Companies (Winding up) Rules 1982 and the Supreme Court has developed certain practices to support and also, to a lesser extent, in the Rules of the Supreme Court 1985. assist them as discussed in our answer to question 3.1. As in other jurisdictions that follow English common law, The only formal restructuring process in Bermuda is the there are various ways by which a creditor can take security over scheme, discussed in our answer to question 3.2. The scheme is assets in Bermuda, by agreement between the creditor and the a highly versatile statutory procedure enabling the restructuring debtor, including by way of: legal mortgage; equitable mort- of debt (and capital) by 75% majority by value and 50% majority gage; fixed charge; floating charge; pledge; contractual lien; and by number (per class of creditor/member) approval and Court assignment. sanction. It is frequently used to restructure debt where the The nature of the security interest, in any particular case, will consent of all creditors is unlikely to be forthcoming. be determined by: The only formal insolvency proceeding is compulsory winding (a) the terms of the parties’ agreement, ordinarily set out in up by the Supreme Court. As we discuss in what follows, the the relevant security documents; Court’s compulsory winding up jurisdiction can serve as a (b) the nature of the property being secured; and protective device within which to restructure a company’s debt (c) the nature of the debtor’s interest in the property being with a view to its continued trading. Compulsory liquidations secured. are common in Bermuda.

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22 Key Issues to Consider When the Miscellaneous offences and liabilities: Sections 243 to 248 of the Companies Act 1981 set out a range of criminal offences Company is in Financial Difficulties that may be committed by directors of companies, including, for example, by fraudulently altering documents relating to company 2.1 What duties and potential liabilities should the property or affairs, falsifying books or accounts with the inten- directors/managers have regard to when managing a tion of defrauding any person, or fraudulently inducing a person company in financial difficulties? Is there a specific to give credit to the company. There are also various legisla- point at which a company must enter a restructuring or tive provisions that impose personal liability on directors for insolvency process? any failure to pay certain taxes and remit pension contributions. Segregated accounts companies representatives: Section Directors’ and officers’ duties are principally owed to the 10 of the Segregated Accounts Companies Act 2000 requires a company itself. To the extent that the company is solvent, such segregated account representative to make a written report to duties are ordinarily owed to the company for the benefit of its the Registrar of Companies within 30 days of reaching the view present and future shareholders. that there is a reasonable likelihood of a segregated account or When the company enters the zone of insolvency, direc- the general account of a segregated accounts company for which tors must act in the best interests of the company’s creditors. he acts becoming insolvent, and section 30 makes it a criminal Directors that allow a company to continue to trade while it offence to fail to do so. is in financial difficulties face a range of potential liabilities, depending on the precise circumstances and the relevant director’s conduct and state of mind (as discussed below). 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the : Section 246 of the Companies Act 1981 Fraudulent trading action that they can take against the company? For provides that any director that has knowingly caused or allowed example, are there any special rules or regimes which a company to carry on business with intent to defraud creditors apply to particular types of unsecured creditor (such of the company or for any fraudulent purpose may be found as landlords, employees or creditors with retention personally liable for all, or any, of the debts or other liability as of title arrangements) applicable to the laws of your the Court may direct. This would include carrying on the busi- jurisdiction? Are moratoria and stays on enforcement ness of the company when it is known to be insolvent. available? Personal liability for fraudulent conveyances/fraudulent preferences: It is possible that directors might be held Creditors with security over an insolvent company’s core assets to be personally liable, in certain circumstances, for fraudu- have the greatest influence over the company’s situation. lent conveyances or fraudulent preferences, as discussed in our Unsecured creditors also exercise considerable influence as answer to question 2.3 below. a result of the rights which they enjoy, pursuant to Bermuda’s Breach of fiduciary duty and failure to exercise reason- winding up jurisdiction. The greater the value of an unsecured able skill and care: Directors owe duties to the company both creditor’s debt (and the greater the support that it can command pursuant to section 97 of the Companies Act 1981, and as a from other unsecured creditors), the greater the influence. matter of common law, to act honestly and in good faith with a Minority unsecured creditors have relatively limited influence, view to the best interests of the company (which can include the above and beyond their statutory and contractual rights. interests of the company’s creditors when the company is in the In addition to the Supreme Court (and any foreign Courts with zone of insolvency), and to exercise the care, diligence and skill jurisdiction over the company), certain regulatory authorities in that a reasonably prudent person would exercise in comparable Bermuda may also influence the company’s situation, depending circumstances. Failure to comply with these obligations may on the circumstances. For example, the Registrar of Companies, result in personal liability on the part of directors. Although not the Bermuda Monetary Authority and the Regulatory Authority confirmed in statute, the power of the directors of a Bermuda of Bermuda might, in appropriate circumstances, investigate the company to petition for the compulsory winding up of an insol- affairs of an insolvent company and exercise such regulatory vent company has been recognised in Re First Virginia Reinsurance powers as may be appropriate. Ltd. [2003] Bda LR 47. Section 165 of the Companies Act 1981 provides that, at any Misfeasance and breach of trust: Section 247 of the time after the presentation of a winding up petition and before Companies Act 1981 provides that a director may be personally a winding up order has been made, the company or any creditor liable if he has misapplied, or retained, or become liable, or account- or contributory may apply to the Court for a stay of any proceed- able for any money or property of the company, or been guilty of ings pending against the Company. any misfeasance or breach of trust in relation to the company. The Section 167(4) of the Companies Act 1981 provides that, when scope and effect of section 247 was considered by the Supreme a winding up order has been made or a provisional liquidator Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ. has been appointed, no action or proceeding shall be proceeded Unlawful return of capital: As a matter of common law and with or commenced against the company except by leave of the pursuant to certain sections of the Companies Act 1981 dealing Court and subject to such terms as the Court may impose. with dividends, reduction of capital, share repurchases and share The Bermuda Court also has the separate power to order redemptions, a Bermuda company that is not in liquidation that Bermuda Court proceedings be stayed in the exercise of cannot lawfully return capital to its shareholders except by way its inherent jurisdiction and as a matter of its case management of an approved reduction of capital, or by way of authorised divi- powers under the Rules of the Supreme Court; the Bermuda dend, redemption, or repurchase. Section 54 of the Companies Court also has the power, in appropriate cases, to issue an anti- Act 1981 provides that a company shall not declare or pay a suit injunction or an anti-enforcement injunction with respect to dividend, or make a distribution out of contributed surplus, if claims being pursued in foreign Court proceedings. there are reasonable grounds for believing that the company is, or would after the payment be, unable to pay its liabilities as they become due or the realisable value of the company’s assets would thereby be less than its liabilities.

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2.3 In what circumstances are transactions entered obtained by the general body of unsecured creditors, rather than into by a company in financial difficulties at risk of the necessity or expedience of the disposition from the compa- challenge? What remedies are available? ny’s or directors’ perspective. In the case of a solvent company, in contrast, there are four elements which must be established Payments, transfers of assets, and security transactions can be before a validation order may be made: first, the proposed vulnerable to attack in the event of the company’s insolvency or disposition must appear to be within the powers of the compa- liquidation. Reviewable transactions include fraudulent convey- ny’s directors; second, the evidence must show that the direc- ances, fraudulent preferences, floating charges, onerous transac- tors believe the disposition is necessary or expedient in the inter- tions, and post-petition dispositions. ests of the company; third, it must appear that the directors in Fraudulent conveyances: Sections 36A to 36G of the reaching that decision have acted in good faith; and fourth, the Conveyancing Act 1983 provide that a creditor of a company reasons for the disposition must be shown to be ones which an may be entitled to apply to the Court to have a transaction set intelligent and honest director could reasonably hold. aside to the extent required to satisfy its claim, provided that Bulk sales in fraud of creditors: Under section 5 of the the dominant intention of the transaction was to put the prop- Bulk Sales Act 1934, certain sales and purchases of stock in bulk erty beyond the reach of other creditors and the transaction was are deemed to be fraudulent, and absolutely void as against the entered into for no value or significantly less than the value of vendor’s creditors, unless the proceeds of sale are sufficient to the property transferred. For these purposes, a creditor is one pay the vendor’s creditors in full, and are in fact so applied. to whom an obligation is owed at the date of the transfer, or to whom it is reasonably foreseeable an obligation will be owed 32 Restructuring Options within two years of the date of the transfer, or to whom an obligation is owed pursuant to a cause of action which accrued 3.1 Is it possible to implement an informal work-out in before, or within, two years after the date of the transfer. your jurisdiction? Fraudulent preferences: Section 237 of the Companies Act 1981 provides that any conveyance, mortgage, delivery of goods, Yes, where the consent of all relevant creditors is forthcoming. payment, execution or other act relating to property made or It is not possible to ‘cram-down’ creditors in the absence of a done by or against a company within six months before the formal restructuring process. commencement of its winding up shall be deemed a fraudulent Where there is a risk that negotiations towards an informal preference of its creditors and be invalid accordingly. Section work-out may be jeopardised by creditors instituting or contin- 238 provides for the liability and rights of fraudulently preferred uing proceedings against the company seeking enforcement of persons. In order to fall foul of the provision, the transfer or their debts, the negotiations may be protected by a ‘soft touch’ disposition must have been made within the six months prior to provisional liquidation, a procedure developed as part of the the commencement of the winding up. In the case of a compul- insolvency practice of the Supreme Court and now commonly sory winding up, this would be the date of the presentation of used to support work-outs. The procedure is described below. the petition to the Supreme Court of Bermuda. The transfer Following presentation of a petition for the winding up of will be invalid if it was carried out with the dominant inten- the company (usually presented by the company itself, if the tion of preferring one creditor over others at a time when the company contemplates a restructuring), a provisional liqui- company was unable to pay all of its creditors in full. dator may be appointed, who may then apply for a statutory Floating charges: Section 239 of the Companies Act 1981 stay of all proceedings against the company while the work-out provides that a floating charge on the undertaking or prop- process continues, whether informally or through the medium erty of a company created within 12 months of the commence- of a scheme. The board of directors retains control over the ment of the winding up shall be invalid, unless it is proved that company, and endeavours to effect a work-out under the super- the company immediately after the creation of the charge was vision of the ‘soft touch’ provisional liquidator and the Court. If solvent, except to the amount of any cash paid to the company the work-out negotiations are successful, the winding up peti- at the time of, or subsequently to, the creation of the charge, tion can be dismissed; if they are unsuccessful, the winding up together with interest at the statutory rate. petition can be restored for a final hearing and the company Onerous transactions: Section 240 of the Companies Act can be wound up and placed into full liquidation. While the 1981 provides that the liquidator of a company can, with the work-out plan is negotiated, the hearing of the winding up peti- Court’s permission, disclaim any property belonging to the tion is adjourned (although the company enjoys the protection company or any rights under any contracts which he considers of the statutory moratorium). to be onerous for the company to hold, or is unprofitable or unsaleable. Post-petition dispositions: Section 166 of the Companies 3.2 What formal rescue procedures are available Act 1981 provides that, in a compulsory winding up, any dispo- in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps sition of the property of a company, including things in action, and pre-packaged sales possible? To what extent can and any transfer of shares or alteration in the status of the creditors and/or shareholders block such procedures members of the company, made after the commencement of or threaten action (including enforcement of security) the winding up (being the time of presentation of the petition) to seek an advantage? Do your procedures allow you shall be void, unless the Court otherwise orders by way of a vali- to cram-down dissenting stakeholders? Can you cram- dation order. In the case of an insolvent company, the Court down dissenting classes of stakeholder? should only make an order validating a post-petition disposition where it can be shown that the disposition will benefit (in Liquidation procedures can generally be divided into compul- a prospective case), or that it has benefitted (in a retrospective sory liquidations and voluntary liquidations. Voluntary liquida- case), the general body of unsecured creditors so as to justify the tions can, in turn, be divided into solvent liquidations (members’ disapplication of the pari passu principle. The focus of the test is voluntary liquidations) or insolvent liquidations (creditors’ mainly directed to an objective assessment of the benefit to be voluntary liquidations).

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As above, the general purpose of liquidation is to gather in, As is noted in our answer to question 3.3, a binding scheme and realise assets, to pay off creditors in accordance with their requires the approval of a majority within each class of credi- rights and priorities, and to distribute any remaining assets to tors present and voting (including by proxy) at the meeting of the company’s shareholders. The only formal rescue procedure that class, representing 75 per cent by value of that class, votes in is the scheme (although see further below in this section for an favour of the scheme. Accordingly, the scheme must be on such exception to this rule). A scheme is a formal procedure which terms as may be approved by the majority of creditors in each may be used to reorganise the business of the debtor with a view class, and a scheme is often the result of promotion and direction to its continued trading. by majority creditors. A scheme may result in the adjustment or compromise of all Those voting at scheme meetings may in some circumstances or a class of the debt of the company. It may include the transfer include persons beneficially interested in the company’s debt. of rights, property and liabilities of the company to another There has been a scheme of debts of a company evidenced by a company. Schemes may also reorganise the company’s capital, global note held by a trustee, in which beneficial owners of the and accordingly may be used (and have on several occasions been note, who were each entitled to require issuance of an individual used) to implement a debt-for-equity swap. note enforceable directly against the company, were allowed to The Court has jurisdiction to make specific provision for this vote in the Scheme as contingent creditors of the company. in the order sanctioning the scheme. As may be seen from the above, a minority of dissenting creditors in each class may be crammed down by a scheme. In the A scheme is not an intrinsically insolvency-related procedure. event that there is an enforceable debt subordination agree- However, it may be employed after the appointment of a liqui- ment in place creating different classes of unsecured creditor dator or provisional liquidator, and there can be advantages in (or in the event that there are deferred creditors, for example, or employing a scheme in this way. Where illiquidity issues confront shareholders claiming payment of debts arising in their capacity the company, for example, its freedom to promulgate or pursue as shareholders), it may be possible to structure and secure the a scheme may be susceptible to litigation or compulsory winding Court’s approval for a scheme in such a way as to cram-down a up petitions presented by dissentient creditors. Where this is a dissenting (subordinate or deferred) class of stake-holder. concern, the powers of the Court pertaining to the winding up of companies and appointment of liquidators may be employed in the protection of a proposed scheme. This may include the use 3.3 What are the criteria for entry into each of a ‘soft touch’ provisional liquidation, along the lines described restructuring procedure? in our answer to question 3.1. In the case of an insolvent insurance company, there is another The scheme procedure may be initiated by application of a cred- restructuring tool potentially available under section 37(5) and itor, a member, the company itself, or (where one has been section 39 of the Insurance Act 1978. These provisions enable appointed) the liquidator. the Court, if it thinks fit, to reduce the amount of the insurance The applicant requests the Court to convene a meeting of contracts of the insurer, on such terms and subject to such condi- the creditors, or the relevant class of creditors, of the company. tions as the Court thinks fit. Although the procedure and case law If the Court so directs (which will almost always be the case, in this area is not fully developed in Bermuda, it is likely that the absent exceptional circumstances), creditors must be summoned Court would require that a meeting of policyholders be convened, by notice. Notification commonly includes advertisement of the and their views canvassed, and one relevant consideration for the meeting. Court would be the effect of any reduction order on the compa- Where, because of differences in their respective rights, two ny’s ability to make recoveries against its reinsurers. Depending on or more creditors are unable to consult together with a view to the circumstances, a formal scheme may be required in any event. their common interest, it will be necessary to separate creditors A pre-packaged sale involves the pre-agreement of terms of into classes for the purposes of voting on the scheme proposal. a sale of the business of the company to another party or a new If a majority in number within each class of creditors present and voting (including by proxy) at the meeting, representing 75 company, which sale is then effected directly after the appoint- per cent by value of that class, votes in favour of the scheme, and ment of an office-holder. The sale and its terms are frequently the Court approves it, then the scheme will be binding on all negotiated by, or with the approval of, major secured creditors of creditors. Court approval is a discretionary matter. The Court the company. The prevailing regime in Bermuda does not lend must be satisfied that the statutory requirements have been met, itself to the use of pre-packaged sales. Winding up proceed- including the holding of requisite class meetings and approval of ings anticipate the death of the company and distribution of its necessary majorities, and that each class was fairly represented at assets. Conversely, the scheme process is too dependent upon each meeting. In addition, the Court must be satisfied that the the views of the general creditor body. Neither allows the discre- scheme is fair to creditors generally – in other words, that the tion necessary to pre-agree and dictate a disposal of the business majority has not taken unfair advantage of its position. of the company, in the manner required for a pre-packaged sale. The scheme is not effective until a copy of the sanction order Conceivably, a receiver and manager appointed by a secured is delivered to the Registrar of Companies. The scheme order creditor pursuant to a charge over substantially all the assets of must be annexed to any copies of the company’s memorandum a company may achieve something akin to a pre-packaged sale. of association issued subsequently to the order. It is also conceivable that a Bermudian exempt company whose centre of main interests is in the United Kingdom, or whose assets and liabilities are situated in the United Kingdom, might 3.4 Who manages each process? Is there any court involvement? seek the assistance of both the Courts of Bermuda and the Courts of England and Wales for the purposes of having a pre-packaged sale effected under the supervision of a court-appointed admin- If the scheme is conducted outside a liquidation, the compa- istrator. The procedure, however, is not as common in Bermuda ny’s board of directors and any managers control the process, as it is in certain other jurisdictions, such as Jersey, and there is although a Scheme Administrator is normally appointed to some uncertainty in the case law as to the scope of the power of administer the scheme once it is implemented. Bermudian Courts and English Courts in this respect. If the scheme is conducted within a liquidation, the liquidator controls the process.

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However, there is a hybrid option, under which the scheme is partnerships. There are also specific provisions relating to conducted within a ‘soft touch’ provisional liquidation, used to insurance companies in the Insurance Act 1978 and relating implement a restructuring within the protective environment of to segregated accounts companies and their general and segre- a provisional liquidation but without the necessity of winding up gated accounts in the Segregated Accounts Companies Act the company. The ‘soft touch’ provisional liquidation procedure 2000. There are also specific provisions relating to banks in the has been described in our answer to question 3.1. The board Banking (Special Resolution Regime) Act 2016, although this of directors normally manages the scheme process under the legislation has not yet been fully brought into force. The rules supervision of the provisional liquidator. relating to compulsory winding up of companies are contained in the Companies (Winding up) Rules 1982 and also, to a lesser 3.5 What impact does each restructuring procedure extent, in the Rules of the Supreme Court 1985. have on existing contracts? Are the parties obliged to Insolvent liquidation procedures can generally be divided into perform outstanding obligations? What protections compulsory liquidations and insolvent voluntary liquidations are there for those who are forced to perform their (creditors’ voluntary liquidations). outstanding obligations? Will termination and set-off The general purpose of the liquidation process is to gather provisions be upheld? in and realise assets, to pay off creditors in accordance with their rights and priorities, and then to distribute any remaining The commencement of a scheme has no automatic effect on assets to the company’s shareholders. However, liquidators in a contracts, save in the case where the relevant contract contains winding up of a company have the power to promote compro- contractual terms to that effect. If a scheme with creditors is mises and arrangements whether by consensual means or using approved, the scheme will govern any issues relating to the termi- a scheme. Furthermore, where the company is not already in nation of contracts with those creditors. The protections avail- liquidation, the winding up jurisdiction of the Court and stat- able to parties that may be compelled to perform outstanding utory machinery may be invoked in order to protect the imple- obligations will depend on whether the company is seeking to mentation of a restructuring (as discussed above in connection effect a solvent scheme (outside of a liquidation process) or an with ‘soft touch’ provisional liquidation). insolvent scheme (within a liquidation process). If the company Liquidators are generally given a degree of discretion as to the commences a liquidation process with a view to promoting an time period within which to effect and complete the liquidation, insolvent scheme, parties that are required to continue performing which may depend to some extent on the nature, location, and outstanding obligations may be in a position to require security or liquidity of the company’s assets. After the liquidation process priority for payment, whether from the company’s liquidators or is complete, the company can then be dissolved and it will cease the company’s other stakeholders. to exist as a legal entity.

3.6 How is each restructuring process funded? Is any Voluntary liquidation protection given to rescue financing? An insolvent voluntary liquidation is initiated by the company’s shareholders through a resolution, based on the recommenda- The company generally uses its own assets to finance the proce- tion of the board of directors. Although creditors participate dures of voluntary liquidation, compulsory liquidation, and in the creditors’ voluntary liquidation procedure, they can only any scheme. However, if the company does not have sufficient secure the active supervision of the Court by petitioning for the assets or liquidity, it is possible for the company, or its liquida- compulsory liquidation of the company. tors, to enter into funding arrangements with those interested in the outcome of the procedures, typically creditors, if doing so is Compulsory liquidation necessary for the beneficial winding up of the company. In such The compulsory liquidation process is initiated by one of the a case, funding liabilities would be expected to be re-paid by the following making a petition to the Supreme Court of Bermuda: company or by the liquidator prior to the repayment of unse- a creditor, including any contingent or prospective creditor; a cured creditors, although subject to the specific terms of any contributory (that is, any person liable to contribute to the assets funding agreement and the Court’s approval. In this context, it of the company in the event of its liquidation, i.e. a shareholder is possible as a matter of Bermuda law to secure protection (or or member); the company itself (by a shareholders’ resolution if priority treatment) for rescue financing on an ad hoc basis, and its i solvent and/or by a directors’ resolution if it is insolvent); by agreement in appropriate circumstances. In certain cases, the and, in certain circumstances, the Registrar of Companies or liquidator appointed by the Court is the Official Receiver, being the Supervisor of Insurance (being the Bermuda Monetary a government official with a limited government budget. Authority). It is also possible, in exceptional circumstances, for receivers 42 Insolvency Procedures of segregated accounts within a segregated accounts company to petition for the winding up of the whole company, and also for 4.1 What is/are the key insolvency procedure(s) the Court to wind up a company of its own motion. available to wind up a company? Section 170(2) of the Companies Act 1981 also allows the Court to appoint a provisional liquidator between the presentation of a winding up petition and its final hearing. As set out above, the formal procedures available for companies in financial difficulties are principally contained in the Companies Act 1981 (the winding up provisions of which are 4.2 On what grounds can a company be placed into substantially modelled on the UK’s Companies Act 1948). each winding up procedure? Some provisions of the Bankruptcy Act 1989 are also applied to companies, by virtue of section 235 of the Companies Act A company may be compulsorily wound up by the Court in 1981, and there is some scope for debate as to the applicability any of the following circumstances, under section 161 of the of certain provisions of the Bankruptcy Act 1989 to corporate Companies Act 1981:

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(a) if the company has, by resolution, resolved that the liquidation. The board of directors is displaced upon the company be wound up by the Court; appointment of the liquidator, and their powers are terminated. (b) if there is default in holding the company’s statutory meeting; 4.4 How are the creditors and/or shareholders able (c) if the company does not commence its business within to influence each winding up process? Are there any a year of its incorporation or suspends its business for a restrictions on the action that they can take (including whole year; the enforcement of security)? (d) if the company carries on any restricted business activity; (e) if the company engages in a prohibited business activity; Subject to any orders dispensing with the need for approval, (f) if the company is unable to pay its debts; a number of the powers of a liquidator appointed in an insol- (g) if the company’s ministerial consents were obtained as vent winding up of a company may only be exercised with the a result of a material misstatement in the application for approval of a ‘Committee of Inspection’ comprising representa- consent; or tive creditors of the company. It is also possible for creditors to (h) if the Court is of the opinion that it is just and equitable apply to the Court with respect to the exercise or proposed exer- that the company should be wound up. cise of the liquidator’s powers, under sections 175 and 176 of the The Supervisor of Insurance (being the Bermuda Monetary Companies Act 1981. Authority) can present a petition for the winding up of an insur- The making of a winding up order brings about a statutory ance company if it is in breach of the regulatory provisions of moratorium on proceedings against the company. This will not the Insurance Act 1978, or if it is in the public interest that the prevent secured creditors enforcing their security where they insurance company should be wound up on just and equitable can do so without instituting proceedings before the Court. grounds. Furthermore, even where judicial assistance is needed, leave Section 34 of the Insurance Act 1978 also provides that the will usually be given to enforce valid security interests notwith- Court may order the winding up of an insurance company standing the statutory moratorium. A judgment creditor will subject to the modification that the insurance company may be not be permitted to continue with the execution of its judgment ordered to be wound up on the petition of 10 or more policy- against the company where notice of an order winding up the holders owning policies of an aggregate value of not less than company is received by the Provost Marshall prior to sale of $50,000, provided that such a petition shall not be presented goods of the company taken in execution or prior to completion except by leave of the Court, and leave shall not be granted until of execution by receipt or recovery of the full amount of the levy. a prima facie case has been established to the satisfaction of the Court and until security for costs for such amount as the Court may think reasonable has been given. 4.5 What impact does each winding up procedure have The Registrar of Companies can petition for the winding up on existing contracts? Are the parties obliged to perform of a company if directed to do so by the Minister of Finance outstanding obligations? Will termination and set-off provisions be upheld? following receipt of a report of an Inspector to investigate the company under section 110 or section 132 of the Companies Act 1981. Other than the statutory provisions governing contracts of A provisional liquidator can be appointed prior to the final employment discussed in our answer to question 6.1, as a matter hearing of a compulsory winding up petition if there is a good of law, there is no automatic termination of contracts with the prima facie case that a winding up order will be made, and if company upon the commencement of a compulsory liquida- the Court considers that a provisional liquidator should be tion or a creditors’ voluntary liquidation (save in the case of the appointed in all the circumstances of the case. liquidator disclaiming an onerous contract or transaction, and save in the case where the relevant contract contains contractual terms to that effect). However, a contracting counterparty 4.3 Who manages each winding up process? Is there can only claim in the liquidation for debts which exist at the date any court involvement? of commencement of the liquidation, and interest also ceases to run from that date. In the circumstances, there is, as a matter Compulsory liquidation: The liquidator or provisional liqui- of fact, a termination or cancellation of contracts in the event dator appointed by the Court controls the procedure of liquida- of liquidation, unless the liquidator elects to affirm the relevant tion, and displaces the company’s board of directors upon his contract. Contracting counterparties can also seek to assert appointment. The exercise by the liquidator of his powers is claims against the company for damages sustained as a result subject to the sanction, supervision and control of the Court, of any breach of contract caused by the commencement of the and, to a lesser extent, the Committee of Inspection, if one is liquidation, subject to proof in the liquidation. appointed. In the same way as the board of directors is displaced, so too are the powers of the shareholders. ‘Soft touch’ provisional liquidation: Subject to the circum- 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? stances of the case, the Court can order that a provisional liquidator be appointed with limited powers (i.e. a ‘soft touch’), and that the directors continue to retain all of their powers or In a compulsory liquidation or a creditors’ voluntary liquidation, certain limited powers, subject only to the supervisory role to creditors’ claims are ranked in the following order: be played by the provisional liquidator (subject, in turn, to the (1) secured creditors enforce their security outside the liquida- Court’s supervisory role). This can be an important tool for the tion, but essentially in priority to all other creditors; purposes of effecting a restructuring, especially in the context (2) the costs and expenses of the liquidation, including all of international insolvencies which require parallel restructuring costs, charges and expenses properly incurred in the procedures both in Bermuda and in other jurisdictions. company’s winding up, including the liquidator’s remuner- Voluntary liquidation: The liquidator appointed or approved ation if sanctioned by the Court (pursuant to sections 194, by the company’s creditors controls the procedure of voluntary

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232, and 236(6) of the Companies Act 1981 and Rule 140 the National Pension Scheme (Occupational Pensions) Act 1998 of the Companies (Winding up) Rules 1982); and Regulation 56 of the National Pension Scheme (General) (3) debts due to employees located in Bermuda under section Regulations 1999, since the legislative provisions are not entirely 33(3) of the Employment Act 2000; clear. (4) preferential debts owed to preferential creditors pursuant to section 236(1) of the Companies Act 1981, including 4.7 Is it possible for the company to be revived in the unpaid taxes under the Taxes Management Act 1976, future? unpaid social insurance/Government pension contributions under the Contributory Pensions Act 1970, liability In the course of the liquidation, the liquidator will adjudicate for compensation under the Workmen’s Compensation the claims of unsecured creditors and collect the assets of the Act 1965, and payments of up to $2,500 due to employees company. Assets will be distributed (to the extent available) of Bermudian companies but resident outside of Bermuda; according to the statutory priorities in the form of dividends. (5) debts secured by a floating charge (although higher At the end of this process, the liquidator is generally released, priority debts must be paid out of any property secured and the company is dissolved. by a floating charge if the assets of the company are not Under section 260 of the Companies Act 1981, the Court has otherwise sufficient to meet them pursuant to section the power to declare a dissolution of a company void in certain 236(5) of the Companies Act 1981); circumstances, up to a period of either two years (most liquida- (6) unsecured creditors’ debts, including the unsecured tion cases) or 10 years (members’ voluntary liquidation) after the balance of secured creditors’ claims (pursuant to sections date of dissolution, and under section 261 of the Companies Act 158(g), 225 and 235 of the Companies Act 1981); 1981 the Court has power to restore a company that has been (7) post-liquidation interest on unsecured creditors’ debt struck off the Register for up to 20 years after strike-off. claims; Following Court approval of a scheme (see below), the scheme (8) debts due to shareholders in their capacity as such (pursuant is implemented under the auspices of the company’s directors to section 158(g) of the Companies Act 1981); and and the Scheme Administrator (or the liquidator, if one has been (9) shareholders’ equity in the event of a surplus balance, appointed). The company may continue in all respects (subject according to their rights and interests under the compa- to the scheme) as before. Alternatively, where the scheme was ny’s bye-laws. promoted in the context of winding up proceedings, the liquida- Each category of debts must be paid in full before payment of tion of the company may proceed on the basis of the balance of creditors in the subsequent category. Creditors in the same cate- its assets and liabilities. gory rank equally (or pari passu) among themselves. A scheme of the debts of a company extinguishes the debts The above-mentioned priorities are modified where the and has no effect on the existence, powers or capacity of the company is registered as an insurer under the Insurance Act 1978 company. Accordingly, the company may go on to trade unbur- so as to give priority, after the payment of preferential debts, to dened by the debts that have been discharged as a result of the the claims of the company’s insurance creditors (i.e., of its direct scheme. and reinsurance policyholders) over the claims of its unsecured general (non-insurance) creditors. Where the insurer carries on 52 Tax both long-term (life) and general (property and casualty) insurance business, debts of all types attributable to each business 5.1 What are the tax risks which might apply to a must be paid out of a separate business fund attributable the restructuring or insolvency procedure? business. The same modified priorities apply to the debts attributable to each business, save that any surplus in a business fund after paying preferential debts of the related business must be No particular tax liabilities are incurred in each procedure, as used to pay any unpaid preferential debts of the other business a matter of local Bermuda law. Stamp duty is payable in the before being used to pay policyholder debts of the related busi- ordinary way, save that section 253 of the Companies Act 1981 provides various exemptions from stamp duty where a company ness. A surplus available after paying policyholder debts of a is in compulsory liquidation or creditors’ voluntary liquidation. business must be used in a similar way before being used to pay general debts of the business. In the case of the winding up of segregated accounts compa- 62 Employees nies, section 25 of the Segregated Accounts Companies Act 2000 provides that the liquidator shall deal with the assets and 6.1 What is the effect of each restructuring or liabilities which are linked to each segregated account only in insolvency procedure on employees? What claims would accordance with the segregation principles of the legislation employees have and where do they rank? and the relevant governing instruments or contracts for each transaction. Section 33(1) and 33(2) of the Employment Act 2000 provide There is some scope for argument as to the order of priority for that the winding up or insolvency of an employer’s business shall payment of claims asserted by former shareholders in mutual fund cause the contract of employment of an employee to terminate companies, whose shares have been redeemed but who are owed one month from the date of winding up or the appointment of a payment of the redemption proceeds at the commencement of receiver, unless, notwithstanding the winding up or insolvency, liquidation. The general view is that these are debts due to share- the business continues to operate. holders that rank behind outside trade creditors’ debts, but ahead Upon termination of an employment contract under the of shareholders’ equity, but the legislative provisions, including Employment Act 2000, employees working in Bermuda may section 158(g) of the Companies Act 1981, are not entirely clear in be entitled to recover accrued entitlements (such as salary and this respect, notwithstanding a recent judgment of the Supreme payment in lieu of paid vacation entitlements), as well as sever- Court of Bermuda that has touched upon the issue. ance pay. There is also scope for argument as to the order of priority As set out in our answer to question 4.6 above, the following of outstanding occupational pension payment liabilities under claims rank within the list of preferential claims that are to be

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settled before payment of certain other unsecured debts: (a) debts (1) there is a ‘sufficient connection’ between the foreign due to employees located in Bermuda under section 33(3) of the Court’s jurisdiction and the foreign company making it Employment Act 2000; and (b) preferential debts owed to pref- the most appropriate, or the ‘most convenient’ jurisdiction erential creditors pursuant to section 236(1) of the Companies to have made an order for the winding up of the company Act 1981, including unpaid taxes under the Taxes Management and appointment of foreign liquidators; Act 1976, unpaid social insurance/Government pension contri- (2) there are documents, assets, or liabilities of the foreign butions under the Contributory Pensions Act 1970, liability for company within the jurisdiction of Bermuda; the foreign compensation under the Workmen’s Compensation Act 1965, company has conducted business or operations within, or and payments of up to $2,500 due to employees of Bermudian from, the jurisdiction of Bermuda, whether directly or by companies but resident outside of Bermuda. agents or by branches; the foreign company has former directors, officers, managers, agents or service providers 72 Cross-Border Issues within the jurisdiction of Bermuda; and/or the foreign company properly needs to be involved in litigation or 7.1 Can companies incorporated elsewhere use arbitration within the jurisdiction of Bermuda; and restructuring procedures or enter into insolvency (3) there is no public policy reason under Bermudian law to proceedings in your jurisdiction? the contrary (if, for example, there would be unfairness or prejudice to local Bermudian creditors). However, the Privy Council has stressed that the question of Following the decision of the Privy Council in PricewaterhouseCoopers how far it is appropriate to develop the common law so as to v Saad Investments Company Limited [2014] UKPC 35 (discussed assist foreign liquidations depends on the facts of each case, and in more detail in our answer to question 7.2), it is clear that the nature of the power that the Bermuda Court is being asked the Supreme Court of Bermuda currently has no jurisdiction to exercise. In the context of an application for an order for to wind up ‘overseas companies’ that have not been granted production of documents by an entity within the jurisdiction a permit by the Minister of Finance to carry on business in of the Bermuda Court, the Privy Council has noted that such a Bermuda. A previously used ‘loophole’ under the External power is available only where necessary to assist the officers of Companies (Jurisdiction in Actions) Act 1885 was closed by the a foreign Court of insolvency jurisdiction or equivalent public Privy Council’s decision. officers, but is not available to assist a voluntary winding up, The Supreme Court currently lacks jurisdiction to order the which is essentially a private arrangement. It is not a power to convening of meetings of creditors in relation to a proposed assist foreign liquidators to do something which they could not compromise or arrangement of the debt of an overseas company, do under the law by which they were appointed, and its exercise unless that company has been registered by the Minister of must be consistent with the substantive law and public policy of Finance as a Non-Resident Insurance Undertaking under the the assisting Court in Bermuda. Non-Resident Insurance Undertakings Act 1967. There is some uncertainty as to whether a foreign scheme or related procedure (such as an insurance business transfer scheme 7.2 Is there scope for a restructuring or insolvency under legislation implementing European single market insur- process commenced elsewhere to be recognised in your ance directives) can be recognised and enforced in Bermuda jurisdiction? as a matter of common law. Although the Supreme Court of Bermuda has shown some willingness to recognise foreign Bermuda has no statutory equivalent of Chapter 15 of the US’s Court orders approving foreign schemes (in the absence of Bankruptcy Code, section 426 of the UK’s Insolvency Act 1986, opposition), it is unclear what position it might take in a conten- or the UK’s Cross-Border Insolvency Regulations 2006, by tious situation. which the UK implemented the United Nations Commission on International Trade Law’s Model Law on Cross-Border 7.3 Do companies incorporated in your jurisdiction Insolvency. The Supreme Court of Bermuda has nonetheless restructure or enter into insolvency proceedings in other confirmed, following the Privy Council decision in Cambridge jurisdictions? Is this common practice? Gas Transportation Corp v Navigator Holdings plc [2007] 1 AC 508 that, as a matter of common law, the Supreme Court of Bermuda Exempted companies incorporated in Bermuda carry on busi- may (and usually does) recognise liquidators appointed by the ness predominantly or exclusively in foreign jurisdictions, Court of the company’s domicile and the effects of a winding up and frequently have their shares and other securities listed on order made by that Court, and has a discretion pursuant to such foreign public exchanges. They are accordingly subject to the recognition to assist the primary liquidation Court by doing insolvency regimes of the jurisdictions in which they do busi- whatever it could have done in the case of a domestic insolvency. ness, where these extend to companies incorporated overseas. However, the precise scope of Bermudian Courts’ common Proceedings in other jurisdictions, for example: the United law power to assist foreign liquidations, and, in particular, to States; the United Kingdom; the British Virgin Islands; the ‘provide assistance by doing whatever it could have done in the Cayman Islands; Hong Kong; and Singapore, affecting insolvent case of a domestic insolvency’ has been the subject of consid- Bermuda exempted companies are common. Where necessary, erable debate in a number of recent judgments, including these are commonly supported by ancillary liquidation proceed- in two judgments by the Privy Council, on appeals from the ings in Bermuda or by judicial recognition and assistance (of the Court of Appeal for Bermuda, in Singularis Holdings Limited v type discussed in our answer to question 7.2) from the Supreme PricewaterhouseCoopers [2014] UKPC 36 and PricewaterhouseCoopers Court with the foreign proceedings, in the absence of winding v Saad Investments Company Limited (referred to in our answer to up proceedings in Bermuda. question 7.1). In summary, subject to the facts of any particular case, the Bermuda Court is likely to recognise the winding up orders of foreign Courts, and to assist foreign liquidators to the fullest extent possible, in circumstances where:

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82 Groups respect to sections 1 and 10 (as at the time of writing). This is a very substantial piece of legislation which provides a new statutory toolset for dealing with the failure or insolvency of a bank 8.1 How are groups of companies treated on the in Bermuda. insolvency of one or more members? Is there scope for The Companies and Limited Liability Company Amendment co-operation between officeholders? Act 2017 also introduced certain legislative changes regarding retention of the books and papers of a company and its There are no statutory provisions for the treatment of insolvent liquidators. group companies. The Supreme Court has, however, occasion- The Chief Justice has recently published various consultation ally appointed the same office-holders as liquidators to multiple papers, proposing certain procedural reforms to the Companies companies in the same group of companies, subject to suitable (Winding Up) Rules 1982 and certain Rules of the Supreme arrangements being made with respect to any conflicts that Court of Bermuda 1985 which are of relevance to corpo- might arise (including by way of appointment of a ‘conflicts’ rate litigation. The Restructuring and Insolvency Specialists liquidator). In appropriate cases, the Supreme Court has also Association (Bermuda) (RISA) has been intimately involved in supported and approved co-operation agreements that have this process. Some of these rule changes were implemented in been entered into between separate office-holders of companies July 2018, and it is anticipated that certain other rule changes within a group of companies. will be implemented later in 2020. The Government of Bermuda is actively engaged in a consul- 92 Reform tation exercise with respect to potential relaxation of the 60/40 Bermudian ownership and control requirements for local 9.1 Are there any other governmental proposals for Bermuda companies. reform of the corporate rescue and insolvency regime in RISA is also actively considering a variety of industry your jurisdiction? proposals for potential law reform in the area of personal bankruptcy, insolvency and corporate rescue, and this is also an area One of the more significant recent legislative developments in of interest to the Government of Bermuda, the Official Receiver, Bermuda is the Banking (Special Resolution Regime) Act 2016, the Registrar of Companies, as well as the Chief Justice. which has been enacted but not yet brought into force, save with

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Nick Miles is a Partner at Kennedys Bermuda and is head of the Corporate/Corporate Finance team, which specialises in restructuring matters. He has extensive experience providing advice to all types of stakeholders in insolvency and restructuring matters. He has represented petitioning creditors in a number of notable insolvency matters in Bermuda (such as those relating to Titan Petrochemicals Group Limited and Gerova Financial Group Limited). He routinely advises bondholders, shareholders and general creditors of distressed Bermuda companies on legal and strategic issues in connection with the use of formal and informal restructuring processes, including the availability of injunctive and other relief, the use of ‘soft touch’ provisional liquidation and Schemes of Arrangement. He advises on all matters relating to lending and security involving Bermuda companies and/or assets. He is a committee member of the Bermuda Restructuring and Insolvency Specialists Association (RISA). He has particular expertise in insolvency and restructuring matters relating to Bermuda insurance companies. As a representative of RISA, he played a prominent role in spearheading legal reform in Bermuda relating to the priority of the claims of policyholders in the winding up of corporate insurers in 2018. He has advised clients on the use of long-term business transfer schemes under the Bermuda Insurance Act 1978. Prior to moving to Bermuda, he practised at City law firms in the UK, during which time he advised clients in connection with a number of insurance business transfer schemes under Part VII of the UK Financial Services and Markets Act 2000.

Kennedys Tel: +1 441 278 7164 20 Brunswick Street Email: [email protected] Hamilton HM10 URL: www.kennedyslaw.com Bermuda

Lewis Preston is the Senior Associate in the litigation department of Kennedys’ Bermuda office. Prior to joining Kennedys, he practised for six years as a commercial barrister in London and for three years in Hong Kong at the offshore firm, Maples, during which time he was involved in very high-value BVI and Cayman Islands disputes. Admitted to the UK, Bermuda and BVI bars, Mr. Preston is experienced in all manner of onshore and offshore commercial litigation and arbitration practice, with a focus on disputes in the fields of contentious insolvency, company law, banking, financial services, investment funds, insurance, reinsurance, professional negligence, and trusts. Mr. Preston is a member of the Restructuring and Insolvency Specialists Association (Bermuda), a member of INSOL and a member of the Chartered Institute of Arbitrators. Mr. Preston’s full professional profile is available at https://www.kennedyslaw.com/our-people/profiles/bermuda/lewis-preston.

Kennedys Tel: +1 441 278 7161 20 Brunswick Street Email: [email protected] Hamilton HM10 URL: www.kennedyslaw.com Bermuda

Kennedys provides expert counsel in relation to commercial and corporate and representing a Bermuda mutual fund company structured as a segre- matters in Bermuda. gated accounts company in responding to various claims and applications The firm handles insolvency and restructuring matters, commercial litiga- for its various segregated accounts to be put into receivership. tion and arbitration, corporate and trust disputes, contract drafting, and The Kennedys insolvency and restructuring team in Bermuda includes general corporate advisory/regulatory work across all business sectors Mark Chudleigh, Nick Miles, Lewis Preston, Nicolas Champ, Laura and with a particular focus on insurance. Williamson and Ciara Brady. The firm excels at prosecuting and defending complex matters involving * * * significant exposure, sensitive public relations issues and industry-wide Kennedys and Kennedys Bermuda are the trading names in Bermuda of policies. Kennedys offers its clients not only local Bermuda expertise but Kennedys Chudleigh Ltd., an independent Bermuda law firm. Kennedys also multinational legal expertise through its association with the interna- Chudleigh Ltd. is a limited liability company incorporated in Bermuda under tional law firm Kennedys Law LLP. the Companies Act 1981, which is regulated under the provisions of the In its insolvency and restructuring practice, Kennedys advises and repre- Bermuda Bar Act 1974, and approved and recognised under the Bermuda sents clients in Bermuda and in other jurisdictions with connections to Bar (Professional Companies) Rules 2009. Bermuda. Recent matters handled by the team include: representing the www.kennedyslaw.com liquidators of two British Virgin Islands-funded 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 management, 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 receiverships;

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Bulgaria Bulgaria

Vassilev & Partners Law Firm Konstantin Vassilev

12 Overview A stabilisation procedure, being a formal restructuring procedure designated to take place before any insolvency proceedings, can be opened for a financially distressed company that is 1.1 Where would you place your jurisdiction on the not yet illiquid but could become so in the next six months. The spectrum of debtor to creditor-friendly jurisdictions? goal is for the distressed company and its creditors to reach an agreement that would allow the company to avoid bankruptcy. Bulgaria should be considered a creditor-friendly rather than A stabilisation procedure requires the involvement of the court debtor-friendly jurisdiction. and of a custodian and generally leads to certain restrictions in According to the law, the insolvency estate serves for the the distressed company’s activities and representation powers. satisfaction of all debtor’s creditors with commercial and A recovery plan procedure, on the other hand, can only take non-commercial claims. What is more, insolvency proceedings place as a formal restructuring procedure after the opening of are creditor-driven, as creditors are entitled to make the most the insolvency proceedings. The plan may provide for deferment significant decisions including, but not limited to: or rescheduling of payments, release from liability in full or in i. appointment of an insolvency administrator and determi- part, reorganisation of the debtor’s enterprise, and undertaking nation of his remuneration; of other acts or transactions. It can be proposed by the debtor, ii. determination of the method and terms of evaluation of the insolvency administrator, the creditors, the shareholders and the debtor’s property and its encashment; and even the employees. A recovery plan can be proposed within iii. appointment of assessors of the debtor’s assets and the one month from publication of the list of admitted creditor’s determination of their remuneration. claims. Within this deadline, written consent from the Minister Additionally, creditors have at their disposal a handful of of Finance must be given for any public liabilities to be resched- different claw-back and invalidation claims against the debtor uled, which makes it in practice very difficult, if possible at all, and his counterparties, aimed at bringing back assets to the to have a recovery plan admitted and voted for. insolvency estate. 22 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 2.1 What duties and potential liabilities should the extent are each of these used in practice? directors/managers have regard to when managing a company in financial difficulties? Is there a specific Bulgarian law provides for informal work-outs, as well as formal point at which a company must enter a restructuring or restructuring and insolvency proceedings. insolvency process? Informal work-out activities, used relatively often in practice, can take place both prior to the formal restructuring and insol- Directors have a general duty to act in the company’s best interests. vency proceedings and also in the course thereof. They would Failure to comply with the statutory obligations when managing normally be fast, flexible, voluntary and confidential and are aimed a company in financial difficulties can result in civil, administra- at finding a plausible and mutually beneficial solution for both the tive or criminal liability of the directors, as well as in their ineligi- distressed company and its creditors. The debtor is represented bility to be appointed as directors of other companies in the future. by its management body (and not by an insolvency administrator). Civil liability may be charged for losses suffered by the Informal work-out negotiations, taking place after the company due to improper management resulting in the company opening of the insolvency proceedings, are supposed to lead to entering into a distressed financial situation, whereupon share- an out-of-court settlement agreement between the debtor and all holders may adopt the respective decision for the company to of its creditors with approved claims. The court’s role is merely to sue its director. In addition, liability for damages of a director verify that the legal requirements for approval of this out-of-court can also arise from not filing for insolvency within 30 days settlement agreement are met. Once it is sanctioned the insol- from the day the company became illiquid or over-indebted, in vency proceedings are subject to termination. which case the management is liable before the creditors for any Formal restructuring and insolvency proceedings, which are damages incurred due to failure to comply with this deadline. used relatively rarely in practice, can take place both prior to the Administrative liability may be triggered for failure to opening of the insolvency proceedings and also in the course comply with tax or social security obligations of the company thereof. represented.

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Criminal liability can occur on account of failure to file for Actions and transactions performed after the opening of the insolvency within the designated deadline. In addition, the insolvency proceedings and that do not comply with the stat- management can be held responsible for disposing of the debt- utory procedural requirements are invalid with respect to the or’s assets in a prohibited manner or for hindering the creditor’s insolvency creditors. Such actions and transactions include: interests, or even for purposefully avoiding the making of tax or i. fulfilment of a debt that has emerged prior to the date of social security payments owed by the distressed company. the decision for institution of bankruptcy proceedings; Directors who have managed insolvent companies cannot ii. perfection of a pledge or a mortgage over rights or assets generally be appointed managers of other legal entities. included in the insolvency estate; and While entering into a stabilisation procedure is voluntary and iii. any transaction relating to a right or asset that is a part of optional for financially troubled entities, filing for insolvency the insolvency estate. is mandatory and must be done within the statutory deadlines. Actions and transactions performed before the opening of the insolvency proceedings that are not invalid but could be declared void with respect to the insolvency creditors depending 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the on certain criteria and the exact moment of execution include: action that they can take against the company? For i. set-offs between the debtor and its creditors, provided that example, are there any special rules or regimes which said creditors have been aware of the debtor’s distressed apply to particular types of unsecured creditor (such financial situation since acquiring the receivable or the as landlords, employees or creditors with retention liability; of title arrangements) applicable to the laws of your ii. fulfilment of monetary obligations by the debtor; jurisdiction? Are moratoria and stays on enforcement iii. perfection of a mortgage or a pledge to secure a debtor’s available? liability that was until this moment unsecured, or to secure third party’s obligations; Stakeholders who have the ability to influence the company’s iv. free of charge transaction with a related party to the situation by way of initiating insolvency proceedings are its debtor; directors, liquidators, creditors, the government tax authorities v. undervalued transactions; and and labour inspection authorities. vi. any other transactions with a related party to the debtor Shareholders, employees and the insolvency administrator that are harmful to the debtor’s creditors. may steer the company by way of proposing a restructuring plan. Contesting such transactions shall not affect any rights, which The insolvency administrator plays a significant role, as after third parties acting in good faith have acquired against consid- the opening of the insolvency proceedings the debtor may eration prior to the date of registration of the invalidation claim. continue its activities under his supervision. New deals and transactions may only be concluded subject to the insolvency 32 Restructuring Options administrator’s prior approval. In certain cases, the debtor can be prevented by the court from managing and disposing of its 3.1 Is it possible to implement an informal work-out in assets, by the delegation thereof to the insolvency administrator. your jurisdiction? Any due obligations or payments are to be received by him and not the debtor. Upon the opening of the insolvency proceedings, any judi- Implementation of an informal work-out is possible in Bulgaria. cial and arbitration civil and commercial cases against the Such informal restructuring proceedings, having no legal regu- debtor must be stayed, save for certain exceptions. This rule lation, normally depend on the readiness and willingness of also applies to enforcement proceedings with few exceptions. the creditors to take part in a joint agreement with the debtor. Stayed proceedings must be terminated as soon as the creditors’ However, the possibility for any creditor to initiate court claims are included in the list of the approved creditors’ claims. proceedings against the debtor is always available, whereby the As regards those that are not included in this list, the stayed interests of other creditors willing to provide standstill agree- proceedings are then to be resumed with the participation of the ments during a period of negotiation are at stake. insolvency administrator, the creditor and any party contesting the existence of the creditor’s claim. 3.2 What formal rescue procedures are available New judicial, arbitration and enforcement proceedings on in your jurisdiction to restructure the liabilities of civil and commercial cases against the debtor or enforcement distressed companies? Are debt-for-equity swaps proceedings against assets included in the insolvency estate are and pre-packaged sales possible? To what extent can generally inadmissible after the insolvency proceedings have creditors and/or shareholders block such procedures been opened. or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- 2.3 In what circumstances are transactions entered down dissenting classes of stakeholder? into by a company in financial difficulties at risk of challenge? What remedies are available? The stabilisation procedure in Bulgaria is still unpopular in the country, probably because it was reintroduced relatively recently In open insolvency proceedings, the insolvency administrator in Bulgarian legislation. The formal rescue procedure is based has various tools to recover and distribute the debtor’s assets on the principles of: i) swiftness (enabling a restructuring in as equally amongst the creditors in order to invalidate any trans- early a stage as possible); ii) correctness of the data and informa- actions that are made against the statutory provisions or that tion provided by the financially distressed company (only the are preferential to certain stakeholders while harmful to others. distressed companies are allowed to file for stabilisation and the Depending on how severe the breach is, Bulgarian law distin- data provided is scrutinised by the court so that no abuse with guishes between completely invalid transactions and voidable the creditor’s interests could take place); iii) different treatment transactions. of the creditors related to the distressed company (excluding

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the possibility of harming the interests of other creditors of the 3.4 Who manages each process? Is there any court company); and iv) bearing of all costs related to the procedure by involvement? the distressed company. Debt-for-equity swaps are possible as long as the receivable The informal restructuring procedures are managed by the is being evaluated in advance and the creditor has declared his financially distressed company, respectively the debtor (repre- willingness to acquire shares in return for him swapping his sented by its management) and the creditors. claim for shares (however, receivables for taxes/social security Both formal restructuring procedures (stabilisation proce- payments cannot be swapped for shares). Sale of the entire or dure and recovery plan procedure) require the involvement of part of the enterprise of the financially distressed company or the court whose main role is to approve the stabilisation or separate assets is also possible, provided that a market price valu- recovery plan the creditors have voted for, as long as it meets ation and a preliminary sale and purchase agreement, executed all legal requirements. An optional body in both procedures is by the buyer, are presented. the Supervisory Body that can be a collective or a one-man body Creditors can attempt to block the adoption of a stabilisa- whose main role is to supervise the actions of the distressed tion plan by: i) raising objections against the inclusion of other company/debtor, and the proper execution of the plan. Certain creditors in the list of creditors entitled to vote for the stabi- actionsf o the distressed company/debtor may only be performed lisation plan; and ii) personally voting against the stabilisation after being approved by the Supervisory Body. It may, at any plan. Shareholders, on the other hand, can influence the whole given time, request information from the management of the procedure by giving instructions to the management, the latter distressed company/debtor with regard to the fulfilment of the being the only body entitled to draft, submit and elaborate on approved plan. the stabilisation plan. In other words, the shareholders (or at least the majority of them) would be indirectly triggering, or at least aware of, the initiation of the stabilisation procedure and 3.5 What impact does each restructuring procedure the contents of the stabilisation plan. Upon the opening of the have on existing contracts? Are the parties obliged to stabilisation proceedings, all enforcement, including against perform outstanding obligations? What protections are there for those who are forced to perform their secured assets, is ex lege stayed. outstanding obligations? Will termination and set-off Dissenting creditors with receivables originating before the provisions be upheld? stabilisation procedure can actually be forced to comply with the approved stabilisation plan, as long as all of the following requirements are met: i) the plan has been approved by more As a rule of thumb, each and every contract that has not been than 50% of the creditors entitled to vote in the respective class; fully or partially fulfilled by the financially distressed company/ ii) more than 75% of the creditors entitled to vote in the respec- debtor could be terminated by the trustee in the stabilisation tive class have taken part in the voting; iii) creditors holding procedure and by the insolvency administrator in the insol- more than 75% of all receivables have approved the plan; and iv) vency proceedings. Apart from that general rule, and as long as the plan complies with all other statutory requirements. a stabilisation or recovery plan has been voted for and approved, existing contracts are impacted by the stabilisation or recovery plan only insofar as the respective liabilities and receivables 3.3 What are the criteria for entry into each under the contracts are to be reorganised or rescheduled with restructuring procedure? the plan. In any case, the financially distressed company/debtor is It is not necessary to meet specific requirements in order to obliged to perform all outstanding discounted obligations enter into an informal out-of-court restructuring procedure. It under the approved plan according to the approved repayment is crucial for the debtor or the financially distressed company to schedule, otherwise the distressed company/debtor risks being have a basic understanding with its creditors regarding the core dragged into insolvency proceedings and/or having the initial, of the restructuring that is to take place. undiscounted amount of obligations restored. Entering into a formal stabilisation procedure requires the Termination and set-off provisions in already concluded distressed company to submit a formal application with the contracts would be normally upheld, unless otherwise stipulated court. This application must contain various data, information in the plan. and attachments, including, inter alia, a detailed description and elaboration regarding the company’s: i) liabilities towards its 3.6 How is each restructuring process funded? Is any creditors; ii) property status and its collateralisation; iii) ongoing protection given to rescue financing? arbitration, enforcement proceedings and business activity for the past three years; iv) disposed assets for the past three years; v) reasons that led to the distressed financial situation; vi) In a stabilisation procedure, the restructuring process is always proposal regarding the terms and conditions, under which the funded by the distressed company whereas in open insolvency creditors’ receivables will the honoured; and vii) possible guar- proceedings, expenses are to be borne by the creditors if they antees and collaterals, along with management, organisational, are proposing the recovery plan, or by the insolvency estate – legal, financial and other changes, that the company is ready provided that the recovery plan is proposed by the debtor itself to provide and undertake to secure the proper execution of the or by the insolvency administrator. stabilisation plan. As far as the recovery plan procedure is concerned, the latter 42 Insolvency Procedures should have the following mandatory content: i) extent of satisfying the approved claims; ii) guarantees provided to each class 4.1 What is/are the key insolvency procedure(s) of creditors; iii) managerial, organisational, legal, financial, tech- available to wind up a company? nical, and other actions needed for the plan to be fulfilled; iv) information regarding the influence on the debtor’s employees; The insolvency procedure itself ends up with the winding up and v) other statutory information. and strike off of the debtor from the commercial register, save

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for cases when, after the insolvency estate encashment, all credi- However, liquidators are to invite company’s creditors to tors’ claims are honoured and there is free property left. claim any outstanding amounts they have towards the company and duly inform them that the company has closed for business. New contracts cannot be concluded, save for cases where 4.2 On what grounds can a company be placed into each winding up procedure? the new contract shall serve the very purpose of the winding up procedure (i.e. safeguarding the company’s assets, evaluation of the property, etc). Winding up of a company can generally be the result of: i. an insolvency procedure; ii. expiration of a predetermined company’s duration period; 4.6 What is the ranking of claims in each procedure, iii. a decision of the company’s shareholders; including the costs of the procedure? iv. merging of companies into a joint-stock company or a limited liability company; The ranking of claims within the insolvency procedure is as v. a court decision based on: i) a request by the company’s follows: shareholders; ii) a request by a prosecutor; or iii) a request i. pledge or mortgage secured claims; by a creditor of a shareholder of the company; and ii. lien-based claims; vi. the death of the sole shareholder of a company who is a iii. insolvency-related expenses; natural person. iv. employment-related claims for employment relations that occurred before the opening of the insolvency proceedings; v. allowance owed to third persons; 4.3 Who manages each winding up process? Is there any court involvement? vi. public claims of the state and the municipalities (taxes, customs levies, duties, fees, mandatory insurance instal- ments and others) arisen before the opening of the insol- A winding up process resulting from: vency proceedings; i. insolvency proceedings, is managed by the court, the cred- vii. claims due arisen after the opening of the insolvency itors and the insolvency administrator; proceedings; ii. the expiration of a predetermined duration period of viii. all other unsecured claims arisen before the opening of the a company, is managed by the company’s liquidator insolvency proceedings; (normally the company’s former manager or another ix. claims for statutory or contractual interest on an unse- person to be appointed by the company’s shareholders); cured claim; iii. a shareholders’ decision, is managed by the company’s x. shareholder’s claims for a loan extended to the debtor; liquidator (normally the company’s former manager or xi. claims arising from a gratuitous transaction; and another person to be appointed by the company’s share- xii. creditors’ expenses related to their participation in the holders); and insolvency proceedings. iv. a court decision, is managed by the company’s liquidator The ranking of claims within all other winding up proceed- (normally the company’s former manager or another ings is as follows: person to be appointed by the company’s shareholders, the i. collateralisation and enforcement expenses-related claims; court, or the commercial register). ii. certain public claims of the state and the municipalities; iii. pledge or mortgage secured claims; 4.4 How are the creditors and/or shareholders able iv. lien-based claims; to influence each winding up process? Are there any v. employment and allowance-related claims; and restrictions on the action that they can take (including vi. state claims, other than fines. the enforcement of security)?

4.7 Is it possible for the company to be revived in the As long as the winding up procedure is performed separately future? from the insolvency proceedings, creditors have no effective tools to influence the winding up procedure, apart from the Reviving a company after it has been de-registered from the right to raise their claims against the company’s liquidator. They commercial register is rare and only possible after the end of can freely initiate any actions against the company (including an insolvency procedure (and not after the strike-off of the enforcement of security) up until the moment the company is company from the commercial register on other grounds). A dissolved and de-registered from the commercial register. debtor may be revived, and insolvency proceedings may be Shareholders, on the other hand, have all legal means and resumed by a court decision, provided that within one year after power to influence and steer the winding up proceedings. In the insolvency proceedings termination: i) amounts set aside for most cases, shareholders are those who start the winding up and litigated claims are released; and ii) assets of which the exist- approve its liquidator. ence was unknown during the bankruptcy proceedings are discovered. 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform 52 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? Winding up procedures performed separately from the insolvency proceedings have no direct effect on existing contracts – these must be fulfilled and complied with by both parties as As a general rule, the debtor or the company that is being restruc- initially agreed upon. tured or dissolved within an insolvency proceeding continues to be liable for the tax due, whereby those liabilities rank in the

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manner described in question 4.6 above. Subordination or 7.3 Do companies incorporated in your jurisdiction waiver of receivables could be recognised as taxable gain, which restructure or enter into insolvency proceedings in other can on the other hand be offset against current losses or loss jurisdictions? Is this common practice? carry-forwards. Companies incorporated in Bulgaria would be able to enter into 62 Employees insolvency proceedings in other European jurisdictions, as long as they are able to prove that their centre of main interests is in 6.1 What is the effect of each restructuring or the respective jurisdiction, which is rather uncommon. insolvency procedure on employees? What claims would employees have and where do they rank? 82 Groups

Within one month from the opening of the insolvency proceed- 8.1 How are groups of companies treated on the ings, the debtor is obliged to terminate employment contracts insolvency of one or more members? Is there scope for with employees, notify the tax authorities thereof, issue the co-operation between officeholders? necessary employment documents to the former employees, and prepare lists of the employees entitled to guaranteed claims In Bulgaria, each company is legally regarded as a separate legal under the Act on Guaranteeing Receivables of Employees in entity, whether or not it is a part of a group. Hence, a sepa- Case of Bankruptcy of the Employer. In cases of large-scale rate insolvency proceeding is to be opened for each company, dismissals, the debtor should also conduct preliminary consulta- provided the legal grounds for this are present (save for the cases tions with the trade union representatives and notify in advance where insolvency proceedings are deemed automatically opened the labour inspection authorities. for another company concealing commercial activity by means A special guarantee fund with the National Social Security of an illiquid company which is rather uncommon in practice). Institute guarantees the employee’s claims for up to six unpaid salaries or labour-related compensations in case of an employ- 92 Reform er’s insolvency. The ranking of the employees’ claims themselves is elaborated in question 4.6 above. 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction? 72 Cross-Border Issues In 2018, Bulgaria approved an action plan with specific meas- 7.1 Can companies incorporated elsewhere use ures in order to fulfil the requirements to join the EU Exchange restructuring procedures or enter into insolvency proceedings in your jurisdiction? Rate Mechanism II and the Banking Union. The ongoing reform itself shall consist of: i. Revising the existing insolvency and stabilisation frame- In accordance with Regulation (EU) 2015/848, the courts in work and finding any shortcomings and obstacles to the Bulgaria would have jurisdiction to open insolvency proceed- system’s effectiveness, and providing recommendations ings, as long as the centre of main interests (being the place for addressing the weaknesses identified. where the debtor conducts the administration of its interests on ii. Reviewing the existing system for data collection and a regular basis and which is ascertainable by third parties) of a publication, defining a data collection and publication European-based debtor is situated in Bulgaria. strategy, and selecting a data collection and publication model on the basis of the European Member States’ best 7.2 Is there scope for a restructuring or insolvency practices. process commenced elsewhere to be recognised in your iii. Drawing up a road map on the implementation of the jurisdiction? recommendations relating to the insolvency framework and on the introduction of the data collection and publi- Pursuant to the same Regulation, the opening of insolvency cation model (including legal changes aimed at: implemen- proceedings handed down by a court of a European Member tation of early warning systems; fast-track procedures for State shall also be recognised in Bulgaria from the moment that small enterprises; shortening of procedural timeframes it becomes effective in the State of the opening of proceed- within the insolvency proceedings; new mechanisms for ings. As far as non-European States are concerned, insolvency securing bridge financing for the debtor; an overall reform proceedings can only be recognised in Bulgaria, as long as this of the current recovery procedure; higher effectiveness for is provided for in an international treaty to which Bulgaria is a encashing the insolvency state; and additional safety meas- party. ures preventing stakeholders from misusing the stabilisation and insolvency proceedings). iv. Extensive training of insolvency administrators, trustees, fiduciaries and judges.

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Konstantin Vassilev, LL.M. Finance, is Founder and Managing Partner of Vassilev & Partners Law Firm. He is a fully-qualified lawyer admitted to the Sofia Bar Association. Konstantin maintains an international practice focused on the corporate and finance field with an emphasis on restructuring and insolvency issues. He frequently represents clients on multi-jurisdictional matters. Konstantin is included in the list of persons who can be elected as an insolvency administrator held by the Ministry of Justice in Bulgaria. He speaks English, German, French and Russian.

Vassilev & Partners Law Firm Tel: +359 2 474 43 06 9 Pozitano Str., Building 1, Entrance B Email: [email protected] Second Floor, Office 4 URL: www.kvlaw.bg Sofia 1463 Bulgaria

Vassilev & Partners Law Firm is a dynamic and business-oriented law practice that provides high-quality legal services to local and foreign corporate clients. The firm provides a full range of legal analyses and due diligence investigations, legal advisory, legal subscription services, participation in negotiations, and legal representation before judicial and extrajudicial institutions, state officials and third parties. Recognised by clients as a reputable and trusted law firm, its expert team supports companies facing financial difficulty to find the most efficient solution for their business. Vassilev & Partners Law Firm serves clients in Bulgarian, English, German, French and Russian. www.kvlaw.bg

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England & Wales & Wales England

Jat Bains

Macfarlanes LLP Paul Keddie

12 Overview English law also provides for two types of court-approved restructuring processes – company voluntary arrangements (“CVAs”) and Schemes. Whilst there are a number of differ- 1.1 Where would you place your jurisdiction on the ences between the two processes, each essentially allows a spectrum of debtor to creditor-friendly jurisdictions? 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 juris- to restructure its affairs, which binds all creditors (regardless of diction and, in particular, friendly towards secured creditors. whether they voted in favour or not). Enforcement of security in the UK is regularly carried out without the need for any court involvement other than the filing 22 Key Issues to Consider When the of certain prescribed forms. Notarisation or similar require- Company is in Financial Difficulties ments that can sometimes delay enforcements in other jurisdictions are also not required. Consequently, English law is often chosen as the governing 2.1 What duties and potential liabilities should the law of contracts and disputes are litigated in the English courts directors/managers have regard to when managing a company in financial difficulties? Is there a specific by both local and overseas parties. A number of high-profile point at which a company must enter a restructuring or cross-border restructurings have also been conducted using insolvency process? English law-governed documents and the English courts have been flexible in facilitating the use of English law to govern proceedings concerning overseas companies. In the context of English law does not prescribe a set point in time at which a restructurings, this is perhaps best demonstrated by the sanc- company’s directors must file for insolvency. It is the duty of the tioning of a number of schemes of arrangement (“Schemes”) directors to decide the appropriate time to file (although secured proposed by foreign companies in the English courts, even creditors may, in practice, take the decision to enforce and put where those companies have a limited connection to the UK the company into an insolvency process prior to the directors (such as English law-governed finance documents which are taking action). being amended via the Scheme). The main impetus for directors in this respect is that directors of companies who knew, or should have known, that the company of which they are a director had no reasonable pros- 1.2 Does the legislative framework in your jurisdiction pect of avoiding entering an insolvency process, but caused allow for informal work-outs, as well as formal creditors to incur losses after that point, can be personally liable restructuring and insolvency proceedings, and to what to compensate creditors for those losses. This is known as extent are each of these used in practice? “wrongful trading”. Consequently, directors are often eager to file for insolvency without too much delay, although a prema- Informal work-outs without any court involvement or the use of ture filing which causes losses to creditors also presents a risk formal insolvency proceedings are common in the English market. to directors. Such work-outs can take a variety of forms and range from (for Further, from the point at which a company becomes insol- example) amendments to credit agreements to relax covenant vent under English law (either on a “balance-sheet basis” – the testing levels or extend maturity dates to debt-for-equity swaps. company’s liabilities exceed the value of its assets – or on a “cash- There are also a number of formal insolvency processes avail- flow basis” – the company owes a liability or liabilities that it is able under English law. A commonly used insolvency process unable to pay when due), the directors of the company must have is administration, pursuant to which a licensed professional is their primary regard to the interests of the company’s creditors. appointed to manage a company’s affairs in place of its directors. Prior to that point, it is the company’s shareholders to whom the The administrator has extensive powers to trade the company directors should have their primary regard. Breaching this duty and may also dispose of the company’s assets, either after a and causing the company’s creditors to incur losses by doing period of trading or immediately upon his appointment (known so risks the director being personally liable for the offence of as a “pre-pack” sale). “misfeasance” if the company subsequently enters liquidation. The alternative to administration is liquidation, which is primarily used in respect of companies which have insufficient remaining assets to be traded or sold and whose affairs are therefore being wound down.

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2.2 Which other stakeholders may influence the example, because the counterparty to the transaction was company’s situation? Are there any restrictions on the dealing with the company in good faith and it would there- action that they can take against the company? For fore be unfairly detrimental to that counterparty if the trans- example, are there any special rules or regimes which action was clawed back), the directors can be ordered to make a apply to particular types of unsecured creditor (such compensatory payment to the company’s creditors for the losses as landlords, employees or creditors with retention caused. of title arrangements) applicable to the laws of your The main types of challenge are: jurisdiction? Are moratoria and stays on enforcement available? ■ transactions at an undervalue where the company gifts or disposes of assets for significantly less than their market value. The transaction must have occurred within two The “pari-passu” principle provides that a company’s ordinary, years of the commencement of the administration or liqui- unsecured creditors should be treated the same and without dation and the company must have been insolvent at the preference between them within an English insolvency process. time of the transaction or become insolvent as a result; However, certain types of unsecured creditors are granted ■ preferences where a company does something or causes certain additional rights and given a different status notwith- something to be done which has the effect of putting a standing the application of that principle: creditor in a better position upon the company entering ■ employees rank ahead of other unsecured creditors to the administration or liquidation than it would have otherwise extent of their “preferential claims” against the company been. In order to be challenged the preference must have – these are claims for certain liabilities such as wages and occurred within two years (if to a person connected with unpaid holiday pay owed to the employee up to certain the company) or six months (if to an unconnected person) prescribed limits. Claims in excess of those limits rank prior to the commencement of the liquidation or admin- alongside all other unsecured claims against the company; istration. The company must also have been motivated by ■ landlords of commercial property are granted certain the “desire” to prefer the recipient of a preference for the rights to seize a company’s assets, sell them and apply the challenge to be successful; and proceeds towards unpaid rent due by the company) and to ■ invalidation of floating charges (which are a type of secu- forfeit (i.e. terminate) a lease if it is breached. These rights rity which “floats” over a company’s non-fixed, movable do not automatically terminate upon a company entering assets, such as stock) that are entered into by a company insolvency; however, the moratorium against creditor within two years (for floating charges granted to connected action which applies in administrations prevents a land- persons) or one year (for floating charges granted to lord from taking any such action without the benefit of a unconnected persons) prior to it entering administration court order or the consent of the administrator; and or liquidation. The invalidity is only to the extent that ■ suppliers of goods to a company may include retention of they secure “old” consideration. This would apply if, for title clauses in the terms of their supply which provide that example, no new money was advanced by the recipient of the supplier retains title to the relevant goods until those the floating charge when it was granted by the company. goods are, either by themselves or along with all other goods supplied by that supplier, sold by the company. Such clauses survive the company entering an insolvency 32 Restructuring Options process and therefore mean that the administrator or liquidator either has to set aside the proceeds of a sale of the 3.1 Is it possible to implement an informal work-out in relevant goods and pay them to the supplier (rather than your jurisdiction? distribute them to all creditors equally) or allow the relevant supplier to collect the goods from the company’s Yes – there are a number of tools available to companies and premises if they are not necessary to the conduct of the creditors which wish to restructure the Company’s obliga- proceedings. tions under English law financing contracts. The Loan Market A moratorium on creditor action comes into effect upon a Association’s (“LMA”) recommended forms of loan facility company entering administration with a two-week interim documentation contain extensive amendment and waiver provi- moratorium also available when a preceding notice of intention sions. These govern, amongst other things, the percentage by to enter administration is filed at court. A moratorium prior face value of a company’s lenders (usually a “majority” of lenders to a CVA is currently only available to companies with turn- holding in aggregate more than two-thirds of the participations over, assets and employees below certain (relatively low) thresh- under the relevant loan, or for certain exceptional changes, all of olds and is little used. The courts have been willing to use their those lenders) required to vote in favour of steps such as waivers general case management powers to stay creditor action where of debt, conversions of debt into equity, re-setting of financial preparations for a Scheme are at an advanced stage (although covenants and disposals of assets. there is no statutory moratorium available). Schemes are often used to push through restructurings where finance documents require the approval of 100% of the company’s lenders to amendments and waivers required in connec- 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of tion with the restructuring. If the company cannot secure the challenge? What remedies are available? consent of all of its lenders, but has the approval of the requisite number of creditors to approve a Scheme (see below), the company can use a Scheme to effect the relevant amendments Certain types of transactions entered into by a company prior to and waivers which, if approved, binds all of the company’s its entry into administration or liquidation can be challenged by creditors. the administrator or liquidator. If that challenge is successful, the transaction can be unwound or, if that is not possible (for

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3.2 What formal rescue procedures are available 3.3 What are the criteria for entry into each in your jurisdiction to restructure the liabilities of restructuring procedure? distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures A company must be insolvent (on either a balance-sheet or cash- or threaten action (including enforcement of security) flow basis) in order to be placed into administration by its direc- to seek an advantage? Do your procedures allow you tors. In order for a secured creditor to appoint an adminis- to cram-down dissenting stakeholders? Can you cram- trator to a company the creditor’s security must be enforceable down dissenting classes of stakeholder? in accordance with its terms. Schemes and CVAs can be initiated by the directors of a Schemes and CVAs are commonly used for companies looking company at any time but, as mentioned above, require a certain to restructure their liabilities. Each process causes creditors who threshold of creditors to vote in their favour together with, in vote against it (or, in the case of a Scheme, creditors who have the case of a CVA, the consent of any affected secured creditors. no economic interest in the Scheme and are not being affected by it) to be crammed down provided that a requisite number of 3.4 Who manages each process? Is there any court creditors vote in favour. In the case of a CVA, at the meeting involvement? convened to vote on the CVA, 75% by value of the companies’ unsecured creditors present or voting by proxy (provided that Administration and liquidation no more than 50% by value of any creditors who vote against the A qualified insolvency practitioner must be appointed as an proposal are creditors who are unconnected with the company) administrator or liquidator of a company and, for all intents must vote in favour of the CVA. If approved, the CVA binds all and purposes, manage the company in place of its directors of the companies’ unsecured creditors, although it cannot affect (including to effect a pre-pack). the rights of a secured creditor without its consent. A Scheme requires that creditors (both secured and unse- Schemes and CVAs cured) are divided into classes, based on commonality of their In a CVA, a qualified insolvency practitioner will act as “super- rights against the company, to vote on the Scheme. Each class visor” of the CVA and carry out the steps and actions provided must then vote on the Scheme at a meeting held for that purpose for in the CVA proposal (which sets out the terms of the CVA). and provided that 75% by value and a majority in number of The directors remain in control of the company, although they each class of creditors present (in person or by proxy) at such will co-operate with the CVA supervisor in order for it to be meetings vote in favour, and provided the Scheme is sanctioned properly implemented. There is no requirement for a quali- by the court, the Scheme binds all creditors of the company. If fied insolvency practitioner to supervise a Scheme, it is simply a company can demonstrate that a particular class of creditors carried out by the company’s directors in accordance with the is not affected by the Scheme (usually “out of the money” credi- terms of the Scheme. tors who have no economic interest in the company), such class A CVA proposal must be filed at court and creditors who feel will not be required to vote on the Scheme. they have been unfairly prejudiced by a CVA or there has been Creditors are able to challenge Schemes and CVAs on the a material irregularity in the CVA process may challenge a CVA basis of being treated unfairly in comparison to other creditors, via a court application within 28 days of its approval. or that the outcome of the CVA or Scheme realises a poorer There is more court involvement in a Scheme as the court result than an alternative process. Furthermore, other than in must, at a first hearing, approve the company’s classification the case of relatively small companies proposing a CVA, there of its creditors to vote on the Scheme in meetings convened is no moratorium or stay on creditors threatening enforcement for that purpose. They must then, if the requisite number of prior to the Scheme or CVA being approved, which can poten- creditors vote in favour of the Scheme at those meetings and tially disrupt the process (although the courts are becoming assuming that the court is satisfied that the Scheme is fair to increasingly willing to stay enforcement action by creditors the company’s creditors, “sanction” and approve the Scheme at which would disrupt a Scheme that has reached an advanced a second hearing. stage and would produce a more favourable outcome for creditors than if that enforcement action was allowed to proceed). Pre-packaged sales are also frequently used as a means to 3.5 What impact does each restructuring procedure restructure a company’s liabilities by transferring the company’s have on existing contracts? Are the parties obliged to assets to a newly incorporated subsidiary free of any liabilities perform outstanding obligations? What protections are there for those who are forced to perform their which the company is unable to pay in full, or to effect a sale outstanding obligations? Will termination and set-off of a company to a third party. A pre-pack involves the docu- provisions be upheld? mentation and terms of the sale being negotiated and agreed in advance and then completed by the administrator immediately upon, or shortly after, their appointment. This is often A company entering into an insolvency process does not automat- preferable to the sale being executed by the company’s direc- ically cause contracts to which it is a party to terminate, although tors because it is the administrator, rather than those directors, those contracts may contain terms which allow the counter- who bears the responsibility of ensuring that the assets are sold party to terminate the contracts upon the process commencing. for the best possible value. Furthermore, a pre-pack sale is often Certain essential utilities and IT suppliers may not terminate executed quickly and can be publicised to creditors and third their contracts as a result of their customer entering adminis- parties as a way of rationalising a company’s liabilities so it can tration or a CVA. The relevant suppliers are protected by virtue trade on successfully, which reduces the “stigma of insolvency” of payment for post-administration supplies having the higher for the company. priority of an expense of the administration and, in addition, the Currently it is not possible to cram-down a dissenting class suppliers may apply to court to terminate the contract if contin- with a Scheme or a CVA (such that a Scheme will fail if a class uing to supply the company is causing them hardship. votes against it).

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An administrator or liquidator may simply refuse to perform the process and, in an MVL, that the directors swear the decla- the company’s obligations under contracts if doing so is in ration of solvency referred to above. the best interests of the company’s creditors. Creditors are Compulsory liquidation requires that one or more prescribed prevented from court action to enforce breaches of contract circumstances apply to the company. Usually, this is that it can without the administrator/liquidator’s approval or an order of be proved to the court that the company is “unable to pay its the court and even if action is successfully taken, the counter- debts” (i.e. is insolvent on either a balance-sheet or cash-flow party has an unsecured claim against the company which ranks basis) which is often demonstrated by serving demand on the alongside all other unsecured creditors (so effectively is not company to pay amounts owed to the petitioning creditor which, worth pursuing). if not paid, can then be used as evidence that the company is A liquidator has additional powers to “disclaim” unprofit- cash-flow insolvent. able contracts (including leases) to which the company is party (which has the effect of determining the counterparty’s rights 4.3 Who manages each winding up process? Is there under the contract upon the disclaimer becoming effective and any court involvement? entitles the counterparty to an unsecured claim against the company). There is court involvement in respect of a compulsory liquidation, which requires a court hearing to order that the company 3.6 How is each restructuring process funded? Is any enters liquidation. Voluntary liquidations do not usually require protection given to rescue financing? any involvement of the court. Once the company has entered liquidation, the liquidation process is managed by the liquidator If an administrator or liquidator trades a business, the costs (with the sanction of shareholders or creditors – see below). and expenses of the process (including their fees) will usually be discharged from the receipts of the trading. An adminis- 4.4 How are the creditors and/or shareholders able trator or liquidator may also seek additional funding which is to influence each winding up process? Are there any then repaid as an “expense of the administration or liquidation” restrictions on the action that they can take (including (ranking above ordinary unsecured claims). However, outside the enforcement of security)? of that possibility, within a formal insolvency process there is no statutory mechanism for rescue/debtor in possession financing Liquidation, unlike administration, does not impose a morato- under English law. rium on the rights of secured creditors to enforce their security, so a liquidator will either obtain the consent of the relevant 42 Insolvency Procedures secured creditor before dealing with any secured assets or allow that creditor to take its own action in respect of those assets. 4.1 What is/are the key insolvency procedure(s) Compulsory liquidation does, however, impose a stay on court available to wind up a company? proceedings, which can only be lifted with the consent of the liquidator or approval of the court. Companies looking to wind down their affairs, and creditors who Liquidators (also unlike administrators) can only take certain wish for a company to be wound up, can initiate a liquidation, actions if sanctioned to do so. In an MVL, this sanction comes whereby a liquidator realises the company’s assets, distributes the from shareholders. In a CVL, sanction must be obtained from proceeds to creditors and then winds the company down. creditors. It is also common, at least in larger liquidations, for There are two types of liquidation: voluntary liquidation; a committee of three to five creditors to be formed as a repre- and compulsory liquidation. Voluntary liquidations can either sentative body and to, amongst other things, scrutinise the steps be made on a “solvent” basis (known as a members’ voluntary taken by the liquidator and approve certain actions taken by liquidation (“MVL”)) where the company’s directors are willing them. to swear a statement to the effect that the company has sufficient assets to meet its liabilities over the next 12 months, or on 4.5 What impact does each winding up procedure have an “insolvent” basis (known as a creditors’ voluntary liquidation on existing contracts? Are the parties obliged to perform (“CVL”)) where the directors are unwilling or unable to give outstanding obligations? Will termination and set-off that statement. Both types of voluntary liquidation are initiated provisions be upheld? by a company’s shareholders; however, in an MVL, the shareholders nominate the liquidator, whereas in a CVL the creditors Termination is covered above. Set-off provisions in contracts have the final say in the choice of liquidator. are, however, superseded by mandatory set-off rules which Compulsory liquidation is made by filing a petition at court, apply in liquidations and which provide that amounts owed by followed by a court hearing. A hearing of the petition is then a creditor to the company are set off against amounts that the held at court and if it can be demonstrated to the court that company owes to the creditor (with only the net balance, if any, one or more prescribed circumstances applies to the company being claimable by that creditor). (usually that the company is insolvent), the company is placed into liquidation. 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 4.2 On what grounds can a company be placed into each winding up procedure? Creditors holding “fixed” charges over a company’s assets (essentially a charge over assets which the company is not able to freely Voluntary liquidations require a resolution of the company’s deal with, such as property) rank first, followed by the expenses shareholders (the exact proportion of those shareholders which and f costs o the liquidation/administration. Creditors with are required to pass the resolution will be determined by the “preferential” claims (usually only employees for unpaid wages, company’s constitutional documents – usually 75%) to initiate

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holiday and pension contributions up to certain prescribed Liquidation limits) rank next, followed by creditors with “floating” charges A company entering compulsory liquidation automatically over the company’s assets (assets which the company can freely causes its employees’ contracts of employment to terminate. deal with, such as stock). A fund of up to £600,000 is also The liquidator then has to re-employ any employees needed for set aside for unsecured creditors from realisations of floating the conduct of the liquidation. Voluntary liquidation does not charge assets known as the “prescribed part”. If there are suffi- automatically terminate employment contracts, although the cient funds available after the prior-ranking amounts have been liquidator can simply refuse to perform employment contracts paid in full, a distribution can then be made to unsecured cred- (with the result that the affected employee(s) can then claim as a itors. In the somewhat unlikely scenario that unsecured credi- creditor of the company for amounts owed to them). tors are paid in full, they are then entitled to claim interest for the f period o administration/liquidation on their claims and, in 72 Cross-Border Issues the even more unlikely scenario that all such claims to interest are paid in full, any surplus is distributed to the shareholders. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency 4.7 Is it possible for the company to be revived in the proceedings in your jurisdiction? future? Yes. The EC Regulation on Insolvency Proceedings (the “EC Yes, in theory, a company that is wound down and dissolved Reg”) will continue to apply as if the UK was a member of (which is the outcome at the culmination of a liquidation) can the EU until 31 December 2020. This provides that compa- be restored for up to six years after it is dissolved by court order, nies incorporated in the EU but which have their “centre of although this is extremely rare. main interests” (“COMI”) (being their primary place of business activity) in England or Wales can commence administra- 52 Tax tions, liquidations and CVAs (each of which are governed by the EC Reg) in England or Wales as “main proceedings”. EU companies which do not have their COMI in England or Wales 5.1 What are the tax risks which might apply to a but which have a non-transitory “establishment” here may open restructuring or insolvency procedure? “secondary” proceedings which are restricted to assets situated in England or Wales. CVAs and Schemes In the event that no agreement is reached between the UK A company is taxed in the usual way whilst going through a CVA and the EU, after 31 December 2020 the EC Reg will no longer or Scheme. However, releases of debt usually incur a tax charge by apply to the UK and without any replacement legislation, each the company although this can be avoided if made pursuant to a Member States’ private laws will dictate whether UK proceed- CVA or Scheme (which is an added benefit of the CVA or Scheme). ings are recognised by its courts. It is expected that a company having its COMI in England and Wales will continue to be the Administration and liquidation main consideration in the English courts’ decision to accept Unpaid tax at the commencement of the administration or liqui- jurisdiction over the company’s insolvency. However, without dation is simply an unsecured debt of the company. Corporation the EC Reg the English courts will not be prevented from tax on gains which arise from the disposal of assets during the accepting jurisdiction over the insolvency of a company which period of the administration or liquidation is paid as an expense has its COMI in a remaining EU Member State. of the administration or liquidation. There is no requirement for a company to have its COMI or an establishment in England or Wales in order to propose 62 Employees a Scheme. Instead, overseas companies have been able to use Schemes where those companies have demonstrated a “suffi- 6.1 What is the effect of each restructuring or cient connection” to England and Wales. The existence of insolvency procedure on employees? What claims would such a connection has been interpreted widely by the courts employees have and where do they rank? over recent years so that companies have been able to (amongst other things) amend the governing law of finance documents to CVAs and Schemes English law in order to establish such a connection. CVAs and Schemes have no direct impact on a company’s employees. 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your Administration jurisdiction? Contracts of employment do not automatically terminate upon the appointment of an administrator. There is a 14-day period Yes. The UK will continue to recognise the insolvency proceed- which commences upon a company entering into administra- ings of an EU Member State under the EC Reg until at least 31 tion during which the administrator can dismiss any employees December 2020, though at the time of writing there is uncer- who are not required for the conduct of the administration. tainty over whether this will be the case after that date. Despite Wages, holiday and sickness pay and pensions contributions due this, recognition of proceedings in jurisdictions outside the to employees retained after this period are paid as expenses of EU (and possibly within the EU from 31 December 2020) is the administration. If the administrator sells the company as a provided for in the UNCITRAL Model Law on Cross-Border going concern (either after a period of trading or as a pre-pack) Insolvency, which has been enacted into English law. English employees, as well as liabilities owed to those employees, auto- law does not require reciprocal adoption of the UNCITRAL matically transfer to the buyer. Determining the number of Model Law by the foreign jurisdiction in order for the relevant such employees and the sums owed to them is therefore a key proceedings to be recognised in the UK. However, the English area of diligence in sales by administrators.

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courts will not allow an English law debt to be compromised by 92 Reform a foreign restructuring or insolvency process where the creditors have not submitted to that foreign jurisdiction. 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in 7.3 Do companies incorporated in your jurisdiction your jurisdiction? restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? The UK government is planning to introduce a special administration regime for airlines which aims to allow the orderly repa- Not commonly; because the English system is generally triation of passengers following the insolvency of an airline. perceived to be creditor-friendly, companies incorporated in Changes to the ranking of debts in insolvency are also expected England and Wales (and their creditors) will usually want to use which will give certain indirect taxes collected by companies on English insolvency and restructuring proceedings. The only behalf of HM Revenue and Customs (included value added tax) real exception to this is, whilst also uncommon, companies priority over holders of floating charges and unsecured creditors. establishing a link to the USA (which can simply just involve Disappointingly, despite consulting on a range of restruc- opening a bank account or having a retainer with a law firm) in turing reforms, the UK government has not included these in order to use Chapter 11 bankruptcy and benefit from the exten- its legislative programme for this year. The reforms would have sive automatic stay on proceedings it affords, will generally be included: recognised by the English courts. ■ a general moratorium on creditor enforcement which would initially be for 28 days but could be extended; 82 Groups ■ a ban on clauses that allow suppliers to terminate supply contracts due to a company’s insolvency; and 8.1 How are groups of companies treated on the ■ a new restructuring plan that would be similar to a Scheme insolvency of one or more members? Is there scope for but allow for the cram-down of a dissenting class of cred- co-operation between officeholders? itors where at least one class which will suffer an impairment on its debt (subject to no impaired class being paid Each company within a group is, for the purposes of English in priority to any senior ranking classes via the plan) law, treated as distinct so there is no concept of group-wide approves the plan and a court considers it “fair” (particu- proceedings. Each company in a group will, therefore, need to larly in comparison to the likely alternative of administra- go into an insolvency process on an individual basis although tion or liquidation). it is common for the same administrator or liquidator to be The government’s plans to introduce potential liability for appointed to multiple companies within a group. directors of a holding company that disposes of an insolvent This is in contrast to the position in respect of cross- subsidiary which shortly afterwards goes into administration or border insolvencies involving companies within the EU. A liquidation have also not made it into the legislative programme. “group co-ordinator” can be appointed in such proceedings, to There will potentially also be changes to recognition of cross- co-ordinate proceedings in a number of jurisdictions and generally border insolvencies within the EU and the UK after the end of preside over them (albeit that the proceedings themselves will the post-Brexit transition period (see questions 7.1 and 7.2). still be conducted by the office-holders appointed to the various insolvent companies).

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Jat Bains specialises in a range of debt finance transactions, acting for a diverse range of stakeholders including credit and special situations funds, corporate clients, sponsors, bondholders and senior and mezzanine lenders in relation to, amongst other things, workouts and restructurings. He has been involved in restructurings in a wide range of sectors including retail, healthcare, hotels, consumer lending, technology and media, construction, manufacturing, professional services and infrastructure. Jat is a member of the Institute for Turnaround.

Macfarlanes LLP Tel: +44 207 849 2234 20 Cursitor Street Email: [email protected] London URL: www.macfarlanes.com EC4A 1LT

Paul Keddie advises on a broad range of corporate restructuring and recovery issues. His clients include companies in financial difficulties, their directors and shareholders, insolvency practitioners appointed over such companies, lenders to and other major creditors of troubled entities, investors interested in a “loan-to-own” strategy and buyers of businesses where there is an insolvency aspect. Paul is a qualified insolvency practitioner, having passed the Joint Insolvency Examination Board examinations, and is the co-author of the Insolvency and Restructuring Manual, 3rd Edition, which was published by Bloomsbury in 2018.

Macfarlanes LLP Tel: +44 207 849 2894 20 Cursitor Street Email: [email protected] London URL: www.macfarlanes.com EC4A 1LT

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Tuomas Koskinen

Waly & Koskinen Attorneys Ltd. Sami Waly

12 Overview 22 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 juris- company in financial difficulties? Is there a specific diction. Both the legal framework and the praxis support the point at which a company must enter a restructuring or insolvency process? enforcement of debt obligations through bankruptcy and 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 Simultaneously, the statutory restructuring procedure avail- a company have a general duty to act in the best interests of the able to debtors is a debtor-friendly process. Entering into company and to prudently ensure the protection of the interests restructuring gives the debtor an extensive protection from the of the company. Finnish company legislation does not recognise enforcement of pre-existing debts. In court practice, debtors are any special interests owed to parent companies or other group often allowed to enter into restructuring. However, a successful companies, and as such, all decisions must be done with the restructuring process requires co-operation between the debtor corporate benefit of each individual company in mind. 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 1.2 Does the legislative framework in your jurisdiction criminal or civil liability if they continue to enter into further allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what commitments even while being aware that the company will extent are each of these used in practice? not be able to meet 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 The Finnish legal system has one formal restructuring and dividends from a company in 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 2,597 bankruptcy proceedings and 366 restructuring proceed- action that they can take against the company? For example, are there any special rules or regimes which ings were initiated during 2019. As such, both proceedings are apply to particular types of unsecured creditor (such used in 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? Are moratoria and stays on enforcement practice, a successful informal work-out requires either a limited available? pool of creditors or existence of LMA-style documentation and an intercreditor agreement. Such loan documentation and inter- The legislative framework grants no formal power to stake- creditor agreements are increasingly common among sophisti- holders over a company in financial difficulties which has not cated creditors. Such informal work-outs are much rarer than entered any insolvency procedure. From a purely legal point of the formal proceedings, but on average, they also typically view, the debtor company operates as it would during ordinary concern much larger companies with sophisticated creditors. course of business. Any stakeholder influence over the debtor is the result of contractual arrangements in place or for purely business reasons.

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The primary statutory method of influence granted to stake- 3.2 What formal rescue procedures are available holders is the possibility to file for the debtor company’s bank- in your jurisdiction to restructure the liabilities of ruptcy or restructuring. A creditor has the right to file for the distressed companies? Are debt-for-equity swaps debtor’s bankruptcy almost at will, given that statutory require- and pre-packaged sales possible? To what extent can ments for a bankruptcy filing are met. Creditors may also creditors and/or shareholders block such procedures apply for the debtor’s restructuring, but such applications are or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you uncommon and have limited chance to succeed without the to cram-down dissenting stakeholders? Can you cram- debtor’s co-operation. Influence of stakeholders that are not down dissenting classes of stakeholder? creditors are somewhat more limited. The Finnish enforcement regime contains the possibility to stay an enforcement, but this generally requires the debtor or a Finnish legislation provides one formal restructuring process: third party to provide a security. For this reason, the most prac- the restructuring of a company under the Restructuring of tical legal instrument for achieving the effects of a moratoria Enterprises Act. The purpose of such a restructuring process is is applying for either bankruptcy or the statutory restructuring adopting a restructuring plan acceptable by the creditors. The described later. The effect of applying for a restricting in prac- restructuring plan allows for changes in the debt obligations, tice acts as a moratorium. such as repayment schedule, interest, or the principal itself. In practice, the amount of principal owed is reduced almost as a rule. Secured obligations are protected from this, since the prin- 2.3 In what circumstances are transactions entered cipal of a secured debt cannot be reduced below the secured into by a company in financial difficulties at risk of amount. challenge? What remedies are available? Debt-for-equity swaps and pre-packaged sales are possible; however, the statutory framework provides no tools for forcing The legislative framework for challenging, and potentially such actions. Pre-packaged sales in the form used in, e.g., the recovering, transactions entered into by a company in financial United States or the UK, are not used in Finland. distress is the Act on the Recovery of Assets to a Bankruptcy Creditors may object to the initiation of restructuring by Estate (758/1991). The same Act is also applied to a restruc- lodging their formal opinion to the court. Typically, an appli- turing process and execution proceedings. Any transaction cation with required support is accepted even if some credi- favouring a creditor or other party at the expense of other creditors object. The commencement of restructuring provides for tors by either reducing the debtor’s assets or increasing the debt- a relief period from stakeholder pressure. A security cannot be or’s liabilities is potentially recoverable by the bankruptcy estate enforced during the preparation phase of a restructuring plan, or the administrator of a restructuring procedure. Primary an exception being if the creditor shows that the secured asset is considerations for recovery are whether the debtor is legally unnecessary for the debtor’s business. insolvent and whether the creditor was aware of the debtor’s A restructuring plan is put to creditor vote and it does not insolvency. need to be adopted unanimously. Adopting the plan requires The most significant ground for a challenge is if a debt was reaching a majority in the different creditor groups, most typi- paid during a three-month window prior to commencement cally secured and unsecured creditors. Any dissenting stake- of bankruptcy or a restructuring process. Such a payment holders are automatically crammed down if they form a minority. may be recoverable given three alternative conditions: first, However, a majority must be reached in each class of stake- if the method of payment was unusual (usually, anything else holders and an entire class cannot be crammed down. However, than money); second, if the payment was made in advance to the way that restructuring is set up means that a restructuring becoming due and payable; or, third, in excess of an amount has no realistic chances of succeeding if a majority cannot be considered significant in relation to the estate’s assets. Court reached. practice has established that any payment in excess of 10% of the assets of an estate at the time of bankruptcy is considered signif- 3.3 What are the criteria for entry into each icant in this respect. A counterargument for such recovery is if restructuring procedure? the payment is considered to have been made in the ordinary course of business. The Restructuring of Enterprises Act stipulates that a company 32 Restructuring Options may enter into restructuring proceedings if it lodges its own application or a joint application with its creditors. Creditors have a legal right to apply for restructuring without the debtor, 3.1 Is it possible to implement an informal work-out in but in practice this almost never happens. The criteria, one of your jurisdiction? which must be met, for entry into restructuring are 1) a joint application with, or the consent of, two unaffiliated credi- Yes. The legislative framework has no bars for implementing tors which represent at least 20% of all the debts of the debtor an informal work-out. However, there is no support for such a company, 2) an existing threat of the debtor company becoming work-out either. A method used in practice over purely informal insolvent, or 3) the debtor company being insolvent without any work-outs is one where the largest creditors reach a joint agree- of the obstacles of restructuring being present. ment in advance with the debtor and any opposing minor credi- Various statutory obstacles for entering into a restructuring tors are dealt with using the formal restructuring process. procedure exist, with the court having broad power of interpretation over some. Such obstacles include, e.g., that the criteria

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for initiating restructuring have not been met or that the debtor 42 Insolvency Procedures is trying to avoid debt collection via restructuring. In legal practice, courts apply caution in ruling that such obstacles exist, since typically courts lack enough evidence for their existence in 4.1 What is/are the key insolvency procedure(s) all but the most extreme cases. available to wind up a company?

Finnish law provides for two procedures to wind up a company: 3.4 Who manages each process? Is there any court bankruptcy under the Bankruptcy Act; and liquidation of a involvement? company under the Companies Act. Liquidation proceedings are only possible if the company is not insolvent, meaning that A court-appointed administrator manages the restructuring the company has more assets than liabilities. Liquidation is process. Courts have an overseeing role in the process, by initi- initiated by the shareholders of a company and does not involve ating it and affirming the restructuring plan once approved by court involvement. Liquidation is not an insolvency procedure the creditors. Courts also rule on objections made to individual in itself, since it is typically used only for companies that cease creditor’s debts. their business for other reasons besides insolvency. For this reason, liquidation is not considered any further in this article. 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to 4.2 On what grounds can a company be placed into perform outstanding obligations? What protections each winding up procedure? are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld? The statutory grounds for the bankruptcy procedure to be initiated is the insolvency of the debtor, meaning the inability to The Restructuring of Enterprises Act has the force of manda- pay debts as they fall due other than temporarily. Bankruptcy tory legislation, superseding all conflicting contractual terms may be applied by the debtor itself or any of its creditors. In agreed by the debtor. According to the Act, only terms allowed a debtor application, insolvency is presumed and usually not in the Act itself form an exception, and any other contractual questioned. A creditor requires either a court ruling (or a debt terms conditional on entering into restructuring are unenforce- which is enforceable without one) or a debt obligation which is able, such as termination and set-off provisions. In addition, the otherwise indisputable enough. The creditor must also provide entry into restructuring is not enough grounds for the debtor’s proof for the debtor’s insolvency. This is typically accomplished contractual parties to demand additional security for the contin- by sending out a payment demand with the threat of filing for uation of their services or the provision of their goods. The Act bankruptcy. If such a payment demand is not paid within a therefore obligates contracting parties to perform outstanding week, the debtor is presumed insolvent. obligations irrespective of the initiated restructuring process. However, the debtor company entering into restructuring, 4.3 Who manages each winding up process? Is there but not creditors, may terminate leases and leasing contracts, any court involvement? and any termination clauses included therein notwithstanding. Such termination may lead to additional liabilities owed by the The bankruptcy process is overseen by the courts in various company entering restructuring in the form of compensation stages. Firstly, the bankruptcy process is managed by a for premature termination. Such compensation is subject to court-appointed administrator of the bankruptcy estate. The the restructuring proceedings and, e.g., haircuts. The debtor court appoints the administrator based on the views of the company may also terminate any agreements deemed unusual. largest creditors. Courts are also involved in ending the bank- Any liabilities incurred by the debtor company after the initi- ruptcy proceedings and approving the distribution list, as well ation of restructuring proceedings must be paid in due course as resolving various disputes, such as the existence of a credi- and they are not subject to haircuts. The same holds true for tor’s debt or the enforceability of a security given to a creditor. any obligations agreed prior to restructuring but fulfilled only after the initiation of restructuring. Failure to satisfy new debts accrued after starting the restructuring is sufficient grounds 4.4 How are the creditors and/or shareholders able for cessation of the provision of further services or supply of to influence each winding up process? Are there any further goods. restrictions on the action that they can take (including the enforcement of security)?

3.6 How is each restructuring process funded? Is any The Finnish bankruptcy process is a creditor-driven process. protection given to rescue financing? All major decisions are made by the creditors in a creditors’ meeting. Each creditor has one vote for one euro of debt owed The costs of restructuring are borne by the company being to them. Only decisions of lesser implication are done by the restructured itself. This includes the administrator’s fee. If administrator of the bankruptcy estate alone. The administrator the restructuring fails and the company is declared bankrupt, has also the duty to safeguard the interests of all creditors on any debt obligations that have been entered into after the initi- equal standing. ation of the restructuring process have precedence over past A security may be enforcement as normal during a bank- debts when the proceeds of the bankruptcy are divided between ruptcy procedure. Upon a decision of the administrator, the creditors. bankruptcy estate may temporarily prevent the enforcement of a

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security for two months if the interests of the bankruptcy estate 52 Tax require such. Typically, secured creditors may ask the administrator to enforce and realise securities as part of the bankruptcy proceedings. 5.1 What are the tax risks which might apply to a In a typical bankruptcy proceeding, shareholders have almost restructuring or insolvency procedure? no influence. Low-ranking creditors, i.e., creditors entitled to pay only after all other creditors, such as shareholders or credi- The processes themselves do not typically give rise to tax liabil- tors of capital loans (as statutorily defined), are typically barred ities. In some cases, it is possible that certain actions, such as from voting, if their debts are not expected to receive payment. divestments, may give rise to tax liabilities as a part of an insol- Influence of shareholders in bankruptcy proceedings usually vency procedure. stems from the fact that they have a dual role as creditors. The tax creditor is on equal footing with other creditors. For example, taxes accrued prior to the initiation of a bankruptcy procedure are subject to the bankruptcy proceedings and the 4.5 What impact does each winding up procedure have bankruptcy estate is not liable for such taxes. The bankruptcy on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off estate is only taxed if it continues to conduct business during the provisions be upheld? bankruptcy process. Realisation of assets is not typically taxed.

The Bankruptcy Act is mandatory legislation and supersedes all 62 Employees conflicting contractual terms of the debtor’s agreements. Upon the commencement of bankruptcy proceedings, the bankruptcy 6.1 What is the effect of each restructuring or estate assumes all the rights and liabilities of the bankrupt insolvency procedure on employees? What claims would company. In legal praxis, this has been interpreted to mean that employees have and where do they rank? the initiation of bankruptcy proceedings itself does not change the rights and liabilities of the bankrupt company. In Finland, An initiated restructuring procedure allows for a shorter notice almost all contractual terms conditional on bankruptcy, such as of termination. If the accepted restructuring plan includes those entitling the creditor to terminate the contract or set off actions that result in the termination of employment, this allows liabilities, are unenforceable. for the termination of employment contracts with two months’ Parties to a contract are obliged to perform outstanding notice. Additionally, if the restructuring leads to ceasing or obligations. The administrator of a bankruptcy estate has the decreasing of work, the same two-month notice period applies. right to terminate any agreements unilaterally regardless of any The employee has the right to terminate their employment with commitments made by the company prior to bankruptcy. If the 14 days’ notice during a restructuring process. bankruptcy estate upholds any agreements, debts incurred after When a bankruptcy process is initiated, all employment the initialisation of bankruptcy proceedings are paid with the contracts may be terminated on 14 days’ notice without the highest priority before any debts incurred prior to bankruptcy, requirement of any further grounds besides the bankruptcy second only to the administrator’s own fee. itself. If there are no sufficient funds in a bankruptcy estate to pay out salary debts, the state-run pay security scheme pays out debts to employees given certain conditions and becomes a 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? creditor in the insolvency proceedings instead of the employees themselves. Employee claims are on equal footing with other unsecured creditors. The highest-ranking claims are those incurred by the bankruptcy estate during the bankruptcy proceedings itself, among 72 Cross-Border Issues which the 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 get a pro rata share of the liquidated 7.1 Can companies incorporated elsewhere use assets of a bankruptcy estate. Exceptions to this primary rule restructuring procedures or enter into insolvency proceedings in your jurisdiction? are secured creditors, creditors holding enterprise mortgages (floating charges), and creditors with debts owed that were incurred during a restructuring procedure that preceded the The primary legislative framework for international insol- bankruptcy. Lower ranking debts consist of statutory capital vencyn i Finland is the recast regulation (EU) 2015/848 of the loans, various statutory sanctions and junior bonds. European Parliament and of the Council of May 2015 on insolvency proceedings (the “Recast Insolvency Regulation”), applied both to bankruptcy and restructuring. The Recast Insolvency 4.7 Is it possible for the company to be revived in the Regulation grants jurisdiction to the courts of the Member State future? in which the centre of a debtor’s main interests is situated. The centre of main interests is the primary place in which the admin- The Finnish legal framework provides for no method through istration of the debtor is conducted, which, unless proven other- which a bankrupt company may be revived once the bankruptcy wise, is assumed to be the place of registered office. This being proceedings start. Bankruptcy proceedings may be cancelled considered, the jurisdiction of incorporation is not relevant if for eight days if legal grounds for this are presented to the court. the centre of a debtor’s main interests is situated within Finland, In practice, especially in the case of a smaller company, it is which grants jurisdiction to Finnish courts over such a debtor. not atypical that a bankruptcy estate sells all or most of its assets, If a debtor having its centre of main interests in another EU including the business name to a new entity. Legally, this consti- Member State has an establishment in Finland, secondary bank- tutes the establishment of a new legal entity with a common ruptcy proceedings (but not restructuring) may be initiated in name to the bankrupt company. Finland. Such a secondary bankruptcy proceeding is limited to

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the debtor’s assets located in Finland. Additionally, the Member 7.3 Do companies incorporated in your jurisdiction State in which a real property involved in insolvency proceed- restructure or enter into insolvency proceedings in other ings has exclusive jurisdiction over such real property. jurisdictions? Is this common practice? In addition, a treaty between the countries results in Finnish courts having no jurisdiction over debtors that have entered The primary situation in which this happens is when another into bankruptcy proceedings in Iceland, Norway or Denmark, Member State has jurisdiction over a Finnish company based on provided that the debtor was domiciled therein. the Recast Insolvency Regulation. Enforcement of insolvency If the Recast Insolvency Regulation does not apply, and there proceedings initiated outside of the EU and concerning compa- is no relevant treaty in force, the legal starting point is that any nies incorporated in Finland may be difficult. To the authors’ company with a place of business in Finland may enter into knowledge, such practices are not commonplace. bankruptcy proceedings before the Finnish courts. This holds true regardless of whether the company conducted business in 82 Groups Finland through a registered establishment or as an unregistered presence. Such bankruptcy proceedings are limited to assets situated within Finland. These proceedings are also rare and 8.1 How are groups of companies treated on the may require case-by-case evaluation. insolvency of one or more members? Is there scope for co-operation between officeholders? The legal situation concerning restructuring of companies incorporated in other non-Member State jurisdictions is unre- fined. A principle of international law is the equal treatment of Finnish company law and insolvency legislation treats each bankruptcy and insolvency proceedings (and similar). As such, company as a fully independent legal entity, regardless of it could be entirely possible for a company incorporated out of whether it has group interests. Thus, the insolvency process of the EU to enter into restructuring in Finland. However, the each group entity proceeds separately. Legally, a group company foreign company must have a business presence in Finland for does not differ in a material way from other stakeholders. the restructuring to have any desired results. To the authors’ It should be noted that, from a recovery standpoint, transac- knowledge, such restructuring proceedings of non-EU compa- tions between related parties are evaluated more stringently and nies are almost unheard of. the critical period, during which challenges to transactions are possible, is longer. Care should therefore be taken to make sure that any significant transactions with related parties are done 7.2 Is there scope for a restructuring or insolvency on an arm’s-length basis, which may also be required for other process commenced elsewhere to be recognised in your jurisdiction? reasons (e.g., tax or corporate law). 92 Reform If an insolvency process has been commenced in another EU Member State, the Recast Insolvency Regulation applies. This leads to the automatic recognition of insolvency processes 9.1 Are there any other governmental proposals for started in other EU Member States. Under the Recast reform of the corporate rescue and insolvency regime in your jurisdiction? Insolvency Regulation, such insolvency processes are construed according to the laws of the EU Member State in which such a process was initiated in. The Bankruptcy Act was last reformed in 2004 and the In addition, Finland is a party to several conventions on the Restructuring of Enterprises Act entered into force in 1993 recognition of foreign judgments, including the Brussels and with the latest major changes entering into force in 2007. There Lugano conventions. These have been largely replaced by appli- have been various discussions on amendments to these statutes, cable EU legislation between Member States. If no convention but the authors are not aware of any major changes. Perhaps applies, the recognition of a restructuring or insolvency process the largest proposed change being discussed is the possibility initiated out of the EU requires an exequatur from a Finnish for natural persons to effectively declare bankruptcy, but no court. proposed acts have yet been published.

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Tuomas Koskinen is a Partner at Waly & Koskinen Attorneys Ltd. Besides insolvency, Tuomas focuses on dispute resolution, especially real estate and construction disputes, and white-collar crimes. Tuomas is a member of the Finnish Bar. He received his LL.M. from the University of Helsinki and also holds a bachelor’s degree in Business Administration, majoring in accounting, from the Aalto University School of Business.

Waly & Koskinen Attorneys Ltd. Tel: +358 09 4257 8780 Rikhardinkatu 1, FI-00130 Email: [email protected] Helsinki URL: www.wklaki.fi/en Finland

Sami Waly is a Partner at Waly & Koskinen Attorneys Ltd. Besides insolvency, Sami focuses on dispute resolution and white-collar crimes. Sami also frequently advises clients from the Middle East region in various corporate matters. Sami is a member of the Finnish Bar. Sami received his LL.M. from the University of Helsinki.

Waly & Koskinen Attorneys Ltd. Tel: +358 09 4257 8780 Rikhardinkatu 1, FI-00130 Email: [email protected] Helsinki URL: www.wklaki.fi/en Finland

Waly & Koskinen Attorneys 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 companies of all sizes, with a focus on small and mid-sized companies as well as entrepreneurs and wealthy individuals. The practitioners have a shared experience together involving more than 100 bankruptcy estates. Our core value offered to our clients is that we provide effective solutions to our clients and we tailor our advice to fit our clients’ business needs to the fullest extent possible. With the cost structure of a boutique firm, we can provide excellent quality of service without the overhead of a larger firm being priced in. www.wklaki.fi/en

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Joanna Gumpelson

De Pardieu Brocas Maffei A.A.R.P.I. Philippe Dubois

12 Overview 22 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 company in financial difficulties? Is there a specific to be rather debtor-friendly. However, the French Bankruptcy point at which a company must enter a restructuring or insolvency process? Code has been regularly amended since 2005 with a view to reinforcing creditors’ rights both in the context of out-of-court work-outs and also insolvency proceedings. In particular, an The company’s legal representative must file for rehabilitation or ordinance dated 12 March 2014 reformed bankruptcy laws with a liquidation (if rehabilitation appears impossible), no later than 45 view to favouring reorganisation at a preventive stage, strength- days from the date on which the company becomes insolvent (see ening the efficiency of out-of-court proceedings and increasing question 3.3), unless conciliation proceedings (which are also avail- the rights of creditors. In addition, a bill dated 6 August 2015 able to insolvent companies) are pending. introduced the possibility, under certain limited conditions, to For certain specific breaches such as using the company’s assets squeeze-out dissenting shareholders of a bankrupt company in or credit for their own benefit or carrying out business activities rehabilitation proceedings, notably to favour debt-for-equity at a loss to further their own interests, directors can be forced to swap restructurings. Finally, a major reform of French bank- assign their equity interest in the company and be prohibited from ruptcy laws is expected in the coming months, to implement the managing any business for up to 15 years. DirectiveEU) ( 2019/1023 of the European Parliament and of Liability can also arise where, as a result of management errors the Council of 20 June 2019 and, in particular, to reinforce cred- (other than mere negligence), a company’s assets do not cover itors’ rights in insolvency proceedings (see question 9.1). its debts: an action for mismanagement can lead to an insolvent company’s directors being liable for all or part of its debts. These liabilities can extend to formally appointed directors/ 1.2 Does the legislative framework in your jurisdiction managers with representation powers, and to any individual or allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what entity that, although they are not officially a director/manager, extent are each of these used in practice? repeatedly influenced the company’s management or strategic decisions (de facto directors/managers). Regarding shareholders of a distressed company, liability French bankruptcy law provides for two main types of restruc- may also arise following the sale of the company, if bankruptcy turing proceedings: proceedings are subsequently commenced against the transferred ■ Out-of-court proceedings: ad hoc proceedings and concil- company and employees are made redundant: in this case, French iation proceedings are flexible, voluntary and confiden- courts ruled that indemnification actions could be initiated by the tial proceedings that aim at facilitating work-outs between laid-off employees against their former employer if it could be a distressed company and its major creditors under the evidenced that the sale was implemented without adequate care supervision of a court-agent. Those are frequently used (“blameworthy lightness”) and that the new owner had no credible especially for large groups of companies in the context of project nor financial capabilities to finance and run the business. financial restructurings. ■ Court-monitored formal proceedings: safeguard (as well as pre-packaged safeguard); rehabilitation; and liquida- 2.2 Which other stakeholders may influence the tion proceedings. Safeguard and rehabilitation are formal company’s situation? Are there any restrictions on the proceedings that aim, depending on the situation of the action that they can take against the company? For example, are there any special rules or regimes which company, to restructure the company’s liabilities whether apply to particular types of unsecured creditor (such through a restructuring plan or a total or partial sale of its as landlords, employees or creditors with retention business and/or assets. The liquidation aims to sell the of title arrangements) applicable to the laws of your company’s assets (as a whole where possible or on an asset- jurisdiction? Are moratoria and stays on enforcement by-asset basis) where the rescue of the company appears as available? obviously impossible. When a company faces difficulties, the French Commercial

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Code provides for different types of warning proceedings ( procé- consideration of debt rescheduling and/or debt write-off granted dures d’alerte) to draw the directors’ attention to any matter likely by the creditors should also be deemed cancelled. to jeopardise the continued operation of the company. They can be triggered by the company’s external auditors, the employees’ 32 Restructuring Options representatives, or shareholders, provided that they own at least 5% of the share capital. 3.1 Is it possible to implement an informal work-out in With respect to creditors, the opening of out-of-court your jurisdiction? proceedings does not trigger an automatic stay. However, the debtor can apply for a moratorium (for a maximum of two years) if any creditor attempts to enforce its right while ad hoc proceed- Ad hoc proceedings and conciliation proceedings are confidential ings or conciliation proceedings are pending. In conciliation, and consensual out‑of-court proceedings that aim to facilitate the debtor’s petition is submitted to the judge who had juris- the negotiation of a work-out agreement between a distressed diction to open such proceedings during both the negotiation company and its major creditors under the supervision of a phase and the implementation phase (that is, after the work-out court-appointed agent. Trade creditors and major shareholders agreement has been approved by the court). can also be invited to take part in the negotiations. Social and tax The opening of court-monitored proceedings triggers a stay authorities can be asked to consent to a debt-rescheduling plan or on enforcement (subject to few exceptions, see question 3.2). a cancellation of debt. A work-out agreement accepted by some creditors cannot be imposed onto other dissenting creditors, as the process is 2.3 In what circumstances are transactions entered consensual and no cram-down can be imposed (subject to the into by a company in financial difficulties at risk of subsequent opening of pre-packed safeguard proceedings, challenge? What remedies are available? see question 3.2). In practice, majority rules provided for in the existing credit documentation apply. In rehabilitation or liquidation (but not in safeguard as those In conciliation specifically, the company has two options to proceedings are available to solvent companies only), any trans- implement the work-out agreement: action entered into during the hardening period ( période suspecte) ■ It can obtain the president of the court’s approval, which can be subject to claw-back provisions. The hardening period does not involve publicity. runs from the date when the company is deemed insolvent and ■ It can request formal court approval, which encour- can be backdated by the court by up to 18 months before the ages creditors to extend credit to the company to benefit judgment opening rehabilitation or liquidation proceedings. from a super-senior repayment status (see “new money” priv- If a court-approved conciliation agreement has been entered ilege in question 3.6). Except where fraud has taken place, into prior to the opening of insolvency proceedings, the insol- a court-approved work-out agreement is also protected vency date cannot be backdated to a date before the court order from the risk of being voided in the future (see question 2.3). approving the conciliation work-out agreement. However, this approval must be recorded in a full judg- A limited number of transactions are automatically voided if ment accessible to the public and therefore subject to chal- performed during the hardening period, for instance: lenge by a third party or appeal. Employees’ represent- ■ any deed entered into without consideration transferring a atives must be informed of the agreement and invited to title to moveable or immoveable property; attend the court hearing. ■ any bilateral contract in which the debtor’s obligations Since 2014, the court-appointed agent may be entrusted with significantly exceed those of the other party; the mission to arrange a pre-packaged sale of a business in ■ any payment by whatever means, made for debts that have conciliation, which could ultimately be implemented in rehabil- not fallen due on the date when payment is made; itation or liquidation proceedings. ■ any payment for outstanding debts, if not made by cash settlement or wire transfers, remittance of negotiable instru- 3.2 What formal rescue procedures are available ments, or Dailly-type assignment of receivables or any other in your jurisdiction to restructure the liabilities of means commonly used in business transactions; or distressed companies? Are debt-for-equity swaps ■ any mortgage or pledge (both contractually agreed or and pre-packaged sales possible? To what extent can court-ordered) granted to secure a pre-existing debt (being creditors and/or shareholders block such procedures noted that, in view of the pending reform currently under or threaten action (including enforcement of security) discussion, other types of security could be subject to to seek an advantage? Do your procedures allow you voidance in the future, see question 9.1). to cram-down dissenting stakeholders? Can you cram- In addition, any transaction or payment entered into during down dissenting classes of stakeholder? the hardening period is subject to optional voidance (that is, subject to the court’s discretionary decision) if proper evidence Safeguard proceedings is brought that the contracting party or the beneficiary of the Safeguard proceedings allow solvent debtors to be restructured payment knew the company’s insolvency (this knowledge being at a preventive stage under the court’s supervision. They begin presumed for companies belonging to the same corporate with an observation period of up to six months (which can be group). extended) to assess the company’s financial position. Once Finally, if court-monitored proceedings are subsequently opened, there is an automatic stay of all creditor payment and opened, the work-out agreement entered into in conciliation is enforcement actions – subject to few exceptions (and notably automatically terminated, meaning that participating creditors claims secured by a security interest conferring a retention right, recover all their claims (deduction made of any payment already claims secured by a trust ( fiducie) and set-off of related claims) received). A recent (yet debated) case law further ruled that new – against the main debtor and individuals acting as guarantors security interests granted as part of the work-out agreement in and joint debtors.

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The general outcome of safeguard proceedings is the approval In addition, under certain narrowly defined circumstances, by the court of a safeguard plan that can involve a debt restruc- the Court can order the squeeze-out of shareholders through turing, re-capitalisation of the company, debt-for-equity swap, a forced sale of all or part of their shares should those share- sale of assets or a partial sale of the business. However, it cannot holders have refused to implement the required change in the include a proposal to sell the business as a whole. equity structure and hold directly or indirectly a majority stake For companies of a certain size, three classes of creditors or a blocking minority stake in the capital of the company, or must be arranged, comprising financial institutions, major trade through an imposed dilution of their equity stake. creditors and bondholders, which are invited to vote on the draft safeguard plan at a two-thirds majority in value for each class. 3.3 What are the criteria for entry into each Subordination agreements, if any, shall be taken into account by restructuring procedure? the administrator in the computing of the votes. If those classes are not set up, or if one of them has rejected the draft plan, the plan must be negotiated on a one-to-one basis The French insolvency test is a pure cash-flow test: a company is with each creditor. The court can impose a 10-year maximum deemed insolvent (en état de cessation des paiements) when it is unable term-out to dissenting creditors, but cannot impose any debt to meet its due and payable liabilities out of its available assets write-off. (those in the form of cash or those that can be quickly turned into If the plan provides for any operation requiring shareholder cash), taking into account undrawn committed facilities and other approval (e.g. debt-for-equity swap), shareholders must also be credit reserves and moratoriums/standstills accepted by creditors. consulted and vote at a two-thirds majority. However, the court Ad hoc proceedings: the company must be solvent, although can reduce the majority applicable to shareholder meetings on there have been some recent precedents where ad hoc proceed- first notice. ings were opened for insolvent companies (but for a very short Once approved by the court, the safeguard plan is enforce- period of time only). able against all members of the creditors’ classes, including the Conciliation proceedings: the company must face legal or dissenting minority within each class. French law, however, does financial difficulties (whether actual or foreseeable) and can be not allow inter-class cram-down, as the court cannot impose a insolvent but for less than 45 days before the petition is filed. plan to a dissenting class of creditors when such class rejected Safeguard proceedings: the company must be solvent and the draft plan. Yet, such inter-class cram-down mechanism is facing difficulties that cannot be overcome, with no restrictions very likely to be soon introduced by the upcoming reform of applied to the concept of “difficulty”. French bankruptcy laws, under certain conditions which are still Rehabilitation proceedings: the company must be insolvent, yet to be determined (see question 9.1). but rescue does not appear to be impossible.

Pre-packaged safeguard proceedings 3.4 Who manages each process? Is there any court Two types of pre-packaged safeguard proceedings are avail- involvement? able: accelerated financial safeguard; and accelerated safeguard. Their global purpose is to enable debtors, for which conciliation In out-of-court proceedings, the court agent does not have any proved unsuccessful to reach all participating creditors’ consent, management responsibilities. There are no restrictions on busi- to be restructured in a very short timeframe with the consent of ness activities. a two-thirds majority within creditor classes. In formal court-monitored proceedings, the judgment opening safeguard or rehabilitation proceedings appoints: Rehabilitation proceedings ■ An insolvency judge ( juge commissaire) who oversees the As a whole, rules applicable to the observation period, the auto- whole procedure. He/she must approve all management matic stay and classes of creditors are the same as in safeguard. decisions that go beyond ordinary actions and any decision Unlike in safeguard, however, there are two main possible to settle pending disputes. outcomes for rehabilitation proceedings: ■ An administrator (administrateur) who supervises or assists ■ a rehabilitation plan, where the same principles apply as in the management to prepare the restructuring plan, but safeguard proceedings; and cannot take over any management responsibility in safe- ■ a sale plan, where the court can authorise the administrator guard proceedings. In rehabilitation proceedings, he/ to auction the business as a whole or in part. Creditors she can be in charge of assisting the management or also, (except for limited exceptions, e.g., creditors benefitting in limited situations, taking control of the company’s from a retention right) have no say on the choice of the management. purchaser made by the court when approving the sale plan. ■ A creditors’ representative (mandataire judiciaire) who repre- As in a safeguard, if shareholder approval is required, the sents the creditors’ interests and assesses proofs of claim, court can reduce majority rules applicable on first notice. and who can be assisted by supervising creditors (créanciers Moreover, in rehabilitation proceedings only, if the insolvent contrôleurs) appointed by the court. 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 (which is a legal requirement in France), the admin- 3.5 What impact does each restructuring procedure istrator can petition the court to appoint an agent in charge of have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections convening the shareholder meeting and to vote, on behalf of the are there for those who are forced to perform their dissenting shareholders, on the recapitalisation of the company outstanding obligations? Will termination and set-off for the amount suggested by the administrator, when the draft provisions be upheld? plan provides for a change in the share capital in favour of one or several committed investors. Out-of-court proceedings Since the 2014 reform of the French Bankruptcy Code, ipso facto provisions are deemed null and void. More generally,

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any contractual provision increasing the debtor’s obligations 42 Insolvency Procedures (or reducing its rights) by that sole reason of the opening of out-of-court proceedings (or of any filing for that purpose) is also null and void. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? Safeguard and rehabilitation proceedings Notwithstanding any contractual provisions, ongoing contracts Liquidation proceedings aim at liquidating a company by selling cannot be terminated by the sole reason of the opening of such its business, as a whole or per branch of activity, or by selling its proceedings (or the debtor’s insolvency, according to case law). assets one by one. Creditors are repaid according to their rank The administrator can require the debtor’s contracting party to and privilege with the sale proceeds. perform ongoing contracts in exchange for the performance of There is a simplified form of liquidation proceedings available the debtor’s post-petition obligations. However, all contracts for small businesses, which lasts for a maximum of six months can be terminated by court order at the request of the admin- or one year, depending on the size of the company. istrator, should this termination be necessary to the company’s safeguard and not excessively detrimental to the contracting 4.2 On what grounds can a company be placed into party’s interests. each winding up procedure? The contracting party can require the administrator to express his/her position on the assumption of an ongoing contract, which will be automatically terminated once a formal notice is The debtor must be insolvent and its rehabilitation must appear sent to the administrator and has remained unanswered within as obviously impossible. Liquidation is the only possible outcome a month. when rehabilitation proceedings are attempted without success. The debtor’s contracting party must perform its obligations despite non-performance by the debtor of its own pre-petition 4.3 Who manages each winding up process? Is there obligations, which will only allow the contracting party the right any court involvement? to file proof of claim. For obligations resulting from certain kinds of financial The judgment opening liquidation proceedings appoints: instruments only, early termination and set-off provisions ■ An insolvency judge to oversee proceedings. remain enforceable, irrespective of the opening of insolvency ■ A liquidator, who is responsible for: proceedings. ■ collecting all of the company’s assets and paying the In terms of protection, when an ongoing contract is assumed creditors to the extent that funds are available; and by the administrator, the debtor must perform its post-petition ■ assessing proofs of claim and representing the credi- obligations. In rehabilitation proceedings, when the assumed tors’ interests. ongoing contract involves the payment of a sum of money, the The liquidator has sole authority to bind the company and contracting party can require that the payment be made in cash assumes all management responsibilities. on delivery. In addition, in both safeguard and rehabilitation proceedings, the contracting party benefits from the statutory privi- 4.4 How are the creditors and/or shareholders able lege granted to certain post-petition claims representing consid- to influence each winding up process? Are there any restrictions on the action that they can take (including eration in connection with a business transaction directly the enforcement of security)? connected to the company’s activities continued during the observation period (see question 4.6). Liquidation proceedings trigger an automatic stay of enforcement against the company, subject to few exceptions. Yet, in 3.6 How is each restructuring process funded? Is any liquidation only (unlike in safeguard or rehabilitation), secured protection given to rescue financing? creditors benefitting from a pledge can enforce their security interest through a court-monitored allocation process (attribution New money injected in the context of a court-approved work-out judiciaire), that is, request the court to be transferred ownership agreement, entered into in conciliation, benefits from a statu- of the pledged asset(s). tory super-senior status if the debtor subsequently files for insolvency. In this case, the new money providers do not have to 4.5 What impact does each winding up procedure have suffer any rescheduling in a term-out scenario and cannot have on existing contracts? Are the parties obliged to perform any write-off, debt-for-equity swap or rescheduling imposed outstanding obligations? Will termination and set-off through the vote of creditor classes. provisions be upheld? In safeguard and rehabilitation proceedings, post-petition claims arising for the purpose of funding the observation period The same rules applicable in safeguard and rehabilitation apply benefit from a certain statutory privilege (see question 4.6). to liquidation proceedings, where the liquidator is recognised In addition, the pending reform of French bankruptcy laws the same prerogatives as the administrator. could introduce new incentives, still to be defined, for cash However, in liquidation proceedings, ongoing contracts contributions granted notably in the context of safeguard and where the debtor’s performance consists of the payment of a sum rehabilitation proceedings (see question 9.1). of money are automatically terminated when the contracting party is informed of the liquidator’s decision not to assume the contract.

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In addition, in case a sale plan is approved by the court, some thereby potentially generating additional tax liabilities. If a debt supply contracts deemed necessary to continue the transferred waiver is granted as part of safeguard, rehabilitation or liquida- activity are judicially assigned to the transferee by the sole effect tion proceedings or pursuant to a court-approved conciliation of the court’s decision. agreement, the debtor can, however, fully offset its available carry-forward losses against the amount waived. This possibility is expressly provided for in the French tax code as an excep- 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? tion to the general rule whereby carry-forward losses can only be used up to an amount, in any given year, of €1 million plus 50% of the taxable profits realised in that year. On the creditor side, Where creditors rank on insolvency is complex, and any attempt whether the debt waiver will be treated as a tax-deductible loss to provide a simple list can be misleading. However, a simplified will mainly depend on whether it can qualify as a “commercial ranking of claims could be summed-up as follows: debt waiver”, in which case, it will typically be treated as deduct- ■ Arrears of wages (see question 6.1): a portion of employees’ ible, or as a “financial debt waiver”. A financial debt waiver may pre-petition claims benefit from a senior preferential be tax deductible at the level of the creditor if granted as part of status, which protects the last 60 days’ wages in arrears safeguard, rehabilitation or liquidation proceedings or pursuant before the judgment opening insolvency. If the bank- to a court-approved conciliation agreement, subject to limita- ruptcy estate cannot pay these claims from its available tions where the creditor is a shareholder of the debtor. cash, they are paid as advances by a national wage insur- Instead of granting debt waivers, creditors may subscribe to ance body, which then replaces the employees’ ranking as a share capital increase of the debtor by way of offset against a creditor. their receivables, thereby implementing a debt-for-equity ■ Post-petition court costs, which arose for the purpose of swap. This would generally not trigger the recognition of the proceedings. taxable income at the level of the debtor, which would then ■ “New money” facilities granted in the framework of a retain its existing carry-forward losses intact. This, however, court-approved work-out in conciliation proceedings (if needs to be reviewed on a case-by-case basis, having in mind any) also benefit from a senior legal privilege. also the resulting consequences for the relevant creditors. A ■ Post-petition claims: in safeguard and rehabilitation proceed- French corporate creditor having recorded a depreciation on its ings, they benefit from a statutory privilege provided that receivable and treated this depreciation as a deductible expense they either arise for the purpose of funding the observa- would need to reverse that depreciation upon conversion of the tion period, or represent consideration in a business transac- receivable into shares, which would create taxable income at its tion directly connected to the company’s activities continued level. The recording of a depreciation on the shares received in during the observation period. They must be paid when they exchange would not be tax-deductible if these shares constitute fall due. If not, they rank ahead of both secured and unse- a participating interest and a later sale of these shares for a price cured pre-petition claims. lower than the initial book value of the receivable would also not ■ Secured pre-petition claims. generate a tax-deductible loss. A successful restructuring will ■ Unsecured pre-petition claims. thus also involve reconciling the interest of both the creditors ■ Shareholders do not receive any repayment of their capital and the debtor from a tax standpoint. investment, unless a surplus remains after all the creditors have been paid in full (which is extremely rare). 62 Employees In liquidation proceedings, the creditors’ ranking is the same, except that pre-petition mortgage claims rank ahead of post-petition claims benefitting from the statutory privilege. 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank? 4.7 Is it possible for the company to be revived in the future? Employment contracts remain in force during the restructuring procedure. The court closes the liquidation in two hypotheticals: hardly Subject to certain conditions, lay-offs for economic reasons ever, when all the creditors are repaid; or when no more proceeds may be implemented in this context. However, rules pertaining can be expected from the sale of the company’s business/assets. to the process of making staff redundant are complex, and In the second case, the company shall terminate and cannot be depend on the type of proceedings and on the timing when revived. lay-offs are implemented. Once closed, liquidation may be re-opened if some of the For instance, the redundancy process during the observation debtor’s assets have not been sold off, or if a legal action in the period differs between safeguard and rehabilitation proceed- interests of the creditors shall be initiated. ings: while in safeguard, there is no specific feature as to the redundancy for economic reasons, in the context of rehabili- 52 Tax tation proceedings, the court-appointed administrator can be authorised by the insolvency judge to implement a redundancy 5.1 What are the tax risks which might apply to a process for economic reasons if it is deemed urgent, unavoid- restructuring or insolvency procedure? able and necessary. In the context of liquidation proceedings or following a total or partial sale plan of the business activities in rehabilitation A taxpayer remains liable for all taxes while undergoing restruc- proceedings, lay-offs are implemented by the court-appointed turing or insolvency proceedings and the French tax authori- administrator or the liquidator, as the case may be, following a ties typically benefit from a preferential ranking as creditors. court’s judgment that provides for the dismissal of the employees In addition, if the taxpayer benefits from debt waivers granted that were not transferred to the bidder. by creditors as part of these proceedings, the amount of these debt waivers will typically be included in its taxable income,

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With respect to employees’ claims, where they rank on insol- 7.2 Is there scope for a restructuring or insolvency vency is complex, and any attempt to provide a simple list can be process commenced elsewhere to be recognised in your misleading. However, in a nutshell, the following principles apply: jurisdiction? ■ Regarding their pre-petition claims, and unlike other creditors, employees are exempted from filing proof of claim, If insolvency judgments are made in a jurisdiction that is party and have the status of preferred creditors: to a treaty with France, they are recognised and enforceable in ■ A portion of employees’ pre-petition claims bene- France. In addition, the Insolvency Regulation allows insol- fits from a so-called “super” senior status and ranks vency procedures in different EU Member States to be automat- ahead all other claims. This includes all forms of ically recognised. pre-petition remuneration left unpaid for the last 60 In other cases, foreign judgments can only be recognised and days of effective work prior to bankruptcy, and other enforced if they have been subject to an inter partes recognition limited compensations and indemnities (e.g. paid procedure known as exequatur, which is intended to verify that holiday, payment in lieu of notice in case of termi- the foreign court had proper jurisdiction, international public nation of the employment contract…), subject to policy has been complied with and no fraud has taken place. certain caps. ■ Certain other employees’ pre-petition claims benefit from a “general” senior status less favourable than the 7.3 Do companies incorporated in your jurisdiction super-senior status, such as pre-petition remuneration restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? for the last six months prior to bankruptcy, compensations and indemnities protected by the super-senior status and other compensation such as severance Some companies incorporated in France have entered into insol- indemnities (subject to certain caps). vency proceedings in other jurisdictions, especially in schemes ■ Employees’ post-petition claims benefit from the priority of arrangement in the UK (e.g. Zodiac). However, it is not rights offered to post-petition claims: they must be paid common practice. when they fall due and if they are not, they rank ahead of Contrariwise, it is far more common for foreign compa- both secured and unsecured pre-petition claims. nies to seek protection under French Bankruptcy Law and to In addition, employees’ claims are guaranteed, under certain commence insolvency proceedings in front of French Courts, circumstances, by a national wage insurance system (AGS), based on the location of their COMI in France (e.g. Coeur which pays these claims as advances (subject to certain caps). Défense, Mansford, Orco Property Group or NextiraOne). For all sums paid to employees, the AGS is subrogated in the employees’ rights vis-à-vis the bankrupt estate. 82 Groups

72 Cross-Border Issues 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for 7.1 Can companies incorporated elsewhere use co-operation between officeholders? restructuring procedures or enter into insolvency proceedings in your jurisdiction? Under French law, a corporation is deemed to be an autonomous entity, and the company’s assets should not be affected by insol- Under Regulation (EU) 2015/848 of the European Parliament vency proceedings commenced against other companies within of the Council of 20 May 2015 on insolvency proceed- the same group. ings, reforming the Regulation (EC) 1346/2000 on insol- However, the court can, under certain circumstances, find vency proceedings and applicable to insolvency proceedings that there is a ground for a consolidation of estates (confusion des commenced after 26 June 2017 (the Insolvency Regulation), the patrimoines), so that debt of several companies can be paid from a EU Member State where a company’s centre of main interests larger consolidated pool of assets. (COMI) is located shall have exclusive jurisdiction to commence In addition, when insolvency proceedings are commenced insolvency proceedings regarding this company. against a company, the same court has jurisdiction to hear any A company’s COMI is presumed to be the place of its regis- proceedings relating to a company it controls or is controlled by, tered office unless it is proven that both: and a common administrator and a common creditors’ repre- ■ Its COMI, as defined in the Eurofood decision of the sentative may be appointed for all the proceedings. European Court of Justice, is in a country other than its Furthermore, at least two administrators and creditors’ repre- place of incorporation. sentatives must be appointed by the court, if the net revenues of ■ The company’s trade and financial partners are fully the debtor or of one of the companies mentioned below reach at aware that the COMI of such company is not its place of least a threshold of €20 million and the debtor either: incorporation. ■ Owns at least three secondary establishments located in Under this framework, a company incorporated in another the jurisdiction of another Commercial Court than the one EU Member State can commence insolvency proceedings in the debtor is registered in. France if its COMI is located in France. If it only has an estab- ■ Owns or controls at least two companies against which lishment based in France, secondary proceedings can be subse- court-monitored proceedings have commenced. quently commenced in France which shall apply to its assets ■ Is owned or controlled by a company against which located in France. court-monitored proceedings have commenced and that With respect to a company incorporated outside of the EU, owns or controls another company against which court-mon- where no international treaty applies, French courts have juris- itored proceedings have commenced. diction to commence proceedings if such courts find that the company’s COMI is located in France.

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92 Reform

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

French bankruptcy laws are expected to be substantially amended in the coming months by way of ordinance, to trans- pose Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019. Mainly relating to the voting process by classes of creditors on the draft safeguard or rehabilitation plan (see question 3.2), this pending reform may provide for the set-up of more homogeneous classes of creditors and the possibility, under certain conditions which are still to be determined, to impose on dissenting classes a plan that was accepted by one class of creditors only. However, the exact scope of this reform has not been determined. French law relating to security interests is also expected to be amended in the coming years. Still under discussion, this reform is expected to simplify and clarify rules pertaining to security interests in the context of restructuring and insolvency proceedings.

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Joanna Gumpelson specialises in insolvency proceedings and debt-restructuring. She represents French and foreign investment funds, banks, as well as lease-finance and factoring institutions, bondholders or suppliers, etc. She also regularly represents French or foreign issuers, in particular in the context of failing LBOs. She also handles commercial, banking and finance litigation cases. Admitted to the Paris Bar in 2002, she graduated from HEC Paris (2000) and holds an advanced degree (DESS) in Tax and Business law from the University of Paris I Panthéon-Sorbonne (2000). She joined De Pardieu Brocas Maffei’s Restructuring & Insolvency team in 2002. She was appointed Counsel in 2009, before being co-opted as Partner in 2014. Joanna Gumpelson was elected as “Lawyer of the Year 2017” by Best Lawyers in Restructuring and Reorganisation Law, and she is 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 A.A.R.P.I. Tel: +33 1 53 57 71 71 57 avenue d’Iéna Email: [email protected] 75016 Paris URL: www.de-pardieu.com France

Philippe Dubois has considerable experience in restructuring & insolvency. He advises banking and financial institutions as well as large French and foreign industrial groups in a wide range of economic sectors. His practice focuses on restructuring, litigation and arbitration in diverse areas such as shareholder disputes, indemnification agreements and liabilities. He manages the firm’s Restructuring & Insolvency and Arbitration teams. Admitted to the Paris Bar in 1994, Philippe Dubois is a doctor-at-law and teaches business law at the University of Paris X Nanterre. He joined the firm in 2008 as a Partner, after working at Jeantet (1984–2005) and Sonier Poulain (2005–2007). He was named “Best Lawyer of the year” in Restructuring by Option Droit & Affaires magazine (2015).

De Pardieu Brocas Maffei A.A.R.P.I. Tel: +33 1 53 57 71 71 57 avenue d’Iéna Email: [email protected] 75016 Paris URL: www.de-pardieu.com France

De Pardieu Brocas Maffei is one of France’s leading independent busi- The team also represents listed and non-listed companies faced with finan- ness law firms and currently has 33 partners. Founded in 1993, the Firm cial difficulties and/or their shareholders, with respect to their reorganisa- has become a key player in French business law and also has a highly tion or the renegotiation of their debts, with solutions ranging from mandat regarded international practice. The Firm’s lawyers regularly advise on ad hoc/conciliation to safeguard procedures and continuation plans. both domestic and international matters, and clients primarily include large www.de-pardieu.com 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.

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Dr. Thomas Hoffmann

Noerr LLP Isabel Giancristofano

12 Overview 22 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 that company in financial difficulties? Is there a specific the main goal of a formal insolvency proceeding is the equal point at which a company must enter a restructuring or insolvency process? satisfaction of the creditors’ claims by liquidating the debtor’s 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, weeks of the occurrence of an insolvency reason (illiquidity or and cram-down of shareholders or minority creditors in insol- balance-sheet over-indebtedness with no going-concern prog- vency plan proceedings. It also enables a debtor-efficient nosis). Directors are subject to criminal and civil law liability restructuring by providing for different kinds of measures, due to late insolvency filing. This may include the payment of such as protective shield proceedings, debtor-in-possession and significant amounts of damages to third parties as well as to the insolvency plan proceedings. Overall, the insolvency regime is debtor. In addition, directors are personally liable for any unpaid slightly creditor-friendly. employee social security contributions and wage and value-added taxes. The directors of a company are obliged to continuously 1.2 Does the legislative framework in your jurisdiction monitor its financial status, irrespective of whether a crisis is allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what occurring or not. extent are each of these used in practice? 2.2 Which other stakeholders may influence the Despite the ongoing EU discussion to implement a pre-insol- company’s situation? Are there any restrictions on the vency proceeding (“Vorinsolvenzliches Sanierungsverfahren”), there action that they can take against the company? For example, are there any special rules or regimes which is so far no legal framework for an out-of-court restructuring. apply to particular types of unsecured creditor (such There is one exception: German law bonds can be restructured as landlords, employees or creditors with retention outside formal insolvency proceedings via a majority vote under of title arrangements) applicable to the laws of your the German Bond Act. jurisdiction? Are moratoria and stays on enforcement Informal work-outs are possible with the consent of all parties available? involved. Due to recent court rulings, those out-of-court work- outs bear certain risks for the management, creditors and Apart from the debtor company itself, creditors are the most advisors. important stakeholders in the financial crisis of a company. In Formal insolvency proceedings require the involvement of a particular, only the debtor itself (through its directors) or credi- court and an insolvency administrator or custodian. However, tors may file for insolvency. Without an insolvency filing, insol- they grant a wide variety of restructuring options, such as a sale vency proceedings cannot be initiated against a company. of the debtor’s business, an operational restructuring based on The debtor may file for insolvency if the company is balance an insolvency plan where the debtor’s business is continued, as sheet over-indebted without a going-concern prognosis, illiquid well as financial 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 and the recipient was aware of the financial distress. To outside of formal insolvency proceedings. In principle, a cred- limit claw-back options for insolvency administrators and itor will have to litigate its claim and show the enforcement was thereby grant security for business transactions, a number unsuccessful before filing for insolvency. However, even if a of exceptions to this provision were included in a reform of creditor successfully enforces against a company in financial the claw-back provisions in April 2017. However, a general distress, payments made to him may be clawed back by the insol- claw-back risk for up to 10 years continues to exist. This vency administrator under certain circumstances. especially applies in the event that the debtor is and has been As soon as insolvency has been filed, enforcement measures in financial difficulties for an extended period of time. by a single creditor are usually no longer admissible or can be clawed back, unless the creditor had no knowledge of the filing. 32 Restructuring Options Secured creditors may under certain circumstances directly enforce into their assets (e.g. creditors with a retention of title 3.1 Is it possible to implement an informal work-out in claim or where assets have been assigned as a security to a your jurisdiction? creditor). Shareholders of the debtor will have few rights and influence in the insolvency proceedings. They are not entitled to file for There is no legal framework for informal restructuring work-outs insolvency (unless all managing directors have resigned – in that under German law. Therefore, they need the consent and partic- case the duty to file for insolvency in time shifts to the share- ipation of all affected parties. In practice, informal work-outs holder with all legal consequences). With few exceptions, share- are the preferred option especially in financial restructurings. It holder loans are subordinated in a German insolvency. is important to note that an out-of-court restructuring requires a Outside of formal insolvency proceedings, no moratoria or third-party restructuring opinion (“Sanierungsgutachten”) to avoid stays are available. liability for all stakeholders involved, should the out-of-court restructuring fail. Should the parties not come to an agreement, the German 2.3 In what circumstances are transactions entered Insolvency Act provides for alternative restructuring options into by a company in financial difficulties at risk of under court and administrator or custodian supervision. challenge? What remedies are available?

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

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bidding process with the aim of selling the business as a whole 3.3 What are the criteria for entry into each on the opening date. Such sales are usually asset deals as the restructuring procedure? debtor entity remains intact with the insolvency debt. The business can then be continued in a purchaser entity. The admin- Any formal insolvency proceeding requires an insolvency filing. istrator will distribute the sale proceeds to the creditors after Special proceedings must be applied for within the filing, such deducting the costs of the insolvency proceedings (“Übertragende as self-administration, insolvency plan proceedings or protec- Sanierung”). tive shield proceedings. Alternatively, the debtor’s business can be restructured. This An insolvency filing will only lead to opened insolvency would usually take place in the framework of an insolvency proceedings, if: . The debtor entity would remain the owner of the business plan ■ an insolvency reason exists (illiquidity, imminent illiquidity and not be liquidated. or balance-sheet over-indebtedness with no going-concern provide a flexible restructuring Insolvency plan proceedings prognosis); and of a business supervised by the court. Either the debtor or the ■ the assets of the debtor are sufficient to cover the costs of insolvency administrator/custodian (for self-administration, see the insolvency proceeding. below) may prepare and file an insolvency plan. The plan will contain measures to restructure the business, such as waivers, haircuts and payment deferrals, change of the legal form of 3.4 Who manages each process? Is there any court the debtor entity, sale of shares, reduction and increase of the involvement? share capital (also combined) and debt-for-equity swaps. The creditors are divided into groups which separately vote on the In preliminary insolvency proceedings (the period between plan. If the majority of the groups approve the plan, the plan is insolvency filing and opening of the proceedings), the debtor deemed accepted, thereby cramming down the dissenting voting regularly continues to manage its business, albeit with the creditor groups. consent of the preliminary insolvency administrator only. As an alternative to an insolvency administrator managing In opened insolvency proceedings, the insolvency adminis- the insolvency procedure, the debtor can apply for self- trator manages the proceedings and ensures the satisfaction of administration. Courts have to allow these proceedings the creditors by implementing the tools explained under ques- unless there are circumstances indicating that this would be tion 3.2 above. disadvantageous for the creditors. In self-administration, the Only in self-administration proceedings can the debtor itself, debtor remains entitled to dispose of its assets and continues to through its executive directors, manage the proceedings. In manage the business supervised by a court-appointed custodian. this case, the debtor is monitored by a court-appointed custo- In order to gain further flexibility for business restructuring, dian who is also responsible for actions usually reserved for an in 2010 protective shield proceedings were introduced. The administrator (such as claw-back of transactions). debtor can apply for protective shield proceedings if it is balance The court is always involved in insolvency proceedings; it sheet over-indebted and imminently illiquid, but not yet illiquid, supervises the participants and decides on specific issues (i.e. and a restructuring is not evidently unfeasible. The application insolvency plan, change from self-administration to regular needs to contain a confirmation by an experienced practitioner insolvency proceedings). that these requirements are met. The court can then grant a period of up to three months in which the debtor is protected 3.5 What impact does each restructuring procedure from enforcement in order to present an insolvency plan. The have on existing contracts? Are the parties obliged to court will usually appoint a preliminary creditor committee and perform outstanding obligations? What protections custodian to supervise the debtor during this period. In practice, are there for those who are forced to perform their the application for a protective shield proceeding will require outstanding obligations? Will termination and set-off thorough preparation and consensus with the key stakeholders. provisions be upheld? Shareholder and creditor rights: ■ Shareholders generally lose control over the debtor when In principle, insolvency proceedings do not affect contracts. insolvency proceedings are opened. They cannot partic- They continue to be valid and effective, but special provisions ipate in the insolvency proceedings other than as regular apply to some contracts: creditors if they have recognised claims against the debtor ■ Certain legal relations are terminated automatically, such other than shareholder loans (in practice, most shareholder as instructions and powers of attorney, profit and loss claims will be classified as loans, even if they concern agreements. other agreements). ■ Any contracts which are not fully implemented can either ■ Creditors are entitled to vote on material decisions in be fulfilled by the insolvency administrator or rejected. the insolvency proceeding through an appointed creditor If the administrator rejects fulfilment, any claims of the committee. If no committee is appointed, the creditors other party are unsecured insolvency claims. decide in the creditor assembly (see below under question ■ In principle, long-term agreements such as property leases 4.4 for creditor rights). remain in force and cannot be terminated by the other ■ Secured creditors. Retention of title is unaffected in party on grounds of the insolvency only. Claims arising insolvency proceedings. If a creditor has full title to an before the insolvency opening can only be filed as unse- asset, it must be returned to the creditor and the creditor cured claims. Any claims arising after the opening of the does not take part in the insolvency proceedings. Most proceedings can be claimed from the insolvency mass as a securities only grant a right to receive the proceeds of their privileged claim. However, the insolvency administrator sale which the administrator takes care of and receives may terminate such agreements early in order to free the a fee for. Therefore, secured creditors have to file their insolvency estate from disadvantageous liabilities. claims with the insolvency administrator and participate ■ The possibility of a set-off for a creditor may be affected in the proceedings. by the opening of insolvency proceedings, depending on

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when the claims subject to the set-off become due and how the debtor’s assets and the distribution to the creditors. The they were acquired. creditor committee and creditor meeting approve the important decisions, and the insolvency court monitors the proceedings (see question 3.6 above). 3.6 How is each restructuring process funded? Is any protection given to rescue financing? 4.4 How are the creditors and/or shareholders able Granting a loan to a company in financial distress bears risk to influence each winding up process? Are there any restrictions on the action that they can take (including as the lender may be liable towards other creditors for delaying the enforcement of security)? its insolvency filing if it had no chances of a successful restructuring. Out-of-court rescue funding is therefore only privileged in an insolvency proceeding if it is based on a third-party Shareholders are in full control of the company during a solvent restructuring opinion (“Sanierungsgutachten”) confirming that the liquidation and creditors have no special rights as all claims will business can be restructured successfully before granting loans. be fully satisfied. In a formal insolvency proceeding, the insolvency adminis- In an insolvency proceeding, shareholders generally lose control trator may take up a loan if he deems such loan can be paid back over the debtor company. The insolvency administrator or custo- from the insolvency mass. Such loan repayment claims are qual- dian takes over the management and disposal of assets completely, ified as privileged claims. The administrator may take up loans including the realisation of security. The creditor assembly resolves and incur privileged insolvency claims during preliminary insol- via majority votes on major issues, i.e. it approves acts of the admin- vency proceedings with prior authorisation of the court. istrator with special importance, such as the sale of the business. The German Employment Agency pays all employee salaries It can also dismiss the insolvency administrator and appoint or for a period of up to three months between insolvency filing dismiss the creditor committee. The creditor committee has addi- and the opening of insolvency proceedings. The debtor’s busi- tional tasks and rights and may request detailed information from ness can be continued without the personnel costs and the costs the administrator or custodian and actively participate in the deci- saved can be used to restructure the business. As soon as insol- sion making regarding the management of the debtor. The cred- vency proceedings are opened, the employee’s claims become itors therefore have a clear influence on the proceedings and can privileged claims and have to be borne by the debtor. The insol- instruct to, or prevent the administrator from, taking actions that vency administrator can therefore only continue to employ staff the creditors do not agree with. if the insolvency mass is sufficient to pay the salaries, social security contributions, loan taxes, etc. 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform 42 Insolvency Procedures 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? See question 3.5 above.

Solvent liquidation can be resolved by the shareholders. The 4.6 What is the ranking of claims in each procedure, debtor company is then wound down, i.e. its assets are liquidated including the costs of the procedure? and debt paid. Solvent liquidation is only possible if all liabilities can be met. Secured creditors I: Creditors with full title to an asset can If the debtor does not have sufficient funds for a solvent liqui- claim for the asset to be separated from the insolvency mass and dation, it must file for insolvency as soon as an insolvency reason handed over to them. They do not have to participate in the exists (see section 3 above). The liquidation of a company is insolvency proceedings. This is, for example, the case for cred- regularly implemented in a regular insolvency liquidation itors with retention of title claims. proceeding by an insolvency administrator. Secured creditors II: Creditors with other security rights (e.g. with a mortgage, security transfer or assignment) partici- 4.2 On what grounds can a company be placed into pate in the insolvency proceedings as creditors. The insolvency each winding up procedure? administrator will liquidate such assets, separate the proceeds and pay them out to the secured creditor. See section 2 above. The managing directors of a company Privileged creditors: Creditors which have made agree- are obliged to file for insolvency if an insolvency reason exists. ments with the insolvency administrator, e.g. all liabilities Creditors are also entitled to file for insolvency, but under the administrator incurs while continuing the business, such stricter requirements. as wages, new orders for goods and services made after the opening of the insolvency proceedings. The insolvency administrator is personally liable for these claims. The costs of the 4.3 Who manages each winding up process? Is there insolvency proceedings, including the administrator’s or custo- any court involvement? dian’s fees, also fall in this rank. Unsecured creditors: These include all unsecured claims In a solvent liquidation, a liquidator is appointed by the share- that originated before the opening of the insolvency proceed- holders. This liquidator can be the former managing director ings. These claims are satisfied from the proceeds of the liqui- of the company. The liquidator manages the winding up of the dation of the debtor’s assets or the continuation of the business. company until no liabilities remain and it can be deleted from In practice, unsecured creditors only receive a small quota on the commercial register when it ceases to exist. their insolvency claims. In insolvency proceedings, an insolvency administrator or, Subordinated creditors: These are usually shareholder loans in self-administration, a custodian manages the liquidation of or similar claims as well as claims for interest, etc.

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4.7 Is it possible for the company to be revived in the 72 Cross-Border Issues future?

7.1 Can companies incorporated elsewhere use In the framework of liquidation procedures, the debtor company restructuring procedures or enter into insolvency is usually liquidated and deleted from the commercial register. proceedings in your jurisdiction? After deletion, it ceases to exist. However, in insolvency plan proceedings, when the insol- Insolvency proceedings can only be initiated in Germany, if an vency plan is fully implemented and no new insolvency reasons entity has its COMI – centre of main interest – in Germany. exist, the company continues to operate and exist. Courts will review the question of COMI carefully. It is not If the insolvency reason is removed for other reasons (e.g. a uncommon for German courts to pull insolvency proceedings shareholder payment), the company can also continue to operate of foreign entities to Germany if the entity’s COMI is deemed and the insolvency proceedings are terminated. to be located in Germany by the court, especially in group insolvencies. 52 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 your restructuring or insolvency procedure? jurisdiction?

In principle, tax laws do not provide special provisions for Foreign insolvency procedures can be recognised under EU insolvency. Particularly, there are no exceptions regarding the regulations as well as the German Insolvency Act as foreign payment of VAT, wage, income, corporation and capital gains main or secondary proceedings. Acts of foreign administra- taxes. tors and receivers can be recognised under such proceedings, Especially in insolvency plans, the tax effects have to be including claw-back, set-off and the subordination of claims. considered carefully to avoid extraordinary restructuring gain These rules are especially relevant in cross-border group insol- (“Sanierungsgewinne”) taxes. Usually, in complex proceedings, a vencies where intra-group or cash pooling claims exist. tax opinion from the competent tax authority is requested to mitigate tax risks, especially those arising in connection with the debt restructuring. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 62 Employees In large insolvencies and where sufficient connection to another 6.1 What is the effect of each restructuring or state exists, it is not uncommon to implement restructuring insolvency procedure on employees? What claims would employees have and where do they rank? measures admissible in other jurisdictions. Specifically, restructuring measures under English law have been used by larger German companies in the past to achieve a financial restruc- Employment agreements remain valid, irrespective of an insol- turing (scheme of arrangement). Due to the time and cost effort vency filing or the opening of insolvency proceedings. The of such foreign proceedings, as well as increasingly strict court insolvency administrator or custodian may terminate employ- decisions on the requirements for and validity of the restruc- ment agreements with a notice period of three months (unless turing measures, in practice foreign insolvency proceedings are the employment agreement provides for a shorter term). used only in a very small number of cases. Employee claims are standard unsecured insolvency claims, no special rules apply for them. If the business is continued, the standard rules apply 82 Groups for termination of employment agreements. The German Dismissal Protection Act is applicable and employees can only 8.1 How are groups of companies treated on the be terminated if the required criteria apply (“social selection”). insolvency of one or more members? Is there scope for co-operation between officeholders? Also, works councils have to be involved. When mass terminations are necessary, the insolvency administrator must negotiate and agree on a social plan for the employees which will usually On 20 April 2018, new provisions in the German Insolvency provide for compensation payments to the employees (privi- Act regarding group insolvencies were implemented. leged claims). Under the new provisions, a group debtor can apply for joint In a business transfer, all employees of a business automat- jurisdiction of all concerned group entities at the same insol- ically transfer to the acquirer. Only the employee, not the vency court. If one of the group debtors files for insolvency and acquirer, can object to such a transfer. This provision is also the court declares itself competent, other insolvency proceed- applicable in a company’s insolvency. Social plans can provide ings for entities of the same group will be opened at the same for employees to be transferred to a special transfer vehicle court and judge. where employees are trained and transferred to new employers. The new group insolvency rules contain further provisions on However, such vehicles are costly, and the acquirer will likely the interaction of the parties to the group insolvency proceed- have to bear a large part of the costs. ings. Insolvency administrators of the same group (if one administrator is not appointed for several entities ) are obliged to co-operate and keep each other informed. The same applies to creditor committees. A group creditor committee can be appointed.

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Special group co-ordination proceedings can be opened an expert commission, which was established to evaluate the upon application of a debtor, a (preliminary) insolvency admin- effects of the German insolvency law reform in 2012, found istrator or a (preliminary) creditor committee. The court will that the self-administration proceedings are largely successful then appoint a group co-ordinator independent from the other and have proved to be attractive in practice. As a result, the parties to the proceedings who shall ensure the aligned admin- government plans to reinforce this procedure. istration of the insolvencies. The co-ordinator can also present Due to the current developments regarding the global outbreak a coordination plan to the group insolvency court, which is not of the coronavirus, German legislature has passed an “Act on the binding for the insolvency proceedings of each entity. mitigation of the impact of the COVID-19 pandemic on civil, For groups with foreign entities, the rules explained under insolvency and criminal procedure law” on 27 March 2020. In section 7 above apply. terms of insolvency law, the obligation to file for insolvency has, under certain conditions, been suspended until 30 September 92 Reform 2020. For the period of suspension, the strict prohibition on payments towards, e.g., creditors or shareholders, has been 9.1 Are there any other governmental proposals for relaxed to an extent which enables managing directors to main- reform of the corporate rescue and insolvency regime in tain proper business operations. Loans granted to a company at your jurisdiction? risk of insolvency during that period will not be considered an immoral contribution to the delay in filing for insolvency and will therefore not result in lender’s liability. In addition, rights The introduction of an out-of-court restructuring procedure to claw back certain acts (e.g. payments or granting of securities) is discussed both on an EU level and in the German literature and reverse transactions have been considerably restricted. This and practice. On an EU level, a directive on preventive restruc- particularly applies to the repayment of loans granted during the turing measures and measures to increase the efficiency of insol- aforesaid suspension period as well as to the securities provided vency and restructuring procedures is set to be voted on for 26 for them. March 2019 in the European Parliament. On a national level,

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Dr. Thomas Hoffmann is co-head of Noerr’s Restructuring & Insolvency practice group. He has been advising companies in distressed situations and during insolvency proceedings for over 20 years. His typical instructions include bridge and restructuring financing on the basis of restructuring plans that meet the requirements of the German Federal Court of Justice as well as the restructuring of syndicated loans or listed bonds. The preparation and, if necessary, implementation of insolvency (plan) restructurings in self-administration proceedings on a debtor’s side is just as much a part of his advisory activities as the representation and analysis of restructurings in the interests of shareholders or creditors. Thomas is a managing director of Team Treuhand GmbH, a Noerr company which offers services in distressed situations, e.g. as a restructuring shareholder in a dual-benefit trust, a security trustee or a joint representative of bond creditors under the German Bonds Act.

Noerr LLP Tel: +49 69 9714 77161 Börsenstraße 1 Email: [email protected] 60313 Frankfurt am Main URL: www.noerr.com Germany

Isabel Giancristofano is an associate partner in Noerr’s Restructuring & Insolvency and Corporate practice groups and is based in our London office. She specialises in complex cross-border transactions, especially with German-UK aspects. Isabel regularly advises on international insolvency and restructuring cases as well as issues relating to the launch of new businesses in Germany and the coordination of multi-jurisdictional matters. Isabel has good knowledge of the German, UK and Iberian markets. Her clients include companies, funds, German and foreign insolvency administrators, as well as banks; the focus of her practice is usually to rescue a company, but she has also advised on large-scale sales and liquidations.

Noerr LLP Tel: +44 20 7562 4338 Tower 42, 25 Old Broad Street Email: [email protected] London EC2N 1HQ URL: www.noerr.com United Kingdom

Noerr stands for excellence and an entrepreneurial approach. With highly Offices: Alicante; Berlin; Bratislava; Brussels; Bucharest; Budapest; experienced teams of strong characters, Noerr devises and implements Dresden; Düsseldorf; Frankfurt; Hamburg; London; Moscow; Munich; New solutions for the most complex and sophisticated legal challenges. United York; Prague; and Warsaw. by a set of shared values, the firm’s 500+ professionals are driven by one www.noerr.com goal: our client’s success. Listed groups and multinational companies, large and medium-sized family businesses as well as financial institutions and international investors all call on the firm. As one of the leading European law firms, Noerr is also internationally renowned with offices in 11 countries and a global network of top-ranked “best friends” law firms. 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.

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Hong Kong Hong Kong

Nick Gall

Ashima Sood

Gall Kritika Sethia

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Whether or not a company must enter a restructuring or insol- makes a gift or enters into a transaction with a person without vency process will depend on various factors, including whether receiving any consideration, or enters into a transaction for a it is solvent or not. A solvent company will be able to restruc- consideration, the value of which is significantly less than the value ture using schemes of arrangement at any time. of the consideration provided by the company. The liquidator may challenge the validity of any such transactions which took place five years prior to the commencement of the winding up. 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 Unfair preferences example, are there any special rules or regimes which An unfair preference occurs where a payment has been made apply to particular types of unsecured creditor (such by the company to a creditor when it is insolvent, but before the as landlords, employees or creditors with retention commencement of its winding up, with the effect of putting the of title arrangements) applicable to the laws of your creditor in a better position than it would otherwise have been jurisdiction? Are moratoria and stays on enforcement in the liquidation of the company. The liquidator may chal- available? lenge the validity of any such transactions which took place two years prior to the commencement of the winding up if the credi- Insolvency tors are ‘associates’ (e.g. director or employee), or six months for In a creditors’ voluntary liquidation and a compulsory liquidation, any other creditor. If the challenge is successful, the court may generally the creditors have the most significant influence on the restore the position to what it would have been if the company company’s situation. In a compulsory liquidation, the creditors had not entered into the relevant transaction. initiate the process and are also responsible for nominating and voting for the appointment of a liquidator, and a committee of Creation of a floating charge inspection to supervise the liquidator in the conduct of the liquida- A floating charge may be declared invalid if created within 12 tion. In a creditors’ voluntary liquidation, the liquidator nominated months prior to the commencement of a liquidation, where by the creditors will normally prevail in the event of a conflict with immediately following the creation of the charge the company the liquidators appointed by the shareholders and creditors. granting the security becomes insolvent. The period extends Secured creditors stand outside the liquidation as they are gener- to two years in respect of floating charges created in favour of ally entitled to be paid out of the proceeds of their security ahead persons who are connected with the company. of all other claims. Unsecured creditors have limited rights in any liquidation as Post-petition disposal of assets they are ranked the lowest amongst all creditors. An unsecured In case of a compulsory winding up by the court, pursuant to creditor would not rank higher than other creditors even if leave Section 182 of the CWUPMO, any disposition of the property of was granted in his/her favour to proceed with or commence an the company including transfer of shares or alteration in the status action against the company in compulsory liquidation and that of the members of the company, after the commencement of the action was ultimately successful. winding up, is considered void unless the court orders otherwise. A landlord would not be allowed to distrain for rent due before the commencement of winding up of the company in respect of Extortionate credit transaction which he/she is a creditor, but will need to prove his/her debt. The court may set aside any extortionate credit transactions Employees would be considered unsecured creditors of the entered into three years before the commencement of a volun- company, except in respect of any statutory claims arising under tary winding up, the date on which a special resolution was the CWUMPO, which would constitute preferential debts. passed to wind up the company or on the date of the winding Creditors with lien would have the right to hold the assets of the up order made by the court. A transaction will be consid- debtor, although this right would not generally extend to the power ered extortionate if, having regard to the risk accepted by the of sale (which should be sought from the Court). person providing the credit, the terms require grossly exorbitant Generally, an unpaid vendor with a retention of title arrange- payments in respect of the provision of credit or grossly contra- ment would be entitled to retain possession of goods which he/she vene ordinary principles of fair dealing. has sold but not delivered to an insolvent purchaser. 32 Restructuring Options Restructuring In a restructuring (whether formal or not), it is again the credi- 3.1 Is it possible to implement an informal work-out in tors who have the most significant influence on the company’s your jurisdiction? situation.

Moratoria or stay of enforcement Yes. Most restructurings in Hong Kong take place by way of There are no provisions available for moratorium or stays on informal work-outs, compositions and arrangements essentially enforcement. The fact that a company is in the process of made by agreement of the parties concerned. restructuring does not prevent an individual creditor from suing the company, seizing the company’s property or presenting a 3.2 What formal rescue procedures are available winding up petition. in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can 2.3 In what circumstances are transactions entered creditors and/or shareholders block such procedures into by a company in financial difficulties at risk of or threaten action (including enforcement of security) challenge? What remedies are available? to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- Transactions at an undervalue down dissenting classes of stakeholder? A transaction at an undervalue takes place when the company

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There are no formal procedures available to achieve a restruc- 3.5 What impact does each restructuring procedure turing of the company’s debts in Hong Kong. The only excep- have on existing contracts? Are the parties obliged to tion is a scheme of arrangement. The Companies Ordinance perform outstanding obligations? What protections of Hong Kong provides for procedures for court-sanctioned are there for those who are forced to perform their schemes of arrangements which may be entered into by a outstanding obligations? Will termination and set-off company with its creditors and/or members, and for companies’ provisions be upheld? amalgamation (as among group companies). A debt-for-equity swap arrangement may form part of a The impact of a restructuring procedure on existing contracts restructuring of a company. This will generally involve the depends on the terms of the scheme and the terms of the dilution or elimination of existing shareholders’ equity in the contract. For example, a contract may contain restrictions on company. restructuring or allow counterparties to terminate the contracts Unlike many jurisdictions, there are no statutory provisions in the event of a restructuring. There is no statutory protection on pre-packaged insolvencies in Hong Kong, or any arrange- for those who continue to perform their outstanding obligations ment whereby the business of the company is carried on under when the restructuring process is underway. Termination and a new and separate special corporate vehicle. Nevertheless, set-off provisions in the contract would be upheld subject to the it is not uncommon for companies to be restructured under a terms of the scheme. pre-packaged arrangement. The fact that a company is in the process of negotiating a 3.6 How is each restructuring process funded? Is any work-out or putting in place a scheme of arrangement does not protection given to rescue financing? prevent an individual creditor from suing the company, seizing the company’s property or presenting a winding up petition. Some (often smaller) creditors will deliberately take such actions A consensual restructuring on an informal basis can be achieved once they know that: through a debt-for-equity swap, which involves the creditors (a) they are not getting a better deal from the proposed exchanging all or part of their debt for shares in the company, scheme of arrangement or even paid off in full; and the issuance of convertible notes at a low rate of interest with an (b) major creditors are in favour of the scheme of arrangement. optionf o converting into shares, and/or through ‘white knight’ The only way of cramming down dissenting stakeholders is investors. in a sanctioned scheme of arrangement. If a scheme of arrange- Currently, there is no legislation granting any protection to ment is sanctioned by the court, it becomes binding on all cred- rescue financing. itors and, as a result, the rights of creditors may change. Until that point, however, unsecured creditors may take any enforce- 42 Insolvency Procedures ment actions available to them against the company. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? 3.3 What are the criteria for entry into each restructuring procedure? The key insolvency procedures available to wind up a company There are no specific criteria to be met by a company before are as follows: negotiating a work-out or a scheme of arrangement. That being (1) a members’ voluntary liquidation (it should be noted that said, restructuring arrangements must be agreed by, and made this is a solvent liquidation); binding on, all creditors, otherwise a dissenting creditor may (2) a creditors’ voluntary liquidation; and frustrate the rescue plan and petition for a winding up. (3) a compulsory liquidation.

4.2 On what grounds can a company be placed into 3.4 Who manages each process? Is there any court each winding up procedure? involvement?

A work-out is managed by the creditor(s) and the management A members’ voluntary liquidation is only available where the of the company. company is solvent. Having made a full inquiry into the compa- On the contrary, a scheme of arrangement is substantially ny’s affairs, the directors must have also formed an opinion that supervised by the court, although the management of the the company will be able to pay all its debts within 12 months company remains in place throughout the restructuring process. of the commencement of the winding up and sign a certificate Once a proposal has been devised and presented to the share- of solvency to that effect. The shareholders must also pass a holders and creditors, an application is made to the court to special resolution to wind up in a General Meeting. convene meetings of the respective classes of shareholders and A creditors’ voluntary liquidation will occur where the creditors. company decides to place itself into voluntary liquidation but After the court makes an order that the meetings of the respec- the directors are unable to certify the solvency of the company tive classes of creditors and shareholders can be convened, (i.e. the company is insolvent), or the liquidator is at any time of notice of the date and time of these meetings is advertised. At the opinion that the company will not be able to pay its debts in these meetings, a majority of 75 per cent in value and 50 per cent full within the specified period. in number is required to approve the proposed scheme. A compulsory winding up order may be made by the court After approval, a petition for sanction must be issued and, at where: the hearing of such petition, the court will consider whether or (1) the company has passed a special resolution for winding not to sanction the scheme. If the scheme is sanctioned by the up by the court; court, a copy of the relevant court order must be filed with the (2) the company has failed to commence its business within Companies Registry in Hong Kong. one year from its incorporation, or suspends its business for a whole year;

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(3) the company has no members; 4.5 What impact does each winding up procedure have (4) the company is unable to pay its debts as and when they fall on existing contracts? Are the parties obliged to perform due; outstanding obligations? Will termination and set-off (5) the event, if any, occurs if the memorandum and articles provisions be upheld? provide that the company is to be dissolved; or (6) the court is of the opinion that it is just and equitable that See the answer to question 2.3 above in respect of avoidance the company be wound up. of disposition of property after a presentation of petition and avoidance of transfers after commencement of a voluntary 4.3 Who manages each winding up process? Is there winding up. As explained in question 2.3 above, the liquidator any court involvement? also has the power to avoid or set aside certain transactions to ‘claw back’ assets of the company in order to increase the funds available to distribute to creditors. A voluntary liquidation is managed by the directors of the Set-off applies in liquidation where there have been mutual company until the appointment of the liquidator. After the credits or mutual debts or other mutual dealings between the resolution for winding up is passed and before the appointment company and the creditor before a winding up order is made. of the liquidator, the directors may exercise their powers only In case of a winding up, parties can terminate a contract if with the sanction of the court. there is an express provision in the contract to that effect. In case of a voluntary liquidation by creditors, while the directors continue to manage the process, the creditors have a greater say. 4.6 What is the ranking of claims in each procedure, A compulsory winding up is commenced by issuing a peti- including the costs of the procedure? tion against the company. The court will hear the petition and make an order for compulsory winding up if it is satisfied that The order of payment in a liquidation is generally as follows: grounds for winding up have been established. It is managed (1) expenses of the winding up, including the liquidator’s remu- by a provisional liquidator, Official Receiver or the liquidator, neration. The order of priority of the costs in a winding up as the case may be. is set out in rule 179 of the Companies (Winding up) Rules (Cap. 32H); 4.4 How are the creditors and/or shareholders able (2) preferential debts; to influence each winding up process? Are there any (3) any preferential charge on distrained goods; restrictions on the action that they can take (including (4) the company’s general creditors; and the enforcement of security)? (5) shareholders.

On the appointment of a liquidator in a members’ voluntary 4.7 Is it possible for the company to be revived in the liquidation, all the powers of the directors cease, although a future? liquidator or the shareholders in a General Meeting can sanction their continuance. Similarly, in a creditors’ voluntary liqui- In a voluntary liquidation, the company will be permanently dation, the powers of the directors will also cease. However, the dissolved three months after the liquidator files the final committee of inspection or, if there is no committee, the credi- account and return with the Companies Registry in Hong Kong tors, can sanction their continuance. In contrast, appointments following the final meeting of creditors. of directors, agents and employees are automatically terminated In a compulsory winding up, the liquidator can apply to the when the court makes a winding up order under a compulsory court for an order to permanently dissolve the company once winding up. the affairs of the company have been completely wound up. The rights of the shareholders will also lapse, although it is Dissolution brings the company to an end. worth noting that the shareholders may still vote in a General Meeting for the continuance of the directors’ powers in a members’ voluntary liquidation. 52 Tax Unsecured creditors have limited rights in any liquidation as they are ranked the lowest amongst all creditors. When a 5.1 What are the tax risks which might apply to a winding up order has been made or a provisional liquidator has restructuring or insolvency procedure? been appointed, creditors must seek leave from the court to continue with, or commence proceedings against, the company. If the company continues to trade or sells its assets, it would be An unsecured creditor would not be ranked higher than other subject to tax on its profits. creditors even if leave was granted in his favour to proceed or commence an action against the company in compulsory liqui- 62 Employees dation and the action is successful. On the other hand, secured creditors stand outside the liqui- 6.1 What is the effect of each restructuring or dation as they are entitled to be paid out of the proceeds of insolvency procedure on employees? What claims would their security ahead of all other claims. That said, if the secu- employees have and where do they rank? rity created is a floating charge, the preferential debts (e.g. sums owing to employees and the government) must be paid before the floating charge holder. Restructuring Generally, a work-out or a scheme of arrangement has no effect on employees. Their employment is not transferred

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automatically between entities as a result of the restructuring. (1) the foreign insolvency proceedings are collective insol- Either (i) the employee accepts the offer of employment with vency proceedings; and the new entity, (ii) the employee resigns, or (iii) the employment (2) they are commenced in the company’s country of is terminated by the employer on grounds of redundancy. The incorporation. employee would be entitled to termination payments pursuant In a recent decision, Hong Kong courts rendered recognition to the Employment Ordinance (Cap. 57). and assistance to a Japanese insolvency proceeding as it was clear from the evidence that the company was in a collective insol- Insolvency vency proceeding in its place of incorporation. It was found In a compulsory winding up, all employment contracts will be that the insolvency regime in Japan was similar to that in Hong automatically terminated, unless the court orders otherwise. Kong and accordingly, the trustee in bankruptcy was vested On the other hand, the commencement of a voluntary liquida- with similar powers under Hong Kong laws, including the right tion does not automatically terminate the service contracts of to take control of the company’s property in Hong Kong and employees. In the event that an employee’s contract is termi- administer it, the right to order an examination of a person nated, that employee becomes a preferential creditor of the concerning the affairs of a company, the right to seek docu- company in respect of any statutory claims such as unpaid ments from a third party concerning the company’s affairs, etc. wages, severance payments, pay for accrued but unused annual leave, wages in lieu of notice, etc. Once an employer becomes 7.3 Do companies incorporated in your jurisdiction insolvent, employees may apply to receive ex gratia payments out restructure or enter into insolvency proceedings in other of the Hong Kong Protection of Wages on Insolvency Fund if jurisdictions? Is this common practice? a winding up petition has been presented against the employer. The Fund covers wages owed in respect of services rendered Although it is common for Hong Kong companies to have to an employer during the four months prior to the last day of assets and operations elsewhere, there are obvious difficulties service (capped at HK$36,000), pay for untaken annual leave in dealing with insolvencies of such companies in jurisdictions and untaken statutory holidays (capped at HK$10,500), wages other than Hong Kong, especially while safeguarding and real- in lieu of notice (capped at HK$22,500) and severance payment ising the assets. (capped at HK$50,000 plus 50% of any excess entitlement) payable to an employee under the Employment Ordinance. 82 Groups 72 Cross-Border Issues 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for 7.1 Can companies incorporated elsewhere use co-operation between officeholders? restructuring procedures or enter into insolvency proceedings in your jurisdiction? Hong Kong does not have the concept of a group liquidation. Generally,n i a winding up of a group company/companies, each Whilst the United Nations Commission on International Trade company of the group is treated as a separate legal entity and Law (UNCITRAL) has adopted the Model Law on Cross-Border the interest of a single company is not sacrificed for the larger Insolvency, there are no statutory provisions in Hong Kong to interest of the group. To secure co-operation and also for prac- implement the UNCITRAL Model Law. Notwithstanding this, tical reasons, the court may permit the same liquidator to take a foreign liquidator may initiate a new liquidation in Hong Kong control of insolvent companies within a group, subject to any against the foreign company. However, the court will only exer- conflict of interest. cise its discretion to make a winding up order against a foreign company if, amongst other requirements, there is sufficient connection within the jurisdiction of Hong Kong. 92 Reform

9.1 Are there any other governmental proposals for 7.2 Is there scope for a restructuring or insolvency reform of the corporate rescue and insolvency regime in process commenced elsewhere to be recognised in your your jurisdiction? jurisdiction?

The key proposals for reform in the current insolvency regime Hong Kong courts rely on common law principles for recog- include, inter alia, the introduction of: nition of and providing assistance to foreign restructuring (1) provisional supervision rescue provisions for companies and insolvency processes. A foreign liquidator may be able with minimum court involvement; to protect assets of a foreign debtor in Hong Kong where the (2) a moratorium on creditors’ claims; foreign winding up order is extraterritorial (i.e. extends to assets (3) provisions relating to payment of outstanding wages and situated in Hong Kong) and is fair (i.e. does not depart from benefits to employees; and the pari passu rule for treating all creditors equally). In order to (4) stringent provisions for insolvent trading in order to achieve this, the foreign liquidator may commence proceedings encourage directors to initiate provisional supervision at in Hong Kong seeking a declaration regarding the effect of the an early stage. foreign insolvency proceedings and to recover debts. Generally, foreign insolvency proceedings will be recognised in Hong Kong if the following criteria are satisfied:

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Nick Gall is Senior Partner and head of the insolvency practice at Gall. His practice areas cover commercial litigation, insolvency, fraud and asset tracing, regulatory/criminal and employment matters. Nick has extensive experience in a range of contentious insolvency and bankruptcy proceedings where he has acted for liquidators, receivers, creditors and directors. He advises on 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.

Gall Tel: +852 3405 7688 3/F, Dina House Email: [email protected] Ruttonjee Centre, 11 Duddell Street URL: www.gallhk.com Central Hong Kong

Ashima Sood is an Associate at Gall. She has experience in general commercial and corporate litigation and contentious insolvency matters. Ashima’s contentious insolvency experience includes: advising and assisting clients in respect of shareholders’ and directors’ disputes; identification, protection and realisation of assets in insolvent estates; security enforcement; corporate and personal debt recovery; and cross-border insolvency issues.

Gall Tel: +852 3405 7688 3/F, Dina House Email: [email protected] Ruttonjee Centre, 11 Duddell Street URL: www.gallhk.com Central Hong Kong

Kritika Sethia joined the firm in July 2019 as a Legal Analyst with previous experience in civil and commercial litigation as well as mergers and acquisitions. She is qualified as an Advocate under the Indian Advocates Act, 1961. During her experience as a litigator in India, she has dealt with matters in the area of contract laws, company laws, property law, environmental law as well as family laws. She has experience in litigation, drafting and mediation.

Gall Tel: +852 3405 7654 3/F, Dina House Email: [email protected] Ruttonjee Centre, 11 Duddell Street URL: www.gallhk.com Central Hong Kong

Gall is a leading dispute resolution law firm in Hong Kong. We specialise in and examinations; security enforcement; corporate and personal debt handling highly complex disputes, many of which involve multi-jurisdictional recovery; and cross-border insolvency issues. litigation. Our lawyers have a wealth of experience in a wide variety of litiga- Our clients also include appointment takers, creditors, bondholders, finan- tion, mediation and arbitration. cial institutions, investment funds, distressed companies and company Our core practice areas include commercial litigation, fraud and asset directors and practitioners in Hong Kong. tracing, employment disputes, restructuring and insolvency, obtaining www.gallhk.com 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

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India India

Sachin Gupta

Dhir & Dhir Associates Varsha Banerjee

12 Overview 22 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 Banking Law Reforms Committee (BLRC) which preceded company in financial difficulties? Is there a specific the enactment of the Insolvency and Bankruptcy Code, 2016 point at which a company must enter a restructuring or insolvency process? (Code), clearly stated that India under the proposed regime shall be taking the course of “creditors in possession” as opposed to “debtors in possession”. The entire proceedings under the Code The directors/managers of a company in financial difficul- are controlled and regulated primarily by the financial creditor ties, while having the obligations and duties as applicable to all who, owing to their position, is entrusted with the resolution of directors/managers, in terms of the Companies Act, 2013 must a company. The debtor under the Code has very limited rights primarily ensure that all their actions were bona fide and that such of participation and is ultimately subject to the commercial directors/managers did all in their knowledge to avoid proceed- wisdom of the Committee of Creditors (CoC) which consists ings under the Code. The Code seeks to initiate proceedings of the Financial Creditor. In the present scenario, the spectrum against delinquent directors/managers for wrongful trading and tilts in favour of a creditor-friendly insolvency regime. failure to exercise due diligence in minimising potential loss to the creditors of the company. There are no specific parameters or points wherein a company 1.2 Does the legislative framework in your jurisdiction can enter an insolvency or restructuring process. The only crite- allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what rion under the Code is the existence of default in payment of extent are each of these used in practice? either financial or operational debt for an amount exceeding INR 1.00 crore (earlier the default threshold was INR 1.00 lacs) above. Under the legislative framework, only the formal restructuring mechanism is available in India. When we talk about informal 2.2 Which other stakeholders may influence the regimes, there was previously a series of frameworks and guide- company’s situation? Are there any restrictions on the lines issued by the Reserve Bank of India (RBI) as the regulator action that they can take against the company? For example, are there any special rules or regimes which of banks and financial institutions as well as non-banking finan- apply to particular types of unsecured creditor (such cial companies under bilateral discussions between the banks as landlords, employees or creditors with retention and the debtor through the Joint Lenders’ Forum such as the of title arrangements) applicable to the laws of your Corporate Debt Restructuring (CDR) scheme, the Systematic jurisdiction? Are moratoria and stays on enforcement Debt Restructuring (SDR) scheme, the Scheme for Sustainable available? Structuring of Stressed Assets (S4A), etc. However, with effect from 12 February 2018, the earlier RBI norms were repealed In terms of the Code, either the financial creditor, i.e. credi- and only a single restructuring mechanism was proposed, vide tors who have disbursed an amount to the company against the the RBI Circular dated 12 February 2018. Recently, the Hon’ble consideration for time value of money, or the operational cred- Supreme Court of India stuck down said RBI Circular dated 12 itor, i.e. creditors who have provided any goods or services to February 2018 as ultra vires, pursuant to which a circular dated the company including employees and statutory authorities, can 7 June 2019 was introduced by the RBI which gave an option initiate proceedings for insolvency or liquidation against the of restructuring within a period of 180 days from the date of company. reporting of default by the lenders. Restructuring, if any, under Once proceedings are admitted against a company under the said circular requires the consent of 75% of lenders by value and Code, the moratorium comes into force in terms of Section 14 60% of lenders by numbers. of the Code. Once the moratorium kicks in, there cannot be

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any coercive recovery action against the company. There is a lender and mutually decide to restructure the debt through a stay on enforcement proceedings against the company along One-Time Settlement or any other mechanism. with restraints on the recovery of any property by an owner or lessor where such property is occupied or in the possession of 3.2 What formal rescue procedures are available the company. In addition, the supply of essential goods and in your jurisdiction to restructure the liabilities of services to the company shall also not be terminated during the distressed companies? Are debt-for-equity swaps period of moratorium. However, in order to safeguard the rights and pre-packaged sales possible? To what extent can of the creditors who continue to provide the leased premises as creditors and/or shareholders block such procedures well as the supply of goods and services, the Code specifically or threaten action (including enforcement of security) provides that the cost of said service during the period of insol- to seek an advantage? Do your procedures allow you vency proceedings shall be paid; failing which, there shall be the to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? right of termination available to the creditor.

When we talk about formal rescue procedures available in our 2.3 In what circumstances are transactions entered jurisdiction, we primarily talk about the process under the into by a company in financial difficulties at risk of challenge? What remedies are available? Code. The Code, at the first stage, gives an opportunity to the suspended board/management to seek withdrawal of the insolvency proceedings upon approval of 90% of the members of the Under the Code, the following transactions can be annulled by CoC. Such a withdrawal can be implemented upon any mutual the Adjudicating Authority: terms as agreed between the company and the CoC. In case (a) Preferential Transaction, i.e. a transaction giving pref- no such withdrawal is possible, the company can be resolved erence to one creditor over the other as regards an ante- through the approval of a resolution plan. Under the Code, an cedent debt. The look-back period for such transaction expression of interest is floated to invite the prospective resolu- is one year from the insolvency commencement date for tion applicants who may come forward with a resolution plan. transactions with unrelated parties and two years from the The suspended board/management may also submit its plan, insolvency commencement date for related parties. provided it does not suffer from any ineligibility as enumerated (b) Undervalued Transaction, i.e. a transaction whereby the under the Code. The resolution plan is approved upon obtaining company makes a gift or transfers one or more assets for consent of 66% of the members of the CoC. Any plan approved a consideration, the value of which is significantly less by the requisite majority is binding on all other stakeholders. than the value of consideration provided by the company Debt-for-equity swaps can be made a part of the resolution or commensurate market value. The lookback period plan under the Code. In addition, such debt to equity swaps for such transaction is one year from the insolvency can be proposed under a scheme of arrangement or compro- commencement date for transaction with an unrelated mise in terms of Section 230 of the Companies Act, 2013. A party and two years from the insolvency commencement scheme under Section 230 of the Companies Act is required to date for a related party. be approved by 75% of creditors of each class, i.e. secured as well (c) Extortionate Credit Transaction, i.e. a credit transaction as unsecured creditors. A scheme under the Companies Act involving receipt of financial or operational debt during also requires consent of 75% of its members, i.e. shareholders. the two-year period preceding the insolvency commence- For the purposes of raising any objection to the scheme, it is ment date, if the terms of such transaction required exor- imperative that the shareholder has at least 10% shareholding, bitant payments to be made by the company. and a creditor must have at least 5% debt of the particular class. (d) Any transaction entered into with an intent to defraud Accordingly, it is evident that in both a resolution plan under creditors or for any fraudulent propose. The Insolvency and Bankruptcy Code (IBC) as well as a scheme In case of any of the above transactions, the Adjudicating under the Companies Act, the majority can cram-down the Authority is duly empowered to annul such transaction, restore minority. such property to the company, release security interest, if any, Pre-pack sales, as on date, are not a part of the formal regime. created on such property, direct for payment of the amount by However, the Insolvency and Bankruptcy Board of India has the party to the company, impose penalty, punishment, etc. formed a committee for suggesting a mechanism to approve pre-pack schemes and the report of the committee is in the 32 Restructuring Options process of having statutory approval as on date.

3.1 Is it possible to implement an informal work-out in 3.3 What are the criteria for entry into each your jurisdiction? restructuring procedure?

The informal regime viz. the RBI Regulatory regime was duly The restructuring process under the Code is triggered upon the applicable in India. However, with effect from 7 June 2019, only filing of an application with the Adjudicating Authority by either a single scheme is in force. The scope and applicability of the the financial creditor, the operational creditor, or the company RBI Circular, which is based on the resolution of the majority itself, upon occurrence of default in payment of either financial lenders, is applicable in the current scenario (for multi-party or operational debt exceeding INR 1.00 crore (earlier the default lending). However, whether such informal regime approved by threshold was INR 1.00 lacs). the requisite majority lenders can interfere with and take away The scheme for compromise and arrangement under Section the statutory rights of the creditors, who are either dissenting or 230 of the Companies Act can be proposed by any member or not part of the RBI Circular, is an issue which is required to be creditor of the company. Such a scheme is required to be placed seen in appropriate cases. before the National Company Law Tribunal for final approval. In addition, under the informal regime, in case of a single (Please note that the change in amount is on account of a recent lender and any other entity, the borrower may approach its amendment introduced in the IBC in light of COVID-19.)

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3.4 Who manages each process? Is there any court 42 Insolvency Procedures involvement?

4.1 What is/are the key insolvency procedure(s) The resolution process under the Code is managed by a resolu- available to wind up a company? tion professional who is guided by the decision of the CoC. In addition, the Adjudicating Authority finally approves a resolu- A company may be wound up in cases where the resolution tion plan in accordance with the provisions of the Code. process under the Code fails and the company is relegated to A scheme of compromise and arrangement is placed by the liquidation proceedings. In case there is no resolution plan member or creditor before the National Company Law Tribunal. approved, the company is sent to liquidation under the Code The scheme is approved after following the process as enumer- after expiry of 180/270 days. Additionally, there is a provision ated under the Companies Act, 2013 which envisages the calling for voluntary winding up under the Code and under Section 271 of the meeting of shareholders, creditors both secured and unse- of the Companies Act, 2013, which states that a company can be cured, inviting objections from the Registrar of Companies, wound up in cases where it has acted against the sovereignty and Income Tax Authority, any regulator involved such as SEBI, integrity of India, just and equitable grounds, etc. Stock Exchanges, etc.

4.2 On what grounds can a company be placed into 3.5 What impact does each restructuring procedure each winding up procedure? have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their Liquidation under the Code as stated in question 4.1 above can outstanding obligations? Will termination and set-off take place upon expiration of 180/270 days according to the provisions be upheld? terms under Section 33 of the Code. Further, the Code also provides that in case the CoC so decides, a company may be sent There is no provision which provides for automatic termination to liquidation before the expiration of the 180/270-day period. In of the existing contract. Under the Code, once the resolution case no resolution plan is received by the Adjudicating Authority process is triggered, a moratorium comes into force; however, within the maximum period permitted for the completion of the parties who are required to continue to perform their obligation insolvency resolution process, or if the Adjudicating Authority on account of moratorium (lessor of the premises and parties rejects the resolution plan on grounds of its non-compliance providing essential services) are duly protected in as much as with the requisites of the Code, then it shall, inter alia, pass an said parties are required to pay the expenses during the period of order for the liquidation of the company. the insolvency resolution process, failing which they may refuse Voluntary liquation can be initiated only by a solvent company to perform their obligations. However, under an approved reso- which has not committed any default and subject to making a lution plan, there may be termination of existing contracts, the declaration under an affidavit from a majority of the directors, rights whereof are required to be seen on a case-by-case basis. stating that either the company has no debt or it will be liable to Under a resolution plan, set-off may also be considered, but there pay its debt in full from the proceeds of the assets to be sold, and is no statutory provision under the Code dealing with the same. that the liquidation process is not being initiated with the intent In f case o a scheme of arrangement and/or compromise, the to defraud any person. Further, within four weeks of the decla- contracts are ordinarily continued. However, the scheme may ration, a special resolution of the members of the company shall provide for different situations which may result in the termina- be passed for the same purposes. tion of existing contracts. Upon approval of the scheme by the Winding up under the Companies Act, 2013 can take place in requisite majority, the same can be placed before the National cases where any of the grounds mentioned in said Act arise in Company Law Tribunal for approval. violation. Section 271 provides for the following grounds: (i) passing of a special resolution to that effect; (ii) acting against the sovereignty and integrity of India, secu- 3.6 How is each restructuring process funded? Is any protection given to rescue financing? rity of state, public relations with a foreign state, public order, decency or morality; (iii) conducting its affairs in a fraudulent manner; Once an insolvency resolution process is initiated under the (iv) default in filing the financial annual returns with the Code, the restructuring process is funded out of the proceeds Registrar of Companies for the immediately preceding five available with the company itself which is at the dispensation financial years; and of the resolution professional. In case funds are not available (v) if the Tribunal is of the opinion that it is just and equitable with the company, the members of the CoC can approve interim that the company should be wound up. funding to be obtained by the company, or the members can contribute funds as interim funding. The interim funding forms part of the insolvency resolution process cost and is required to 4.3 Who manages each winding up process? Is there be paid in priority. any court involvement? Funding under a scheme of arrangement and compromise is provided by the one proposing the scheme. Prior to approval Once a liquidation order is passed in case of a company, the of the scheme, the company continues to operate on its own, Adjudicating Authority appoints the resolution professional as wherein the shareholders or the promoters may be required to the liquidator. Upon his appointment, all the powers of the bring in funds for continued operations. board of directors, key managerial personnel and the partners of

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the company vest with the liquidator. The liquidator is in charge ■ wages and any unpaid dues owed to employees other than of the entire process of liquidation under the Code. He may workmen for a period of 12 months preceding the liquida- approach the Adjudicating Authority for orders to give effect to tion commencement date; the process of liquidation. ■ financial debts owed to unsecured creditors; A liquidator also acts in terms of the Code for voluntary liqui- ■ equal ranking between any amount due to the Central dation, and is amenable to the supervisory jurisdiction of the Government and the State Government in respect of Adjudicating Authority. whole or any part of the period of two years preceding In cases of liquidation proceedings under the Companies the liquidation commencement date and debts owed to Act, 2013, the liquidator appointed by the National Company a secured creditor for any amount unpaid following the Law Tribunal conducts the process under the jurisdiction of the enforcement of security interest; Tribunal. ■ any remaining debts and dues; ■ preference shareholders, if any; and ■ equity shareholders or partners, as the case may be. 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 4.7 Is it possible for the company to be revived in the the enforcement of security)? future?

Once a company is undergoing liquidation under the Code, its Liquidation is distinct from resolution in as much as liquidation predominance, which existed at the stage of resolution, ceases to marks the end of the company. However, liquidation may not have effect. The creditors exercise a limited role for the purpose necessarily result in marking the end of a company in as much of approval of a scheme of arrangement in terms of Section 230 as, even under liquidation, the company can be revived through of the Code. Upon commencement of the liquidation process, a scheme under Sections 230–231 of the Companies Act, 2013, the secured creditors have two options for the recovery of their or sold as a going concern in which case the company continues dues, i.e. either to relinquish their security interest to the liqui- with its legal existence. dation estate and receive proceeds from the sale of assets by the liquidator, or to stay outside the liquidation process and 52 Tax recover their dues by enforcement of their security interest. The payment under liquidation proceedings is made in terms of waterfall as provided under Section 53 of the Code. 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?

4.5 What impact does each winding up procedure have In a scheme of arrangement and compromise, all applicable on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off taxing statutes are required to be made applicable in their provisions be upheld? entirety. Thus, in such cases there can be issues pertaining to the Income Tax Act, stamp duty, sales tax, excise, customs, etc. As far as tax dues are concerned, they are a part of the oper- The Code deals with any automatic cessation of existing ational dues and thus require to be treated as part of the oper- contracts upon the initiation of winding up/liquidation proceed- ational dues of the company. Under an approved resolution ings. However, contractual terms more often than not have plan, tax dues can be written down, reduced, modified or extin- a clause pertaining to the termination of the agreement upon guished. In case of liquidation proceedings, the statutory dues commencement of liquidation proceedings. During the period are lower down the hierarchy and are thus, more often than not, of liquidation proceedings, no suit or legal proceedings can be unlikely to be paid in entirety. initiated against the company. The liquidation order envisages a notice of termination to the employees and the directors of the company. In cases when the liquidator is of the view that the 62 Employees company can operate as a going concern during the period of liquidation proceedings, he may seek performance of contract 6.1 What is the effect of each restructuring or with due consent of the parties concerned. It is noteworthy that, insolvency procedure on employees? What claims would unlike a moratorium, which is in force during the insolvency employees have and where do they rank? resolution period and provides for the continuance of essential service, no such provision is there in case of liquidation proceed- Employees are treated as operational creditors under the Code ings. Thus, termination of the contract is clearly statutorily and accordingly, under an approved resolution plan, their envisaged during the stage of liquidation proceedings. outstanding dues can be written down or reduced, employment terms modified or terminated, etc. However, such treatment to be accorded to employees under the Code in case of a resolution 4.6 What is the ranking of claims in each procedure, plan should not be less than the liquidation value and the water- including the costs of the procedure? fall in terms of Section 53 of the Code. In case of liquidation proceedings under the Code, employees in terms of waterfall, as Below is the ranking of claims under Section 53 of the Code: enumerated in Section 53 of the Code, are entitled to payment of ■ the insolvency resolution process costs and the liquidation dues for two years and are paid in priority, on a pari passu basis, costs paid in full; along with the dues of secured financial creditors. ■ equal ranking between workmen’s dues for a period of 24 months preceding the liquidation commencement date and the debts owed to a secured creditor in the event that such secured creditor has relinquished security;

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72 Cross-Border Issues insolvency proceedings under Dutch law as such did not interfere with the insolvency proceedings under the Code. The administrator under Dutch Law was only made a participant in 7.1 Can companies incorporated elsewhere use the proceedings under the Code without any rights of primacy. restructuring procedures or enter into insolvency Accordingly, companies incorporated in India can be restruc- proceedings in your jurisdiction? tured under the Code.

The provisions of the Code are applicable to companies incor- 82 Groups porated in India. Accordingly, companies incorporated elsewhere cannot seek restructuring under the Code. In terms of the Companies Act, 2013, companies incorporated elsewhere 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for can be wound up as unregistered companies if they have busi- co-operation between officeholders? ness in India. However, companies incorporated elsewhere can initiate proceedings against companies registered in India and can also Currently, there is no provision in India which regulates and duly participate in proceedings under the Code as well as under provides for a mechanism of group insolvency. One or more the Companies Act, 2013 as creditors of companies incorpo- members of the group are treated as separate entities and in a rated in India. pending insolvency process of a single company, they are simply treated as related party creditors, stakeholders, shareholders, etc. The Adjudicating Authority, however, in some matters such 7.2 Is there scope for a restructuring or insolvency as the Videocon matter, directed itself for consolidation of the process commenced elsewhere to be recognised in your proceedings of group companies in order to ensure the achieve- jurisdiction? ment of a holistic resolution process. Similarly, the National Company Law Appellate Tribunal, in the matter of IL&FS Sections 234 and 235 of the Code provide for recognition of group companies, directed an overall resolution plan for all 348 a restructuring or insolvency process commenced elsewhere, group companies which are presently in process. However, wherein India has reciprocal arrangements with such jurisdic- despite the initiative taken by the judiciary there is no statutory tion. Said provisions of the Code are not yet in force. regime guiding group insolvency as on date in India.

7.3 Do companies incorporated in your jurisdiction 92 Reform restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in There is no bar on companies incorporated in India to restruc- your jurisdiction? ture or enter into insolvency proceedings in other jurisdictions. The legality and binding nature of such insolvency proceedings The Government is in the process of coming up with pre-pack are required to be looked into, in light of question 7.2 above, in schemes and cross-border insolvency proceedings as well as cases where the proceedings occur in a jurisdiction outside of group insolvency provisions. The Insolvency and Bankruptcy India and are sought to be made on the basis of proceedings Board of India (IBBI), which was created under the Code, has in India. The Jet Airways matter offers the instance wherein formulated committees for all of the above circumstances and a company incorporated in India is undergoing insolvency reports have been placed before the Government for appropriate proceedings in another jurisdiction. In this case, the pending legislation to be introduced in order to regulate the same.

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Sachin Gupta heads the Corporate Litigation & Dispute Resolution Practice of the firm as a Senior Partner, with prime focus on complex civil & commercial litigation and arbitration matters. He graduated as an Engineer and thereafter completed his degree in Law. He has immense exposure in the field of corporate commercial law. His areas of expertise are rehabilitation of distressed entities, shareholders dispute resolution, issues related to equity and debt, recovery of debts, and securitisation-related matters, bidding and commercial disputes arising out of other contractual matters. He handles matters in the Supreme Court of India, High Courts, various Tribunals and other quasi-judicial and alternate dispute resolution forums. He also provides consultancy, opinions and strategic advice to clients to manage their litigations. He has advised clients in a variety of litigation matters relating to commercial contracts, shareholder agreements, oppression, mismanagement, winding up, white-collar crimes, amalgamation and restructuring of companies, both at trial and appellate level, including handling writ litigations.

Dhir & Dhir Associates (D&D) Tel: +91 11 4241 0000 D-55, Defence Colony Email: [email protected] New Delhi, 110 024 URL: www.dhirassociates.com India

Varsha Banerjee is a Partner and has been in practice for the last 11 years. She represents corporate entities, institutional creditors, shareholders, investors and large lender groups or entities in insolvency matters, major debt restructurings, and asset sale transactions. She focuses her litigation practice on corporate restructuring and insolvency matters with expertise in the rehabilitation of distressed entities, issues pertaining to recovery of debt, securitisation-related matters and commercial disputes arising out of other contractual matters, civil suits and arbitration law arising in cases of distressed entities. She regularly appears before various judicial/quasi-judicial authorities in the country including the Supreme Court of India, various High Courts and NCLTs/NCLAT. She has been advising clients on various issues pertaining to liquidation processes and other related aspects of insolvency and restructuring law. She is also an active member of ‘INSOL India’ and the ‘International Women’s Insolvency & Restructuring Confederation’ in India.

Dhir & Dhir Associates (D&D) Tel: +91 11 4241 0000 D-55, Defence Colony Email: [email protected] New Delhi, 110 024 URL: www.dhirassociates.com India

Dhir & Dhir Associates (D&D) is a full-service Indian law firm, founded has created an upper edge over other firms. The firm members partici- in 1993 to serve as a single-window legal service provider in a dynamic pate regularly in thought leadership forums as panellists and are also the commercial environment with offices in New Delhi, Mumbai and recipients of prestigious awards by Asian Legal Business, Business World, Hyderabad along with an international representative office in Japan. Achromic Point, Public Diplomacy Forum, etc. Right from the Sick Industrial Companies Act (SICA) to IBC, D&D and www.dhirassociates.com its Managing Partner Mr. Alok Dhir are consistently ranked as leaders in Restructuring & Insolvency by The Legal 500, Chambers & Partners, AsiaLaw Profiles, IFLR1000, India Business Law Journal (IBLJ), etc. Mr. Dhir has also featured as an exceptional lawyer in ‘The A-List: India’s top 100 lawyers’ by IBLJ, since 2016. D&D has a very substantial, well-rounded practice of both litigation and non-litigation work. The firm has handled more than 60% of cases before BIFR and AAIFR and currently handles more than 25% of the total NPAs in India. Hence, with over 36 years of existence, it

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Indonesia Indonesia

Immanuel A. Indrawan

Indrawan Darsyah Santoso Eric Pratama Santoso

12 Overview options in view of salvaging the company would be to: (i) seek for an additional capital injection or loan from the shareholders; or (ii) offer a debt-to-equity swap to its creditors. 1.1 Where would you place your jurisdiction on the If the debtor is no longer able or, has projected that it would spectrum of debtor to creditor-friendly jurisdictions? not be able to, fully pay its due and payable debts, it may consider voluntarily filing for suspension of payment or bankruptcy to Indonesia is a rather friendly jurisdiction for creditors. The the competent Commercial Court. Indonesian Law number 37 of 2004 on Bankruptcy and Suspension of Payments (“Bankruptcy Law”) provides consid- 2.2 Which other stakeholders may influence the erable leverage to the creditors, among others relatively loose company’s situation? Are there any restrictions on the requirements to initiate bankruptcy and suspension of payments action that they can take against the company? For proceedings without having to consider the financial condi- example, are there any special rules or regimes which tion of the debtor, and significant roles are given to creditors to apply to particular types of unsecured creditor (such determine the results of such proceedings. The Bankruptcy Law as landlords, employees or creditors with retention tends to protect creditors’ interests. It was historically formu- of title arrangements) applicable to the laws of your lated to swiftly settle enormous bad debts during the Indonesian jurisdiction? Are moratoria and stays on enforcement monetary crisis in the late 1990s. available?

Certain creditors (that may be unsecured) may influence the 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal debtor’s situation such as lessors or property owners who are restructuring and insolvency proceedings, and to what entitled to terminate lease or rental agreements following decla- extent are each of these used in practice? ration of bankruptcy or suspension of payments by Commercial Court. The termination normally leads to repossession of leased/rented properties by said creditors. Besides that, credi- The Bankruptcy Law is silent regarding informal workouts, tors with retention of title may also influence debtors’ situation but it is not uncommon for debtors and creditors to conduct as they have rights to retain properties of the debtors until their negotiations in view of reaching an out-of-court settlement and claims are fully paid. avoiding the last resort of filing for a bankruptcy or suspension There are no formal classifications of unsecured creditors. of payments. However, some of them might have specific rights subject to Formal restructuring is possible in both bankruptcy and their respective terms of agreement as explained in the above. suspension of payments process where debtors may propose a The Bankruptcy Law imposes a 90-day stay period during the composition plan to creditors. The composition plan shall be bankruptcy and suspension of payments proceedings, in which ratified by the Commercial Court subject to agreement of quali- period secured creditors are also stayed from taking enforce- fied majority of the creditors. ment action. 22 Key Issues to Consider When the 2.3 In what circumstances are transactions entered Company is in Financial Difficulties into by a company in financial difficulties at risk of challenge? What remedies are available? 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 Any action undertaken by a bankrupt debtor prior to the decla- point at which a company must enter a restructuring or ration of bankruptcy that is detrimental to creditors will be insolvency process? subject to cancellation if there is proof that the bankrupt debtor and its counterparty were aware or should have been reasonably aware that such action would be detrimental to the creditors. The Board of Directors must conduct its fiduciary duties in Unless proven otherwise, the bankrupt debtor and its coun- managing the company, which also include raising funds to terparty are deemed aware or should have been aware that an relieve the financial difficulties. When the company has a nega- action taken within one year prior to bankruptcy declaration tive balance, it would presumably be more difficult to obtain is detrimental to the creditors if it meets any of the following new third-party loans, hence in such situation the apparent criteria:

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a. The bankrupt debtor was not legally required to perform Both secured and unsecured creditors objecting to the compo- such action. sition plan may use their rights to vote against it. Unsecured b. The action is related to an agreement where the bankrupt creditors that are against the composition plan would be debtor’s obligations are disproportionately much bigger crammed down if most of the creditors give their approving vote compared to those of its counterparty. and the Commercial Court ratifies the plan. On the other hand, c. The action is a payment or grant of security for debts that dissenting secured creditors are still entitled to be compensated have yet to be due and payable. with the lowest value of the security object or actual value of the d. In the case where the bankrupt debtor is an individual, secured debt. the action was done for the interest of his/her family Any dissenting creditor may also challenge the ratification of members/relatives or affiliated companies. the composition plan at the Commercial Court. However, said e. In case the bankrupt debtor is an entity/company, the objection can only be submitted on the following limited stat- action was made in the interest of directors, commis- utory grounds: sioners, shareholders, controllers and/or their family a. the value of the debtor’s estate is significantly higher than members as well as relatives. the amount agreed under the composition plan; f. In the case where the bankrupt debtor is an entity/ b. there is not enough certainty that the composition plan company, the action was done for the interest of other would be implemented successfully; companies affiliated with it or within the same group of c. the settlement is reached through fraud, conspiracy or companies. deceit between the debtor and the creditor(s); and/or Payment for a due and payable debt may also be cancelled in d. fees and disbursements of experts and administrator(s) the occurrence of below conditions: have not been paid or there is lack of guarantee of such a. there is proof that the relevant creditor is aware that a payment. bankruptcy petition against the debtor had been filed when the payment was made; or 3.3 What are the criteria for entry into each b. the payment is a conspiracy between the bankrupt debtor restructuring procedure? and certain creditor for the latter’s sole benefit above the interest of other creditors. Cancellation of actions (actio pauliana) mentioned in the above The restructuring, commonly referred to in Indonesia as suspen- can be done through the filing of a claim by the Court-appointed sion of payments, can be initiated by: (i) the debtor, provided receiver to the relevant Commercial Court. it has more than one creditor and it is no longer able or, has projected that it wouldn’t be able to, fully pay its debts; or (ii) 32 Restructuring Options the creditor. Only the relevant government authority is entitled to file petition for suspension of payments when the debtor is one of the following: banks; securities companies; insurance and 3.1 Is it possible to implement an informal work-out in reinsurance companies; pension funds; or state-owned enter- your jurisdiction? prises engaged in public interest sector.

The Indonesian regulatory framework has yet to formally regu- 3.4 Who manages each process? Is there any court late the possibility of informal workouts, but in practice it is involvement? implemented especially when the debtor still has commercial viability. During temporary suspension of payments, one or more Court- appointed administrator(s) together with the debtor shall 3.2 What formal rescue procedures are available manage the assets of the debtor. The joint management of the in your jurisdiction to restructure the liabilities of administrator and debtor is supervised by a Court-appointed distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can supervisory judge in the aim of getting the debtor through the creditors and/or shareholders block such procedures whole process towards a restructuring. or threaten action (including enforcement of security) The administrator and supervisory judge shall be relieved to seek an advantage? Do your procedures allow you from their duties upon ratification of the debtor’s composi- to cram-down dissenting stakeholders? Can you cram- tion plan by the Commercial Court or if the debtor entered into down dissenting classes of stakeholder? bankruptcy proceedings if the composition plan is rejected by the creditors. Suspension of payments is the formal rescue procedure available in Indonesia to restructure the liabilities of distressed debtors. It 3.5 What impact does each restructuring procedure can be initiated by either the debtor or the creditor, if the debtor have on existing contracts? Are the parties obliged to is unable or has projected that it would not be able to fully pay perform outstanding obligations? What protections its due and payable debts to the creditors. are there for those who are forced to perform their Once the Commercial Court has declared a debtor under outstanding obligations? Will termination and set-off temporary suspension of payments, the creditors are prevented provisions be upheld? from collecting payment from the debtor whilst the secured creditors’ rights to take enforcement action are stayed. A debtor in The suspension of payments will mainly affect existing contracts suspension of payments is expected to submit a composition plan which stipulate a payment obligation by the debtor, in that the to the creditors for their deliberation. The debtor may propose payment will be suspended until after conclusion of the suspen- debt-for-equity swaps in the composition plan. Indonesian laws sion of payments proceedings. Additionally, any enforcement do not specifically regulate pre-packaged sales although these are action already initiated by a creditor for repayment of debt will possible to propose, provided they can maximise debtor’s estate be stayed until after conclusion of the suspension of payments so that debt restructuring is more feasible. proceedings.

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Provisions of existing contracts remain valid and binding, but declared bankrupt by the Commercial Court if it can be the debtor will need approval from the Court-appointed admin- summarily proven that the company has at least two outstanding istrator in order to perform obligations that might have a detri- debts and one of them is due and payable. If the foregoing mental effect to the debtor’s estate. requirements are satisfied, any creditor or the company itself In cases where the debtor and the counterparty had entered may initiate the bankruptcy procedure. into a contract prior to suspension of payments proceedings and A company can also be placed into a bankruptcy procedure the parties have yet to perform their obligations or have only after it has gone through a suspension of payments process but partially performed such, the counterparty may seek whether failed to reach a restructuring due to any of the following: the administrator will continue performance in a timeframe a. the company submitted a composition plan but it is rejected to be agreed between the counterparty and the administrator by the creditors; or in a timeframe determined by the supervisory judge if the b. the company did not submit a composition plan; or parties failed to reach an agreement. If the administrator fails to c. the company did submit a composition plan which is respond or is not willing to continue performance, the contract agreed by the creditors, but the Commercial Court refuses will be terminated and the counterparty is entitled to claim for to ratify it. compensation in the suspension of payments proceedings as an unsecured creditor. The Bankruptcy Law also provides specific 4.3 Who manages each winding up process? Is there consequences applicable to contracts involving the delivery of any court involvement? goods or rental by the debtor. When the termination clause in a contract provides that the counterparty may unilaterally terminate the contract upon the Specifically in the context of insolvency, winding up (dissolu- debtor being declared under suspension of payments (or suspen- tion and liquidation) of a debtor is initiated in the following sion of payments petition is filed against the debtor), such right occasions: to terminate should be upheld but any pre-agreed compensation (i) if the debtor, after having been declared bankrupt, is in payable as a result of the termination would have to be brought insolvent condition. In this case, the Court appoints the as an unsecured claim in the suspension of payment proceedings. receiver as liquidator; or Set-off may be done during suspension of payments proceed- (ii) if the bankruptcy of the debtor is lifted by virtue of final ings, provided that: (i) the claim and the debt had existed prior to and binding court decision and the bankruptcy estate is commencement of the suspension of payments proceedings; or insufficient to even pay for the bankruptcy costs. In this (ii) the debt and the claim occur as a result of transaction or legal case, the shareholders will appoint the liquidator. act committed prior to the commencement of the suspension of payment proceedings. A debt or claim taken over by a third 4.4 How are the creditors and/or shareholders able party can only be set off if it was taken over in good faith prior to influence each winding up process? Are there any to commencement of the suspension of payments proceedings. restrictions on the action that they can take (including the enforcement of security)?

3.6 How is each restructuring process funded? Is any protection given to rescue financing? If the winding up is voluntary, shareholders have the key influence, while creditors can merely file a claim against the company in liquidation. The shareholders will have to initiate the volun- The suspension of payments process which includes all tary winding up process by adopting resolutions approving the expenses incurred during the proceedings (e.g. making news- dissolution and liquidation of the company as well as appoint- paper announcements, organising creditors’ meetings, etc.) and ment of the liquidator. From that point on, the liquidator will administrator’s fees, is funded by the debtor. manage the process and upon conclusion, provide final liqui- On rescue financing, the Bankruptcy Law allows the debtor dator report for the shareholders’ approval. to secure additional financing from any third party only for If the winding up is compulsory, the shareholders’ influence the purpose of increasing the value of its estate. If the lender is very minimal unless they are willing to inject additional funds requires security for the loan, the debtor may provide any of its into the company. In a compulsory winding up process, the unencumbered assets as collateral. liquidation process will be led by the Court-appointed liquidator. It is important for the debtor to maintain that its estate is sufficient for the restructuring. If the suspension of payments fails to reach a restructuring, the debtor would immediately be 4.5 What impact does each winding up procedure have declared bankrupt, but the bankruptcy proceedings can only on existing contracts? Are the parties obliged to perform take place if there is sufficient estate. outstanding obligations? Will termination and set-off provisions be upheld? 42 Insolvency Procedures Declaration of bankruptcy does not automatically terminate existing contracts except where agreed otherwise by the parties. 4.1 What is/are the key insolvency procedure(s) The counterparty in a contract that has not been performed available to wind up a company? or has been partially performed may ask the Court-appointed receiver for assurance on the continuance of such contracts Under Indonesian law, the key insolvency procedure available to within a certain agreed timeframe. The supervisory judge wind up a company is the bankruptcy procedure. shall determine such timeframe if the parties failed to reach an agreement. If the receiver fails to respond or is not willing to 4.2 On what grounds can a company be placed into continue performance, the contract will be terminated and the each winding up procedure? counterparty is entitled to claim for compensation as an unsecured creditor. If the receiver agrees to fulfil the contracts, then A company established and/or existing in Indonesia can be the receiver must provide a guarantee for such fulfilment. Note

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that the foregoing provisions are not applicable to contracts 2. all creditors’ claims have been satisfied. In this case, the containing obligations that must be performed by the bankrupt creditors might not receive payment in full amount of debtor itself. their claims. Once the relevant creditor agrees on the Any contract concerning delivery of commercial goods by payment amount (which may be in full or proportionately), the debtor shall be null and void once the debtor is declared said creditor is not allowed to submit a new claim for the bankrupt. In that case, counterparties of the debtor may claim unpaid portion. for compensation in the bankruptcy proceedings as unsecured creditors. On the other hand, if the contract being declared null 52 Tax and void results in the value of bankruptcy estate decreasing, then the counterparties of the debtor are obliged to compen- 5.1 What are the tax risks which might apply to a sate such loss. restructuring or insolvency procedure? Existing rental or lease agreement can be terminated by either the receiver or the lessor on condition that the debtor has not yet paid the rental. Such termination requires service of prior The tax exposure during bankruptcy or suspension of payments notification according to the agreed notice period. If the agree- proceedings depends on the nature of each relevant transaction. ment does not stipulate any notice period, the notification shall In terms of rank of claims, the state’s claim over unpaid taxes is be given at the minimum of 90 days prior to the effective date of ranked as a preferred claim having priority over claims of unse- termination. In a case where the bankrupt debtor has paid the cured creditors (please also see question 4.6). rental in advance, the agreement cannot be terminated until the lapse of the paid rental period. Outstanding rental payment is 62 Employees considered the debt of the bankruptcy estate. Employment agreements can be terminated by either the 6.1 What is the effect of each restructuring or employee or the receiver by giving prior notice according to the insolvency procedure on employees? What claims would relevant provisions of the employment agreement or the labour employees have and where do they rank? law, or at least 45 days prior to the termination. Payment of outstanding wages is considered the debt of the bankruptcy After a company is already declared bankrupt by virtue of estate. final and binding Court decision, in the following bankruptcy Set-off provisions should be upheld if they exist prior to proceedings, employee’s rights are treated as preferential claims. declaration of bankruptcy. A debt or claim taken over by a third The order of preference depends on the type of employee’s party can only be set off if it was taken over in good faith prior right concerned. The claim for employee’s outstanding wages to the declaration of bankruptcy. The right of creditors to set (i.e. basic salary, fixed and non-fixed allowances) is prioritised off is exempted from a 90-day stay period. over claims from all other creditors even the secured creditors. On the other hand, the claim for employee’s other rights (e.g. 4.6 What is the ranking of claims in each procedure, severance package if employment is terminated) ranks below including the costs of the procedure? claims from secured creditors but takes priority over claims from all unsecured creditors including tax claims. The ranking of claims against a bankrupt debtor is as follows: 1. Claims of preferred creditors, inter alia: 72 Cross-Border Issues a. Employees’ wages (excluding employees’ other rights). b. Court fees for auctioning goods in an enforcement of 7.1 Can companies incorporated elsewhere use judgment. restructuring procedures or enter into insolvency c. Costs incurred to save goods. proceedings in your jurisdiction? d. Auction fees. e. Tax claims. Yes, any company that runs its business in Indonesia, even 2. Claims of secured creditors. These are claims of security where incorporated elsewhere, can use suspension of payments right holders (e.g. mortgage, fiduciary, pledge). procedures or enter into bankruptcy proceedings in Indonesia. 3. Claims that are preferred against specific items of bankruptcy estate (e.g. rental and repair of movable and immov- 7.2 Is there scope for a restructuring or insolvency able properties, purchase price of movable properties process commenced elsewhere to be recognised in your which payments are still outstanding). jurisdiction? 4. Claims that are preferred against the bankruptcy estate in general (e.g. claims of minors, claims of creditors who are Restructuring or insolvency processes commenced outside the under guardianship). jurisdiction of Indonesia are not recognised in Indonesia. It is 5. Claims of unsecured creditors. The claims of creditors the law in Indonesia that foreign judgments are not recognised without preferential and/or security rights. and thus cannot be enforced in Indonesian jurisdiction. Any foreign judgment that wishes to be executed in Indonesia must 4.7 Is it possible for the company to be revived in the be re-litigated. future?

7.3 Do companies incorporated in your jurisdiction Its i possible to revive/rehabilitate a bankrupt company if any of restructure or enter into insolvency proceedings in other the following conditions are met: jurisdictions? Is this common practice? 1. the company submits a composition plan that is agreed by the creditors and ratified by the Commercial Court. The The Bankruptcy Law is silent on the possibility of an Indonesian ratification legally ends the bankruptcy; or company entering into restructuring or insolvency proceedings

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in other jurisdictions. In the event that an Indonesian company In a case where a company is acting as a guarantor for other has significant presence and operation in other jurisdictions, company’s debt, either within the same group of companies or the possibility for it entering into restructuring or insolvency not, bankruptcy or suspension of payments petition can also be proceedings there is subject to the insolvency law of such juris- filed against the non-performing guarantor. dictions. However, it is unlikely for Indonesian companies to enter into restructuring or insolvency proceedings outside 92 Reform Indonesian jurisdiction, especially if most of their businesses and assets are located in Indonesia. 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in 82 Groups your jurisdiction?

8.1 How are groups of companies treated on the As of April 2020, no proposals have been made by the govern- insolvency of one or more members? Is there scope for ment for reform of the corporate rescue and insolvency regime in co-operation between officeholders? Indonesia. The Supreme Court of the Republic of Indonesia has recently issued a guidance book on the handling of bankruptcy Under the Bankruptcy Law, the premise is that a bankruptcy or and suspension of payments cases in line with the Bankruptcy suspension of payments petition can only be filed against one Law. The guidance book provides administrative and technical non-performing debtor. When there is more than one insol- details on bankruptcy and suspension of payments procedures vent company within the same group, the creditors will have to in Indonesia. file its petition separately for each company (considering each of them is a separate legal entity). Note If the insolvent debtor is a parent/holding company of a corporate group by way of shares ownership, then the parent This chapter provides basic information only and must not be company’s shares ownership in its subsidiary companies and regarded as an analysis of the subject covered, nor be treated as undistributed dividends therefrom will be held as part of the a substitute for legal advice. parent company’s bankruptcy estate.

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Immanuel A. Indrawan is a seasoned litigator and insolvency litigation is one of his key practices. He has argued at all levels of trial from the first instance to the top appellate Indonesian courts, defending Indonesian and international clients, in cases involving debt recovery, insolvency, maritime and shipping, employment/industrial relations, insurance and other corporate and commercial contentious matters. He has substantial experience in advising and representing creditors and debtors in both bankruptcy and suspension of payments proceedings in Indonesia. Some notable matters he has been involved in include acting for one of the world’s largest aircraft lessors in the bankruptcy proceedings of an Indonesia airline, and acting for a prominent heavy earthmover equipment company in the suspension of payments proceedings of an Indonesian gold mine company. Immanuel is a registered receiver/administrator for bankruptcy/suspension of payments in Indonesia and a member of the Association of Indonesian Receivers and Administrators (AKPI).

Indrawan Darsyah Santoso Tel: +62 21 250 6737 Sona Topas Tower, 15th Floor Email: [email protected] Jalan Jenderal Sudirman Kav. 26 URL: www.idsattorneys.com Jakarta 12920 Indonesia

Eric Pratama Santoso is one of the Partners leading the Corporate & Securities practice at Indrawan Darsyah Santoso. Eric regularly acts as Indonesian counsel in a multitude of M&A transactions, representing either side of the parties in acquisition transactions and joint ventures, as well as acting as lead counsel in merger and restructuring arrangements. He also advises clients in debt restructuring arrangements, either on the side of distressed debtor or creditor pursuing claims Eric has counselled clients in a variety of M&A matters, such as foreign shareholding restrictions, direct or indirect change of control, employment benefits triggered by a change of ownership, closing conditions, representations & warranties, escrow/holdback arrangements, intellectual property ownership, limitation of liability, indemnification, governmental and third-party consents, non-compete and non-solicit agreements, and choice of dispute resolution forums. Eric is a member of the Indonesian Advocates Association (PERADI) and the Indonesian Association of Capital Market Legal Consultants (HKHPM).

Indrawan Darsyah Santoso Tel: +62 21 250 6737 Sona Topas Tower, 15th Floor Email: [email protected] Jalan Jenderal Sudirman Kav. 26 URL: www.idsattorneys.com Jakarta 12920 Indonesia

Indrawan Darsyah Santoso (IDS) is an independent Indonesian firm which was launched in 2013 when its founders decided to start a new venture, having amassed years of practice in one of the largest law firms in Indonesia. The idea since the inception of IDS has always been to provide top-notch legal services by consistently providing direct accessibility, a client-focused approach, as well as timely and insightful advice. Having been forged in a high-profile international environment, we are equipped with the experience as well as the know-how to adapt to worldwide market demands. We are able to work seamlessly in a global environment and relish the opportunity to assist in the most complex and challenging legal matters, both contentious and non-contentious. It is always our goal at IDS to provide comprehensive legal advice and a problem-solving approach to all facets of our clients’ business in Indonesia. www.idsattorneys.com

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Italy Italy

Pirola Pennuto Zei & Associati Massimo Di Terlizzi

12 Overview Within this new frame, company liquidation is considered the last option for the company, to be activated only when no other restructuring procedures are feasible. 1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions? 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal Pursuanto t the first Italian bankruptcy law (R.D. 267/1942 restructuring and insolvency proceedings, and to what “the Bankruptcy Law”), bankruptcy in Italy was considered an extent are each of these used in practice? indelible social stain and returning in a better-fortune status (so-called in bonis) was considered difficult to implement and According to the current Italian legal system, it is possible to socially unacceptable. As a result, the Italian legal system was distinguish between: primarily aimed at the liquidation of the debtor and not at the 1. pre-bankruptcy procedures: certified restructuring plan recovery of the debtor. (“piano di risanamento” – art. 67 of the Bankruptcy Law); Only with reforms, starting from 2003, did the focus of the and debt restructuring agreement (“accordo di ristrutturazione legislator turn to the recovery of the debtor by emulating the del debito” – art. 182bis of the Bankruptcy Law); mechanism of the so-called “second chance”, born in the US. 2. procedures that are not yet bankruptcy: composition with Following reforms, until 2012, had as their primary aim the creditors (“concordato preventivo” – art. 160 et seq. of the recovery of the debtor’s productive capacity through compo- Bankruptcy Law) that can aim either to rescue or to wind sitions with creditors, also in “blank”, which facilitated the up the company; and continuation of the business activity, with the further possibility, 3. bankruptcy (“fallimento” – art. 5 et seq. of the Bankruptcy through these compositions, to split the debtor into classes. Law), bankruptcy agreements (“concordato fallimentare” – art. In addition, the legislator implemented the so-called “certified” 124 et seq. of the Bankruptcy Law) and compulsory admin- restructuring plan and debt restructuring agreement, which are istrative liquidation (“liquidazione coatta amministrativa” – independent of judicial control during the processing phase. art. 124 et seq. of the Bankruptcy Law). Reforms from 2013 to 2015, introduced instruments aimed There are also special procedures provided by Legislative at creditors’ interests in the context of the compositions with Decree 270/1999 (so-called “Prodi-bis”), as amended by the creditors, such as minimum payment thresholds, “competing “Marzano Decree”, that involve large companies. offers” and specific informational obligations, in particular in In light of the last Reform contained in Legislative Decree n. the “blank” compositions. 14/2019, the Italian legal system will provide for a single proce- Furthermore, through the Delegation Law of 2017 n. 155 (the dure in order to access the above-mentioned procedures under “Crisis and Insolvency Code”), the legislator reached a point points 1, 2 and 3, which will be regulated all together in the of balance between the protection of creditors’ interests, debt- so-called “Crisis and Insolvency Code”. or’s interests and the continuation of the business activity as the Only the above-mentioned Extraordinary Administration of main objective. Large Companies procedures will remain regulated by special Indeed, pursuant to Legislative Decree n. 14/2019, which laws (“Prodi-bis” – Legislative Decree n. 270/1999 and “Marzano will come into force definitively on 15 August 2020, the credi- Decree” – Decree n. 347/2003). tors and the debtor will both obtain new protections. The creditor will be able to constantly monitor the health conditions of the company through some monitoring tools and, on the other 22 Key Issues to Consider When the hand, the debtor will be aware of his crisis before the “judicial Company is in Financial Difficulties liquidation” (the “new name” for the bankruptcy procedure given to avoid the stigmatisation of the debtor) and will also be 2.1 What duties and potential liabilities should the able to access various alternative instruments in order to ensure directors/managers have regard to when managing a the continuity of the business of the company. In other words, company in financial difficulties? Is there a specific the Italian Legislator has anticipated the moment in which the point at which a company must enter a restructuring or company and the creditors will be aware of the crisis of the insolvency process? company in order to allow the restructuring of the company and keep safe the value of the business. Directors can run into several possible liability scenarios:

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i. not having promptly detected the symptoms of the crisis The 2019 Reform has also amended the moratoria agreement or not having reacted promptly; and “stays” on enforcement in the Italian legal system. ii. having provoked or worsened the company’s crisis; Firstly, the Reform has extended the duration of the mora- iii. having badly used the necessary or useful tools in order to toria agreement, regulated by art. 182-septies, paragraph 5 of the deal with the crisis or limit its effects; and/or Bankruptcy Law, having the purpose of stabilising relations iv. not having guaranteed the “par condicio creditorum”. with the company’s financial creditors for an established period Nevertheless, a company crisis depends not necessarily on of time. directors’ behaviour until that moment, but may also arise when The moratoria agreements are not necessarily linked to other directors, due to their improper capacity to manage the company, crisis instruments regulated by the bankruptcy law, but can be can make decisions that, even though they were chosen to dispel efficiently used to reach the signing of: the crisis, can actually worsen the situation. 1. a certified recovery plan, pursuant to art. 67, third para- In general, directors’ decisions remain unquestionable by the graph, lett. d), Bankruptcy Law; court (“business judgment rule”), unless they could appear mani- 2. a debt restructuring agreement, pursuant to art. 182bis of festly uneconomic, imprudent or hazardous for the company. the Bankruptcy Law; Directors must prepare organisational tools that allow them 3. a restructuring agreement with financial intermediaries, to know in advance, of any financial crisis that can lead to insol- pursuant to art. 182-septies of the Bankruptcy Law; vency. In other words, they must be able to ascertain whether 4. a direct or indirect arrangement with creditors, pursuant the company can continue its business or not, due to the finan- to art. 161 of the Bankruptcy Law; and cial situation of the company and its capacity to make profit. 5. a settlement agreement with creditors. There are also potential criminal liabilities for directors due Through the 2019 Reform, the moratoria agreement negoti- to their actions or omissions that have led to the insolvency of ated between the debtor company and one or more participating the company. banks or financial intermediaries, representing 75% of financial It is difficult to identify the specific moment in which a credits, also produce effects with respect to non-adherent banks company enters into financial crisis. However, it is important and financial intermediaries if they were informed of the start of to pay attention to the symptoms of the financial status of a negotiations and had been able to participate. company, such as delay or non-payment of withholdings, taxes, According to the 2019 Reform, the agreement can also be social contributions or repayment of mortgage or the receipt of extendedo t creditors who are not qualified as banks/financial injunctions notified by creditors. creditors on condition that those creditors may be identified in The Reform of Legislative Decree n. 14/2019 also extends the homogeneous categories (with equal satisfaction on debtor’s duties of company’s directors in order to keep safe the compa- assets as in the bankruptcy procedure) and the plan under the ny’s assets. In particular, the Reform amends, with immediate agreement may not have winding nature. effect, art. 2476 of the Italian Civil Code concerning the liability Furthermore, the “automatic stay”, to be used in case of access of company’s directors, introducing their liability towards to one of the available procedures in case of company’s crisis, the creditors (and not only towards the shareholders as it was will also be amended by the above-mentioned Reform. The new before the Reform) for the non-observance of the obligations system will no longer provide an automatic inhibition of indi- concerning the protection of the integrity of company’s assets. vidual enforcement actions filed by creditors; starting from the According to the new framework, creditors can file a liability entry into force of the Reform, the debtor will have to ask the lawsuit when the assets are insufficient to satisfy their credits. judge to declare the “automatic stay” within his petition for the admission to the procedures. 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the 2.3 In what circumstances are transactions entered action that they can take against the company? For into by a company in financial difficulties at risk of example, are there any special rules or regimes which challenge? What remedies are available? apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your In case of transactions entered into by a company in financial jurisdiction? Are moratoria and stays on enforcement difficulties during the so-called “suspect period” (i.e. the period available? before the declaration of bankruptcy), the Italian legal system provides for the possibility of “claw-back” actions underlying Other stakeholders may influence a company’s situation through such payments with the following terms and conditions: the filing of a lawsuit or executive actions against the company i. the payments made by the debtor occurring within the in order to obtain the payment of their credits. There are no suspect period of two years before the bankruptcy decla- special rules applicable to unsecured creditors; when a company ration, may be clawed-back in order to settle debts that is not able to/or decides not to oppose to lawsuits filed by credi- would have expired in the period following the declaration tors, they can also file before the competent Court a petition for of bankruptcy; the declaration of bankruptcy of the company. The Italian legal ii. the “abnormal” transactions listed in Bankruptcy Law that system, as amended by the 2019 Reform, will consider the judi- took place within the suspect period of one year or six cial liquidation (the old “bankruptcy”) as the last remedy for the months before the bankruptcy declaration – depending on company in crisis. This could change the way in which creditors the type of transaction – may be clawed back if the other can interfere with the credit recovery. party does not prove that they were unaware of the debt- Furthermore, in some proceedings involving companies’ or’s insolvency status; restructuring (such as in case of a certified restructuring plan iii. the “normal” transactions listed in Bankruptcy Law that or debt restructuring agreement), the main creditors (often took place within the suspect period of six months before the banks) may ask for a change in the governance, especially the bankruptcy declaration can be clawed back if the bank- regarding the management, selecting new directors to whom ruptcy receiver proves that the other party knew of the assign the process of business turnaround. insolvency of the debtor;

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iv. the Bankruptcy Law also provides cases in which claw- The 2019 Reform amended the systematic structure of back actions cannot be filed (e.g. payments for goods and the rules concerning the “certified restructuring plan” by services that can be included: in the normal course of busi- introducing a specific article (art. 56 of the new “Crisis ness with standard terms; payments due to employees; acts and Insolvency Code”) regulating such tool, while in and payments made or securities granted on a debtor’s the previous system they were regulated within the same assets on the basis of a certified restructuring plan, a debt article (art. 67 of the Bankruptcy Law) concerning claw- restructuring agreement or a composition with creditors; back actions. In the new framework, the claw-back actions sale or preliminary contracts of sale of real estate at a fair are regulated separately. price; and payments on a bank account when they do not ■ Debt Restructuring Agreements (“accordo di ristruttur- permanently reduce the debtor’s exposure); and azione del debito” – art. 182bis of the Bankruptcy Law) v. in addition, transactions entered into between companies Debt restructuring agreements aim to allow to the debtor of the same group may be clawed back under the rules in financial difficulties to restructure its debts and obtain governing extraordinary administration proceedings (the protection against creditors, through the validation by suspect period is extended to three/five years). the court of an agreement made with at least 60% of its Transactions entered into by a company in financial difficul- creditors. ties may also be clawed back under the rules governing the ordi- This is a private negotiation between the debtor and its nary claw-back actions pursuant to the Italian Civil Code. creditors; the court is involved only at the end of the negotiation process to obtain the validation of the restructuring 32 Restructuring Options agreement. The application for the validation shall include a fair- 3.1 Is it possible to implement an informal work-out in ness opinion by an independent expert regarding, among your jurisdiction? others, the reasonableness of the restructuring agreement to ensure full payment of creditors who are not party of the agreement. These creditors have to be paid within i) There is the possibility to enter into informal work-out agree- 120 days from the validation of the agreement in case of ments between the debtor and its creditors, so long as it is under- expired credits, or ii) 120 days from the expiring date of stood that these agreements i) are freely negotiable between the the credits in case those credits are not expire at the date of parties, and ii) are binding only for the parties who have entered the validation of the agreement. into them. Nevertheless, what often occurs is that such agree- For companies that have, for the main part, their debts ments are finalised to hide – and so postpone – a financial crisis. to banks and other financial operators, there is the possi- These work-out agreements, in case of the subsequent default bility to enter into an agreement with a part of such cred- of the company, may have consequences in terms of claw-back itors in order to delay the payment of their credits; such actions and criminal liabilities too; therefore, it is preferable to agreements are also binding for the creditors that have not enter into the restructuring agreements provided by the law. entered into them (so-called “stand-still agreements”). Before the restructuring agreement is signed, it is always 3.2 What formal rescue procedures are available possible for the company to prevent any individual action in your jurisdiction to restructure the liabilities of by creditors, by filing an application with the court distressed companies? Are debt-for-equity swaps including i) the proposal of the restructuring agreement, ii) and pre-packaged sales possible? To what extent can an affidavit certifying the ongoing negotiations with cred- creditors and/or shareholders block such procedures itors, and iii) a fairness opinion by an independent expert or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you confirming the suitability of the proposed agreement. to cram-down dissenting stakeholders? Can you cram- After the validation of the agreement, every dissenting down dissenting classes of stakeholder? stakeholder that has not entered into the agreement may file an opposition against the agreement. Art. 57 of the new “Crisis and Insolvency Code” substan- In order to restructure the liabilities of distressed companies, tially reproduces the content of the current art. 182bis of the Italian system provides the following options: the Bankruptcy Law not modifying the features of the ■ Certified Restructuring Plan (“piano di risanamento” – ordinary discipline of the restructuring agreements, while art. 67 of the Bankruptcy Law) the new art. 61 of the Code, as mentioned above under The Certified Restructuring Plan is a private agreement question 2.2, extends the effectiveness of a restructuring between the debtor and its creditors, and it is named agreement not only to financial creditors, but also to “certified restructuring plan” since it has to be “certified” non-financial creditors. by an independent expert, who guarantees the feasibility ■ Composition with Creditors (“concordato preventivo” – art. and truthfulness of the plan. The court is not involved in 160 et seq. of the Bankruptcy Law) this process. This procedure involves an agreement between the debtor Only the payments and, in general, the transactions made and its creditors, subject to the supervision of the court, with in accordance with the certified plan, are not subject to the aim of: i) avoiding the bankruptcy by means of liquida- claw-back actions. tion of the company (“concordato liquidatorio”); or ii) reaching The most relevant effects connected with the adoption an agreement with its creditors in order to restructure its of a certified restructuring plan will be provided by arts. debts and continue the business (“concordato con continuità”). 166 and 324 of the Code, which regulate respectively, i) The procedure starts filing before the Bankruptcy Court: the exemption from the claw-back action of the deeds and i) a petition; ii) a plan (that has to provide for the payment payments made in the execution of the plan, and ii) the of, at least, 20% of the unsecured creditors and may exemption from criminal liabilities relating to the crimes provide for the division of the creditors in classes); and iii) of preferential bankruptcy and simple bankruptcy possibly an expert’s opinion confirming the feasibility of the plan resulting from the fulfilment of such acts and payments. and the truthfulness of the accounting data.

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The court is involved in verifying the existence of the ■ Debt Restructuring Agreement and Composition legal requirements (e.g. the minimum payment of unse- with Creditors cured creditors of 20%) to enter into the procedure, but All companies that perform commercial activities may the approval is made by the creditors. The composition is enter into a debt restructuring agreement or file a petition approved by the favourable vote of the unsecured creditors for a composition with creditors unless the debtors are (who will be subject to the partial repayment of their credits) expressly excluded by the application of the Bankruptcy representing the majority of the claims admitted to vote. Law (art. 1). Creditors whose rights accrued before the date of filing In the light of the new Reform, non-commercial entrepre- of the compositions cannot start legal action against the neurs will have access to the procedures described above, debtor to enforce their claims until the court’s approval with percentages of agreement depending on the type of becomes definitive; creditors whose rights accrued after debtor requesting and the objective that the plan sets. the filing of the composition have the right to be paid ■ Extraordinary Administration before the other admitted creditors (“creditori prededucibili”). For Prodi’s proceedings, it is necessary that the company The decision to file an application for a composition with has more than 200 employees and a total indebtedness of creditors is taken by i) directors in case of limited compa- no less than two-thirds of the aggregate of the total assets nies, and ii) by the shareholders in case of partnership. and the revenues of the preceding financial year. The new regulation of the composition with creditors is For Marzano’s proceedings, it is necessary that the company provided by the “Crisis and Insolvency Code” by art. 44 has more than 500 employees (also considered in a group) and following, with reference to the general rules for the and a total indebtedness of no less than 300 million euros. access to any procedure, and in art. 84 and following, with reference to the specific rules applicable only to composi- 3.4 Who manages each process? Is there any court tion with creditors. The new legislation about composition involvement? with creditors reduces terms for the deposit of the plan and the protective measures, which will be subject to a specific request of the debtor and in any case limited to 12 months. ■ The Certified Restructuring Plan (art. 67 of the ■ Extraordinary Administration Bankruptcy Law) Extraordinary Administration is a special insolvency This is a mechanism completely unrelated to the involve- procedure that is: i) supervised by the Ministry for ment of the court and the directors of the company Productive Activities; ii) applicable to large entities with manage it. significant indebtedness; and iii) specifically aimed at the ■ The Debt Restructuring Agreements (art. 182bis of the restructuring of the company. Bankruptcy Law) It may be implemented through i) the sale of the business The court is involved in the final phase for the approval of run by the company, on the basis of a programme to be the agreement while the directors of the company manage completed in one year, or ii) the restructuring of a compa- the execution of the agreement. The court has no duty of ny’s debt on the basis of a business plan aimed to restore supervision on the execution of the agreement. the company in two years. ■ Compositions with Creditors Once the competent authority admits the debtor to Prodi In compositions with creditors, the court is involved in the or Marzano’s extraordinary administration proceedings, process of the approval of the agreement; the execution the creditors, whose rights accrued prior to the date of the of the agreement is assigned to a judicial liquidator who admission, cannot take legal action against the debtor in is supervised by a judicial commissioner, both appointed order to enforce their claims. by the court who then is involved in case of extraordinary Debt-for-equity swaps transactions not planned in the agreement. This form of satisfaction of creditors (accepting to receive ■ Extraordinary Administration shares, bonds and similar in exchange of their credits), was In Prodi and Marzano’s extraordinary administration initially introduced as an alternative form of extraordinary proceedings, two phases can be identified: in the first one administration and then extended to other bankruptcy the judicial commissioner, appointed by the court, super- procedures, but it is not often used. vises the management of the company and expresses its Pre-packaged sales opinion on the existence of the conditions for the approval In case of crisis of the company, it is possible to perform of such procedure; and in the second one, the Ministry of pre-packaged plans (i.e. providing for the sale or lease of Economic Development is involved in the appointment of the debtor’s assets to a third party). These plans can be the extraordinary commissioner who manages the company. performed: i) in accordance with a restructuring procedure These rules will still apply according to the new “Crisis (for example, certified restructuring plans, debt restruc- and Insolvency Code”. turing agreements and compositions with creditors) and in this case it is not subject to claw-back actions; or ii) out of 3.5 What impact does each restructuring procedure a restructuring procedure but, in this case, the operation have on existing contracts? Are the parties obliged to can be subject to claw-back actions. perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off 3.3 What are the criteria for entry into each provisions be upheld? restructuring procedure? Among the innovations introduced by the 2019 Reform The criteria for entry into the below restructuring procedures regarding the pending contracts in case of access to an insol- are as follows: vency procedure, there is: i. an express provision granting the trustee the right of termination of the preliminary real estate sale contract;

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ii. an express provision stating the automatic termination of prior to the filing of the claim to access to the procedure, even if contracts of a personal nature; and provided by the following plan of the said procedure. It is there- iii. a specific provision regarding the employment contracts fore no longer reproduced in the provision of the second para- in force at the time of the opening of judicial liquida- graph of art. 182-quater Bankruptcy Law. tion granting the trustee the right to decide the termina- Secondly, the possibility to apply for the so-called “prededucibile” tion or maintenance of the contracts and stating that in financing is limited to cases in which it is provided for the contin- case the latter does not communicate his decision within uation of the activity, even if only for a limited period of time. four months from the opening of judicial liquidation, the contract is considered terminated by law. 42 Insolvency Procedures

The certified restructuring plan and debt restructuring 4.1 What is/are the key insolvency procedure(s) agreement available to wind up a company? The existing contracts are not affected and they normally perform as ordinary management of the company; the chance to terminate the contract is subject to the decision of the parties. According to Italian law, there are i) procedures only aimed at the winding up of the company: bankruptcy; bankruptcy agreements; and compulsory administrative liquidation, and ii) procedures Compositions with creditors Regarding the compositions with creditors aimed to restructure that can also be aimed at the winding up of the company: certi- the company (“concordato con continuità”), the existing contracts fied restructuring plan, debt restructuring plan; compositions with normally continue, but it provides the possibility for the debtor creditors; and extraordinary administration (Prodi’s procedures). to apply for the suspension or termination of pending contracts (with an indemnity provided for the counterparty according 4.2 On what grounds can a company be placed into to the provisions of the contract). The Bankruptcy Law also each winding up procedure? provides the inapplicability of the above rules to employment contracts, rental of real estate, preliminary agreement of a real In case of crisis for a company or if the corporate purpose has estate, leasing and financing for a specific deal. been reached or has become impossible to reach, the company can enter into a voluntary winding up process firstly finalising Extraordinary administration the payment of its creditors. The extraordinary commissioner can terminate pending contracts In case of winding up of company’s assets which is able to not completely performed by both parties. fully repay its debts, it is not mandatory to apply for an insol- In any case, the counterparty (“contraente in bonis”) could termi- vency procedure as, in order to avoid responsibility of the direc- nate unperformed contracts according to the Italian Civil Code tors and to guarantee in the correct way the rights of all creditors, rules about the breach of contracts. it is just required that the winding up process is run according to Set-off operations are possible, according to Italian one of the tools provided by the law. Bankruptcy Law, if both credits arose before the filing for decla- As mentioned above, once is verified that the company is not ration to the court, even if the creditor’s title has not yet expired. able to satisfy all the creditors, it becomes mandatory to wind Compensation is excluded in the following cases: up the company according to one of the following insolvency i. the creditor’s unexpired credit was purchased by the inter procedures: vivos deed after the declaration of bankruptcy or in the ■ Banktuptcy and Administrative Liquidation previous year (this rule also applies to overdue credits); and Filing a petition for these procedures is mandatory and ii. the credit is subject to certain conditions and this has not the liquidation of the company begins immediately after yet occurred. the declaration by the court (the administrative liqui- These rules will still apply according to the new “Crisis dation only applies to banks and insurance companies). and Insolvency Code”. Regarding the case of bankruptcy, the liquidation process can also be performed and closed through a bankruptcy 3.6 How is each restructuring process funded? Is any agreement (“concordato fallimentare”) in which a creditor or a protection given to rescue financing? third party can propose a plan aimed at full or partial reimbursement of the creditors. In general, the restructuring procedures are aimed at the reim- ■ Compositions with Creditors, Debt Restructuring bursement of the credits of the company but it may happen that, Agreements and Certified Restructuring Plans in order to perform the targets provided in the plan, the debtors Filing a petition for of these procedures is an opportunity for need new financing. the company and the liquidation is activated with the filing This new financing has to be included in the plan and the of the proposal or the subscription of the agreements. These independent expert must give an opinion about the possibility types of procedure allow the avoidance of bankruptcy. to reimburse this new financing. The 2019 Reform has amended art. 2486 of the Italian In the event of subsequent judicial liquidation of the company, Civil Code regarding the liabilities of the directors upon the credit arising further to this new financing is satisfied with the occurrence of a cause for dissolution of the company. preference to the other creditors (“prededucibile” according to the Bankruptcy Law). 4.3 Who manages each winding up process? Is there The 2019 Reform amended this matter, significantly restricting any court involvement? the effectiveness of the said funding. Firstly, it has completely eradicated the possibility for the ■ Bankruptcy debtor to obtain the financing to be satisfied with a preference This is managed by the bankruptcy trustee with the super- to the other creditors (“prededucibile”) which had been disbursed vision of the court and the creditors’ committee.

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■ Bankruptcy Agreements according to the Italian Bankruptcy Law. Please see the Once the agreement is approved by the court, the execu- answer to question 3.5. tion of the agreements is performed by the directors and supervised by the appointed judge, bankruptcy trustee and 4.6 What is the ranking of claims in each procedure, creditors’ committee. including the costs of the procedure? ■ Administrative Liquidation The Public Authority manages the procedure and authorises the extraordinary acts proposed by the extraordinary The ranking of claims is the following: commissioner, who is appointed by the Ministry and who i. costs of the procedure (“crediti prededucibili” according to is entrusted with the management of the company. the Bankruptcy Law); ■ Compositions with Creditors and Debt Restructuring ii. privileged creditors in order of priority provided by law Agreements (e.g. employees, artisans, professionals, taxes, contribu- See the answer to question 3.4. tions, etc.); iii. creditors secured by guarantees (in case the value of the secured property is lower than the credit, the remaining 4.4 How are the creditors and/or shareholders able part of the credit is admitted as unsecured); and to influence each winding up process? Are there any iv. unsecured creditors. restrictions on the action that they can take (including the enforcement of security)? 4.7 Is it possible for the company to be revived in the future? Regarding insolvency procedures, creditors cannot influence the winding up process; they simply have to file a petition to the court through the bankruptcy receiver, in order to request to be Despite there being no specific provision in Italian law, it is included in the list of the creditors. possible that a company will be revived in the future if its busi- Starting from the admission of the debtor to any of the winding ness has been sold for prospective business continuity, so that up procedures, the creditors cannot take executive legal actions the company may continue its activity as a different entity. individually. The creditors assisted by general or special privilege (also by pledge or mortgage) have no right to perform individual 52 Tax executions; they simply have the right to be satisfied, with preference to the other unsecured creditors, with the sum obtained by 5.1 What are the tax risks which might apply to a the sale of the secured assets. In the case that the sum obtained is restructuring or insolvency procedure? lower than the value of the credits, for the remaining debts, such creditors will be treated as the unsecured creditors. In the context of restructuring and insolvency procedures, tax liabilities are included in the debts of the company with privi- 4.5 What impact does each winding up procedure have leged nature. on existing contracts? Are the parties obliged to perform Regarding tax risks (i.e. arising from future and eventual tax outstanding obligations? Will termination and set-off assessment), the art. 14 paragraph 5bis of Legislative Decree provisions be upheld? 472/1997 (Italian law related to tax penalties and fines) provides that in the case of a sale of business of a company, performed ■ Bankruptcy and Compulsory Administrative according to a restructuring procedure (art. 67 and art. 182bis of Liquidation the Bankruptcy Law) or insolvency procedure, the buyer is not There is a general rule that the declaration of bankruptcy responsible for the tax liabilities of the seller (except in the case of a company provokes the suspension of the execution of fraud). of the contract until the bankruptcy receiver, upon the approval of the creditors’ committee, decides whether to 62 Employees perform or terminate it. The Bankruptcy Law also provides some exceptions 6.1 What is the effect of each restructuring or for contracts that automatically perform (such as rental insolvency procedure on employees? What claims would contracts and insurance contracts) or terminate automati- employees have and where do they rank? cally (such as banking contracts or proxy contracts). Finally, contracts are provided which perform automati- In case of “certified” restructuring plans, debt restructuring cally but the bankruptcy trustee can make the decision agreements and compositions with creditors aimed at restruc- regarding their termination (such as a rental contract with turing the company (“ ”), there are no the insolvency of the renter) or contracts which terminate concordato in continuità specific effects on employment contracts. automatically but the bankruptcy trustee can decide on The procedures of bankruptcy, compulsory administrative their performance (such as tender). liquidation or extraordinary administration are not causes for The same rules apply for compulsory administrative dismissal but, from the start of these procedures, the perfor- liquidation. mance by the employees is suspended until the bankruptcy ■ Compositions with Creditors and Debt Restructuring receiver or the commissioner decide on their performance or Agreements termination. In this period, the employees are entitled to receive See the answer to question 3.5. a social contribution aimed at integrating their salary (so-called The counterparty (“contraente in bonis”) could terminate “ ”). In case of bankruptcy, the credits unperformed contracts according to the Italian Civil Code cassa integrazione guadagni of employees towards the company are satisfied by the National rules on the breach of contracts. Social Welfare Institution. Furthermore, in bankruptcy and in compulsory administrative liquidation, set-off operations are possible,

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With reference to the changes introduced by the Reform 82 Groups regarding employment contracts, please see question 3.5 above.

8.1 How are groups of companies treated on the 72 Cross-Border Issues insolvency of one or more members? Is there scope for co-operation between officeholders? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? The 2019 Reform has provided an organic regulation for group company crises. In particular it provided, for the first time in the Italian legal system, a group definition, which is the following: EC Regulation 1346/2000 and EU Regulation 848/2015 intro- “all the companies, businesses and entities, excluding the State, duced the concept of COMI (Centre of a debtor’s Main Interest) which, pursuant to arts 2497 and 2545-septies of the Civil Code, according to which the declaration of the principal insolvency are subject to the direction and coordination of a company, of procedure (that involves all the assets of the debtor) must be an entity or of a natural person, on the basis of a participatory filed before the court of the state in which the company has the constraint or a contract, for this purpose it is presumed, unless centre of its interests (for the companies it is presumed that the proved otherwise, that: 1) the management and coordination COMI has to be identified with the place in which there is the of companies is exercised by the company or body required to registered office). consolidate their financial statements; 2) the companies directly It is also possible to open secondary procedures in other EU or indirectly controlled or subject to joint control are subjected States in which the debtor has a form of dependence, limited to to the management and coordination of a company or entity the assets located in those other states. with respect to the company or body that exercises management The concept of COMI is especially useful in resolving bank- and coordination activity.” ruptcy proceedings of groups of companies with offices in Following the intervention of the Reform 2019, a coordi- different Member States. nated procedure for the management of insolvency proceedings Pursuanto t EU Regulation 848/2015, the Italian Legislator regarding groups is now available within the Italian legal system. has introduced in the new “Crisis and Insolvency Code” a provi- Specifically, the request to access the new coordinated proce- sion on jurisdiction according to which the court, when it opens dure shall not necessarily be presented by the holding company, a cross-border insolvency procedure in accordance with EU since such company may not be in a crisis and, as a consequence, Regulation 848/2015, shall declare whether the procedure is the may not be interested in the procedure. main one, the secondary one or territorial. However, this does not exclude that the same or other companies of the group not in crisis may, according to the plan, partic- 7.2 Is there scope for a restructuring or insolvency ipate in the management of the crisis. process commenced elsewhere to be recognised in your 1) Management and coordination: jurisdiction? In order to access the mentioned procedure, the group shall be subject to management and coordination activity. EC Regulation 1346/2000 and, from June 2017, EU Regulation If a company that exercises management and coordination 848/2015 provide that the judgment is automatically recog- activities is not in crisis, the competent court will be iden- nised in all other Member States from the moment in which tified having regards to the company that has the highest it produces its effects in the State in which the procedure was debt exposure according to the last approved financial opened, without needing judicial intervention. This effect statements. The new rule aims to avoid that the competent is produced even if the debtor, according to the national law court is that of the seat of the holding company without of another Member State, cannot be subject to insolvency any connection with the court that is competent regarding proceedings. the other companies actually in crisis. The effects that the recognition of the procedure involves in 2) The unique proposal: every other Member State are those “provided for by the law of the The proposal, with its unitary plan or its connected plans, State of opening”, unless a secondary procedure is opened in other shall show that the group procedure concerning the indi- States. Such second procedure (that anyway is not compul- vidual companies in crisis is suitable to allow the recovery sory), if opened, produces its effects only in the State in which of the debt exposure of each single company in crisis, is opened. ensuring at the same time the convenience of a group In case of procedures opened in countries outside the EU, the procedure for the creditors. relevant effects are regulated by Italian law n. 218/1995. 3) Single procedure: The companies of a group may access a procedure before the court (either a procedure of composition with creditors 7.3 Do companies incorporated in your jurisdiction or a judicial liquidation) by filing a single appeal, asking restructure or enter into insolvency proceedings in other to access the single procedure. In these cases, a form of jurisdictions? Is this common practice? coordination of the procedures shall be highlighted with respect to the procedure the companies are willing to Companies incorporated in the Italian jurisdiction can restruc- access and would not have existed in case of individual ture or enter into insolvency proceedings according to EU procedures. Regulations for other Member State’s jurisdictions, while in the 4) Single court: case of States outside Europe, it depends on the specific treaties In order to proceed with a single procedure there will be or legal rules provided by the foreign jurisdictions. Although the appointment of a sole court (“giudice delegato”) and a sole this possibility is provided by law, such rules did not have an trustee of the procedure to simplify the management of effective execution in the past, since these types of rules are the single procedure. mostly suitable in the case of insolvency of a large company.

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5) Claw-back action: 1. it grants a six-month extension for the beginning of the The trustee of the procedure in the context of a unique alert procedures for small and medium-sized companies, procedure or of a plurality of procedures, may take actions i.e. those excluded from the duty to have a Supervisory aimed to obtain the declaration of ineffectiveness of the Board and internal auditors; acts performed in the five years prior to judicial liquidation. 2. it clarifies the notion of “crisis” by replacing the word The trustee of the procedure may also claw back deeds and “difficulty” with “imbalance” in order to give relevance to payments carried out by other group companies before an actual situation of financial stress instead of a predic- the starting of the judicial liquidation and in the two years tion of financial stress, and is so considered more accurate before the same. according to the parameters of business science; 3. it settles the ambiguity arising from the definition of 92 Reform “crisis indicators” originally expressed in affirmative form and now corrected in negative form (i.e. from “sustain- 9.1 Are there any other governmental proposals for ability of debt” to “unsustainability of debt” and from reform of the corporate rescue and insolvency regime in “suitability of equity” to “unsuitability of equity”); your jurisdiction? 4. it amends the rules defining the groups of companies for some wording clarifications and provides the conditions under which it is possible to presume the existence of The Italian Legislator, aware of the impact that the Crisis and groups of companies; Insolvency Code would have had on the organisation and mech- 5. it specifies that the unitary plan or the related plans in anisms that regulate the business market and extraordinary the group procedures, shall expressly quantify the corpo- operations, had already provided within the Delegated Law n. rate benefit that the creditors of the individual companies 155/2017 the possibility to amend and integrate the text of the belonging to the group structure would receive; Code within two years of its entry into force, i.e. until 15 August 6. with specific reference to companies under a procedure of 2022. arrangements with creditors with continuity of the busi- In this context, the Italian Government has drafted and sent ness, the Corrective Decree provides that a moratoria to the competent Commissions of the Chamber of Deputies, agreement for the payment of preferential claims cannot Senate and to the Council of State, in order to acquire their final exceed two years from validation of the arrangement itself; opinions, the first draft of the Corrective Legislative Decree to 7. it introduces a specific regulation for the pending bank the Crisis and Insolvency Code. loan contracts; and The draft of the Corrective Legislative Decree contains 8. it reintroduces the possibility to access to “bridge-financing”. several amendments and adjustments to the Code, the most significant of which are:

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Massimo Di Terlizzi was 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. ■ Co-Managing Partner, Member of the Executive Committee and of the Board at Pirola Pennuto Zei & Associati (Milan). ■ Managing Partner at Pirola Pennuto Zei & Associati LTD (London). ■ Chairman at Pirola Advisory China (Beijing, Shanghai and Hong Kong). ■ 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 Tel: +39 02 66 99 52 03 Via Vittor Pisani no. 20 Email: [email protected] Milan 20124 URL: www.pirolapennutozei.it Italy

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 profes- sionalism 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 methodolo- gies and an extensive network of correspondents. Pirola Pennuto Zei & Associati is an authoritative partner in business, academic and professional circles, with offices in Milan, Rome, Turin, Bologna, Padua, Verona, Naples, Brescia, Florence, Parma, London, Shanghai, Beijing and Hong Kong. www.pirolapennutozei.it

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Daisuke Asai

Mori Hamada & Matsumoto Dai Katagiri

12 Overview the filing of the company’s bankruptcy proceedings may be held liable for such conduct under criminal or tort law, or both. In general, directors of distressed debtors are not obliged 1.1 Where would you place your jurisdiction on the to file restructuring or insolvency proceedings. However, any spectrum of debtor to creditor-friendly jurisdictions? liquidator of a company under voluntary liquidation is obliged to (i) file for special liquidation if the company’s debts are In restructuring proceedings, the creditor cannot take the initi- suspected to exceed its assets, and (ii) file for bankruptcy if ative, nor do they have the right to control the proceedings both the liquidator finds that the company’s debts exceed its assets. institutionally and factually in Japan. For instance, in general, Failure to comply with these obligations may result in fines and the debtor in civil rehabilitation proceedings or the trustee in the liquidator being held liable for damages to the creditors. corporate rehabilitation proceedings has the right to control almost the entire restructuring proceedings. In addition, the 2.2 Which other stakeholders may influence the trustee in bankruptcy proceedings or the debtor in special liqui- company’s situation? Are there any restrictions on the dation proceedings also has the right to control almost the entire action that they can take against the company? For liquidation proceedings. As a result, we believe that Japan is a example, are there any special rules or regimes which debtor-friendly jurisdiction. 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? Are moratoria and stays on enforcement allow for informal work-outs, as well as formal available? restructuring and insolvency proceedings, and to what extent are each of these used in practice? Upon the commencement of insolvency/restructuring proceedings, in general, civil actions and civil execution proceedings Informal financial restructurings of distressed companies with respect to unsecured claims are suspended, and unsecured are allowed and being increasingly used, especially for small creditors are prohibited from commencing new civil actions or or mid-sized companies. Such restructurings are encouraged civil execution proceedings. However, exercising security inter- through the alternative dispute resolution mechanism avail- ests is not prohibited, and secured creditors may collect their able for business revitalisation under the Alternative Dispute claims regardless of the commencement of such proceedings, Resolution Act (2007), and soft law such as the Guidelines for except corporate reorganisation proceedings which prohibit Individual Debtor Out-of-Court Workouts (2013). secured creditors from exercising their security interests. 22 Key Issues to Consider When the 2.3 In what circumstances are transactions entered Company is in Financial Difficulties into by a company in financial difficulties at risk of challenge? What remedies are available? 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 In civil rehabilitation, corporate reorganisation and bankruptcy point at which a company must enter a restructuring or proceedings, the debtor’s pre-insolvency transactions may be insolvency process? challenged. The company or trustee (as applicable) must exercise this right through court proceedings within two years after the commencement of each of these proceedings. There are no specific provisions of law that place enhanced There are two elements to the grounds for such challenges. duties on the directors of distressed debtors. However, they owe The first pertains to the timing of the transactions, which must be obligations under general provisions of the Companies Act, such conducted after the debtor falls into financial crisis. The second as the duties of diligence and loyalty. Thus, for example, direc- pertains to the harmfulness of the transactions to the debtor. tors could be held liable for damages to the company or creditors If such challenges are successful, the subject transactions if they breach their duty of diligence. In addition, certain acts basically become null and void. Bona fide third parties, however, (such as gratuitous ones) by an insolvent company are vulnerable may be protected from such challenges. to being challenged as being legally null and void. Furthermore, In special liquidation proceedings, such challenges are not any director or officer who engages in fraudulent conduct before available, but creditors may challenge transactions that are

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harmful to creditors based on the Civil Code. This challenge rehabilitation proceedings or corporate reorganisation proceed- is not unique to insolvency proceedings and may apply to trans- ings. Commencement of civil rehabilitation proceedings does actions in general. not automatically affect any secured creditor’s right to enforce its security interests; provided, however, that in exceptional circum- 32 Restructuring Options stances, the court may impose certain restrictions on the secured creditors’ right to enforcement. On the other hand, once corpo- 3.1 Is it possible to implement an informal work-out in rate reorganisation procedures commence with respect to the your jurisdiction? debtor corporation, enforcement of security interests will be subject to certain limitations as contemplated in the Corporate Reorganisation Act. It is possible to implement an informal work-out in addition Cram-down is permitted under corporate reorganisation to restructuring court proceedings. Restructuring plans in an proceedings. When one or more classes of stakeholders approve informal work-out must be approved by all creditors. the reorganisation plan, the court may authorise the reorganisation plan by providing a clause to protect the interests of 3.2 What formal rescue procedures are available dissenting creditors. in 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 creditors and/or shareholders block such procedures restructuring procedure? or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you The entry requirement is for (i) there to be a risk that the debtor to cram-down dissenting stakeholders? Can you cram- will not be able to pay its debts as they become due or that its down dissenting classes of stakeholder? debts exceed its assets, or (ii) the debtor to be unable to pay its debts already due without causing significant hindrance to the There are two types of restructuring procedures in Japan: civil continuation of its business. rehabilitation proceedings (minji-saisei); and corporate reorganisation proceedings (kaisha-kosei). In civil rehabilitation proceedings, the debtor must propose 3.4 Who manages each process? Is there any court involvement? and submit to the court a rehabilitation plan within the period specified by the court. Registered creditors also have the right to propose and submit a rehabilitation plan that must be approved at In civil rehabilitation proceedings, the board of the debtor a creditors’ meeting by a majority number of creditors present and company remains in control and has the power to manage the voting at the meeting and a majority by value of all creditors who company’s business. However, the court may require the debtor hold voting rights. If approved, the court authorises the rehabili- to obtain permission of the court in order to conduct certain tation plan, which will bind the company and the creditors. types of activities, including (but not limited to): (i) disposing of In corporate reorganisation proceedings, the trustee must property; (ii) accepting the transfer of property; (iii) borrowing propose and submit to the court a reorganisation plan within money; (iv) filing an action; (v) settling a dispute or entering into the period specified by the court. The debtor company, regis- an arbitration agreement; and (vi) waiving a legal right. In prac- tered creditors or stockholders may also propose and submit a tice, the court appoints a supervisor in most cases and grants reorganisation plan. The reorganisation plan must be submitted him or her the authority to give such permission to the debtor on to and approved at a stakeholders’ meeting. If approved, the its behalf in respect of the debtor’s activities. In addition, under court authorises the reorganisation plan, which will bind the exceptional circumstances, a court-appointed trustee may take stakeholders. Different classes of stakeholders (e.g. unsecured over control of the company’s business. creditors, secured creditors and shareholders) vote separately, In corporate reorganisation proceedings, a trustee must and approval must be obtained from each class. The Corporate be appointed for the corporate debtor. The trustee, who is Reorganisation Act sets forth different thresholds for different appointed by the court and is usually an attorney with exper- classes (for example, the requisite majority for unsecured credi- tise in insolvency cases, has control and possession of the debt- tors is a majority by value). or’s business and its assets. However, the trustee may also be a Debt-for-equity swaps are possible in both proceedings. In businessperson who is deemed fit to operate the debtor’s busi- corporate reorganisation proceedings, the process set forth under ness. Even under corporate reorganisation proceedings, there the Companies Act for the issuance of shares (such as a special are increasing numbers of cases in which the court appoints resolution of the shareholders’ meeting or a resolution of the board trustees from the current management. Such proceedings are of directors) will not apply if the debt-for-equity swap scheme is called ‘debtor-in-possession-type’ (‘DIP-type’) reorganisation provided for by the approved reorganisation plan. In civil rehabil- proceedings, as opposed to traditional ‘administration-type’ itation proceedings, however, the issuance of shares is subject to proceedings. In those cases, the court usually also appoints a certain requirements under the Companies Act. supervisor who monitors the management’s activities. Thus, the Pre-packaged sales are commonly used in Japan, especially in proceedings look similar to civil rehabilitation proceedings. civil rehabilitation proceedings. In cases where a pre-packaged sale process is used, the proceedings are generally shorter than the 3.5 What impact does each restructuring procedure standard period. While there are no specific provisions in the Civil have on existing contracts? Are the parties obliged to Rehabilitation Act for proceedings involving pre-packaged sales, perform outstanding obligations? What protections these sales are subject to the same requirements as under normal are there for those who are forced to perform their proceedings (for example, pre-packaged sales must be stipulated outstanding obligations? Will termination and set-off in the rehabilitation plan and approved at a creditors’ meeting). provisions be upheld? Creditors and/or shareholders may file an immediate appeal against the court’s decision to commence civil If the company and its contract counterparty have not yet

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completely performed their obligations under a bilateral contract 4.3 Who manages each winding up process? Is there by the time of commencement of civil rehabilitation proceed- any court involvement? ings or corporate reorganisation proceedings, the company or trustee (as applicable) may either cancel the contract or cause Upon commencement of bankruptcy proceedings, a trustee is the company to perform its obligations and request the coun- appointed by the court and takes over control and possession of terparty to perform. When the counterparty is required to the company’s property. The trustee is usually an attorney and perform its obligations, the counterparty’s claims are catego- is supervised by the court. On the other hand, in special liqui- rised as a common benefit claim that can be paid at any time dation proceedings, the liquidator who has been appointed by without going through the proceedings. the company continues to hold control and possession of the Even though existing contracts with the debtor often contain company’s property. The liquidator’s activities are subject to the a termination clause providing that the filing of restructuring court’s supervision. proceedings is a cause for termination, such clauses are often regarded as void. If a creditor owes a debt to the debtor at the time of commence- 4.4 How are the creditors and/or shareholders able ment of restructuring proceedings, the creditor may set off its to influence each winding up process? Are there any claim against the debtor’s claim under certain circumstances. restrictions on the action that they can take (including the enforcement of security)?

3.6 How is each restructuring process funded? Is any In bankruptcy proceedings, creditors are prohibited from protection given to rescue financing? receiving payment in respect of any claim arising from any cause occurring before the commencement of the proceed- The costs or expenses of restructuring proceedings are borne by ings (‘Bankruptcy Claim’) or otherwise acting in any manner the debtor. In both civil rehabilitation and corporate reorgani- that has the effect of satisfying their claim outside the proceed- sation proceedings, the debtor’s or the trustee’s right to borrow ings. Civil actions and civil execution proceedings with respect new money is subject to the court’s permission. The court will to Bankruptcy Claims are suspended, and the Bankruptcy grant permission if the debtor proves that new funding is neces- Claims are prohibited from commencing new civil actions or sary to continue trading and maximise the value of the compa- civil execution proceedings. On the contrary, exercising secu- ny’s business. The lender can collect its claim outside these rity interests is not prohibited, and secured creditors may collect proceedings as a common benefit claim. This places the new their claims regardless of the filing or commencement of bank- lender in a better position than prior unsecured creditors, but ruptcy proceedings. The shareholders’ rights are not formally the new funding will not have priority over secured creditors in affected by the commencement of bankruptcy proceedings. respect of their secured assets. Nevertheless, shareholders will have little stake in the proceedings because the company’s shares are effectively valueless, and 42 Insolvency Procedures because both the company and its shares will be extinguished upon closing of the proceedings. 4.1 What is/are the key insolvency procedure(s) In special liquidation proceedings, the company must give available to wind up a company? public notice in the Official Gazette to request that its creditors register their claims during a certain specified period of There are two options for court liquidation for insolvent compa- time. The company cannot pay or otherwise satisfy creditors’ claims during this period. Claims without security or priority nies: bankruptcy proceedings (hasan); and special liquidation are called ‘agreement claims’ and must be paid on a basis. proceedings (tokubetsu-seisan), the latter being more flexible than pro rata the former. Special liquidation proceedings allow a director or an Exercising security interests is not prohibited, and secured officer of the company to be the liquidator to execute the liqui- creditors may collect their claims regardless of the filing or dation, while bankruptcy proceedings require a court-appointed commencement of special liquidation proceedings. However, trustee to execute the liquidation. the court may order suspension of the exercise of security interests for the general benefit of creditors. Shareholders of the company under special liquidation will have little stake in the 4.2 On what grounds can a company be placed into proceedings because the company’s shares are effectively value- each winding up procedure? less, and because both the company and its shares will be extinguished upon closing of the proceedings. For bankruptcy proceedings, a company can be placed into them if: 4.5 What impact does each winding up procedure have ■ the company is characterised as being ‘unable to pay its on existing contracts? Are the parties obliged to perform debts’ – that is, where the company is generally and contin- outstanding obligations? Will termination and set-off uously unable to pay its debts as they become due; or provisions be upheld? ■ the company is characterised as ‘insolvent’ – that is, where the company’s debts exceed its assets. In bankruptcy proceedings, bilateral contracts are not automat- For special liquidation proceedings, a company can be placed ically terminated. However, when the company and its contract into them if: counterparty have not yet completely performed their obliga- ■ there are circumstances prejudicial to implementation of tions under a bilateral contract by the time of commencement of the voluntary liquidation; or the bankruptcy proceedings, the trustee may either: ■ there is suspicion that the company is ‘insolvent’. ■ cancel the contract; or ■ perform its obligations and request the counterparty to perform theirs.

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However, creditors are not prohibited from offsetting their In special liquidation proceedings, tax claims are treated claims against their obligations to the company except in limited as superior claims that can be paid at any time outside the circumstances. proceedings. In special liquidation proceedings, the proceedings themselves do not automatically affect the legal status of the existing 62 Employees contracts. Creditors are not prohibited from offsetting their claims against their obligations to the company except in limited 6.1 What is the effect of each restructuring or circumstances. insolvency procedure on employees? What claims would employees have and where do they rank? 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? In restructuring proceedings, in general, the company or trustee (as applicable) tries to maintain employment contracts with its In bankruptcy proceedings, creditors’ claims are ranked in the employees. If the company or trustee (as applicable) terminates following order: employment, it must do so in a manner consistent with Japanese i. estate claims (e.g. fees for trustees, administrative expenses, employment law (which is employee-friendly). Claims for unpaid tax claims that became due within one year before the wages before the commencement of restructuring proceedings commencement of bankruptcy proceedings, employee are treated as claims with general priority, whereas claims for compensation for their work within three months before wages after the commencement are treated as common benefit the commencement of bankruptcy proceedings); claims that can be paid at any time outside the proceedings. ii. superior bankruptcy claims (e.g. tax claims and employee In insolvency proceedings, in many cases, the debtor compensation that are not estate claims); company dismisses all or part of its employees before filing for iii. ordinary bankruptcy claims; and commencement of the proceedings. If the company or trustee iv. subordinated bankruptcy claims (e.g. interests after the (as applicable) terminates employment after the commencement commencement of bankruptcy proceedings). of the proceedings, it must do so in a manner consistent with In special liquidation proceedings, creditors’ claims are Japanese employment law, which requires 30 days’ notice before ranked in two categories. Claims in the first category basically such termination (or equivalent compensation). The company correspond to estate claims and superior claims in bankruptcy or trustee may continue to employ some of the employees so that proceedings. Claims in the second category basically corre- they can assist with its administration. In such cases, wages are spond to ordinary bankruptcy claims and subordinated bank- treated as estate claims, which can be paid at any time outside the ruptcy claims in bankruptcy proceedings. The first category is proceedings. Claims for unpaid wages before the commence- superior to the second category. ment of the proceedings are also granted certain priorities. The priority of shareholders is the lowest rank both in bankruptcy and special liquidation proceedings. Japanese law does 72 Cross-Border Issues not have any rule of equitable subordination. 7.1 Can companies incorporated elsewhere use 4.7 Is it possible for the company to be revived in the restructuring procedures or enter into insolvency future? proceedings in your jurisdiction?

In principle, the company will be extinguished and not be As long as the company has an office or assets in Japan, a debtor revived if bankruptcy or special liquidation proceedings end. incorporated outside Japan can enter into restructuring or insol- However, if assets are found after the proceedings have already vency proceedings in Japan. ended, the company will be deemed to survive its corporate capacity and a liquidator will be appointed by the court. 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your 52 Tax jurisdiction?

5.1 What are the tax risks which might apply to a Local courts in Japan may recognise foreign restructuring or restructuring or insolvency procedure? insolvency proceedings. The process is initiated by a debtor’s filing with the Tokyo District Court, which has exclusive juris- In general, tax claims before the commencement of restruc- diction on such recognition proceedings. The test for recogni- turing proceedings are treated as claims with general priority, tion is based mainly on the necessity of such recognition. For whereas tax claims after the commencement are treated as example, if foreign restructuring or insolvency proceedings common benefit claims that can be paid at any time outside the are obviously ineffective over assets in Japan, such recognition proceedings. In restructuring cases, it is very important for the would be denied. debtor company to avoid taxation on income from discharge of indebtedness by applying deductible expenses to such income. 7.3 Do companies incorporated in your jurisdiction Tax claims before the commencement of bankruptcy proceed- restructure or enter into insolvency proceedings in other ings are treated as estate claims if they became due within one jurisdictions? Is this common practice? year before the commencement of bankruptcy proceedings; otherwise, they are treated as superior bankruptcy claims. Tax It is not common practice, but companies incorporated in Japan claims after the commencement of bankruptcy proceedings are can enter into restructuring or insolvency proceedings in other treated as estate claims if they are categorised as administrative jurisdictions. For instance, Azabu Buildings Co. Ltd. entered expenses; otherwise, they are treated as subordinate bankruptcy into Chapter 11 bankruptcy proceedings in the U.S. in 2006. claims.

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82 Groups than that of a parent-subsidiary, and a subsidiary is extremely large or there are potential conflict issues among the group companies, the court will sometimes appoint different trus- 8.1 How are groups of companies treated on the tees. Nevertheless, the same court will have jurisdiction over insolvency of one or more members? Is there scope for the group companies in most cases, which makes it easy to co-operation between officeholders? proceed with several restructuring or insolvency proceedings at the same time and to construct a cooperative relationship In general, there are no specific legal provisions on how to treat between the trustees. group companies in restructuring or insolvency proceedings. However, in practice, group companies will usually file these 92 Reform proceedings at the same time because they must resolve guarantee claims with respect to bank loans, typically in situations where the parent company has guaranteed its subsidiary’s bank loans. 9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in There are no specific legal provisions on cooperation your jurisdiction? between officeholders. However, in general, the court will usually appoint the same trustee if group companies have a parent-subsidiary relationship. If the relationship is other No proposals are pending.

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Daisuke Asai is a Partner at Mori Hamada & Matsumoto, who is admitted in Japan and New York and specialises in restructuring, litigation and M&A, both domestic and international. He has broad experience in cross-border restructuring and bankruptcy and has represented domestic and foreign clients/trustees in many large bankruptcy cases of global businesses. He is a member of various associations for restructuring practitioners including ‘INSOL’ and ‘EAAIR’ (East Asian Association of Insolvency and Restructuring). He earned his LL.M. from Cornell Law School in 2015 and has experience practising with a U.S. law firm in Washington, D.C. during 2015–2016. He served as a lecturer at the University of Tokyo, Faculty of Law during 2017–2018.

Mori Hamada & Matsumoto Tel: +81 3 6266 8752 16th Floor, Marunouchi Park Building Email: [email protected] 2-6-1 Marunouchi, Chiyoda-ku URL: www.mhmjapan.com Tokyo 100-8222 Japan

Dai Katagiri is a Senior Associate at Mori Hamada & Matsumoto who is admitted in Japan and New York, and has extensive experience in both out-of-court and court-supervised restructurings and bankruptcy proceedings for domestic and foreign clients. He also specialises in litigation, M&A and corporate law, which include litigation in multiple jurisdictions and cross-border transactions. He earned his LL.M. from the University of Pennsylvania Law School in 2016 and has experience working at Pillsbury Winthrop Shaw Pittman LLP’s New York office in 2016–2017.

Mori Hamada & Matsumoto Tel: +81 3 6266 8774 16th Floor, Marunouchi Park Building Email: [email protected] 2-6-1 Marunouchi, Chiyoda-ku URL: www.mhmjapan.com Tokyo 100-8222 Japan

Mori Hamada & Matsumoto (‘MHM’) is a full-service law firm that has DIP financings, asset-backed lending and debt-equity swaps. The depth served clients with distinction since its establishment in December 2002, and breadth of the firm’s practice enables us to provide comprehensive by the merger of Mori Sogo and Hamada & Matsumoto. MHM has an services in transactions and proceedings involving financially distressed extensive insolvency practice, acting on behalf of both debtors and credi- companies. tors, as well as financial advisors, from a variety of jurisdictions, in all types www.mhmjapan.com of Japanese bankruptcy and reorganisation proceedings. MHM always ensures that our focus and efforts are directed towards achieving the best possible outcome for our clients. We take pride in our high success rate in restructuring cases and especially in out-of-court workout cases. The firm has been engaged in a number of pioneering transactions that involve a variety of corporate, M&A and financing techniques in conjunction with insolvency proceedings, including corporate demergers, securitisations,

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Ardian Rexha

Deloitte Kosova Sh.p.k. Vegim Kraja

12 Overview 22 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 Following the adoption of the new Law No. 05/L-83 “On company in financial difficulties? Is there a specific Bankruptcy” (“Law on Bankruptcy”), Kosovo’s ranking in point at which a company must enter a restructuring or insolvency process? the World Bank Group’s Doing Business Report for 2017 improved significantly, jumping from 163rd place to 43rd. In the Doing Business Report for 2020, Kosovo was slightly downgraded to Accordingo t Article 258 of the Law No. 06/L-16 “On Business 48th place. Organisations” (“Law on Business Organisations”), the According to provisions of the Law on Bankruptcy, credi- directors must exercise their function by observing the duties tor(s) play a very active role in the bankruptcy procedure. Two for loyalty and care at all times. Directors/managers of a or more creditors are entitled to initiate the bankruptcy proce- company are also obliged to disclose any transaction with poten- dure against the debtor who failed to pay a debt due to each tial conflict of interest. of the creditors, and the threshold for bankruptcy petition is Concerning restructuring or insolvency processes, under relatively low. Further, pursuant to Article 30 of the Law on Article 19 of the Law on Bankruptcy, the debtor itself may file Bankruptcy, the debtor is obliged to act bona fide and to disclose a bankruptcy petition for either (i) reorganisation, or (ii) liqui- full information to its creditors. It is strictly forbidden for the dation. However, the Law on Bankruptcy does not provide any debtor to provide misleading information to the court and cred- terms and conditions when the debtor is obliged to initiate the itors, which might be categorised as criminal offence. bankruptcy procedure. In this context, the Kosovo jurisdiction is a creditor-friendly It is worth noting that under Article 19 of the Law on jurisdiction. Bankruptcy, filing the bankruptcy procedure for improper purpose such as fraud, deceit and subvert of creditors may be subject to punitive measures with fines from 500 EUR up 1.2 Does the legislative framework in your jurisdiction to 10,000 EUR. Further, according to the Criminal Code of allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what Kosovo No. 06/L-074, causing false bankruptcy and fraud in a extent are each of these used in practice? bankruptcy procedure is a criminal offence and is punishable by imprisonment of up to 10 years. Prior to initiation of the formal bankruptcy petition and prior to approval of the petition, the debtor and creditor may freely agree 2.2 Which other stakeholders may influence the on and contract the issue of debt arrangements. company’s situation? Are there any restrictions on the Moreover, pursuant to Article 17 of the Law on Bankruptcy, action that they can take against the company? For example, are there any special rules or regimes, which if the debtor has secured the votes of its creditors for a reor- apply to particular types of unsecured creditor (such ganisation plan prior to initiation of the bankruptcy procedure, as landlords, employees or creditors with retention the debtor at its disposal may request the approval of the reor- of title arrangements) applicable to the laws of your ganisation plan from the court. Thus, Article 17 of the Law jurisdiction? Are moratoria and stays on enforcement on Bankruptcy explicitly allows the possibility of a prearranged available? reorganisation plan between the debtor and creditors. In relation to the use of formal restructuring and insolvency The parties to the bankruptcy procedure are: (i) the debtor; (ii) procedure, to the best of our knowledge insolvency procedure the creditors, which are categorised as secured and unsecured has been used more than formal restructuring. creditors organised in a Creditor Committee; and (iii) the bank- However, it is worth noting that in certain cases the court ruptcy estate representative. has successfully implemented and achieved the reorganisation Following the initiation of the bankruptcy procedure and of companies undergoing bankruptcy procedures. approval of the bankruptcy petition by the court, by the operation of the law, the moratorium and stays are imposed on other procedures, such as:

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i. The commencement or continuation of any aspect of a 32 Restructuring Options judicial, administrative, or their action, or proceeding related to the debtor’s business activities against the debtor and its property including freezing or locking of any bank 3.1 Is it possible to implement an informal work-out in accounts that was or could have been commenced before your jurisdiction? the opening or commencement of the case. ii. The enforcement, against the debtor or against property Prior to commencing the bankruptcy procedure, the debtor and of the bankruptcy estate, of a judgment obtained before creditor(s) may freely agree on arrangements of the debt. the opening or commencement of the case to the extent Pursuant to Article 17 of the Law on Bankruptcy, if the debtor related to the debtor’s business activities. has secured the votes of its creditors for a reorganisation plan iii. Any act to obtain possession of property of the bank- prior to the initiation of the bankruptcy procedure, the debtor ruptcy estate or of property from the estate, or to exercise at its disposal may request the approval of the reorganisation control over property of the bankruptcy estate. plan from the court. Thus, Article 17 of the Law on Bankruptcy iv. Any act to create, perfect, or enforce any lien against prop- explicitly allows the possibility of a prearranged reorganisation erty of the bankruptcy estate. plan between the debtor and creditors. v. Any act to create, perfect, or enforce any lien against prop- However, following the approval of petition for bankruptcy erty of the debtor to the extent that such lien secures a by the court and the imposition of moratorium, each action of claim that arose before the commencement of bankruptcy the parties shall be subject to court approval. proceedings, and to the extent that it relates to the business activities of the debtor. 3.2 What formal rescue procedures are available vi. Any act to collect, assess, or recover a claim against the in your jurisdiction to restructure the liabilities of debtor to the extent that it relates to the debtor’s business distressed companies? Are debt-for-equity swaps activities and to the extent that such claims arose before and pre-packaged sales possible? To what extent can the commencement of bankruptcy proceedings. creditors and/or shareholders block such procedures vii. The set-off of any claim owing to the debtor and related or threaten action (including enforcement of security) to the debtor’s business activities that arose before the to seek an advantage? Do your procedures allow you commencement of bankruptcy proceedings against any to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? claim against the debtor. There is no special rule or regime that is applicable for the category of unsecured creditors. Debt-for-equity swaps and pre-packaged sales are not prohibited in Kosovan legislation. These institutes, which are not explicitly recognised by the Law on Bankruptcy, can be implemented 2.3 In what circumstances are transactions entered in a prearranged reorganisation plan agreed between the debtor into by a company in financial difficulties at risk of and creditors. challenge? What remedies are available? The creditors may challenge the reorganisation plan through voting in the creditors committee or challenge the acts of the Under Article 39 of the Law on Bankruptcy, the representa- debtor or administrator at the court. tivef o the bankruptcy estate and/or administrator may chal- The reorganisation plan is deemed accepted if: lenge the transactions entered by the company in cases when i. Creditors holding at least 50% of all claims voting in that the transaction: class accept the plan of reorganisation. i. was made before the commencement of bankruptcy ii. A class is deemed to have accepted the plan of reorganisa- proceedings; tion without the need of voting if the plan leaves the claims ii. was made to a creditor or for the benefit of a creditor such or equity interests in that class unimpaired. as payment that had the effect of reducing the exposure on Regarding the cram-down dissenting, in general under Article a guaranty on account of a debt that was incurred before 78 of the Law on Bankruptcy the reorganisation plan must be the transfer; voted for by the creditors holding at least 50% of the claims of iii. was made while the debtor was insolvent; each class. However, Article 79 of the Bankruptcy Law provides iv. was made within 120 days of the commencement of bank- an exception where the reorganisation plan might be confirmed ruptcy proceedings; or, if the transferee was an insider, by the court even if it has not been voted for by each class of was made within 365 days of the commencement of bank- creditors under certain conditions, such as: (i) the reorganisation ruptcy proceedings; and plan must be in compliance with the Law on Bankruptcy; (ii) the v. enabled the transferee to receive more from the debtor and proposer of the reorganisation plan must act bona fide; and (iii) bankruptcy estate than it would have had the transfer not the reorganisation plan must foresee that claims of each creditor been made and the transferee had received only a dividend or shareholder affected by the reorganisation plan should be at in a liquidation case. least minimally satisfied in the same manner as if the debtor was In addition to this, the representative of the bankruptcy estate undergoing the liquidation procedure. and/or administrator may challenge the transaction entered by the company under Article 40 of the Law on Bankruptcy in cases where: 3.3 What are the criteria for entry into each a. the transaction was made by the debtor with intent to restructuring procedure? hinder, delay or defraud creditors within two years from the commencement of the bankruptcy proceedings; and One of the principles of the present law is that in reorganisa- b. the transaction was made for less than reasonably equiv- tion proceedings, the court shall take steps to ensure that, if alent value while the debtor (i) was insolvent, or (ii) had successful, the reorganisation procedure will (i) preserve or insufficient capital or reserves to pay reasonably antici- create new working places, and (ii) maintain or preserve the pated obligations. value of assets as it is provided in the reorganisation plan. The

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reorganisation plan may be proposed by the debtor itself or 3.6 How is each restructuring process funded? Is any other parties such as the administrator or creditors. The reor- protection given to rescue financing? ganisation plan must be approved with at least 50% of claims of creditors of each class. In addition to this, the approval of the Under Article 34 of the Law on Bankruptcy, if not ordered reorganisation plan by the court is required. otherwise by the competent court, the reorganisation process may be funded by obtaining unsecured credit and incurring 3.4 Who manages each process? Is there any court unsecured debt in the ordinary course of business where it will involvement? be considered an administrative expense. Additionally, the court can authorise the debtor/bankruptcy The bankruptcy estate representative and the court are respon- estate representative to obtain other unsecured credit or to incur sible for the overall management of the bankruptcy procedure. unsecured debt, which again will be considered an administra- The bankruptcy estate representative shall: tive expense. i. administer the property of the bankruptcy estate; If the representative of the debtor/bankruptcy estate repre- ii. have the power to sue and be sued in the estate’s name; and sentative is unable to obtain unsecured credit or unsecured debt, iii. perform all duties specified in the present law required to the court may decide to authorise the obtaining of credit or be performed by the bankruptcy estate representative. incurring of debt (as an administrative expense) as follows: On the other hand, the court has the following competences i. with priority over any or all administrative expenses; in the bankruptcy procedure: ii. secured by a lien on property of the bankruptcy estate that i. approval or rejection of the petition for bankruptcy; is not otherwise subject to a lien; or ii. registration of the bankruptcy case; iii. secured by a lien on property which is part of the bankruptcy iii. notification of the other institution such business registry, estate that is secured previously by a lien, provided that the tax administration and financial institutions that the bank- new lien does not have priority over the existing lien. ruptcy procedure has started; iv. appoint and dismiss the administrator; 42 Insolvency Procedures v. impose, amend and remove the moratorium against the debtor; 4.1 What is/are the key insolvency procedure(s) vi. approve the reorganisation plan; available to wind up a company? vii. approval of the transactions conducted by the debtor, except transactions conducted in the normal course of activity; The key insolvency procedure for winding up a company is liqui- viii. approval of new financing of the debtor; dation. This procedure is intended to convert all the assets of ix. determination of the compensation for professionals the company into cash, in order to satisfy all claims of the cred- engaged in the bankruptcy procedure; itors. Following the closure of the bankruptcy procedure, the x. validity and value of claims of creditors; and debtor’s company will be deregistered from the business register. xi. closure of the bankruptcy case.

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In case of voluntary dissolution, it is the Business c. employment claims; Registration Agency that approves the winding up process, d. tax claims; and following the application of a company and fulfilment of all e. any other unsecured claim. legal requirements. 4.7 Is it possible for the company to be revived in the 4.4 How are the creditors and/or shareholders able future? to influence each winding up process? Are there any restrictions on the action that they can take (including According to the Law on Bankruptcy, liquidation is initi- the enforcement of security)? ated with the purpose of fulfilling the claims of the company (debtor), after which the debt to the creditors must be paid (to The Law on Bankruptcy allows the possibility of the creation of the extent possible). the creditors committee. This committee is considered to have The company that has undergone the liquidation procedure been legally established if at least three and no more than five will be deregistered from the business register and future revival creditors agree to take part in the committee. The court will is not possible. give priority to creditors with the largest unsecured claims that wish to serve in the committee. 52 Tax This creditors committee has the following rights and duties: i. to receive a copy of all letters addressed to the court by the debtor in possession, at the same time as the court; 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? ii. to employ professional persons on the same basis and with the same restrictions as are binding upon the administrator’s employment of such persons; If the company/debtor sells its assets below the market price, the iii. to receive notices from the court and decisions of the court applicable tax would be charged as if the assets were sold in the which affect the rights of creditors; market price. This is done in order to ensure that the state is not iv. to convene in a session where the debtor or its repre- adversely affected by a bankruptcy proceeding. sentatives are obliged to answer questions of the creditors committee regarding the case. Every answer of the 62 Employees debtor or its representative shall be considered a declaration under oath; 6.1 What is the effect of each restructuring or v. with court approval, after the administrator indicates it will insolvency procedure on employees? What claims would not do so, the committee may initiate an action to avoid a employees have and where do they rank? transaction under Chapter IV of the Law on Bankruptcy; vi. to share access to information it has obtained with credi- Claims from the employment relationship are considered third tors who are not members of the committee; in priority among the unsecured claims. vii. prepare recommendations for reorganisation plans; and Regarding the effect of the liquidation procedure on employ- viii. any other rights and duties as the court may specify, so ment relations, the termination of a contract due to bankruptcy long as such rights are consistent with the provisions of proceedings is a valid legal basis for termination of the employ- this Law. ment contract. Creditors and shareholders, in the capacity of the interested Whereas, during restructuring proceedings, employees may parties, may challenge in the court the actions undertaken by the continue their employment in order to implement the reorgan- debtor and the administrator. isation plan.

4.5 What impact does each winding up procedure have 72 Cross-Border Issues on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? The administrator in the winding up procedure is entitled, under Article 88 of the Law on Bankruptcy, to realise incomes Companies incorporated elsewhere cannot initiate restruc- from properties of bankruptcy estate that are in his/her admin- turing procedures or insolvency proceedings in Kosovo courts; istration, meaning that he/she is entitled to request the perfor- however, their subsidiaries and foreign branches registered in mance of outstanding obligations from third parties towards the Kosovo may be affected, thus Kosovo courts will apply cross- debtor. border bankruptcy provisions if requested by a foreign court.

4.6 What is the ranking of claims in each procedure, 7.2 Is there scope for a restructuring or insolvency including the costs of the procedure? process commenced elsewhere to be recognised in your jurisdiction? The rankings, in terms of line of payment, are as follows: i. Secured claims (claims which have the same amount as Yes, according to the provisions of Chapter IX of the Law on their credit in the form of collateral). Bankruptcy, a restructuring or insolvency process commenced ii. The ranking of Unsecured Claims is as follows: elsewhere may be recognised in Kosovo. a. administrative expenses; b. family relations claims and/or restitution of victims claims are paid second;

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7.3 Do companies incorporated in your jurisdiction are filed at the court by or against: a) a husband and wife; b) a restructure or enter into insolvency proceedings in other general or limited partnership and one or more of its general jurisdictions? Is this common practice? partners; c) two or more general partners; or d) a debtor and an affiliate. To the best of our knowledge, the companies established in the Republic of Kosovo do not have a common practice for entering 92 Reform into insolvency proceedings in other jurisdictions. 9.1 Are there any other governmental proposals for 82 Groups 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 for Currently there are no proposals for reform regarding the insol- co-operation between officeholders? vency procedure, as the Law on Bankruptcy is relatively new having entered into force at the end of 2016. Article 23 of the Law on Bankruptcy provides consolidation of the bankruptcy procedure in cases when two or more petitions

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Ardian Rexha is a Legal Manager in the Tax & Legal Department of Deloitte Kosova Sh.p.k. Ardian holds a Bachelor’s Degree in Law from the University of Pristina, Faculty of Law, and an advanced Master’s Degree in International and European Economic Law (LL.M.) from Maastricht University, Faculty of Law. Ardian has successfully passed the Bar Exam and, prior to joining Deloitte, he worked as a Legal Associate at a law firm and as a Senior Legal Researcher at the Kosovo Judicial Council. Ardian has more than five years of experience in corporate law, project and corporate finance and employment law and has extensive experience in M&A, competition, bankruptcy procedures and energy law, among other areas. Ardian is fluent in Albanian (native speaker) and English. He also has basic knowledge of German and Serbian.

Deloitte Kosova Sh.p.k. Tel: +383 49 780 430 Str. “Lidhja e Pejës” No. 177 Email: [email protected] Zona Industriale 10 000 URL: www2.deloitte.com/al Prishtinë Kosovo

Vegim Kraja is a Senior Legal Associate at the Tax & Legal Department of Deloitte Kosova Sh.p.k. Vegim has more than nine years of professional work experience representing governmental and international organisations and private clients in the field of commercial, banking and financial, M&A, bankruptcy, employment, environmental and energy law. Vegim has broad experience in the field of bankruptcy having assisted bankruptcy administrators in various bankruptcy procedures. Vegim is fluent in Albanian (native speaker) and English, and has basic knowledge of Serbian.

Deloitte Kosova Sh.p.k. Tel: +383 49 217 557 Str. “Lidhja e Pejës” No. 177 Email: [email protected] Zona Industriale 10 000 URL: www2.deloitte.com/al Prishtinë Kosovo

Deloitte refers to one or more of Deloitte Touché Tohmatsu Limited In the Republic of Kosova, the services are provided by Deloitte Kosova (“DTTL”), its global network of member firms, and their related entities sh.p.k. which is affiliate of Deloitte Central Europe Holdings Limited. (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Deloitte Kosova is one of the leading professional services organisations in Global”) and each of its member firms and related entities are legally sepa- the country, providing audit & assurance, tax & legal, consulting, and finan- rate and independent entities, which cannot obligate or bind each other in cial advisory services through over 60 national and specialised expatriate respect of third parties. DTTL and each DTTL member firm and related professionals. entity are liable only for their own acts and omissions and not those of www2.deloitte.com/al each other. DTTL does not provide services to clients. Please see www. deloitte.com/about to learn more. Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organisation”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www.deloitte.com.

Restructuring & Insolvency 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London 134 Chapter 22 Mexico Mexico

Fernando Pérez Correa Camarena

SOLCARGO Zulima González García

12 Overview 5. If they order or provoke that the company’s operations do not get registered, or if they modify or order the modification of the registries to hide the true nature of the opera- 1.1 Where would you place your jurisdiction on the tions, affecting the company’s statement of account. spectrum of debtor to creditor-friendly jurisdictions? 6. If they order or accept to register false data in the company’s accountancy. Mexico is considered a neutral jurisdiction, meaning it is both 7. If they destroy, modify or order the modification of the debtor and creditor friendly. One of the objectives of the company’s accountancy. Commercial Insolvency Law (CIL) is to procure the conserva- 8. If they modify or order the modification of the active tion and operation of the debtor, but it also looks to protect the or passive accounts of the company or the agreements creditor’s interests and rights. subscribed by the company conditions, as well as register inexistent expenses of the company. 1.2 Does the legislative framework in your jurisdiction These conducts can only be reported by the company, not by the allow for informal work-outs, as well as formal creditors or a third party, and the penalty is limited to payment restructuring and insolvency proceedings, and to what of damages in favour of the debtor. extent are each of these used in practice? There is no specific point at which a company must enter a restructuring or insolvency proceeding. The decision to enter Yes, the legislative framework allows informal work-outs, as well into an insolvency or restructuring proceeding is up to the as formal restructuring and insolvency proceedings. However, company’s shareholders. informal work-outs, as foreseen in the CIL, have not been used to date by debtors in Mexico. Formal restructuring and insol- 2.2 Which other stakeholders may influence the vencies are only used by complex companies, serving as an company’s situation? Are there any restrictions on the example that since 2000 when the CIL was enacted, there have action that they can take against the company? For only been approximately 778 formal insolvency and restruc- example, are there any special rules or regimes which turing proceedings in Mexico. apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your 22 Key Issues to Consider When the jurisdiction? Are moratoria and stays on enforcement Company is in Financial Difficulties available?

2.1 What duties and potential liabilities should the Some creditors may affect a company’s situation in very impor- directors/managers have regard to when managing a tant ways. For instance: tax creditors may have the capacity company in financial difficulties? Is there a specific to seize the company’s bank accounts; and/or labour creditors point at which a company must enter a restructuring or (employees) may initiate a strike against the company and/or insolvency process? attach the assets of a company even if it is under an insolvency proceeding. There are no special rules for unsecured creditors. The director or board of directors and key personnel can be The Insolvency or Restructuring Court may dictate ex officio held liable for a company’s insolvency only in the following or by request of the creditors some remedies, including: circumstances: ■ The prohibition to realise the payment of obligations due 1. If they voted or decided on a matter concerning the before the date of admittance of the petition for insolvency. company’s properties and assets, knowing they had a ■ The moratorium and stay of enforcement proceedings conflict of interest regarding the matter. against the assets and rights of the company, with the 2. If they intentionally favour a shareholder or group of share- exception mentioned before (employee’s credits). holders, therefore prejudicing the rest of the shareholders. ■ The prohibition against the company’s performance of 3. When, without a legitimate cause and because of their sales, transfers or encumbrances of the principal assets of position or job, they obtain an economic benefit for them- its enterprise. selves or a third party, including a group of shareholders. ■ The appointment of a judicial administrator. 4. If they generate, spread, publish, provide or order information, knowing it is false.

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■ The prohibition to transfer funds or securities in favour of Pre-packaged restructuring third parties. The CIL provides for two restructuring schemes: ■ The arrest warrants, among others. ■ formal proceeding (reorganisation), which is similar to the reorganisation procedure regulated under Chapter 11 of the US Bankruptcy Code; and 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of ■ pre-packaged restructuring, where the debtor with challenge? What remedies are available? the majority of its creditors can file for an insolvency proceeding with an agreed restructuring plan. If it fulfils all legal requirements, the Bankruptcy Court will issue a Irrespective of the date on which they have been performed ruling approving the plan, providing it does not contain (except for the general commercial rule that sets the statute any clause in violation of the law (public interest) and does of limitations at 10 years), acts in fraud of creditors will be at not affect third parties’ rights. risk of challenge in an insolvency or restructuring proceeding. The acts in fraud of creditors are those that meet the following Reorganisation procedure requirements: (i) they were performed prior to the declaration of Debtors may file a voluntary petition for reorganisation at any commercial insolvency; (ii) through them, creditors were know- time if they believe that they are in the insolvent situation fore- ingly defrauded; and (iii) the third party involved in the act was seen by the CIL. Admission of the petition requires the filing aware of the fraud. of evidence showing in a presumptive manner that the debtor is The following, among others, are acts that are considered to in an insolvency situation at the time of filing. be creditor frauds, so as long as they were performed within the The debtor enjoys a 185-day period, extendable up to an addi- date of retroaction (270 days prior to the date of the judgment tional 180 days from the date of the Court’s resolution admit- that formally declares the company under insolvency): (i) gratu- ting the debtor’s petition, to draft a reorganisation plan and itous acts; (ii) acts and sales in which the debtor pays a price obtain the consent of the required majorities of secured and clearly higher in value or receives a clearly lower value; (iii) trans- non-secured creditors. actions performed by the debtor in which conditions or terms The restructuring plan must receive the approval of more established were significantly different to the prevailing condi- than 50% of: tions of the market in which they were performed, on the date of ■ all unsecured creditors; and their performance, or from commercial practices and uses; (iv) ■ secured creditors. debt remittances; and (v) payments of unmatured obligations. Once the plan is endorsed and performed, the Court will issue The CIL deems that the performance of any of these acts a resolution declaring the reorganisation to be concluded and inherently includes the bad faith of the person performing it, finalising the intervention of the conciliator. both the debtors and the other parties involved. In all cases, the Creditors cannot block any insolvency procedure or threaten transaction will be declared null and void by petition of any of action, but they can seek enforcement of collaterals if they are the parties (creditor, comptroller, conciliator, liquidator). not necessary to the operation of the debtor. Finally, insolvency procedures in Mexico only allow the 32 Restructuring Options cram-down of dissenting stakeholders if those dissenters form a majority of creditors (veto). 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 procedure? Yes, the CIL foresees rules for an informal work-out, but companies can also enter a non-judicial restructuring process if they In Mexico, the eligibility criteria for initiating a restructuring prefer. However, companies recur to formal work-outs because procedure is based on the ability to prove that the company has the company does not need the approval of all of the creditors, failed to fulfil the payment of its obligations in a general manner. only 50% of them. Another benefit of a reorganisation agree- The CIL considers that a company is in an insolvency state ment is that it is mandatory for all unsecured creditors, even for if it fails to fulfil its payment obligations to two or more cred- those who did not sign the agreement. itors. One of the two following conditions should also exist if the insolvency petition is filed by the company itself, and both 3.2 What formal rescue procedures are available conditions must be proved if the insolvency petition is filed by in your jurisdiction to restructure the liabilities of the creditors: distressed companies? Are debt-for-equity swaps ■ Insolvency – 35% or more of the company’s payment obli- and pre-packaged sales possible? To what extent can gations must be at least 30 days due on the date that the creditors and/or shareholders block such procedures or threaten action (including enforcement of security) restructuring proceeding was filed. to seek an advantage? Do your procedures allow you ■ f Lack o liquidity – the company has insufficient assets to to cram-down dissenting stakeholders? Can you cram- fulfil at least 80% of its payment obligations due on the down dissenting classes of stakeholder? date that the restructuring proceeding was filed. In addition, the CIL foresees several events that may be considered a presumption that a company is in a general default Out-of-court restructuring Out-of-court restructuring will be entered into with all or a of the payment of its obligations (e.g. the non-existence or insuf- portion of the debtor’s creditors. Non-party creditors are not ficiency of assets to be enforced in the case of an attachment). bound by the restructuring terms, which therefore do not affect their original debt terms and conditions. As a result, out-of- court restructuring has no practical effect or use for dissenting stakeholders.

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3.4 Who manages each process? Is there any court counterpart by means of the acknowledgment of the involvement? credits procedure; and ■ in the case of a balance in favour of the debtor, the counterpart will be bound to pay the conciliator for the benefit Yes, the Bankruptcy Court (Federal Court) leads the process and of the estate within a term not exceeding 30 calendar days, is therefore involved throughout the restructuring proceeding calculated from the date of the declaration of commercial and will resolve all petitions of the creditors and debtor. insolvency. The Court will also determine whether a debtor must be declared insolvent or not, and must issue a ruling declaring the ranking and priority of all of the creditors. Additionally, the 3.6 How is each restructuring process funded? Is any Court must issue a judgment approving or rejecting the reorgan- protection given to rescue financing? isation agreement entered into by the company and its creditors. In general, the Court conducts the restructuring proceeding During the restructuring process, the company can obtain new and resolves all motions filed by the parties. credits or take out additional new credits (DIP Financing) and The informal work-outs foreseen by the CIL should be secure loans during the insolvency procedure, providing that managed by the conciliator, who should act as a “friendly medi- these resources are strictly necessary to maintain the company’s ator” between the parties. operations. These new credits or loans will be considered privileged credits and must be paid before any other. 3.5 What impact does each restructuring procedure Other costs, such as payment of salaries, taxes and all ordi- have on existing contracts? Are the parties obliged to nary expenses of the company (rents, utilities, etc.) are funded perform outstanding obligations? What protections by the assets of the company while it is in operation, but can be are there for those who are forced to perform their also funded by third parties, such as the creditors themselves or outstanding obligations? Will termination and set-off any other party. provisions be upheld? 42 Insolvency Procedures Generally, the validity of the contracts is not affected by the restructuring procedure. However, the CIL makes a casuistic 4.1 What is/are the key insolvency procedure(s) classification: available to wind up a company? ■ the validity of the agreements concerning only personal goods will not be affected, as well as inalienable goods, those exempt of attachment and those not subject to a Out-of-court liquidation: Out-of-court liquidation does not statute of limitation; require the filing of a complaint or evidence to demonstrate that ■ preparatory and definitive agreements must be complied the debtor is insolvent. The company’s shareholders may agree with by the company, unless the liquidator considers that it on a voluntary dissolution of the company. Such resolution shall will harm the insolvency estate; be approved at a shareholder’s meeting (dissolution meeting), in ■ the seller can oppose delivering goods regarding purchase which one or more liquidators must be appointed. agreements in which the company is the buyer, unless the The liquidation proceeding begins immediately after the company pays the full price agreed by the parties or guar- company’s dissolution minutes have been duly registered with antees the payment of the goods; the Public Registry of Commerce. ■ deposit agreements, loan agreements and commission and The sole manager must provide all corporate and accounting agency agreements will not be terminated for the liquida- documents, information and books to the liquidator, which tion procedure, unless the liquidator considers it necessary; must be registered in an inventory. The liquidator is entitled ■ existing account agreements will be terminated, unless the to act on behalf of the company, acting as legal representative company has the consent of the liquidator to continue its of the partnership; therefore, the liquidator has all the obliga- fulfilment; tions, responsibilities and limitations, as well as the authority ■ securities repurchase agreements will be terminated; and powers of attorney of a legal representative. ■ lease agreements will not be cancelled by the liquidation Unless the dissolution minutes or law provide otherwise, the procedure, unless the company is the lessee and the liqui- liquidator is obliged to: dator considers it necessary, in which case the receiver must ■ Conclude the outstanding transactions and operations. pay the penalty agreed in the contract or three months’ ■ Collect due payments and pay debts. rent for the anticipated termination; ■ Sell the company’s assets. ■ personal service agreements will not be cancelled; ■ Distribute the remaining assets proportionately among the ■ lump-sum construction contracts will be cancelled, unless shareholders. the company agrees to comply with the agreement with the ■ Draft the liquidation balance sheet. liquidator’s authorisation; and ■ Guard the documents, as well as the corporate and ■ insurance contracts will not be cancelled if the company is accounting books in deposit for 10 years. the insured party; however, if the company is the insurer, The final liquidation balance sheet must be approved by the insured party can choose to terminate the contract. the shareholders in a closing meeting. Liquidators may then Regarding repurchase, securities loans, futures and deriva- proceed to: tives transactions, the declaration of commercial insolvency will ■ Pay shareholders’ equity against their corresponding share- lead to the early termination of those transactions, provided holding interests. that: ■ Inform the Ministry of Finance and Public Credit of the ■ the debts and credits resulting from these transactions are company’s liquidation. offset; ■ Request the cancellation of the taxpayers’ registry, as ■ the outstanding balance that may result from the set-off well as the shareholder’s registry in the Public Registry of against the debtor may be claimed by the corresponding Commerce.

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Shareholders will decide during the closing up meeting about In both cases, it must be proved (even in a presumptive way) the distribution of the remaining assets (distribution agree- that the debtor has not fulfilled their payment obligations in a ment), once the liabilities have been paid or their amount has general manner. In order to prove this condition, the debtor been deposited when payment is not possible. The liquidator must have failed to fulfil their payment obligations to two or will determine the amount or assets that each partner is entitled more creditors, and the following conditions must be met: to receive as final payment for its ownership interest. ■ at least 35% of all company obligations must be at least 30 Simplified out-of-court liquidation: The General Law of days due; and Business Entities introduced two innovations for the closing up ■ the company’s liquid assets must be insufficient to satisfy at and liquidation procedure of companies: least 80% of its due obligations on the date of the petition. ■ It establishes that a judicial resolution or an administrative Also, a debtor can file for liquidation if it will imminently decision by a Court is ground for dissolution, in accord- meet any of the two scenarios mentioned above, within the ance with the tendency set by the legislator to recognise period of 90 days. these grounds for dissolution in the case of Simplified Stock Companies. 4.3 Who manages each winding up process? Is there ■ Enact a simplified closing up procedure, without the need any court involvement? to notarise the dissolution and closing up of meetings. Business entities can conduct the simplified closing procedure if, and only if, the entity complies with the following Out-of-court liquidation is managed by the shareholders and requirements: directors of the company, as well as the appointed liquidator. ■ it comprises exclusively partners and shareholders that are Court liquidation is managed by the Bankruptcy Court. individuals; ■ it does not operate illegally or habitually commit illicit acts; 4.4 How are the creditors and/or shareholders able ■ it must publish its Special Book of Partner or its Stock to influence each winding up process? Are there any Registry in the Secretary of the Economy’s electronic restrictions on the action that they can take (including system, with the current sharing structure as of 15 busi- the enforcement of security)? ness days from the date of the meeting in which the closing was agreed upon; Regarding out-of-court liquidation, shareholders decide if the ■ it has not undertaken any operations or emitted any elec- company will enter into a dissolution and winding up process, tronic invoices during the last two years; and creditors can act reluctantly and seek enforcement of ■ it has complied with all of its tax, labour, and social secu- security. rity obligations; Regarding a court liquidation proceeding, when it is requested ■ it has not imposed any monetary obligations on third by the company, the shareholders must approve the decision for parties; the company to file for bankruptcy. The formality of such deci- ■ none of its legal representatives are a part of criminal sion depends on the company’s bylaws. investigations for financial or property crimes; Also, secured creditors may seek enforcement of their collat- ■ it is not insolvent; and eral in a different lawsuit, generally in a State Court. ■ it is not an entity within the financial system. Court liquidation: The debtor company may voluntarily 4.5 What impact does each winding up procedure have file an insolvency proceeding, requesting the liquidation of all on existing contracts? Are the parties obliged to perform its assets, properties, goods and rights. The Federal Institute outstanding obligations? Will termination and set-off of Commercial Insolvency (IFECOM) will appoint a receiver provisions be upheld? (liquidator) to manage the company and sell its assets and rights in order to pay its creditors. The effects are the same as in the restructuring procedure. The Compulsory liquidation will take place when the company’s general rule is that the contracts entered by the company (debtor) creditors file a bankruptcy proceeding requesting the compa- will continue to be valid, except when the liquidator rejects them ny’s liquidation, or if the company and its creditors do not reach in the best interest of the estate. a reorganisation agreement during the conciliation stage of the insolvency proceeding (365 days maximum). The only regulatory difference between voluntary liquidation 4.6 What is the ranking of claims in each procedure, and compulsory liquidation is that, if the compulsory liquida- including the costs of the procedure? tion is filed by the creditors, the company may reject such petition and the insolvency proceeding will begin from the concil- In the conciliation stage of the bankruptcy proceeding, the iatory stage. conciliator will be in charge of recognising and ranking the credit claims against the bankrupt company, or if the proceeding 4.2 On what grounds can a company be placed into initiates in the liquidation stage, the trustee or liquidator will be each winding up procedure? the one to fulfil such task. If the insolvency proceeding unfolds into the liquidation of the company, the bankruptcy trustee or liquidator must pay the Out-of-court liquidation: It will be sufficient that the company creditors in the following order of priority: (debtor) proves that it is facing general economic or financial 1. Labour claims for wages and employee benefits for a difficulties. period of two years preceding the date of the insolvency Court liquidation: The liquidation procedure may be initi- judgment. ated if: 2. Claims for debtor-in-possession financing. ■ the debtor company applies for an insolvency proceeding 3. Liabilities and obligations of the insolvency estate (such in the liquidation stage; or as management fees and other administrative costs, and ■ one or more of its creditors request the liquidation stage.

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the costs of defending and providing maintenance to the During insolvency procedures, the attachment of assets is insolvency estate). forbidden for all creditors, with the exception of those ordered 4. Claims secured by mortgages and pledges, up to the by a Labour Court regarding unpaid salaries in the last two years. amount secured (including secured tax claims). Creditors (including employees) who have not been paid fully 5. Claims regarding unsecured federal, state or local taxes. in a liquidation proceeding will retain their rights and actions to 6. Labour claims other than those previously referred to. claim the unpaid amount against the company. 7. Claims, other than the above, that enjoy any special privilege under Mexican commercial law, but only up to the 72 Cross-Border Issues amount of the privilege. 8. Claims of unsecured creditors, including the portion of 7.1 Can companies incorporated elsewhere use any claims of secured creditors exceeding the value of their restructuring procedures or enter into insolvency collateral. proceedings in your jurisdiction? 9. Claims of voluntarily subordinated creditors. 10. Claims of certain related party creditors that are subordi- If a foreign company carries out business transactions or has nate by operation of law. agencies or offices in Mexico, under Mexican law it will be In a non-judicial liquidation, there is no specific ranking of considered a merchant. If a foreign company is declared bank- the debts of the company; nonetheless, the company will not rupt in its jurisdiction, the Foreign Bankruptcy Court can ask be able to be liquidated if its federal, state or local taxes are not for its rights, goods, assets and properties located in Mexico to completely paid. be declared bankrupt or be liquidated. In such cases, a Mexican Bankruptcy Court will rule the proceeding in Mexico of such 4.7 Is it possible for the company to be revived in the assets, goods, rights and properties, under the supervision of the future? foreign bankruptcy representative.

Yes. If a company is declared bankrupt and its assets liqui- 7.2 Is there scope for a restructuring or insolvency dated, that does not mean that the company will lose its capacity process commenced elsewhere to be recognised in your to continue operating in the future. Nonetheless, if the assets jurisdiction? were not enough to pay all the recognised credits, the company’s resources must be used to pay the pending debts. Yes. Mexican Courts recognise the validity of foreign insolvency proceedings when: 52 Tax ■ a foreign court or representative requests assistance from Mexican Courts regarding a foreign insolvency proceeding; 5.1 What are the tax risks which might apply to a ■ when the insolvency proceeding takes place in Mexico and restructuring or insolvency procedure? a foreign country; and ■ when foreign creditors ask for an insolvency proceeding to The CIL has foreseen that all tax credits will continue to cause be initiated in Mexico. fines and accessories that correspond to pursuant applicable regulations. In case of reaching a reorganisation agreement, the 7.3 Do companies incorporated in your jurisdiction fines and accessories caused during the conciliation stage can be restructure or enter into insolvency proceedings in other cancelled. The tax authorities may condone the company’s debt jurisdictions? Is this common practice? in the same percentages as those used by the common creditors in the reorganisation agreement. Yes, it is common for global companies to have a branch or a However, a bankruptcy judgment will not be enough to inter- subsidiary company in Mexico, thus cross-border proceedings rupt the payment of taxes and social security obligations, as they are common practice. are considered indispensable for the company’s operations. From the date of judgment of insolvency and until the end 82 Groups of the period of the conciliation stage, all administrative procedures for the execution of tax credits will be suspended, even though the tax authorities may continue any process to determi- 8.1 How are groups of companies treated on the nate the tax credits of the company. insolvency of one or more members? Is there scope for co-operation between officeholders? 62 Employees Groups of companies can be declared bankrupt and process their insolvency proceeding together, if they file for bankruptcy 6.1 What is the effect of each restructuring or in the same application or if one or more creditors present a insolvency procedure on employees? What claims would employees have and where do they rank? complaint for their bankruptcy. If the bankruptcy application or complaint is filed separately for each company, their insolvency proceedings will be Employees’ salaries and wages must be paid, since an insolvency accumulated. procedure is not justification to interrupt such payments, espe- In the case that one of the companies is declared bankrupt and cially as they are considered indispensable for the company’s that compromises one or more of the group’s companies, they operation. Employees’ claims will be ranked as creditors against must file for bankruptcy before the Court that is resolving the the bankruptcy estate (first ranking) when their claim derives insolvency proceeding of the first company that was declared from unpaid salaries in the last two years. However, if a claim bankrupt. derives from a different concept, the ranking will be paid after tax creditors without collateral.

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92 Reform

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

To this date, there is no proposal to amend the law that regulates the insolvency proceedings in Mexico. Nonetheless, on March 6, 2020, an amendment to Article 28 of the Constitution of Mexico was published, which establishes that all kinds of tax condonations by the tax authorities are absolutely prohibited. This reform establishes that all legislatures must harmonise their codes and laws to be consistent with this Constitutional amendment. In this regard, the CIL might be amended in the next couple of months, since its Article 152 establishes that a company may enter into agreements with the tax authorities and request condonations or authorisations under the terms of the applicable provisions.

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Fernando Pérez Correa Camarena is a lawyer with more than 20 years of experience in dispute resolution, civil and commercial litigation, arbitration and mediation. He is admitted to practise in the state of New York and in the federal courts of the Second Circuit of the United States of America. He is a certified mediator before the Superior Court of Justice of Mexico City and since 2005, he has been registered as conciliator and receiver before the Federal Institute of Specialists in Insolvency Proceedings (IFECOM). Since 1998, he has been the managing partner of the dispute resolution practice area. He has experience as a party lawyer in more than 25 international commercial arbitrations, four investment arbitrations and more than 20 bankruptcy proceedings. He is listed in classifications such as Chambers and Partners, The Legal 500 and Latin Lawyer.

SOLCARGO Tel: +52 55 5062 0050 Avenida Insurgentes Sur 1602, Floor 11 Email: [email protected] Office 1102, Colonia Crédito Constructor URL: www.solcargo.mx P.C. 03940, Mexico City Mexico

Zulima González García joined the firm as an associate in 2014 and, since then, has participated in all of SOLCARGO’s high-profile insolvency and restructuring cases, both national and cross-border. Her practice focuses on bankruptcy and insolvency proceedings. She is a full-service attorney with experience in civil and commercial litigation, domestic and international arbitration. Zulima is specialised in Mexican amparo proceedings and has experience in constitutional and human rights matters. She has also been recognised by The Legal 500 as a “notable associate” in the Bankruptcy and Restructuring practice. She is an active contributor to the Lexology platform where she has published several articles including “Access to bankruptcy proceedings in Mexico” and “The Classification of Consumer’s Credits in Bankruptcy Proceedings in Mexico”.

SOLCARGO Tel: +52 55 5062 0050 Avenida Insurgentes Sur 1602, Floor 11 Email: [email protected] Office 1102, Colonia Crédito Constructor URL: www.solcargo.mx P.C. 03940, Mexico City Mexico

Founded in 1995, SOLCARGO is a top-tier law firm in Mexico, with a highly a multidisciplinary approach in counselling its clients and draws upon qualified, internationally educated team with experience working in tier 1 the firm’s unparalleled resources, including the creation of firm-wide task law firms across the world. The firm can implement efficient legal solutions, forces to address important industry and topical client needs. while taking into consideration its clients’ business rationale. SOLCARGO www.solcargo.mx 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, arbitration, litigation, mediation, restructuring and bankruptcy proceedings, IP and pharmaceutical industries. SOLCARGO adopts

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Netherlands Netherlands

Job van Hooff

Stibbe Daisy Nijkamp

12 Overview 22 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 Dutch jurisdiction is primarily creditor-friendly, the primary company in financial difficulties? Is there a specific aim of the Dutch Bankruptcy Act (“DBA”) – more specifically point at which a company must enter a restructuring or insolvency process? the bankruptcy proceedings – is to ultimately satisfy the creditors, and not to give the debtor a remedy to reorganise its business and to grant a (full or partial) discharge of debts. The managing directors of the debtor are not under a statutory obligation to file for the opening of insolvency proceedings. Although the DBA does not contain such obligation, the 1.2 Does the legislative framework in your jurisdiction managing directors may become personally liable vis-à-vis the allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what creditors if the managing directors have allowed the company extent are each of these used in practice? to incur obligations towards a third party which they know, or should have known, the company will not be able to timely meet. In such circumstances, the managing directors will be required The DBA provides for two formal corporate insolvency proceed- to take appropriate measures, which could – depending on the ings: bankruptcy ( faillissement; corporate liquidation proceed- circumstances – include the cessation of trading and the filing ings); and suspension of payments (surseance van betaling; corpo- for suspension of payments or bankruptcy. rate restructuring proceedings). A managing director can be held liable for losses suffered In both formal insolvency proceedings the debtor can offer by the company due to improper management if the managing a composition plan (akkoord ) to its (ordinary) creditors, but this director can be seriously blamed (ernstig verwijt), taking into does not happen often. account all facts and circumstances, such as the allocation of Suspension of payments is rarely successful and is often duties within the management board, the management board followed by bankruptcy. In practice, bankruptcy is the most guidelines, information which the member of the management used insolvency proceeding. board is or should have been aware of, etc. These proceed- The legislative framework also allows informal work-outs, ings can only be initiated by the company, or by the bankruptcy for example, by means of a plan of composition. Such an trustee in case of a bankrupt company. informal composition, currently, requires the cooperation of all Managing directors are liable for the deficit of the estate if creditors. it is plausible that the management board manifestly improp- The Dutch legislator has prepared a bill – the Act on confir- erly managed the company and this was an important cause of mation of private restructuring plans (Wet homologatie onderhands the bankruptcy. Certain legal presumptions apply. This liability akkoord) – introducing a framework that allows debtors to towards the bankruptcy estate also applies to a de facto managing restructure their debts outside formal insolvency proceedings director. (the “ ”). The Dutch Scheme combines features Dutch Scheme Although the main rule is that only the company (and not its of the US Chapter 11 and English scheme of arrangements. This managing directors) is liable towards third parties such as cred- highly-anticipated bill is expected to enter into force in 2020 (see itors of the company, personal liability towards third parties further under question 3.2). may nevertheless arise if a managing director has committed an unlawful act towards such third party by violating his general duty of care. In all cases, the standard of liability is that the member of the management board can be seriously blamed for this. Members of the management board may further become jointly and severally liable for the payment of certain taxes. This liability arises in the case of manifestly improper management.

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If the company or any of the managing directors timely filed a Voluntary legal acts by the bankrupt debtor, of which the notification of non-payment, the tax authorities have to demon- results are detrimental to creditors (which is established when strate that there was such manifestly improper management. If the action is invoked), may be invalidated if both the debtor and the company or any of the managing directors failed to timely its counterparty knew or should have known (at the time the file the notification, it is legally assumed that the non-payment legal act was voluntarily entered into) that such legal act would of taxes was caused by the managing director, unless he proves have a detrimental effect on the creditors. The fact that a trans- otherwise. action was at arm’s length does not necessarily mean that a trans- In conclusion, certain criminal law provisions apply, e.g. in action cannot be challenged. case of fraudulent conveyance. Also, compulsory legal acts can be invalidated if (a) the creditor knew that the request for bankruptcy was pending, or (b) if the creditor consulted with the debtor with the intention to 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the put him in a more favourable position than the other creditors. action that they can take against the company? For These must be proven by the bankruptcy trustee. There is no example, are there any special rules or regimes which presumption of knowledge as in the case of voluntary legal acts. apply to particular types of unsecured creditor (such Outside of formal insolvency proceedings, transactions can as landlords, employees or creditors with retention also be challenged. As a matter of Dutch law, every creditor may of title arrangements) applicable to the laws of your nullify (by a simple declaration) any legal act entered into by a jurisdiction? Are moratoria and stays on enforcement debtor with a third party if the requirements for voidable prefer- available? ence outside bankruptcy are met. The validity and enforceability of the obligations of a debtor In the Netherlands it is fairly easy for creditors to obtain leave under, e.g. guarantee or security interest, may be successfully for conservatory attachment. Such creditors may also file a peti- contested by a debtor (or its bankruptcy trustee) if the execution tion for bankruptcy. The filing of such petition can trigger of the security document is not within the scope of the corpo- contractual clauses that make it possible to terminate existing rate objects of the debtor (doeloverschrijding) and the counterparty contracts. of such debtor under the security document knew or ought to Dutch law further provides for a broad retention of title have known (without enquiry) of this fact. regime. Suppliers can arrange to reclaim their goods until all invoices have been paid. 32 Restructuring Options Secured creditors (financiers) also have a strong influence. In practice, a company in financial difficulties will be placed under 3.1 Is it possible to implement an informal work-out in the supervision of the financiers’ special management depart- your jurisdiction? ment because certain covenants under the financing agreements will be breached. Formally, the secured creditor has no role within the company but in practice the company often coop- As a general rule, the Dutch legislative framework currently only erates with the bank, in the knowledge that the cooperation of allows informal work-outs if all creditors cooperate and approve the the financiers is required for any restructuring due to all assets informal work-out. In exceptional cases, creditors can be forced to being pledged. approve the informal work-out (i.e. in case of abuse of power). A Employees take a special position in the Netherlands. debt-for-equity swap can be part of an informal work-out. Outside of a bankruptcy scenario, the possibilities to dismiss employees are limited. This is one of the reasons why it is diffi- 3.2 What formal rescue procedures are available cult to successfully restructure a company outside insolvency in your jurisdiction to restructure the liabilities of proceedings. Legislation is being drafted to strengthen the posi- distressed companies? Are debt-for-equity swaps tion of employees in case of a transfer of undertaking during and pre-packaged sales possible? To what extent can bankruptcy proceedings. creditors and/or shareholders block such procedures In the Netherlands, suspension of payments (moratorium) is or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you granted on a preliminary basis if a debtor foresees that it will be to cram-down dissenting stakeholders? Can you cram- unable to meet its obligations. During suspension of payments down dissenting classes of stakeholder? proceedings, the debtor cannot be forced to pay his debts and all actions in progress to recover those debts are suspended. However, this regime only affects the ordinary creditors. See Suspension of payments is the main formal rescue procedure question 3.2 and further. available in the Netherlands. Suspension of payments only A freeze period can apply in bankruptcy or suspension of affects the rights of ordinary creditors; the obligations of the payments (see question 4.4). debtor to pay its ordinary creditors are suspended. The rights of the secured and preferential creditors are not affected. The debtor can offer a composition plan which provides for a 2.3 In what circumstances are transactions entered full or partial payment of the suspended claims of the creditors, into by a company in financial difficulties at risk of in full satisfaction of their claims. Using the plan of compo- challenge? What remedies are available? sition during suspension of payments may lead to a successful reorganisation. Dissenting ordinary creditors can be forced to The bankruptcy trustee is entitled to invalidate legal acts of the accept the composition if – in summary – the majority of the bankrupt debtor which were carried out before the declaration creditors vote in favour of the plan and the plan is approved of bankruptcy and which were detrimental to the creditors. No by the court. However, in practice, it is difficult to achieve a hardening period applies. The burden of proof may be reversed successful restructuring by way of offering a composition plan. in respect of voluntary legal acts that took place less than a year So far, a pre-packaged sale is also allowed under Dutch law. before the debtor was declared bankrupt (e.g. legal acts entered Although there is no specific legislation regarding pre-packaged into with related parties or transactions at undervalue). sales yet (see question 9.1), the majority of Dutch courts allowed

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for pre-packaged sales. Since the European Court of Justice he will not be able to continue paying his debts. The court can has decided that the transfer of undertaking rules in respect of appoint an expert to investigate whether the debtor is in such a employment contracts can be applicable in pre-packaged sales, situation. the pre-packaged sale has not been very popular. There is a risk that employees of the debtor automatically transfer to the 3.4 Who manages each process? Is there any court purchaser in a pre-packaged asset sale. Case law from the Dutch involvement? Supreme Court on this topic is expected. Also, see the development on new legislation under question 9.1. We explained that the Dutch Scheme is expected to enter into Upon granting a preliminary suspension of payments, the court force in 2020. Once in force, the new Dutch Scheme provides will appoint an administrator (bewindvoerder). A supervisory judge the opportunity to arrange financial restructuring outside is usually also involved. The administrator, in co-operation with insolvency proceedings by means of a court-approved restruc- the management board of the debtor, will administer the affairs turing plan. Both the debtor as well as creditors, shareholders of the debtor and investigate the possibilities of a reorganisation and employee representatives (creditors e.a.) can take the initi- of the debtor’s company and/or full or partial payment of the ative for the Dutch Scheme. If the creditors e.a. take the initi- creditors through a plan of composition. By law, the manage- ative, a restructuring expert must be appointed. The debtor, ment and the administrator may only act together; the admin- however, remains in possession and no insolvency practitioner is istrator is de facto in control during suspension of payments. In appointed. The Dutch Scheme allows for a wide range of possi- practice, the preliminary suspension of payments is most often bilities to restructure the debt, for example, a debt-for-equity shortly followed by a bankruptcy, because the administrator swap converting the claim of the creditor wholly or in part into considers that a successful reorganisation is unlikely. equity, amending contractual terms of existing agreements (see The intention of the legislator with respect to the Dutch question 3.5) or an extension of payments. Scheme is, in principle, to minimise the involvement of the In the current proposal, the debtor does not require share- court. If one of the creditors, shareholders or employee repre- holder consent for a restructuring plan. Furthermore, a restruc- sentatives takes the initiative for the Dutch Scheme, that same turing plan would only require at least one class of creditors to entity must ask the court to appoint a restructuring expert who vote in favour of the plan in order for the debtor, or the restruc- will prepare the restructuring plan on behalf of the debtor. A turing expert, to be able to request the court for a confirma- debtor may also request the appointment of a restructuring tion of the restructuring plan. Upon confirmation by the court, expert by the court, for example to avoid any suggestion of a the restructuring plan becomes binding on the debtor and all conflict of interest. The debtor, however, remains in control of creditors and shareholders who were entitled to vote. The court the business and the day-to-day management of the company. has to test the restructuring plan at its own motion against the The debtor or the restructuring expert can file a request for general grounds for refusal and reject the plan if any of those confirmation of an extrajudicial restructuring plan with the grounds applies, e.g. procedural requirements have not been court. The court has to test the restructuring plan and upon met, the performance of the plan is not sufficiently guaran- its confirmation the restructuring plan becomes binding on the teed, the plan is a result of fraud, etc. The court may also reject debtor and all creditors and shareholders who were entitled to the restructuring plan if any of the general grounds for refusal vote. In addition, during the process, the debtor or the restruc- applies or, at the request of opposing creditors or shareholders, turing expert can request the court to issue preliminary judg- if they would be significantly worse off under the plan compared ments on several points such as class formation, eligibility and to a liquidation scenario (best interest of creditors test). valuation. If one or more classes have rejected the restructuring plan, the court can still confirm it if at least one class, that is expected to 3.5 What impact does each restructuring procedure receive cash payment in the event of bankruptcy, has accepted have on existing contracts? Are the parties obliged to the plan (cross-class cram-down). However, the court must perform outstanding obligations? What protections reject the plan at the request of opposing creditors or share- are there for those who are forced to perform their holders when the order of priority is disregarded in relation to the outstanding obligations? Will termination and set-off provisions be upheld? opposing class (absolute priority rule) or the relevant creditors are not offered a cash amount equivalent to the amount that would have been received in the event of a liquidation. The supple- In principle, suspension of payments does not affect existing mental grounds for refusal are largely inspired by the US Chapter agreements. However, the debtor’s payment obligations in 11 “best interest of creditors test” and “absolute priority rule”. relation to ordinary claims are suspended. Moreover, these contracts might contain provisions on the consequences of the granting of suspension of payments on any of the parties to 3.3 What are the criteria for entry into each the agreement, and these remain in principle valid. The same restructuring procedure? applies to set-off provisions. Although agreements in principle are not affected by suspen- The debtor can file a petition in court for a suspension of sionf o payments, the administrator/debtor does not have to payments if it foresees that it will be unable to continue to timely perform all obligations under agreements as this may conflict meet its obligations. Suspension of payments is immediately with his duty to treat all creditors equally (e.g. not obliged to make granted on a preliminary basis. In theory, the object of a suspen- payments, deliver goods). The counterparty can file its (ordinary) sion of payments is to allow the debtor time either to overcome claimn i the bankruptcy estate. The administrator/debtor does temporary illiquidity or to propose a settlement to its creditors. have the obligation to passively perform (e.g. honour the lease An application for suspension of payments cannot be made by agreement if the debtor is the lessor). If such obligations are not creditors or other third parties. honoured, the counterparty has a direct claim on the estate. The Dutch Scheme may be initiated by either the debtor or any If both the debtor and the counterparty have not or have of its creditors, shareholders or employee representatives, when only partially performed under an agreement, the counterparty the debtor is in a situation that it can be reasonably expected that can request that the administrator/debtor confirms within a

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reasonable time whether they are willing to perform under the trustee (curator). The bankruptcy trustee is entrusted with the contract.f I the administrator/debtor does not confirm this, he/ administration of the bankruptcy and is exclusively entitled to she loses the right to claim performance of the counterparty’s administer and dispose of the assets. The bankruptcy trustee obligations. If the administrator/debtor confirms that he/she is usually an attorney of the local bar association and, especially will perform, the administrator/debtor has to provide security. in case of larger bankruptcies, a specialised insolvency lawyer. The Dutch Scheme allows for the possibility to restructure The supervisory judge’s task is to supervise the bankruptcy debt by amending the contractual terms of existing agreements trustee and he has a statutory duty to approve certain decisions (see question 3.2). The debtor or the restructuring expert has the to be made by the bankruptcy trustee. option to terminate an agreement if the counterparty does not agree to a proposed voluntary amendment or termination if the 4.4 How are the creditors and/or shareholders able court authorises the early termination and confirms the restruc- to influence each winding up process? Are there any turing plan. The counterparty will be entitled to damages, but restrictions on the action that they can take (including that claim can be included in the Dutch Scheme. However, it the enforcement of security)? is not possible to affect the rights of employees under employment contracts. The management board is not authorised to file for bankruptcy without a resolution to do so from the general meeting of share- 3.6 How is each restructuring process funded? Is any holders. Other than that, shareholders have little influence on protection given to rescue financing? the bankruptcy proceedings. The court may, depending on the type and size of the bank- Reorganisation of the company will generally be funded by the ruptcy, decide to form a creditors’ committee which task is to debtor itself. The debtor can generate money by selling certain advise the trustee. If a creditors’ committee is installed, the assets in order to pay off debts. bankruptcy trustee is obliged to seek advice from the committee Rescue financing is not protected by any legislation. However, with regard to the subjects referred to in the DBA. In addition, after the opening of insolvency proceedings it is possible for a creditors have the right to file a request with the supervisory financier to provide a preferential loan that has a higher rank judge objecting to acts of the bankruptcy trustee or demanding than other debts of the debtor if the bankruptcy trustee or the an order from the supervisory judge. administrator agrees. Ordinary creditors are not entitled to enforce their claims; all In the Dutch Scheme, the restructuring costs, e.g. the costs attachments on the debtor’s assets which benefit specific creditors, for the restructuring expert, will be borne by the debtor. are replaced by a general bankruptcy attachment which benefits Restructuring efforts, such as DIP financing, are protected all creditors. Pending legal proceedings are suspended. Creditors from avoidance actions. have to file any claims on the debtor in the bankruptcy estate. Creditors that have a right of mortgage or right of pledge have 42 Insolvency Procedures more influence. Subject to any applicable freeze order, secured creditors are entitled to foreclose their collateral during bankruptcy. The bankruptcy trustee is in principle not entitled to the 4.1 What is/are the key insolvency procedure(s) proceeds of the sale of the secured assets, nor is he entitled to available to wind up a company? withhold these assets. The secured creditors cannot be charged with the costs of the bankruptcy. The key insolvency procedure available to wind up a company However, the bankruptcy trustee may impose on the mort- is bankruptcy. gagee or pledgee a reasonable term for selling the collateral. If secured creditors do not execute the collateral before the dead- 4.2 On what grounds can a company be placed into line, the bankruptcy trustee is entitled to liquidate the collat- each winding up procedure? eral himself, notwithstanding the creditor’s right of priority to the proceeds as a preferential creditor. In that case the secured creditor has to share in the costs of the bankruptcy, which may A debtor can be declared bankrupt by a Dutch court if it resides mean that they will receive little or no proceeds. or has a place of business in the Netherlands and either applies The supervisory judge may declare a freeze period, during for bankruptcy itself or an application for bankruptcy is filed by which recourse can only be sought against (some of the) assets of a creditor. the estate or assets in the possession of the bankruptcy trustee, The petition must reveal facts and circumstances which after having obtained authorisation from the supervisory judge. constitute prima facie evidence that the debtor has ceased to pay The freeze period applies for a maximum period of two months its debts. This is considered to be the case if there are at least and may be extended once, for a maximum of two months. two creditors, one of whom has a claim which is due and payable and which the company cannot or refuses to pay. The DBA does not require that other creditors support the petition. 4.5 What impact does each winding up procedure have In addition, the administrator in suspension of payments on existing contracts? Are the parties obliged to perform might have to file for bankruptcy. This would, for example, outstanding obligations? Will termination and set-off be the case if there is no outlook that the debtor will be able to provisions be upheld? satisfy its creditors or the debtor acts in bad faith. In principle, bankruptcy proceedings do not affect the validity or the content of an agreement. Set-off provisions and termi- 4.3 Who manages each winding up process? Is there any court involvement? nation provisions will be upheld. The DBA provides for broad set-off possibilities. Although agreements are in principle not affected by the When making the bankruptcy order, the court appoints a super- bankruptcy proceedings, the bankruptcy trustee does not have visory judge (rechter-commissaris) and at least one bankruptcy to perform obligations under agreements that may conflict with

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his duty to treat all creditors equally (e.g. not obliged to make bankrupt legal entity then emerges from bankruptcy and can payments, deliver goods). The counterparty has to file its claim continue to do business. In practice, the plan of composition is with the bankruptcy estate. The bankruptcy trustee does have almost never offered in case of bankruptcy proceedings. the obligation to passively perform (e.g. honour the lease agreement if the debtor is the lessor). Alternatively, the counterparty 52 Tax has a direct claim on the estate. If both the debtor and the counterparty have not, or have only 5.1 What are the tax risks which might apply to a partially performed under an agreement, the counterparty can restructuring or insolvency procedure? request the bankruptcy trustee to confirm within a reasonable time whether he is willing to perform under the contract. If the bankruptcy trustee does not confirm, he loses the right to claim Restructuring and insolvency proceedings can significantly performance of the counterparty’s obligations. If the bankruptcy affect the fiscal position of the company. Certainly in group trustee confirms that he will perform, he has to provide security. relationships, complex tax regulations can have far-reaching The DBA does grant the bankruptcy trustee with the right to consequences that affect not only the distressed company itself, terminate lease agreements and employment contracts. but also the group of companies to which it belongs. Examples of possible tax risks are: ■ Companies in distress are obliged to timely report to the 4.6 What is the ranking of claims in each procedure, tax authorities their inability to pay tax debts. including the costs of the procedure? ■ Many groups of companies form a fiscal unity ( fiscale eenheid ) for corporation tax, VAT, or both. If a company in The ranking of claims is as follows: a fiscal unity goes bankrupt, this may affect and eventually Estate claims (boedelvorderingen) are direct claims against the terminate the fiscal unity in relation to that company. estate. Estate claims have priority over all other claims. An ■ If a creditor remits a claim, this can lead to a taxable profit exception applies to the claims of secured creditors which have for the debtor (kwijtscheldingswinst). Under Dutch law there timely foreclosed their security, as they can act as if there is no is a specific regulation concerning these kinds of profits. bankruptcy at all. Remission is also possible within the company’s fiscal Estate claims are claims which arise by virtue of law (e.g. rental unity. payments during the bankruptcy, and salaries dating from after It is therefore important to map out the distressed company’s the date of the bankruptcy order), from legal acts performed by tax position adequately and timely. the bankruptcy trustee in his capacity and resulting from actions of the bankruptcy trustee in breach of an obligation or commit- 62 Employees ment applicable to him in his capacity as bankruptcy trustee. The salary and costs of the bankruptcy trustee are estate claims as well. 6.1 What is the effect of each restructuring or Claims of secured creditors are claims of creditors which insolvency procedure on employees? What claims would are secured by a right of mortgage (hypotheek) or a right of pledge employees have and where do they rank? (pandrecht). Subject to any applicable freeze order, secured creditors are entitled to foreclose their collateral during bankruptcy With authorisation from the supervisory judge, the bankruptcy (see above under question 4.4). To the extent that not all claims trustee is entitled to terminate the employment contracts. The can be satisfied from the proceeds of the enforcement of the applicable termination period depends on the terms of the rele- security rights, the remainder is treated as an ordinary claim. vant employment agreement, but at the longest is six weeks. Preferential claims are claims that have a priority right to The salary and pension contributions between the bankruptcy the proceeds of all or certain assets of the estate (depending on date and the date of termination of the employment agreement the type of claim). The claims of the tax and social authori- rank as estate claims. Claims that predate the bankruptcy date ties (taxes and social insurance contributions) as well as certain and arose within one year prior to that date are preferential claims of employees, are the most important categories of pref- claims. Any further claims rank as ordinary claims. The same erential claims. Preferential creditors only receive payment if all regime applies in a suspension of payments. estate claims are paid. With regard to the proceeds of fixtures In practice, most of the employee’s claims on the estate will and fittings, tax claims take preference over secured claims be paid by the Employee Insurance Agency (“UWV”) under under certain circumstances. the wage guarantee scheme. It concerns the amount that ranks Ordinary claims are claims that already existed on the date as estate claim (with a maximum of six weeks) and also the of the bankruptcy order or were already a part of the legal posi- salary for the period until 13 weeks prior to the bankruptcy and tion of the creditor at the date of the bankruptcy order. Ordinary certain other amounts (e.g. holiday pay and holidays for the year claims must be submitted for verification. The ordinary cred- preceding the bankruptcy). The UWV in turn will subrogate in itors receive a pro rata share of the remainder after the estate the claims of the employees towards the estate. claims and preferential claims are paid. In a suspension of payments, the administrator and debtor Post-insolvency claims are claims that arise after the bank- acting jointly can terminate the employment contracts together. ruptcy and do not fall within one of the above-mentioned cate- They require a dismissal permit from the UWV. The termination gories. Those claims cannot be submitted for verification. period can vary depending on the relevant employment contract. European rules on the transfer of undertaking are not appli- 4.7 Is it possible for the company to be revived in the cable in case of an asset sale during bankruptcy proceedings. future? This, however, might differ in the case of a pre-packaged sale due to the recent judgment of the European Court of Justice in In theory, the bankruptcy can end with a plan of composition relation to Smallsteps; see also question 3.2 above. In addition, offering the creditors a partial payment of their claim. The legislation is being drafted so that the transfer of undertaking

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rules are also applicable in bankruptcy proceedings, unless In exceptional cases, the bankruptcies can be settled jointly the purchase can provide economic, technical or organisation by means of what is known as a consolidated settlement. At reasons that justify changes to staff or the employment contracts the request of the bankruptcy trustee, the appointed supervi- (see also question 9.1.) sory judge is authorised to decide whether a consolidated settlement is necessary. 72 Cross-Border Issues Dutch law does not provide for a statutory obligation for bankruptcy trustees to cooperate with one another. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency 92 Reform proceedings in your jurisdiction? 9.1 Are there any other governmental proposals for Any debtor residing in the Netherlands or with its centre of reform of the corporate rescue and insolvency regime in main interest located in the Netherlands can enter into insol- your jurisdiction? vency proceedings in the Netherlands. The following developments in the context of reform of the corporate rescue and insolvency regime in the Netherlands are 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your worth mentioning: jurisdiction? ■ The Act on confirmation of private restructuring plans (Wet Homologatie Onderhands Akkoord), introducing a framework allowing debtors to restructure their debts outside There is a difference between proceedings commenced in an formal insolvency proceedings (the Dutch Scheme). The EU Member State and those commenced in a non-EU Member draft act was officially submitted to the parliament on 5 State. July 2019 and is expected to enter into force in the course Insolvency proceedings commenced in EU Member States of 2020. (with the exception of Denmark) are recognised pursuant to the ■ Continuity of Enterprises Act (Wet Continuiteit EU Insolvency Regulation (recast). Ondernemingen I), providing legislation regarding pre-packs. Proceedings commenced in non-EU Member States are The purpose of this proposal is to provide a legal basis formally not recognised in the Netherlands absent any treaty, for the working method that has arisen in practice, but in practice do have some effect. When determining a claim whereby in certain cases an intended bankruptcy trustee is for recognition of insolvency proceedings rendered by a court appointed prior to an expected bankruptcy, often termed in a non-EU Member State, Dutch courts will apply the Dutch a “pre-pack”. The effect of the Court of Justice ruling private international rules for recognition of foreign judgments. mentioned under question 3.2 is that the number of situ- Foreign judgments will be recognised if the authority of the rele- ations in which the proposal will be used is more limited vant court is based on internationally accepted standards and the than was taken into account at the start of the legislative foreign judgment does not conflict with the Dutch public order. process. It is the intention to examine and consult further The recognition of the foreign insolvency order is, however, on this proposed law together with the proposal for the limited by the principle of territoriality. This means that the Transfer of Undertaking in Bankruptcy Act (Wet over - foreign proceeding, for example, cannot impair the rights of gang van onderneming in faillissement). This draft bill tries to creditors to take recourse on assets located in the Netherlands. remove the legal uncertainty following the Court of Justice ruling and implies that in most cases the purchaser is 7.3 Do companies incorporated in your jurisdiction obliged to take over all employees unless the purchaser can restructure or enter into insolvency proceedings in other provide economic, technical or organisational reasons that jurisdictions? Is this common practice? justify changes to the staff or terms and conditions. The internet consultation with respect to this draft bill ended Occasionally, companies incorporated in the Netherlands enter on 31 August 2019. into insolvency proceedings or restructuring proceedings in other jurisdictions. Dutch incorporated companies have, in the past, for example, used the English scheme of arrangement in order to restructure their debt. It is not unusual, but neither is it common practice.

82 Groups

8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?

Dutch legislation does not provide for a formal procedure with regard to the insolvency of a group of companies. The main rule is that each company has to be separately liquidated.

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Job van Hooff co-heads Stibbe’s restructuring and insolvency group, specialising in liability, security rights and restructuring. Job has extensive experience in in both court-supervised and out-of-court restructurings and related litigation. He also acts as a court-appointed administrator and bankruptcy trustee. With experience as a bankruptcy trustee, as well as advising all parties in litigation, he understands all perspectives of financial restructuring matters, enabling efficient and timely advice when challenging business circumstances arise. Job is an active member of Insolad, INSOL World and INSOL Europe and he regularly teaches and publishes on subjects of liability, including directors’ liability, security rights and bankruptcy law.

Stibbe Tel: +31 20 546 06 71 Beethovenplein 10 Email: [email protected] 1077 WM Amsterdam URL: www.stibbe.com Netherlands

Daisy Nijkamp has proven experience litigating and advising on liability, security rights and insolvency law issues for a broad spectrum of clients. She regularly advises on complex restructurings and acts as a trustee in bankruptcy matters. Daisy also has expertise in banking and finance. In 2014, she was seconded to an international Dutch bank as in-house counsel to advise the financial restructuring and recovery team. Daisy is an active member of Insolad and INSOL Europe and regularly teaches on security rights and bankruptcy law.

Stibbe Tel: +31 20 546 02 54 Beethovenplein 10 Email: [email protected] 1077 WM Amsterdam URL: www.stibbe.com Netherlands

About Stibbe concerning companies in stress and distress. The team acts on cross- Stibbe is an international law firm advising on the laws of the Benelux border financial restructuring matters and distressed transactions for a countries and European law, with offices located in Amsterdam, Brussels range of high-profile borrowers and lenders. It also represents clients in and Luxembourg as well as in Dubai, London and New York. litigation relating to bankruptcy or insolvency and members of the team Our practice groups include restructuring and insolvency, employment, are regularly appointed by the court as an administrator and bankruptcy pensions and incentives, corporate, mergers and acquisitions, real estate, trustee. The team combines transactional and litigation skills. construction, telecom, media and technology, administrative law, environ- www.stibbe.com ment and planning, private equity, capital markets, finance, tax, litigation and dispute resolution, EU competition, energy and intellectual property. In addition to our own international offices, we collaborate closely with other top-tier firms for cross-border matters outside our Benelux home jurisdictions. These relations are non-exclusive and enable us to assemble a tailor-made, integrated team of lawyers with the best expertise and contacts for each specific matter. This guarantees efficient coordination on cross-border matters, whatever their complexity and nature. Restructuring & Insolvency Stibbe’s Restructuring and Insolvency team is a leading player in the Netherlands and is highly experienced in a broad range of matters

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Dr. Jennifer Douglas-Abubakar

Ikiemoye Ozoeze

Miyetti Law Zada Amede Oputa

12 Overview 22 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 Nigeria is a creditor-friendly jurisdiction. The rights of a cred- company in financial difficulties? Is there a specific itor once made known are protected under the provisions of the point at which a company must enter a restructuring or insolvency process? Companies & Allied Matters Act (CAMA) Cap C20, Laws of the Federation of Nigeria, 2004. Section 471 provides for the voluntary winding up of the defaulting company by its credi- Under Section 422 of the CAMA, the directors have a duty tors. It is instructive to note that the provisions of Section 493 to cooperate with the appointed liquidator and deliver up all of the CAMA ranks secured and unsecured creditors above the company properties and provide any document so requested. members of the company during the winding up proceedings. They are bound to declare insolvency of the company at a The members are not entitled to any payments until the credi- general meeting. Section 508 of the CAMA imposes duties on tors have been fully refunded and the debts liquidated. directors to keep account of their books. Put differently, directors have duties to make a declaration of solvency or otherwise and to exercise due care, skill and diligence in the discharge of 1.2 Does the legislative framework in your jurisdiction obligations. Failure to exercise responsible care is a ground for allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what an action in negligence. extent are each of these used in practice? With respect to restructuring, where a company is distressed, it may elect to wind up, or the creditors of the company may file a petition in court to wind up, said company. Where this The options available to financially distressed companies are: is the case, the board of directors has a duty to approve the receivership; liquidation; and arrangement and compromise. In special resolution and call an extraordinary meeting to notify practice, liquidation and receivership are most common. These the company officially. Also, where a receiver/manager or options are geared towards the dissolution of the company. liquidator is appointed to assume management of a distressed Due to the limited nature of insolvency provisions, credi- company, the directors will have no legal rights to deal in the tors and companies often resort to the court for interpretation company but must assume that the monies received are chan- of the legal provisions. The only extant provision that iden- nelled through the right source, or else risk personal liability. tifies priority for secured creditors is the Assets Management Section 290 of the CAMA touches on potential liability, Corporation of Nigeria (AMCON), amended No. 2 Act, 2019. where money was received by a company by way of loan for a Any out-of-court restructuring is considered an “informal” specific purpose or by way of advance payment from a party arrangement. Informal workouts serve as a timely alternative to for the execution of a contract and not so concluded, the direc- recovery of funds pursuant to coordinated negotiations to avoid tors or officers would be personally liable to the party for such unnecessary liquidation of viable companies. misappropriation. Regarding the time frame for restructuring, there is no specific point at which a company must restructure, because it is presumed that a restructuring is a continuous process and could occur in solvency or at the brink of insolvency.

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2.2 Which other stakeholders may influence the 3.2 What formal rescue procedures are available company’s situation? Are there any restrictions on the in your jurisdiction to restructure the liabilities of action that they can take against the company? For distressed companies? Are debt-for-equity swaps example, are there any special rules or regimes which and pre-packaged sales possible? To what extent can apply to particular types of unsecured creditor (such creditors and/or shareholders block such procedures as landlords, employees or creditors with retention or threaten action (including enforcement of security) of title arrangements) applicable to the laws of your to seek an advantage? Do your procedures allow you jurisdiction? Are moratoria and stays on enforcement to cram-down dissenting stakeholders? Can you cram- available? down dissenting classes of stakeholder?

The Nigerian Deposit Insurance Corporation (NDIC), the Formal rescue procedures available to a financially distressed Securities and Exchange Commission (SEC) and the Corporate company in Nigeria are of two types: (a) internal restructuring Affairs Commission (CAC) are the predominant statutory regu- which includes arrangement and compromise, sales arrange- latory bodies that have influence over a company’s situation. ments and reduction of share capital; and (b) external restruc- Other non-regulatory stakeholders that might have influence turing including mergers and acquisitions, takeovers, purchase over a company’s performance particularly in times of financial and assumption. difficulties are debenture holders, employees and shareholders. Internal restructuring: Section 539 of the CAMA provides The respective laws i.e. the CAMA, the Investment and for arrangement and compromise. By this provision, where a Securities Act (ISA) and the NDIC Act have defined instances compromise or arrangement is proposed between the company when the stakeholder can bring an action against a company and and its creditors or members, the company shall make an appli- to what extent they can recover. Under the relevant laws, pref- cation to the Federal High Court for an order to summon a erential payments shall be made to pay off debts in the nature of meeting of the creditors or members in such a manner as the charges, rates and other taxes that the company owes within 12 Court directs. Notice of the meeting will be served to the cred- months preceding its insolvency. itors or members, accompanied by a statement showing the With regard to restructuring, the same will not be sanctioned effect of the compromise or arrangement on the directors, cred- until the laid down procedure by the SEC has been abided with. itors and shareholders. Under Section 538 of the CAMA, a sale Stays on enforcement can only operate against unsecured arrangement commences when members pass a special resolu- creditors. Secured creditors cannot be restrained from the tion to wind up the company voluntarily and appoint a liqui- realisation before winding up proceedings. Section 412 of dator to sell the company’s assets. Once the scheme of arrange- the CAMA provides that, where a petition for winding up of ment is approved, the directors will make a declaration of company is before a court, a company, its creditor or contrib- solvency as the basis of winding up. A dissenting member or utory may obtain a stay or restraining order against all other creditor may to write the liquidator within 30 days of the passing suits in any other court pending the outcome of the winding up of the resolution, asking him either to abstain from carrying out proceedings, or apply to have the matter transferred to the court the resolution or to purchase his own shares at a determined for hearing of the petition. price. The arrangement will be valid if no objection has been raised within one year. Therefore, by virtue of this provision, minority shareholders of the company are not forced to accept 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of the sale arrangement. On the other hand, a company may decide challenge? What remedies are available? to reduce its share capital through share cancellations and repurchase. This is done to increase shareholders’ value and produce a more efficient capital structure. By virtue of Section 160(2) of The directors of a company can lawfully act on its behalf until a the CAMA, a company can acquire its own shares for several liquidator is appointed either by the company, creditors or by the reasons including to settle or compromise a debt or to satisfy the court. At such point, every action taken for the company must claims of dissenting shareholders. Section 383(3) of the CAMA be made by the liquidator; otherwise, it is voidable. A member vested power on companies to allot unissued shares to deben- of a company or the CAC or any other appropriate person may ture holders or creditors as shares fully paid. apply to the court for remedies where it is perceived that the External restructuring: Mergers and acquisitions occur business of a company is being conducted in an unfair manner. when a viable company acquires another company or decides to Such remedies include rescission of a transaction and damages. merge in order to form a new company or maintain the earlier Likewise, a company may be investigated by the CAC and the names of the companies. In a takeover, a company which later investigation may result in civil action against the company. becomes a holding company acquires the issued share capital of another company in order to have control over the manage- 32 Restructuring Options ment of the acquired company. Purchase and assumption takes place where a solvent company purchases assets of an insolvent 3.1 Is it possible to implement an informal work-out in company and assumes its liabilities. your jurisdiction?

3.3 What are the criteria for entry into each Informal work-out is strongly encouraged and practiced in restructuring procedure? Nigeria. This occurs where the creditor is cooperative, and the company’s business is viable. The work-out may involve restruc- In arrangements and compromises, under Section 539(2) of turing the terms of the company’s debt and a reduction of the the CAMA, three-quarters of the shareholders present and workforce and operations, among others. voting, either in person or by proxy at the meeting, shall agree to any compromise or arrangement which may be referred by the court to the SEC who shall appoint inspectors to investigate the fairness of the compromise or arrangement and make a

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written report to the court within a time specified by the court. 42 Insolvency Procedures If the court is satisfied as to the fairness of the compromise or arrangement, it shall be binding on all shareholders and creditors. Sections 129 and 130 of the ISA made provisions for a 4.1 What is/are the key insolvency procedure(s) transferee company to acquire shares of dissenting shareholders available to wind up a company? and the right of dissenting shareholders to compel acquisition of their shares, respectively. For mergers, the transferee company There are two broad types of winding up proceedings in must command at least 51% of the controlling shares of the Nigeria: compulsory winding up (i.e. winding up by the court or transferor company, and a pre-merger notification shall be made subject to the supervision of the court); and voluntary winding to the SEC before it is approved. For takeover, a minimum of up (i.e. members’ voluntary winding up and creditors’ voluntary 30% control of the shares of the target company is sufficient to winding up). kickstart the bid. The takeover bid must be served on SEC, the board of directors of the companies, the shareholders and the 4.2 On what grounds can a company be placed into creditors of the target company. 90% of the members of the each winding up procedure? target companies must endorse it for it to scale through. The interest of the dissenting 10% can be acquired at a price to be fixed by a court-appointed independent share valuer. The grounds for winding up by the court are: inability of a company to pay its debt, shortfall in membership of the company below two adults; default in filing a statutory report 3.4 Who manages each process? Is there any court by the company; where a court considers winding up just and involvement? equitable; or where the members by special resolution call for a court winding up. Sometimes, a company may pass a reso- Both informal work-out and internal restructuring are managed lution for voluntary winding up, but the court is petitioned for by the directors and shareholders of the company, sometimes the processes to be completed by the court. Then, it is said to with the influence of the creditors. The company ensures that be winding up subject to the supervision of the court. On the it complies with the statutory regulations governing the restruc- other hand, the grounds for members’ voluntary winding up are turing process. Regarding external restructuring, the SEC the effluxion of the lifespan of the company or the happening manages the process. Apart from informal work-out, the court of a predefined occurrence after which the company was to be is involved in all restructuring procedures, but the extent of its wound up as provided in its article of association, and where involvement depends on the type of restructuring. the company decides by a special resolution that it be wound up voluntarily. The grounds for a creditor’s voluntary winding up is an inability on the part of the directors of the company to issue 3.5 What impact does each restructuring procedure a declaration of solvency pursuant to Section 462 of the CAMA. have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their 4.3 Who manages each winding up process? Is there outstanding obligations? Will termination and set-off any court involvement? provisions be upheld?

Winding up processes are managed by liquidators, receivers When a company is being restructured, the scheme of arrange- and receiver managers. Where it is compulsory winding up or ment shall provide for the mode of compliance with existing winding up subject to the court’s supervision, the court is signif- contracts. Therefore, a restructuring procedure does not affect icantly involved in the liquidation procedure. The CAC plays the company’s contracts except that such contracts made restruc- a role in winding up processes as it is the corporation tasked turing grounds for termination. However, it is important to note with registering companies as well as keeping the books of regis- that Section 4 of AMCON amended No. 2 Act, 2019 provides tered companies. For voluntary winding up, the creditor, share- that, upon the acquisition of rights by the Corporation in an holders or directors may be involved at various stages. eligible bank asset, the Corporation shall acquire all rights applicable to the assets notwithstanding that only equitable rights are created in the assets and the Corporation is entitled to exercise 4.4 How are the creditors and/or shareholders able the powers of a legal estate holder in a charge or legal mortgage. to influence each winding up process? Are there any The interpretation of this provision is that AMCON may refuse restrictions on the action that they can take (including the enforcement of security)? to be bound by a contract between a third party and the bank from which AMCON acquired an eligible asset. As such, parties obliged under such contracts may apply for variation or discharge. Section 473 of the CAMA gives the creditors a wide power in the appointment of the liquidator for a creditors’ voluntary winding up. Upon such appointment, the directors of the company must 3.6 How is each restructuring process funded? Is any refrain from the running and management of the company. The protection given to rescue financing? creditors, however, retain the power to fill vacancies for the position of liquidator occasioned by either death, resignation or other- Informal work-out and internal restructuring are funded by the wise. The creditors may decide to appoint a committee of inspec- members and shareholders of the company. Also, depending on tors which oversees the activities and determines the remuneration the module of restructuring involved, creditors may make some of the liquidators. Also, shareholders can influence winding up concession or compromise. For external restructuring, funding proceedings by voting and passing a resolution in general meetings is handled by both companies, but substantially by the acquiring on whether or not winding up proceedings should be commenced. or transferee company.

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4.5 What impact does each winding up procedure have Where they are unrelated, they are treated as distinct entities on existing contracts? Are the parties obliged to perform and are liable to commencement and cessation tax. Where outstanding obligations? Will termination and set-off they are related entities, the FIRS may provide tax waivers. provisions be upheld? In the case of an acquisition, or a merger of unrelated parties, Section 29 of the Act provides that the company formed, or the Winding up procedures in general have no effect on existing acquiring company must file commencement tax returns, while contracts, except if such contracts are deemed fraudulent and the acquired company pays cessation tax returns. In such a case, as such they are rendered invalid. However, the terms of any any non-utilised capital allowances or tax losses of the former existing contract may determine that a contract ceases to exist if entities may not be taken over by the new company. However, winding up procedures commence. the acquired company may, at the discretion of the FIRS, be Section 441 of the CAMA provides that the court may, exempted from tax returns if the companies involved are related at any time after making a winding up order, make an order parties, and the surviving entity will only be eligible for annual on any contributory for the time being on the list of contrib- allowance based on the tax written-down values of assets taken utories to pay to the company, in the manner directed by the over. The rationale behind this is that business of the acquired order, any money due from him or from the estate of the person entity is deemed continued by the acquirer. whom he represents, exclusive of any money payable by him or Under merger and acquisition, the Act is clear on the respon- the estate by virtue of any call. Also, a liquidator can disclaim sibility of the acquiring company to bear tax responsibilities of contracts which are burdensome to the company in liquidation. the acquired company. Section 29(9) of the Act demands that Upon completion of the liquidation procedure, the company’s a security be deposited to guarantee that taxes of the acquired contracts are deemed terminated. entity will be borne by the acquiring entity. Capital gains may also arise where gains are made from the acquisition of the shares of an entity either merged with or absorbed by another 4.6 What is the ranking of claims in each procedure, company. Where these gains were received in the form of cash, including the costs of the procedure? capital gains tax will be paid in that regard. Stamp duties will apply where additional shares are registered with the CAC. Claims are ranked in this order: A. costs and expenses of winding up; 62 Employees B. secured creditors; C. social and contractual liabilities, such as: local rates and 6.1 What is the effect of each restructuring or charges, all pay-as-you-earn tax deductions, assessed insolvency procedure on employees? What claims would taxes, land tax, property or income tax assessed on or due employees have and where do they rank? from the company; deductions under the Nigeria Social Insurance Trust Fund Act; wages or salary of any clerk or servant in respect of services rendered to the company; In an insolvency, an employee will certainly be affected and wages of any workman or labourer, in respect of services may claim compensation. This compensation may be assessed rendered to the company; and accrued holiday remunera- by reference to the contract rights (remuneration and bene- tion payable to any clerk, servant, workman or labourer or fits) which would have accrued over the remaining term of the their heirs on the termination of their employment before contract, and such compensation shall not be taxed. Under or by the effect of the winding up; and restructuring, the employees’ contracts may either be terminated, D. debenture holders under a floating charge and other unse- renewed, or reviewed. Section 566 of the CAMA empowers the cured creditors. companyo t make provisions for the benefits of employees/past By the provisions of Section 34 of AMCON amended No.2 employees in a cessation or transfer of its business. Act, 2019, AMCON gives priority over any other claims even if they are unsecured. 72 Cross-Border Issues

7.1 Can companies incorporated elsewhere use 4.7 Is it possible for the company to be revived in the restructuring procedures or enter into insolvency future? proceedings in your jurisdiction?

Section 524 of the CAMA provides that the company can be Any foreign company intending to carry out business in Nigeria revived in the future if an application is made to void the disso- must take the necessary steps to be incorporated for that lution by an interested party or the liquidator. purpose. Although, in certain circumstances, an exemption may be granted by the President of the Federation. Therefore, 52 Tax until a foreign company undergoes the process of domestica- tion in Nigeria, any efforts to carry out any business functions 5.1 What are the tax risks which might apply to a including entering into insolvency proceedings is void. restructuring or insolvency procedure?

7.2 Is there scope for a restructuring or insolvency Any form of restructuring must be brought to the notice of process commenced elsewhere to be recognised in your the Federal Board of Inland Revenue Service (FIRS). Section jurisdiction? 29(12) of the Companies and Income Tax Act (the Act) requires the Board’s direction to be sought, and clearance received before In corporate insolvency, there is no provision on judicial cooper- any restructuring procedure can take place. ation with foreign courts, as Nigeria has not adopted the United Tax considerations are dependent on whether the entities Nations Commission on International Trade Law (UNCITRAL) involved in the restructuring are related or unrelated entities. Model Law on cross-border insolvency. Further, there are no

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legislations, frameworks or institutions set up to deal with the 92 Reform recognition and enforcement of cross-border insolvency procedures. However, in Nigeria, foreign proceedings and decisions on insolvency may be recognised and enforced so long 9.1 Are there any other governmental proposals for as they comply with the provision of Section 10 of the Foreign reform of the corporate rescue and insolvency regime in your jurisdiction? Judgment (Reciprocal Enforcement) Act 2004, which requires that the judgment must be final and conclusive, and must be a wholly or partly satisfied monetary judgment debt. The opera- In an attempt to keep up with the dynamic regulatory landscape tion of the provision of this law is predicated on the reciprocity of insolvency laws in the international community, particu- of treatment of similar judgments in the original jurisdiction. larly the UNCITRAL Model Law, the Nigerian legislature took steps to enact a new insolvency law. The Bankruptcy and Insolvency Bill (the Bill), which seeks to repeal the Bankruptcy 7.3 Do companies incorporated in your jurisdiction and Insolvency Act 2004, makes provisions for corporate and restructure or enter into insolvency proceedings in other individual insolvency, and cross-border/international insol- jurisdictions? Is this common practice? vencies by incorporating provisions of the Model Law. The Bill, still awaiting Presidential assent, incorporates provisions The practice is virtually non-existent in Nigeria as there are no recognising foreign insolvency orders and provides assistance frameworks or institutions dealing with cross-border insolven- to foreign representatives e.g. liquidators, trustees, etc. The cies. However, nothing precludes a Nigerian company from Bill also introduces the “letter of request” concept to assist initiating proceedings in a foreign jurisdiction if the laws of with cross-border insolvencies i.e. requesting the assistance of that jurisdiction permit. In such an event, the principles of the the relevant courts within the jurisdiction where the trustee Foreign Judgment (Reciprocal Enforcement) Act 2004 shall or liquidator is to realise assets. In recognition of the need to apply in respect of recognition and enforcement of any decision promote business rescue, the Companies and Allied Matters reached. Act (Repeal and Re-enactment) Bill (the CAMA Bill) has been passed by both Houses of the National Assembly and is awaiting 82 Groups Presidential assent. The CAMA Bill prioritises business rescue above liquidation and receivership. Further, the Finance Act 8.1 How are groups of companies treated on the 2020, which was passed into law on 13 January 2020, intro- insolvency of one or more members? Is there scope for duced a “minimum holding requirement” test for related party co-operation between officeholders? group restructuring. The new provision curbed the formation of short-term group relationships created for the purpose of Nigerian law is silent on dealing with restructuring or liquida- enjoying tax concessions as a business reorganisation strategy. tion of a group of companies. However, generally speaking, a The new Act also modifies the tax exemption on business reor- parent company and its subsidiaries are separate legal entities. ganisations allowing related party business reorganisations to A parent company can only be liable for liabilities of its subsid- be conducted in a tax-neutral manner, subject to meeting the iaries (and vice versa) if there is a contract between them to the “minimum holding requirement” test. effect or where there is evidence of fraud. Therefore, insolvency proceedings instituted against members of a group are treated as separate and distinct entities. In cases where members of a group are involved in insolvency proceedings, they may elect to appoint the same insolvency officers to save costs and avoid a multiplicity of processes.

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Dr. Jennifer Douglas-Abubakar is the Managing Partner at Miyetti Law in Nigeria. Her practice focuses on corporate financing transactions and transnational asset recovery. Jennifer provides strategic counsel and general advisory to governments and domestic and international corporations navigating the regulatory environment in Nigeria. Jennifer is also the Editor-in-Chief of the Miyetti Quarterly Law Review.

Miyetti Law Tel: +234 09 904 6440 1 Nwaora Close Off Gana Street Email: [email protected] Maitama, Abuja FCT URL: www.miyettilaw.com 900271 Nigeria

Ikiemoye Ozoeze is the Practice Manager and a Senior Associate at Miyetti Law in Nigeria. She is an adept lawyer who manages and supervises practice, with areas of expertise in corporate commercial transactions, business development, asset tracing and debt recovery. She has a keen interest in legal research, environmental law and cyber law.

Miyetti Law Tel: +234 80 90 205 905 1 Nwaora Close Off Gana Street Email: [email protected] Maitama, Abuja FCT URL: www.miyettilaw.com 900271 Nigeria

Zada Amede Oputa is the Legal Coordinator at Miyetti Law in Nigeria. She is a highly focused and versatile lawyer. She has had great exposure to a wide variety of progressive law practice which encompasses all aspects of corporate and commercial law, civil litigation and alternative dispute resolution.

Miyetti Law Tel: +234 80 90 205 913 1 Nwaora Close Off Gana Street Email: [email protected] Maitama, Abuja FCT URL: www.miyettilaw.com 900271 Nigeria

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Alexander Zadorozhny

Synum ADV Artem Kazantsev

12 Overview 1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what 1.1 Where would you place your jurisdiction on the extent are each of these used in practice? spectrum of debtor to creditor-friendly jurisdictions? The Law on Bankruptcy obliges the management of a company Russian bankruptcy legislation may be characterised as to take measures on bankruptcy prevention should financial pro-creditor, both in theory and practice. The following provi- difficulties arise, which may lead to the initiation of a formal sions of the Federal Law No. 127-FZ “On insolvency (bank- bankruptcy procedure. ruptcy)” (the “Law on Bankruptcy”) emphasises Russia as a The obligation of bankruptcy prevention is assigned to pro-creditor jurisdiction, due to: managers, shareholders and other persons, who may give ■ enhancement of subsidiary responsibility of the persons mandatory instructions to a company’s management. controlling the debtor, including the presumption of guilt In relation to the companies carrying out ordinary business for controlling persons under certain circumstances, the (small and medium-sized business) the bankruptcy legislation challenging burden of which is assigned to the controlling does not contain a list of specific measures that the management person. Herewith, the controlling person can be brought of the company should take in order to prevent bankruptcy. to subsidiary responsibility both out of the bankruptcy Meanwhile, there is a provision in Russian legislation obliging matter and in the case of its termination; the manager to take measures on bankruptcy prevention. ■ special bankruptcy conditions for challenging a debtor Such measures can be taken in the form of reestablishing a transaction, which resulted in the withdrawal of assets or debtor’s solvency. Herewith, the creditors can directly partici- one or several creditors were provided with a preferential pate in such reestablishing through entering into the agreements satisfaction of obligations; with the debtor. ■ banks and tax authorities are entitled to apply for debtor Russian legislation specifies financial recovery as one of the bankruptcy without resolution of the court, as opposed bankruptcy prevention measures, which result in the provision to all other creditors, which right to apply for bankruptcy of financial aid to the debtor by shareholders in an amount suffi- arises upon a legally effective court decision on debt cient to satisfy all the debts of the debtor. collection; The regulation of banks’ bankruptcy prerequisites is accounted ■ pledge lenders are entitled to vote on the meetings of the in more detail in the Russian bankruptcy legislation. creditor on key aspects, including the selection of an appli- The legislation provides the following measures on the cable bankruptcy proceeding as well as the matters refer- prevention of bankruptcy in banks, which can also be applied ring to removal or selection of an insolvency manager to ordinary companies: candidate; ■ financial recovery of the company; ■ deprivation of the debtor’s right to choose an insolvency ■ company reorganisation; and manager candidate in case of initiation of the bankruptcy ■ other measures. matter by such debtor; Considering that the list of measures on bankruptcy preven- ■ authorisation of employees to apply for declaration of tion both for ordinary companies and banks is non-exhaustive bankruptcy of the employer without any costs to the bank- and subject to broad interpretation, managers have the right at ruptcy matter; their discretion to take any measures that can potentially help to ■ subordination of claims of the creditors affiliated with the overcome financial difficulties. debtor, which implies refusal to include such claims in the Such measures may include the agreements with the cred- register of creditors’ claims in return for their satisfaction itor on change of obligation terms, deferred payments, decrease before payment of the liquidation quota to the debtor’s of interest, provision of compensation and novation of the shareholders; and obligations. ■ an exception to the general rule on the prohibition of set-off of claims arising from the leasing and work contracts signed between a debtor and his creditor, provided that there is no sign of preference by such creditor over other creditors.

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22 Key Issues to Consider When the ■ liquidator or liquidation committee; ■ employees of the debtor; and Company is in Financial Difficulties ■ creditors. According to Russian bankruptcy legislation, the controlling 2.1 What duties and potential liabilities should the person of the debtor is a person that has or had the right to directors/managers have regard to when managing a give mandatory instructions to the debtor or an opportunity to company in financial difficulties? Is there a specific define its actions otherwise, including instructions on entering point at which a company must enter a restructuring or into the transactions and defining their terms, for not more than insolvency process? three years prior to the signs of bankruptcy arising, as well as upon their arising, before the debtor’s bankruptcy application The Law on Bankruptcy provides for the possibility of bringing was adopted by the arbitration court. the head of the company to administrative and criminal liability, In the event a company manager failed to apply to the court as well as imposing liability on the head of the company in terms for bankruptcy of the company, shareholder or other controlling of liabilities that were not paid during the bankruptcy procedure. person of the debtor, they may demand an early meeting with Bringing the head of the company to subsidiary liability is the managing body of the company in order to apply to the arbi- possible in the following cases: tration court for bankruptcy of the debtor. ■ If the actions of a manager, shareholder or other Russian bankruptcy legislation obliges the liquidator to apply controlling person have become a proven reason for for bankruptcy of the debtor, in the event the company meets failure in repaying all claims of the creditors in full. In the f signs o insolvency and/or lack of property within the liqui- this case, the amount of liability is equal to the amount of dation process. the creditors’ claims, which were not cancelled during the The right of employees or former employees of the company bankruptcy procedure. to apply for bankruptcy arises if there is an effective court deci- ■ If the manager, shareholder or other controlling person has sion on wage or discharge allowances claims. not timely applied to the court with a statement on bank- There are two types of debtor creditors: ruptcy of the debtor. In this case, the amount of subsidiary ■ creditors with privileged status concerning origination of liability is equal to the amount of unpaid claims that arose bankruptcy matter – banks and tax authorities, which may after the obligation to file for bankruptcy appeared. apply for bankruptcy of the debtor without effective court Russian bankruptcy laws have established the following cases decision; and where the debtor’s manager is obliged to file a bankruptcy peti- ■ ordinary creditors and creditors secured by a pledge, which tion with a company: have the equal right to originate a bankruptcy matter, ■ payment in favour of one creditor or several creditors will provided that there is an effective court decision on debt make it impossible for the debtor to fulfil monetary obli- recovery. Hereafter, creditors secured by the pledge have gations in full to other creditors; sufficiently limited voting rights on the meetings of the ■ decision of the head of the company on liquidation of the creditors. debtor with subsequent application to the arbitration court The question of moratorium and suspension of obligation on recognising the insolvency of the debtor; performance is regulated individually for each procedure appli- ■ foreclosure of the debtor’s property will significantly cable in the bankruptcy matter and depends on the scope of complicate or make the economic activity of the debtor activities of the debtor (banks, insurance company, town- impossible; forming enterprises, etc.). ■ the debtor meets the criteria of insolvency and/or insuffi- ciency of property; and ■ there are wage arrears outstanding for more than three 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of months due to insufficient funds. challenge? What remedies are available? The obligation to file a bankruptcy petition must be performed by the manager within one month after the occurrence of any of the circumstances above. Transactions that are committed by a company in the face of The head of the company may be held: (a) criminally liable in financial problems that have occurred may be invalidated with the event that the bankruptcy of the company is proved to be the use of corresponding consequences, both for general reasons fictitious or deliberate; and (b) administratively liable for failure and for special reasons provided for by the Russian bankruptcy to comply with the requirements of bankruptcy laws. legislation. The transactions made at pre-foreclosure stage fall into shady and preferential transactions. In its turn, shady transactions fall into transactions made with 2.2 Which other stakeholders may influence the the purpose to cause property damage to creditors and transac- company’s situation? Are there any restrictions on the tions with unequal counter-performance. action that they can take against the company? For example, are there any special rules or regimes which A transaction with an unequal counter-performance is a apply to particular types of unsecured creditor (such transaction made within one year prior to, or after the adop- as landlords, employees or creditors with retention tion of a bankruptcy application, if the debtor transferred prop- of title arrangements) applicable to the laws of your erty at a price lower than the price at which similar transactions jurisdiction? Are moratoria and stays on enforcement are carried out. available? A transaction made with the purpose of causing damage to creditors is a transaction made within three years prior to the Other interested persons who may influence the company adoption of a bankruptcy application, or after it, if the transac- through the initiation of bankruptcy matter, except the head of tion resulted in the alienation of property of the debtor and the company, are: other party was aware of the purpose of the transaction made. ■ shareholders/members; A preferential transaction is a transaction made within one ■ other controlling persons of the debtor; month prior to the adoption of the bankruptcy application, or

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after it, if such transaction influences or may influence a pref- bankruptcy procedure, which was adopted by the meeting of erence towards one of the creditors instead of another creditor. shareholders. The consequence of rendering the above-mentioned transactions ineffective is returned to the debtor of the assets, which 3.3 What are the criteria for entry into each were transferred by the debtor and withdrawn from him under the restructuring procedure? transaction. In case of the impossibility to return the property to the debtor, the counterparty to the transaction should compensate the market value of the assets from the moment it was acquired, as The observation procedure is the first stage of bankruptcy, well as the damages caused by its subsequent price change. which can be initiated by both the debtor and the creditor. After observation, on the basis of the decision of the first 32 Restructuring Options meeting of creditors, the court makes a decision on the introduction of the following procedure. The decision is made at the creditor meeting by a majority vote. 3.1 Is it possible to implement an informal work-out in In order to participate in the creditor meeting, the latter must your jurisdiction? be included in the register of creditors’ claims. Financial recovery is introduced at the request of the debtor Informal work-out procedures are the more preferred means of on the basis of the decision of its members, which is approved by solvency reestablishing in Russia than the procedures stipulated the majority of creditors. in the Law on Bankruptcy due to an unsatisfactory level of legal External management is introduced on the basis of the cred- regulation of rehabilitation procedures and their rare implemen- itors’ decision. tation in practice. A settlement agreement shall be accepted by a majority of creditors’ votes and is considered accepted once all the creditors 3.2 What formal rescue procedures are available secured by the pledge have voted for it. in your jurisdiction to restructure the liabilities of Sanation may be carried out only in case of the provision of distressed companies? Are debt-for-equity swaps financial assistance to the debtor by its founders, creditors or and pre-packaged sales possible? To what extent can third parties. Provision of financial assistance may be accompa- creditors and/or shareholders block such procedures nied by the commitment of the debtor or other persons in favour or threaten action (including enforcement of security) of the persons who have provided financial assistance. to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? 3.4 Who manages each process? Is there any court involvement? The restructuring can be carried out at several stages of the bankruptcy procedure, which consists of observation, external In bankruptcy procedures, debtor management is carried out by management, financial recovery, settlement agreement and an insolvency officer that is approved by a majority vote on the bankruptcy administration. The following procedures belong meeting of creditors of the debtor. The functionality and obli- to solvency rehabilitation: financial recovery; external manage- gations of the insolvency officer vary depending on the stages of ment; and settlement agreement. bankruptcy procedure. Besides, the Law on Bankruptcy provides sanation. Sanation The whole bankruptcy procedure is under the control of is a provision of financial assistance by the shareholders of the court that makes decisions on key aspects of the proce- the company in order to reestablish debtor solvency. Russian dure, including: the approval of an insolvency officer candi- legislation does not contain a detailed regulation of sanation. date selected by the creditors; approval of the bankruptcy stage The provision of financial assistance can be accompanied by selected by the creditors; consideration of individual disputes obtaining obligations by the debtor or other persons in favour within the bankruptcy matter referring to the inclusion of cred- of the persons which provide financial assistance. itors on the list of creditors; claims of actions/omission of the Financial recovery procedure is applied in respect of the insolvency officer; the recovery of the damages; the question of debtor in order to reestablish its solvency and debt repayment in challenging the transaction of the debtor made with preference accordance with an approved schedule. or fraudulent conveyance; and bringing controlling persons of The purpose of external management is financial recovery of the debtor to subsidiary liability (corporate veil piercing). enterprise with transfer of management authorities of the debtor to the receiver. External management is carried out in accord- 3.5 What impact does each restructuring procedure ance with the schedule approved by the creditors. have on existing contracts? Are the parties obliged to A settlement agreement can be concluded at any bankruptcy perform outstanding obligations? What protections stage that should contain the conditions on procedure and terms are there for those who are forced to perform their of obligation performance of the debtor in monetary form. outstanding obligations? Will termination and set-off In respect of a pro-creditor orientation of regulation, the provisions be upheld? procedures aimed at recovering the company are rarely applied in practice. The creditors usually choose bankruptcy adminis- From the date that the debtor is recognised as bankrupt, the tration, as a rule, in order to enforce the recovery of property at period for fulfilment of obligations under contracts arising prior a reduced value, which is defined by tender. to the recognition of the debtor as bankrupt is considered to Replacing of assets is possible at the stage of external manage- have occurred. ment and bankruptcy administration. The decision to replace Therefore, all creditors have the right to demand perfor- shall be taken only by unanimous approval of the creditors mance of the contract by filing an application for inclusion in secured by the pledge. the register of creditors’ claims, after which the arbitration court Shareholders, minority lenders and other persons do not have can verify the reasonableness of the creditors’ claims. the option to obstruct decisions on implementation of a certain

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External management procedure provides for the right of the 4.4 How are the creditors and/or shareholders able debtor to refuse to execute transactions if they interfere with the to influence each winding up process? Are there any restoration of the debtor’s solvency. In this case, the counter- restrictions on the action that they can take (including party has the right to demand compensation from the debtor for the enforcement of security)? damages caused by the refusal. This waiver cannot be filed in respect of transactions concluded during the observation with Shareholders have no influence on the winding up process, as the consent of the insolvency manager or during the financial the shareholders’ meeting can lose its power after an insolvency rehabilitation. manager enters into power. In the meantime, creditors have all After the introduction of bankruptcy, the creditor’s claims the influence on the process due to the key role of the resolu- against the debtor are not allowed. tion of the creditors’ meeting. Actions decided during the creditors’ meeting have no restrictions subject to its compliance with 3.6 How is each restructuring process funded? Is any the law. For example, the right to determine the procedure and protection given to rescue financing? conditions for the sale of the pledged property in the bankruptcy proceedings, as well as the right to first priority satisfaction of their claims from the money raised from the sale of the As a general rule, the bankruptcy procedure is financed through pledged property, is granted only to the secured creditors. the account of the debtor’s property. If the property of the debtor is insufficient for financing the procedure, the court may assign creditors to finance the proce- 4.5 What impact does each winding up procedure have dure with their consent. The court may also require the cred- on existing contracts? Are the parties obliged to perform itor to transfer funds on a special deposit account of the court. outstanding obligations? Will termination and set-off If the property of the debtor is insufficient or no consent provisions be upheld? of the creditors is obtained, the court can terminate the bankruptcy procedure. Refusal to execute existing contracts and other transactions of a debtor can be declared, if such transactions impede the restora- 42 Insolvency Procedures tion of the debtor’s solvency or if the debtor’s execution of such transactions entails losses for the debtor as compared to similar transactions concluded with comparable circumstances. 4.1 What is/are the key insolvency procedure(s) available to wind up a company? It is not allowed to terminate the debtor’s monetary obligations by offsetting a homogeneous claim, if this violates the legal order of satisfying creditors’ claims. The bankruptcy of a debtor being liquidated is the key insolvency procedure available to wind up a company. The debtor is liquidated in the manner prescribed by the Law on Bankruptcy, 4.6 What is the ranking of claims in each procedure, if the value of the property of the debtor, in respect of which the including the costs of the procedure? decision on liquidation was made, is insufficient to satisfy the claims of the creditors. It is necessary to distinguish competitive and current (extraor- In addition to the bankruptcy of the debtor being liquidated, dinary) lenders. the meeting of creditors or the person providing security during Only those creditors of a debtor whose monetary claims the financial rehabilitation of the debtor has the right to decide arose before filing an application to the court of arbitration for on the reorganisation of the debtor through merger, accession, declaring a debtor insolvent (bankrupt) can be recognised as division, separation or transformation, while the debtor ceases bankruptcy creditors. If the claims against the debtor appeared to exist in all types of reorganisation, except for separation. after the introduction of the monitoring procedure, then such creditors are current creditors. Claims of current creditors are satisfied in the course of insol- 4.2 On what grounds can a company be placed into each winding up procedure? vency procedures, regardless of the transition to settlements with creditors, while satisfaction of the requirements of bankruptcy creditors occurs only in the case of transition to settle- Any winding up procedure is introduced only by the decision of ments with creditors. the court based on the application received from the owners of Current claims are ranked in the following order: the company, creditors of the company or tax authority. ■ The first order: current payments of the debtor, to include The reorganisation of the company with subsequent liquida- payment for the services of an arbitration manager, court tion of the debtor requires a relevant decision from the creditors’ costs and other costs associated with property management. meeting and the application of a company’s CEO in the event ■ The second order: requirements of the employees who the reorganisation helps to restore the company’s solvency. quit both before and after the declaration of bankruptcy. Payment of wages for the worked period and severance pay 4.3 Who manages each winding up process? Is there is carried out, except wages of the head, chief accountant, any court involvement? their deputies, etc., which shall be paid after the repayment of debt to the first three orders of the creditors. Each winding up process is managed by a liquidation manager. ■ The third order: payment for the services of persons An insolvency winding up procedure develops within a engaged by an arbitration manager for bankruptcy particular matter of the court under regular control of the judge. proceedings and property management. ■ The fourth order: payment of utility and energy supplying services. ■ The fifth order: satisfaction of requirements for other current payments.

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The fulfilment of obligations within one queue takes place in specified provisions, the final financial result can be positive. calendar order. Current income formed during bankruptcy management can be The following expenses are redeemed out of ranking (before redeemed by the losses of previous years. But such redemp- current claims): tion can take place under the condition of documentary confir- ■ claims of creditors for current payments to creditors mation of business transactions for the period of losses forma- whose claims arose before the application for declaring the tion, and cannot cause income tax reduction for more than 50%. debtor bankrupt; and Thus, a positive financial result from the sale of the property of ■ the cost of carrying out activities to prevent the occur- the debtor under bankruptcy management is subject to income rencef o man-made and/or environmental disasters, or tax. death. As a general rule, asset disposition operations and the sale of Claims of bankruptcy creditors are satisfied in the following property of the debtor are not subject to VAT taxation. However, order: the operations on the performance of works, services and provi- ■ The first order: payments for causing harm to the life or sion of property for use are not excluded from the operations health of citizens. subject to VAT taxation. That is, if the debtor continues to carry ■ The second order: payment of severance payments and/or out income activity during bankruptcy management, the obliga- wages to persons working under an employment contract, tion to pay VAT will arise. remunerations to the authors of intellectual property. There is also a risk that tax amounts adopted by the debtor to ■ The third order: payments to the other creditors. be deducted by the acquisition of property used in the activity, Payment to the creditors for a transaction declared invalid within which the operations on products (works, services) sales in bankruptcy proceedings are made after settlements with the subject to VAT taxation were carried out, are subject to recovery. other creditors of the third order. That is, if bankruptcy management is introduced in respect of The claims of creditors for obligations secured by the pledge the company and the depreciation term of the property is not of the debtor’s property are satisfied at the expense of the value expired by the time of its sale, the amount of previously calcu- of the collateral. lated tax deduction should be recalculated, as there may be a Claims of the owners of bonds with no maturity are satisfied situation when VAT tax burdens in respect of bankruptcy assets after the claims of all other creditors are satisfied. will arise. From a creditor’s point of view, by the time bankruptcy management of the debtor is finished, the creditor obtains 4.7 Is it possible for the company to be revived in the future? the right to acknowledge losses formed due to bankruptcy of the counterparty for the purpose of income taxation, which is considered to be a compensatory measure for taxpayers. The company may be revived in the following events: In December 2019, the Constitutional Court of the Russian ■ restoration of the company’s solvency during either finan- Federation declared invalid the norm of the Tax Code of Russia, cial recovery or external management; which declared sale of the property of the debtor free from VAT. ■ conclusion of a settlement agreement; The VAT deduction by the buyer of the property of the debtor ■ refusal of all the creditors involved in a bankruptcy case is possible under the condition that the bankruptcy trustee and from the stated requirements; or the buyer have not known that VAT, taken into account in the ■ satisfaction of all the creditor claims included in the price of the products, could not be paid to the budget due to the register of creditor claims in the course of any procedure indebtedness of the organisation. applied in a bankruptcy case. There is also a risk that tax amounts adopted by the debtor to be deducted by acquisition of property used in the activity, 52 Tax within which the operations on products (works, services) sales subject to VAT taxation were carried out, are subject to recovery. 5.1 What are the tax risks which might apply to a That is, if bankruptcy management is introduced in respect of restructuring or insolvency procedure? the company and the depreciation term of the property has not expired by the time of its sale, the amount of previously calcu- Due to the initiation of bankruptcy matter the debtor and the lated tax deduction should be recalculated and there may be a creditor have the following tax consequences: situation where the VAT tax burden in respect of bankruptcy The debtor at any bankruptcy stage remains a taxpayer until assets will arise. the bankruptcy management procedure is finished. From a creditor’s point of view, by the time bankruptcy The debtor should continue to pay property taxes (prop- management of the debtor is finished, the creditor obtains erty tax and land tax) and keep a record of property sales oper- the right to acknowledge losses formed due to bankruptcy of ations for income tax and VAT calculation subject to recovery the counterparty for the purpose of income taxation, which is and payment to the budget, if VAT paid to the seller had been considered to be a compensatory measure for taxpayers. previously declared by the debtor as tax deduction by acquisition of respective assets. Such taxes are subject to being recorded 62 Employees as current receivables that are to be satisfied prior to the other listed claims. 6.1 What is the effect of each restructuring or Income tax will occur as the property can be sold at a price insolvency procedure on employees? What claims would higher than the remaining cost according to balance, and taxable employees have and where do they rank? income will originate. This income will be reduced to current losses from the collection of receivables and other property (if The employees and former employees are entitled to apply for the cost of its sale proved to be lower than remaining cost), to bankruptcy of the debtor along with the other creditors. The losses formed by uncollectible debt relief and so on. At the same manager of the debtor should inform employees about bank- time, there can be different situations, and, notwithstanding ruptcy procedure implementation.

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The insolvency officer should call a meeting for employees That aside, foreign companies may file their claims in the and former employees, where they will elect a representative to creditors’ claims register for Russian insolvent companies. participate in the bankruptcy procedure; however, it can be held earlier upon the initiative of the employees or the manager of the 7.2 Is there scope for a restructuring or insolvency organisation. Herewith, the payment for services of the repre- process commenced elsewhere to be recognised in your sentative of the employees should be carried out on account of jurisdiction? the debtor. The representative of the employees has the right to participate in the meeting of the creditors but does not have Resolutions of foreign courts, including bankruptcy matters, the right to vote. He has the right to apply for bringing the are recognised and enforced in Russia by judicial procedure as controlling persons of the debtor to subsidiary liability. well as upon international contracts and principles of mutu- The representative of the employees participates in the ality. However, Russian legislation does not consider that bank- insolvency process in the common interest of all the employees, ruptcy is an extended process and requires separate recognition and the employees themselves are not entitled to participate in of every judicial act under one case. the trial. Nevertheless, in case the interests of some employees contradict others (e.g. when the order of priority in paying off their 7.3 Do companies incorporated in your jurisdiction claims is violated), such employees have a right to appeal separa- restructure or enter into insolvency proceedings in other tely against the insolvency officer. jurisdictions? Is this common practice? The insolvency officer of the debtor is entitled to dismiss employees by compliance with the established procedure. There are no cases of restructuring or bankruptcy of Russian The requirement to pay remunerations and discharge allow- companies in other jurisdictions. ances takes second priority in the claims of the creditors on current payments (arose upon bankruptcy application and 82 Groups payable prior to listed claims) – after payment of expenses in respect of a bankruptcy procedure, but before the rest of current 8.1 How are groups of companies treated on the claims. insolvency of one or more members? Is there scope for Employee claims have second priority in the list of creditors – co-operation between officeholders? right after the claims concerning personal injury and before the rest of the claims of the creditors. Upon the application of an insolvency officer, the court has Russian legislation does not contain any provisions on the bank- the right to reduce the wage rate of the employees, in the event ruptcy of corporate groups, and manager cooperation is not the wage rate was increased within six months before the bank- specifically regulated. ruptcy application was made. In the event of a bankruptcy of a town-forming enterprise 92 Reform (an enterprise with the number of employees exceeding 5,000 persons, or an enterprise where no less than 25% of a town’s 9.1 Are there any other governmental proposals for population is working) additional guaranties to employees can reform of the corporate rescue and insolvency regime in be provided. That way, by the sale of an enterprise during bank- your jurisdiction? ruptcy, the obligation of the buyer to retain no less than 50% of workplaces within a specified term (no more than three years) The State Duma is now considering a bill, which provides a can be established. possibility to hold an extrajudicial insolvency procedure for individuals that have no property or sources of income. In such 72 Cross-Border Issues cases the insolvency officer himself shall conduct the bankruptcy procedure in a simplistic way. The special fund is to be 7.1 Can companies incorporated elsewhere use created in order to finance such procedures. restructuring procedures or enter into insolvency The Ministry of Economic Development is ready to introduce proceedings in your jurisdiction? a bill that shall provide drastic changes in the insolvency procedure. The reformed insolvency procedure is supposed to consist This is not regulated by Russian legislation and it does not of only two stages: rehabilitation; and restructuring. contain any direct prohibition for foreign persons to go through The Ministry is also proposing to introduce more versa- the procedure of restructuring or bankruptcy in Russia. tile auction rules and a possibility to sell the entire business: There is a general provision in the Arbitration Procedure the bankrupt’s assets shall form a new business vehicle, which Code that allows Russian courts to consider disputes involving shares might be sold at the auction. the tight connection of the legal relationship in dispute with the The Ministry also provides a completely new competitive territory of the Russian Federation, and there have been cases procedure for nominating insolvency officers and for calcu- of carrying out the bankruptcy procedure of foreign citizens on lating their remuneration. its basis because they conducted their main activity in Russia. However, there are no bankruptcy procedures of foreign entities in the Russian Federation in practice.

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Alexander Zadorozhny is a Russian lawyer with more than 15 years’ experience specialising in litigation, bankruptcy and corporate law. Alexander has participated in the successful completion of legal disputes, as a result of which the principals were able to retain ownership of the property that makes up the energy business, large land plots for development and corporate rights. Alexander Zadorozhny has a wealth of experience in supporting bankruptcy proceedings, protecting the interests of both creditors and debtors and participating in bankruptcy proceedings of credit organisations. Alexander is a regular contributor to some of the most comprehensive works in Russian bankruptcy law and lectures on corporate law issues. Alexander holds a Master’s degree in private law from the Russian School of Private Law under the President of the Russian Federation (Moscow). He is fluent in Russian and English.

Synum ADV Tel: +7 495 909 9924 Yakimanskaya Embankment 4, Building 1 Email: [email protected] Moscow URL: www.synum.ru Russia

Artem Kazantsev is a Russian lawyer with over 15 years of experience in dispute resolution, bankruptcy and commercial law. Artem has unique experience in developing laws of the constituent entities of the Russian Federation regulating economic activities. Artem is the co-author of one of the most comprehensive works on Russian bankruptcy law. Artem‘s experience includes work with international law firms, such as DLA Piper and Gide Loyrette Nouel. Artem graduated from Rostov State University and studied at the graduate school of the Moscow State Law University, named after O.E. Kutafin. He is fluent in Russian, English and French.

Synum ADV Tel: +7 495 909 9924 Yakimanskaya Embankment 4, Building 1 Email: [email protected] Moscow URL: www.synum.ru Russia

Synum ADV is a Russian law firm specialising in litigation, bankruptcy and Lawyers of Synum ADV have a long record of successfully consulting corporate conflicts. Due to rapid development, Synum ADV now success- companies in respect of a wide range of legal issues, as well as constant fully represents the interests of major Russian and international compa- integrated legal support of business. nies, in both legal consulting and conflict situations. www.synum.ru Being professional participants of the distressed assets market, we represent interests of business in bankruptcy, corporate and property disputes. Synum ADV has consistent experience of solicitation in all instances of state arbitrazh courts, city courts and international commercial arbitration courts. Synum ADV leverages its unique litigation experience for advising its clients in corporate law issues, the legal support of investment projects and merger and acquisition deals. According to the ratings of Pravo 300 and IFLR1000, Synum ADV is consistently among the best law firms in Russia in the field of bankruptcy and the arbitration process.

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Singapore Singapore

Edward Tiong

Allen & Gledhill LLP Kenneth Lim

12 Overview arrangement regime was enhanced following amendments to the Companies Act (Cap. 50) (the “Act”) in 2017, which provided enhanced automatic moratorium provisions to allow 1.1 Where would you place your jurisdiction on the debtors time to finalise and propose a scheme to their creditors, spectrum of debtor to creditor-friendly jurisdictions? as well as the ability to cram-down dissenting creditor classes in certain circumstances. Singapore takes a relatively balanced stance. Our legislative If formal restructuring is unsuccessful, or deemed unlikely to framework strives to allow deserving debtors time and space to succeed, the debtor company may be placed into voluntary liqui- resolve short-term issues and to propose long-term solutions to dationy b resolution of its shareholders and/or creditors, or into their creditors, while ensuring that the interests of creditors are, compulsory liquidation by order of Court. Insolvency proceed- amongst other things, protected by requiring proof of creditor ings are usually taken as a last resort. support and periodic disclosure of financial information. 22 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 2.1 What duties and potential liabilities should the extent are each of these used in practice? directors/managers have regard to when managing a company in financial difficulties? Is there a specific Our statutes do not directly address informal work-outs, and point at which a company must enter a restructuring or debtors and creditors are free to reach agreements to restructure insolvency process? financial obligations inter se. If an informal work-out is not possible, debtors and creditors In addition to their usual duties, when a company is insolvent or may have to resort to the formal restructuring regimes provided close to insolvency, directors in carrying out their duties must under Singapore law: proposing a scheme of arrangement; or act in good faith and give particular regard to the interests of placing the debtor company under judicial management. creditors of the company generally rather than the shareholders, A scheme of arrangement may be proposed by the company and failure to do so may give rise to a breach of fiduciary duties. to its creditors on a standalone basis, or may be proposed by Furthermore, directors should not cause a company to enter a judicial manager as part of the judicial management process into voidable transactions, as doing so would be a breach of (with some differences in the judicial management context). directors’ duties. We elaborate further on these voidable trans- Generally, the value of a scheme of arrangement is that it allows actions in question 2.3 below. a compromise that has been approved by the statutory majority Directors of companies which are insolvent or close to insol- and by the Court to become binding on all of the creditors or the vency also should be wary of committing offences under the Act relevant class of creditors. which include, in particular, causing the company to contract The judicial management regime hands control of the debtor a debt when, at the time the debt was contracted, the director company to a judicial manager and places it under a moratorium, had no reasonable expectation that the company would be able with the aim of providing some breathing space to either allow to pay it. the company to be nursed back into financial health, obtain the There is no requirement under Singapore law for a company to approval of a scheme of arrangement for the company and its initiate restructuring or insolvency proceedings once a specific creditors or achieve a better realisation of its assets than would threshold or event has been reached. Anecdotally, debtors have been possible in a liquidation scenario. Judicial manage- tend to delay reaching out to restructuring professionals until ment is not a debtor in possession regime, and is particularly creditor goodwill and funds are running low. Consequently, helpful when creditors lack confidence in the existing manage- restructuring can become more difficult as a result of inertia. ment of the debtor. Restructuring professionals should be consulted when directors The scheme of arrangement regime is generally more become aware of signs of distress in order to reduce the likeli- commonly used than judicial management. Schemes of arrange- hood of directors becoming personally liable and to increase the ment are debtor in possession regimes, and are generally less chances of a successful restructuring. costly than judicial management. In addition, the scheme of

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The stakeholders that can influence a company’s situation Singapore law provides for two formal rescue/restructuring will vary depending on the type of business carried out by the procedures: schemes of arrangement; and judicial management. company and the assets held by the company. Debt-for-equity swaps are possible, and may be implemented Generally, creditors are able to significantly influence the as part of either an informal work-out or a formal restructuring company’s situation. Secured creditors may appoint receivers procedure. to enforce their security. Creditors may also apply to place the A scheme of arrangement proposed between a company company under judicial management or liquidation, which as and its shareholders or its creditors outside of judicial manage- mentioned above would displace the management of the company ment may be blocked at the scheme meeting by (i) a majority in in favour of the nominated judicial manager or liquidator. number of shareholders or creditors (as the case may be) in a Moratoria are available in support of schemes of arrangement given class, and/or (ii) shareholders or creditors (as the case may and as part of the judicial management regime, and preclude, be) representing more than one-fourth in value of the share- amongst other things: the commencement/continuation of holders or creditors. proceedings against the company; the enforcement of security In the case of a scheme proposed within the context of judi- over property of the company; and repossession of goods held cial management, it may be blocked at the scheme meeting by by the company under, amongst others, retention of title agree- creditors representing more than one-fourth in value of the ments and the enforcement of any right of re-entry or forfeiture creditors present and voting in each class. under any lease of premises occupied by the company, save with Cram-downs are possible. The Singapore Courts retain leave of Court. the power to approve a scheme of arrangement despite there being dissenting classes of creditors, if the Court is satisfied that, amongst other things, the scheme does not discriminate 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of unfairly between classes of creditors, and is fair and equitable to challenge? What remedies are available? the dissenting class(es).

A liquidator (or, with Court sanction, a judicial manager) may apply 3.3 What are the criteria for entry into each to reverse or set aside certain transactions entered into before the restructuring procedure? commencement of winding up or the making of a judicial management order. In particular: In relation to a scheme of arrangement, a company should gener- (1) transactions at an undervalue; ally make an application to Court for approval to call a meeting (2) unfair preferences; of creditors after they have formulated a proposal of a scheme to (3) the provision of credit on terms which require grossly exor- be considered by the creditors. bitant payments, or are harsh and unconscionable or substan- In the case of judicial management, a company or its creditors tially unfair having regard to the risk accepted by the creditor; may apply for the company to be placed under judicial manage- (4) floating charges granted by the company for insufficient or ment if the company is or is nearing insolvency, and there is a nil consideration; and reasonable probability of achieving one of the aims of judicial (5) registrable charges which are not registered within the statu- management, i.e. rehabilitating the company, preserving all or tory timelines. part of its business as a going concern, or achieving a better real- If the statutory requirements are met, the transaction will be isation of its assets than would have been possible in a liquida- voided and the relevant counterparties will be required to take the tion scenario. necessary steps to reverse the transaction. In addition to the above, the Singapore Courts will generally not 3.4 Who manages each process? Is there any court give effect to contractual arrangements in a liquidation scenario: involvement? (1) that intend to deprive a party of its property (or rights) on the insolvency of that party (the anti-deprivation rule); and (2) that provide a creditor with more than his proper share of the The scheme of arrangement process is managed by a scheme available assets or where debts due to the creditor were to be manager, who is generally appointed by the debtor company. dealt with other than in accordance with the statutory regime The Court is involved at key points in the process, namely (the pari passu rule). deciding whether any long term moratorium protection should be extended to the company, whether a meeting of shareholders 32 Restructuring Options or creditors should be summoned to consider the scheme and whether the scheme should be made binding after the requisite approval of the shareholders or creditors has been obtained. 3.1 Is it possible to implement an informal work-out in Judicial management, on the other hand, is initiated upon a your jurisdiction? successful application to Court for a judicial management order. Following on from this, the existing management of the debtor As mentioned above, yes, it is possible to implement an informal company is displaced in favour of a judicial manager who will work-out in Singapore. manage the affairs, business and assets of the company. The

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initial judicial management order is valid for 180 days, and the 4.2 On what grounds can a company be placed into judicial manager must return to Court to apply for any exten- each winding up procedure? sion of this period. In the meantime, the judicial manager is required to keep the Court apprised on, amongst other things, A company may be placed into voluntary winding up by the the proposals which he intends to make to the creditors to passing of a special resolution by its shareholders. In the case of achieve the aims of judicial management, and the outcome of a members’ voluntary winding up, the directors of the company the creditors’ meeting to consider his proposals. must make a declaration of solvency, stating in essence that they have formed the opinion that the company will be able to 3.5 What impact does each restructuring procedure pay its debts in full within 12 months of the commencement of have on existing contracts? Are the parties obliged to winding up. perform outstanding obligations? What protections If the directors of the company are not able to make a declara- are there for those who are forced to perform their tion of solvency, a meeting of the creditors shall be summoned outstanding obligations? Will termination and set-off immediately after the meeting at which the resolution for volun- provisions be upheld? tary winding up is to be proposed, for the creditors to, amongst other things, nominate a liquidator. While a judicial management order is in effect, and where mora- Compulsory winding up is usually initiated by creditors, torium protection has been sought to facilitate the proposal of a rather than by the shareholders. Briefly, an application must be scheme of arrangement, creditors will not be able to commence made to Court by a party with standing for the company in ques- or continue proceedings against the company without leave of tion to be wound up. The most common ground for seeking Court. such an order is that the company is unable to pay its debts. That being said, it is common for contracts to contain ipso facto clauses, i.e. clauses which provide that the entry of a contracting party into a restructuring or insolvency procedure will entitle 4.3 Who manages each winding up process? Is there any court involvement? the other contracting parties to terminate the contract. These clauses are not currently affected by the moratoria mentioned above. This position will be affected by the commencement of A liquidator is appointed to manage each winding up process. the Insolvency, Restructuring and Dissolution Act. We elabo- However, the party appointing the liquidator is likely to be rate further on this in question 9.1 below. different in each case. In a members’ voluntary winding up, the liquidator is appointed by the shareholders. In a creditors’ voluntary winding up, the shareholders and the creditors will at 3.6 How is each restructuring process funded? Is any their respective meetings nominate a liquidator, with the credi- protection given to rescue financing? tors’ nomination trumping the shareholders’. In the case of a compulsory winding up, the Court is required Both restructuring processes are generally funded out of the to exercise its discretion whether to place a company into assets of the debtor company, unless arrangements can be made winding up or not. with creditors or a third-party investor or funder. It is common for liquidators to apply to Court to seek direc- The Court has the power to grant super priority for financing tionso or t sanction the exercise of certain powers and/or which is necessary for the survival of a company or to achieve a major decisions, for example, in relation to litigation funding, better realisation of its assets than would have been possible in if required. a liquidation scenario. The Court may in appropriate circumstances order that: (1) in the event that the company is wound up, the debt shall 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any be treated as part of the costs and expenses of the winding restrictions on the action that they can take (including up, or shall have priority over other unsecured debts; the enforcement of security)? (2) the debt be secured by security over unencumbered property; or (3) if the existing security holder’s interest is sufficiently In a members’ voluntary winding up, the liquidator will usually protected, the debt be secured by a security interest on seek the views of the shareholders on important matters. property subject to existing security, on an equal or higher However, in a creditors’ voluntary winding up or in a compul- priority than the existing security interest. sory winding up, the views of the creditors are sought instead. The creditors may appoint a committee of inspection to represent the interests of the creditors, and the committee of inspec- 42 Insolvency Procedures tion may approve the exercise of certain powers by the liquidator. If the creditors and/or shareholders do not agree with the 4.1 What is/are the key insolvency procedure(s) decisions of the liquidator, the liquidator, creditor or share- available to wind up a company? holder may apply to Court for directions. In appropriate cases, its i possible for the creditors and/or shareholders to apply to Under Singapore law, a company may be wound up volun- Court to show cause for removal of a liquidator. tarily or by order of court, which is also known as compulsory When a company is put into liquidation, creditors and/or winding up. shareholders will not be able to commence or continue proceed- Voluntary winding up may be divided into two further cate- ings against the company without leave of Court. There is gories: members’ voluntary winding up; or creditors’ voluntary generally no restriction on the enforcement of security, save that winding up. Generally, compulsory winding up and creditors’ the liquidator has the right to challenge security in appropriate voluntary winding up apply to insolvent companies, and only circumstances, e.g. see question 2.3 above. solvent companies should be placed into members’ voluntary winding up.

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4.5 What impact does each winding up procedure have broader considerations of justice. Once the Court has made on existing contracts? Are the parties obliged to perform such a declaration, proceedings may be taken as they might have outstanding obligations? Will termination and set-off been taken if the company had not been dissolved. provisions be upheld? 52 Tax Save that mandatory insolvency set-off of mutual debts will displace contractual rights of set-off, the commencement of 5.1 What are the tax risks which might apply to a winding up generally does not, without more, affect existing restructuring or insolvency procedure? contracts. As mentioned in question 3.5 above, ipso facto clauses currently The tax implications arising from a restructuring depend on give contractual counterparties the right to terminate existing the specific form and structure of the relevant transaction. A contracts upon the commencement of insolvency. This posi- company under judicial management is still required to submit tion will be affected by the commencement of the Insolvency, its income tax return (Form C-S/C), audited/unaudited finan- Restructuring and Dissolution Act. We elaborate further on this cial statements and tax computations to the Inland Revenue in question 9.1 below. Authority of Singapore (“IRAS”) annually. The liquidator may, with leave of Court or the Committee of In relation to an insolvency, the liquidator must not distribute Inspection, disclaim onerous property or unprofitable contracts any assets of a company to its shareholders unless he has made if such disclaimer would facilitate the liquidation process. In provision for the payment in full of any tax which may be found such cases, the other party may prove as a debt in the liquidation payable by the company under the Income Tax Act, Chapter the loss suffered as a result of the disclaimer, calculated on the 134 of Singapore, and is required to carry out certain actions basis of damages for breach of contract. including submitting all outstanding tax returns, financial statements and tax computation(s) of the company in liquidation up 4.6 What is the ranking of claims in each procedure, to the date of liquidation. Tax clearance may also be obtained in including the costs of the procedure? certain circumstances from the IRAS.

In brief, claims against an insolvent company are ranked as 62 Employees follows: (1) secured creditors and certain quasi-security holders; 6.1 What is the effect of each restructuring or (2) debts arising from rescue financing accorded super priority; insolvency procedure on employees? What claims would (3) the costs and expenses of winding up; employees have and where do they rank? (4) wages and salary of employees; (5) retrenchment benefits or ex gratia payments due to Schemes of arrangement generally do not have any direct effect on employees; contracts of employment. (6) work injury compensation due under the Work Injury The onset of judicial management also will not have a direct Compensation Act (Cap. 354); effect on contracts of employment. That being said, the judicial (7) Central Provident Fund (“CPF”) contributions; manager has the power to terminate these contracts, and should (8) remuneration payable to employees in respect of vacation decide whether to adopt or terminate these contracts within 28 days leave; of the making of the judicial management order. If the employees (9) taxes; continue to work for the company after the 28-day period, the judi- (10) retirement and retrenchment benefits payable under the cial manager may be personally liable for their wages. Employment Act; As mentioned above in question 4.6, in a liquidation scenario, (11) claims secured by floating charge; save that claims for wages and salary and retrenchment benefits (12) claims of the general body of unsecured creditors; and are subject to a cap, claims by employees for wages and salary, (13) shareholders. retrenchment benefits, work injury compensation, CPF contributions, remuneration for vacation leave and retirement and retrench- 4.7 Is it possible for the company to be revived in the ment benefits are given priority. future? 72 Cross-Border Issues If the company has not yet been dissolved, it is possible to apply for a stay of the winding up proceedings, which halts the 7.1 Can companies incorporated elsewhere use winding up proceedings and allows the management to resume restructuring procedures or enter into insolvency control from the date of the stay. It should be noted that the proceedings in your jurisdiction? threshold for such a stay is a relatively high one. Where a company has been dissolved, the Court may at any The Singapore Courts have the discretion to wind up a foreign time within two years after the date of dissolution, on applica- company if the company has a substantial connection with tion of the liquidator of the company or of any other person Singapore. In this regard, the following factors are relevant who appears to the Court to be interested, make an order upon when determining whether a foreign company has a substantial such terms as the Court thinks fit declaring the dissolution to connection with Singapore: have been void. The Court’s general approach would be to exer- (1) whether Singapore is the centre of main interest of the cise that discretion carefully and judicially, bearing in mind company; that in some instances, a winding up ought to be reversed to (2) whether the company is carrying on business in Singapore ensure fairness and justice. A non-exhaustive list of scenarios or has a place of business in Singapore; that might warrant a reversal include the presence of overlooked (3) whether the company is registered in Singapore under the realisable assets, prejudice or fraud, or reasons stemming from Act;

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(4) whether the company has substantial assets in Singapore; permitting the extension of a Section 211B moratorium to a (5) whether the company has chosen Singapore law as the subsidiary, a holding company or an ultimate holding company governing law for its transaction documents; or where such company plays a necessary and integral role in the (6) whether the company has submitted to the jurisdiction compromise or arrangement. of the Singapore Courts for the resolution of disputes involving the company. 92 Reform A foreign company which has a substantial connection with Singapore may similarly avail itself of Singapore’s scheme of 9.1 Are there any other governmental proposals for arrangement or judicial management regime if it is able to meet reform of the corporate rescue and insolvency regime in the relevant statutory requirements. your jurisdiction?

7.2 Is there scope for a restructuring or insolvency Singapore has been taking significant steps to improve its corpo- process commenced elsewhere to be recognised in your rate restructuring regimes. A raft of substantial amendments jurisdiction? to the Act were introduced in 2017 and include in particular enhanced stay and cram-down provisions in support of schemes An application may be made to the Singapore Courts by the of arrangements, super priority for rescue financing in relation foreign representative for recognition of the foreign restruc- to both schemes of arrangement and judicial management and turing or insolvency proceedings, where the main proceeding the adoption of the UNCITRAL Model Law. takes place in the state where the debtor has its centre of main Further, the landmark omnibus Insolvency, Restructuring interests or if the debtor has an establishment within the and Dissolution Act (“IRDA”) was passed by Parliament in foreign state for non-main proceedings. Such foreign proceed- October 2018 and is expected to come into force in late 2020 ings may not be recognised in Singapore if it is found that or 2021. Amongst other things, this Act consolidates personal they are contrary to the public policy of Singapore, although and corporate insolvency laws, and the laws relating to debt the Singapore Courts have shown willingness to grant limited restructuring by individuals and companies into a single piece recognition in such cases where required by justice and fairness. of legislation. The Singapore Courts have also drawn distinctions between the The key changes under the IRDA include: scopes of assistance provided in the recognition of foreign main (1) restrictions on the operation of certain types of ipso facto proceedings and foreign non-main proceedings. clauses; (2) the scope for appointment of the Official Receiver as liquidator has been reduced. Applicants must show that they 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other have taken reasonable steps, but were unable to appoint a jurisdictions? Is this common practice? private liquidator, and they must obtain the consent of the Official Receiver; (3) a new “wrongful trading” provision will replace the It is not unusual for companies incorporated in Singapore which current “insolvent trading” regime at Sections 339 and 340 are in judicial management or winding up to commence ancil- of the Act; lary insolvency proceedings in other jurisdictions to, amongst (4) in relation to schemes of arrangement, certain specified other things, recover assets located in said jurisdictions. Other proceedings may be allowed to proceed unaffected by jurisdictions such as the UK have also successfully recognised moratoria if so prescribed by regulations; and restructuring-related moratoria granted by the Singapore Courts (5) in relation to judicial management, debtor companies will under the UNCITRAL Model Law on Cross-Border Insolvency. be permitted to place themselves into judicial management without the need for an order of Court, if they are able 82 Groups to obtain a resolution of the company’s creditors for the company to be placed into judicial management. 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for Acknowledgment co-operation between officeholders? The authors would like to thank Ee Jia Min for her invaluable The starting position is that group companies are considered assistance in the preparation of this chapter. Jia Min’s main separate legal entities, and the insolvency of one group company, areas of practice are restructuring and insolvency, commercial without more, will not directly affect the others. litigation and international arbitration. However, where there have been dealings between persons On the restructuring and insolvency front, Jia Min has connected with a company, which is often the case in groups advised directors, financial institutions, statutory boards and of companies, the statutory time limit for a transaction to be multinational corporations. She also has extensive experience considered an unfair preference is extended, and certain adverse with restructuring and insolvency-related litigation involving presumptions will be made in relation to the transaction which schemes of arrangement, judicial management and winding up. may facilitate insolvency claw-backs. On the disputes front, Jia Min has assisted in a number of high- In addition, where it is shown that a company is used as a value commercial suits and arbitrations, representing govern- façade for other solvent entities, the corporate veil may be ment bodies, banks and multinational corporations in matters lifted so as to treat the companies as a single entity. Another including shareholder disputes, contentious trust matters and example where the veil may be lifted is where the controller breaches of directors’ duties. of the company treats the companies as a single entity and has Jia Min graduated from the National University of Singapore complete control over them. in 2015, was called to the Singapore Bar in 2016 and has been On the other hand, Singapore’s legislative framework with Allen & Gledhill since. also facilitates the rehabilitation of groups of companies by Email: [email protected]

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Edward Tiong is a Partner at Allen & Gledhill LLP. His main areas of practice are corporate restructuring and insolvency, commercial and banking litigation and property disputes. He has been lead counsel in several high-profile cases, in particular, restructuring matters (both cross-border and domestic), and commercial disputes. In insolvency, he has advised statutory boards, government-linked companies, major banks, corporates and financial institutions on schemes of arrangements and compromise, judicial management, liquidation and claw-backs.

Allen & Gledhill LLP Tel: +65 6890 7887 One Marina Boulevard #28-00 Email: [email protected] 018989 URL: www.allenandgledhill.com Singapore

Kenneth Lim is a Partner at Allen & Gledhill LLP. His main areas of practice are litigation, restructuring and insolvency, and international arbitration. Kenneth regularly represents lenders, borrowers and insolvency professionals in relation to liquidation, judicial management, receivership, schemes of arrangement, and complex multi-jurisdictional restructurings. He has substantial experience representing clients in complex contentious matters involving contractual claims, property disputes, shareholder disputes, banking claims, trust disputes, directors’ duties, media and entertainment disputes, employment, and defamation.

Allen & Gledhill LLP Tel: +65 6890 7811 One Marina Boulevard #28-00 Email: [email protected] 018989 URL: www.allenandgledhill.com Singapore

Allen & Gledhill LLP is an award-winning full-service South-east Asian law its associate firm, Rahmat Lim & Partners in Malaysia; and its alliance firm, firm providing legal services to a wide range of premier clients, including Soemadipradja & Taher in Indonesia, Allen & Gledhill LLP’s network has local and multinational corporations and financial institutions. The Firm is over 550 lawyers in the region. consistently ranked as a market leader in Singapore and South-east Asia, www.allenandgledhill.com having been involved in a number of challenging, complex and significant deals, many of which are the first of its kind. The Firm’s reputation for high- quality advice is regularly affirmed by the strong rankings in leading publications, and by the various awards and accolades. With a growing network of associate firms and offices, it is well-placed to advise clients on their business interests in Singapore and beyond, on matters involving South- east Asia and the Asian region. With offices in Singapore and Myanmar;

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Spain Spain

Pedro Moreira

SCA LEGAL, SLP Isabel Álvarez

12 Overview difference, debtors find themselves in a scenario where, much to the regret of some if not all stakeholders, winding up is the most common outcome. 1.1 Where would you place your jurisdiction on the Therefore, from a legal point of view, Spain is definitely spectrum of debtor to creditor-friendly jurisdictions? more a creditor- than debtor-friendly jurisdiction. Nonetheless, in practical terms, the insolvency regime may lead to unde- Historically, Spain has been a creditor-friendly jurisdiction, in sired outcomes for the creditors, as the winding up of bank- the sense that the law – only in very limited terms – allowed for rupt debtors, to which most are fated, tends to generate insuf- limitations of the creditors’ rights or for any reductions of the ficient proceeds, resulting in most of the credits, notably debt burden imposed on the creditors. Under such scenario, non-senior ones, being left unpaid. This is actually the most creditors’ rights are fully enforced, no matter the financial common scenario in the case of small and mid-size compa- condition of the debtor, in terms that, in many cases, ended nies in the services area, which tend to operate with few easily with the liquidation of the debtors’ assets on a “first come, first tradeable assets (real property, machinery, vehicles, etc.) and, as served” basis. In practical terms, this does not mean that cred- such, generate scarce proceeds at the time of being liquidated via itors end up recovering their credits in better terms than they bankruptcy proceedings. would otherwise do, but the fact is that, at least from a legal perspective, the law has been always on the creditors’ side. 1.2 Does the legislative framework in your jurisdiction This scenario has not substantially changed with the passing allow for informal work-outs, as well as formal of the first insolvency legislation in 1922 nor with the enact- restructuring and insolvency proceedings, and to what ment,n i 2003, of Law 22/2003, as of 9 July, on Insolvency (herein- extent are each of these used in practice? after “Spanish Insolvency Act” or “SIA”). With the SIA, Spain gained a modern insolvency legal framework, although, so far, From a legal perspective, nothing prevents informal work-outs in general terms, neither debtors nor creditors have been able to between creditors and debtors who are interested in negotiating use it in a manner that generates better ratios of credit recovery an arrangement. If all creditors accept a certain work-out, this and fewer winding ups of debtors. agreement would be fully enforceable and there would be no This has several reasons, one of them being the fact that a need for the debtor to initiate insolvency proceedings. high number of debtors file for bankruptcy at a very late stage Nonetheless, in most situations, with a reasonable number of of financial stress, where even liquidity available to pay debts creditors, it is not easy for a debtor to bring in all its creditors. generated after the bankruptcy declaration may be scarce, some- Therefore, in most cases, only some of the creditors would end thing that makes recovery much more difficult than at an earlier up engaging in a work-out, and this is what makes them less used stage. Nonetheless, other reasons thereto have to do with certain than they could be. options followed by the legislator, based on the principle that In practice, informal work outs are not used as much as they credits are to be honoured, such as (i) the high majorities required for could be, because creditors (notably, banks and other providers the approval of a creditors’ agreement (article 124 SIA), (ii) the of finance) tend to refuse to engage in these sort of arrange- protections given to creditors with security on debtor’s assets, ments, as they see them as bearing the risk of being repealed in which in practical terms leaves them almost immune to the case the debtor initiates bankruptcy proceedings or, if not for effects of the bankruptcy proceedings (articles 56 (1) and 155 any other reason, because they tend to see them as an undue SIA), and (iii) the fact that senior credits (tax and social secu- intent of the debtor to sweeten its obligations under the initial rity contributions, among others) are excluded from the manda- finance agreements, or, in the best case, as an attempt to treat tory effects of a creditors’ agreement (article 100 (2) SIA), which the creditors that participate in the arrangement in terms less means that such credits will not be subject to the pardons and/ favourable than those applied to the holdout creditors. Informal or delays foreseen in such an agreement. And, last but not least, refinancing tends to be accepted by banks when negotiated in the technical option followed by the SIA to set forth a unique advance by smarter debtors who, at the time of the negotiations, type of bankruptcy proceedings, though with an alternative are still in good standing. development that avoids the winding up (the approval of a cred- As for formal restructuring and insolvency proceedings, both itors’ agreement), also plays a role in the bad fate of most of the are provided by the SIA. The SIA provides two types of formal bankruptcy proceedings held in Spain. Due to the mentioned restructuring: refinancing agreements, under article 71 bis, a unique type of bankruptcy proceedings, with long and complex provision added in 2013; and out-of-court payment arrange- steps, in cases where simple and rapid steps could have made a ments, under articles 231 to 242, all added in 2013.

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Pursuant to article 71 bis SIA, refinancing agreements are obligations, i.e., that its available liquidity is not enough to allow arrangements reached with some of the creditors before the it to comply with its obligations (article 2 (2)). debtor is declared bankrupt by a court, that cannot be turned In the case of companies, the obligation to file for a bank- down by this, in case the debtor is declared bankrupt at a later ruptcy process lies on the directors of the bankrupt company. stage, if they (i) increase the amount of credit available to the Failure by the debtor to comply with this obligation is a ground debtor, if they refinance the debtor, or (ii) modify or extinguish for the court to qualify the bankruptcy as blameworthy under the any of the debtor’s debts, (iii) provided that, in any case, such aforesaid article 165 (1) SIA. In such scenario, those persons measures are part of a viability plan that allows the continuation (directors, shareholders, etc.) who failed to file for bankruptcy of the debtor’s activity in the short- and mid-term. at the time foreseen by the SIA may be deemed personally liable Regarding out-of-court payment arrangements, these can be for the unpayable debts of the bankrupt debtor. used by companies only if they are already bankrupt and if their debts and assets do not amount to more than €5 million each 2.2 Which other stakeholders may influence the (articles 232.2 and 190 SIA). These arrangements need to be company’s situation? Are there any restrictions on the managed by an official bankruptcy mediator, appointed either action that they can take against the company? For by a notary public or the Companies’ Registrar (article 233 SIA). example, are there any special rules or regimes which If successful, these arrangements end with an agreement that apply to particular types of unsecured creditor (such can include any of the following measures: (i) a delay of no more as landlords, employees or creditors with retention than 10 years; (ii) an acquaintance; (iii) an assignment to the of title arrangements) applicable to the laws of your creditors of the debtor’s assets to cover its debts, either in full jurisdiction? Are moratoria and stays on enforcement available? or partially; (iv) debt-equity swaps, where credits are converted into new equity to be issued by the debtor; or (v) the conversion of such credits in certain types of loans or financial instru- The most important stakeholders are creditors (creditors in ments (callable preferred stock, convertible bonds, debt instru- general, employees and public creditors) and employees and ments where interest is paid in debtor’s shares, junior debt, etc.). landlords, not as creditors but as parties interested in keeping Pursuant to article 5 bis SIA, the initiation of negotiations their respective condition of suppliers of labour and offices/ aimed at reaching a refinance agreement or an out-of-court land to the debtor in the future. payment arrangement give the debtor a four-month period, Creditors play an important role in the sense that, when the during which: (i) no creditor is allowed to request the courts to debtor does not request its winding up, either at the time of declare the bankruptcy of the debtor; and (ii) no enforcement of filing for bankruptcy or at a later stage during the bankruptcy credits against assets used by the debtor in its activities can be proceedings, the survival of the debtor, under a creditors’ agree- initiated or, in case they had already been, will be subject to a ment, will basically depend on their will to approve such an stay. If the debtor could not reach, during the said four-month agreement, which will mean, to some of the credits, pardons period, any such arrangements that excludes it from the obliga- and/or delays. tion, foreseen in article 5 SIA, to request the court to initiate When a court declares the bankruptcy of a debtor, this auto- bankruptcy proceedings, then it is mandatory for the debtor to matically imposes a moratorium or a stay on the enforcement of do so (article 235 SIA). the creditors’ rights. From that point on, their credits will be As for insolvency proceedings, as mentioned before, the SIA enforceable under the less favourable terms of a creditors’ agree- rules on a unique type of insolvency proceedings, covering all ment, in case this comes to be approved, or within the liquida- parts of the same, both in substantive and procedural terms, and tion process, in case it does not. ruling on the regime applicable to the receivers. Therefore, new individual enforcements are never allowed The use of the insolvency proceedings is much more wide- during the bankruptcy proceedings (article 55 (1) SIA), save spread than that of the informal work-outs and formal restruc- in case of enforcement of credits secured by assets, which are turing, although not so much as one would think at first, notably allowed, though in some cases with a moratorium of one year in what concerns small and mid-size indebted companies. (article 56 SIA). As for stays on enforcement, pursuant to article 55 SIA, the fact that a debtor is declared bankrupt by a court 22 Key Issues to Consider When the necessarily determines such stay, though with several excep- Company is in Financial Difficulties tions (enforcement of administrative rights and labour credits, provided that the seizure of any of the debtor’s assets was ordered before the bankruptcy declaration and if those assets 2.1 What duties and potential liabilities should the are not necessary for the debtor’s business activity). 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 or 2.3 In what circumstances are transactions entered insolvency process? into by a company in financial difficulties at risk of challenge? What remedies are available? As a rule, the directors of a company are not liable for the company’s debts. Nonetheless, in case this is declared insol- The SIA sets forth that certain transactions entered into by the vent, within bankruptcy proceedings, they may be liable for the debtor in the two years before the date when a company initiates unpaid debts in case they took decisions that are considered, by an insolvency process can be challenged (article 71), either by the the court that hears the case, as the cause of debtor’s inability insolvency practitioner (“receiver”) or, in case this fails to do it, to pay its debts or a part thereof, insofar as those decisions lead by any of the creditors (article 72), whenever such transactions such court to qualify the bankruptcy as blameworthy (article 165 can be deemed detrimental to the debtor’s assets. (1), 1st, SIA). Defiance of those transactions in court can lead the court to Article 5 (1) SIA provides that the debtor has to file for a declare them void, in which case their effects will be repealed bankruptcy process in the two months following the time (article 73), e.g., in case of a sale of a debtor’s asset that is declared when it acquires knowledge that it cannot comply with its due void by the court, such asset is to return to the debtor’s balance

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sheet and any monies paid by the buyer are to be returned to The process begins with a common phase, where the finan- the debtor. cial situation of the debtor is fully accessed and ends with two Nonetheless, as mentioned before, the transactions entered reports submitted by the receiver, where it discloses the debt- into by the debtor with the aim of avoiding insolvency can be or’s assets and their debts at the time of the declaration of bank- excluded from any challenges if they meet certain requirements, ruptcy, with the grade assigned to them ( first order, senior, ordinary as is the case of the refinance agreements, carried out under and/or junior) by the receiver. article 71 bis SIA, as mentioned in the answer to question 1.2. From this point on, the process can either proceed to the winding up of the debtor or to the negotiation of a creditors’ 32 Restructuring Options agreement. In the first case, the debtor will be extinguished, and its assets 3.1 Is it possible to implement an informal work-out in sold, with a view to use the proceeds of the sales to pay the your jurisdiction? creditors. This phase begins with the approval of a liquidation plan (where pre-packaged sales may definitely be carried out) and once this is approved, the receiver begins with the sale of An informal workout between a debtor and its creditors is always the assets. Once the proceeds have been collected, the receiver possible under Spanish law, if the parties agree to engage in such starts paying the credits in accordance with their grade, from an arrangement. Once the parties reach an agreement, unless it the highest to the lowest. In case the proceeds are not sufficient breaches any mandatory regulations, in principle, this would be to pay all credits qualified with the same grade, the receiver will enforceable between them. pay them in proportion. However, if the debtor does not succeed in convincing all its Creditors have a say in the outcome of the process, in the creditors to accept the terms of the work-out and if the debtor, sense that, if the majority of the ordinary creditors, as foreseen no matter the existence of such an arrangement, is still unable in article 124 SIA, does not accept the terms of a creditors’ agree- to comply with its obligations before any holdout creditors, any ment submitted either by some of the creditors or by the debtor, of the latter may request the court of commerce to declare the the company will automatically be wound up. Therefore, cred- debtor in bankruptcy. And if bankruptcy is actually declared, itors actually have the power to block any restructuring of the the arrangements reached by the debtor with some of the credi- credits and the survival of the debtor. tors may be turned down by the court, on request of the receiver The debtor also has a say in the process in the sense that it or a creditor. can either request the court to wind it up (article 142 (1) SIA) Nonetheless, article 71 bis SIA, added in 2011 and modified or submit a draft of a creditors’ agreement (article 124 (1) and in 2014, waives the possibility of those arrangements (reached (2) SIA). However, it cannot avoid the winding up if it fails to with some of the creditors before the debtor is declared bank- convince the required majority of creditors to accept the credi- rupt by a court), being repealed by the court, if they increase tors’ agreement submitted to them. credit available to the debtor or modify or extinguish debts of As the decisions to be taken by the debtor under the SIA as a this, provided that certain other requirements are met and when rule, lie in the hands of the debtor’s directors or former direc- those measures can be deemed part of a viability plan that fore- tors, the debtor’s shareholders tend to have very limited input casts the continuation of the debtor’s activity in the short- and in the process. mid-term. Provided that some other requirements are also met, The only area in which shareholders can play a significant the arrangements can be ratified by the court, in which case, role is in the case of debt-for-equity swaps, as the issue of new they could not be repealed at a later stage, either by the receiver equity is a matter reserved for the shareholders’ meeting (article or the creditors (fourth additional provision of the SIA). 160 of the Spanish Companies Act). Nonetheless, if the shareholders’ meeting refuses to authorise an increase of the share 3.2 What formal rescue procedures are available capital within a debt-for-equity swap, this may lead the bank- in your jurisdiction to restructure the liabilities of ruptcy to be declared by the court as blameworthy, and the share- distressed companies? Are debt-for-equity swaps holders voting against the said share capital increase will be and pre-packaged sales possible? To what extent can deemed liable for the unpaid credits (article 165 (2) SIA). creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you 3.3 What are the criteria for entry into each to cram-down dissenting stakeholders? Can you cram- restructuring procedure? down dissenting classes of stakeholders? In its initial version, the SIA foresaw a unique bankruptcy The SIA provides for a unique bankruptcy process (“process”), type for the court process. Nonetheless, in 2013, Law 14/2013 though with two different types, the main and the abridged added a chapter to the SIA (Title X, with articles 231 to 242), (articles 183–191 quater SIA), whose use does not depend on which provides out-of-court formal work-out proceedings, to be who files for bankruptcy (the debtor or any of its creditors) but managed by a bankruptcy mediator. on the complexity of the case. In less complex cases: as a rule Companies can file for this process only in case they (i) meet to be determined by the court in accordance with the guidelines the requirements foreseen in article 5 (1), in relation to (article 2 set forth in article 190 (1) (fewer than 50 creditors, liabilities not (2), and (ii) would qualify for an abridged court process (article exceeding 5 million euros and debtor’s assets with an estimated 231 (2)), two things that are not required in the case of physical value not exceeding that amount either), the procedure should persons. Therefore, in the case of companies, the criteria fore- follow the abridged rite. Nonetheless, the SIA foresees some seen by the SIA for court and out-of-court bankruptcy proceed- scenarios where, waiving the regime set forth in the said article ings are the same, i.e. a company can initiate these work-out 190 (1), the court in charge of the case can opt for the abridged proceedings only if it is already at a stage where it cannot comply rite (article 190 (2)) and others where it is mandatory to follow with its obligations, not at an earlier stage where it may have such rite (article 190 (3)). reasons to think that it will fail to comply with those obligations in the future.

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3.4 Who manages each process? Is there any court the creditors or any third parties to provide funds that allow the involvement? debtor to leave the state of insolvency. Funding can be either in the form of a pardon, a delay, a debt-equity swap or fresh credits. Any fresh credits granted after the declaration of bankruptcy Bankruptcies declared by a court are managed by the receivers will always be qualified as first grade, and as such payable before appointed thereto by the court. Receivers are in charge of iden- any other with different grades. Regarding credits granted tifying the assets and liabilities of the debtor, managing the before such declaration, the SIA sets forth that those granted company in certain cases or authorising the decisions taken by under the regime foreseen in article 71 bis are graded as senior. the directors in other cases, preparing reports for the court, Rescue finance can also be granted as a condition for the cred- requesting the court to declare void certain transactions on the itors to approve a creditors’ agreement. It can be provided either ground of damaging the creditors, liquidating the company, by a third party (a shareholder, existing or new, a bank, etc.) or requesting the court to declare the bankruptcy as blameworthy, etc. a creditor. In such scenario, the protection granted to the new Some of the decisions taken by the receiver can be defied by funding will be agreed between the rescuer and the creditors, the creditors or even the debtor before the court of commerce provided that it does not breach the rules on creditors’ agree- that is hearing the case. The court will rule on the dispute after ments foreseen by the SIA. hearing the other party or parties. Nonetheless, the most important decisions in the process are up to the court hearing the case, notably the decisions to initiate 42 Insolvency Procedures (articles 14–15 SIA) and terminate the process (article 176 SIA), approve a creditors’ agreement (article 127 SIA), wind up the 4.1 What is/are the key insolvency procedure(s) debtor (articles 142 and 143 SIA) and declare the bankruptcy as available to wind up a company? fortuitous or blameworthy (article 172 SIA). Out-of-court payment arrangements are negotiated by a The SIA provides a unique insolvency procedure, during the bankruptcy mediator, whose functions cease once they have course of which the court, under certain circumstances, can been approved by the shareholders who accepted to engage in order the winding up of the debtor. When, in the end of the the negotiation. These arrangements in no way require court so-called “common phase” of this process, the court rules in involvement, save in case one creditor decides to challenge these terms, then the winding up phase is initiated. them, in which case it would be up to the court to rule on the Basically, the winding up of a company consists of two steps: dispute (article 239 SIA). first, when the court orders the winding up, at which point the company immediately ceases to be a legal person with organs 3.5 What impact does each restructuring procedure and assets and liabilities; and secondly, consists of a liquidation have on existing contracts? Are the parties obliged to process, where the remaining assets that once belonged to the perform outstanding obligations? What protections debtor are sold and the proceeds therefrom used to pay its debts are there for those who are forced to perform their or, in most of the cases, a part thereof. outstanding obligations? Will termination and set-off The liquidation process shall follow the mandatory rules fore- provisions be upheld? seen thereto in the SIA (articles 142–162) and those included in the liquidation plan to be approved by the court under article The fact that a debtor is declared bankrupt does not in itself lead 148 of this piece of legislation. As a rule, the assets need to be to the termination of the contracts in force at the time of the sold in auctions organised by the court, though, in some cases, declaration of bankruptcy (article 61 (2) SIA). Any termination a direct sale to a certain buyer can be authorised by the court if or set-off provisions to be applied in case of bankruptcy of one certain requirements thereto are met. In addition, though the of the parties to an agreement would breach the provision set rule is that each asset shall be sold in an independent manner, forth in article 61 (2) SIA and, as such, would be deemed void. the SIA provides a subsidiary rule for the sale of business units, Nonetheless, the receiver, in case the directors of the debtor under which terms this type of unit should preferably be sold have been removed, or otherwise the debtor, with the receiv- as a whole. er’s approval, can request the court to order termination of the agreements if they deem this convenient to the interest of the 4.2 On what grounds can a company be placed into process. The court will hear the other party to the agreements each winding up procedure? and in case the parties do not reach a termination agreement, uphold the claim in case it also considers that termination is convenient for the process. This decision is a court ruling just A bankrupt company can be placed into a winding up process like any other and should be enforceable in the very same terms. at its own request, at any time during the bankruptcy proceed- The other party to an agreement in force at the time the ings (article 142 SIA). In addition, if the creditors do not agree debtor is declared bankrupt cannot terminate that agreement on on a creditors’ agreement during these proceedings, the same the ground of such declaration. Although the credits generated will necessarily end with the winding up of the company (article to such party after the declaration of bankruptcy will be treated 143 SIA). as first order credits, i.e., credits excluded from the bankruptcy proceedings and that are to be paid once they become due (“first 4.3 Who manages each winding up process? Is there grade credits”). The risk of unsettlement of this type of credit is any court involvement? small, although in no way non-existent. The winding up process consists of two subphases, the first, 3.6 How is each restructuring process funded? Is any where a decision to wind up the debtor is taken by the court, and protection given to rescue financing? the second, the so-called “liquidation”, where the debtor’s assets are sold and the proceeds are used to pay the creditors. Whereas The funding of any restructuring process depends on the will of the first subphase always lies in the hands of the court upon a

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request of the debtor or in case of failure to approve a creditors’ As for the ins, all credits qualified in these terms are credits agreement, the second is managed by the receiver, previously due, although unsettled, at the time of the bankruptcy declara- appointed by the court, under the supervision of the court. The tion. These credits, if admitted by the receiver in the listing of receiver will liquidate the assets and pay the creditors in accord- such credits to be approved in the first phase of the process, will ance with the rules provided by the SIA (articles 148–162). be paid after the outs, with the remaining liquidity. In the said listing, the receiver will assign one of the following alternative grades to each of the admitted credits: senior (with or without 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any security over the debtor’s assets); ordinary; or junior. restrictions on the action that they can take (including Ordinary credits are ins that, pursuant to the SIA, should not the enforcement of security)? be qualified either as senior or junior (article 89 (3)). Senior credits will be paid after the outs and no ordinary credits are payable until all seniors have been paid in full. Nonetheless, The f ability o the creditors and/or shareholders to influence the the proceeds from the senior secured credits will be used to winding up process is null. Once the court orders the winding pay the creditors secured by them and only in case the senior up of the debtor and approves the liquidation plan, all that is left secured credits have been paid will the remaining proceeds be to be done is the sale of the debtor’s assets in accordance with used to pay non-secured senior credits. such plan and the use of the proceeds to pay the creditors in Once all senior credits have been paid in full and there is still accordance with each credit’s grade. Though the legality of each liquidity outstanding, this will be used to pay the ordinary ones. decision taken by the receiver at this stage can still be defied And if such liquidity is enough to pay all the ordinary credits and in court, what is at stake is no longer how the process should there is still liquidity outstanding, then payment of the juniors evolve in the future but only whether the measures adopted by will begin. the receiver to liquidate the company comply with the laws and As mentioned before, if the proceeds available are not suffi- the liquidation plan. cient to pay all credits qualified with the same grade, they will The rights of the creditors with security on a certain debtor’s be paid in proportion. assets can be enforced at any stage during the process in separate enforcement proceedings or within the process. Their rights will in no way be affected by the winding up, as the proceeds of 4.7 Is it possible for the company to be revived in the the sale of the secured asset will be assigned to the secured credit future? and only the remaining amount, if any, after this settlement, will be available to pay any other credits (article 155 SIA). Under the Spanish Companies’ Act, a decision to wind up a non-bankrupt company would not prevent it from being revived 4.5 What impact does each winding up procedure have if the shareholders agree (article 370 (1)), although such decision on existing contracts? Are the parties obliged to perform cannot be taken after the termination of the liquidation process. outstanding obligations? Will termination and set-off If it were taken thereafter, instead of a revival, the shareholders provisions be upheld? would have to set up a new company, foreseeably with the same name, though with a different tax number and fully independent, The decision in itself to wind up a company does not automat- in terms of assets and liabilities, from the wound up company. ically determine the termination of all agreements, although, at Nonetheless, in case of a company engaged in insolvency the end of the liquidation process, all agreements necessarily proceedings, after the court has decided to wind it up, its terminate, unless an assignment of the same could be worked revival would be possible only in case those proceedings could out before that point. be terminated on the ground of the full payment of its debts th Nonetheless, while the agreement has not been validly termi- (article 176 (1), 4 , SIA). In such a scenario, though the SIA nated by either of the parties (e.g., on the ground of a breach of does not expressly provide so, there is no legal reason why the its obligations by the other party), it remains in force during the company could not be revived, and this is the logical outcome of winding up procedure, and this, in itself, is no ground for termi- the company if it succeeds in paying all its debts. nation by the other party. 52 Tax 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? The ranking of credits follows the rules set forth in the SIA (articles 84 and 89 to 93). Tax creditors share the risks borne by any creditors, in the sense The main distinction is between the credits out of the bank- that, if the debtors’ assets are not enough to cover all their liabil- ruptcy proceedings (“outs”) and those in these proceedings ities, creditors may face losses. (“ins”). However, part of the tax credits is graded as senior, some- The outs are credits of first order, in the sense that they are thing that increases their chances of being paid, if not in full at payable once due and in any case before the ins (article 154 (1) least in part. This is on the ground that they will be paid before SIA). With a few exceptions (certain labour credits, the cost any lower graded credits, but also because, as mentioned before, incurred by the debtor with the declaration of bankruptcy claim, in case of approval of a creditors’ agreement, senior credits are etc.), almost all of the outs are credits generated after the decla- excluded from it, which is something that will eradicate them ration of bankruptcy (article 84 SIA), and the reason for their from any pardon or delay. priority is the intent to avoid the debtor being banished from From the debtor’s perspective, a restructuring or insolvency engaging in any transaction after its bankruptcy declaration, as procedure does not lead to incurring specific tax risks. However, the risk of unsettlement for the other party (provider, seller, etc.) in case the bankruptcy proceedings are qualified as blameworthy, would be too high. the unpaid tax credits will stand, just like any other credits, at

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the time of determining the bulk of the unpayable credits of the 72 Cross-Border Issues debtor for which certain persons provided by the SIA may be deemed personally liable. In addition to the above, it is worth bearing in mind that, in 7.1 Can companies incorporated elsewhere use case of pardons granted by the creditors in a creditors’ agree- restructuring procedures or enter into insolvency proceedings in your jurisdiction? ment, this would generate capital gains in the debtor, which would be taxed in accordance with the corporate tax regulations (article5f 1 o Law 27/2014, on Corporate Tax). Against this, debt- Article 10 SIA distinguishes between main and territorial insol- for-equity swaps arranged between the debtor and any of its vency proceedings, the former being any proceedings initiated creditors, in principle, would not have any tax effects, at least in in the country where the debtor has its registered office and/or termsf o corporate tax (article 17 (2) of the said Law 27/2014, as its main place of business, in which case they cover its worldwide interpreted by the Tax General Directorate, in its binding reso- assets, and the latter being any proceedings that pertain only to lution V3463-16, passed on 20 July 2016). assets owned by the debtor in the territory where such proceedings are pending. 62 Employees Under the said rules, insolvency proceedings can be initiated in Spain in relation to a company incorporated elsewhere, provided that such company has its main place of business in 6.1 What is the effect of each restructuring or Spain, in which case the proceedings will be deemed main, or, insolvency procedure on employees? What claims would employees have and where do they rank? in case it does not, provided that it has assets in this country, in which case such proceedings will be territorial.

A distinction should be made between employees’ credits and jobs. As for employees’ credits, the SIA distinguishes between 7.2 Is there scope for a restructuring or insolvency credits for salaries earned in the last 30 days of work before process commenced elsewhere to be recognised in your jurisdiction? the initiation of the debtor’s bankruptcy process and up to the double of the minimum salary, which are subject to the regime provided in article 84 SIA, and any other labour credits. The As a rule, insolvency processes that have commenced elsewhere regime provided in article 84 is the most protective for the cred- will not be recognised in Spain until the corresponding rulings itors, in the sense that it allows payment of the credits to which given in a foreign country obtain exequatur when they meet the it applies – the outs mentioned in the answer to question 4.6 – requirements thereto (article 220 SIA). Nonetheless, in the case before any other credits. Credits covered by the said article 84 of processes initiated in another EU Member State, they would are payable once they become due and the said labour credits, be fully recognised in Spain without any exequatur, pursuant to provided by its section (1) are so on spot. the Regulation (EU) 2015/848, of the European Parliament and Concerning the remaining labour credits, the SIA distin- the Council, of 20 May 2015, on insolvency proceedings. guishes between certain labour credits (salaries and indemnities for labour accidents and/or illnesses), which are deemed senior 7.3 Do companies incorporated in your jurisdiction under article 91, and the remaining ones, which may be ordinary restructure or enter into insolvency proceedings in other (article 89 (5)) or even junior (article 92). jurisdictions? Is this common practice? In terms of jobs, the initiation of a bankruptcy process does not in itself determine the termination of any labour contracts Pursuanto t EU regulation 2015/848, a company incorporated or a change in the terms of these. During the bankruptcy in Spain can initiate proceedings in other EU jurisdictions, if it process, those agreements can be either terminated or modified has its main place of business in such jurisdiction, in which case by the debtor’s appointed receiver, under the rules foreseen in those proceedings should be main ones, or if it has assets in such the labour legislation with the specialties set forth in article 64 jurisdiction, in which case they should be territorial. Nonetheless, SIA. Nonetheless, with some exceptions, the most important so far, it is not common practice for Spanish companies to file labour disputes or issues arising (collective dismissals, amend- for bankruptcy in other EU Member States. ments or suspension of labour contracts) during the bankruptcy process will not be heard by a labour court but by the court of commerce where such process is pending (article 8 SIA). Any 82 Groups dismissals, amendment or suspension of labour contracts in a number below the figure foreseen in the Spanish Labour Act 8.1 How are groups of companies treated on the above which they would be deemed collective, would be heard by insolvency of one or more members? Is there scope for a labour court. co-operation between officeholders? Whereas, as we have said, the initiation of a bankruptcy process does not in itself determine the termination of any The SIA provides that any members of a group of companies labour contracts, the initiation of a winding up process neces- can file for bankruptcy in a single petition and creditors are also sarily leads to the termination of all labour agreements at the end allowed to request the declaration of bankruptcy in the same of the liquidation or even before that, save in case the company proceedings of any such members (article 25 SIA). is revived in terms mentioned in the answer to question 4.7 or In addition, during a bankruptcy process, either the debtor or in case of a sale of a business unit of the debtor, as provided in the receiver can also request two or more pending processes be labour legislation (article 44 of the Spanish Labour Act). In this merged into a single one, if those processes pertain to compa- last case, if a business unit of the debtor is sold to a third party, nies that belong to a group (article 25 bis SIA). the debtor’s employees that worked in that unit are automatically assigned to the acquirer and therefore their contracts are not terminated.

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Regardless, both in case of joint or merged processes under restructuring frameworks, on discharge of debt and disqual- articles 25 and 25 bis SIA, respectively, as a rule, neither the ifications, and on measures to increase the efficiency of proce- assets nor the debts of each of the bankrupt companies can be dures concerning restructuring, insolvency and discharge of debt, merged (article 25 ter SIA); the only effect of the joint-handling and amending Directive (EU) 2017/1132 – the now in-force of the cases being that they will be handled in a coordinated Directive on restructuring and insolvency – should be trans- manner. posed by all EU Member States no later than 17 July 2021. Therefore, although the Government has not yet disclosed the 92 Reform draft piece of legislation that needs to be passed for the transpo- sition of the said Directive; this will foreseeably happen in 2020 9.1 Are there any other governmental proposals for or in the early months of 2021. reform of the corporate rescue and insolvency regime in your jurisdiction?

For the time being, no reform of the Spanish corporate rescue and insolvency regime has been announced. Nonetheless, the EU Directive (EU) 2019/1023 of 20 June 2019, on preventive

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Pedro Moreira, a founding Partner of SCA LEGAL, SLP, has almost 20 years of experience as a litigation lawyer, specialising in civil, commercial and corporate law disputes. Thanks to his expertise in those areas of law and his background in economics and business administration, he regularly advises clients, from different jurisdictions and businesses, in complex litigation cases (in relation to the breach of commercial contracts, damage claims, shareholders conflicts and other corporate law issues, bankruptcy and insolvency matters, etc.), some of them multijurisdictional and/or heard by a court of arbitration. Mr. Moreira advises also on a regular basis on non-contentious matters, mostly in commercial and corporate law. Mr. Moreira has also been appointed receiver in several bankruptcy cases by some of Madrid’s Courts of Commerce. Mr. Moreira graduated in Law from the Complutense University of Madrid and also has a B.A. in Law from the Catholic University of Lisbon, an M.A. in Economics (Diploma de Estudios Avanzados en Economía) from the Complutense University of Madrid and an M.B.A. from the EAE/ Camilo José Cela University (Madrid). He is a member of the Madrid Bar Association, speaks fluent Spanish, Portuguese and English and also has a working knowledge of French and German.

SCA LEGAL, SLP Tel: +34 91 781 50 40 Calle Castelló 82, 4º I Email: [email protected] 28006 Madrid URL: www.sca-legal.com Spain

Isabel Álvarez is a Partner at SCA LEGAL, SLP. She has 10 years of experience as a litigator, her practice focusing on civil, commercial and labour law disputes. She regularly advises Spanish and foreign clients in complex litigation cases (in relation to breaches of contract, damage claims, real property and inheritance disputes, termination of labour agreements with directors and other senior staff, etc.). She also advises on a regular basis on non-contentious matters, mostly in civil and commercial law. Ms. Álvarez holds a B.A. in Law from the Complutense University of Madrid and is a member of the Madrid Bar Association. She speaks fluent Spanish and English.

SCA LEGAL, SLP Tel: +34 91 781 50 40 Calle Castelló 82, 4º I Email: [email protected] 28006 Madrid URL: www.sca-legal.com Spain

Established in 2001, SCA LEGAL is an independent Spanish business law firm with offices in Madrid and representative offices in São Paulo (Brazil) and Buenos Aires (Argentina). The firm counts on a team of lawyers used to work on international transactions involving different sets of laws, flexibility to adapt to clients’ needs, a reliable work method, underpinned by a solid body of experience, and a cost/benefit approach. In the beginning, the firm specialised in commercial and corporate law. Now that its practice has expanded to other areas, its commercial and corporate practice is still one of the most thriving. And, within this, insolvency has been one of most thriving subareas, as the firm has advised, on many occasions, (i) creditors of bankrupt companies, (ii) bankrupt companies, and (iii) directors of bankrupt companies in liability claims filed against them. In addition, one of the firm’s partners has been appointed as a receiver in several bankruptcy cases heard by some of Madrid’s Courts of Commerce. www.sca-legal.com

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Switzerland Switzerland

Tanja Luginbühl

Lenz & Staehelin Dr. Roland Fischer

12 Overview 22 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) point at which a company must enter a restructuring or insolvency process? and the Swiss Debt Enforcement and Bankruptcy Act (DEBA). The CO 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 restruc- responsibilities of the directors of a Swiss company that specif- turing options more appealing to debtors. Based on our expe- ically apply in financial distress. The regime is identical for the rience so far, this has slightly shifted the balance. In turn, the corporate forms most frequently used in practice, i.e., corpo- trigger events set forth in the CO are currently under review. It rations (Aktiengesellschaften/sociétés anonymes) and limited liability is, however, unclear when the pertaining legislative process will companies (Gesellschaften mit beschränkter Haftung/sociétés à résponsa- be finalised and not possible to conclusively assess the impact of bilité limitée). such revision at this point in time. If, based on the last financial statements, half of the share capital and the legal reserves of the company are no longer covered by its assets (article 725 par. 1 CO, Kapitalverlust/perte de 1.2 Does the legislative framework in your jurisdiction capital) the directors, inter alia, have to convene an extraordinary allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what shareholders’ meeting and to propose appropriate restructuring extent are each of these used in practice? measures. If a Swiss company is over-indebted (überschuldet/suren- detté) within the meaning of article 725 par. 2 CO, i.e., if its assets no longer cover its liabilities, the board of directors must notify There are two main types of formal insolvency and restruc- the court without delay unless certain creditors are willing to turing proceedings in Switzerland: bankruptcy (i.e., liquida- subordinate their claims to those of all other company creditors tion) proceedings (Konkursverfahren/faillite); and composition in an amount sufficient to cover the capital deficit and any losses proceedings (Nachlassverfahren/concordat). Whereas in bank- anticipated to be incurred in the next 12 months. Notification ruptcy proceedings a company is eventually wound up, compo- of the court will typically lead to the opening of bankruptcy sition proceedings can either: (i) be used to liquidate and realise proceedings. Furthermore, bankruptcy proceedings have to be the debtor’s assets in a more flexible manner than in bankruptcy initiated if a meeting of shareholders resolves on the dissolution (composition agreement with assignment of assets); (ii) result of the corporation as a result of its illiquidity (zahlungsunfähig/ in a debt restructuring (be it through a debt-rescheduling or a insolvable) pursuant to article 191 DEBA. dividend agreement or a combination thereof); or (iii) be used As an alternative to filing for bankruptcy, a company (or as a mere restructuring moratorium, which may be terminated a creditor entitled to request the opening of bankruptcy without the need to reach a composition agreement or to open proceedings) may apply for the postponement of bankruptcy bankruptcy liquidation proceedings if the debtor can be success- (Konkursaufschub/ajournement de faillite) or the opening of compo- fully restructured during the moratorium. Further, Swiss law sition proceedings. However, it is not required for the admis- provides for the possibility of an informal work-out; please see sibility of composition proceedings and the grant of a morato- question 3.1 below for more details. Special insolvency regimes rium that the company is over-indebted within the meaning of exist for certain types of companies, most notably banks, securi- article 725 CO, i.e., if its assets no longer cover its liabilities, or ties dealers, insurance companies and other players in the finan- that it is unable to pay its debts within the meaning of article cial industry. 190 par. 1 section 2 DEBA. Still, the debtor must make it plau- It is fair to say that although both types of formal proceedings sibleo t the court that over-indebtedness and/or illiquidity are used in practice, bankruptcy proceedings are opened signif- are likely to occur in the near or more distant future unless a icantly more frequently than composition proceedings. Due to restructuring is pursued under the protection of a moratorium. the higher costs linked to the latter, they are primarily (albeit not Furthermore, court precedents hold that a company which is exclusively) used by major companies in financial distress. over-indebted may continue to trade if there are good prospects

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that the company can be restructured within a short period statutory auditors (Revisionsstelle/organe de révision) must notify the of time. The timeframe available to the directors is typically court if the company is over-indebted and the board of directors viewed to be in the range of four to six weeks from the determi- fails to notify the court itself. In addition, creditors may peti- nation of over-indebtedness. tion the court to open bankruptcy proceedings or composition Directors’ liability typically arises in bankruptcy. The general proceedings in respect of the company under certain circum- legal basis as regards the civil liability of directors (Haftung für stances. As long as no such proceedings have been opened by Geschäftsführung/responsabilité dans la gestion) is article 754 CO, the court, creditors may take the same debt enforcement actions pursuant to which the members of the board of directors and against a company in financial distress as they may against a any person entrusted with the management or the liquidation company in good standing. Also, there are no special rules of a corporation shall be liable for damages “caused by wilful and regimes applicable to particular types of unsecured cred- or negligent violation of their duties”. Accordingly, the liability itors as far as the enforcement of their claims is concerned, of a director requires: (i) a breach of the director’s duties; (ii) i.e., the available enforcement actions under the DEBA are damages caused to the corporation or a particular creditor; (iii) a the same for all unsecured creditors. This notwithstanding, wilful or negligent conduct (fault); and (iv) a causal link between the claims of certain creditor categories such as employees or the breach and the damage. According to the above, courts have social security insurances are privileged in the context of insol- held directors who failed to take the steps required by law by not vency proceedings (see also question 4.6 below) and some cred- notifying the court about the over-indebtedness of the company itors may have additional contractual rights vis-à-vis the debtor liable. In such scenarios, damages typically cover the increase under Swiss substantive laws (e.g., the right of termination of of loss that occurred between the moment the directors should the landlord in case of non-payment of the rent). A particular have known of the corporation’s distressed situation and failed constellation in this context consists in the so-called lien of to take appropriate actions and the moment the bankruptcy was the landlord (Retentionsrechts des Vermieters) which, under certain actually declared (Konkursverschleppung/retard de la prononcé de la fail- circumstances, provides that the inventory kept in the premises lite). Further liability risks may arise in case of a mismanagement leased under a commercial lease shall secure outstanding rent or the context of transactions that are at risk of being challenged payments for a period of up to a year-and-a-half. If the lessee is (see question 2.3). declared bankrupt or otherwise liquidated by means of formal Several provisions of the Swiss Criminal Code (CrimC) may insolvency proceedings, the landlord would need to register its also apply in the context of the activity undertaken by a director. claims and the pertaining lien – subject to a number of limi- Article 165 CrimC punishes debtors whose acts of mismanage- tations and requirements – in the course of such proceedings. ment have caused the company’s bankruptcy (Misswirtschaft/ Whether or not such claims and the lien would then be admitted gestion fautive). This criminal provision expressly refers to the case to the schedule of claims is decided by the receiver in bank- of the debtor who, by means of an insufficient capital endow- ruptcy, with other creditors being able to contest both the exist- ment, causes or aggravates its over-indebtedness before being ence and amount of the claim itself as well as the lien. declared bankrupt. Special attention must also be paid to article Finally, with regard to retention of title arrangements in general, 167 CrimC, which deals with the issue of the advantages granted it should be noted that while Swiss law in theory allows for such to certain creditors by an insolvent debtor who is subsequently arrangements to be established, the pertaining formal require- declared bankrupt (Bevorzugung eines Gläubigers/avantages accordés ments are rather cumbersome and the retention of title does not à certains créanciers). As for disqualification (Berufsverbot/interdic- protect against the bona fide acquisition of title by a third party. tion d’exercer une profession) issues, article 67 par. 1 CrimC (which Consequently, such constellations are of very little relevance and do is in fact very rarely implemented) provides that the court may not confer any additional creditor rights in insolvency proceedings. prevent a convicted person from exercising their profession for a period extending from six months to five years if this person 2.3 In what circumstances are transactions entered has been punished either by an imprisonment sanction exceeding into by a company in financial difficulties at risk of six months or a fine exceeding 180 day rates for an offence challenge? What remedies are available? committed within the exercise of a profession when the circumstances give reason to fear new abuses from the convicted person. According to the DEBA, certain preferential or fraudulent acts made by the debtor within certain suspect periods may become 2.2 Which other stakeholders may influence the subject to challenge. The avoidance regime set forth in articles company’s situation? Are there any restrictions on the 285 et seq. DEBA provides for three different avoidance actions action that they can take against the company? For (Anfechtungsklage/action révocatoire), i.e.: (i) the action to avoid example, are there any special rules or regimes which gratuitous transactions (Schenkungsanfechtung/révocation des libéral- apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention ités) which targets, in particular, all gifts and all dispositions of title arrangements) applicable to the laws of your made by the debtor without any, or without adequate, considera- jurisdiction? Are moratoria and stays on enforcement tion during the year prior to the opening of bankruptcy proceed- available? ings, the granting of a moratorium or the seizure of assets; (ii) the voidability of certain specified transactions during the year Moratoria and stays on enforcement are generally available prior to the opening of bankruptcy proceedings, the granting of under Swiss insolvency laws, as outlined in detail in question 1.2 a moratorium or the seizure of assets while the debtor is already above and question 3.2 et seq. below. They would not, however, over-indebted (Überschuldungsanfechtung/revocation en cas de surendet- prevent foreclosure in all types of collateral. Most importantly, tement), i.e., the granting of a security interest for existing debts foreclosure in assets where legal title has been transferred for without being, by prior agreement, contractually obligated to security purposes may still occur despite a composition morato- create the relevant security interest, the settlement of a monetary rium and certain types of intermediated securities may also be claim in a manner other than by usual means of payment, or the realized during a stay. payment of a debt which was not yet due, in each case provided As to the possibility of other stakeholders to influence the that the recipient is unable to prove that it was unaware and company’s situation, firstly it should be noted that the company’s must not have been aware of the debtor’s over-indebtedness; and

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(iii) the avoidance for intent (Absichtsanfechtung/révocation pour dol ) possible if it can be established before the court that the debtor which targets dispositions and other acts made by the debtor is restructured (without the need for a debt rescheduling or a within a period of five years prior to the opening of bank- dividend agreement). An individual agreement must be reached ruptcy proceedings, the granting of a moratorium or the seizure with each single creditor who is expected to make a concession. of assets if the disposition was made by the insolvent with the Second, where it is not possible to receive consent from each intent to disadvantage its creditors or to prefer certain creditors single creditor, a composition agreement may be proposed. In to the detriment of other creditors and if the privileged creditor a debt-rescheduling agreement (Stundungsvergleich/concordat mora- knew or should have known of such intent. For all challenges, toire) the debtor offers the creditors full discharge of their claims it is further required that the challenged transaction has caused according to a fixed time schedule and, hence, the contractual damages to other creditors of the debtor. The rules regarding terms and conditions of the credits are modified. In a divi- avoidance for intent as well as avoidance of gratuitous transac- dend agreement (Prozent- oder Dividendenvergleich/concordat divi- tions provide for an inversion of the burden of proof whenever dende), the debtor offers the creditors only a partial payment these transactions are entered into by related parties (including of their claims in connection with a creditors’ waiver of the affiliated entities). Accordingly, in such cases the benefitting remainder. The debtor is not wound up as a consequence of party must prove that it could not have been aware of the dispro- such debt-rescheduling or dividend agreement and once such portion between performance and consideration (in case of agreement has been adopted by the required quorum of credi- avoidance of gratuitous transactions) or of the intention of the tors and the competent court, the debtor would have full power insolvent debtor to prefer certain creditors over others (in case to manage the company’s affairs. The composition agreement of avoidance for intent). must be approved by a majority of creditors. These are rarely If all prerequisites are met, the court orders the defendant to used to restructure large companies. return the specific assets to the estate. If the return of a specific Debt-for-equity swaps and/or composition agreements with asset is no longer possible, the court may order the defendant incorporation of a company (Nachlassvertrag mit Gesellschaftsgründung/ to compensate the estate in cash. In recent case law, the Swiss concordat avec constitution de société) are admissible in Switzerland. In Federal Supreme Court has shown a tendency to apply rather a typical debt-for-equity swap, creditors receive interests in the low standards for a successful avoidance for intent. debtor in proportion to their recognised claims. Under a composition agreement with incorporation of a company, the debtor 32 Restructuring Options undertakes to assign its assets to a newly created company in which the creditors obtain interests in proportion to their recognised 3.1 Is it possible to implement an informal work-out in claims. Furthermore, pre-packaged sales are possible under Swiss your jurisdiction? law. Such sales may require the consent of the court-appointed administrator (Sachwalter/commissaire) and the court. Specific rules apply to debt-for-equity swaps for certain enti- In case of a loss of capital (Kapitalverlust/perte de capital), the ties that are subject to a special insolvency regime, most notably board of directors must convene an extraordinary shareholders’ to banks. meeting and propose appropriate restructuring measures (article During the moratorium, creditors of claims are not enti- 725 par. 1 CO, see question 2.1). No court needs to be involved tled to commence or continue debt enforcement proceedings for the proposition or implementation of such measures. (Betreibung/poursuite). This restriction does not apply to credi- While, according to article 725 par. 2 CO, there is a general tors whose claims are secured by real estate who are, however, obligation to notify the court in case of over-indebtedness precluded from foreclosing on the real estate. For further limi- (Überschuldung/surendettement), court precedents hold that, during tations on the effects of a stay, see question 2.2. a short window of a few weeks, an informal work-out may be As soon as a draft composition agreement (Nachlassvertrag/ carried out without court involvement in case of good prospects concordat) is proposed, the administrator convenes a creditors’ of success (see question 2.1). Furthermore, the court may, at meeting. Only creditors who have filed claims in time are given the request of the board of directors or a creditor, postpone the the right to vote in the creditors’ meeting. Other than the right adjudication of bankruptcy, provided that there is the prospect to vote in the creditors’ meeting, creditors are generally not able of a financial reorganisation (Konkursaufschub/ajournement de la fail- to influence composition proceedings. lite). Such reorganisation may occur under the supervision of Approval of the proposed composition agreement requires an an administrator, which is instated by the court. That said, the affirmative vote by a quorum of either (i) a majority of credi- opening of composition proceedings (see question 3.2 below) is tors representing two-thirds of the total debt, or (ii) one-quarter requested more frequently in such instances. of the creditors representing three-quarters of the total debt. Creditors with privileged claims and secured creditors (to the 3.2 What formal rescue procedures are available extent that their claims are covered by the estimated liquida- in your jurisdiction to restructure the liabilities of tion proceeds of the collateral) will not be entitled to vote on distressed companies? Are debt-for-equity swaps the composition agreement. After approval by the creditors, the and pre-packaged sales possible? To what extent can composition agreement requires confirmation by the compo- creditors and/or shareholders block such procedures sition court. With the court’s confirmation, the composition or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you agreement becomes valid and binding upon all creditors of to cram-down dissenting stakeholders? Can you cram- claims subject to the composition agreement, whether or not they down dissenting classes of stakeholder? have participated in the composition proceedings and irrespective of their non-approval of the composition agreement. It is thus possible to cram-down dissenting creditors in such proceed- Formal rescue procedures are available in the form of compo- ings. In turn, Swiss law does not provide for different classes of sition proceedings. The restructuring of liabilities may be creditors which are subject to a composition agreement, hence no achieved in two ways, with or without a cram-down element: cram-down of dissenting classes of creditors is available. First, composition proceedings may be used as a mere restruc- As opposed to the creditors, shareholders have no voting rights turing moratorium (article 296a DEBA). A termination is only over court-adjudicated composition agreements. The DEBA,

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however, provides that in order for an ordinary composition providing for an automatic termination of the relevant agree- agreement to be approved by the court, the equity holders must ment or a termination right upon the grant of a moratorium, or make an appropriate contribution to the restructuring efforts. (ii) the specific contract provides for 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 3.3 What are the criteria for entry into each restructuring procedure? Swiss debtor and the administrator from a Swiss insolvency law perspective. Notwithstanding the foregoing, there are certain restrictions (see question 3.4) which may prohibit the debtor Composition proceedings are typically initiated by the debtor. from disposing of its assets or continuing its business. No specific trigger event exists which must have occurred for If, in contrast, a contract is not terminated, while the the debtor to be entitled to request the opening of composition contracting party would generally have to perform its obliga- proceedings. In addition, both creditors entitled to request the tions in kind, it may demand that security be provided if the opening of bankruptcy proceedings and the bankruptcy court debtor’s restructuring has an adverse effect on the counterpar- may request the opening of composition instead of bankruptcy ty’s claim (which would typically be the case). In the event that proceedings. no security is provided in due course – with the applicable time Upon receipt of a request to this effect, the court grants a period depending on the underlying circumstances – the coun- provisional moratorium ( provisorische Nachlassstundung/sursis provi- terparty is entitled to unilaterally rescind the relevant agree- soire) of up to four months. Furthermore, a provisional admin- ment. In case of long-term contracts (Dauerschuldverhältnisse/ istrator ( provisorischer Sachwalter/commissaire provisoire) may be contrats de durée), to the extent the counterparty performs its obli- appointed by the court to permit an assessment of the prospects gations during a moratorium with the consent of the adminis- of a successful reorganisation or of a composition agreement. trator, its claims against the debtor constitute so-called debts of If the court finds that there are reasonable prospects for a the estate (Masseverbindlichkeiten/dettes de la masse) and have to be successful reorganisation or that a composition agreement is paid with priority (prior to all other non-secured creditors). likely to be concluded, it must grant a definitive moratorium Further, the administrator has the authority to order conver- (definitive Nachlassstundung/sursis concordataire) for a period of four sion of a performance owed by the debtor in kind into a mone- to six months and appoint an administrator (Sachwalter/commis- tary claim of corresponding value, which will then become saire). Upon application by the administrator, the duration of subject to the terms of the composition agreement. Set-off the moratorium may be extended to up to 12, and in particularly rights are modified upon the grant of a moratorium in much the complex cases 24, months. same way as upon the opening of bankruptcy proceedings (see question 4.5 below). 3.4 Who manages each process? Is there any court Finally, with the consent of the administrator, the involvement? debtor may extraordinarily terminate long-term contracts (Dauerschuldverhältnisse/contrats de durée) during the moratorium If the provisional moratorium is made public, it is not compulsory against full indemnification of the counterparty if the contin- (but customary) to appoint an administrator during the provi- uing existence of these contracts would defeat the restructuring sional moratorium. An administrator must always be appointed purpose (article 297a DEBA). for the duration of the definitive moratorium. In addition, the court may appoint a creditors’ committee (Gläubigerausschuss/ 3.6 How is each restructuring process funded? Is any commission des créanciers) to supervise the administrator and the protection given to rescue financing? proceedings in general. The debtor may continue its business activities under the Costs triggered by composition proceedings qualify as debts supervision of the administrator and the court. The compo- of the estate (Masseverbindlichkeiten/dettes de la masse) and have to sition court may, however, direct that certain acts shall require be paid with priority from funds available at the outset of the the administrator’s participation in order to be legally valid, or proceedings, trading results or realisation proceeds. External authorise the administrator to take over the management from funding is possible. An administrator will carefully analyse the debtor. Without the authorisation of the composition court whether external funding is appropriate. or the creditors’ committee (if appointed), the debtor is prohib- As to rescue financing, whether or not the provision of such ited from divesting, encumbering or pledging certain assets and financing is given protection depends on the individual circum- to grant guarantees or to make gifts. stances of the restructuring context. In particular, a distinction Major steps in the composition proceedings require the needs to be made between rescue financings made available prior involvement of the court. This holds true for the opening of to the opening of insolvency proceedings and loans granted in composition proceedings, the appointment of an administrator, the context of composition proceedings. As a result of the most the approval of certain transactions involving the debtor and, recent revision of the DEBA, transactions made during compo- finally, the approval of the composition agreement. sition proceedings with the approval of the competent court or – if applicable – the creditors’ committee are explicitly exempted 3.5 What impact does each restructuring procedure from the scope of avoidance actions as described in question 2.3 have on existing contracts? Are the parties obliged to above and, thus, benefit from claw-back protection. In addition, perform outstanding obligations? What protections any claims arising out of such transactions qualify as debts of the are there for those who are forced to perform their estate (Masseverbindlichkeiten/dettes de la masse) which are paid with outstanding obligations? Will termination and set-off priority before any distributions are made to other creditors. provisions be upheld? In light of the most recent court precedents, it is not clear if – and on what conditions – rescue financing granted prior to the Contractual relationships between the debtor and its coun- opening of insolvency proceedings (so-called Sanierungsdarlehen/ terparties generally continue to be effective unless (i) there prêt accordés dans un but d’assainissement) may benefit from claw-back is a specific statutory provision under applicable contract law protection. As a consequence of such unclear and ambiguous

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case law, pre-insolvency rescue financing presents a rather high assets has been approved and confirmed by the creditors and the risk for potential lenders. court, the liquidator would take over the realisation of the assets.

42 Insolvency Procedures 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any 4.1 What is/are the key insolvency procedure(s) restrictions on the action that they can take (including available to wind up a company? the enforcement of security)?

The key insolvency procedure which leads to the winding up of a Once bankruptcy proceedings have been opened, all debt company is bankruptcy. Additionally, composition proceedings enforcement proceedings come to an end and creditors may can be used to liquidate and realise the debtor’s assets in a more not commence new debt enforcement proceedings against the flexible manner than in bankruptcy (composition agreement debtor. Apart from attending the creditors’ meetings (see ques- with assignment of assets, Nachlassvertrag mit Vermögensabtretung/ tion 4.3 above), unsecured creditors have no individual rights concordat par abandon d’actif ) but with the same result, i.e., winding to enforce their claims. Secured creditors have to (i) notify up of the company. the bankruptcy administrator if they are holding assets owned by the debtor within 30 days as from the public announcement of the opening of bankruptcy proceedings, and (ii) hand 4.2 On what grounds can a company be placed into in the collateral to the bankruptcy administrator. As a rule, each winding up procedure? contractual or statutory rights to privately realise such collateral are no longer enforceable in bankruptcy. Notable excep- A company may be placed into bankruptcy proceedings by the tions exist with respect to individual assets, most importantly competent court: (i) if a creditor whose claim has not been settled for certain intermediated securities. Furthermore, the restric- but upheld within the course of debt enforcement proceedings tions do not apply to certain types of security interests involving has successfully requested the opening of bankruptcy proceed- an outright transfer of title. In any event, the secured creditors ings (Konkursbegehren/réquisition de faillite); (ii) upon a debtor’s keep their preferential rights with respect to the collateral and request by declaring to the court that it is insolvent; (iii) upon will be satisfied out of the net proceeds of the sale of such collat- a creditor’s request if the company has committed certain acts eral in priority to any other creditors. Real estate mortgages are to the disfavour of its creditors or if it has ceased payments or if only realised and proceeds paid out to creditors if their claims certain events have happened during composition proceedings; against the debtor are due; claims secured by real estate mort- or (iv) upon a notification of the court by the board of directors gages that are not yet due are transferred to the acquirer of the (or the statutory auditors) of the company that the company is real property. over-indebted within the meaning of article 725 par. 2 CO. As For composition proceedings with assignment of assets, please to the opening of composition proceedings with the intention of refer to question 3.5 above. Once a composition agreement with concluding a composition agreement with assignment of assets, assignment of assets has been approved and confirmed by the see question 3.3 above. creditors and the court, private realisation of collateral is available for movable assets on the basis of article 324 DEBA. 4.3 Who manages each winding up process? Is there any court involvement? 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform Bankruptcy proceedings are opened by the competent court outstanding obligations? Will termination and set-off and, within the course of bankruptcy proceedings, the insolvent provisions be upheld? company is represented exclusively by the bankruptcy administration. If the rules for ordinary bankruptcy proceedings apply Whether existing contracts are terminated upon the initiation (summary proceedings are ordered if the proceeds of the bank- of winding up procedures is primarily governed by substan- rupt party’s assets are unlikely to cover the costs of ordinary tive contract law and the specific terms of a contract, which are proceedings or in non-complex circumstances), the bankruptcy generally upheld in a Swiss winding up proceeding. Under Swiss estate is administered as follows: the bankruptcy administra- contract law, certain types of contracts are terminated ex lege, tion publishes a notice of bankruptcy instructing all creditors whereas others can be terminated immediately by one party in and debtors to file their claims and debts within one month and case of bankruptcy of the other. inviting creditors to a first creditors’ meeting. The first credi- If contracts are not terminated, the contracting party would tors’ meeting may appoint a private bankruptcy administration generally have to perform its obligations in kind but it would be acting instead of the state bankruptcy office as well as a credi- bound to accept a dividend rather than full payment or specific tors’ committee which has certain supervisory (and limited deci- performance. However, should the bankruptcy administra- sive) competencies. A second creditors’ meeting is convened tion elect in its sole discretion to pursue the performance of to pass resolutions as to all important matters, including the a contract which was not or was only partially fulfilled at the commencement or continuation of claims against third parties time of opening of the bankruptcy proceedings, the counter- and the method of realisation of the assets belonging to the party may demand that security be provided, and it may further bankruptcy estate (the actual realisation, however, is reserved expect full performance by the bankruptcy administration. The to the bankruptcy administrator). Following distribution of right of the bankruptcy administration to elect performance of the proceeds (according to question 4.6 below), the bankruptcy the contract is excluded in the case of financial future, swap, administration submits its final report to the bankruptcy court. option and similar strict deadline transactions, if the value of the If the court finds that the bankruptcy proceedings have been contractual performance can be determined based on market or completely carried out, it declares them closed. For composition stock exchange prices at the time of the opening of the bank- proceedings with assignment of assets please refer to question ruptcy. The bankruptcy administration and the contractual 3.4 above. Once a composition agreement with assignment of partner are each entitled to claim the difference between the

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agreed value of the contractual performance and the market the third class. Claims in a lower ranking class will only receive value at the time of the opening of the bankruptcy proceedings. dividend payments once all claims in a higher ranking class have Special insolvency rules apply to long-term contracts. Even if been satisfied in full. Claims within a class are treated on a pari they are not terminated upon the opening of bankruptcy proce- passu basis. dures, future claims arising under such long-term contracts will The costs incurred during the bankruptcy proceedings are only be admitted to the schedule of claims if they cover the debts of the estate (Masseverbindlichkeiten/dettes de la masse) and period until the next possible termination date (calculated from have to be paid with priority, i.e., before any other creditor is the opening of bankruptcy) or until the end of the fixed dura- paid. tion of a contract. If the bankruptcy estate has made use of performances under the long-term contracts, article 211a DEBA 4.7 Is it possible for the company to be revived in the provides for the indemnification thereof to be a claim against future? the bankruptcy estate (Masseverbindlichkeiten/dettes de la masse) and, thus, to be paid with priority. Set-off rights are also available in cases of bankruptcy, but Once the bankruptcy proceedings have been terminated, this is the substantive set-off rules are subject to certain modifications generally not possible. In this scenario, following distribution in bankruptcy. First, a distinction needs to be made between of the proceeds, the bankruptcy administration submits its final (i) claims of the insolvent party forming part of the insolvency report to the bankruptcy court which declares the bankruptcy estate and claims against the insolvent party (Konkurs- oder proceedings closed if it finds that they have been completely Nachlassforderungen/créances dans la faillite ou le concordat) to be satis- carried out. As a consequence, the company ceases to exist and fied with a dividend payment out of the proceeds of the insol- will be removed from the commercial register. However, in case vency estate on the one hand, and (ii) claims of, and against, the previously unknown assets of the insolvent are discovered after insolvency estate (Masseforderungen und -verbindlichkeiten/créances et the bankruptcy proceedings have been closed, the bankruptcy dettes de la masse) which are mainly characterised by the fact that administration distributes the proceeds of such assets without they have come into existence only after the opening of insol- further formalities. vency proceedings with the consent of the insolvency adminis- In contrast, there are limited options for the debtor to have tration. As a rule, set-off is only possible between claims of the bankruptcy proceedings revoked during the course of proceed- same category. In addition, set-off of claims of the first cate- ings. At the outset of bankruptcy proceedings, the debtor has gory is not admissible if (i) the debtor of the insolvent party the possibility to appeal the declaration of bankruptcy ordered became a creditor of the latter only after the opening of bank- by the competent court within 10 days. To this effect, the debtor ruptcy proceedings or the grant of a moratorium, respectively, must (i) make it plausible that it is able to pay its debts (zahlungs- or (ii) the creditor of the insolvent party did not become a debtor fähig/solvable), and (ii) provide evidence that the relevant claim has of the insolvent party or the insolvency estate until after the been settled or deposited with the court on behalf of the respec- opening of the bankruptcy proceedings or the grant of a mora- tive creditor or that the creditor having requested the opening torium, respectively. Furthermore, set-off is voidable if a debtor of bankruptcy proceedings renounces that such proceedings of the insolvent party acquires a claim against the latter prior to be carried out. Alternatively, at a later stage, as from the expi- the opening of bankruptcy proceedings or the grant of a mora- ration of the deadline for the creditors’ call (Schuldenruf/appel torium, respectively, but in awareness of the insolvency in order aux créanciers) until the closure of proceedings, the debtor may to gain an advantage for himself or a third party to the detriment request the competent court to revoke bankruptcy (Widerruf des of the insolvency estate. Konkurses/revocation de la faillite), provided (i) that the debtor is able to evidence that all claims have been settled, (ii) that the debtor submits a written statement of all creditors having requested the 4.6 What is the ranking of claims in each procedure, opening of bankruptcy proceedings that such request is with- including the costs of the procedure? drawn, or (iii) a composition agreement has been achieved.

Secured claims ( pfandgesicherte Forderungen/créances garanties par 52 Tax gage) are satisfied directly out of the proceeds from the realisation of the collateral. Should the proceeds not be sufficient to 5.1 What are the tax risks which might apply to a satisfy the claim of a secured creditor, such creditor shall rank restructuring or insolvency procedure? as an unsecured and non-privileged creditor for the outstanding amount of its claim. Unsecured claims are ranked within three classes of claims. As a rule, companies in financial difficulties do not benefit Leaving aside claims which are irrelevant in a corporate context, from any special tax treatment under Swiss law. In particular, the classes are composed as follows: the first class consists of dissolving hidden reserves or the forgiveness of debt granted by claims of employees (i) derived from the employment relation- third parties is generally considered a taxable profit. However, ship which arose during the six months prior to the opening of a company in financial difficulties has generally incurred losses bankruptcy proceedings and which do not exceed the maximum in previous years that can be set off against these profits. In insurable annual salary as defined by the Federal Ordinance on this context, one must note that Swiss tax law enables set-off Accident Insurance (which is currently CHF 148,200), (ii) in with reported losses of the seven prior years. The forgiveness relation to the restitution of deposited security, and (iii) derived of debt granted by shareholders is, under certain circumstances, from social compensation plans which arose during the six treated as a contribution for no remuneration and is subject to months prior to the opening of the bankruptcy proceedings. an issuance stamp duty (Emissionsabgabe/timbre d’émission) of one The first class also includes claims of the assured derived from per cent, as is the case with respect to an increase of capital. the Federal Statute on Accident Insurance and from faculta- The same analysis prevails in case of a reduction of the share tive pension schemes, as well as claims of pension funds against capital followed by an increase of the share capital or the contri- employers. The second class includes claims of various contribution for no remuneration (“Harmonika”). However, in case butions to social insurances. All other claims are comprised in of a financial restructuring, a company may apply for a waiver

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of issuance stamp duty to the extent that the increase of share proceedings in the jurisdiction at the registered seat are either capital, the contribution for no remuneration or the forgiveness unavailable or impracticable (high requirements) and that there of debt does not exceed CHF 10 million and further provided is a close nexus to Switzerland (which may be satisfied through that such amount covers losses of the company. In addition, a debtor’s centre of main interest (COMI) in Switzerland). We even if such threshold is exceeded, a waiver of stamp duty can are, however, not aware of a precedent which would have opened be obtained if levying such duty would be excessively harsh for main proceedings in Switzerland on the basis of this theory. the company. This notwithstanding, in case a debtor incorporated outside of Switzerland operates a branch in Switzerland, Swiss insolvency 62 Employees proceedings may be opened against such debtor in the jurisdiction where the Swiss branch is located (Niederlassungskonkurs/fail- 6.1 What is the effect of each restructuring or lite de la succursale). Such proceedings, however, are limited to insolvency procedure on employees? What claims would obligations incurred by the branch (article 50 DEBA). employees have and where do they rank? In particular, it should be noted that Switzerland is not an EU Member State and, thus, the COMI principle laid down in EU Regulation 2015/848 on insolvency proceedings is not appli- Employment agreements are not automatically terminated cable in cross-border cases involving Switzerland. upon the opening of insolvency proceedings of the employer. In case the employer becomes insolvent, though, an employee may terminate the employment relationship without notice 7.2 Is there scope for a restructuring or insolvency unless such employee is provided security for claims arising process commenced elsewhere to be recognised in your from the employment relationship. Subject to such termination jurisdiction? rights, the bankruptcy administration may decide to maintain some employment contracts. The administration may also, as it In bankruptcy matters, Switzerland follows the principle of happens in the majority of cases, cease the business and there- territoriality. Accordingly, a foreign bankruptcy or any similar fore decide to terminate the work contracts. When doing so, it proceeding has no effect in Switzerland unless it has been recog- has to comply with the applicable notice period. Unpaid salaries nised. The recognition of foreign proceedings (Anerkennung/ have to be claimed and scheduled. Composition proceedings reconnaissance) is governed by a special chapter in the Swiss Private generally have a legal effect that is similar to bankruptcy with International Law Act (PILA). The conditions for recognition respect to employment contracts. That said, it is much more are as follows: (i) the insolvency decree must have been rendered common to maintain employment contracts than in bankruptcy. in the state of the debtor’s domicile or where the debtor has its Employee claims are privileged claims and rank in the first COMI outside of Switzerland; (ii) the petition for recognition class of creditors. They comprise (i) claims having their basis in has been introduced by the bankruptcy’s administrator, by the the employment relationship which arose during a period of six debtor itself or by a creditor; (iii) the bankruptcy decree must be months prior to the opening of insolvency proceedings, up to a enforceable in the state where it was rendered; and (iv) the bank- maximum amount determined by Swiss accident insurance legis- ruptcy must not be inconsistent with Swiss public policy and lation which is currently equivalent to CHF 148,200 (see also the fundamental principles of Swiss procedural law. Since 2019, question 4.6 above), as well as employee claims for (ii) return reciprocity is no longer a requirement. As soon as the petition of deposits, and (iii) social compensation plans (Sozialplan/plan for recognition has been filed, the court may, on application of social) that came into existence or fell due no earlier than six the petitioner, order conservatory measures. In principle, once months prior to the opening of insolvency proceedings. Claims the recognition is granted, the foreign bankruptcy decree has exceeding such maximum amount are allocated to the third the same effects as a Swiss bankruptcy decree with regard to the class of (unsecured and non-privileged) creditors while claims debtor’s assets located in Switzerland. in relation to social insurance contributions are privileged and Prior to a revision of the PILA entering into force in 2019, the rank in the second class. opening of Swiss ancillary proceedings in case of bankruptcy was mandatory whereas, under certain circumstances, such ancillary 72 Cross-Border Issues proceedings were not necessary in the case of restructuring-type of proceedings (Nachlass- oder ähnliches Verfahren/concordat ou proce- 7.1 Can companies incorporated elsewhere use dure analogue). Under the revised PILA, effective since 1 January restructuring procedures or enter into insolvency 2019, it is possible for the Swiss courts to waive the opening of proceedings in your jurisdiction? ancillary proceedings also in case of a recognition of a foreign bankruptcy decree, provided that (i) a request to this effect is made by the foreign bankruptcy administration, (ii) there are no credi- Pursuant to the DEBA, bankruptcy and composition proceed- tors in Switzerland the claims of which are privileged or secured ings may only be opened in respect of companies incorporated by a pledge, and (iii) the claims of non-privileged and unsecured in Switzerland, meaning that such company must be registered creditors in Switzerland are adequately taken into account in the with the Swiss commercial register (Handelsregister/register du foreign proceedings and such creditors were granted an oppor- commerce). A Swiss court is not competent to order the bank- tunity to be heard. In case no ancillary proceedings are opened, ruptcy or composition of a company with registered seat outside the foreign insolvency administration may carry out all actions of Switzerland, even if such company has substantial trade and to which it is authorised pursuant to the applicable foreign law business activities in Switzerland. A company incorporated in Switzerland, including, most notably, the transfer of assets of outside of Switzerland may therefore only restructure or enter the foreign debtor located in Switzerland to the foreign insol- into insolvency proceedings in Switzerland after such company vency estate. In this context, the foreign insolvency administra- has re-domiciled to Switzerland. For the sake of complete- tion must ensure that it is at all times compliant with all appli- ness, it should be noted that Swiss legal doctrine discusses the cable Swiss laws. In particular, it must not perform any official availability of main Swiss proceedings for a non-Swiss incorpo- acts, use any means of coercion or adjudicate on any disputes. rated entity in exceptional circumstances where main insolvency

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If, by contrast, ancillary insolvency proceedings are opened, jurisdiction of the insolvency courts and authorities which are pursuant to article 172 par. 1 PILA, only certain claims may be competent for one group entity for all affected group entities, included in the schedule of admitted debts, i.e., (i) the claims subject to prior agreement of all involved authorities. However, secured by pledged assets located in Switzerland according to as this provision was introduced only recently, there is little article 219 pars. 1 to 3 DEBA, (ii) the unsecured but privi- guidance available with regards to how such coordination is leged claims of creditors having their domicile in Switzerland handled in practice. according to article 219 par. 4 DEBA (first and second This duty to cooperate does not extend to foreign insolvency classes), and (iii) claims for liabilities on account of a branch proceedings of group members outside of Switzerland. In prac- (Zweigniederlassung/succursale) of the debtor registered in the tice, however, Swiss bankruptcy authorities in charge of liqui- commercial register in Switzerland. After the satisfaction of dating a Swiss group member often enter into mutual agree- these creditors, any remaining balance is remitted to the foreign ments with foreign insolvency administrations, settling mutual bankruptcy estate (article 173 par. 1 PILA). This transfer, which claims amicably. represents the result of the Swiss ancillary bankruptcy, requires, however, the prior recognition of the foreign schedule of claims, 92 Reform whereby the Swiss courts review, in particular, whether the creditors domiciled in Switzerland were fairly treated in the proce- 9.1 Are there any other governmental proposals for dure and were granted an opportunity to be heard. reform of the corporate rescue and insolvency regime in Special provisions exist for banks and other financial institu- your jurisdiction? tions where foreign insolvency proceedings are recognised by the Swiss Financial Market Supervisory Authority (FINMA). A change to articles 725 et seq. CO, currently dealing, inter alia, with the issue of loss of capital and over-indebtedness (see ques- 7.3 Do companies incorporated in your jurisdiction tion 3.1 above), is being debated in Swiss parliament. The restructure or enter into insolvency proceedings in other purpose of this reform is to induce the directors to take coun- jurisdictions? Is this common practice? termeasures at an early stage in case of financial difficulties. In this context, it is also proposed to extend the maximum term of As stated in question 7.1 above, Swiss courts have exclusive a silent moratorium from four to eight months. These amend- jurisdiction on companies registered in Switzerland for the ments are subject to parliamentary discussion and may still opening of insolvency proceedings. The fact that a company change in parts. domiciled and registered in Switzerland has already requested Separately, and as part of the emergency measures taken by the opening of insolvency proceedings outside of Switzerland the Swiss Federal Council to counter the negative impact of the would not prevent the Swiss court from opening separate Swiss COVID-19 pandemic on the Swiss economy, the COVID-19 main proceedings. In fact, the Swiss authorities would not Insolvency Ordinance was enacted on April 16, 2020. One of its accept any proceedings outside of Switzerland in such instances. main goals is to relieve the pressure on executive bodies of Swiss Accordingly, companies domiciled in Switzerland and registered entities by temporarily suspending strict filing obligations which with the Swiss commercial register do not, in practice, restruc- otherwise apply pursuant to article 725 CO in case of over-in- ture or enter into insolvency proceedings in other jurisdictions. debtedness (see question 2.1). Relief is targeted at over-indebtedness situations caused by negative impacts of the COVID-19 82 Groups pandemic on liquidity, earnings and going-concern prospects. The temporary suspension of filing obligations will only be available if there are prospects that the over-indebtedness situation will 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for be cured by the end of 2020. Further, the Swiss Federal Council co-operation between officeholders? put in place a special COVID-19 moratorium. This “moratorium-lite” will facilitate SMEs’ fast access to a protective moratorium with less formal requirements than would otherwise apply Swiss insolvency law is based on the principle of “one company under the general composition moratorium. The “moratori- one proceeding”. Hence, in case multiple members of the same um-lite” may be granted for a maximum term of six months, corporate group request the opening of insolvency proceedings, will necessarily become public and is typically made without the there will be separate insolvency proceedings for each group appointment of an administrator. The effects of the “morato- member. The group itself is not subject to insolvency. This rium-lite” are similar to the ones of the general composition principle notwithstanding, pursuant to article 4a DEBA, Swiss moratorium. The most important differences are that interest bankruptcy authorities have to coordinate their actions to the continues to run and court proceedings are not generally stayed extent possible in a group insolvency scenario. In particular, in a “moratorium-lite”. The COVID-19 Insolvency Ordinance based on article 4a DEBA it would be possible to appoint one expires six months after its enactment. sole administrator in the insolvency proceedings of affiliate entities within the same group or to decide on the exclusive

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Tanja Luginbühl is a partner in the corporate, M&A and insolvency group of the Zurich office of Lenz & Staehelin. She studied law at the University of Zurich, and is a graduate of the LL.M. programme at the New York University School of Law (1999), USA. Tanja Luginbühl specialises in the area of insolvency and restructuring, corporate, M&A and secured financing. She has been involved in various insolvency cases and advises banks, rating agencies, creditors and companies in situations of financial distress.

Lenz & Staehelin Tel: +41 58 450 80 00 Brandschenkestrasse 24 Email: [email protected] CH-8027 Zurich URL: www.lenzstaehelin.com Switzerland

Dr. Roland Fischer is a counsel in the Zurich office of Lenz & Staehelin and specialises in domestic and cross-border insolvency law, finance and restructurings. He graduated from the University of Zurich and obtained an LL.M. degree (Corporate Law) from New York University (2007). He has extensive experience in counselling creditors and debtors in insolvency and restructuring situations, and advises banks and corporates on finance transactions of all types and related enforcement matters.

Lenz & Staehelin Tel: +41 58 450 80 00 Brandschenkestrasse 24 Email: [email protected] CH-8027 Zurich URL: www.lenzstaehelin.com Switzerland

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. www.lenzstaehelin.com

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Gökben Erdem Dirican

Dirican | Gözütok Ali Gözütok

12 Overview 22 Key Issues to Consider When the 1.1 Where would you place your jurisdiction on the Company is in Financial Difficulties spectrum of debtor to creditor-friendly jurisdictions? 2.1 What duties and potential liabilities should the Under Turkish law, the collection of receivables, bankruptcy and directors/managers have regard to when managing a 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 and Bankruptcy Law (Law No. 2004) (the “EBL”) (published insolvency process? in the Official Gazette dated June 19, 1932 and numbered 2128). The EBL provides provisions tending to balance the interest of the creditor and the debtor. We may give as examples of In the event of a suspicion that a company is in debt, the board such tendency that, while the creditor may initiate an execu- of directors must prepare an interim balance sheet. Pursuant tion proceeding against the debtor without basing its claims to Article 179 of the EBL and Article 376 of the Turkish over any document or Court judgment, the debtor may suspend Commercial Code (Law No. 6102) (the “TCC”) (published such proceeding by merely raising an objection. Article 85 of in the Official Gazette dated February 14, 2011 and numbered the EBL provides that the execution officer must equilibrate 27846), in case the liabilities of the company exceed its assets the interests of both parties. The EBL sets forth provisions and/orts i i understood from the interim balance sheet that the aiming to prevent the immoderate violation of the debtor’s right company is deeply in debt, the board of directors must apply of property, such as certain assets of the debtor necessary for the to the Commercial Court with a bankruptcy request. As per conduct of the debtor’s business and his house which is proper Article 377 of the TCC, the members of the board or a cred- to his financial situation which cannot be attached. itor may also request concordat restructuring during the trial process of bankruptcy at the Court. Article 345/a of the EBL provides that, in case the author- 1.2 Does the legislative framework in your jurisdiction ised individuals of a company fail to apply for bankruptcy, they allow for informal work-outs, as well as formal must be punished with imprisonment for up to three months restructuring and insolvency proceedings, and to what upon the complaint filed by one of the company’s creditors. The extent are each of these used in practice? board of directors shall be liable for the damages arising from such failure. The financial restructuring may be conducted in an informal way with an agreement executed between the debtor and its creditors. Such a financial restructuring would not be binding 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the on creditors who are not parties to such agreements. The agree- action that they can take against the company? For ments must not be executed to hide assets from other creditors, example, are there any special rules or regimes which which shall prevent them from collecting their receivables and apply to particular types of unsecured creditor (such cause them to incur losses. The debtor who executed agree- as landlords, employees or creditors with retention ments with the intention of causing his creditors damage shall of title arrangements) applicable to the laws of your be considered as fraudulent bankrupt and shall be punished as jurisdiction? Are moratoria and stays on enforcement per the Turkish Criminal Code (Law No. 5237) (published in available? the Official Gazette dated October 12, 2004 and numbered 25611). Both informal work-outs and formal restructuring and insol- When a joint-stock company suffers losses, which reduce its vency proceedings are widely used in practice. paid-up share capital by two-thirds, the board of directors is required to call an extraordinary general assembly meeting. At

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this meeting, the shareholders must resolve either to compen- 3.2 What formal rescue procedures are available sate the company in cash for the accumulated loss or to decrease in your jurisdiction to restructure the liabilities of the company’s paid-up share capital to one-third of its existing distressed companies? Are debt-for-equity swaps share capital. If the shareholders do not take one of these steps, and pre-packaged sales possible? To what extent can the board of directors is required to file a lawsuit before the rele- creditors and/or shareholders block such procedures vant Commercial Court for bankruptcy. Please also see ques- or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you tion 4.2. There are special debt collection procedures available to cram-down dissenting stakeholders? Can you cram- for some creditors such as landlords, creditors with retention down dissenting classes of stakeholder? of title arrangements, banks, and creditors bearing negotiable instruments. There are also special rules for a speeded-up trial process for employees. Under Turkish law, the main types of restructuring are concord The creditors can make an agreement to enter into a stay or restructuring and amicable restructuring. moratorium. The creditors will not during the standstill period Concord restructuring is proposed by the debtor or a cred- take action to enforce security, to make demand or speed up itor to compromise certain liabilities in accordance with a plan. loans or other debt claims, to bring legal proceedings against the The key aim is to present a probable success through a concordat company and possibly, not to exercise rights of set-off. plan, with no intention to cause any damage or loss to the cred- The postponement of bankruptcy provisions enabling an itors. The restructuring can be implemented in three different insolvent company or person to avoid declaring bankruptcy if, ways: as the ordinary concordat; the concordat in bankruptcy; and to the extent that, its financial situation is improvable, is and the concordat through asset abandonment. Some restric- abolished by the Law No. 7101 (published in the Official Gazette tions are imposed on creditors, enforcing their rights over dated March 15, 2018 and numbered 30361) amending the EBL. companies under a temporary period and a precise period of Stays on enforcement can be applicable depending on the concordat. During the temporary period and precise period of precautionary measures which may be taken by Court. concordat, no proceedings may be filed against the company and any proceedings previously initiated are suspended; prescription periods and statute of limitations deadlines shall be suspended; 2.3 In what circumstances are transactions entered preliminary injunctions shall not be applicable; foreclosure into by a company in financial difficulties at risk of proceedings, mortgage claims and commercial pledges may be challenge? What remedies are available? initiated/continued provided that protective measures cannot be taken by creditors; and the sale of pledged property cannot The hardening period is a key concept in insolvency and bank- be performed. ruptcy proceedings, providing that a transaction entered into Amicable restructuring is applicable for capital stock compa- during a hardening period may be deemed invalid by a Court. nies and co-operatives. If a company is not able to pay its During the debt collection and liquidation process, the trans- debts or its receivables are not enough to recover its debts, or actionsf o the insolvent/bankrupt completed prior to its insol- if the company is under the threat of facing these steps, such vency/bankruptcy, particularly transactions within the hard- company may apply to a Commercial Court in order to request ening period, shall be considered and reviewed, which may the amicable restructuring. result in the cancellation of such transactions provided that such With regard to debt-for-equity swaps, it is known that the fall within the scope of Articles 278, 279 and 280 of the EBL principal element of any debt-for-equity swap is a restructuring stating three different hardening periods. of the balance sheet of a corporate debtor so that the relevant The one-year hardening period applies to (i) security interests, participating creditors receive equity interests in a reorganised if such security interest is created to secure an existing debt and capital structure in consideration for reducing their debt claims the security collateral provider has not committed to provide against the company. security interest at the time of incurring a debt, (ii) payments Pursuant to Articles 329 and 602 of the TCC, joint-stock made via instruments other than cash or ordinary payment companies and limited liability companies are liable for their instruments, (iii) payments made before their due date, and (iv) debts only by their assets owned as a legal entity. It is not possible certain annotations to the title deed registries. These transac- to impose an attachment on a shareholder’s shares due to a debt tions should have been made within one year prior to the bank- of the company as a legal entity. Pursuant to Article 133 of the ruptcy of the debtor or the attachment of its assets in order for TCC, in equity companies, in the event that the creditors have these transactions to be annulled. a receivable from a shareholder, the relevant creditors are enti- The two-year hardening period applies to donations or gifts. tled to request that the shares owned by the debtor shareholder The five-year hardening period applies to transactions made be attached as per the relevant provisions of the EBL regarding by the debtor with one of its creditors with the aim of harming movable assets, and that such be sold and converted into cash. its other creditors, provided that the creditor with whom the For all trade companies, the creditors are also entitled to transactions are made is aware of the insolvency and the aim of obtain their receivables out of the receivables of the debtor the debtor at the time of the transaction. shareholder from the company, and also impose an attachment In order for the aforementioned transactions to be annulled, for such. It is worth noting that the above-mentioned provision they should have been made within five years prior to the initia- does not hinder the creditors to apply to the assets of the debtor tion of bankruptcy or execution proceedings. shareholders out of the company. With respect to pre-packaged sales, under Turkish law, a 32 Restructuring Options pre-packaged sale is possible in terms of Article 538 of the TCC. Pursuant to said Article, unless decided otherwise by the general 3.1 Is it possible to implement an informal work-out in assembly, the liquidator can perform the sale of the active assets your jurisdiction? 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 Please see question 1.2. by the liquidators.

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Concerning the concord restructuring, in case the Court does 3.4 Who manages each process? Is there any court not approve the concord or cancels the concord period, it will involvement? immediately decide on the bankruptcy of the debtor upon the report of the concord commissar. Creditors may apply to the Concerning concord restructuring, the concord commissar is Court for the termination of the concord restructuring if it is liable to supervise the acts of the debtor, report to the Court and found that the debtor acted in bad faith in having the restruc- inform the creditors regarding the concord period (Article 290 turing proposal approved or that the debtor breaches the provi- of the EBL). The creditors board shall supervise the acts of the sions of the concord. commissar and has the right to request the appointment of a new Concerning the amicable restructuring, if the restructuring commissar from the Court when and if necessary. project is successful, the debtor will continue to operate. If Concerning amicable restructuring, if the Court takes meas- the company breaches the terms of the amicable restructuring, ures to protect the debtor’s assets until its decision on ratifica- the company should seek to agree with creditors and to have tion or rejection of the amicable restructuring plan, the creditors an amendment approved by the Court to the restructuring and debtor – or, if the same fail to agree on one, the Court – can proposal. In the absence of an agreement, a creditor may apply appoint one or more mid-term auditors to assume responsibility to the Court for the termination of the restructuring. In case for directing, managing and supervising the debtor’s activities the Court realises that the company did not fulfil its obliga- from the date of appointment until the Court’s ratification or tion arising from the amicable restructuring, it will decide on rejection of the plan (Article 309(ö) of the EBL). bankruptcy. In the event that the plan is ratified by the Court, it may in its There are no other cram-down provisions in Turkish insol- ratification decision appoint one or more plan supervisors, who vency legislation. Concord and amicable restructuring may will have the authority to supervise and monitor whether the include terms that provide for the cram-down of creditors as plan is being fulfilled and to report on the situation to the cred- a whole. itors (Article 309(p) of the EBL).

3.3 What are the criteria for entry into each 3.5 What impact does each restructuring procedure restructuring procedure? have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections Concord restructuring is regulated under Articles 285–309 of are there for those who are forced to perform their the EBL, targeting the liquidation of the debts by protecting outstanding obligations? Will termination and set-off both the debtor in poor financial standing and his creditors. provisions be upheld? Concord restructuring may be proposed either (i) by the debtor, where he/she will submit a concord pre-plan to the Court The provisions of agreements accepting concord claims as a together with documents evidencing his/her financial status, valid legal ground for a termination shall not be enforceable. the list of creditors and privileged creditors, a chart comparing In the absence of such a provision, it is legally not possible to the amount to be provided to creditors with concord restruc- terminate an agreement by referring to concord as a termina- turing and the amount the creditors may receive upon a bank- tion reason. ruptcy, financial analysis reports issued by independent audit Agreements bearing perpetual liabilities may be terminated companies authorised by the Capital Markets Board, with a by the debtor in case such agreements create a risk for the petition stating the reason for its request, or (ii) by a creditor, successful completion of the concord with the positive view of having the right to request bankruptcy by submitting its peti- the commissar and approval of the Court. A set-off performed tion, stating the reason for its concord request. with an aim to damage the rights of the creditors may be subject The Court shall grant a temporary period by appointing a to objections before a Court and the date of the temporary commissar and taking all necessary measures for the protec- period shall be considered. Please also see question 3.2. tion of the debtor’s assets. The concord request will then be Pursuant to Article 297 of the EBL, the debtor may continue announced and within seven days following the announcement, his activities under the supervision of the commissar. The creditors can object the concord request. Court may decide whether certain transactions are valid only Should the Court consider the concord plan viable, it may with the permission of the commissar or if the commissar accept it, once it has received a positive report from the concord should carry out the operating activity in lieu of the debtor. The commissar. The Court shall grant a precise one-year concord debtor cannot use liens, warrants, transfers, and restrictions to period with the appointment of a commissar and a creditors gratuitously delay the ongoing proceedings of the operation board, if this is necessary. In case the Court does not approve even partially without the leave of the Court from the date of the concord or cancels the precise concord period, it will decide the respite decision. Otherwise, the transactions are null and on the bankruptcy. void. The Court must take into account the view of the credi- Amicable restructuring is applicable for capital stock tors and the commissar for certain transactions before granting companies (excluding banks and insurance companies) and its decision. There is no specific protection provided for the co-operatives. The company shall submit its restructuring parties performing their outstanding obligations. plan which has been previously negotiated and accepted by the With respect to the amicable restructuring, the restructuring creditors who are affected by the terms of the plan. The cred- project’s terms will override all agreements executed with creditors, who are invited to the negotiation of the restructuring itors affected by the project. The following rules in agree- plan, are also deemed creditors who are affected by the terms ments will not apply, regardless of whether the agreements were of the plan. The Court holds a hearing in which opposing cred- concluded with creditors that are affected by the project: itors can state their case. For the plan to become effective, it ■ Rules that could lead to the amendment or termination of shall be accepted by half of the total number of creditors and by the project. a two-third majority by value of creditors who participated in ■ Rules providing that a debtor’s use of restructuring is an the voting of the plan. An amicable restructuring plan must be act of default or breach of the agreement. approved by the Court.

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3.6 How is each restructuring process funded? Is any At the first creditors’ meeting, the candidates for the protection given to rescue financing? bankruptcy managers are notified to the Execution Court. Accordingly, the Execution Court appoints the bankruptcy managers which constitute the bankruptcy management. As per Article 285 of the EBL, the Court expenses and charges Within one month after the declaration of bankruptcy, the shall be deposited in advance by the applicant. Pursuant to creditors shall register to the bankruptcy management. After Annex 1 of the Law of Charges, a fixed charge shall be paid the registry period provided for the creditors has expired and while applying for a concord request. There are other fees and the bankruptcy management has been elected, the bankruptcy charges applicable such as expert examination fees, announce- management examines the registrations, and prepares a list of ment expenses, concord commissar expenses, and other service creditors, stating the orders of the creditors for the payment, expenses which shall also be paid by the applicant in advance. submits the relevant list to the Bankruptcy Office, and notifies the creditors by way of announcement. 42 Insolvency Procedures The bankruptcy administration, after determining the creditors, shall invite to the second meeting the creditors whose 4.1 What is/are the key insolvency procedure(s) claims are accepted by the bankruptcy administration in part or available to wind up a company? in whole and who have filed a suit for inclusion in the schedule of ranking, and accepted to attend the meeting. The insolvency procedure types provided by the EBL are: volun- The powers of the second creditors’ meeting are more extensive tary bankruptcy; and bankruptcy. than the first meeting. The second creditors’ meeting decides as to whether the bankruptcy administration shall continue its work or not, claims of ownerships, whether the suspended lawsuits 4.2 On what grounds can a company be placed into each winding up procedure? shall continue or not, sale of certain goods by bargaining and the concord offer made by bankruptcy. The bankrupt’s estate shall be sold and distributed by the When a joint-stock company suffers losses, which reduce its bankruptcy administration. The administration shall request paid-up share capital by two-thirds, the board of directors is the closing of bankruptcy by presenting a final report, and the required to call an extraordinary general assembly meeting. At Commercial Court, which commenced the bankruptcy, must this meeting, the shareholders must resolve either to compen- also decide on closing. sate the company in cash for the accumulated loss or to decrease the company’s paid up share capital to one-third of its existing share capital. Otherwise, the board of directors is required to 4.4 How are the creditors and/or shareholders able file a lawsuit before the relevant Commercial Court of First to influence each winding up process? Are there any restrictions on the action that they can take (including Instance for bankruptcy. If the board of directors does not file a the enforcement of security)? voluntary bankruptcy lawsuit, each director shall be personally, jointly and severally liable for any and all real damages incurred by the creditors and the shareholders. Any proceedings with an attachment request that were started against the debtor for debt recovery before its bankruptcy are Bankruptcy suspended on the commencement of bankruptcy (that is, the Ordinary bankruptcy judgment of the Court) and terminated when the bankruptcy Ordinary bankruptcy involves a creditor bringing bankruptcy decision becomes conclusive (that is, after the finalisation of the proceedings against a debtor. Bankruptcy can only apply to appeal process). merchants (that is, an entity or a person engaged in the purchase A creditor with a prior perfected pledge/mortgage has a prefer- and sale of commodities for profit), in relation to their unpaid ential o right t the proceeds of the pledged property. The pledged/ (and due) debts. mortgaged assets will be sold at the earliest and most appropriate time by the bankruptcy administration and the proceeds will be Special bankruptcy paido t the pledgee/mortgagee without waiting for the end of the A creditor who holds negotiable instruments (cheques, bonds or liquidation. promissory notes) can bring special bankruptcy proceedings for The pledgee/mortgagee may initiate an execution by way of negotiable instruments against the debtor. foreclosure of the pledge/mortgage and/or continue its previously filed execution proceedings against the bankruptcy estate Direct bankruptcy following the declaration of the bankruptcy. If the pledged/ Direct bankruptcy is possible where the debtor’s liabilities are mortgaged property is insufficient to discharge the debt, the greater than its current assets. Individuals authorised to manage pledgee will be an unsecured creditor for the remainder. and represent those companies, co-operatives or any of the cred- In case the bankrupt’s claim was deemed unnecessary to itors, can apply for the debtor’s bankruptcy. A separate direct pursue by the bankruptcy administration, such claim may be bankruptcy reason is foreseen in the law for companies, which transferred to any requesting creditor. If the latter succeeds in occurs when the liabilities of a company is more than its assets. such claim, the amount to be obtained will be received by the relevant creditor after deducting the expenses.

4.3 Who manages each winding up process? Is there any court involvement? 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 Following the bankruptcy decision, the Court notifies such deci- provisions be upheld? sion 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 the bankruptcy on the existing contracts of the bankrupt is a very comprehensive issue

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depending on the type and conditions of the contract. Some for the employees and in order to perpetuate such; and of the existing contracts might be deemed terminated upon all sorts of alimony receivables arising from family law the opening of the bankruptcy. For instance, contracts related which had accrued for the year before the opening of the to usufructuary lease, financial lease, mandate, commission, bankruptcy. agency, ordinary partnership and current account might be ■ Second rank: Receivables of the persons whose proper- deemed automatically terminated upon bankruptcy. On the ties are entrusted to the debtor because of parentship and other hand, some of the existing contracts are not terminated appointed guardianship. despite the bankruptcy. For instance, contracts related to sale, ■ Third rank: Receivables which had been determined as barter, donation, ordinary lease, commodatum, mutuum, employ- preferential receivables. ment, construction, insurance and surety might still be deemed ■ Fourth rank: Unprivileged claims. not terminated despite the opening of the bankruptcy. All of the creditors in a category must be satisfied before cred- While it is possible to continue the business operation for itors in such category are paid. If the remaining money is not the management of the company until the bankruptcy deci- sufficient for the unprivileged receivables, it will be distributed sion is rendered, after the opening of the bankruptcy, since between said creditors in proportion to their receivables. the management will have no disposal and/or representation The expenses of the Bankruptcy Office or bankruptcy authority, continuance of the business operation by the manage- administration can be requested from the bankrupt’s estate. ment is not legally possible. Expenses regarding the announcement of the bankruptcy deci- Following bankruptcy, the bankruptcy administration will be sion, protection of the assets, fees of the liquidators, etc., consti- entitledo t continue to execute the existing (but not yet executed/ tute some examples of these expenses. The payments regarding performed) contracts, but is not obliged to do so. If execution estate debts have priority over bankruptcy receivables. of the contract (performance of the bankrupt’s obligation arising from the contract) is more beneficial for the bankrupt’s 4.7 Is it possible for the company to be revived in the estate, the bankruptcy administration shall prefer to execute future? the contract. Otherwise, the subject of the contract will be converted into money and registered as bankruptcy receivable on the bankrupt’s estate. As per Article 547 of the TCC, if it is determined that the liquidation was not duly accomplished, and an additional liquidation must be performed, upon the request of the board members, 4.6 What is the ranking of claims in each procedure, creditors, shareholders or liquidation officers, the competent including the costs of the procedure? Commercial Court may decide that the company be restituted for an additional liquidation. The shareholders may cancel a The Bankruptcy Office shall distribute the amount as per liquidation decision before the commencement of the distribu- Articles 206 and 207 of the EBL. Receivables of preferred credi- tion of assets between the shareholders. tors are firstly taken into consideration by the Bankruptcy Office. Ordinary creditors shall be paid only after the preferred credi- 52 Tax tors are fully satisfied. Concerning a receivable arising out of a contract, it is worth noting that such receivable is in principle an 5.1 What are the tax risks which might apply to a ordinary receivable unless it is secured by a pledge or mortgage. restructuring or insolvency procedure? The liabilities of the estate are determined by a schedule of ranking. The accepted portion and rank of every credit registered to the estate and every claim other than ownership claims A corporation which goes bankrupt shall be subject to the shall be shown in a schedule of ranking. liquidation process which is regulated under Article 17 of Once the costs of procedure are paid, property that is the Corporate Income Tax Code (the “CIT Code”) (Law No. pledged/mortgaged forms part of the bankruptcy estate, and a 5520) (published in the Official Gazette dated June 21, 2006 and party with a prior perfected pledge/mortgage has a preferen- numbered 26205). The liquidation period shall be considered tial o right t the proceeds of the pledged property. The pledged/ instead of the fiscal period. mortgaged assets will be sold at the earliest and most appro- According to subparagraph (a) of Article 17 paragraph (1) of priate time by the bankruptcy administration and the proceeds the CIT Code, the liquidation process starts on the registration wille b paid to the pledgee/mortgagee without waiting until the date of the General Assembly resolving that the company goes end of the liquidation. into liquidation and such process is completed on the registra- The pledgee/mortgagee may initiate an execution by way tion date of the liquidation resolution. of foreclosure of the pledge/mortgage against the bankruptcy In cases where liquidation is closed with loss, the liquida- estate following the declaration of the bankruptcy. tion result shall be corrected towards the previous liquidation If the pledged/mortgaged property is insufficient to discharge periods, and the taxes overpaid in the previous periods shall be the debt, the pledgee is an unsecured creditor for the remainder. refunded to the taxpayer. The receivables secured but not covered by a pledge/mort- If the liquidation process starts and concludes within the gage, or unsecured receivables, are registered in order to be paid same calendar year, the liquidation tax return shall be submitted in the following order: to the affiliated tax office within 30 days following the date ■ First rank: receivables of the employees including sever- on which the liquidation is concluded. If these are realised ance and notice pays arising from the employment rela- in different calendar years, the liquidation tax return for each liquidation period shall be submitted to the tax office from the tion and accrued for the year before the opening of the th bankruptcy, together with the severance and notice pays first day until the evening of the 25 day of the fourth month they earn due to the termination of the employment rela- following the month when the liquidation period is closed. tion due to bankruptcy; the debts of the employers to the As per Article 17 paragraph (4) of the CIT Code, the tax base foundations and institutions which had been established of a corporation which goes into liquidation shall be the liqui- in order to form provident funds or other aid institutions dation profit. The liquidation profit is the positive difference

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between the value of the assets at the end of the liquida- 72 Cross-Border Issues tion period, and the value of the assets as at the date of the commencement of the same. During the calculation of the liquidation profit: 7.1 Can companies incorporated elsewhere use ■ any and all kinds of payments that were made to the share- restructuring procedures or enter into insolvency proceedings in your jurisdiction? holders or to the owners of the corporation as advanced or otherwise shall be added to the value of the assets which is calculated at the end of the liquidation; and Pursuant to Article 154 of the EBL, the competence of the ■ the payments that were made by the shareholders or the Commercial Court at the place where the debtor’s business centre owners of the corporation in addition to the current is located pertains to the matter of public order and is exclusive. capital, and the earnings and the proceeds obtained during The Commercial Court at the place where the debtor’s business the liquidation, which were exempt from tax, shall be centre is located has jurisdiction over the concord restructuring added to the value of the assets which is calculated at the and amicable restructuring applications. Therefore, companies beginning of the liquidation period. incorporated abroad cannot enter into insolvency proceedings During the calculation of the liquidation profit, related provi- in Turkey. sions of the CIT Code in relation to the deductible expenses, loss deduction, other deductions and non-deductible expenses 7.2 Is there scope for a restructuring or insolvency shall be taken into consideration. Upon calculation of the net process commenced elsewhere to be recognised in your liquidation profit, the corporate income tax at the rate of 20 per jurisdiction? cent shall be declared and paid over such profit. Without setting aside a provision in accordance with the Please refer to question 7.1. Turkish authorities do not recog- Article 207 of the EBL for i) taxes already accrued on behalf nise and execute bankruptcy judgments of other jurisdictions of the company, ii) taxes calculated according to the liquidation granted for a Turkish entity. A decision given for a foreign tax returns, and iii) other disputed tax assessments, liquidation entity may be enforced in Turkey following the enforcement and officers cannot pay to the creditors stated in Article 206 of the recognition process. EBL and cannot make distribution to the shareholders. From any and all kinds of tax assessments and tax penalties owed by companies who have been already liquidated and the 7.3 Do companies incorporated in your jurisdiction legal personality of whom have been cancelled from the trade restructure or enter into insolvency proceedings in other registry, those which pertain to the pre-liquidation period shall jurisdictions? Is this common practice? be imposed on behalf of one of the liquidator officers, and those which pertain to the liquidation period shall be imposed on As explained above under question 7.2, since the competence of behalf of the legal representatives as they will be held as sever- Turkish Courts over the bankruptcy and restructuring proceed- ally liable. ings pertains to the matter of public order, Turkish authorities For the public receivables which are pertaining to the do not recognise or execute bankruptcy procedures and bank- pre-liquidation period, shareholders of limited companies shall ruptcy judgments of other jurisdictions granted for Turkish be held liable limited to the proportion of the share capital entities. that they invested in the company. The liquidation officer’s Therefore, it is not a common practice for Turkish companies liability is limited with regard to the amount distributed as a to enter into insolvency or restructuring proceedings in other result of the liquidation. jurisdictions.

62 Employees 82 Groups

6.1 What is the effect of each restructuring or 8.1 How are groups of companies treated on the insolvency procedure on employees? What claims would insolvency of one or more members? Is there scope for employees have and where do they rank? co-operation between officeholders?

In all procedures, credits arising from the compensations to be There is no specific provision pertaining to the insolvency of paid by the employers regarding the employment agreements are the members of groups of companies and co-operation in this determined to be the first rank of unsecured credits. Please also regard. see our answer to question 4.6. The employees may claim receivables of the employees 92 Reform including severance and notice pays arising from the employment and accrued for the year before the opening of the bank- 9.1 Are there any other governmental proposals for ruptcy, together with the severance and notice pays arising from reform of the corporate rescue and insolvency regime in the termination of their employment. In case of bankruptcy, your jurisdiction? the receivables of employees are accepted as privileged receivables at the first rank. There are no other governmental proposals.

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Gökben Erdem Dirican is 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 | Gözütok and 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 legal and regulatory regimes and corporate structures.

Dirican | Gözütok Tel: +90 212 278 3170 Nispetiye Caddesi 4/1 Email: [email protected] Besiktas, Levent URL: www.dgb-law.com Istanbul Turkey

Ali Gözütok is the co-founder of Dirican | Gözütok. Ali has over 20 years of experience and expertise in cross-border litigation and arbitration. He has had extensive involvement in many local and cross-border transactions, cases relating to banking, real estate, competition, intellectual property, restructuring and insolvency-related matters. As an esteemed legal practitioner, Ali has successfully handled many complex cases and transactions for companies and institutions across a wide range of industries.

Dirican | Gözütok Tel: +90 212 278 3170 Nispetiye Caddesi 4/1 Email: [email protected] Besiktas, Levent URL: www.dgb-law.com Istanbul Turkey

Dirican | Gözütok is a full-service law Firm established in Istanbul. The and international transactions, the Firm brings together the knowledge, Firm boasts a wealth of experience in handling numerous proceedings skills and experience of different practice areas to form focused, creative and has unique experience in dispute resolution spanning mediation, and hands-on teams for specific transactions. arbitration and litigation. Its highly regarded Partners advise clients in all www.dgb-law.com 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

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Ukraine Ukraine

Dmytro Donenko

ENGARDE Attorneys at law Artem Parnenko

12 Overview creditors who are interested parties concerning the debtor are not counted for the purposes of voting for the approval of the rehabilitation plan. 1.1 Where would you place your jurisdiction on the Afterwards, the rehabilitation plan must be approved by the spectrum of debtor to creditor-friendly jurisdictions? court. The debtor’s rehabilitation procedure is applicable in cases Bankruptcy issues in Ukraine are currently regulated by the where the debtor and the majority of creditors, as well as the newly adopted Code of Ukraine on Bankruptcy Procedures, secured creditors, are in friendly relations. In practice, this does which entered into force on October 21, 2019 (with subsequent not happen often. Therefore, bankruptcy cases are more often amendments, the current edition is dated February 1, 2020). In considered according to the normal procedure. contrast to the previous law (Law of Ukraine “On Restoring Debtor’s Solvency or Declaring It Bankrupt”), the current 22 Key Issues to Consider When the edition contains more detailed provisions regarding the reha- Company is in Financial Difficulties bilitation procedure of the debtor before the opening of bankruptcy proceedings, the sale of a bankrupt’s property, terms of the relevant procedures, changes to the rights of secured credi- 2.1 What duties and potential liabilities should the tors, etc. In general, the procedure has become more regulated. directors/managers have regard to when managing a company in financial difficulties? Is there a specific An application for opening a bankruptcy case can be filed point at which a company must enter a restructuring or both by the debtor and by the creditors. Following the introduc- insolvency process? tion of the relevant procedure, the control over the procedure is within the majority of creditors. Operational management is carried out by the arbitration manager. At the stage of disposing The legislation of Ukraine provides that, if there are signs of of the bankrupt’s property, the court appoints the arbitration bankruptcy, the head of the debtor is obliged to send a notice to manager selected by the automated system. At the stage of reha- the founders (participants, shareholders) of the debtor and the bilitation, the arbitration manager is appointed by the court at property owner (the body authorised to manage the property) of the request of the creditors’ committee. At the liquidation stage the debtor, informing them of the signs of bankruptcy. (the stage at which the debtor loses control over the activity of In general, the debtor is obliged to apply to the court with an the company), the arbitration manager is also appointed by the application to initiate a bankruptcy case within one month, if: court at the request of the creditors’ committee. ■ fulfilling the claims of one or several creditors will make it In general, the legislator is trying to maintain a balance impossible for the debtor to fulfil its monetary obligations between the rights of the debtor and creditors, but in practice, a in full to other creditors (insolvency threat); or better-trained participant always has an advantage. ■ in other cases, which are stipulated by the legislation. It e should b noted that if the directors/managers violate these requirements, said director/manager must bear solidary respon- 1.2 Does the legislative framework in your jurisdiction sibility for the dissatisfaction of creditors’ claims. 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 In Ukraine, the debtor’s rehabilitation procedure can be applied example, are there any special rules or regimes which before the opening of bankruptcy proceedings. The debtor, by apply to particular types of unsecured creditor (such the decision of the founders (participants, shareholders), has as landlords, employees or creditors with retention the right to initiate such a procedure. The debtor’s rehabilita- of title arrangements) applicable to the laws of your tion procedure before the opening of bankruptcy proceedings jurisdiction? Are moratoria and stays on enforcement is performed according to the rehabilitation plan of the debtor available? (hereinafter “the rehabilitation plan”). The rehabilitation plan must be approved by each category The creditors and the arbitration manager have the main influ- of non-secured creditors, meaning that more than 50 per cent ence on the company during the bankruptcy proceedings. of the total unsecured claims included in such categories shall Creditors are persons who have monetary claims against the agree on such rehabilitation plan. The claims of non-secured debtor. At the same time, Ukrainian legislation distinguishes

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the creditors depending on whether their claims are collater- 32 Restructuring Options alised or not. The creditors, whose claims are not secured by collateral, have the right to vote at a creditor meeting. Moreover, the pledge creditors have the right to coordinate/veto the sale 3.1 Is it possible to implement an informal work-out in of pledged property, and the rehabilitation plan. The Code your jurisdiction? provides additional measures for termination of moratorium for the pledge creditors. The debtor’s rehabilitation procedure before the opening of The legislation also provides the order in which the meeting bankruptcy proceedings is performed according to the reha- of creditors’ claims is prioritised. First of all, the wage claims bilitation plan of the debtor before the opening of bankruptcy of former and current employees are met; second, the demands proceedings. arising out of harm to health and injuries and relevant social The debtor’s rehabilitation plan must meet the following taxes; third, the demands for paying taxes and fees; and fourth, requirements: the claims of non-secured creditors, etc. The claims of secured ■ for approval of the rehabilitation plan, the debtor must creditors at the expense of the bankrupt’s property, which is the summon the creditors to a meeting by written notice to subject of collateral, are carried out in an extraordinary manner. all creditors who, according to the rehabilitation plan, are At the opening of a bankruptcy case, the court renders a involved in the rehabilitation procedure. The meeting ruling which, among other things, introduces a moratorium on shall be convened no earlier than 10 days after the the satisfaction of creditors’ claims. Also, such a court ruling announcement; resolves the issue of taking measures to secure creditors’ claims ■ if the rehabilitation plan includes the participation of by prohibiting the debtor and the property owner (the body secured creditors in rehabilitation, a rehabilitation plan authorised to manage the property) of the debtor to make deci- must be approved by two-thirds of the creditors of the total sions on liquidation and on the reorganisation of the debtor, as secured claims included in the rehabilitation plan of each well as to alienate fixed assets and pledged items. The court is category. Moreover, the claims of secured creditors who also entitled, at the request of the parties or participants in the are interested parties of the debtor are not counted for the bankruptcy case or on its own initiative, to take other measures purposes of voting for the approval of the rehabilitation to secure the claims of creditors. plan; ■ if the rehabilitation plan provides for a change of priority of claims of secured creditors, the rehabilitation plan must 2.3 In what circumstances are transactions entered be approved by each such creditor; and/or into by a company in financial difficulties at risk of challenge? What remedies are available? ■ in case of applying for refusal of securing by the secured creditor, such provisions shall be included in the rehabilitation plan. Such creditor shall be deemed a non-secured Deals committed by a debtor after initiating a bankruptcy case, creditor in part of the claims concerning which the cred- or within three years prior to initiating a bankruptcy case, may itor refused to secure. be invalidated by the court in bankruptcy proceedings upon the The rehabilitation plan must be approved in each category of application of an arbitration manager or creditor according to non-secured creditors who own more than 50 per cent of the the following grounds: total unsecured claims included in the rehabilitation plan in such ■ the debtor has fulfilled their property obligations before categories. The requirements of non-secured creditors who are the deadline; interested parties concerning the debtor are not counted for the ■ the debtor assumed obligations before initiating a bank- purposes of voting for the approval of the rehabilitation plan. ruptcy case, as a result of which he became insolvent or his The new Code of Ukraine on Bankruptcy Procedures provides monetary obligations to other creditors became completely that the commercial court must accept or refuse an application or partially impossible; for approval of the rehabilitation plan within five days of receipt. ■ the debtor alienated or acquired the property at prices If a debtor’s application is refused, a list of the following condi- lower or higher than the market price, provided that at the tions must be provided: time of the commitment or as a result of its fulfilment the ■ the rehabilitation plan does not comply with this Code; debtor’s property was (became) insufficient to satisfy the ■ the case is not under the jurisdiction of this commercial creditors’ claims; court; ■ the debtor has paid the creditor or accepted the property ■ the application goes against the debtor-initiated proceed- in order to fulfil the monetary claims on the day when the ings in bankruptcy; or sum of the claims of the creditors to the debtor exceeded ■ the debtor-legal entity is terminated in accordance with the value of the property; or legislation. ■ the debtor assumed secured liabilities to ensure the fulfil- The commercial court may also, within five days of receipt of ment of monetary claims. the application, return it without consideration on the grounds Deals committed by a debtor within three years prior to of art. 174 of the Commercial Code of Ukraine, considering the initiating a bankruptcy case may also be invalidated by the court requirements of the Code. in bankruptcy proceedings upon the application of an arbitra- The ruling on the acceptance of the debtor’s application for tion manager or creditor according to the following grounds: approval of the rehabilitation plan stipulates the implementa- ■ the debtor alienated the property for free, assumed obligation of moratorium on the satisfaction of creditors’ claims. The tions without corresponding property actions of the other commercial court may then limit the moratorium in exceptional party, and waived its own property claims; cases, if the moratorium may result in loss of the collateral of the ■ the debtor concluded an agreement with interested parties; secured creditor. or The rehabilitation plan is subject to approval by the court ■ the debtor concluded a gift agreement. within one month of acceptance of the application for the consideration. At the same time, the court is obliged to approve it, except in cases when:

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■ the law was violated when approving the rehabilitation the rehabilitation plan must be approved by each such creditor. plan that could affect the voting outcome of the general In case of applying for refusal of securing by the secured cred- meeting of creditors; itor, such provisions shall be included in the rehabilitation plan. ■ a creditor who did not participate in voting, or voted Such creditor shall be deemed a non-secured creditor in part of against the adoption of a rehabilitation plan, proves that if claims concerning which the creditor refused to secure. the debtor was liquidated in the manner specified by this The main influence on the development of bankruptcy Law, his claims would be satisfied in an amount exceeding proceedings is carried out by the debtor’s creditors. As a general the amount of claims that will be satisfied in accordance rule, decisions are made by a majority of lenders. Such deci- with the terms of the rehabilitation plan; or sions are binding on all lenders. The debtor is not entitled to ■ the debtor provided false information, which is essential in vote at the meetings of creditors. At the same time, the mort- determining the success of the rehabilitation plan. gage lenders, as not having the right to vote, have the right to Ruling for approval of the rehabilitation plan cancels the veto the sale of the pledged property and the rehabilitation plan. moratorium. Ruling for refusal of the rehabilitation plan cancels the moratorium and any other measures taken by the 3.3 What are the criteria for entry into each court. Upon satisfying the claims of creditors secured by the restructuring procedure? debtor’s property that is the subject of security, the moratorium is terminated automatically 60 days from the date of acceptance for consideration of the debtor’s application for approval of the The general procedure provides for the application of the prop- rehabilitation plan, if the commercial court during this time will erty disposal procedure with the subsequent transition to the not consider the application. rehabilitation or liquidation procedures. During the disposal of the property (that shall be administered for up to 170 days), a search and subsequent approval by 3.2 What formal rescue procedures are available the court of the register of creditors – the formation of a credi- in your jurisdiction to restructure the liabilities of tors’ committee – shall be carried out by a body representing the distressed companies? Are debt-for-equity swaps interests of all creditors. and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures The rehabilitation procedure shall be introduced by a court or threaten action (including enforcement of security) decision at the request of the creditors’ committee. During to seek an advantage? Do your procedures allow you the rehabilitation, a rehabilitation plan shall be developed and to cram-down dissenting stakeholders? Can you cram- further approved by the court with the participation of prospec- down dissenting classes of stakeholder? tive investors. The rehabilitation procedure shall be terminated prematurely According to Ukrainian legislation, the following bankruptcy in case of failure to fulfil the conditions of the rehabilitation procedures are applied to the debtor-legal entity: plan and/or in case of a debtor’s failure to fulfil its current obli- ■ disposal of the debtor’s property; gations, therefore the court shall declare the debtor as bankrupt ■ rehabilitation of the debtor; and and open the liquidation procedure. ■ liquidation of the debtor. The liquidation procedure shall be introduced by the court, The disposal of the debtor’s property or the property manage- as well as by virtue of the creditors’ request, in cases where the ment is understood as a system of measures to supervise and debtor’s rehabilitation cannot be implemented, and the amount control the management and disposal of the debtor’s property of the debtor’s assets is not enough to satisfy the claims of all in order to ensure the preservation and effective use of the debt- creditors. or’s property assets, analyse its financial position, and determine the following optimal procedure (rehabilitation or liquidation). 3.4 Who manages each process? Is there any court Rehabilitation is understood as a system of measures taken involvement? during the bankruptcy proceedings to prevent the debtor from being declared bankrupt and his liquidation, aimed at improving Since the introduction of the property disposal procedure, the the debtor’s financial and business situation, as well as meeting court shall appoint a property manager from a group of arbi- the creditors’ claims in full or in part through restructuring of tration managers. The appointment of the property manager the enterprise, debts and assets and/or changes in the organisa- shall not be a ground for termination of the powers of the head tional, legal and production structure of the debtor. of the debtor or its managing body. At the same time, after the The liquidation procedure in a bankruptcy case is understood appointment of the property manager and prior to the termina- as a system of measures for the complete cessation of the debt- tion of the property disposal procedure, the debtor’s governing or’s activities, its liquidation, the sale of its property and the bodies are not entitled, without the consent of the property satisfaction of creditors’ claims in full or in part. manager, to make a number of corporate decisions (including on In Ukrainian legislation, there are no provisions that directly reorganisation, establishment of other legal entities or branches, regulate the procedure for converting the payables into author- payment of dividends, withdrawal from other entities, etc.). ised capital. At the same time, the legislation stipulates that the In addition, the head or managing body of the debtor shall, rehabilitation plan may contain conditions on the satisfaction exclusively with the consent of the property manager, conclude of creditors’ claims in other ways that do not contradict the law. transactions regarding: If the rehabilitation plan includes participation in rehabilita- ■ alienation or encumbrance of the debtor’s immovable tion of secured creditors, a rehabilitation plan must be approved property, including its lease, pledge, contributing such by two-thirds of the creditors of the total secured claims included property to the authorised capital of another company or in the rehabilitation plan within each category. Moreover, the business entity, or disposing of the debtor’s immovable requirements of secured creditors who are interested parties of property in any other way; the debtor are not counted for the purposes of voting for the ■ obtaining and granting loans (credits), providing guaran- approval of the rehabilitation plan. If the rehabilitation plan tees, warranties, assignment of demand, transfer of debt, provides for a change of priority of claims of secured creditors,

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and also the transfer of debtor’s property to trust manage- ■ the maturity of all monetary obligations of the debtor is ment; and considered to have occurred; ■ the disposition in any way of another debtor’s property, the ■ the debtor shall not have any additional obligations, except book value of which is more than one per cent of the book for expenses related to the implementation of the liquida- value of the debtor’s assets, and the conclusion of other tion procedure; major transactions. ■ the imposing of penalties (fines, default interest), interest If the debtor’s managing bodies fail to fulfil their obligations and other economic sanctions on all types of bankruptcy properly, the court shall, at the request of the creditors, termi- debts shall discontinue; and nate the powers of the debtor’s managing bodies and transfer ■ claims on the debtor’s bankruptcy obligations arising them temporarily to the debtor’s property manager. during the bankruptcy proceedings may be made only Since the introduction of the debtor’s rehabilitation proce- within the liquidation procedure within two months from dure, the court will appoint a rehabilitation manager, who shall the date of the official publication of the information on implement the debtor’s rehabilitation procedure. From the declaration of the debtor as bankrupt and opening of the moment the debtor’s rehabilitation procedure is introduced, liquidation procedure. the head of the debtor shall be dismissed. Management of the As for the obligations under contracts to the debtor, they debtor shall be passed to the rehabilitation manager. At the remain in force unless otherwise provided by such contracts, end of the rehabilitation procedure, the rehabilitation manager and in the future may be attributed to the property of the debtor, should provide a report, which must be approved by the court. which is subject to sale in order to satisfy the claims of creditors. After the introduction of the debtor’s liquidation procedure, the The offset of the counterclaims of the debtor and third parties court will appoint a liquidator who shall perform all the functions is considered through the prism of recognition of the claims of of managing the debtor, as well as implementing the liquidation such a party to the debtor (entry in the register of creditors). The procedure of the debtor who has been declared as bankrupt and legislation provides that, for the satisfaction of creditors’ claims, ensure satisfaction of the creditors’ claims. After completion of all offsetting counterclaims shall be made with the consent of the settlements with creditors, the liquidator must provide a report and creditor(s) in cases where it does not violate the property rights liquidation balance sheet, which must be approved by the court. of other creditors. The acts or omissions of any of the arbitration managers at any stage may be appealed in the court. 3.6 How is each restructuring process funded? Is any protection given to rescue financing? 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to All expenses associated with the bankruptcy proceedings in the perform outstanding obligations? What protections court are firstly subject to reimbursement from the sale of the are there for those who are forced to perform their outstanding obligations? Will termination and set-off bankrupt’s property. A debtor’s rehabilitation plan may provide provisions be upheld? for a special procedure for the reimbursement of such expenses. Creditors can create a fund for the advancement of monetary remuneration and reimbursement of expenses of the arbitration Simultaneously with the beginning of the disposal of property, manager. The formation of the fund and the use of its resources a moratorium on the satisfaction of creditors’ claims shall be shall be determined by the decision of the creditors’ committee introduced. The moratorium on the satisfaction of creditors’ and approved by the court. However, the creditor who initiates claims provides, inter alia, the suspension of the debtor’s fulfil- the bankruptcy proceedings must pay in advance remuneration ment of monetary obligations, the maturity of which is prior of the arbitration manager for the three-month period. to the moratorium day, and the termination of measures aimed at ensuring the fulfilment of these obligations applied prior to the moratorium day. During the moratorium, no penalty (fine, 42 Insolvency Procedures default interest) shall be charged; no other financial sanctions shall be applied for non-fulfilment or improper fulfilment of 4.1 What is/are the key insolvency procedure(s) obligations to satisfy all claims to which the moratorium applies. available to wind up a company? Also, during the moratorium, the running of the limitation period stops and the inflation index does not apply for the entire The debtor may be liquidated under the liquidation procedure. period of delay in the performance of a monetary obligation, etc. If, according to the results of the liquidation procedure and The moratorium does not apply to claims of current creditors, after the satisfaction of the creditors’ claims, there is no prop- i.e. on contractual obligations that arise after the initiation of a erty left, the court shall decide to liquidate the legal entity as bankruptcy case, on the payment of wages, claims on enforce- bankrupt. If the bankrupt’s property was enough to satisfy the ment documents of a non-property nature, obliging the debtor creditors’ claims in full, it shall be considered to be debt-free and to perform certain actions or to refrain from committing them, can continue its business. as well as a number of other obligations. In this case, the presentation of claims by current creditors 4.2 On what grounds can a company be placed into to the debtor and their satisfaction shall also be carried out in a each winding up procedure? special procedure. The action of the moratorium stops on the day the bankruptcy proceedings are terminated. The liquidation procedure shall be introduced by the court, as During the rehabilitation procedure, the sale of property well as by virtue of the creditors’ request, in cases where, as a and the satisfaction of creditors’ claims shall be carried out in rule the debtor’s rehabilitation cannot be implemented, and the accordance with the rehabilitation plan. amount of the debtor’s assets is not enough to satisfy the claims At the same time, since the opening of the liquidation of all creditors. procedure:

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4.3 Who manages each winding up process? Is there conducted upon the authorisation of the creditor in cases where any court involvement? it does not infringe the property rights of other creditors.

A liquidator is a person who manages the liquidation procedure. 4.6 What is the ranking of claims in each procedure, He shall perform all the functions of managing the debtor, as including the costs of the procedure? well as implement the liquidation procedure of the debtor who has been declared bankrupt and ensure satisfaction of the cred- Ukrainian law utilises a queue system to rank the order of settle- itors’ claims. After completion of all settlements with credi- ment of claims: tors, the liquidator must provide a report and liquidation balance ■ First queue: payments to employees and related claims; sheet, which must be approved by the court. claims by creditors based on insurance agreements; and expenses related to bankruptcy proceedings, etc. 4.4 How are the creditors and/or shareholders able ■ Second queue: claims on obligations, arising out of harm to influence each winding up process? Are there any to health and injuries; and claims of contributors of trust restrictions on the action that they can take (including institutions. the enforcement of security)? ■ Third queue: tax payment claims. ■ Fourth queue: claims of unsecured creditors. The impact of the debtor’s shareholders on the liquidation ■ Fifth queue: claims of payment of dues of members of the procedure is very limited and may be exercised exclusively in workforce to the statutory capital of the enterprise; and cases where the state holds more than 25 per cent in the share claims of additional remuneration to the manager of the capital of the debtor. rehabilitation or the liquidator. Creditors have a larger impact on the liquidation procedure, ■ Sixth queue: other claims. during which the liquidator reports to the creditors’ committee The settlement of claims of secured creditors at the expense at least once a month about its activity, as well as financial status of the debtor’s property, which is collateral, is free of queues. and property of the debtor on the day of opening and during the liquidation procedure, and the use of the debtor’s assets and 4.7 Is it possible for the company to be revived in the other information at the request of the creditors’ committee. future? If the liquidator does not perform its obligations or performs them inadequately, the commercial court at the request of the A company may renew its status after the commencement of creditors’ committee may terminate its powers and appoint a bankruptcy proceedings if claims of creditors are recognised as new liquidator. unjustified, if the rehabilitation procedure is complete. If the Besides that, after the opening of the liquidation procedure company is liquidated, the liquidation balance sheet is approved at the request of the creditors’ committee, the court may rule and changes are implemented in the registry of companies of to implement the rehabilitation procedure if there is a rehabil- Ukraine – there is no procedure for the revival of such company itation plan and if it happens before the start of the sale of the in Ukrainian law. bankrupt’s property. The sale of the bankrupt’s property, which is collateral, is carried out with the permission of the court or the creditor, 52 Tax whose claims it enforces. The report of the liquidator presented at the end of the liqui- 5.1 What are the tax risks which might apply to a dation procedure must be approved by the creditors’ committee. restructuring or insolvency procedure? Upon completion of all payments to creditors, the liquidator shall submit to the commercial court a liquidation balance sheet Ukrainian bankruptcy legislation prevails over tax legislation. and report on liquidation. Therefore, the special regime of discharge of obligations in the bankruptcy procedure extends to tax obligations. 4.5 What impact does each winding up procedure have At the same time, it is worth noting that the commence- on existing contracts? Are the parties obliged to perform ment of bankruptcy proceedings is a ground for an unscheduled outstanding obligations? Will termination and set-off inspection by the tax authorities. provisions be upheld? 62 Employees From the moment of opening the liquidation procedure: ■ all of the debtor’s financial obligations mature; 6.1 What is the effect of each restructuring or ■ no additional obligations of the debtor arise, apart from insolvency procedure on employees? What claims would expenses, related to the liquidation procedure; employees have and where do they rank? ■ penalties (late charges, fines), interest and other economic sanctions stop accruing on all of the bankrupt’s debts; and The debtor’s employees’ claims are included in the general ■ claims on liabilities of the debtor, declared bankrupt, registry of creditors and are to be settled in the first queue. which arose during the bankruptcy procedures, may be During the course of rehabilitation, employees of the debtor, advanced only within the liquidation procedure and no who may not be engaged in the process of enforcement of the later than two months after official notification of bank- rehabilitation plan, are dismissed. From the moment the liqui- ruptcy and commencement of the liquidation procedure. dation procedure commences, all of the debtor’s employees shall Third-party obligations to the bankrupt debtor remain in be dismissed. force unless otherwise specified by the contract. Settlement of creditors’ claims by setting off similar counterclaims is

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72 Cross-Border Issues 82 Groups

Ukrainian bankruptcy legislation regulates procedures regarding Ukrainian bankruptcy legislation does not contain special debtors incorporated in Ukraine only. provisions regarding the bankruptcy of a debtor belonging to a group of companies. 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your 92 Reform jurisdiction? 9.1 Are there any other governmental proposals for Ukrainian legislation provides for the possibility to recognise reform of the corporate rescue and insolvency regime in foreign bankruptcy proceedings. your jurisdiction? Foreign bankruptcy proceedings may be applied in accordance with the international treaties of Ukraine and the reci- On October 18, 2018 the Parliament of Ukraine adopted the procity principle. new Code of Ukraine on bankruptcy procedures. As of the Recognition of a foreign bankruptcy proceeding includes the moment of this publication, the Code entered into force. recognition of foreign judicial decisions as well as decisions on The Code updated Ukrainian bankruptcy legislation. In appointment, dismissal or replacement of a foreign receiver, particular, the effectiveness of procedures will improve, the decisions regarding the status of the foreign proceeding, and its creditors’ right is now better protected, the auction procedure suspension or termination. for the sale of the debtor’s property is enhanced, the contracts and judicial decisions are better enforced, and issues of renewal of solvency of natural persons are better regulated. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other As of today, the Parliament of Ukraine considers new amend- jurisdictions? Is this common practice? ments to the Code of Ukraine on bankruptcy procedures. There are propositions to improve relations in the field of insurance services in bankruptcy and to improve continuity in the imple- Ukrainian legislation envisages a principle, according to which mentation of bankruptcy procedures. the bankruptcy proceeding regarding a debtor, which is incorporated and conducts activity in accordance with Ukrainian law and on the territory of Ukraine, is the main proceeding in comparison to any other foreign proceedings. In light of this principle, the possibility of initiating bankruptcy proceedings regarding Ukrainian debtors in other jurisdictions is questionable.

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Dmytro Donenko specialises in the areas of complex cross-border commercial litigation, international commercial and investment arbitration. He has been involved in high-profile matters related to corporate governance, M&A transactions, allegations of fraud and asset tracing, contractual disputes, and the validity of contractual instruments. Dmytro also represents clients in national courts. Dmytro is permanently involved in organising the Kyiv Arbitration Days Conference in Kyiv (2011–2020).

ENGARDE Attorneys at law Tel: +38 044 498 73 80 45-v Honchara Str. Email: [email protected] Kyiv 01054 URL: www.engarde-attorneys.com Ukraine

Artem Parnenko has been practising law since 2004 and during this time he has been exposed to important projects in many areas of financial and banking law. During his work as ENGARDE’s associate, an in-house lawyer for a leading leasing company and an industrial corporation, Artem developed outstanding expertise in corporate lending and leasing, debt collection, restructuring and bankruptcy. Having joined ENGARDE after completing his LL.M. at the University of Amsterdam specialising in International Trade and Investment Law (International and European Law) and with seven years of prior legal experience, Artem immediately started working on high-value financial law projects.

ENGARDE Attorneys at law Tel: +38 044 498 73 80 45-v Honchara Str. Email: [email protected] Kyiv 01054 URL: www.engarde-attorneys.com Ukraine

Being a well-established and dynamic Ukrainian law firm, we have a reputation for providing exceptional legal service. We are renowned for our commitment to excellence and for our ability to find innovative solutions to the most complex of legal problems. Our focus is on dispute resolution, corporate law, and restructuring processes. We also have extensive experience in the following areas: mergers and acquisitions; international trade and investments; intellectual property; competition and antitrust; real estate and construction; and taxation. Whatever the nature and role of our client – an individual or organisation, of Ukrainian origin or operating internationally – we combine our skills and legal expertise to deliver a service, which is not only tailored to suit clients’ needs but also represents true value for money. www.engarde-attorneys.com

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Alan W. Kornberg

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

12 Overview duty of care requires a director to discharge duties with the care an ordinarily prudent person in a like position would exercise under similar circumstances. The duty of loyalty requires direc- 1.1 Where would you place your jurisdiction on the tors to act in the best interests of the corporation; it prohibits spectrum of debtor to creditor-friendly jurisdictions? self-dealing and the usurpation of corporate opportunities by directors. Ordinarily, decision-making by directors is protected The United States can most accurately be described as by the business judgment rule, even when a company is insol- reorganisation-friendly. On the one hand, the United States vent. Civil liability may arise if the directors fail to adhere to could be considered comparatively debtor-friendly in that their duties of loyalty or care. management is typically permitted to retain operating control of In general, when a company becomes insolvent, the direc- the business, there is a very broad stay of creditor enforcement tors must exercise their fiduciary duty in the best interests of actions, debtors have exclusive authority to propose a plan of the corporation, taking into account the interests of, among reorganisation at the outset of a case, and debtors are given others, creditors. Upon insolvency, creditors may, under certain powers, such as the option to reject unprofitable contracts, that circumstances, bring derivative claims on behalf of the corpo- they are not afforded outside of a formal insolvency proceeding. ration against directors. Causes of action for breach of fidu- On the other hand, the United States could also be considered ciary duty, fraud and fraudulent conveyance may be appropriate creditor-friendly in that creditors are afforded significant to challenge the wrongful actions of directors of insolvent protections by the Bankruptcy Code, the bankruptcy process is corporations. designed to be public and transparent, and creditors are given a In addition, directors may be criminally or civilly liable under voice at every stage of the restructuring process. federal and state laws for failure to comply with certain disclosure obligations or for insider trading, or for the company’s 1.2 Does the legislative framework in your jurisdiction failure to pay certain taxes and wages, among other things. allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what 2.2 Which other stakeholders may influence the 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 While informal out-of-court restructurings are commonplace example, are there any special rules or regimes which and are typically implemented by contract among the relevant apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention parties, there is no specific legislative framework to sanction of title arrangements) applicable to the laws of your such work-out procedures. The relevant statute, the Bankruptcy jurisdiction? Are moratoria and stays on enforcement Code, provides for formal court-supervised proceedings, although available? the 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 22 Key Issues to Consider When the interested acquirers, among others, may all attempt to influ- Company is in Financial Difficulties ence the company’s situation within the bounds of whatever contractual agreements may exist and applicable law. For this 2.1 What duties and potential liabilities should the reason, and to make any potential insolvency process smoother, directors/managers have regard to when managing a a company in financial distress will oftentimes seek to engage company in financial difficulties? Is there a specific its stakeholders in restructuring discussions prior to beginning point at which a company must enter a restructuring or an insolvency process. The commencement of a bankruptcy insolvency process? case, however, effects an automatic stay that enjoins secured and unsecured creditors from taking most actions against the debtor Directors are not personally liable for continuing to trade while or property of the estate absent further order of the court. the company is in financial distress. The Bankruptcy Code also prescribes special rules for certain The fiduciary duties of a company’s directors are defined categories of creditors. For example, certain types of prepe- by the law of the state of the company’s incorporation. The tition claims (such as domestic support obligations, employee primary duties of directors are those of care and loyalty. The wages up to $13,650 per individual, and certain tax obligations)

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are entitled to priority over other general unsecured claims. In recognition of a foreign insolvency or restructuring proceeding addition, counterparties to executory contracts and unexpired and for conducting an ancillary proceeding in the United States. leases with the debtor enjoy certain special rights. See question Ancillary proceedings are those in aid of a “foreign proceeding” 3.2 for further detail. administered by a foreign representative and designed to foster cooperation between US and foreign courts. Debt-for-equity swaps are commonplace both in-court and 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of out-of-court. Depending on the terms of the debt-for-equity challenge? What remedies are available? swap, existing equity may be substantially diluted or, if the valuation supports it, eliminated altogether. “Pre-packaged” sales may be achieved either by means of (i) Transactions entered into by an entity in financial distress may a pre-packaged chapter 11 plan, which the Bankruptcy Code be attacked as an actual or constructive fraudulent transfer or as is designed to facilitate, or (ii) a sale under section 363 of the a preference under the Bankruptcy Code and/or state law. Bankruptcy Code, which has been negotiated by the parties and Under the Bankruptcy Code, a transfer may be avoided as documented prior to the chapter 11 petition being filed. fraudulent if it occurred within two years before the bankruptcy The filing of a voluntary bankruptcy petition automatically filing, and the debtor made the transfer with actual intent to operates as a stay that enjoins secured and unsecured creditors defraud creditors, regardless of whether the debtor was insol- from taking most actions against the debtor or property of the vent. In addition, a trustee (or debtor in possession) may recover estate absent further order of the court. The stay of actions a transfer as constructively fraudulent that occurred within two against the debtor’s property generally continues until such years before the bankruptcy filing if the debtor received less property is no longer property of the estate or the case is closed than reasonably equivalent value in exchange for such transfer, or dismissed. and (i) was insolvent, (ii) was engaged in business for which the A chapter 11 restructuring aims to foster cooperation between debtor was insufficiently capitalised, (iii) intended or believed it management (which may include significant shareholders) and the would incur debts beyond its ability to repay, or (iv) made such Company’s creditors to agree on a value-maximising path forward transfer to, or for the benefit of, an insider under an employ- for the Company. Shareholders and creditors alike are welcome ment contract and not in the ordinary course. Bankruptcy trus- to propose transactions that could lead to the Company’s emer- tees (or debtors in possession) can also invoke state fraudu- gence from bankruptcy; however, only the company has the right lent transfer laws, which may have longer reachback periods, to to propose a plan of reorganisation and solicit its acceptance for recover transfers for the benefit of the estate. at least the first 120 days following the date of the filing. Such A transfer of an interest of the debtor in property made on time period is often extended beyond 120 days by the Court but account of an antecedent debt, while the debtor was insolvent and may not be extended beyond 18 months following the date of the within the 90 days prior to a bankruptcy filing (or within one year filing. before the bankruptcy filing if the transferee was an insider) that Secured creditors have certain special rights, however. A enables the creditor to receive more than it would have received secured creditor may be entitled to adequate protection in the in a liquidation, can be avoided as a preference, subject to certain form of cash payments, replacement liens or the “indubitable exceptions. There is a rebuttable presumption that a debtor is equivalent” of the value of its collateral to the extent such value insolvent during the 90 days before the bankruptcy filing. is depreciating as a result of the stay or the debtor’s use of such Transactions determined to be preferential or constructively collateral. If secured creditors are oversecured, they have the fraudulent can be avoided or reversed so as to return the parties right to receive post-petition interest generally at the applicable to their original positions. This can be effectuated through the contract rate. Secured creditors may also be well-positioned recovery of payments or unwinding of entire transactions. to provide debtor-in-possession financing, which may provide the secured creditor greater influence over the reorganisation 32 Restructuring Options process. Secured creditors generally are also afforded the right to credit bid in a sale of their collateral. 3.1 Is it possible to implement an informal work-out in your jurisdiction? Cramdown In a chapter 11 case, a dissenting class of claims or interests may While out-of-court restructurings are commonplace and are be crammed down if, among other things: (i) the plan does not typically implemented by contract by and among the relevant discriminate unfairly; (ii) the plan is “fair and equitable”; and parties, there is no procedure by which a court will sanction (iii) if a class of claims is impaired under the plan, at least one such work-outs. To receive the sanction of a court, a case must class of impaired claims has voted to accept the plan, without be filed under the Bankruptcy Code. counting the votes of “insiders”. It is generally understood that a plan does not unfairly discriminate if the dissenting class receives relatively equal value 3.2 What formal rescue procedures are available under the plan as compared to similarly situated classes. in 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 and pre-packaged sales possible? To what extent can priority rule. With respect to secured creditors, members of creditors and/or shareholders block such procedures the class must either: (i) retain their liens and receive deferred or threaten action (including enforcement of security) payments with a value equal to the allowed amount of their to seek an advantage? Do your procedures allow you secured claims, valued as of the effective date of the plan; (ii) to cram-down dissenting stakeholders? Can you cram- receive the proceeds from the sale of their collateral, if such down dissenting classes of stakeholder? property is to be sold, including the right to credit bid at any such sale; or (iii) receive the “indubitable equivalent” of their Chapter 11 is the primary procedure by which companies secured claims. restructure; although it may also be used for the purposes of A plan is fair and equitable with respect to unsecured credi- an orderly liquidation. Chapter 15 provides the procedure for tors if the members of the class receive property of a value equal

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to the allowed amount of their unsecured claims, or if such class the extent a debtor accepts, but fails to pay for, post-petition is not paid in full, no junior class will receive any estate prop- benefits under an executory contract or lease, the counterparty erty under the plan. will generally be allowed claims with administrative expense priority. Except to the extent the holder of an administrative expense claim agrees to different treatment, a chapter 11 plan 3.3 What are the criteria for entry into each restructuring procedure? can only be confirmed if it provides for cash payment of the full amount of allowed administrative expense claims. If a debtor chooses to assume a contract or lease, it will be Insolvency is not a prerequisite for chapter 11 relief. A company bound by the contract’s terms. The debtor may not assume such may file a voluntary case under chapter 11 if the company has contract or lease unless it: (i) cures or provides adequate assur- a domicile, place of business or property in the United States. ance that it will cure any default; (ii) compensates, or provides An involuntary case may be commenced under chapter 11 adequate assurance that it will compensate, the counterparty for by three or more creditors that hold non-contingent, undis- any actual pecuniary losses resulting from the default; and (iii) puted claims against the company. The creditors (or an inden- provides adequate assurance of future performance under the ture trustee representing them) must hold claims that aggregate contract or lease. However, a debtor is not required to cure a $16,750 more than the value of any collateral securing the credi- default that arises because of a provision in the contract condi- tors’ claims. If there are fewer than 12 creditors of the debtor, a tioned on the insolvency of the debtor. The debtor may not single creditor may file the petition. If the petition is not timely assume a contract where applicable law excuses the counter- controverted, the court will order relief. However, if the peti- party to the contract from accepting performance from, or tion is controverted, the creditors must establish that the debtor rendering performance to, an entity other than the debtor, such is generally not paying its undisputed debts as they come, or that as a personal services contract. a custodian was appointed within 120 days of the petition date. A debtor may reject a contract where it determines that Involuntary petitions filed in bad faith may result in damages performance of the contract would be unduly burdensome. awarded against the petitioning creditor(s). Rejection of an executory contract or unexpired lease constitutes a breach and generally gives rise to a general unsecured 3.4 Who manages each process? Is there any court claim for damages. involvement? If a contract or lease has been assumed, the debtor usually may assign it, notwithstanding a provision in the contract that Under chapter 11, management retains control, remains “in prohibits or conditions such an assignment. possession”, and continues to run the daily business oper- The Bankruptcy Code generally preserves a creditor’s ations of the debtor company, subject to oversight by the non-bankruptcy set-off rights. A right of set-off is treated as a company’s board of directors. A chief restructuring officer or secured claim and a creditor seeking to exercise such right must similar professional often is added to the management team. first obtain relief from the automatic stay. However, creditors Transactions which are not in the ordinary course of business that possess set-off rights under certain types of repurchase require bankruptcy court approval. Official and unofficial agreements and other specified financial contracts may exercise committees generally consult with the debtor concerning the such rights without violating the stay. administration of the estate, may investigate the conduct, assets and liabilities of the debtor and participate in the formulation of 3.6 How is each restructuring process funded? Is any a plan. A chapter 11 trustee may be appointed where there has protection given to rescue financing? been gross mismanagement or fraud. The court closely supervises proceedings under chapter 11. A trustee or debtor in possession may use free cash in the ordinary course of business without notice or a hearing, unless the 3.5 What impact does each restructuring procedure court orders otherwise. The debtor may not use encumbered have on existing contracts? Are the parties obliged to cash unless each entity with an interest in the cash collateral perform outstanding obligations? What protections consents or the court authorises such use upon a finding of are there for those who are forced to perform their adequate protection. outstanding obligations? Will termination and set-off A trustee or debtor in possession may also obtain unsecured provisions be upheld? financing in the ordinary course of business that will be allowed as an administrative priority expense to pay the actual and A chapter 11 debtor may assume or reject most executory necessary costs of preserving the estate, including the payment contracts or unexpired leases, subject to the court’s approval. of wages and salaries after the commencement of the case, as Subject to time limits applicable to non-residential real estate well as taxes. leases, the debtor may assume or reject a contract or lease at any If the trustee or debtor in possession is unable to obtain unse- time before confirmation of a plan, but the court may order the cured financing that would be allowed as an administrative debtor to act within a shorter time. In most cases, the debtor’s priority expense, the Bankruptcy Code contains a framework counterparty must continue to perform until the debtor assumes for permitting other types of debtor-in-possession financing, or rejects the contract or lease. Provisions providing for termi- including: (i) unsecured financing allowed as a “superpriority” nation upon a bankruptcy filing are typically unenforceable expense with priority over all other administrative priority under the Bankruptcy Code, though there are exceptions. expenses; (ii) financing secured by unencumbered estate prop- A debtor’s counterparties also enjoy certain protections under erty; (iii) financing secured by a junior lien on previously the Bankruptcy Code. For example, a debtor must continue to encumbered estate property; and (iv) financing secured by an pay rent under a non-residential real estate lease prior to its deter- equal or priming lien on previously encumbered property (so mination whether to assume or reject such lease. In addition, a long as the trustee or debtor in possession is unable to obtain counterparty may seek adequate protection of its interests in any financing otherwise and each holder of a lien on such property property leased, used, or sold by the debtor. Furthermore, to is adequately protected).

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42 Insolvency Procedures of such interests. If a creditor is undersecured to some extent, such portion is treated as a general unsecured claim. The Bankruptcy Code confers priority on various categories of 4.1 What is/are the key insolvency procedure(s) claims. All claims in a higher priority must be paid in full before available to wind up a company? claims with a lower priority may be paid. First priority is reserved for unsecured claims for certain domestic support obligations Chapter 7 provides the procedure for liquidation of a company. (if the debtor is an individual). Second priority is conferred on As noted above, although chapter 11 is the primary procedure claims for expenses incurred in connection with the administra- by which companies restructure, it may also be used for the tion of the estate. Administrative priority expenses include wages purposes of an orderly liquidation. and salaries for employees for post-petition services rendered and compensation for professionals retained in the case, including a 4.2 On what grounds can a company be placed into chapter 7 trustee. Lower priority categories include claims for each winding up procedure? certain pre-petition wages and employee benefit plan contributions and pre-petition tax claims, among others. General unsecured claims generally rank equally with each other. Insolvency is not a prerequisite for chapter 7 or chapter 11 relief. A company may file a voluntary case under chapter 7 or chapter 11 if the company has a domicile, place of business or property 4.7 Is it possible for the company to be revived in the in the United States. future? The grounds for commencing an involuntary case under chapter 7 are the same as the grounds for commencing an invol- While the company as an entity is typically dissolved after its assets untary case under chapter 11. See question 3.3 for further detail. are liquidated, assets of the company, such as the brand name or business model, may be acquired for use in a new venture. 4.3 Who manages each winding up process? Is there any court involvement? 52 Tax

In chapter 7, a trustee is appointed to marshal the assets of the 5.1 What are the tax risks which might apply to a company, reduce them to cash and pay creditors. Officers and restructuring or insolvency procedure? directors are displaced. Courts closely supervise the chapter 7 process. As discussed in question 3.4, management gener- The bankruptcy process does not, in itself, impose additional tax ally remains in possession during a chapter 11 case, even if the risks on the debtor. Day-to-day tax liability is incurred during a company is liquidated during such case. bankruptcy case and claims for such liability are generally paid as administrative expenses. While cancellation of indebtedness typically gives rise to taxable income under United States 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any tax law, debt cancelled in a chapter 11 or chapter 7 case is not restrictions on the action that they can take (including included as taxable income. the enforcement of security)? 62 Employees Secured creditors are prevented from enforcing their security in the same manner in chapter 7 as they are in chapter 11. See ques- 6.1 What is the effect of each restructuring or tion 3.2 for further detail. Unsecured creditor interests are most insolvency procedure on employees? What claims would often represented by an official committee. While shareholders employees have and where do they rank? 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 In chapter 11, the company may continue to employ its workers trustee rather than restructured. and to pay their salaries and wages in the ordinary course of business. To the extent the company owes pre-petition salaries 4.5 What impact does each winding up procedure have and wages, claims therefor will be entitled to priority status but on existing contracts? Are the parties obliged to perform only to the extent of $13,650 for each individual earned within outstanding obligations? Will termination and set-off 180 days before the bankruptcy filing. provisions be upheld? The Bankruptcy Code restricts payments to “insiders”. Before a company incurs an obligation to retain such a person, A chapter 7 trustee or chapter 11 debtor may assume or reject the court must determine, among other things, that the obliga- most executory contracts or unexpired leases, subject to the tion is essential because such person has received a job offer at court’s approval. See question 3.5 for further detail. the same or greater rate of compensation and that the obligation In chapter 7, the trustee must assume a contract or lease within incurred is not greater than 10 times the amount of an obligation 60 days of the order for relief or it will be deemed rejected, incurred to non-management employees. A severance payment unless an extension of time is granted by the court within such to an “insider” officer or director may not be allowed or paid 60-day period. 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 amount of severance pay 4.6 What is the ranking of claims in each procedure, provided to non-management employees. including the costs of the procedure? A chapter 7 trustee will likely terminate most employees. They will hold administrative priority claims for post-petition Claims of secured creditors are entitled to priority with respect labour and lower priority claims for any pre-bankruptcy filing to their interests in collateral and are secured only to the extent wages owing to the extent described above.

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72 Cross-Border Issues 82 Groups

A company may file a voluntary case under chapter 7 or chapter Each member of a group of companies is treated as a separate 11 if the company has a domicile, place of business or prop- entity by the Bankruptcy Code. The insolvency of one group erty in the United States. Such company may also commence a member has no formal legal effect on other group members; chapter 15 case in the United States for recognition of a judicial each entity must file its own case under the Bankruptcy Code. or administrative proceeding in a foreign country. In practice, however, group members usually file cases at the same time, in the same court, and are often represented by the same professional advisors. In addition, their cases generally are 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jointly administered for procedural purposes. jurisdiction? There is scope for court supervised cooperation between groups of companies and their officeholders. In fact, it is typical for the first day of a bankruptcy case to be devoted to motions Yes. Chapter 15 cases are commenced by a foreign representa- designed to maintain the “status quo” during the pendency of the tive filing a petition for recognition of a foreign proceeding in a case or cases; courts often grant motions to continue a group US bankruptcy court. A foreign proceeding is a collective judi- cash management system, group shared services agreements and cial or administrative proceeding in a foreign country in which other inter-group arrangements during these so-called “first-day the assets and affairs of a debtor are subject to control or super- hearings”. vision by a foreign court for the purposes of reorganisation or liquidation. In chapter 15, the foreign representative may use such proceedings to request assistance from the US court for 92 Reform such relief as entry of a stay to protect property located in the United States. 9.1 Are there any other governmental proposals for A bankruptcy court will recognise the foreign proceeding if: (i) reform of the corporate rescue and insolvency regime in the foreign proceeding qualifies as a “foreign main proceeding” your jurisdiction? (a foreign proceeding pending in the country where the debtor has the centre of its main interests) or “foreign non-main A proposal has been introduced with the aim of preventing proceeding” (a foreign proceeding pending in a country where debtors from “forum shopping” for bankruptcy venues that are the debtor conducts non-transitory operations); (ii) the foreign more favourable to the debtors but may be less favourable to representative applying for recognition is a person or body their stakeholders. If approved, the proposal would amend the authorised to administer the reorganisation or liquidation of current bankruptcy-venue provisions to require a debtor to file the debtor; and (iii) the petition is accompanied by sufficient its bankruptcy case in the U.S. District in which (i) its principal evidence of the commencement of the foreign proceeding and assets are located, (ii) its principal place of business is located, of the appointment of the foreign representative. or (iii) there is a pending bankruptcy case of an affiliate that Once the court has entered a recognition order concerning a “directly or indirectly owns, controls, is the general partner, or foreign main proceeding, several provisions of the Bankruptcy holds 50 per cent or more of the outstanding voting securities” Code take effect automatically, including the automatic stay and of the debtor. The proposal would thus eliminate the current provisions governing the use, sale or lease of property of the domicile-venue option, as well as the current affiliate-venue debtor in the US, and other relief may be available upon request option that allows larger parent companies to file in the same to the court. While such relief is not automatically available with court as a smaller subsidiary. Although ancillary bankruptcy respect to a foreign non-main proceeding, the court has discre- cases under chapter 15 of the Bankruptcy Code are excluded, the tion to grant similar relief. proposal may affect foreign debtors’ ability to file plenary bankruptcy cases in the United States. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?

It would be unusual for a company incorporated in the US to enter into plenary insolvency proceedings in other jurisdictions, although this has occurred from time to time.

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Alan W. Kornberg is co-chair of the Restructuring Department and handles chapter 11 cases, cross-border insolvency matters, out-of-court restructurings, bankruptcy-related acquisitions and insolvency-sensitive transactions and investments. Alan has represented a diverse range of clients spanning numerous industries in some of the most complex and contentious bankruptcy proceedings in recent years. Some of Alan’s significant cross-border and domestic debtor representations have included advising David’s Bridal, Bumble Bee Foods, CGG S.A., Noranda, EnQuest, Quiznos and Houghton Mifflin Harcourt Publishing Company. Alan also has extensive creditor-side experience, including representing ad hoc debtholder groups in the restructurings of Westinghouse Electric, Tops Markets, Texas Competitive Electric Holdings Company, Tidewater, Pacific Exploration and SquareTwo Financial. Alan is currently representing the California Public Utilities Commission in the chapter 11 cases of PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company, California’s largest investor-owned public utility and the largest public utility in U.S. history to file for bankruptcy relief. Alan is recognised as a Band 1 practitioner by Chambers Global, and is also praised as a leading lawyer by The Legal 500, IFLR1000, The Best Lawyers in America and Who’s Who Legal. Alan’s work has consistently received industry recognition by publications such as The American Lawyer and Financial Times and he is also a prolific writer and speaker on industry topics. Alan is a Conferee of the National Bankruptcy Conference, a Fellow of the American College of Bankruptcy and a member of the International Insolvency Institute.

Paul, Weiss, Rifkind, Wharton & Garrison LLP Tel: +1 212 373 3209 1285 Avenue of the Americas Email: [email protected] New York, NY 10019 URL: www.paulweiss.com USA

Elizabeth R. McColm, a partner in the Restructuring Department, specialises in the areas of corporate restructurings and bankruptcy. She has been involved in major domestic and cross-border restructurings and bankruptcies representing debtors, creditors and acquirers of assets. Elizabeth’s recent creditor matters include advising key stakeholders in the restructurings of Country Fresh Holdings, Seadrill Limited, FULLBEAUTY Brands, Pacific Drilling, GenOn, Armstrong Energy, Ultra Petroleum and SquareTwo Financial, and her noteworthy debtor representations include The Bon-Ton Stores, Noranda, JW Aluminium, Boart Longyear, School Specialty and Houghton Mifflin Harcourt Publishing Company. The M&A Advisor selected Elizabeth’s representation of Pacific Drilling as the 2019 “Energy Deal of the Year” and The Bon-Ton Stores as its 2018 “Consumer Discretionary Deal of the Year (Over $100MM)”. The Financial Times has “Highly Commended” Elizabeth in its annual report on “U.S. Innovative Lawyers” for her work representing certain CEVA Group lenders in the company’s restructuring. Elizabeth is recognised as a leading practitioner by Chambers USA, The Legal 500 and IFLR1000, she speaks frequently at industry events and also contributes to a number of market-leading publications. Elizabeth currently serves on the Bankruptcy and Corporate Reorganisation Committee of the New York City Bar Association.

Paul, Weiss, Rifkind, Wharton & Garrison LLP Tel: +1 212 373 3524 1285 Avenue of the Americas Email: [email protected] New York, NY 10019 URL: www.paulweiss.com USA

Diversity of experience, senior-level attention and seamless delivery of our Corporate, Finance, Securities, Tax, Litigation, Employee Benefits, of multidisciplinary services are the foundations of the Paul, Weiss Real Estate and Environmental Departments, we are able to tailor our Restructuring Department. efforts to the specific business challenges that our clients face. We possess a thorough knowledge of every aspect of bankruptcy law, www.paulweiss.com 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 work-outs, 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 Restructuring Department fields large, multidisciplinary teams that leverage the resources of our firm as a whole. By drawing on the expertise

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