Restructuring & Insolvency 2021

A practical cross-border insight into restructuring and insolvency law

15th Edition

Featuring contributions from:

Bennett Jones LLP INSOL International SCA LEGAL, SLP De Pardieu Brocas Maffei A.A.R.P.I. International Insolvency Institute Schindler Rechtsanwälte GmbH Dhir & Dhir Associates Kennedys Stibbe Dirican | Gözütok Kirkland & Ellis Studio Legale Ghia ENGARDE Attorneys at law Lenz & Staehelin Synum ADV Gall Macfarlanes LLP Vassilev & Partners Law Firm Gilbert + Tobin Mason Hayes & Curran Vieira de Almeida Goldfarb Seligman & Co. Mori Hamada & Matsumoto Wachtell, Lipton, Rosen & Katz Indrawan Darsyah Santoso Paul, Weiss, Rifkind, Wharton & Garrison LLP Waly & Koskinen Attorneys Ltd. ISBN 978-1-83918-112-2 ISSN 1754-0097

Published by

59 Tanner Street London SE1 3PL United Kingdom Restructuring & Insolvency 2021 +44 207 3 67 0720 [email protected] th www.iclg.com 15 Edition

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Senior Editor Sam Friend

Head of Production Contributing Editor: Suzie Levy Jat Bains Chief Media Officer Macfarlanes LLP Fraser Allan

CEO Jason Byles

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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 International – An Introduction 1 Julie M. Hertzberg, INSOL International

International Insolvency Institute – An Overview 4 Debra Grassgreen, International Insolvency Institute

Expert Analysis Chapters

What is Next for Businesses to Repair Their Balance Sheets? 7 Simon Beale & Amy Walker, Macfarlanes LLP

Recent Trends in U.S. Corporate Bankruptcy and Restructuring 12 Joshua A. Feltman, Emil A. Kleinhaus, Michael S. Benn & John R. Sobolewski, Wachtell, Lipton, Rosen & Katz

Q&A Chapters

Australia Ireland 16 Gilbert + Tobin: Dominic Emmett & Alexandra Whitby 106 Mason Hayes & Curran: Frank Flanagan & Judith Riordan Austria 23 Schindler Rechtsanwälte GmbH: Martin Abram & Israel Florian Cvak 113 Goldfarb Seligman & Co.: Adv. Aaron Michaeli, Adv. Yehuda Rosenthal, Adv. CPA Asher (Ashi) Engelman Belgium & Adv. Inbar Tal 29 Stibbe: Pieter Wouters Italy Bermuda 119 Studio Legale Ghia: Enrica Maria Ghia 35 Kennedys: Mark Chudleigh & Laura Williamson Japan Bulgaria 127 Mori Hamada & Matsumoto: Daisuke Asai 44 Vassilev & Partners Law Firm: Konstantin Vassilev Netherlands Canada 133 Stibbe: Job van Hooff & Daisy Nijkamp 50 Bennett Jones LLP: Kevin J. Zych & Joshua Foster Russia England & Wales 141 59 Synum ADV: Alexander Zadorozhnyi & Artem Macfarlanes LLP: Simon Beale & Tim Bromley-White Kazantsev Finland 66 Spain Waly & Koskinen Attorneys Ltd.: Tuomas Koskinen & 149 SCA LEGAL, SLP: Pedro Moreira & Isabel Álvarez Sami Waly Switzerland France 157 Lenz & Staehelin: Tanja Luginbühl & Dr. Roland 72 De Pardieu Brocas Maffei A.A.R.P.I.: Fischer Joanna Gumpelson & Philippe Dubois Turkey Germany 167 Dirican | Gözütok: Gökben Erdem Dirican & Ali 80 Kirkland & Ellis: Dr Josef Parzinger, Dr Johannes Gözütok Lappe & Michael Berger Ukraine Hong Kong 174 ENGARDE Attorneys at law: Dmytro Donenko & 87 Gall: Nick Gall, Ashima Sood & Kritika Sethia Artem Parnenko India 94 USA Dhir & Dhir Associates: Sachin Gupta & Varsha 181 Banerjee Paul, Weiss, Rifkind, Wharton & Garrison LLP: Alan W. Kornberg & Elizabeth R. McColm Indonesia 100 Indrawan Darsyah Santoso: Immanuel A. Indrawan & Eric Pratama Santoso Welcome

Digital Edition Chapters

Portugal 188 Vieira de Almeida: Filipa Cotta & Catarina Carvalho Cunha

Preface

Welcome to the 2021 edition of ICLG – Restructuring & Insolvency. Macfarlanes is delighted to continue to serve as the Guide’s contributing editor. The detailed content of year’s edition is very different from years gone by, primarily as a consequence of the government reactions to the consequences of COVID-19, and I expect that there will be yet more change to reflect in the chapters of this Guide in the years to come. A lot of what we have seen in the past year could be described as ‘crisis management’. For example, suspensions of director liability for late insolvency filings and blocks on creditor action to recover unpaid debts in many jurisdictions have helped to ensure that formal insolvencies are much lower than the historic average. However, those types of measures fail to address the massive accrual of liabilities on corporate balance sheets through the deferral of tax payments, the non-payment of rent to landlords and borrowing under government-backed loan schemes. If the post-pandemic economic recovery is not to be drawn out for many years to come, practitioners will need to come up with appropriate solutions – potentially with the assistance of further legal reform. My colleagues Simon Beale and Amy Walker consider this in their Expert Analysis chapter, which I commend to you. This year’s edition contains contributions from many leading practitioners, including an insight into the issues in restructuring and insolvency across 25 jurisdictions. We are very grateful for their support and we trust that you will find it valuable. 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 2021 [email protected] Welcome Chapter 1 1

INSOL International – An Introduction

INSOL International Julie M. Hertzberg

As President of INSOL International, I am grateful for the with our partners the World Bank Group and UNCITRAL opportunity to once again contribute to this publication. on the next forum, which will be held in a virtual format in 2020 proved to be a difficult year for us all on both a personal September 2021. and professional basis. The impact of COVID-19 has been seismic, and while there now appears to be light at the end of Africa Round Table (ART) the tunnel with the development and deployment of vaccines in some countries, 2021 will continue to prove challenging. Despite operating against the backdrop of a global pandemic, The establishment of the Africa Round Table, with the support INSOL has successfully pivoted to virtual delivery and thank- of our partners the World Bank Group, was a historical and fully has continued with its planned initiatives, collaborations, ground-breaking initiative by INSOL. The most recent ART and products, which I have detailed below. meetings in Mauritius (2017), Mozambique (2018) and Namibia (2019) were very successful and were followed in 2020 with a Collaboration with Multilateral and virtual event due to COVID-19 restrictions. Multinational Bodies BRICS Countries INSOL has over time developed strong relationships with both multilateral and multinational organisations engaged in policy INSOL has a number of projects ongoing to assist the econo- development and standard building in insolvency and related mies of Brazil, Russia, India, China, and South Africa (BRICS) areas. INSOL continues to collaborate with the United Nations in their development and reform initiatives regarding restruc- Commission on International Trade Law (UNCITRAL) in the turing and insolvency systems. In the last 12 months, virtual crucial area of cross-border insolvency work. We also continue seminars have been held in the PRC and India with further to work closely with the World Bank Group on a wide range of events currently being organised for late 2021/early 2022. projects principally aimed at the development of institutional capacity, and more recently with the establishment of our Asian Hub, located in Singapore, we have increased our engagement Latin America with the Asian Development Bank and the Asian Business Law Institute. INSOL held a Virtual Seminar in March of this year. This had an important cross-border element whilst addressing local issues and Regional Initiatives benefitted from simultaneous translation to assist local attendees. INSOL has a number of continuing regional and country-spe- Furthermore, INSOL also publishes a biannual Latin America cific initiatives to assist with improvements in insolvency Newsletter, giving our members a synopsis of legislative changes systems and the enhancement of institutional capacities in in the region. emerging markets. Education

Middle East North Africa (MENA) The value of education can never be underestimated, and as such it was a cornerstone of our strategic review, which identified a growing need for an entry-level introductory cross-border training In recent years, we have held a one-day seminar in Tel Aviv, course, particularly in the developing world. This need ushered in Israel (2017), and a seminar in Dubai (2018). Originally, we had INSOL’s Foundation Certificate in Insolvency Law. The course hoped to return to the region in person in 2020 but as a result attracted 119 students from 35 countries in its first year and 122 of COVID-19 restrictions, we have been forced to continue our candidates from 42 countries in 2020/2021. The online nature of engagement here in a virtual manner, which includes holding an this course makes it highly accessible and cost-effective, and will online Judicial Round Table for the region in November 2020. help younger practitioners enter the industry. Due to COVID-19 restrictions, INSOL was unable to enrol a Forum on Asian Insolvency Reforms (FAIR) 2020 class in the Global Insolvency Practice Course (GIPC). In the last decade it has seen 171 professionals achieve the accred- The most recent FAIR was held in Thailand in September 2018. itation of Fellow, INSOL International, and we are very proud Looking further into this year, INSOL International is working of this and of our fellows who continue to prove themselves to

Restructuring & Insolvency 2021 2 INSOL International – An Introduction

be highly engaged individuals who have helped to shape INSOL’s INSOL International Technical Publications future. In 2021, we will hold an online GIPC course, returning to in-person delivery in 2022. Our technical library, which can be found on the INSOL website, is a worthwhile point of reference for any professional Seminars and Webinars concerned with insolvency and restructuring. The publications cover an array of topics and cutting-edge developments. These Prior to COVID-19 restrictions being introduced, INSOL was publications could not be produced without the knowledge and able to hold seminars in India and Mexico City in the early part experience of those members who have contributed, for which of 2020. However, as the global pandemic took hold, INSOL we are so grateful. moved swiftly to implement its webinar programme. From May Whilst INSOL delivered a series of Special Reports, Technical 2020 we held a series of short-form sessions looking at emer- Papers and books this year as we would in any other year, one gency relief measures put in place around the world and more specific piece of work that we are very proud of is the COVID in-depth webinars that focused on specific issues – 15 webinars Guide. in total. In addition, we held a number of regional seminars in The COVID-19 pandemic has had, and will likely continue to a virtual format, such as PRC, Hong Kong and Cayman Islands. have, major financial repercussions across the globe. In many countries, the effects of reduced demand, disrupted supply chains Conferences and tighter liquidity are already causing significant financial distress for businesses – from large public entities to SMEs and At the point of planning INSOL Cape Town 2020, no one could informal traders – desperate to survive until the crisis subsides. have foreseen the circumstances that would prevent that event Many governments are introducing new financial, legal and from going ahead. The results of the pandemic have made phys- regulatory measures in an effort to manage the economic effects ical conference events a practical impossibility even more so for of the crisis in an effective and timely manner. These meas- an international audience. Consequently, INSOL redesigned its ures continue to rapidly evolve as governments do their best to conference programme to deliver a virtual event across three respond to the crisis. time zones to ensure that members were still able to meet, share As a result, beginning in April 2020, INSOL International and learn. At a time of increased uncertainty, the importance and the World Bank Group have jointly produced a “Global of insight, analysis and clarity is even greater, and the confer- Guide: Measures adopted to support distressed businesses ence attracted more than 500 delegates. All of INSOL’s member through the COVID-19 crisis” to highlight some of the primary measures that were introduced in 38 countries as a response to countries were represented, and the programme offered pandem- the COVID-19 crisis. We are currently in the process of adding ic-specific content and wider economic and restructuring value. more countries to our interactive map and updating existing The future for INSOL conferences remains uncertain until the contributions, as this is an ongoing “live” document. pandemic recedes, but this event has allowed us to learn and establish a viable online model, and we hope to establish hybrid events in the future. Going Forward 2020 provided its share of challenges for INSOL International, and 2021 has begun as last year left off. However, I am confi- dent that we will be able to continue to deliver value for our members this year, and hopeful that 2022 will see a return to a world more familiar to us all.

Restructuring & Insolvency 2021 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 and was recently appointed the practice group leader for A&M’s ESG Services division specialising in providing advice on environment, social and governance issues. With over two decades 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 44 Member Associations worldwide with over 10,500 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. ©2021 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 2021 4 Chapter 2

International Insolvency Institute – An Overview

International Insolvency Institute Debra Grassgreen

Introduction The Executive Committee consists of the President, the immediate past-President and four Vice-Presidents. The President is While many commentators were predicting some sort of Debra Grassgreen of Pachulski Stang Ziehl & Jones LLP, San economic downturn in 2020, it was unimaginable at the start of Francisco (USA) and the immediate past-President role is repre- last year that we would be facing a global health and economic sented by Alan Bloom of EY, London (UK). The Vice-Presidents crisis of the proportions that we have seen with the COVID-19 are: John Martin of Norton Rose Fulbright, Sydney (AUS); Pekka pandemic. The true impact on our global economy may not Jaatinen of Castren & Snellman Attorneys, Helsinki (FIN); be known for years to come. However, what is certain is that Justice Ramesh Kannan of the Supreme Court of Singapore; organisations like the International Insolvency Institute (“III”) and Hon. Shelley Chapman of the U.S. Bankruptcy Court in the and others are making valuable contributions in providing Southern District of New York. The Executive Committee and thought leadership to assist with the recovery. The ability to other committees are supported by a small, experienced team of rehabilitate businesses through out-of-court or court-supervised senior administrators. insolvency proceedings is critical to the global recovery and, as The III’s operational committees consist of three types: a result, communication and cooperation between parties to ■ Four regional committees representing: USA/Canada and global insolvency proceedings are more important than ever. the Caribbean; EMEA; Asia; and Latin America. The III is a non-profit, limited-membership organisation ■ Three core committees: Programs and Meetings; Projects; that draws its membership from the most senior and respected and Insolvency Development & Practice. insolvency practitioners, judges, and academics in the world. ■ Various specialist committees such as: the Academic It holds special consultative status with agencies of the United Committee; the Judicial Committee; and the NextGen Nations. The III is dedicated to supporting global insol- Committee. vency reforms through sponsorship of projects, conferences, Each of the regional committees has co-chairs and between academic and judicial meetings, and regional activities. The III five and 10 members. The role of the regional committees is supports the development of thought leadership in the area of principally to: cross-border insolvency and work with governmental entities ■ identify suitable new members; and the judiciary to provide education and support for these ■ identify new candidates for the NextGen programme; efforts. ■ organise regional activities including meetings, webinars, The III is now 20 years old. The organisation currently has 415 etc.; and members. Membership is currently: 40% from North America ■ consider projects for submission to the Projects Committee. and the Caribbean; 32% from Europe, the Middle East and The Programs and Meetings Committee oversees the work of Africa; 18% from Asia; and 10% from Latin America. We have our annual conference committees, ensures that we present the a stated objective to increase representation from jurisdictions best possible conferences, and learn from the lessons of previous with less mature insolvency regimes and therefore less well-de- events to ensure quality, consistency, and continuity. It is also veloped insolvency professions and judiciary. responsible for looking at future destinations for the annual Our membership is currently 81% male and 19% female, with conference and ensuring that each of the regional meetings are a clear and stated intention of increasing gender diversity. In dovetailed with other activities within the Institute. addition, our membership includes: 17% judges; 14% academics; The Projects Committee is responsible, in liaison with the 65% legal practitioners; and 5% financial advisory practitioners. Academic Committee, for helping to generate ideas for new We also have a goal of increasing the number of financial advi- projects and approving any proposed projects before they are sory members across the full range of financial advisory activities. sanctioned by the Executive Committee and the Board. Membership is by invitation through full member sponsorship, The Insolvency Development and Practice Committee so we have a network of individuals, as part of our membership ensures that the III is working closely with other like-minded committee, who liaise with the existing membership to estab- organisations in a positive and proactive way while collabo- rating on projects and joint-ventures where appropriate. The lish a pipeline of candidates to be considered for membership. Committee is also looking at opportunities to use the skill base The III is accountable to its members, through a Board, an of the III membership to support initiatives either cross-border Executive Committee, and a series of operating committees. The or within countries, to develop insolvency/bankruptcy regimes, Board consists of members with a good cross-section of geographic, and to support the development of a suitably skilled judiciary. gender, and professional backgrounds. It meets monthly, and all The Academic Committee meets on the day before each major decisions have to be approved by the Board. annual conference and part of the meeting is open for any of

Restructuring & Insolvency 2021 International Insolvency Institute 5

our members to attend. It provides a forum for the discussion COVID Coffee Breaks and debate on key topics and its work often results in the generation of new project ideas, as well as input to our regional and In order to cope with social distancing, we have initiated COVID annual events. Coffee Breaks within the regions so our members can meet and The Judicial Committee also meets the day before our annual exchange current issues in legal and regulatory changes in an conference. Unlike the Academic forum, the Judicial forum is informal matter. not open to non-judges and it serves to stimulate debate and influences the subject matter for projects, wider forums, and Webinars future conferences, e.g., on court-to-court communication. During the last in-person Annual Conference in Barcelona In May 2020, we hosted a series of webinars on issues arising in June 2019, there was an opportunity for the academics and from the new EU Directive on Restructuring, law reforms as judges to get together and discuss issues of mutual interest. a consequence of the pandemic, the impact of the pandemic The NextGen membership consists of approximately 100 on real estate, recreations, and retail with perspectives from current members and approximately 45 alumni. The NextGen the United States, Canada and the United Kingdom, as well as group organise their own conference, with a completely separate the impact on the airlines industry. These events were a great tailor-made programme that they develop, which takes place the success and allowed access to a much wider group of partici- day before each annual conference. There is an open invitation pants without the cost and time commitment of travelling. III for full members to participate. NextGen also organise their own will hold exciting webinars jointly organised with ACB and ABI social programme. Increasingly, NextGen members support and in February/March 2021 on the impact of Brexit on European participate in the work of the full member committees. Insolvency & Restructuring, an international perspective consid- The creation of these committees has resulted in more activity ering view from the United States, Canada and the Caribbean at the III than ever before, with many more opportunities for and from Asia (Singapore and Hong Kong). members to participate. A few highlights from the past year and from the programme for the next few months illustrate the Ian Fletcher Moot Competition opportunities for our members to get involved and significantly In a strong collaboration with INSOL International, we have greater platforms for the Institute and its members. created a branded moot competition in honour of Professor Ian Fletcher. Running for the fifth time after Sydney (2017), Annual Conference Vancouver (2018), Singapore (2019) and London (2020), the While we reallocated our conference from Hong Kong to New competition will be held completely virtually in 2021. Despite York in early 2020, thereafter we were required to cancel the that fact, the competition received the most submissions so far conference due to the COVID-19 pandemic. We used a virtual from a wide range of civil and common law jurisdictions. The meeting platform for and held our first annual membership quality of submissions and the prominence of the judges make meeting virtually. The venue for 2021 was planned for São Paolo this a very impressive, now annual, event. The III and INSOL in June, but that conference was, unfortunately, postponed as a International are committed to continue the moot as a successful consequence of the ongoing pandemic. At the point of writing, event to build the next generation of successful restructuring we still hope to hold a hybrid conference in fall 2021. The venue and insolvency lawyers. for 2022 will be Hong Kong from 12–14 May. Academic Events / Programmes and Panels III Thought Leadership Project – The Need In September 2020, the III held a virtual workshop to discuss for an Emergency Restructuring Entity the findings of the III-funded project to develop a model law for cross-border resolution of financial institutions. The project The III initiated a Thought Leadership Project in October 2020 will conclude with a book in 2021. In February 2021, the III following the onset of the COVID-19 pandemic. The working sponsored the virtual workshop “The Global Competition group of III members and a senior IMF professional analysed for Large Insolvency Cases”, held at the University of Austin restructuring tools responsive to the economic disruption in (Texas), which was attended by a number of leading academics order to assist the rehabilitation of viable companies affected in the field. The III also produced panels at other organisa- by the pandemic and put together a proposal and presenta- tions’ virtual events: at the ABI International Symposium; at the tion regarding the need, in many countries, for an Emergency NCBJ conferences; and in conjunction with the International Restructuring Entity (“ERE”). The III members that worked Committee of the ACB. on this project have put together materials and have presented programmes to various government officials regarding the benefits of establishing an ERE and a proposal for the structure of such an entity.

Restructuring & Insolvency 2021 6 International Insolvency Institute – An Overview

Debra Grassgreen is a senior partner in Pachulski Stang Ziehl & Jones’ San Francisco office and heads the firm’s international insolvency practice. She is president of the prestigious International Insolvency Institute (the first woman to be elected to that position) and is widely regarded as a leading expert on cross-border restructuring matters. Ms Grassgreen has significant experience representing debtors, trustees, and creditors’ committees in large and complex chapter 11 cases nationwide and internationally. Ms Grassgreen has participated in the United Nations working group (UNCITRAL), developing a uniform international insolvency law and materials to assist countries in the adoption and implementation of insolvency legislation for over 10 years. Ms Grassgreen is listed in Who’s Who Legal: Thought Leaders—Global Elite 2019, one of only seven U.S.-based lawyers listed for Restructuring and Insolvency, and has been named by the Daily Journal as one of the top 100 women lawyers in California for several years. She is a fellow in the American College of Bankruptcy, and has been listed in Best Lawyers in America every year since 2001 for her work in both Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law and Litigation – Bankruptcy. Ms Grassgreen holds an AV Preeminent Peer Rating, Martindale-Hubbell’s highest recognition for ethical standards and legal ability, and is ranked among Bankruptcy/Restructuring attorneys by Chambers USA. Every year since 2010, she has been named a “Northern California Super Lawyer” by San Francisco Magazine. She was also listed by Lawdragon as one of the 2020 “Lawdragon 500 Leading Global Restructuring & Insolvency Lawyers”. Ms Grassgreen is a graduate of the University of Florida, where she also received her J.D., and is admitted to practise in Florida as well as California.

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

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 2021 Chapter 3 7

What is Next for Businesses to Repair Their Balance Sheets? Simon Beale

Macfarlanes LLP Amy Walker

Introduction term, as this is unlikely to negatively impact future elections, but achieve what is needed in the longer term. However, ultimately The COVID-19 pandemic has placed significant stresses onto most countries will come to face the same problems. businesses across the globe. However, by and large, this has not yet manifested itself in an increase in corporate insolven- Financial Position of Companies cies. In the UK, for example, since the start of the first lockdown in March 2020 the rate at which companies have entered There is little doubt that businesses worldwide will now owe a formal insolvency has fallen compared to pre-pandemic levels. high level of financial debt. This financial debt may have been The London Gazette confirmed that there were 12,557 corporate incurred in at least two different ways: insolvencies in 2020, a 27% decrease from 2019’s figure of 17,196. ■ financial debt borrowed prior to the pandemic which, as a This reduction in company insolvencies has been due to the result of the effects of the pandemic, the borrower group government support measures that have been introduced since will no longer be able to repay on maturity; and the onset of the pandemic. In the UK alone, these are expected ■ financial debt borrowed from government lending (or to exceed £300 billion. The support measures in the UK government-guaranteed lending) schemes introduced include, for example, funding support packages, tax reliefs and during the course of the pandemic, but which the borrower the Coronavirus Job Retention Scheme (“CJRS”). As at March group will again be unable to repay on maturity. 2021, UK government statistics show that almost £180 billion These may well have had a cumulative effect for many compa- has been provided by the government in loans to businesses, nies. In addition, companies may be left with a higher debt which represents over one quarter of UK businesses, and that burden in other ways as a result of the pandemic. For example: the overall cost of the CJRS is around £58 billion. ■ companies with leased premises may have taken advan- The pandemic has already given rise to many new pieces of tage of measures preventing their landlords from pursuing national legislation. In the UK, the Corporate Insolvency and them for unpaid rent during the course of the pandemic. Governance Act 2020 (“CIGA”) became effective on 26 June While the situation may differ from country to country, 2020 and introduced temporary measures in response to the in the UK this unpaid rent will merely have been deferred COVID-19 pandemic as well as accelerating the implementa- and will still become due and payable at some later date. tion of permanent measures. To provide companies and direc- In practice, in the UK we have seen some businesses and tors with the necessary breathing space during the pandemic, the landlords re-negotiating the terms of the leases or, in some temporary measures include (i) a moratorium on creditor actions cases, companies going through a company voluntary designed to result in the company’s liquidation, unless it can be arrangement process to implement significant rent reduc- shown that the debt relied upon has not arisen as a consequence tions and to exit unprofitable leases; of COVID-19, (ii) a moratorium on landlords re-taking posses- ■ companies may have had to furlough a number of employees sion, and (iii) the suspension of certain director liabilities that during the pandemic. Whilst in the UK the CJRS provides might otherwise arise from continuing to trade prior to a formal a contribution towards the employment costs of furloughed insolvency. We will describe the permanent measures later. employees (up to 80% of wages, capped at £2,500 per month), A number of the UK’s government support and legislative the wages may be significantly in excess of those amounts measures were extended further in March 2021 and may poten- being made available by the government. Therefore, in order tially be extended yet again. Other countries have both intro- to retain those employees, particularly those which are crit- duced and extended similar measures. However, given the cost ical to the businesses, many employers have had to bear the of the support measures both in the UK and elsewhere, they extra costs of paying these wages in full, despite not being must eventually come to an end, and businesses worldwide will “open for business”; and need to be prepared for this. ■ finally, the pandemic has brought significant challenges In the short term, political factors will doubtless play a part to businesses in relation to stock planning. For example, here. We might therefore expect, for example, that France and retail businesses will have invested in seasonal stock and Germany will need to extend high levels of government support therefore, unless they have an online platform, this stock to businesses at least until their national elections later this year will now have to be replaced. Similarly, in the food and and perhaps beyond, dependent on the politicians’ promises. In beverage sector, stock will have perished as a result of the comparison, the UK is unlikely to have another national election government restrictions. We have, however, seen a lot of until 2023 or 2024. The UK government therefore has an early adaptation and innovation in this sector with many restau- opportunity to make decisions that are less popular in the short rants now offering a takeaway service, in order to use stock and to maintain a source of revenue.

Restructuring & Insolvency 2021 8 What is Next For Businesses to Repair Their Balance Sheets?

Consumer behaviour and spending has also changed consid- to extend the maturity dates of unpaid debt. Provided the erably throughout the pandemic. Therefore, the level of demand borrower was able to service the interest, and to pay any asso- for certain businesses and sectors coming out of the pandemic is ciated fees and other charges, those lenders would suffer no difficult to predict. With the uncertainty around what the “new immediate hardship. normal” will look like, companies are having to consider how This did not resolve the fact that the lending arrangements were to survive on a short-term basis and review their longer-term unsustainable. Instead it led to the result that borrower groups strategy, and how to address their liquidity issues. Businesses were obliged to expend a high proportion of their available cash that have mothballed, and that are low on cash, will need to servicing their finance debt, which meant that they had few or no find ways to replenish stock levels, invest in capital expenditure available funds left for capital expenditure and the other invest- and “re-open for business”. Many of these companies will have ments they needed to develop their businesses. This in turn led maximised their debt capacity and will therefore need to find to a growth in the number of so-called “zombie” companies who ways to get the working capital cycle going again. were able to continue to exist but not to grow and invest. The cumulative effect of successive UK governments’ poli- Approaches Available to Governments cies since 2008 has been a higher rate of employment during the 2010s than in many other comparable countries. However, there This article looks first at the approaches taken following the are potential concerns about the UK’s lower rate of productivity 2008 financial crisis and the lessons that might be learned from than many of those same countries. Many voices in the UK have this. It then considers several possible approaches that govern- suggested that we now have an opportunity to find different ments might take from here: solutions, or to “build back better”. ■ introduce new restructuring procedures; ■ take a public stake in businesses by converting govern- Introduce New Restructuring Procedures ment-guaranteed debt into equity or even by investing further government money; One particularly significant way in which the COVID-19 ■ provide a route for private sector investors to invest by way pandemic differs from that following the 2008 financial crisis is how companies have been impacted operationally. Following of equity; or the financial crisis we saw groups with viable businesses unable ■ allow certain companies to go into insolvency. to pay their existing finance debt at maturity. However, in In this respect, again we focus particularly on our own expe- larger groups the problem frequently manifested itself within rience with the UK. However, we would hope that at least some the stacks of holding companies that had been established to of what we say is also applicable to many other jurisdictions facilitate complex financial arrangements. Below these holding throughout the world. companies, operating subsidiaries continued to generate the cash they needed to part their own day-to-day trade creditors. The Strategy Following the 2008 Financial When COVID-19 hit, however, it quickly became clear that Crisis companies were likely to face problems at operating level as well. As mentioned above, in addition to introducing a range of In the aftermath of the financial crisis, the UK government’s temporary measures to prevent landlords and other trade cred- strategy was to intervene in privately owned corporates only to itors taking action against debtors, the UK rapidly accelerated a the minimum extent necessary. The government acted quickly number of insolvency reforms by way of CIGA. to stabilise the major banks, and two of the “Big 4” banks The three main permanent changes introduced by this piece were duly taken into majority public ownership. However, of legislation were: the government did not intervene to any great extent in other ■ a new, standalone “pre-insolvency” moratorium procedure private sector businesses. for companies in financial difficulty; There was an initial focus in the UK on public sector invest- ■ a new form of restructuring plan for companies that are in, ment as the tactic for reviving the economy. However, the or likely soon to be in, financial difficulty; and general election in 2010 introduced a Conservative/Liberal ■ new provisions to protect supplies to companies that have Democrat coalition government in place of the previous Labour entered one of a number of formal insolvency procedures government. They were concerned by the growing size of the or other restructuring procedures by making it harder for UK’s national debt and preferred a policy of austerity and of suppliers of goods and services to amend or terminate reducing public sector expenditure, which was broadly in line contracts. with the policy favoured by other larger EU Member States at None of these changes were unexpected to UK restructuring that time. The UK government’s desire, among other things, professionals. As long ago as 2016, the government published was for companies to invest capital that they had built up on a consultation paper seeking views on measures to update the their corporate balance sheets in their own businesses. UK’s corporate insolvency regime. One of the stated aims So far as the banks were concerned, the UK duly avoided was to improve the UK’s standing in the World Bank’s annual the collapse of any large, systemically important financial insti- “Doing Business Report”. The measures included within the tutions. However, it is also true to say that the UK’s clearing paper were also broadly in line with the aims of then-cur- banks did not resume new lending on the scale seen prior to the rent proposals for an EU directive on introducing preventive crisis. They preferred to exercise a degree of caution in ensuring restructuring frameworks that might help a company avoid a that they were better capitalised. In their place, a host of new more extreme insolvency process. The latter have subsequently lenders have entered the market, or dramatically increased their evolved into Directive (EU) 2019/1023 of the EU Parliament presence within it. and of the Council and will therefore be familiar to restruc- The economic downturn following the 2008 financial crisis turing professionals in various other EU Member States. saw a far lower number of formal insolvencies than many insol- The UK government’s consultation sought views on four vency professionals had been expecting. Lenders who wrote proposals. The first three of these were variants of the morato- down debt or who enforced as a result of payment defaults rium, restructuring plan and protections of supplies now intro- would be obliged to recognise the loss they had suffered. Rather duced. The fourth proposal was to create greater opportunities than recognising losses early, therefore, many lenders preferred for companies to obtain additional funding while undergoing a

Restructuring & Insolvency 2021 Macfarlanes LLP 9

rescue process, but the UK ultimately chose not to introduce any protect against foreign takeovers of businesses badly hit by the new form of debtor-in-possession financing. pandemic, with the aim in turn of protecting jobs in Germany. The restructuring plan in particular allowed the use of “cross- This raises the further question of how a public stake might be class cram-down” for the first time in the UK whereby, subject held. The ultimate long-term aim might be to establish a citizens’ to certain statutory and judicial safeguards, one or more classes wealth fund to hold a variety of stakes in many companies. One of creditor voting in favour of a restructuring plan might still possibility is that the government or other lenders of govern- impose a debt restructuring plan on one or more classes of cred- ment-backed loans convert some or all of the debt into equity. itor voting against it. This raises the possibility, for example, of The equity is then sold to a fund, which invests in a number of finance creditors voting to impose such a plan on operating cred- companies. Institutional investors and affluent individuals may itors. Indeed, the UK’s first restructuring plan, which avoided then invest in this fund. The main advantages of this route is the formal insolvency of Virgin Atlantic Airways Limited, duly that it would not involve the government taking a shareholding encompassed restructuring of both finance and trading debts, in private companies and it would ensure that support was only albeit in that case the required majorities of all classes voted in provided where an independent fund manager believed that a favour. A subsequent restructuring plan for three companies business was viable. However, a realistic, shorter-term aim might in the Deep Ocean group has seen the cross-class cram-down be a national investment bank. mechanism used successfully. Doubts will remain as to whether the state, even though a Throughout the world, other countries have been making quasi-autonomous body, is genuinely the most objective investor permanent changes to their own restructuring regimes, the aims or best steward of the equity of a wide portfolio of companies in of which are similar to those of the UK. the longer terms. It could be viewed that political factors, such In practice, we have doubtless seen these new tools used less as a wish to win votes in a particular election, will never play a so far than they will be in the future due to the present levels of part in its decision-making. government support. However, even then the new restructuring procedures may not prove a panacea if, once again, companies Private Sector Investors merely downsize their finance and other debts to a level that An oddity of the past 12 months is that, while a variety of private they are able to service or indeed choose not to restructure at all sector investors, including private equity, venture capital, overseas in the absence of a genuine burning platform. sovereign wealth funds, insurers and pension providers continue to hold between them a vast arsenal of “dry powder” capital, they Take a Public Stake have had fewer than ever opportunities to deploy this. Funds specialising in distressed investment have reported a What is already different to the aftermath of 2008 is the level to frustrating year, where they may feel that government support which governments now have a direct financial interest in many schemes have denied them the opportunities that would other- businesses, whether as a direct lender or as a guarantor of debt. wise exist. There will also have been many of the funds’ port- In the UK, more than 1.5 million businesses have been granted folio companies that will have required additional support loans through government or government-backed schemes. throughout the pandemic. Therefore, more resources will have The possible options for government to intervene in debt been directed towards liquidity and operational issues of compa- restructuring include the following: nies that were otherwise performing well pre-pandemic, rather ■ providing companies with the opportunity to turn existing than the focus predominantly being on new opportunities. government support loans into public-owned equity. In Clearly, the availability of private sector funding will not this case, the state would become a part-owner of the in itself resolve the difficulties of businesses that are already company in return for a reduction in its debt burden. over-indebted, but they could play a significant role in post-pan- Indeed this has already occurred on a small scale in the demic recovery. One possible solution is that the government, UK, via the capitalisation of loans offered through the rather than holding its newly acquired equity, sells it on into the government’s Future Fund; and private equity market. This would enable the government to ■ repaying government-guaranteed debt in return for the recover sums owed by the company or de-risk itself in relation to issue of equity by the company. Certainly, the govern- the guarantees and would provide private sector investors with a ment may see this as a better alternative to an insolvency sharp increase in investable opportunities. where it is called on to pay out under its guarantee without receiving a benefit in return. Increase in Corporate Insolvencies Separately, there is the possibility of government equity injections. This is a form of support that the UK has so far been slow Without government intervention, there is a risk that we could to adopt. In the early stages of the pandemic, the UK govern- again see a proliferation of zombie companies. However, the ment developed Project Birch, a support scheme for viable fact that many companies may soon be left facing problems companies that have exhausted all options and whose failure paying operational creditors rather than just financial creditors would disproportionately harm the economy. While there was could lead to a different result. no shortage of applicants for government bailout through loans Given the reduction in corporate insolvencies throughout the or equity, so far the only company to receive support through the pandemic and a fall in GDP of 9.9% in 2020, there is likely to be scheme was Celsa Steel UK, the UK’s largest steel rebar manu- a significant backlog of businesses that have been kept solvent facturer. Whilst the government has not confirmed the amount, due to the support measures, but otherwise would have failed. media reports have suggested that Celsa was provided with a £30 Whilst we anticipate that some government support measures million bailout and this was in the form of a loan. We understand may be extended past 30 June 2021, an astute government might the company was given a series of legally binding conditions to choose to wind down its support on a sector-by-sector basis. adhere to, and told that the money was to be repaid in full. Therefore, if the support measures are retained for the sectors An example of equity injections in Europe last year includes that have been most impacted by the pandemic, such as the retail Germany forming a €600 billion public equity fund called and leisure sector, then the unwinding of the government meas- Wirtschaftsstabilierungsfonds. A major justification for this was to ures can be tested on other sectors first, that have been less impacted by the pandemic.

Restructuring & Insolvency 2021 10 What is Next For Businesses to Repair Their Balance Sheets?

The pandemic has clearly affected different sectors in different as a preferential creditor. Therefore, large amounts of source ways and therefore governments need to strike a careful balance taxes (such as PAYE, VAT and employee NIC) that were between continuing to extend the support measures and just deferred as part of the government support packages will now opening the floodgates to enforcement against businesses at a have priority over many other creditors, both secured and unse- time when they need to recover. We can expect, however, that cured, in the event of an insolvency. This will therefore make the cliff edge is on the horizon and there will be a sharp rise in HMRC a very powerful creditor in any restructuring scenario corporate insolvencies when the government support measures and their change in status may make lenders unwilling to lend to come to an end. certain businesses, which again could contribute to an increase For a number of reasons, we might also see larger and smaller in corporate insolvencies. businesses affected in different ways. The government might decide to place its emphasis on the rescue of larger corpo- Conclusion rate entities if it decides that these are most important to the COVID-19 has accelerated change in many different sectors, economy rather than also trying to ensure the long-term survival and we have seen adaptation, innovation and new ways of doing of a host of other small and medium-sized enterprises. The business over the last 12 months. Some of these changes, such new tools described about may well provide opportunities that as the shift to online platforms, will continue. There will, did not previously exist, but some of these – for example, the however, be a number of complex challenges that companies UK’s new restructuring plan – will be expensive to use and the will face when we return to a “new normal” and the government cost may prove prohibitive for small and medium entities. The support measures come to an end. Governments will therefore largest corporates are likely to have access to all of the profes- need to focus on which companies they most wish to continue sional advice they need, but this may not be true of less sophis- to support through to recovery, and which may be allowed to ticated entities, who may not know to whom to turn until it is fail. There will also be certain sectors, impacted the most by the too late or who may turn to the wrong source of advice. In the pandemic, that the government will need to continue to support absence of external support, some corporates will simply decide for a longer period than others. that formal insolvency is a more attractive option than an ener- Overall, companies will now need to focus in the short-term gy-sapping process of trying to rebuild a business while simulta- on servicing their debts, repairing their balance sheets and neously undergoing many rounds of debt-restructuring discus- engaging with key stakeholders to find solutions for the busi- sions with creditors. ness, rather than being able to invest, expand and prepare for In the UK, for the more viable businesses, we may see a shift the future. At the same time, they will need to review their back to a more old-fashioned solution of saving businesses rather operations, overheads and how they need to adapt to reflect than corporate entities, where over-indebted companies enter changes in consumer behaviour and spending as a result of the formal insolvency proceedings and their businesses are acquired pandemic. This will ultimately impact the long-term strategy by new, third-party investors. While this goes against the trend of these businesses and productivity. It might take a long time for the world’s economies to recover from the pandemic, but for saving corporate entities, it may ultimately be the best route it could be the actions taken from now on by their respective to avoid another rise of the zombie companies. It may provide governments that decide how long. the boost these businesses need if it provides their best chance of right-sizing their debts and of securing new, private sector investment at an early stage. It will be interesting to see whether Acknowledgments anything similar occurs in jurisdictions that are traditionally We would like to express our gratitude to Mark Phillips QC and more debtor-friendly, or whether different solutions emerge. David Gauke for taking the time to share their thoughts and Finally, there will be quirks that are specific to different ideas with us, which we have incorporated into this chapter. jurisdictions. For example, in the UK, notwithstanding the pandemic, the UK’s tax authority (“HMRC”) was reintroduced

Restructuring & Insolvency 2021 Macfarlanes LLP 11

Simon Beale is the head of the Insolvency practice at Macfarlanes. He has more than 23 years’ experience of advising on corporate restructuring and recovery issues. Simon continues to act 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”, now on its third edition, and also recently of a Law Insight guide to the “Corporate Insolvency and Governance Act 2020”, both published by Bloomsbury Professional.

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

Amy Walker advises on a broad range of financial transactions, with a focus on restructurings and insolvency. She holds the Certificate of Proficiency in Insolvency and is on the IFT NextGen Committee. Her experience includes advising on administrations, liquidations, schemes of arrangement and other formal insolvency processes. Her clients include insolvency practitioners, companies in financial difficulties and their directors and shareholders, banks, alternative finance providers and corporate borrowers.

Macfarlanes LLP Tel: +44 20 7849 2377 20 Cursitor Street Email: [email protected] London EC4A 1LT URL: www.macfarlanes.com United Kingdom

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

Restructuring & Insolvency 2021 12 Chapter 4

Recent Trends in U.S. Corporate Bankruptcy Joshua A. Emil A. and Restructuring Feltman Kleinhaus

Michael S. John R. Wachtell, Lipton, Rosen & Katz Benn Sobolewski

The COVID-19 pandemic and fears of a global recession roiled including the ability to halt litigation against both the bank- financial markets around the world in March and April 2020: rupt business and, in some situations, related, non-bankrupt U.S. investment-grade risk premiums reached their highest parties. For instance, in both the Purdue Pharma and Mallinckrodt levels since the Great Recession of 2008/9 and commercial cases, the bankruptcy stay of opioid litigation (including litiga- paper markets briefly froze; the leveraged loan and high-yield tion brought by governmental entities) was applied not just to bond markets seized shut; and the amount of U.S. distressed stay proceedings against the bankrupt companies but to litiga- debt (bonds yielding at least 1,000 basis points more than treas- tion against equity holders, officers and employees. The bank- uries and loans trading for less than 80 cents on the dollar) ruptcy stay is especially useful in mass tort situations where ballooned to nearly $1 trillion. Related oil market shocks and the multitude of parties can be brought to a single forum and economic shutdowns brought a sharp rise in corporate bank- litigation across 50 states can be replaced with a centralized ruptcies across a wide range of industries in 2020. Some of the process. Bankruptcy can also resolve claims that might arise in companies that filed were distressed or highly leveraged before the future, providing finality to reorganizing debtors as well as the pandemic, but others were generally healthy before being facilitating equality of distribution among claimants. In addi- broadsided by COVID-19. tion, bankruptcy can be used by non-bankrupt parent compa- The carnage could have been far worse had the financing nies to manage and resolve tort liabilities relating to a troubled markets, aided by government intervention, not proven to be subsidiary or former subsidiary. For example, in the ongoing resilient, bouncing back far more quickly than the real economy Imerys chapter 11 case—precipitated by a wave of personal injury and allowing many impacted companies to stave off default or suits relating to talc—current and former parent companies of bankruptcy. Government stimulus programs and central bank the debtor agreed to make contributions to a trust in exchange activity—including the U.S. Federal Reserve’s cut in interest for broad releases. rates to zero and direct intervention in credit markets through An appellate decision in early 2020 reaffirmed the power of purchase of corporate debt—buoyed markets and set the stage bankruptcy to address mass tort claims. The plan of reorgan- for a binge of new borrowings and other financings. Companies ization of asbestos manufacturer Johns Manville, which was moved quickly to stockpile liquidity, first by drawing existing confirmed in 1986, “channeled” all asbestos-related claims lines of credit and then by exploring more creative options. against the company and certain of its insurers to a trust, which Some companies, such as Expedia and Gap, undertook major continues to operate today. Decades later, a plaintiff whose inju- capital structure reconfigurations, strengthening their balance ries manifested long after confirmation of the plan sought to sue sheets with new sources of capital to ride out the storm. But for one of Johns Manville’s insurers. The Second Circuit upheld many companies, the price has been high: to secure financing, the channeling of Johns Manville-related asbestos claims to the they have had to pledge previously unencumbered assets and trust, including claims against the insurer, ruling that appoint- take on more debt, leaving them with less flexibility to address ment of a representative for “future claimants” (i.e., those whose future setbacks and uncertainty as to whether, as the pandemic injuries had not yet manifested at the time of the bankruptcy) winds down, their businesses will grow into their new capital and a wide publicity campaign during the Johns Manville bank- structures. ruptcy were constitutionally adequate to bind future claimants. Amidst all the challenges of 2020, one silver lining was the Mass tort situations are invariably complicated, and even smooth working of the U.S. bankruptcy system. Although the successful cases can be expensive and protracted. As an loss of in-person hearings and dealmaking has been felt acutely, example, the Boy Scouts of America (the “BSA”) filed a chapter U.S. bankruptcy courts operated successfully despite the pres- 11 petition in 2020 to address historical claims of abuse asserted sure of more and bigger cases, holding multi-day hearings by former Scouts. While the BSA was a defendant in about throughout 2020 (and early 2021) by video conference. 275 cases at the time of its filing, a notice campaign during We discuss below some trends and developments in the the bankruptcy case resulted in the filing of over 96,000 abuse restructuring world over the last 12 months, and expectations claims. As another example, Pacific Gas & Electric Corporation for the year ahead. (“PG&E”) emerged from bankruptcy in the summer of 2020 with a trust in place to pay claims arising out of the wildfires alleged to have been caused by PG&E’s equipment. That result Mass Tort Bankruptcies followed protracted negotiations among wildfire claimants, The resurgence in the use of chapter 11 to address mass tort governmental entities, holders of insurance subrogation claims, liabilities, which began in 2019, continued through 2020 and and financial creditors and shareholders. The bankruptcy into 2021. The U.S. Bankruptcy Code provides companies process took 17 months and the debtors incurred approximately facing litigation of almost any type with a powerful set of tools, $700 million in professional fees.

Restructuring & Insolvency 2021 Wachtell, Lipton, Rosen & Katz 13

Faced with this complexity and cost, companies using chapter The receptivity of bankruptcy courts in both Delaware and 11 to address mass tort liabilities have sought to pre-negotiate Texas to the need for bankrupt E&P companies to shed the settlements and plans to the maximum extent possible. As an burden of uneconomic midstream contracts will undoubtedly example, drug manufacturer Mallinckrodt—which faced wide- prompt more E&P companies to seek relief from such arrange- scale litigation from individual claimants and government enti- ments in chapter 11. The change in expectations regarding the ties relating to its production of opioid painkillers—filed for inviolability of midstream contracts could also impact financing chapter 11 in October 2020 with a restructuring support agree- for new pipeline projects, which is often predicated on the ment signed by unsecured noteholders, 50 attorneys general and revenue projected to be generated from the projects under long- an executive steering committee of opioid plaintiffs. term contracts with E&P companies.

Out-of-Court Deals: The War of Creditor A Shift in Negotiating Leverage in Retail Against Creditor Bankruptcies Thomas Hobbes’ famed “war of all against all” proved prophetic The retail bankruptcy surge of the past several years acceler- of intercreditor dynamics in the distressed credit markets in ated further in 2020, as the pandemic forced store closures and 2020. Various stressed or distressed companies addressed foot traffic drastically declined nationwide. In the early months liquidity problems by employing flexibility in their credit docu- of the pandemic, decisions in the Modells and Pier 1 chapter 11 mentation to create competition among their lenders. The cases permitted debtors to delay rent payments, despite the U.S. companies utilized existing covenant carveouts, and sometimes Bankruptcy Code’s requirement of timely payment for non-res- majority-lender amendment provisions, to issue “new money” idential leases. Even without those rulings, however, market debt ranking senior in lien priority to their existing debt and/or conditions have strengthened debtors’ hands in their negotia- benefitting from collateral that had previously been part of the tions with landlords. Faced with the loss of retail and other package securing the existing debt. tenants, and the prospect of large amounts of unoccupied space, Such priming transactions took various forms. In what is landlords have faced pressure to provide rent reductions and sometimes called a “J. Crew” transaction, borrowers (including, other concessions. For example, while a Texas bankruptcy court among others, Hornblower and Travelport) took advantage of refused in December 2020 to grant debtor Chuck E. Cheese “basket” capacity to contribute assets to “unrestricted subsidi- relief from making timely rent payments—ruling that the U.S. aries,” which then raised new financing secured by such contrib- Bankruptcy Code requirement of current payments could not uted assets. Other transactions involved purchase offers, open be excused, and that the force majeure clause did not cover the only to a subset of existing lenders that agreed to provide a new, situation—by the time the ruling was issued, Chuck E. Cheese super-senior liquidity facility, pursuant to which those lenders had already reached accommodations with landlords at most of sold existing claims for new debt ranking senior to the claims of the 141 locations where it had sought to delay rent payments. existing lenders that did not participate in the transaction. While Similarly, Ascena Retail Group achieved considerable savings challenges to some of these transactions remain pending, at least through negotiations with its landlords, facilitating a successful one court, in the Serta case, rejected an attempt to enjoin an out-of- sale process under section 363 of the U.S. Bankruptcy Code for court transaction that allowed lenders providing new financing to certain of its assets and maximizing recovery for its creditors. also obtain more senior positions for their existing debt. It remains to be seen whether, as the markets adapt, lenders Debt Default Activism will seek to address the collective action problems raised by these Windstream exited bankruptcy in 2020, ending a saga that recent transactions by requiring more restrictive credit docu- unfolded after a court ruling, at the behest of a creditor widely mentation (e.g., requiring unanimous as opposed to majority believed to have sold short Windstream debt, that the company consent to subordinate the liens of the existing debt). In the had defaulted on that debt years prior. The Windstream case meantime, we expect well-advised companies facing headwinds brought attention to the phenomenon we have called “Debt to continue to take advantage of intercreditor dynamics to raise Default Activism,” in which investors purchase debt on the liquidity. thesis that a borrower may already be in default, and then seek to profit from the alleged default, including through credit default Rejection of Midstream Contracts in Oil and swaps (or “CDS”) or short positions in the capital structure. Gas Bankruptcies Borrowers have in recent years increasingly sought to preempt the threat of debt default activism by including in debt agree- 2020 saw the largest volume of oil and gas bankruptcies since ments provisions that undermine activist strategies, including 2016. One notable legal development in these cases relates to strategies based on profiting from short positions. But the tech- “midstream contracts” between exploration and development nology continues to evolve, with strong capital markets enabling (“E&P”) businesses and pipeline companies, which provide for companies to obtain previously unheard-of protections from the storage, processing and transportation of petroleum prod- default assertions. Recent deals have included hard voting caps ucts. These are generally long-term contracts, often providing for lenders, whether or not short, limiting any one large lender’s for minimum commitments and other terms that were rendered ability to dictate voting outcomes, as well as provisions designed uneconomic by the sharp decline in oil and gas prices. to preclude unfriendly holders from accumulating large posi- In the past, pipeline companies have successfully argued that tions in the first place. these contracts create “covenants running with the land” and thus are not capable of rejection under the U.S. Bankruptcy Other Restructuring Developments Code. But in 2020, in the Chesapeake Energ y bankruptcy in Texas, and the Extraction and Southland cases in Delaware, bankruptcy In a busy year for restructuring, we saw other notable develop- courts concluded that the midstream contracts did not contain ments both in and out of court, including: covenants running with the land and were susceptible to rejec- ■ New Competition for Debtor-in-Possession (“DIP”) Financing. tion. Further, in each case, the courts suggested that even the 2020 saw various examples of asset managers, including existence of such a covenant would not necessarily bar rejection. private equity firms, providing DIP (i.e., bankruptcy)

Restructuring & Insolvency 2021 14 Recent Trends in U.S. Corporate Bankruptcy and Restructuring

financing to companies of which they were not major ■ Strict Foreclosure Remains a Useful Tool. While U.S. bank- creditors. In LATAM Airlines, Oaktree provided a large ruptcy courts have continued to function, bankruptcy third-party DIP loan, which was combined with a junior remains expensive and time-consuming. When there is tranche provided by shareholders and bondholders, to sufficient consensus among creditor classes and/or rela- fund the case. Apollo stepped up in Aeroméxico to provide tively simple capital structures, out-of-court “strict fore- the same, again with bondholder participation. Both DIPs closure” transactions can be a nearly equivalent alterna- reflect continuing evolution in asset manager and private tive from a legal perspective, saving months and millions. equity strategy, with such investors competing for oppor- Critically, like a plan under the U.S. Bankruptcy Code, a tunities in direct lending and hybrid investments. foreclosure under the Uniform Commercial Code can ■ U.S. Bankruptcy Courts Still the Forum of Choice for Many bind holdouts in classes of secured debt and effectively International Debtors. In a time of crisis, debtors facing discharge unsecured financial debt. In 2020, secured complicated international restructurings continued to lenders to Phillips Pet Food & Supplies deployed this tool turn to the U.S. bankruptcy system, with foreign-based to equitize their claims. While recent decisions in New airlines LATAM, Aeroméxico and Avianca, among others, York could render strict foreclosure more challenging for all seeking to restructure their liabilities through chapter capital structures with secured bonds qualified under (or 11 cases filed in New York. This is a testament to the resil- incorporating the terms of) the Trust Indenture Act of iency and depth of the U.S. bankruptcy system. 1939, the process remains viable in many situations.

Restructuring & Insolvency 2021 Wachtell, Lipton, Rosen & Katz 15

Joshua A. Feltman focuses both on acquisitions of leveraged entities in connection with in-court and out-of-court workouts and on the financing aspects of leveraged acquisitions generally, including negotiation, implementation and issuance of credit facilities and debt securities. Prior to joining Wachtell Lipton, Mr. Feltman worked as a consultant and economist on regulatory and antitrust matters for Price Waterhouse and National Economic Research Associates. Josh’s professional biography can be read at https://www.wlrk.com/attorney/jafeltman/.

Wachtell, Lipton, Rosen & Katz Tel: +1 212 403 1109 51 West 52nd Street Email: [email protected] New York, NY 10019 URL: www.wlrk.com USA

Emil A. Kleinhaus represents clients in litigation at the trial and appellate levels, with a focus on issues relating to bankruptcy, insolvency and creditors’ rights. His areas of expertise include chapter 11 reorganizations, fraudulent transfer and fiduciary claims, and disputes under credit agreements and indentures. Emil has written more than a dozen publications and is the author of a chapter in Collier on Bankruptcy, the leading treatise in the field. Emil’s professional biography can be read at https://www.wlrk.com/attorney/eakleinhaus/.

Wachtell, Lipton, Rosen & Katz Tel: +1 212 403 1332 51 West 52nd Street Email: [email protected] New York, NY 10019 URL: www.wlrk.com USA

Michael S. Benn represents borrowers with respect to all types of financing for mergers and acquisitions and other significant transactions across various industries. In the distressed and restructuring space, Mike represents ad hoc lender groups and potential acquirors in connection with transactions in and outside of bankruptcy. Mike’s recent experience includes representing Capital Research & Management, Barings LLC and Aegon in connection with the chapter 11 case of Hertz Global Holdings. Mike’s professional biography can be read at https://www.wlrk.com/attorney/msbenn/.

Wachtell, Lipton, Rosen & Katz Tel: +1 212 403 1158 51 West 52nd Street Email: [email protected] New York, NY 10019 URL: www.wlrk.com USA

John R. Sobolewski’s practice includes a broad range of finance, restructuring and related matters, including leveraged M&A, public and private capital markets transactions, complex syndicated bank financings, special situations and in-court and out-of-court workouts, and debt default activism and net-short debt activism situations. John has represented major investors in numerous restructuring situations and has also represented key stakeholders in multiple major public and private debt default activism situations. John’s professional biography can be read at https://www.wlrk.com/attorney/jrsobolewski/.

Wachtell, Lipton, Rosen & Katz Tel: +1 212 403 1340 51 West 52nd Street Email: [email protected] New York, NY 10019 URL: www.wlrk.com USA

Wachtell, Lipton, Rosen & Katz enjoys a global reputation as one of the extensive experience in all types of financing transactions, including senior world’s leading business law firms. The firm regularly handles many of secured facilities, bridge facilities, Rule 144A and registered high-yield the largest and most complex transactions, investigations and litigations and investment-grade bond offerings, tender offers, exchange offers and in the U.S. and around the world. consent solicitations. Wachtell Lipton has one of the leading restructuring practices, principally www.wlrk.com representing banks, hedge funds, private equity funds and other creditors and acquirers in national and multinational bankruptcy cases and out-of- court restructurings. Attorneys in the restructuring and finance group regularly handle the financing of complicated acquisitions or divestitures of businesses in financial distress or bankruptcy, highly leveraged transactions and other major transactions involving significant debtor/creditor issues. Additionally, the firm has a market-leading financing practice, with

Restructuring & Insolvency 2021 16 Chapter 5 Australia Australia

Dominic Emmett

Gilbert + Tobin Alexandra Whitby

12 Overview The “safe harbour” protections introduced into Australia’s legislative regime through the Insolvency Law Reform Act 2016 (Cth) (ILRA) may result in an increase in the use of informal 1.1 Where would you place your jurisdiction on the work-outs. The protection is designed to provide finan- spectrum of debtor- to creditor-friendly jurisdictions? cially distressed companies time to develop an informal turnaround where a formal insolvency might have otherwise been Australia is widely considered to emphasise the rights of credi- necessary. Given the real exposure directors have to personal tors over debtors and as such is recognised as a creditor-friendly liability, which risk is only mitigated and not eliminated by jurisdiction. Whilst there are some limitations on the options the safe harbour provisions, it is unclear at this stage whether that might otherwise be available to distressed companies and the reforms go far enough to significantly increase the use of some inflexibility in certain tools available to insolvency prac- informal work-outs. This is particularly so given the tempo- titioners, Australia’s insolvency regime is, for the most part, rary relief measures introduced in response to the COVID-19 primarily focused towards protecting the rights and interests of pandemic (see question 9.1 below). creditors over the interests of debtors. For example, Australia’s voluntary administration regime is controlled by creditors to 22 Key Issues to Consider When the the exclusion of management and members and its purpose Company is in Financial Difficulties is designed to maximise creditor returns. Further, unlike the United Kingdom for instance, receivership is alive and well in Australia. 2.1 What duties and potential liabilities should the Creditors are active participants in all insolvency processes directors/managers have regard to when managing a company in financial difficulties? Is there a specific in Australia. They can enforce their rights in each process and, point at which a company must enter a restructuring or whilst there are some timing limitations placed on their enforce- insolvency process? ment rights in a voluntary administration scenario, enforcement rights over secured assets are otherwise unfettered. Secured creditors and employees enjoy a statutory priority in Directors owe a number of general and specific law duties to the a distribution of assets and, in some circumstances, unsecured company, its shareholders and creditors. These include: creditors can also place themselves in a position of protection. ■ duties of good faith and due care and diligence; Unlike secured creditors, unsecured creditors are given no legal ■ to not improperly use the position, or information obtained right to priority, yet due to a particular relationship that may by virtue of the position, to gain personal advantage or exist with a debtor (for example, as a supplier of essential mate- cause detriment to the company; rials), they can exercise that power to obtain payment and ensure ■ to keep adequate financial records; future payments as a practical necessity to maximise value and ■ to take into account the interests of creditors; and keep the debtor business running. ■ to prevent insolvent trading. Compliance with these duties means that directors should place a company into external administration at such time that the 1.2 Does the legislative framework in your jurisdiction company is cash-flow insolvent or there exists a less than reason- allow for informal work-outs, as well as formal able prospect that the company will remain cash-flow solvent. restructuring and insolvency proceedings, and to what Australia’s safe harbour provisions could, in certain circum- extent are each of these used in practice? stances, enable a company to delay a formal insolvency appointment where it seeks to pursue a turnaround plan with a “better Informal work-outs and reorganisations can be pursued in outcome” for the company (see question 9.1 below). If such a Australia provided adequate attention is paid to the prohibitions plan is being developed, the company must ensure it meets the on insolvent trading. The Corporations Act 2001 (Cth) (the Act) criteria to enliven the protection, because as a matter of prac- bestows a positive duty on directors to prevent a company from tice, if the turnaround plan is unsuccessful and a formal insol- incurring a debt whilst it is insolvent (or where they suspect it is vency follows, the safe harbour protection will only be a defence likely to become insolvent). A breach of this duty exposes the to an insolvent trading claim rather than a positive exception to director(s) to penalties such as personal liability for future debts liability. incurred, including during any informal work-out period.

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2.2 Which other stakeholders may influence the ■ unfair loans, which are voidable if entered into any time company’s situation? Are there any restrictions on the before the winding up began; action that they can take against the company? For ■ unreasonable director-related transactions, which are example, are there any special rules or regimes which voidable if entered into during the four years ending on apply to particular types of unsecured creditor (such the relation-back day; and as landlords, employees or creditors with retention ■ transactions entered into for the purpose of defeating, of title arrangements) applicable to the laws of your delaying or interfering with creditors’ rights on a compa- jurisdiction? Are moratoria and stays on enforcement available? ny’s winding up, which are voidable if entered into during the 10 years ending on the relation-back day. Uncommercial transactions and unfair preferences are void- Stakeholders who have the power to influence a company’s situ- able if the company was insolvent at the time of the transaction ation include: or at a time when an act was done to give effect to the trans- ■ Secured creditors, who may seek to enforce their security action. Australian Courts have held a transaction is “uncom- and appoint a receiver to realise the assets of the company. mercial” if a reasonable person in the company’s circumstances ■ Unsecured creditors, where they may have a particular rela- would not have entered into it. An unfair preference is one where tionship with a debtor (e.g. as a supplier of essential mate- a creditor receives more for an unsecured debt than would have rials), may exercise that power to obtain future payment of been received if the creditor had to prove it in the winding up. its debts as a practical necessity to keep the debtor business The other party to the transaction or preference may prevent it running. being held void if they can show they became a party in good ■ Shareholders. faith, they lacked reasonable grounds for suspecting that the An automatic moratorium applies in respect of each of the company was insolvent and they provided valuable considera- formal procedures, other than receivership, to prevent unse- tion or changed position in reliance on the transaction. cured creditors (including shareholders and landlords) from Loans to a company have been held to be “unfair” and thus enforcing their rights. Whilst no such moratorium exists in voidable if the interest or charges in relation to the loan were/ receivership, to the extent an unsecured creditor takes action to are not commercially reasonable. This is distinct from the loan enforce their rights, they have no recourse to the assets that are simply being a bad bargain. Any “unreasonable” payments secured and in the control of the receivers. made to a director or a close associate of a director are also The Personal Properties and Securities Act 2009 (Cth) (the PPSA) voidable, regardless of whether the payment occurred when the provides a regime for certain unsecured creditors and the protec- company was insolvent. tion of a supplier’s title to goods relevantly supplied. A uniform 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 an obli- 3.1 Is it possible to implement an informal work-out in gation. It also applies to certain deemed security interests such as your jurisdiction? certain types of lease arrangements for certain terms, retention of title arrangements and transfers of debt, regardless of whether See question 1.2 above. the relevant arrangement secures payment or performance of an obligation. Personal property is defined broadly and essen- 3.2 What formal rescue procedures are available tially includes all property other than land, fixtures and buildings in your jurisdiction to restructure the liabilities of attached to land, water rights and certain statutory 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 Property and Securities Register (the PPSR). If a security or threaten action (including enforcement of security) interest is not perfected it will, on liquidation of the grantor, to seek an advantage? Do your procedures allow you vest in the grantor, despite the agreement between the supplier to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? and recipient 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 challenge? What remedies are available? ■ scheme of arrangement (Scheme).

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 appli- tion (i.e. a formal appointment). cation to the court to declare the following types of transac- Once a company is in voluntary administration, a DOCA tions void: can be proposed by anyone with an interest in the company. ■ insolvent transactions (which includes both unfair prefer- A DOCA is effectively a contract or compromise between the ences and uncommercial transactions) if entered into, in company and its creditors. Whilst it is a feature of voluntary the case of unfair preferences, during the six-month period administration, it should in fact be viewed as a distinct regime, ending on the relation-back day (the relation-back day is where the rights and obligations of the creditors and company generally the date of the appointment of administrators differ to those under a voluntary administration. prior to the application to wind up the company) or in the Approval of a DOCA requires a simple majority (50% of cred- case of uncommercial transactions, during the two-year itors voting in number and value). Where a DOCA is approved, period ending on the relation-back day; it will bind unsecured creditors, the company, directors and

Restructuring & Insolvency 2021 18 Australia

shareholders and those secured creditors who vote in favour of Notwithstanding the above, the market may well evolve so it. Secured creditors who do not vote to approve the DOCA that we see more pre-packs if it can be demonstrated clearly that retain their rights to enforce their security at any time, including junior creditors and shareholders are out of the money. by appointing a receiver. As such, secured creditors are the only form of stakeholder who cannot be crammed down under a 3.3 What are the criteria for entry into each DOCA. restructuring procedure? Shareholders have no entitlement to vote on a DOCA but will be bound by it. A DOCA is a flexible restructuring tool in terms of outcomes DOCA that it can deliver. These include debt-for-equity swaps, a Where a DOCA has been proposed by an interested party, it transfer of equity pursuant to section 444GA of the Act, mora- will be accepted at the second creditor meeting if the majority of torium of debt repayments, a reduction in outstanding debt and creditors (50% in number and value) vote in favour of it. the forgiveness of all, or a portion of, outstanding debt. Scheme Scheme A Scheme will be approved where at least 50% in number and A Scheme is a restructuring tool that sits outside of formal insol- 75% in value of creditors in each class of creditor vote in favour vency. It is a court-approved agreement that binds a company’s of it. creditors and/or members to some form of rearrangement or Final court approval is required. compromise of their pre-existing rights and obligations. Schemes typically involve the deleveraging of a business or 3.4 Who manages each process? Is there any court the reduction of outstanding debt in exchange for the issuance involvement? of equity. Schemes have also been used to facilitate a subsequent proposed (and not mandatory) debt restructuring, rather than to actually implement it. DOCA The approval threshold for Schemes is 50% by number and The management of the company under the DOCA will depend 75% by value of the debt held by those creditors voting in entirely on its terms. A Deed Administrator may be appointed each class such that it is possible for dissenting creditors to be to control the company and/or management may be reinstated. crammed down. However, given that the approval threshold Court supervision is not mandatory for a DOCA; however, must be met in each class, dissenting creditors may have a power should a section 444GA share transfer be contemplated, it is of veto if they can establish that they belong in a separate class likely leave of the court will be required for implementation. and reach a veto threshold. Classes are determined by reference Dissatisfied creditors also have recourse to the court to have to commonality of legal rights and only those creditors whose a DOCA set aside. rights will be affected need be included. The key element to the success of both restructuring proce- Scheme dures is the willingness of (any) secured creditors to work The pre-existing management of the company generally with management of the distressed company as well as other continues in that capacity during the Scheme process and stakeholders. The starting point for the negotiation will often approval phases (and, depending on the terms of the Scheme involve an agreement or undertaking on a standstill or forbear- itself, after implementation). ance period during which the company will look to refinance The Scheme process is supervised by the court (as well as its current debt structure (often through the injection of new regulatory bodies) and is subject to two hearings. The first capital and/or equity). court hearing is to approve the convening of the meeting for the relevant class(es) of creditors. At the second court hearing, the Pre-packaged sales court must approve the Scheme prior to implementation. The “pre-pack sale” in the traditional English and US tradition has had limited application in the Australian restructuring environment due to the stringent obligations placed on insolvency 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to practitioners and the protections afforded to creditors under both perform outstanding obligations? What protections statute and common law. However, the use of pre-packs may are there for those who are forced to perform their increase following the introduction of the safe harbour 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 Following appointment, administrators, receivers and liqui- that a receiver should take in order to comply with the second dators can choose not to continue to perform a contract. Any limb of the obligation, which include a market or auction sale process and marketing campaign, which has made “pre-pack” damages flowing to the counterparty from the non-performance sales difficult for receivers to achieve. of a contract will rank unsecured against the company. However, Due to the impediments described above, pre-packs tend only any contract that an insolvency practitioner continues with may to be used in circumstances where: result in the practitioner being held personally liable under the Act. (a) there are limited alternative sale options available to the Contractual and mandatory set-off will apply in formal insol- insolvency practitioner appointed and there is evidence to vency processes, with certain exceptions. Section 553C of the support the assumption that any delay in sale may be fatal Act provides for a statutory set-off in a liquidation where there to the underlying business; or have been mutual dealings between the distressed company (b) a market testing sale process has already been undertaken and the relevant creditor. In such circumstances an automatic prior to the appointment of the receiver or administrator. account is taken of the sum due from one party to the other in

Restructuring & Insolvency 2021 Gilbert + Tobin 19

respect of those mutual dealings, and the sum due from one is solvency under section 494 of the Act that, in their opinion, set off against any sum due from the other. after an inquiry into the affairs of the company, the company Until 1 July 2018, it was not uncommon for contracts to will be able to discharge its debts in full within 12 months of the contain ipso facto clauses allowing a counterparty to terminate or commencement of winding up. This is coupled with a special renegotiate a contract on the occurrence of any insolvency event resolution of the members to wind up the company (at least 75% (which can be defined to include any form of restructure). of votes cast by members entitled to vote). Following the introduction of ILRA and its associated instruments, the ipso facto clause regime underwent significant Creditors’ voluntary winding up change, which came into effect from 1 July 2018. The effect of A creditors’ winding up arises when the company is insolvent. It the regime amendments is to impose an automatic stay on the can occur in a number of circumstances, including: enforcement of ipso facto termination rights in certain contracts ■ if the members of the company resolve that the company that are triggered simply because a company enters into a formal be wound up and the directors cannot provide a solvency or informal insolvency or restructuring process. The stay oper- declaration; ates during a “stay period”, the length of which is determined ■ where a liquidator is appointed by members, the liquidator by reference to the length of the relevant restructuring process. forms the opinion that the company is in fact insolvent, There are also circumstances in which the stay period will be they will convert the process from a members’ voluntary indefinite. A court will also have the power to lift the automatic winding up into a creditors’ voluntary winding up; and stay where it considers it is in the interests of justice to do so. ■ a company may also enter into a creditors’ voluntary Where the stay operates to prevent a counterparty from exer- winding up at the end of an administration if the creditors cising termination rights, a corresponding stay will also operate resolve to do so at the second creditors’ meeting. to prevent a company from requiring a “new advance of money or credit” from the relevant counterparty. This corresponding Compulsory liquidation stay is designed to protect counterparties from advancing further A creditor can apply to the court for an entity to be wound up. “money or credit” to a company that has entered an insolvency The most common ground for the application is insolvency, usually indicated by a failure to comply with a statutory demand process. However, the concept of a “new advance of money or or judgment debt. Other grounds not related to insolvency are credit” is not defined such that its scope is ambiguous and its also available, including that it is “just and equitable” to do so or application (for example, to lenders within the terms of a facility because of a deadlock at a shareholder or director level affecting or to suppliers of goods and services under credit) is unclear. the ability to manage the company. The full effect of the new regime will take some time to be properly understood as it does not operate retrospectively and Provisional liquidation only applies to contracts entered into after 1 July 2018. All Upon application to the court to wind up a company, the court existing contracts as of 1 July 2018 that contain ipso facto termi- can order the appointment of a provisional liquidator. nation clauses will confer rights on the counterparty to enforce those rights in accordance with the terms of the contact. 4.3 Who manages each winding up process? Is there any court involvement? 3.6 How is each restructuring process funded? Is any protection given to rescue financing? Liquidation Following appointment, a liquidator will control the affairs of The costs of a DOCA will be the company’s costs in the admin- the company and has the power to realise and distribute assets istration. Equally, Scheme costs will usually be the costs of the to the exclusion of the directors and shareholders. company, unless otherwise negotiated. Court involvement is required in a compulsory winding up, A debtor can obtain financing and otherwise use its assets where it will appoint the liquidator. as security in a Scheme and informal voluntary reorganisations. Courts will also consider applications by the liquidator, This is solely a matter for agreement between the company and pursuant to section 480 of the Act, for an order that the liqui- its creditors. There are no special priorities given to new debt as dator be released and that the company be deregistered after the of right and such priorities have to be negotiated and agreed with liquidator has realised all of the property out of the company any existing creditors who already hold some form of priority. or so much of that property as can be realised (in his or her opinion) without needlessly protracting the winding up, has 42 Insolvency Procedures distributed a final dividend (if any) to the creditors, has adjusted the rights of the contributories among themselves and made a 4.1 What is/are the key insolvency procedure(s) final return (if any). The court must be satisfied that no creditor available to wind up a company? will be adversely affected by the order.

Provisional liquidation A company may be wound up: The provisional liquidator controls the affairs of the company ■ if solvent, voluntarily by its members; or during the provisional liquidation to the exclusion of the direc- ■ if insolvent, by its creditors or compulsorily by order of the tors and shareholders. court.

4.4 How are the creditors and/or shareholders able 4.2 On what grounds can a company be placed into to influence each winding up process? Are there any each winding up procedure? restrictions on the action that they can take (including the enforcement of security)? Members’ voluntary winding up A members’ voluntary liquidation is a solvent winding up. It Generally, unsecured claims rank pari passu (with some excep- requires the directors of the company to make a declaration of tions), with secured creditors afforded a level of priority by

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virtue of the security arrangements in place. However, the court 62 Employees has the power (in limited circumstances) to change the rank of a creditor’s claim. Section 564 of the Act provides an incentive to creditors to give financial assistance or indemnities to 6.1 What is the effect of each restructuring or the liquidator to pursue asset recovery proceedings or to protect insolvency procedure on employees? What claims would employees have and where do they rank? or preserve property. If creditors provide such assistance, the liquidator may apply to the court for an order that the contributing creditors receive a higher dividend from the company’s Receivership assets than they would otherwise be entitled to. A receiver becomes personally liable for the services rendered After the commencement of a winding up of a company, or by an employee to the company. A receiver may choose to after the appointment of a provisional liquidator, leave of the terminate employment contracts and is not personally liable for court is required to commence or continue legal proceedings accrued entitlements prior to appointment. The claims of the against a company. Secured creditors are generally exempted terminated employees (in relation to unpaid entitlements) are from this process, assuming the validity of their security, as they given priority to all other unsecured claims. remain entitled to realise their security despite the liquidation. Voluntary administration The position of an employee under any voluntary administration 4.5 What impact does each winding up procedure have will be at the discretion of the administrator. on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? DOCA Employees are afforded a level of protection under a DOCA. The statutory priority afforded to employees in liquidation See question 3.5. must be the equivalent in a DOCA (unless the employees vote otherwise). 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? Provisional liquidation Provisional liquidation does not automatically terminate Generally, the statutory waterfall set out in the Act has secured employees. creditors paid in priority to unsecured creditors. Secured creditors may contract priority arrangements between themselves if Liquidation there are different levels of secured debt within a company. Employees are afforded a statutory priority ahead of other unse- There is an exception to this for employee entitlement claims. cured creditors, and in some cases, secured creditors, for claims During a winding up, the entitlements of employees have priority in relation to unpaid employee entitlements. The position of over all other unsecured debts and claims in respect of those directors and management is different, and the priority afforded assets subject to a circulating security interest (formerly floating to them is capped significantly. A liquidator that chooses to run charges). The renumeration, costs and expenses of liquidators are the business for a short period of time as part of the process afforded priority over all creditors’ claims, including employees. will become personally liable for services provided by individuals retained or employed during that period.

4.7 Is it possible for the company to be revived in the Scheme future? A Scheme of itself generally does not affect employment.

A company cannot be revived in the future following a winding 72 Cross-Border Issues up. Once the company’s assets have been sold, the company is deregistered with the corporate regulator and ceases as a corpo- 7.1 Can companies incorporated elsewhere use rate identity. In certain circumstances (for instance to enable restructuring procedures or enter into insolvency insurance to be availed), applications can be made to re-register proceedings in your jurisdiction? companies. Companies registered as foreign corporations in Australia could 52 Tax have receivers, administrators or liquidators appointed to them, but it is rare for this to occur. We are not aware of any foreign 5.1 What are the tax risks which might apply to a corporations having initiated a Scheme in Australia. restructuring or insolvency procedure?

7.2 Is there scope for a restructuring or insolvency Tax liabilities (including PAYG and capital gains tax) can process commenced elsewhere to be recognised in your continue to be incurred during trade-ons in each of the insol- jurisdiction? vency and restructuring processes. Whilst the tax office is not afforded priority, certain tax liabilities are met regularly in Australian Courts act cooperatively with foreign courts and distressed situations as directors can be rendered personally insolvency practitioners and will recognise the jurisdiction of liable of those certain tax liabilities that are not paid. the relevant court where the “centre of main interest” is located. This approach follows the UNCITRAL “Model Law” on insolvency, which was codified into Australian law through the Cross- Border Insolvency Act 2008 (Cth).

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There is also scope under different legislation (such as the Pooling of group funds may occur in limited circumstances, as Act) for Australian Courts to recognise foreign judgments in prescribed by Division 8 and Part 5.6 of the Act, being sections Australia. Such recognitions require compliance with the rele- 5.71 to 5.79L. Generally, those circumstances are where there vant court practice and procedure rules. is a substantial joint business operation between members of the same corporate group and external parties, such members of the group are jointly liable to creditors. The liquidator of 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other the corporate group makes what is called a pooling determina- jurisdictions? Is this common practice? tion, after which separate meetings of the unsecured creditors of each company must be called to approve or reject the determination. The court may vary or terminate any approved pooling It is becoming increasingly common for Australian companies determination. subject to a formal insolvency process to seek recognition of that process in other jurisdictions (for example, Chapter 15 recognition in the United States of America) but it is rare for Australian 92 COVID-19 companies to look to initiate a formal insolvency process or restructure exclusively in a foreign jurisdiction. 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic? 82 Groups On 22 March 2020, the Australian government announced 8.1 How are groups of companies treated on the urgent temporary reform measures to existing insolvency laws insolvency of one or more members? Is there scope for in response to the global health pandemic, COVID-19. Most co-operation between officeholders? significantly, part of the reform package provided directors with temporary relief from their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the In insolvency proceedings involving corporate groups, a consol- company’s business and the personal liability that would ordi- idated group is not considered a single legal entity. Where narily attach to a breach of such duty. Relief was also provided companies operate as a consolidated group, the starting legal to companies regarding statutory demands, by increasing the position is the “separate personality” principle which prevents threshold at which they could be issued (from $2,000 to $20,000) creditors of an insolvent company from gaining access to the and extending the time within which companies are required to funds of other companies for payment of their debts. Having respond (from 21 days to six months). said that, groups of companies often enter into deeds of cross Through the introduction of section 588GAAA of the Act, guarantee to afford themselves the benefit of consolidated directors were afforded a temporary safe harbour defence to financial reporting. In a liquidation scenario, that deed commits insolvent trading, the effect of which provided that the prohibi- the companies a party to it to pay the liabilities of all the other tion on insolvent trading did not apply to debts incurred in the companies that are a party to it. ordinary course of business during the temporary relief period The Act, however, provides for a holding company to be liable (other than in circumstances involving dishonesty or fraud). for the debts of their insolvent subsidiaries in certain circum- The temporary relief measures became effective on 25 March stances. These provisions enable the subsidiaries’ liquidator to 2020 and expired on 31 December 2020. recover amounts equal to the loss or damage suffered by creditors from the parent company if the parent failed to prevent the subsidiary from incurring debts while the subsidiary was trading whilst cash-flow insolvent.

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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, such as: ■ 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; Disputes and Investigations; Competition + Regulation; Intellectual Property; 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% of its due debts, it will become liquid again (temporary). A debtor is over-indebted if its assets (valued 1.1 Where would you place your jurisdiction on the at their liquidation and not their book values) would not be spectrum of debtor- to creditor-friendly jurisdictions? 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 was 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 tasks and the obligation to file on the basis of over-indebtedness of of realising all assets and paying off the creditors). a debtor was suspended until 30 June 2020 if the insolvency 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 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 Insolvency Court-appointed insolvency administrators can challenge trans- Act provides for three types of proceedings: two restructuring actions that occurred within certain “suspect periods” prior to proceedings (a restructuring proceeding with self-administra- the opening of the insolvency proceedings if there is a prospect tion (mit Eigenverwaltung) and a restructuring proceeding without that the recovery of the creditors can be increased thereby and self-administration (ohne Eigenverwaltung)); and bankruptcy one of the following grounds for challenge can be established: proceedings. In addition, the Austrian Reorganisation Act ■ discrimination against creditors (Benachteiligung) where the provides for the restructuring of a company in financial distress debtor at least accepted the discriminating effect (dolus even- which is, however, of little practical relevance, as the completion tualis) and the counterpart knew (10-year suspect period) of such procedure requires the consent of all creditors. or negligently failed to know of the debtor’s motivations Pre-packaged sales (that is, a sale pre-agreed pre-filing and (two-year suspect period); completed after filing) are not foreseen by the Austrian Insolvency ■ squandering of assets where the counterpart knew or Act nor does the Austrian Insolvency Act provide for a forced debt- for-equity swap. What occasionally happens is that shareholder negligently failed to know that the transaction constitutes debt gets waived (and thereby converts into equity). Another squandering (one-year suspect period); method that helps in cases of impending over-indebtedness is ■ transfers without consideration (unentgeltliche Verfügungen) contracted qualified subordination (qualifizierte Nachrangerklärung). (two-year suspect period); The effect of contracted qualified subordination is that the share- ■ favouring of creditors (Begünstigung) by payment or provi- holder (sometimes also other debt) is not considered debt when sion of security: determining whether the company is over-indebted (see question ■ where the creditor is not entitled to such payment or 2.1). security (inkongruent), no additional prerequisites apply; In in-court restructuring proceedings, creditors can influence ■ where the creditor is entitled to such payment or the process through threatening to withhold their consent to the security (kongruent), the debtor must at least have restructuring plan. The restructuring plan must be approved accepted the favouring effect (dolus eventualis) and the by simple majority (by headcount) of the insolvency creditors creditor must have known or negligently failed to present at the restructuring plan hearing (Sanierungsplantagsatzung), know of the debtor’s motivations (one-year suspect who must represent at least 50 per cent of the outstanding unse- period); and cured debt represented at the hearing and be confirmed by a ■ certain transactions with the (already) insolvent debtor decision of the court. Insolvency creditors who have acquired where the counterpart knew or negligently failed to know their claims after the opening of the proceedings have no voting of the debtor’s insolvency (six-month suspect period). right (unless they acquired the claim based on an agreement entered into prior to the opening of the proceedings). In prin- 32 Restructuring Options ciple, the restructuring plan must treat all insolvency creditors equally (Paritätsprinzip) unless (where a group of insolvency cred- 3.1 Is it possible to implement an informal work-out in itors is concerned) unequal treatment is approved by a simple your jurisdiction? majority (by headcount) of the affected insolvency creditors present at the restructuring plan hearing, who must represent at least 75 per cent of the affected insolvency claims represented As mentioned under question 2.1 above, the managing directors at the hearing or (where an individual creditor is concerned) the must file for the opening of insolvency proceedings if the debtor individual creditor has granted his explicit consent. The court is “insolvent” without culpable delay (schuldhafte Verzögerung) decision confirming the restructuring plan releases the debtor and in any event, no later than within 60 days of its insolvency. from his obligation to pay insolvency creditors in excess of the Out-of-court restructurings are therefore only an option prior agreed quota. If the debtor defaults and fails to come current to the lapse of the 60-day back-stop period and only as long during the requisite cure period, the released claims are rein- as the out-of-court restructuring is diligently pursued and there stated and become immediately due. is a prospect of success. The obvious advantage of an out-of- Shareholders also have some (albeit less formalised) influ- court restructuring is that the proceedings are not registered ence on the restructuring proceeding since, in most cases, the in the insolvency database (Ediktsdatei) (as would be the case debtor will require additional shareholder funding to (a) service with in-court restructuring proceedings), and thus it is less likely the estate claims (Masseforderungen), and (b) fulfil the payment to become public. The other advantage is that out-of-court obligations pursuant to the (approved) restructuring plan. The restructurings tend to offer more flexibility and can be imple- Austrian Insolvency Act does not provide for a (creditor-initi- mented quicker as long as all relevant parties contribute. The ated) cram-down of a debtor’s shareholders as a whole or classes disadvantage is that out-of-court restructurings only capture of a debtor’s shareholders. the contracting parties (and not all insolvency creditors) and in certain situations there may be a risk of voidance where an 3.3 What are the criteria for entry into each agreement is entered into at a time where the debtor is already restructuring procedure? insolvent and the effect thereof is to potentially dilute the value of the insolvency estate. The insolvency court will open insolvency proceedings (Insolvenzverfahren) as bankruptcy proceedings (Konkursverfahren)

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(only) upon application of the debtor (or its management) or a (Masseforderungen). Set-off provisions will be upheld; however, creditor of the debtor. The proceedings are opened as bank- with modifications: contingent and undue debt becomes due and ruptcy proceedings (Konkursverfahren) unless the debtor has filed non-monetary claims (e.g., for performance) convert to mone- for the opening of the proceedings as restructuring proceedings tary claims upon the opening of the proceedings. The set-off (Restrukturierungsverfahren) and has submitted a viable restruc- claim must exist at the time of the opening of the proceedings. turing plan (Sanierungsplan). Creditor-initiated proceedings can Moreover, a set-off is excluded if the creditor knew of the insol- later be converted into restructuring proceedings upon applica- vency when he acquired the claim. tion of the debtor and a viable restructuring plan. The restructuring plan must provide (i) that the rights of 3.6 How is each restructuring process funded? Is any secured creditors (that is, rights of creditors holding an owner- protection given to rescue financing? ship interest in an asset (Aussonderungsgläuber) and the rights of creditors (Absonderungsgläubiger) holding a security interest in an asset to the proceeds of enforcement into that asset) will not be The debtor needs to provide proof of funds to cover the estate affected, (ii) full payment of all estate claims (Masseforderungen) claims (Masseforderungen) for a period of 90 days following the (see question 4.6), as well as (iii) an offer to pay at least 20 per application. There are no restrictions on the sources of funding, cent (or 30 per cent if self-administration is requested) of the so funds can be provided by shareholders, through operating claims filed by insolvency creditors within two years of confir- cash flows, through existing unutilised financing lines or mation of the restructuring plan. Furthermore, the debtor must 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

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

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 admin- 4.2 On what grounds can a company be placed into istrator may (on its own initiative) veto matters within the ordi- each winding up procedure? nary course of business. In in-court restructurings without self-administration (ohne Eigenverwaltung), control transfers to A voluntary liquidation is initiated by a resolution of the share- the administrator. The administrator’s role usually ends upon holders of a company. In such resolution, a special suffix is acceptance of the restructuring plan by the creditors and confir- added to the company name to denote that the company is in mation by the insolvency court. The restructuring plan may, wind-down. Both the resolution and the change of the company however, also provide that a trustee is appointed to (i) supervise name have to be notified to the Companies Register. the fulfilment of the restructuring plan by the debtor (in which For the preconditions of opening bankruptcy proceedings, case supervision is similar to that during restructurings with see question 2.1 above. As mentioned above, the debtor can self-administration), (ii) take over the estate (übernehmen) with apply for a conversion of bankruptcy proceedings into restruc- the mandate to fulfil the restructuring plan (Sanierungstreuhand), turing proceedings. or (iii) liquidate the estate (Liquidationstreuhand).

4.3 Who manages each winding up process? Is there 3.5 What impact does each restructuring procedure any court involvement? have on existing contracts? Are the parties obliged to 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) the outstanding obligations? Will termination and set-off managing directors of the company or by newly appointed liqui- provisions be upheld? dators, as decided by the company’s shareholders. Court involvement is limited; the liquidators have to make certain filings with Out-of-court restructurings do not have any impact on existing the Companies Register, which are only subject to a limited review contracts and the parties’ performance obligations thereunder. by the court. The liquidators will have to terminate all existing In in-court restructurings, special termination rights apply for contractual relationships of the company, settle all outstanding contracts not (fully) performed by either party, for leases and claims and repay the company’s debts before the company can be for employment contracts. In addition, vital contracts (that is, finally wound down and deleted from the register. contracts that are essential for the success of the restructuring) In case of bankruptcy proceedings, the administrator takes can only be terminated for good cause for six months following care of the realisation of the assets and the payment of the quota the opening of the proceedings. Default on payments and dete- to the insolvency creditors. The company is then terminated. rioration of the financial or economic state of the debtor is not considered good cause for such purposes. Funding commit- 4.4 How are the creditors and/or shareholders able ments under credit lines are, however, exempt. Where no specific to influence each winding up process? Are there any termination provision applies and no vital contract is concerned, restrictions on the action that they can take (including terminations remain unaffected. Where contractual partners the enforcement of security)? are obligated to continue to perform following the opening of an insolvency proceeding, claims for services provided after the In a voluntary liquidation, the liquidators need to pay off all opening of the proceedings are treated as (preferred) estate claims existing creditors of the company, so the creditors are in a strong

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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 creditor bankruptcy proceedings; certain decisions of the administrator may be subordinated by operation of contracted subordination require the prior consent of the creditors’ committee, where the (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 assume or withdraw from contracts that neither party has 5.1 What are the tax risks which might apply to a 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 restructuring or insolvency proceedings them- In case of a withdrawal, any resulting (damage) claims of the selves do not give rise to tax risks. However, where a restruc- contracting party are ordinary insolvency claims (and thus turing involves a subordination or waiver of existing shareholder limited to the quota). Where the debtor is a tenant, the admin- debt, the debtor may realise a taxable gain as a result. In most istrator (not the landlord) can terminate the lease, in which case circumstances, that taxable gain will not be that relevant, as the he must only observe the statutory notice period or a shorter gain 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 avail- There are two types of secured creditors: Aussonderungsgläubiger able to a debtor in a restructuring with self-administration if (who are entitled to request the return of assets in which they he decides to close part of the business or unit, and continuing hold a property interest); and Absonderungsgläubiger (who are enti- the employment of an employee of that part of the business or tled to preferred settlement out of the proceeds of enforce- unit would put the restructuring or the business at risk. Such ment against the assets subject to their security interest; any a measure, however, requires the consent of the administrator. surplus of enforcement goes to the general insolvency estate Please note that mass lay-offs in connection with restruc- (Gemeinschaftliche Insolvenzmasse)). Then there are the Massegläubiger turing or insolvency proceedings require a 30-day pre-notifica- of estate claims (Masseforderungen) (these are, ranked in order tion of the competent branch of the Austrian Labour Market of practical relevance: claims for labour; services and goods Service. During the aforementioned 30-day notice period, no furnished to the estate post-filing; the costs of the proceedings termination can be effectively announced – which means that (including the remuneration and reimbursement awarded to the the notice period is de facto prolonged by the 30-day period. creditor’s committee and the Special Creditors’ Rights Protection Post-petition salaries of employees as well as the costs for Associations); any monies advanced by a third party to cover the terminating certain types of employment agreements are estate initial costs of the proceedings (to avoid a dismissal of the filing claims (see question 4.6). Claims of employees for periods before in limine); and the fees of the administrator), which rank prior to the opening of the proceedings (i.e., back pay, unpaid severance payments, etc.) are normal insolvency claims sharing the general

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quota. However, Austria maintains an Insolvency Contingency 7.3 Do companies incorporated in your jurisdiction Fund, where employees receive compensation for back pay and restructure or enter into insolvency proceedings in other other claims from the employment relationship that arose no jurisdictions? Is this common practice? earlier than six months before the opening of in-court insolvency proceedings (up to a specified maximum amount), in exchange for Generally, Austrian companies tend to restructure or enter into passing on their claims to the Insolvency Contingency Fund; as a insolvency proceedings in Austria. As opposed to Germany, result of this scheme, the Insolvency Contingency Fund is typically where several debtors have tried to open insolvency proceed- one of the bigger creditors in in-court restructuring proceedings. ings in the UK in the recent past, we have not observed such attempts in Austria. 72 Cross-Border Issues 82 Groups 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency 8.1 How are groups of companies treated on the proceedings in your jurisdiction? insolvency of one or more members? Is there scope for co-operation between officeholders? Companies registered in another EU Member State can enter into insolvency proceedings in Austria if the centre of their Since the 2017 amendment, the Austrian Insolvency Act incor- main interests (COMI) is in Austria and no insolvency proceed- porates the provisions of Council Regulation (EC) No 848/2015 ings have been opened in respect of that debtor in another regarding insolvency proceedings for groups of companies. EU Member State as a main proceeding according to Council These provisions basically provide for increased coordination of Regulation (EC) No 848/2015. Companies registered outside insolvency proceedings for the various group entities. the EU can, in principle, also enter into insolvency proceedings in Austria, if their COMI is in Austria; however, there is a 92 COVID-19 rebuttable assumption that the COMI is located in its country of registration. 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic? 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction? In response to the COVID-19 pandemic, the requirement to file for insolvency due to over-indebtedness has been eliminated until 31 March 2021 and the filing deadline due to illiquidity has Insolvency proceedings that were opened as main proceedings been extended from 60 days to 120 days, provided the pandemic in another EU Member State have to be recognised in Austria was the cause of the illiquidity. Additionally, various (proce- pursuant to Council Regulation (EC) No 848/2015. dural) deadlines may be either extended at the discretion of the Insolvency proceedings opened outside of EU Member States court or are extended by law. In case of payment difficulties are recognised provided that the COMI of the debtor is located within a repayment plan due to measures made necessary by the in the country where the insolvency proceedings were opened pandemic, debtors can ask for a deferral of nine months. To and the foreign insolvency proceeding is comparable to an further help companies in need of liquidity, short-term credits Austrian insolvency proceeding. Please note that the Insolvency by shareholders, which are payable within 120 days and granted Act does not provide for a formal recognition procedure. until the 31 January 2021, are not deemed as equity-replacing. Accordingly, the effects of such foreign insolvency proceedings will be decided by Austrian courts primarily when creditors try to initiate enforcement actions against the debtor in Austria.

Restructuring & Insolvency 2021 28 Austria

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. The firm regularly advises leading national and international financial investors and their investments in corporate businesses, as well as financing banks. www.schindlerattorneys.com

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Belgium Belgium

Stibbe Pieter Wouters

12 Overview as a reasonable and prudent director placed in the same circumstances. ■ Directors can, under certain circumstances, incur liability 1.1 Where would you place your jurisdiction on the for unpaid social security contributions, corporate tax, or spectrum of debtor- to creditor-friendly jurisdictions? VAT. ■ Directors will have to fulfil certain duties with regard to Belgian restructuring law can be considered to be debtor-friendly informing the employees. for viable business, as well as being creditor-friendly at the same ■ Directors must timely convene an extraordinary general time as it provides tools for creditors to counter any abuse of this meeting of shareholders in case of loss of equity (the finan- branch of law by debtors. cial threshold depends on the type of company). ■ Finally, directors have a statutory duty to file for bank- 1.2 Does the legislative framework in your jurisdiction ruptcy within one month after the company is in the state allow for informal work-outs, as well as formal of bankruptcy, i.e., when it has ceased to pay its debts and restructuring and insolvency proceedings, and to what its creditworthiness is undermined. A director who did extent are each of these used in practice? not timely file for bankruptcy can be held liable towards the company and third parties for any losses incurred as a Belgian insolvency law allows for informal work-outs (i.e., result of his or her failure to file for bankruptcy. Directors reaching an amicable settlement with two or more creditors), can also be punished under criminal law for certain acts formal restructuring (i.e., judicial reorganisation procedure and omissions (e.g., not filing for bankruptcy on time or under court supervision), and insolvency proceedings (i.e., for at all) if such acts and omissions are found to have been bankruptcy and liquidation). Formal restructuring and insol- committed intentionally to delay the bankruptcy. vency proceedings are often used in practice. Informal work- outs are never publicly disclosed. In our experience, informal 2.2 Which other stakeholders may influence the work-outs have proven to be useful for several matters. Very company’s situation? Are there any restrictions on the recently, the legislator adopted a hybrid procedure in which action that they can take against the company? For there is first a more informal phase, followed by a formal one. 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 an NV / SA summoned before court and can seek its liquidation Directors can be held liable on various grounds when they are if the company’s net asset value becomes less than 61,500 euros. managing a company in financial difficulties. In summary, However, the court can grant the company time to correct its directors should consider these specific issues when doing so: 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 ness activities transferred under court supervision.

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A debtor is protected from a petition for bankruptcy or liqui- So-called “fraudulent transactions”, i.e., abnormal trans- dation once it has filed an application for the opening of a judi- actions entered into with the knowledge that the transaction cial reorganisation procedure. This filing also automatically would prejudice the creditors of a company, are also ineffective suspends any enforcement. However, any seizure of goods that in the subsequent bankruptcy of that company. This is so even is already in an advanced stage cannot be stayed automatically if the transaction dates back from before the hardening period. because of the filing, so the debtor, in such situation, will have to request the court to order suspension of such seizure. 32 Restructuring Options If the court affirms the opening of a judicial reorganisation procedure, the court will grant the debtor a moratorium. 3.1 Is it possible to implement an informal work-out in During the moratorium: your jurisdiction? ■ no bankruptcy or liquidation proceedings may be opened in respect of or pursued against the debtor; Belgian restructuring law gives the debtor the possibility ■ no means of enforcement (in relation to both movable to conclude an amicable settlement with two or more of its and immovable assets) against the debtor may be used or creditors. pursued for claims pre-dating the opening of the judicial The reason for creditors to want to conclude such settlement reorganisation procedure; and with their debtor lies in the fact that such type of agreement ■ no assets of the debtor may be seized for claims pre-dating enjoys protection from certain claw-back rules, as mentioned the opening of the judicial reorganisation procedure unless under question 2.3. the seizure is in an advanced stage and the court did not Very recently, the legislator adopted a hybrid restructuring suspend it. tool that allows a debtor to negotiate a “preparatory agree- The prohibition of enforcement during the moratorium ment”. This concept allows the debtor-company to negotiate prevents the enforcement of recovering actual security inter- an amicable settlement with two or more creditors, or to nego- ests (e.g., a pledge or mortgage) or enforcement sought by cred- tiate a debt-restructuring plan that involves all creditors without itors benefitting from a statutory lien. However, it is allowed any obligation to publish any notices. If the debtor is successful to enforce: (i) any specific pledge over claims; and (ii) financial in negotiating a “preparatory agreement”, it can be submitted collateral created under the Act of 15 December 2004 on finan- to the court, in which case the court will open an accelerated cial collateral (on the condition that the debtor is in default). process of the judicial reorganisation proceedings with fewer The debtor can also opt for a restructuring aiming at coming strict formalities. These proceedings will usually end within to a “preparatory agreement”. In such restructuring there is no a maximum of one month if an amicable settlement has to be automatic moratorium, but the court-appointed commissioner sanctioned, or a maximum of three months if a debt-restruc- can seek the court to permit conditions and/or postponement turing plan has to be voted for by all creditors. of payment of all or part of the debt as suited to the needs of the debtor. The duration of such conditions and instalments may not exceed four months. 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps 2.3 In what circumstances are transactions entered and pre-packaged sales possible? To what extent can into by a company in financial difficulties at risk of creditors and/or shareholders block such procedures challenge? What remedies are available? or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- In case of bankruptcy, certain transactions may be declared down dissenting classes of stakeholder? ineffective against third parties if concluded or performed by the debtor during the so-called “hardening period” (a period of a maximum of six months before the date of the bankruptcy A debtor can opt for a reorganisation procedure under court supervision. The purpose of undergoing such judicial reorgani- order, except in the case where the bankruptcy order relates to sation procedure is to preserve the continuity of all or part of the a company that was dissolved more than six months before the company or of its viable business activities. A debtor can also date of the bankruptcy order in circumstances suggesting an initiate a judicial reorganisation procedure after having negoti- intent to defraud its creditors). ated a preparatory agreement (see question 3.1). A pre-packaged The transactions entered into or performed during the hard- sale is not allowed. ening period that may be declared ineffective against third A judicial reorganisation procedure can be initiated with the parties include, among others, (i) gratuitous transactions aim to: entered into at an undervalue or on extremely beneficial terms (i) Conclude an amicable settlement with two or more cred- for the counterparty, (ii) payments for debts which are not due, itors (this is similar to the amicable settlement mentioned (iii) payments other than in cash for debts due, and (iv) security under question 3.1, but it is concluded under court supervi- provided for pre-existing debts. sion). The amicable settlement cannot affect third parties’ In addition, the court may, at the request of the trustee and rights. at its discretion, declare ineffective against third parties other (ii) Implement a debt restructuring plan. The reorganisa- transactions entered into or performed during the hardening tion plan can contain the conversion of debt into equity. period provided that the counterparty was aware of the debtor’s The restructuring plan will be submitted for voting at a cessation of payments and the court determines that this decla- meeting attended by the creditors and will only be adopted ration would benefit the bankruptcy estate. if (i) the majority of the creditors attending the meeting, The above provisions have been made inapplicable to a large and (ii) the majority share of the total value of the debt extent with regard to financial collateral and with regard to claims (the principal sum) vote in favour of such plan. certain transactions that have taken place within the framework The creditors are not divided into classes, but the plan can of a judicial reorganisation procedure. provide for a differential treatment of creditors.

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If the creditors’ meeting votes in favour of such plan, the Claims arising during the judicial reorganisation procedure court will ratify it, and the plan will then bind all the debt- will be treated preferentially over all other creditors’ claims in or’s creditors. the event of a subsequent bankruptcy or liquidation. Moreover, (iii) Selling all or part of its assets and activities to a third party. claims arising after the opening of the judicial reorganisation Upon completion of the sale, the creditors are entitled to procedure are not subject to the moratorium and can thus be exercise their rights on the sale proceeds. Any remaining enforced. They can also be set off. part of the company can then be submitted to either bankruptcy or a voluntary liquidation. 3.6 How is each restructuring process funded? Is any Any party with standing can demand early termination of a protection given to rescue financing? judicial reorganisation procedure if the debtor can no longer ensure the continuity of its activities in accordance with the aim of the procedure. Belgian law explicitly allows the debtor to provide new security interest for both existing and new debts (e.g., bank credits, factoring, etc.) during the moratorium as long as doing so will 3.3 What are the criteria for entry into each sustain the continuity of the business. Any new collateral restructuring procedure? granted during the moratorium cannot be challenged in a subsequent bankruptcy. An out-of-court amicable settlement can be concluded as soon Claims arising after or relating to services rendered after the as this is necessary for reorganising the debtor’s business. opening of the restructuring proceedings are regarded as an A debtor can negotiate a preparatory agreement or request estate’s debts in the event of subsequent liquidation proceed- the opening of a judicial reorganisation procedure if the debtor’s ings. Estates’ debts have the highest priority over all claims, and continuity is threatened in the short- or long-term. rank higher than any other type of debt claim.

3.4 Who manages each process? Is there any court 42 Insolvency Procedures involvement? 4.1 What is/are the key insolvency procedure(s) An out-of-court amicable settlement is managed by the directors available to wind up a company? and without court involvement. A judicial reorganisation procedure with a view to concluding There are two types of liquidation procedures under Belgian an amicable settlement or implementing a debt restructuring law: bankruptcy; and voluntary or judicial liquidation. plan is managed by the directors under court supervision. A judicial reorganisation procedure with a view to selling all 4.2 On what grounds can a company be placed into or part of the debtor’s assets is managed by a judicial adminis- each winding up procedure? trator acting under court supervision. However, the directors remain on board to manage the company. The judicial administrator also has a more active role in case A company that has ceased to pay its debts persistently as they of a restructuring with the aim of negotiating a preparatory become due and that is no longer in a position to obtain credit agreement. can be declared bankrupt. Under certain circumstances, the court can appoint a judicial Voluntary liquidation of a company results from a decision administrator to assist or to replace the directors. made by the general shareholders’ meeting. A company can be placed in judicial liquidation on various grounds. The most common ones are: 3.5 What impact does each restructuring procedure ■ failure to file its annual accounts with the National Bank have on existing contracts? Are the parties obliged to of Belgium; perform outstanding obligations? What protections ■ removal of the company from the Crossroads Bank for are there for those who are forced to perform their outstanding obligations? Will termination and set-off Enterprises; provisions be upheld? ■ failure to appear when summoned before the chamber for 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 initiation or opening of a reorganisation procedure are null. A 4.3 Who manages each winding up process? Is there creditor may not terminate a contract on the basis of a debtor’s any court involvement? default that occurred prior to the reorganisation procedure if the debtor remedies such default within 15 days from the date of the The bankruptcy procedure is managed by one or more court-ap- default notice. Subject to certain conditions, close out netting pointed bankruptcy receivers. The court also appoints a bank- provisions can be upheld. ruptcy judge who supervises the procedure. As an exception to the general rule of continuity of contracts, Liquidation is managed by a liquidator who is appointed by the debtor may cease performance of a contract during the reor- the shareholders (but such appointment must be approved by ganisation proceedings if the debtor notifies the creditor about the court if the balance sheet shows that third parties will not be it and the decision to cease performance is necessary for the paid in full) in case of a voluntary liquidation, and appointed by reorganisation of the business. The debtor’s exercise of this the court in case of a judicial liquidation. The court will have to right to cease performance does not preclude the creditor from approve the payment distribution plan that describes the distri- suspending, on its turn, the performance of its own obligations bution of funds if not all creditors will be paid. under that contract.

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4.4 How are the creditors and/or shareholders able will be refunded to the receiver as priority, which will be to influence each winding up process? Are there any paid out from the proceeds from the assets sold before restrictions on the action that they can take (including the rest of the proceeds are distributed to the secured the enforcement of security)? creditors. ■ Security interests: Creditors that hold a security interest As a general rule, the enforcement rights of individual credi- have a priority right over the secured asset (whether by tors are suspended once the court declares the opening of bank- means of appropriation of the asset or from the proceeds ruptcy proceedings. And only after this declaration is the bank- generated from the asset’s sale). ruptcy receiver allowed to take any actions against the debtor ■ Privileges: Creditors may have a particular privilege right and liquidate its assets. However, such suspension does not on certain or all assets (e.g., tax claims, claims for social apply to any pledge of financial instruments or cash held on security premiums, etc.). Privilege rights on specific assets account, which falls under the scope of the Act of 15 December rank higher than privilege rights on all of the assets of the 2004 on financial collateral. debtor. For creditors whose debt claims are secured by certain ■ Pari passu: Once all of the estate’s debts are settled and movable assets, such suspension would normally be limited to once the creditors holding security interests and privilege the period required for the first verification of the debt claims. rights are satisfied, the sale proceeds from the remaining For creditors whose debt claims are secured by immovable assets will be distributed among the unsecured creditors assets, the intervention of the bankruptcy receiver is necessary who are ranked pari passu (unless a creditor agrees to be to pursue the sale of the assets. A first-ranking mortgagee will subordinated). generally be entitled to pursue the enforcement of its mortgage after the first verification of the debt claims if the enforcement 4.7 Is it possible for the company to be revived in the procedure was already in an advanced stage. future? In case of liquidation, unsecured creditors and creditors with a general privilege on all assets lose their enforcement No, it is not possible to revive a company once the bankruptcy rights, save to the extent that the enforcement would not prej- procedure/liquidation has been closed. udice other creditors or the proper course of the liquidation. There is a possibility, however, to appoint a bankruptcy Creditors whose debt claims are secured by certain movable receiver ad hoc or to reopen the liquidation if assets are discov- assets or immovable assets do not lose their enforcement rights. ered after the closing of the bankruptcy/liquidation. Furthermore, and as from the closing of the liquidation, cred- 4.5 What impact does each winding up procedure have itors have five years to still initiate proceedings against the liqui- on existing contracts? Are the parties obliged to perform dated company. If the liquidation was closed while fraudulently outstanding obligations? Will termination and set-off disregarding the interests of a creditor, such creditor can seek to provisions be upheld? have the closing of the liquidation declared null. If such claim is granted by the court, the liquidation will be reopened. The declaration of bankruptcy or opening of a liquidation does not in itself cause the termination of existing contracts. 52 Tax However, two exceptions apply: ■ the parties to a contract may contractually agree that the 5.1 What are the tax risks which might apply to a occurrence of a bankruptcy/liquidation constitutes an restructuring or insolvency procedure? early termination or acceleration event; and ■ intuitu personae contracts (i.e., contracts whereby the identity of the other party constitutes an essential element of the A creditor who has filed a debt claim in the bankruptcy is enti- contract conclusion) are automatically terminated. tled to record that claim immediately as loss and to request the In case of a bankruptcy, the bankruptcy receiver may elect not refund of VAT, insofar as it is applicable. to perform the obligations of the bankrupt party that are still The opening of a judicial reorganisation procedure does not outstanding after the bankruptcy if such decision is necessary affect the debtor’s tax obligations. for the management and the liquidation of the bankrupt estate. Debt reductions or waivers granted by creditors in the frame- The counterparty may not seek injunctive relief or specific work of a collective restructuring plan approved by the court is performance of the contract. not regarded as a taxable gain for the debtor. Subject to certain conditions, close out netting provisions can be upheld. 62 Employees

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

In case of bankruptcy (or deficit liquidation), the debts will An employment contract is considered an ongoing contract and generally be priority-ranked according to a complex set of rules. does not end when bankruptcy proceedings pertaining to the Here is a general overview of these rules: employer are opened. The bankruptcy receiver is the one who ■ Estate’s debts: All costs and debt incurred by the bank- must terminate the employment contracts. However, the law ruptcy receiver/liquidator during the bankruptcy/liquida- sets out a simplified procedure for the bankruptcy receiver to tion proceedings are known as “estate’s debts”, and these dismiss employees. have ultimate priority. In addition, if the bankruptcy No specific rules apply to employee dismissals in the event receiver/liquidator has contributed financially towards the of the employer’s liquidation, so the liquidator needs to comply sale and enforcement of secured assets, such contribution with labour law provisions on the dismissal of employees.

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Unpaid salaries and severance pay benefit from a privilege 82 Groups right on all movable assets of the debtor-employer. It is important to note that in certain circumstances, Belgian law gives dismissed employees the right to a (capped) financial contribu- 8.1 How are groups of companies treated on the tion from the Indemnity Fund for the closing-down of firms. insolvency of one or more members? Is there scope for co-operation between officeholders? In case of judicial reorganisation procedure, employment contracts are not affected and remain in full force. Belgian law, just as the law in most EU countries, allows the employer the Belgian insolvency law does not contain regulatory provisions possibility to dismiss employees for economical or other specific regarding groups of companies. It is possible, however, for a reasons as part of a social plan. In case of a judicial reorgani- group of companies to have the same insolvency practitioner sation procedure with a view to selling all or part of the debt- appointed. or’s assets and activities, the parties involved will have to abide In an international context, Belgian insolvency law contains by a specific Collective Bargaining Agreement (i.e., CBA no. provisions that give effect to the group insolvency provisions 102) which, in short, entitles the buyer to decide on how many under the European Insolvency Regulation. It also contains provi- employees should be transferred and even to renegotiate to some sions on co-operation in case of an international insolvency that extent the individual terms of employment with the employees falls outside the scope of the European Insolvency Regulation. concerned. The CJEU has, however, decided that the right to choose the number of employees violates Council Directive 92 COVID-19 2001/23/EC. 9.1 What, if any, measures have been introduced in 72 Cross-Border Issues response to the COVID-19 pandemic?

7.1 Can companies incorporated elsewhere use In April 2020, the Belgian Government announced that compa- restructuring procedures or enter into insolvency nies in difficulty could invoke a temporary moratorium (Royal proceedings in your jurisdiction? Decree No. 15 of 24 April 2020) whereby any debtor-company was in principle protected from enforcement measures sought In situations to which Regulation (EU) 2015/848 of the by creditors and from being declared (or forced to be declared) European Parliament and of the Council of 20 May 2015 on bankrupt. The temporary moratorium had an initial validity until insolvency proceedings (“European Insolvency Regulation”) mid-June 2020 and was reintroduced by law in December 2020 does not apply, Belgian private international law states that during the second national lockdown. At the end of January 2021, companies incorporated elsewhere can use restructuring proce- the government decided not to extend the temporary moratorium dures or enter into insolvency proceedings if its principal estab- but, instead, promised new measures by the end of March. lishment is located in Belgium. In most cases, the concept of On 26 March 2021, the legislator created the possibility to “principal establishment” will be aligned with the concept restructure a company through a “preparatory agreement”. of “centre of main interests”, which is used in the European This new concept is part of a temporary legislative arrangement Insolvency Regulation. (valid until 30 June 2021) until lawmakers adopt a more thor- If the establishment is not the principal establishment, ough reform of the insolvency procedure, which is expected secondary insolvency proceedings can be opened that will affect by mid-July, in view of transposing the new EU directive on the Belgian establishment only. restructuring and insolvency. The concept of the preparatory agreement allows the debtor-company to negotiate an amicable settlement with two 7.2 Is there scope for a restructuring or insolvency or more creditors, or to negotiate a debt-restructuring plan process commenced elsewhere to be recognised in your jurisdiction? that involves all creditors without any obligation to publish any notices. In this way, debtor-companies can try to solve their liquidity problems in peace and, when ready, they can announce In situations to which the European Insolvency Regulation does the solution they are ready to offer. The purpose is to prevent not apply, Belgian private international law states that foreign or restrict reputational harm and to prevent panic among cred- judgments with regard to restructuring or insolvency proceed- itors and trading partners. The court-appointed commissioner ings can be recognised in Belgium if all conditions for recogni- can seek the court to permit conditions and/or postponement tion are met (e.g., the judgment (i) does not contravene certain of payment of all or part of the debt. If the debtor is successful provisions regarding applicable law, public order, the right of in negotiating a preparatory agreement, the court can open an defence, (ii) does not contravene another judgment, and (iii) accelerated process of the judicial reorganisation proceedings does not attempt to escape or deviate from mandatory law, etc.). with fewer strict formalities. The provisions concerning the “preparatory agreement” mech- 7.3 Do companies incorporated in your jurisdiction anism remain in force until 30 June 2021, but the Government restructure or enter into insolvency proceedings in other can still extend it. In fact, an extension is expected given the jurisdictions? Is this common practice? difficulties in containing the COVID-19 pandemic. In addition, new changes to insolvency law have been announced, as Yes, this has been the case for some Belgian companies because Belgium is now working on transposing the Restructuring and they are members of an international group, but it is not common Second Chance Directive (2019/1023), which must be imple- practice. mented by this summer.

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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 Central Plaza – Loksumstraat 25 Email: [email protected] 1000 Brussels URL: www.stibbe.com Belgium

Stibbe is a leading, internationally oriented Benelux law firm that provides As an independent law firm, Stibbe co-operates 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 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 advisors contacts for every specific matter. to our clients from all corners of the world, which range from multinational www.stibbe.com 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

Mark Chudleigh

Kennedys Laura Williamson

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? There is no provision in Bermuda’s legislation for informal work- Bermuda is a self-governing British Overseas Territory. The outs. However, informal work-outs are common in Bermuda, systems of law administered in Bermuda are local Bermudian and the Supreme Court has developed certain practices to support legislation, Bermudian common law (as developed from English and assist them as discussed in our answer to question 3.1. common law), and UK legislation expressly made applicable to The only formal restructuring process in Bermuda is the Bermuda. scheme process, discussed in our answer to question 3.2. The Bermuda has its own Court system, including a desig- scheme is a highly versatile statutory procedure enabling the nated Commercial Court which is part of the Supreme Court restructuring of debt (and capital) by 75% majority by value of Bermuda, with rights of appeal to the Court of Appeal for and 50% majority by number (per class of creditor/member) Bermuda, and then the Privy Council in London. approval and Court sanction. It is frequently used to restruc- As in other jurisdictions that follow English common law, ture debt where the consent of all creditors is unlikely to be there are various ways by which a creditor can take security over forthcoming. assets in Bermuda, by agreement between the creditor and the The only formal insolvency proceeding is compulsory winding debtor, including by way of: legal mortgage; equitable mort- up by the Supreme Court. As we discuss in what follows, the gage; fixed charge; floating charge; pledge; contractual lien; and Court’s compulsory winding up jurisdiction can serve as a assignment. protective device within which to restructure a company’s debt The nature of the security interest, in any particular case, will with a view to its continued trading. Compulsory liquidations be determined by: are common in Bermuda. (a) the terms of the parties’ agreement, ordinarily set out in the relevant security documents; 22 Key Issues to Consider When the (b) the nature of the property being secured; and Company is in Financial Difficulties (c) the nature of the debtor’s interest in the property being secured. 2.1 What duties and potential liabilities should the There are various statutory provisions relevant to the taking directors/managers have regard to when managing a of security in Bermuda, including, for example, section 19(d) company in financial difficulties? Is there a specific of the Supreme Court Act 1905, section 1 of the Bonds and point at which a company must enter a restructuring or Promissory Notes Act 1874, and section 2 of the Charge and insolvency process? Security (Special Provisions) Act 1990. Bermuda can be described, for the most part, as a very cred- Directors’ and officers’ duties are principally owed to the itor-friendly jurisdiction. Secured creditors can generally company itself. To the extent that the company is solvent, such enforce their security outside of the insolvency process, and duties are ordinarily owed to the company for the benefit of its the insolvency legislation is highly pro-creditor. It provides, in present and future shareholders. particular, for the right of an unsecured creditor with an unpaid When the company enters the zone of insolvency, direc- debt to apply for an order that the corporate debtor be compul- tors must act in the best interests of the company’s creditors. sorily wound up and its assets applied in satisfaction of its Directors that allow a company to continue to trade while it debts, and there is no statutory corporate rescue regime beyond is in financial difficulties face a range of potential liabilities, the ‘Scheme of Arrangement’ (‘scheme’), discussed below. depending on the precise circumstances and the relevant direc- Nevertheless, the Supreme Court has developed an insolvency tor’s conduct and state of mind (as discussed below). practice, through the appointment of ‘soft touch’ provisional Fraudulent trading: Section 246 of the Companies Act 1981 liquidators, which is designed to support formal and informal provides that any director that has knowingly caused or allowed restructuring plans that have credible prospects of success, and a company to carry on business with intent to defraud creditors the support of the majority of creditors. In appropriate circum- of the company or for any fraudulent purpose may be found stances, therefore, the Court does have the power to approach personally liable for all, or any, of the debts or other liability as corporate insolvencies in a ‘debtor-friendly’ manner, with a view the Court may direct. This would include carrying on the busi- to achieving a corporate restructuring. ness of the company when it is known to be insolvent.

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Personal liability for fraudulent conveyances/fraud- Unsecured creditors also exercise considerable influence as a ulent preferences: It is possible that directors might be held result of the rights they enjoy pursuant to Bermuda’s winding to be personally liable, in certain circumstances, for fraudu- up jurisdiction. The greater the value of an unsecured credi- lent conveyances or fraudulent preferences, as discussed in our tor’s debt (and the greater the support that it can command from answer to question 2.3 below. other unsecured creditors), the greater the influence. Minority Breach of fiduciary duty and failure to exercise reason- unsecured creditors have relatively limited influence, above and able skill and care: Directors owe duties to the company, both beyond their statutory and contractual rights. pursuant to section 97 of the Companies Act 1981 and as a In addition to the Supreme Court (and any foreign Courts with matter of common law, to act honestly and in good faith with a jurisdiction over the company), certain regulatory authorities in view to the best interests of the company (which can include the Bermuda may also influence the company’s situation, depending interests of the company’s creditors when the company is in the on the circumstances. For example, the Registrar of Companies, zone of insolvency), and to exercise the care, diligence and skill the Bermuda Monetary Authority and the Regulatory Authority that a reasonably prudent person would exercise in comparable of Bermuda might, in appropriate circumstances, investigate the circumstances. Failure to comply with these obligations may affairs of an insolvent company and exercise such regulatory result in personal liability on the part of directors. Although not powers as may be appropriate. confirmed in statute, the power of the directors of a Bermuda Section 165 of the Companies Act 1981 provides that, at any company to petition for the compulsory winding up of an insol- time after the presentation of a winding up petition and before vent company has been recognised in Re First Virginia Reinsurance a winding up order has been made, the company or any creditor Ltd. [2003] Bda LR 47. or contributory may apply to the Court for a stay of any proceed- Misfeasance and breach of trust: Section 247 of the ings pending against the company. Companies Act 1981 provides that a director may be personally Section 167(4) of the Companies Act 1981 provides that, when liable if he has misapplied, or retained, or become liable or accountable for, any money or property of the company, or been guilty a winding up order has been made or a provisional liquidator has of any misfeasance or breach of trust in relation to the company. been appointed, no action or proceeding shall be continued or The scope and effect of section 247 was considered by the Supreme commenced against the company except by leave of the Court Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ. and subject to such terms as the Court may impose. Unlawful return of capital: As a matter of common law and The Bermuda Court also has the separate power to order pursuant to certain sections of the Companies Act 1981 dealing that Bermuda Court proceedings be stayed in the exercise of with dividends, reduction of capital, share repurchases and share its inherent jurisdiction and as a matter of its case management redemptions, a Bermuda company that is not in liquidation powers under the Rules of the Supreme Court. The Bermuda cannot lawfully return capital to its shareholders except by way Court also has the power, in appropriate cases, to issue an anti- of an approved reduction of capital, or by way of authorised divi- suit injunction or an anti-enforcement injunction with respect to dend, redemption, or repurchase. Section 54 of the Companies claims being pursued in foreign Court proceedings. Act 1981 provides that a company shall not declare or pay a dividend, or make a distribution out of contributed surplus, if 2.3 In what circumstances are transactions entered there are reasonable grounds for believing that the company is, into by a company in financial difficulties at risk of or would after the payment be, unable to pay its liabilities as challenge? What remedies are available? they become due or the realisable value of the company’s assets would thereby be less than its liabilities. Payments, transfers of assets, and security transactions can be Miscellaneous offences and liabilities: Sections 243 to 248 of the Companies Act 1981 set out a range of criminal offences vulnerable to attack in the event of a company’s insolvency or that may be committed by directors of companies, including, for liquidation. Reviewable transactions include fraudulent convey- example, by fraudulently altering documents relating to company ances, fraudulent preferences, floating charges, onerous transac- property or affairs, falsifying books or accounts with the inten- tions, and post-petition dispositions. tion of defrauding any person, or fraudulently inducing a person Fraudulent conveyances: Sections 36A to 36G of the to give credit to the company. There are also various legisla- Conveyancing Act 1983 provide that a creditor of a company tive provisions that impose personal liability on directors for may be entitled to apply to the Court to have a transaction set any failure to pay certain taxes and remit pension contributions. aside to the extent required to satisfy its claim, provided that Segregated accounts companies representatives: Section the dominant intention of the transaction was to put the prop- 10 of the Segregated Accounts Companies Act 2000 requires a erty beyond the reach of other creditors and the transaction was segregated account representative to make a written report to entered into for no value or significantly less than the value of the Registrar of Companies within 30 days of reaching the view the property transferred. For these purposes, a creditor is one that there is a reasonable likelihood of a segregated account or to whom an obligation is owed at the date of the transfer, or to the general account of a segregated accounts company for which whom it is reasonably foreseeable an obligation will be owed he acts becoming insolvent, and section 30 makes it a criminal within two years of the date of the transfer, or to whom an obli- offence to fail to do so. gation is owed pursuant to a cause of action that accrued before, or within, two years after the date of the transfer. 2.2 Which other stakeholders may influence the Fraudulent preferences: Section 237 of the Companies Act company’s situation? Are there any restrictions on the 1981 provides that any conveyance, mortgage, delivery of goods, action that they can take against the company? For payment, execution or other act relating to property made or example, are there any special rules or regimes which done by or against a company within six months before the apply to particular types of unsecured creditor (such as commencement of its winding up shall be deemed a fraudulent landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? preference of its creditors and be invalid accordingly. Section Are moratoria and stays on enforcement available? 238 provides for the liability and rights of fraudulently preferred persons. In order to fall foul of the provision, the transfer or disposition must have been made within the six months prior Creditors with security over an insolvent company’s core assets to the commencement of the winding up. In the case of a have the greatest influence over the company’s situation.

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compulsory winding up, this would be the date of the presenta- Following presentation of a petition for the winding up of tion of the petition to the Supreme Court of Bermuda. The the company (usually presented by the company itself, if the transfer will be invalid if it was carried out with the dominant company contemplates a restructuring), a provisional liqui- intention of preferring one creditor over others at a time when dator may be appointed, who may then apply for a statutory the company was unable to pay all of its creditors in full. stay of all proceedings against the company while the work-out Floating charges: Section 239 of the Companies Act 1981 process continues, whether informally or through the medium provides that a floating charge on the undertaking or prop- of a scheme of arrangement. The board of directors retains erty of a company created within 12 months of the commence- control over the company, and endeavours to effect a work-out ment of the winding up shall be invalid, unless it is proved that under the supervision of the ‘soft touch’ provisional liquidator the company immediately after the creation of the charge was and the Court. If the work-out negotiations are successful, the solvent, except to the amount of any cash paid to the company winding up petition can be dismissed; if they are unsuccessful, at the time of, or subsequently to, the creation of the charge, the winding up petition can be restored for a final hearing and together with interest at the statutory rate. the company can be wound up and placed into full liquida- Onerous transactions: Section 240 of the Companies Act tion. While the work-out plan is negotiated, the hearing of the 1981 provides that the liquidator of a company can, with the winding up petition is adjourned (although the company enjoys Court’s permission, disclaim any property belonging to the the protection of the statutory moratorium). company or any rights under any contracts that he considers to be onerous for the company to hold, or is unprofitable or unsaleable. 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of Post-petition dispositions: Section 166 of the Companies distressed companies? Are debt-for-equity swaps Act 1981 provides that, in a compulsory winding up, any dispo- and pre-packaged sales possible? To what extent can sition of the property of a company, including things in action, creditors and/or shareholders block such procedures and any transfer of shares or alteration in the status of the or threaten action (including enforcement of security) members of the company, made after the commencement of the to seek an advantage? Do your procedures allow you winding up (being the time of presentation of the petition) shall to cram-down dissenting stakeholders? Can you cram- be void, unless the Court otherwise orders by way of a validation down dissenting classes of stakeholder? order. In the case of an insolvent company, the Court should only make an order validating a post-petition disposition where The only formal rescue procedure is the scheme of arrange- it can be shown that the disposition will benefit (in a prospec- ment (although see further below in this section for an excep- tive case), or has benefitted (in a retrospective case), the general tion to this rule). A scheme is a formal procedure that may be body of unsecured creditors so as to justify the disapplication of used to reorganise the business of the debtor with a view to its the pari passu principle. The focus of the test is mainly directed continued trading. to an objective assessment of the benefit to be obtained by the A scheme may result in the adjustment or compromise of all general body of unsecured creditors, rather than the necessity or or a class of the debt of the company. It may include the transfer expedience of the disposition from the company’s or directors’ of rights, property and liabilities of the company to another perspective. In the case of a solvent company, in contrast, there company. Schemes may also reorganise the company’s capital, are four elements which must be established before a validation and accordingly may be used (and have on several occasions been order may be made: first, the proposed disposition must appear used) to implement a debt-for-equity swap. The Court has juris- to be within the powers of the company’s directors; second, the diction to make specific provision for this in the order sanc- evidence must show that the directors believe the disposition is tioning the scheme. necessary or expedient in the interests of the company; third, it A scheme is not an intrinsically insolvency-related procedure. must appear that the directors, in reaching that decision, have However, it may be employed after the appointment of a liqui- acted in good faith; and fourth, the reasons for the disposition dator or provisional liquidator, and there can be advantages in must be shown to be ones that an intelligent and honest director employing a scheme in this way. Where illiquidity issues confront could reasonably hold. the company, for example, its freedom to promulgate or pursue Bulk sales in fraud of creditors: Under section 5 of the a scheme may be susceptible to litigation or compulsory winding Bulk Sales Act 1934, certain sales and purchases of stock in bulk up petitions presented by dissentient creditors. Where this is a are deemed to be fraudulent, and absolutely void as against the concern, the powers of the Court pertaining to the winding up of vendor’s creditors, unless the proceeds of sale are sufficient to companies and appointment of liquidators may be employed in pay the vendor’s creditors in full, and are in fact so applied. the protection of a proposed scheme. This may include the use of a ‘soft touch’ provisional liquidation, along the lines described 32 Restructuring Options in our answer to question 3.1. In the case of an insolvent insurance company, there is another 3.1 Is it possible to implement an informal work-out in restructuring tool potentially available under sections 37(5) and your jurisdiction? 39 of the Insurance Act 1978. These provisions enable the Court, if it thinks fit, to reduce the amount of the insurance contracts of Yes, where the consent of all relevant creditors is forthcoming. the insurer, on such terms and subject to such conditions as the It is not possible to ‘cram-down’ creditors in the absence of a Court thinks fit. Although the procedure and case law in this formal restructuring process. area is not fully developed in Bermuda, it is likely that the Court Where there is a risk that negotiations towards an informal would require that a meeting of policyholders be convened, and work-out may be jeopardised by creditors instituting or contin- their views canvassed, and one relevant consideration for the uing proceedings against the company seeking enforcement of Court would be the effect of any reduction order on the company’s their debts, the negotiations may be protected by a ‘soft touch’ ability to make recoveries against its reinsurers. Depending on provisional liquidation, a procedure developed as part of the the circumstances, a formal scheme may be required in any event. insolvency practice of the Supreme Court and now commonly A pre-packaged sale involves the pre-agreement of terms of used to support work-outs. The procedure is described below. a sale of the business of the company to another party or a new

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company, which sale is then effected directly after the appoint- the Court approves it, then the scheme will be binding on all ment of an office-holder. The sale and its terms are frequently creditors. Court approval is a discretionary matter. The Court negotiated by, or with the approval of, major secured creditors of must be satisfied that the statutory requirements have been met, the company. The prevailing regime in Bermuda does not lend including the holding of requisite class meetings and approval of itself to the use of pre-packaged sales. Winding up proceed- necessary majorities, and that each class was fairly represented at ings anticipate the death of the company and distribution of its each meeting. In addition, the Court must be satisfied that the assets. Conversely, the scheme process is too dependent upon scheme is fair to creditors generally – in other words, that the the views of the general creditor body. Neither allows the discre- majority has not taken unfair advantage of its position. tion necessary to pre-agree and dictate a disposal of the business The scheme is not effective until a copy of the sanction order of the company, in the manner required for a pre-packaged sale. is delivered to the Registrar of Companies. The scheme order Conceivably, a receiver and manager appointed by a secured must be annexed to any copies of the company’s memorandum creditor pursuant to a charge over substantially all the assets of of association issued subsequently to the order. a company may achieve something akin to a pre-packaged sale. It is also conceivable that a Bermudian exempt company whose 3.4 Who manages each process? Is there any court centre of main interests is in the United Kingdom, or whose involvement? assets and liabilities are situated in the United Kingdom, might seek the assistance of both the Courts of Bermuda and the Courts of England and Wales for the purposes of having a pre-packaged If the scheme is conducted outside a liquidation, the compa- sale effected under the supervision of a court-appointed admin- ny’s board of directors and any managers control the process, istrator. The procedure, however, is not as common in Bermuda although a Scheme Administrator is normally appointed to as it is in certain other jurisdictions, such as Jersey, and there is administer the scheme once it is implemented. some uncertainty in the case law as to the scope of the power of If the scheme is conducted within a liquidation, the liquidator Bermudian Courts and English Courts in this respect. controls the process. As noted in our answer to question 3.3, a binding scheme However, there is a hybrid option, under which the scheme is requires that the majority within each class of creditors present conducted within a ‘soft touch’ provisional liquidation, used to and voting (including by proxy) at the meeting of that class, repre- implement a restructuring within the protective environment of senting 75% by value of that class, votes in favour of the scheme. a provisional liquidation but without the necessity of winding up Accordingly, a scheme is often the result of promotion and direc- the company. The ‘soft touch’ provisional liquidation procedure tion by majority creditors. has been described in our answer to question 3.1. In such cases, Those voting at scheme meetings may in some circumstances the board of directors normally manages the scheme process include persons beneficially interested in the company’s debt. under the supervision of the provisional liquidator. There has been a scheme of debts of a company evidenced by a global note held by a trustee, in which beneficial owners of the 3.5 What impact does each restructuring procedure note, who were each entitled to require issuance of an individual have on existing contracts? Are the parties obliged to note enforceable directly against the company, were allowed to perform outstanding obligations? What protections vote in the scheme as contingent creditors of the company. are there for those who are forced to perform their As may be seen from the above, a minority of dissenting cred- outstanding obligations? Will termination and set-off provisions be upheld? itors in each class may be crammed down by a scheme. In the event that there is an enforceable debt subordination agreement in place creating different classes of unsecured creditor The commencement of a scheme has no automatic effect on (or in the event that there are deferred creditors, for example, or contracts, save in the case where the relevant contract contains shareholders claiming payment of debts arising in their capacity terms to that effect. If a scheme with creditors is approved, as shareholders), it may be possible to structure and secure the the scheme will govern any issues relating to the termination Court’s approval for a scheme in such a way as to cram-down a of contracts with those creditors. The protections available to dissenting (subordinate or deferred) class of stakeholder. parties that may be compelled to perform outstanding obligations will depend on whether the company is seeking to effect a solvent scheme (outside of a liquidation process) or an insol- 3.3 What are the criteria for entry into each vent scheme (within a liquidation process). If the company restructuring procedure? commences a liquidation process with a view to promoting an insolvent scheme, parties that are required to continue The scheme procedure may be initiated by application of a cred- performing outstanding obligations may be in a position to itor, a member, the company itself, or (where one has been require security or priority for payment, whether from the appointed) the liquidator. company’s liquidators or other stakeholders. The applicant requests the Court to convene a meeting of the creditors, or the relevant class of creditors, of the company. If the Court so directs (which will almost always be the case, 3.6 How is each restructuring process funded? Is any protection given to rescue financing? absent exceptional circumstances), creditors must be summoned by notice. Notification commonly includes advertisement of the meeting. The company generally uses its own assets to finance the proce- Where, because of differences in their respective rights, two dures of voluntary liquidation, compulsory liquidation, and or more creditors are unable to consult together with a view to any scheme. However, if the company does not have sufficient their common interest, it will be necessary to separate creditors assets or liquidity, it is possible for the company, or its liquida- into classes for the purposes of voting on the scheme proposal. tors, to enter into funding arrangements with those interested in If a majority in number within each class of creditors present the outcome of the procedures (typically, creditors) if doing so is and voting (including by proxy) at the meeting, representing necessary for the beneficial winding up of the company. In such 75% by value of that class, votes in favour of the scheme, and a case, funding liabilities would be expected to be re-paid by the

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company or by the liquidator prior to the repayment of unse- of the company in the event of its liquidation, i.e. a shareholder cured creditors, although subject to the specific terms of any or member); the company itself (by a shareholders’ resolution if funding agreement and the Court’s approval. In this context, it it is solvent and/or by a directors’ resolution if it is insolvent); is possible to secure protection (or priority treatment) for rescue and, in certain circumstances, the Registrar of Companies or financing on an ad hoc basis, and by agreement, in appropriate the Supervisor of Insurance (being the Bermuda Monetary circumstances. In certain cases, the liquidator appointed by Authority). the Court is the Official Receiver, a government official with a It is also possible, in exceptional circumstances, for receivers limited government budget. of segregated accounts within a segregated accounts company to petition for the winding up of the whole company, and also for 42 Insolvency Procedures the Court to wind up a company of its own motion. Section 170(2) of the Companies Act 1981 allows the Court to appoint a provisional liquidator between the presentation of a 4.1 What is/are the key insolvency procedure(s) winding up petition and its final hearing available to wind up a company?

The formal procedures available for companies in financial 4.2 On what grounds can a company be placed into each winding up procedure? difficulties are principally contained in the Companies Act 1981 (the winding up provisions of which are substantially modelled on the UK’s Companies Act 1948). Some provi- A company may be compulsorily wound up by the Court in sions of the Bankruptcy Act 1989 are also applied to compa- any of the following circumstances, under section 161 of the nies, by virtue of section 235 of the Companies Act 1981, and Companies Act 1981: there is some scope for debate as to the applicability of certain (a) if the company has, by resolution, resolved that the provisions of the Bankruptcy Act 1989 to corporate partner- company be wound up by the Court; ships. There are also specific provisions relating to insurance (b) if there is default in holding the company’s statutory companies in the Insurance Act 1978 and relating to segregated meeting; accounts companies and their general and segregated accounts (c) if the company does not commence its business within in the Segregated Accounts Companies Act 2000. There are a year of its incorporation or suspends its business for a also specific provisions relating to banks in the Banking (Special whole year; Resolution Regime) Act 2016, although this legislation has not (d) if the company carries on any restricted business activity; yet been fully brought into force. The rules relating to compul- (e) if the company engages in a prohibited business activity; sory winding up of companies are contained in the Companies (f) if the company is unable to pay its debts; (Winding up) Rules 1982 and also, to a lesser extent, in the Rules (g) if the company’s ministerial consents were obtained as of the Supreme Court 1985. a result of a material misstatement in the application for Insolvent liquidation procedures can generally be divided into consent; or compulsory liquidations and insolvent voluntary liquidations (h) if the Court is of the opinion that it is just and equitable (creditors’ voluntary liquidations). that the company should be wound up. The general purpose of the liquidation process is to gather The Supervisor of Insurance (the Bermuda Monetary in and realise assets, to pay off creditors in accordance with Authority) can present a petition for the winding up of an insur- their rights and priorities, and then to distribute any remaining ance company if it is in breach of the regulatory provisions of assets to the company’s shareholders. However, liquidators in a the Insurance Act 1978, or if it is in the public interest that the winding up of a company have the power to promote compro- insurance company should be wound up on just and equitable mises and arrangements whether by consensual means or using grounds. a scheme. Furthermore, where the company is not already in Section 34 of the Insurance Act 1978 also provides that the liquidation, the winding up jurisdiction of the Court and stat- Court may order the winding up of an insurance company subject utory machinery may be invoked in order to protect the imple- to the modification that the insurance company may be ordered mentation of a restructuring (as discussed above in connection to be wound up on the petition of 10 or more policyholders with ‘soft touch’ provisional liquidation). owning policies of an aggregate value of not less than $50,000, Liquidators are generally given a degree of discretion as to the provided that such a petition shall not be presented except by time period within which to effect and complete the liquidation, leave of the Court, and leave shall not be granted until a prima which may depend to some extent on the nature, location, and facie case has been established and until security for costs for such liquidity of the company’s assets. After the liquidation process amount as the Court may think reasonable has been given. is complete, the company can then be dissolved and it will cease The Registrar of Companies can petition for the winding up to exist as a legal entity. of a company if directed to do so by the Minister of Finance following receipt of a report of an Inspector to investigate the company under sections 110 or 132 of the Companies Act 1981. Voluntary liquidation A provisional liquidator can be appointed prior to the final An insolvent voluntary liquidation is initiated by the company’s hearing of a compulsory winding up petition if there is a good shareholders through a resolution, based on the recommenda- prima facie case that a winding up order will be made, and if tion of the board of directors. Although creditors participate the Court considers that a provisional liquidator should be in the creditors’ voluntary liquidation procedure, they can only appointed in all the circumstances of the case. secure the active supervision of the Court by petitioning for the compulsory liquidation of the company. 4.3 Who manages each winding up process? Is there Compulsory liquidation any court involvement? The compulsory liquidation process is initiated by one of the following making a petition to the Supreme Court of Bermuda: Compulsory liquidation: The liquidator or provisional a creditor, including any contingent or prospective creditor; a liquidator appointed by the Court controls the procedure of contributory (that is, any person liable to contribute to the assets

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liquidation, and displaces the company’s board of directors Contracting counterparties can also seek to assert claims against upon his appointment. The exercise by the liquidator of his the company for damages sustained as a result of any breach powers is subject to the sanction, supervision and control of the of contract caused by the commencement of the liquidation, Court, and, to a lesser extent, the Committee of Inspection, if subject to proof in the liquidation. one is appointed. In the same way as the board of directors is displaced, so too are the powers of the shareholders. 4.6 What is the ranking of claims in each procedure, ‘Soft touch’ provisional liquidation: Subject to the circum- 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’), In a compulsory liquidation or a creditors’ voluntary liquidation, and that the directors continue to retain all of their powers or creditors’ claims are ranked in the following order: certain limited powers, subject only to the supervisory role to (1) secured creditors enforce their security outside the liquida- be played by the provisional liquidator (subject, in turn, to the tion, but essentially in priority to all other creditors; Court’s supervisory role). This can be an important tool for the (2) the costs and expenses of the liquidation, including all purposes of effecting a restructuring, especially in the context of costs, charges and expenses properly incurred in the international insolvencies, which require parallel restructuring company’s winding up, including the liquidator’s remuner- procedures both in Bermuda and in other jurisdictions. ation if sanctioned by the Court (pursuant to sections 194, Voluntary liquidation: The liquidator appointed or approved 232, and 236(6) of the Companies Act 1981 and Rule 140 by the company’s creditors controls the procedure of volun- of the Companies (Winding up) Rules 1982); tary liquidation. The board of directors is displaced upon the (3) debts due to employees located in Bermuda under section appointment of the liquidator, and their powers are terminated. 33(3) of the Employment Act 2000; (4) preferential debts owed to preferential creditors pursuant 4.4 How are the creditors and/or shareholders able to section 236(1) of the Companies Act 1981, including to influence each winding up process? Are there any unpaid taxes under the Taxes Management Act 1976, restrictions on the action that they can take (including unpaid social insurance/Government pension contribu- the enforcement of security)? tions under the Contributory Pensions Act 1970, liability for compensation under the Workmen’s Compensation Subject to any orders dispensing with the need for approval, Act 1965, and payments of up to $2,500 due to employees a number of the powers of a liquidator appointed in an insol- of Bermudian companies but resident outside of Bermuda; vent winding up of a company may only be exercised with the (5) debts secured by a floating charge (although higher approval of a ‘Committee of Inspection’ comprising representa- priority debts must be paid out of any property secured tive creditors of the company. It is also possible for creditors to by a floating charge if the assets of the company are not apply to the Court with respect to the exercise or proposed exer- otherwise sufficient to meet them pursuant to section cise of the liquidator’s powers, under sections 175 and 176 of the 236(5) of the Companies Act 1981); Companies Act 1981. (6) unsecured creditors’ debts, including the unsecured The making of a winding up order brings about a statutory balance of secured creditors’ claims (pursuant to sections moratorium on proceedings against the company. This will not 158(g), 225 and 235 of the Companies Act 1981); prevent secured creditors enforcing their security where they (7) post-liquidation interest on unsecured creditors’ debt claims; can do so without instituting proceedings before the Court. (8) debts due to shareholders in their capacity as such (pursuant Furthermore, even where judicial assistance is needed, leave to section 158(g) of the Companies Act 1981); and will usually be given to enforce valid security interests notwith- (9) shareholders’ equity in the event of a surplus balance, standing the statutory moratorium. A judgment creditor will according to their rights and interests under the compa- not be permitted to continue with the execution of its judgment ny’s bye-laws. against the company where notice of an order winding up the Each category of debts must be paid in full before payment of company is received by the Provost Marshall prior to sale of creditors in the subsequent category. Creditors in the same cate- goods of the company taken in execution or prior to completion gory rank equally (or pari passu) among themselves. of execution by receipt or recovery of the full amount of the levy. The above-mentioned priorities are modified where the company is registered as an insurer under the Insurance Act 1978 4.5 What impact does each winding up procedure have so as to give priority, after the payment of preferential debts, to on existing contracts? Are the parties obliged to perform the claims of the company’s insurance creditors (i.e., of its direct outstanding obligations? Will termination and set-off and reinsurance policyholders) over the claims of its unsecured provisions be upheld? general (non-insurance) creditors. Where the insurer carries on both long-term (life) and general (property and casualty) insur- Other than the statutory provisions governing contracts of ance business, debts of all types attributable to each business employment discussed in our answer to question 6.1, as a must be paid out of a separate business fund attributable to the matter of law, there is no automatic termination of contracts business. The same modified priorities apply to the debts attrib- with the company upon the commencement of a compulsory utable to each business, save that any surplus in a business fund liquidation or a creditors’ voluntary liquidation (save where after paying preferential debts of the related business must be the liquidator disclaims an onerous contract or transaction, or used to pay any unpaid preferential debts of the other business where the relevant contract contains contractual terms to that before being used to pay policyholder debts of the related busi- effect). However, a contracting counterparty can only claim in ness. A surplus available after paying policyholder debts of a the liquidation for debts that exist at the date of commence- business must be used in a similar way before being used to pay ment of the liquidation, and interest also ceases to run from general debts of the business. that date. In the circumstances, there is, as a matter of fact, a In the case of the winding up of segregated accounts compa- termination or cancellation of contracts in the event of liquida- nies, section 25 of the Segregated Accounts Companies Act tion, unless the liquidator elects to affirm the relevant contract. 2000 provides that the liquidator shall deal with the assets

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and liabilities that are linked to each segregated account only As set out in our answer to question 4.6 above, the following in accordance with the segregation principles of the legislation claims rank within the list of preferential claims that are to be and the relevant governing instruments or contracts for each settled before payment of certain other unsecured debts: (a) debts transaction. due to employees located in Bermuda under section 33(3) of the There is some scope for argument as to the order of priority for Employment Act 2000; and (b) preferential debts owed to pref- payment of claims asserted by former shareholders in mutual fund erential creditors pursuant to section 236(1) of the Companies companies, whose shares have been redeemed but who are owed Act 1981, including unpaid taxes under the Taxes Management payment of the redemption proceeds at the commencement of Act 1976, unpaid social insurance/Government pension contri- liquidation. The general view is that these are debts due to share- butions under the Contributory Pensions Act 1970, liability for holders that rank behind outside trade creditors’ debts, but ahead compensation under the Workmen’s Compensation Act 1965, of shareholders’ equity, but the legislative provisions, including and payments of up to $2,500 due to employees of Bermudian section 158(g) of the Companies Act 1981, are not entirely clear in companies but resident outside of Bermuda. this respect, notwithstanding a recent judgment of the Supreme Court of Bermuda that touched upon the issue. There is also scope for argument as to the order of priority 72 Cross-Border Issues of outstanding occupational pension payment liabilities under the National Pension Scheme (Occupational Pensions) Act 1998 7.1 Can companies incorporated elsewhere use and Regulation 56 of the National Pension Scheme (General) restructuring procedures or enter into insolvency Regulations 1999, since the legislative provisions are not entirely proceedings in your jurisdiction? clear. Following the decision of the Privy Council in PricewaterhouseCoopers 4.7 Is it possible for the company to be revived in the v Saad Investments Company Limited [2014] UKPC 35 (discussed in future? more detail in our answer to question 7.2), it is clear that the Supreme Court of Bermuda currently has no jurisdiction to wind In the course of the liquidation, the liquidator will adjudicate up ‘overseas companies’ that have not been granted a permit the claims of unsecured creditors and collect the assets of the by the Minister of Finance to carry on business in Bermuda. company. Assets will be distributed (to the extent available) A previously used ‘loophole’ under the External Companies according to the statutory priorities in the form of dividends. (Jurisdiction in Actions) Act 1885 was closed by the Privy At the end of this process, the liquidator is generally released, Council’s decision. and the company is dissolved. The Supreme Court currently lacks jurisdiction to order the Under section 260 of the Companies Act 1981, the Court has convening of meetings of creditors in relation to a proposed the power to declare a dissolution of a company void in certain compromise or arrangement of the debt of an overseas company, circumstances, up to a period of either two years (most liquida- unless that company has been registered by the Minister of tion cases) or 10 years (members’ voluntary liquidation) after the Finance as a Non-Resident Insurance Undertaking under the date of dissolution. Under section 261 of the Companies Act Non-Resident Insurance Undertakings Act 1967. 1981, the Court has the power to restore a company that has been struck off the Register for up to 20 years after strike-off. 7.2 Is there scope for a restructuring or insolvency 52 Tax process commenced elsewhere to be recognised in your jurisdiction?

5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? Bermuda has no statutory equivalent of Chapter 15 of the US’s Bankruptcy Code, section 426 of the UK’s Insolvency Act 1986, No particular tax liabilities are incurred in each procedure, as or the UK’s Cross-Border Insolvency Regulations 2006, by a matter of local Bermuda law. Stamp duty is payable in the which the UK implemented the United Nations Commission ordinary way, save that section 253 of the Companies Act 1981 on International Trade Law’s Model Law on Cross-Border provides various exemptions from stamp duty where a company Insolvency. The Supreme Court of Bermuda has nonetheless is in compulsory liquidation or creditors’ voluntary liquidation. confirmed, following the Privy Council decision in Cambridge Gas Transportation Corp v Navigator Holdings plc [2007] 1 AC 508, 62 Employees that, as a matter of common law, the Supreme Court of Bermuda may (and usually does) recognise liquidators appointed by the Court of the company’s domicile and the effects of a winding up 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would order made by that Court, and has a discretion pursuant to such employees have and where do they rank? recognition to assist the primary liquidation Court by doing whatever it could have done in the case of a domestic insolvency. However, the precise scope of Bermudian Courts’ common Section 33(1) and 33(2) of the Employment Act 2000 provide law power to assist foreign liquidations and, in particular, to that the winding up or insolvency of an employer’s business shall ‘provide assistance by doing whatever it could have done in the cause the contract of employment of an employee to terminate case of a domestic insolvency’ has been the subject of consider- one month from the date of winding up or the appointment of a receiver, unless, notwithstanding the winding up or insolvency, able debate, including in two judgments by the Privy Council, the business continues to operate. on appeals from the Court of Appeal for Bermuda, in Singularis Upon termination of an employment contract under the Holdings Limited v PricewaterhouseCoopers [2014] UKPC 36 and Employment Act 2000, employees working in Bermuda may PricewaterhouseCoopers v Saad Investments Company Limited (referred be entitled to recover accrued entitlements (such as salary and to in our answer to question 7.1). payment in lieu of paid vacation entitlements), as well as sever- In summary, subject to the facts of any particular case, the ance pay. Bermuda Court is likely to recognise the winding up orders of

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foreign Courts, and to assist foreign liquidators to the fullest 7.3 Do companies incorporated in your jurisdiction extent possible, in circumstances where: restructure or enter into insolvency proceedings in other (1) there is a ‘sufficient connection’ between the foreign jurisdictions? Is this common practice? Court’s jurisdiction and the foreign company making it the ‘most convenient’ jurisdiction to have made an order Exempted companies incorporated in Bermuda carry on busi- for the winding up of the company and appointment of ness predominantly or exclusively in foreign jurisdictions, and foreign liquidators; frequently have their shares and other securities listed on foreign (2) there are documents, assets, or liabilities of the foreign public exchanges. They are accordingly subject to the insolvency company within the jurisdiction of Bermuda; the foreign regimes of the jurisdictions in which they do business, where company has conducted business or operations within, or these extend to companies incorporated overseas. Proceedings from, the jurisdiction of Bermuda, whether directly or by in other jurisdictions – for example: the United States; the United agents or by branches; the foreign company has former Kingdom; the British Virgin Islands; the Cayman Islands; Hong directors, officers, managers, agents or service providers Kong; and Singapore – affecting insolvent Bermuda exempted within the jurisdiction of Bermuda; and/or the foreign companies are common. Where necessary, these are commonly company properly needs to be involved in litigation or supported by ancillary liquidation proceedings in Bermuda or by arbitration within the jurisdiction of Bermuda; and judicial recognition and assistance (of the type discussed in our (3) there is no public policy reason under Bermudian law to answer to question 7.2) from the Supreme Court, in the absence of winding up proceedings in Bermuda. 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 82 Groups how far it is appropriate to develop the common law so as to assist foreign liquidations depends on the facts of each case, and 8.1 How are groups of companies treated on the the nature of the power that the Bermuda Court is being asked insolvency of one or more members? Is there scope for co-operation between officeholders? to exercise. In the context of an application for an order for production of documents by an entity within the jurisdiction of the Bermuda Court, the Privy Council has noted that such a There are no statutory provisions for the treatment of insolvent power is available only where necessary to assist the officers of group companies. The Supreme Court has, however, occasion- a foreign Court of insolvency jurisdiction or equivalent public ally appointed the same office-holders as liquidators to multiple officers, but is not available to assist a voluntary winding up, companies in the same group of companies, subject to suitable arrangements being made with respect to any conflicts that which is essentially a private arrangement. It is not a power to might arise (including by way of appointment of a ‘conflicts’ assist foreign liquidators to do something which they could not liquidator). In appropriate cases, the Supreme Court has also do under the law by which they were appointed, and its exercise supported and approved co-operation agreements that have must be consistent with the substantive law and public policy of been entered into between separate office-holders of companies the assisting Court in Bermuda. within a group of companies. There is some uncertainty as to whether a foreign scheme or related procedure (such as an insurance business transfer scheme 92 COVID-19 under legislation implementing European single market insurance directives) can be recognised and enforced in Bermuda as a matter of common law. Although the Supreme Court of Bermuda 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic? has shown some willingness to recognise foreign Court orders approving foreign schemes (in the absence of opposition), it is unclear what position it might take in a contentious situation. Bermuda has not introduced any specific insolvency measures in response to the COVID-19 pandemic, although the availability of ‘soft touch’ provisional liquidations is likely to provide a life- line to struggling companies.

Restructuring & Insolvency 2021 Kennedys 43

Mark Chudleigh, managing partner of the Bermuda office of the global law firm, Kennedys, has over 30 years of commercial litigation experience including in the City of London, the United States and Bermuda. He maintains an international practice and frequently represents clients on complex, multijurisdictional matters, particularly involving the United States, having been admitted as an attorney in the State of California in 1998. Mark’s practice encompasses commercial/corporate litigation, insolvency and restructuring, private client/trust matters and regulatory issues. He frequently acts as an expert witness on Bermuda law and is regularly appointed as an arbitrator in commercial disputes. Mark has been recognised as a leading lawyer in Bermuda by several directories, including Chambers Global and The Legal 500.

Kennedys Tel: +1 441 278 7160 20 Brunswick Street Email: [email protected] Hamilton HM10 URL: www.kennedyslaw.com Bermuda

Laura Williamson is an associate in the litigation department of Kennedys’ Bermuda office. She has an international practice encom- passing a broad range of commercial litigation and arbitration, including financial services, insurance, insolvency, professional negligence and trusts disputes. Much of her work has a multi-jurisdictional dimension. She is a member of the Restructuring and Insolvency Specialists Association (Bermuda) and INSOL International. Laura has been called to the Bar of England and Wales and to the Bermuda Bar. Prior to joining Kennedys, she practised as a barrister in London for five years.

Kennedys Tel: +1 441 278 7166 20 Brunswick Street Email: [email protected] Hamilton HM10 URL: www.kennedyslaw.com Bermuda

Kennedys provides expert counsel in relation to commercial and corpo- of two Bermuda mutual fund companies structured as segregated accounts rate matters in Bermuda. The firm handles insolvency and restructuring companies; representing management, creditors and shareholders of matters, commercial litigation and arbitration, corporate and trust disputes, various Bermuda companies, funds and private equity structures in a contract drafting, and general corporate advisory/regulatory work across number of contested compulsory winding up petitions; representing the all business sectors and with a particular focus on insurance. interests of unsecured creditors in various receiverships; and representing The firm excels at prosecuting and defending complex matters involving a Bermuda mutual fund company structured as a segregated accounts significant exposure, sensitive public relations issues and industry-wide company in responding to various claims and applications for its various policies. Kennedys offers its clients not only local Bermuda expertise but segregated accounts to be put into receivership. also multinational legal expertise through its association with the interna- www.kennedyslaw.com tional law firm Kennedys Law LLP. In its insolvency and restructuring practice, Kennedys advises and represents clients in Bermuda and in other jurisdictions with connections to Bermuda. Recent matters handled by the team include: representing the 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

Restructuring & Insolvency 2021 44 Chapter 9 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 the 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 inter- vency proceedings and also in the course thereof. They would ests. Failure to comply with the statutory obligations when normally be fast, flexible, voluntary and confidential and are aimed managing a company in financial difficulties can result in civil, at finding a plausible and mutually beneficial solution for both the administrative or criminal liability of the directors, as well as in distressed company and its creditors. The debtor is represented their ineligibility to be appointed as directors of other compa- by its management body (and not by an insolvency administrator). nies in the future. Informal work-out negotiations, taking place after the Civil liability may be charged for losses suffered by the opening of the insolvency proceedings, are supposed to lead to company due to improper management resulting in the company an out-of-court settlement agreement between the debtor and all entering into a distressed financial situation, whereupon share- of its creditors with approved claims. The court’s role is merely to holders may adopt the respective decision for the company to verify that the legal requirements for approval of this out-of-court sue its director. In addition, liability for damages of a director settlement agreement are met. Once it is sanctioned, the insol- can also arise from not filing for insolvency within 30 days vency proceedings are subject to termination. from the day the company became illiquid or over-indebted, in Formal restructuring and insolvency proceedings, which are which case the management is liable before the creditors for any used relatively rarely in practice, can take place both prior to the damages incurred due to failure to comply with this deadline. opening of the insolvency proceedings and also in the course Administrative liability may be triggered for failure to comply thereof. with tax or social security obligations of the company 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 on 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the 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 obligations; Stakeholders who have the ability to influence the company’s (iv) free of charge transactions 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 that 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 at as equally amongst the creditors in order to invalidate any trans- early a stage as possible); (ii) correctness of the data and infor- actions that are made against the statutory provisions or that mation 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 involvement? by 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, and respectively the debtor willingness to acquire shares in return for him swapping his (represented by its management) and the creditors. claim for shares (however, receivables for taxes/social security Both formal restructuring procedures (stabilisation procedure payments cannot be swapped for shares). Sale of the entire or and recovery plan procedure) require the involvement of the court part of the enterprise of the financially distressed company or whose main role is to approve the stabilisation or recovery plan the separate assets is also possible, provided that a market price valu- creditors have voted for, as long as it meets all legal requirements. ation and a preliminary sale and purchase agreement, executed An optional body in both procedures is the Supervisory Body, by the buyer, are presented. which can be a collective or a one-man body, whose main role is Creditors can attempt to block the adoption of a stabilisa- to supervise the actions of the distressed company/debtor, and tion plan by: (i) raising objections against the inclusion of other the proper execution of the plan. Certain actions of the distressed creditors in the list of creditors entitled to vote for the stabili- company/debtor may only be performed after being approved by sation plan; and (ii) personally voting against the stabilisation the Supervisory Body. It may, at any given time, request informa- plan. Shareholders, on the other hand, can influence the whole tion from the management of the distressed company/debtor with procedure by giving instructions to the management, the latter regard to the fulfilment of the approved plan. being the only body entitled to draft, submit and elaborate on the stabilisation plan. In other words, the shareholders (or at least the majority of them) would be indirectly triggering, or at 3.5 What impact does each restructuring procedure least aware of, the initiation of the stabilisation procedure and have on existing contracts? Are the parties obliged to the contents of the stabilisation plan. Upon the opening of the perform outstanding obligations? What protections are there for those who are forced to perform their stabilisation proceedings, all enforcement, including against outstanding obligations? Will termination and set-off secured assets, is ex lege stayed. provisions be upheld? Dissenting creditors with receivables originating before the stabilisation procedure can actually be forced to comply with the approved stabilisation plan, as long as all of the following As a rule of thumb, each and every contract that has not been fully requirements are met: (i) the plan has been approved by more or partially fulfilled by the financially distressed company/debtor than 50% of the creditors entitled to vote in the respective class; could be terminated by the trustee in the stabilisation procedure (ii) more than 75% of the creditors entitled to vote in the respec- and by the insolvency administrator in the insolvency proceed- tive class have taken part in the voting; (iii) creditors holding ings. Apart from that general rule, and as long as a stabilisa- more than 75% of all receivables have approved the plan; and tion or recovery plan has been voted for and approved, existing (iv) the plan complies with all other statutory requirements. contracts are impacted by the stabilisation or recovery plan only insofar as the respective liabilities and receivables under the contracts are to be reorganised or rescheduled with the plan. 3.3 What are the criteria for entry into each In any case, the financially distressed company/debtor is restructuring procedure? obliged to perform all outstanding discounted obligations under the approved plan according to the approved repayment It is not necessary to meet specific requirements in order to schedule, otherwise the distressed company/debtor risks being enter into an informal out-of-court restructuring procedure. It dragged into insolvency proceedings and/or having the initial, is crucial for the debtor or the financially distressed company to undiscounted amount of obligations restored. have a basic understanding with its creditors regarding the core Termination and set-off provisions in already-concluded of the restructuring that is to take place. contracts would be normally upheld, unless otherwise stipulated Entering into a formal stabilisation procedure requires the in the plan. distressed company to submit a formal application with the court. This application must contain various data, informa- 3.6 How is each restructuring process funded? Is any tion and attachments, including, inter alia, a detailed descrip- protection given to rescue financing? tion and elaboration regarding the company’s: (i) liabilities towards its creditors; (ii) property status and its collateralisation; (iii) ongoing arbitration, enforcement proceedings and In a stabilisation procedure, the restructuring process is always business activity for the past three years; (iv) disposed assets funded by the distressed company, whereas in open insolvency for the past three years; (v) reasons that led to the distressed proceedings, expenses are to be borne by the creditors if they financial situation; (vi) proposal regarding the terms and condi- are proposing the recovery plan, or by the insolvency estate – tions, under which the creditors’ receivables will be honoured; provided that the recovery plan is proposed by the debtor itself and (vii) possible guarantees and collaterals, along with manage- or by the insolvency administrator. ment, organisational, legal, financial and other changes, that the company is ready to provide and undertake to secure the proper 42 Insolvency Procedures execution of the stabilisation plan. As far as the recovery plan procedure is concerned, the latter 4.1 What is/are the key insolvency procedure(s) should have the following mandatory content: (i) extent of satis- available to wind up a company? fying the approved claims; (ii) guarantees provided to each class of creditors; (iii) managerial, organisational, legal, finan- The insolvency procedure itself ends with the winding up and cial, technical, and other actions needed for the plan to be strike off of the debtor from the commercial register, save for fulfilled; (iv) information regarding the influence on the debt- cases when, after the insolvency estate encashment, all creditors’ or’s employees; and (v) other statutory information. claims are honoured and there is free property left.

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4.2 On what grounds can a company be placed into the new contract shall serve the very purpose of the winding up each winding up procedure? 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; 4.6 What is the ranking of claims in each procedure, (ii) expiration of a predetermined duration period of the including the costs of the procedure? company; (iii) a decision of the company’s shareholders; The ranking of claims within the insolvency procedure is as (iv) merging of companies into a joint-stock company or a follows: limited liability company; (i) pledge or mortgage secured claims; (v) a court decision based on: (i) a request by the company’s (ii) lien-based claims; shareholders; (ii) a request by a prosecutor; or (iii) a request (iii) insolvency-related expenses; by a creditor of a shareholder of the company; and (iv) employment-related claims for employment relation- (vi) the death of the sole shareholder of a company who is a ships that occurred before the opening of the insolvency natural person. proceedings; (v) allowance owed to third persons; 4.3 Who manages each winding up process? Is there (vi) public claims of the state and the municipalities (taxes, any court involvement? customs levies, duties, fees, mandatory insurance instalments and others) arising 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 arising after the opening of the insolvency itors and the insolvency administrator; proceedings; (ii) the expiration of a predetermined duration period of a (viii) all other unsecured claims arising before the opening of company, is managed by the company’s liquidator (normally the insolvency proceedings; the company’s former manager or another person to be (ix) claims for statutory or contractual interest on an unse- appointed by the company’s shareholders); cured claim; (iii) a shareholders’ decision, is managed by the company’s (x) shareholders’ 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 an can freely initiate any actions against the company (including insolvency procedure (and not after the strike-off of the company enforcement of security) up until the moment the company is from the commercial register on other grounds). A debtor may dissolved and de-registered from the commercial register. be revived, and insolvency proceedings may be resumed by a Shareholders, on the other hand, have all legal means and power to influence and steer the winding up proceedings. In court decision, provided that within one year after the insol- most cases, shareholders are those who start the winding up and vency proceedings termination: (i) amounts set aside for litigated approve the liquidator. claims are released; and (ii) assets, the existence of which was unknown during the bankruptcy proceedings, are discovered.

4.5 What impact does each winding up procedure have 52 Tax on existing contracts? Are the parties obliged to perform 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 As a general rule, the debtor or the company that is being restruc- – these must be fulfilled and complied with by both parties as tured or dissolved within an insolvency proceeding continues to initially agreed upon. be liable for the tax due, whereby those liabilities rank in the However, liquidators are to invite company’s creditors to manner described in question 4.6 above. Subordination or claim any outstanding amounts they have towards the company waiver of receivables could be recognised as taxable gain, which and duly inform them that the company has closed for busi- can on the other hand be offset against current losses or loss ness. New contracts cannot be concluded, save for cases where carry-forwards.

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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?

Within one month from the opening of the insolvency proceed- In Bulgaria, each company is legally regarded as a separate legal ings, the debtor is obliged to terminate employment contracts entity, whether or not it is a part of a group. Hence, a sepa- with employees, notify the tax authorities thereof, issue the rate insolvency proceeding is to be opened for each company, necessary employment documents to the former employees, provided the legal grounds for this are present (save for the cases and prepare lists of the employees entitled to guaranteed claims where insolvency proceedings are deemed automatically opened under the Act on Guaranteeing Receivables of Employees in for another company concealing commercial activity by means Case of Bankruptcy of the Employer. In cases of large-scale of an illiquid company, which is rather uncommon in practice). dismissals, the debtor should also conduct preliminary consulta- tions with the trade union representatives and notify in advance 92 COVID-19 the labour inspection authorities. A special guarantee fund with the National Social Security 9.1 What, if any, measures have been introduced in Institute guarantees the employee’s claims for up to six unpaid response to the COVID-19 pandemic? salaries or labour-related compensations in case of an employer’s insolvency. The ranking of the employees’ claims themselves is elaborated Without any doubt, the COVID-19 pandemic has highlighted in question 4.6 above. the need for Bulgaria to accelerate the national reform to digi- talise judicial institutions’ handling of cases, and parties’ and lawyers’ exchange of information and documents. 72 Cross-Border Issues As part of this endeavour, certain court hearings can now take place entirely online via videoconferencing tools, should a party not 7.1 Can companies incorporated elsewhere use be able to travel to the designated court district. However, these restructuring procedures or enter into insolvency videoconferences are supposed to take place in court premises proceedings in your jurisdiction? where the impeded party is located. In certain cases, provision of expert opinions and witness interrogations may also be made In accordance with Regulation (EU) 2015/848, the courts in online. Bulgaria would have jurisdiction to open insolvency proceed- As of June 2021, the Unified E-Justice Portal is supposed to ings, as long as the centre of main interests (being the place be fully functional, enabling court and litigants to submit and where the debtor conducts the administration of its interests on receive all forms of court-related acts electronically. The Portal a regular basis and which is ascertainable by third parties) of a shall not replace the hardcopy court files, but rather provide an European-based debtor is situated in Bulgaria. additional option for the parties to have easy access to them electronically. Users shall be able to log into the Portal and see 7.2 Is there scope for a restructuring or insolvency the status of their case, along with all uploaded case documents. process commenced elsewhere to be recognised in your The recently introduced Unified Court Experts Register repre- jurisdiction? sents an online platform containing data on professionals certified as legal experts and registered with the courts. This electronic register provides listing of all available court experts, Pursuant to the same Regulation, the opening of insolvency their education, specialties, along with the court district they are proceedings handed down by a court of a European Member active in. It greatly facilitates the work of both the court and the State shall also be recognised in Bulgaria from the moment that litigants in finding an expert with suitable expertise. it becomes effective in the State of the opening of proceed- The Unified Judicial Enforcement Information System shall soon ings. As far as non-European States are concerned, insolvency become a single electronic database onto which bailiffs across proceedings can only be recognised in Bulgaria, as long as this Bulgaria will, on a daily basis, upload in a unified manner and is provided for in an international treaty to which Bulgaria is a format data from their registers and diaries on all actions taken party. in enforcement cases. So far, private enforcement agents have been using various electronic information systems with different 7.3 Do companies incorporated in your jurisdiction functions for registering the above data, which makes it hard (if restructure or enter into insolvency proceedings in other possible, at all) for the parties to the enforcement proceedings to jurisdictions? Is this common practice? keep track of the actions taken.

Companies incorporated in Bulgaria would be able to enter into insolvency proceedings in other European jurisdictions, as long as they are able to prove that their centre of main interests is in the respective jurisdiction, which is rather uncommon.

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Konstantin Vassilev, LL.M. Finance, is the 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

Restructuring & Insolvency 2021 50 Chapter 10 Canada Canada

Kevin J. Zych

Bennett Jones LLP Joshua Foster

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, Canada has been viewed somewhere between the company in financial difficulties? Is there a specific United States and the UK in terms of “friendliness”. However, point at which a company must enter a restructuring or insolvency process? over the past 30 years Canada has developed a “rescue culture” in dealing with restructuring matters intended to facilitate (when reasonably possible) the continuation of the debtor’s busi- Canadian corporate statutes impose two principal duties ness and avoid bankruptcy or liquidation. on directors: a fiduciary duty and a duty of care. Generally, In the context of a restructuring under the Companies’ Creditors these duties require directors, in exercising their powers and Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”) (the statute discharging their obligations, to act honestly and in good faith commonly used in larger situations) and the proposal provi- with a view to the best interests of the corporation and to exer- sions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 cise the care, diligence and skill that a reasonably prudent person (the “BIA”), the court has jurisdiction to grant a broad stay of would exercise in comparable circumstances. There is no fidu- proceedings to prevent creditor enforcement actions, make a ciary duty owed by directors to creditors, even if the corpora- proposal or plan of compromise or arrangement to their credi- tion is insolvent. tors, disclaim uneconomic contracts and seek the vesting of all Although there is no specific point in time at which a company or substantially all of their assets in a purchaser free and clear is obligated to enter a restructuring or insolvency process, of all claims and encumbrances. Equally, creditors benefit prudent directors should be alert to any looming liquidity crisis from certain protections under the BIA and CCAA and may and be prepared to respond promptly in the best interests of raise concerns or objections at nearly every stage of a debtor the corporation. Such steps may include, among others, consid- company’s formal restructuring. The appointment of neutral ering a refinancing, an informal work-out, formal restructuring and objective court officers, including monitors, proposal trus- proceedings, or the winding down of the company. tees or trustees in bankruptcy and the oversight of courts in When managing a potential solvency crisis, liabilities imposed Canadian insolvency proceedings also assists in safeguarding on directors under provincial and federal statutes will warrant the interests of stakeholders. careful consideration. Among other things, directors may be liable for employee termination and severance pay, wage arrears, source deductions, environmental liabilities and the obligations 1.2 Does the legislative framework in your jurisdiction of the corporation to collect, withhold or remit Canada Pension allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what Plan contributions, income tax, employment insurance, retail extent are each of these used in practice? sales tax and general sales tax/harmonised sales tax. While these liabilities are not unique to insolvency proceedings, they are amplified where a company does not have the wherewithal Informal work-outs are common in the Canadian market and to meet its ordinary course obligations. take place against the backdrop of potential formal insolvency In addition to statutory liabilities imposed on directors gener- proceedings. While Canadian insolvency legislation does not ally, there are certain liabilities that arise solely in the context expressly address informal work-outs, distressed companies of insolvency. For instance, directors may be personally liable frequently seek to effect recapitalisations and balance sheet for authorising the repurchase or redemption of shares or the restructurings consensually with their creditors. Additionally, payment of dividends when the company is insolvent or where pursuant to the arrangement provisions of statutes such as such actions render it insolvent. Similarly, directors may be the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the liable where they received severance pay, termination pay, or “ ”), it is possible to implement balance sheet restructur- CBCA incentive benefits within one year of the company’s initial bank- ings without the need for the initiation of formal insolvency ruptcy event, if such payments rendered the company insolvent proceedings. or were made at a time when the company was insolvent.

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2.2 Which other stakeholders may influence the Under the BIA, a preference is characterised as a transfer company’s situation? Are there any restrictions on the of property, a provision of services, a charge on property or a action that they can take against the company? For payment made or an obligation incurred or judicial proceedings example, are there any special rules or regimes which taken or suffered by an insolvent person in favour of a creditor apply to particular types of unsecured creditor (such as with a view to, or, in the case of non-arm’s length creditors, that landlords, employees or creditors with retention of title has the effect of, giving that creditor a preference over another arrangements) applicable to the laws of your jurisdiction? creditor. In contrast, a transfer at undervalue is a transfer of Are moratoria and stays on enforcement available? property or services for no consideration or conspicuously less than their fair market value that (i) was made at a time where the When a company is experiencing financial distress and nearing debtor was insolvent or was rendered insolvent by such transfer, insolvency, it should be alert to the rights of particular stake- and (ii) the debtor intended to defraud, defeat or delay a cred- holders including, among others, landlords, secured creditors, itor. Where such transfer occurred with a party not dealing at government entities/regulatory bodies and lien claimants. The arm’s length with the debtor in the period that begins on the day rights of such stakeholders and their treatment upon a compa- that is one year before the date of the initial bankruptcy event, ny’s insolvency may inform which restructuring procedure, if it will be presumed to be a transfer at undervalue regardless of any, is pursued. intention or whether it was made at a time when the debtor was Landlords – in addition to any rights conferred under the insolvent or rendered the debtor insolvent. Importantly, provin- terms of the applicable lease, landlords have a common law right cial fraudulent conveyance and preference legislation similarly to distrain. The right to distrain permits landlords to keep or prohibits certain assignments, transfers and preferences. seize certain assets belonging to a tenant and monetise those A trustee in bankruptcy and a court-appointed monitor under assets to recover rental arrears. the BIA and the CCAA, respectively, are authorised to review Secured creditors – perhaps the most intuitive of the catego- alleged preferences and transfers at undervalue made or entered ries of stakeholders capable of impacting a distressed company into by the debtor within prescribed time periods. Such trans- pre-filing, secured creditors have a right to appoint a receiver actions between the debtor and a non-arm’s length creditor are over the assets, undertakings and property of a debtor to enforce subject to greater scrutiny. For this reason, they may be reviewed their security. Where appointed, a receiver will assume control if having occurred within longer periods of time preceding the of a debtor company’s assets and management and will be able to date of bankruptcy in the case of the BIA or commencement of monetise such assets in the interests of maximising value for the proceedings under the CCAA than similar transactions with an debtor company’s stakeholders. Additionally, secured creditors arm’s length creditor. Transactions found to be preferences or may petition a debtor company into bankruptcy and although not transfers at undervalue are void as against the trustee in bank- common, may attempt to initiate a creditor-driven CCAA filing. ruptcy under the BIA and the court-appointed monitor under These rights are in addition to any contractual rights the secured the CCAA. creditor may have against the debtor company upon an event of Trustees in bankruptcy and court-appointed monitors under default/default under their loan and security agreement(s). the BIA and the CCAA, respectively, are also empowered to Government entities/regulatory bodies – certain government challenge certain dividends, share redemptions and compensa- entities and regulatory bodies are empowered to impose sanction. Specifically, the payment by a debtor of a dividend (other tions on companies for wrongdoing, including environmental than a stock dividend), redemption or purchase for cancella- harm, and restrict the transfer of certain assets and licences in tion of shares of the capital stock of the debtor or payment of the ordinary course and in the context of formal insolvency termination or severance pay or incentive or other benefits to a proceedings. Such powers are of particular significance in director or officer of the debtor when the debtor was insolvent, resource sectors such as the oil and gas and mining industries. or rendered insolvent by such conduct, may be challenged. As Also, as a general matter, the court cannot stay the exercise of previously noted, the BIA and the CCAA expose directors of certain powers of regulatory agencies. debtor companies that participate in the aforementioned trans- Both the CCAA and the BIA’s proposal provisions afford actions to personal liability. debtor companies seeking to restructure broad stays of proceed- Although somewhat beyond the scope of this discussion, ings, which will prohibit most enforcement actions. If the financially distressed debtors should also be alert to corporate debtor company assigns itself or is petitioned into bankruptcy, law remedies that can be used to challenge certain transactions. it will only benefit from a stay in respect of the enforcement For instance, under the CBCA and its provincial analogues, actions of unsecured creditors. While a company seeking to transactions may be scrutinised if they are oppressive or unfairly effect a restructuring pursuant to a plan of arrangement under prejudicial to or unfairly disregard the interests of any security the CBCA or the arrangement provisions of an analogous holder, creditor, director or officer. provincial statute may obtain a stay of proceedings, its scope will be limited and is subject to the discretion of the court. 32 Restructuring Options

2.3 In what circumstances are transactions entered 3.1 Is it possible to implement an informal work-out in into by a company in financial difficulties at risk of your jurisdiction? challenge? What remedies are available?

Informal work-outs are frequently implemented in Canada. Generally, there are three categories of transactions that may Given that Canadian insolvency legislation does not expressly be entered into by a company experiencing financial difficulties facilitate informal work-outs, debtors seeking to implement that can be challenged. Namely: such consensual resolutions with their creditors and stake- (a) preferences; holders will not benefit from certain statutory protections such (b) transfers at undervalue; and as a stay of proceedings. Nonetheless, parties may seek court (c) the payment of dividends or certain forms of compensa- approval of certain informal work-outs and the avoidance of the tion and share redemptions. professional costs and stigma associated with formal insolvency

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proceedings make informal work-outs, where practicable, attrac- a result, it is not uncommon for debtor companies proposing a tive to distressed companies. Refinancing transactions, forbear- plan of compromise or arrangement under the CCAA to leave ance agreements, and partial asset sales are common features of certain claims unaffected (i.e. certain or all secured claims or such informal work-outs. Notably, it is not uncommon for such unsecured claims) such that the plan need only be approved by a informal work-outs to form the basis of a “pre-pack”-like formal single class of creditors. Proposals under the BIA also must be restructuring and insolvency proceedings. approved by the Requisite Majority in each class. Unlike under the CCAA, however, the BIA does not permit a debtor company to make a proposal only to its secured creditors. 3.2 What formal rescue procedures are available Beyond the use of the BIA’s and CCAA’s formal insolvency in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps procedures, a debtor company may also effect a balance sheet and pre-packaged sales possible? To what extent can restructuring pursuant to a plan of arrangement under the creditors and/or shareholders block such procedures CBCA. The flexibility afforded by the CBCA’s plan of arrange- or threaten action (including enforcement of security) ment provision has made it a popular means of facilitating to seek an advantage? Do your procedures allow you recapitalisations and balance sheet restructurings for distressed to cram-down dissenting stakeholders? Can you cram- companies. down dissenting classes of stakeholder?

3.3 What are the criteria for entry into each Principally, there are three means of restructuring the liabilities restructuring procedure? of distressed companies in Canada. These include effecting a restructuring under the: The criteria for entering into each of the restructuring proce- (a) CCAA; dures discussed in the preceding section vary significantly. (b) BIA’s proposal provisions; and These criteria are discussed immediately below. (c) CBCA’s plan of arrangement provision or that of a similar provincial corporate law statute. BIA proposals While receiverships and bankruptcies are not discussed The BIA’s proposal provisions are accessible to an “insolvent within this section, they are commonly initiated when enforcing person”. The BIA defines an insolvent person as a person who creditors’ rights and can be used strategically to block a debt- is not bankrupt and who resides, carries on business or has prop- or’s commencement or continuance of proceedings under the erty in Canada, whose liabilities to creditors equal or exceed BIA’s proposal provisions or the CCAA. For instance, upon CA$1,000 that: a debtor company bringing an application under the CCAA, (a) is unable to meet their obligations as they generally become a secured creditor may attempt to bring a competing receiver- due; ship application. Similarly, in the context of a debtor company (b) has ceased paying their current obligations in the ordinary seeking protection under the BIA by filing a notice of intention course of business as they generally become due; or to make a proposal (“NOI”), a creditor may bring an applica- (c) has property with an aggregate value that is not suffi- tion to terminate the stay of proceedings afforded to the debtor, cient, or, if disposed of, would not be sufficient to enable resulting in a deemed bankruptcy. payment of all of their obligations due and accruing due. The CCAA is considered to be flexible and remedial legis- A person who satisfies any one of the above tests for insol- lation designed to enable debtor companies with over CA$5 vency may initiate proceedings under the BIA’s proposal provi- million in liabilities to restructure their business and avoid sions in two ways. First, an insolvent person may file a copy of the social and economic costs of bankruptcy. The flexibility its proposal and a prescribed statement of affairs with a licensed of the CCAA has made it an attractive choice for restructuring trustee, who in turn will file each with the official receiver in the in Canada. Comparatively, the BIA proposal provisions offer debtor’s locality. Second, an insolvent debtor may file an NOI debtor companies a more expedient and often less costly means with the official receiver in its locality stating the following: of restructuring. However, these benefits are accompanied by a (a) their intention to file a proposal; more rules-based and less flexible restructuring regime. (b) the name and address of the licensed trustee who has Both the BIA’s proposal provisions and the CCAA permit the consented to act as the proposal trustee; and sale of all or substantially all of the assets or business of a debtor (c) the names of the creditors with claims amounting to company and do not contain express prohibitions on pre-pack- CA$250 or more and the quantum of their respective aged sales. Generally, such pre-packaged transactions involve a claims. pre-insolvency sales process that results in a stalking horse asset When filing an NOI, the insolvent person must also include purchase agreement (the “Stalking Horse APA”) being entered a copy of the proposal trustee’s written consent to act. Within into. Upon commencing formal restructuring proceedings, the five days of filing the NOI, such proposal trustee is required debtor company will typically seek approval of the Stalking to send the information submitted with the NOI to all known Horse APA for the purpose of acting as a stalking horse bid in a creditors of the insolvent person. Further, within 10 days of truncated sale and solicitation process (the “SISP”). Assuming filing the NOI, the insolvent person must file a cash-flow state- that no higher or better bid is received in the SISP, the debtor ment, a report containing prescribed representations by the company will seek approval of the transaction(s) contemplated insolvent person regarding the cash-flow statement and a report by the Stalking Horse APA. on the reasonableness of the cash-flow statement to the offi- A debtor company may effect a restructuring under the CCAA cial receiver. or the BIA’s proposal provisions pursuant to a plan of compromise or arrangement or a proposal, respectively. In the case of Restructuring under the CCAA the CCAA for instance, a plan of compromise or arrangement can Restructuring proceedings under the CCAA may be initiated only be sanctioned if it is approved by a majority in number repre- by an applicant that constitutes a “debtor company”, the total senting ⅔ in value of the creditors (the “Requisite Majority”), or claims against which exceeds CA$5 million. The total of all the class of creditors, as the case may be, voting on the proposed claims against a group of affiliated debtor companies may also plan. This requirement precludes cross-class cram downs. As be relied on to satisfy this threshold.

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Under the CCAA, a “debtor company” is a company, corpo- emerge solvent following implementation of the arrangement. ration or legal person other than a bank, insurance company Careful consideration of whether the proposed arrangement is or certain other excluded form of company, that is bankrupt or fair and reasonable will be given when the company seeks a final insolvent, has committed an act of bankruptcy, is deemed to order approving the arrangement. be insolvent, has made an assignment in bankruptcy or against which a bankruptcy order has been made or that is in the course 3.4 Who manages each process? Is there any court of being wound up. While the CCAA does not define the term involvement? “insolvent person”, courts have traditionally relied on the definition for insolvent person provided under the BIA. Additionally, courts have found that a company may be found to be insolvent The principal formal means of implementing a restructuring for the purposes of the CCAA where it is expected to run out – through the BIA’s proposal provisions, under the CCAA or of liquidity within the time reasonably required to implement a through a plan of arrangement under Canadian corporate law restructuring. statutes such as the CBCA – each require court involvement. A debtor company seeking relief under the CCAA must bring However, the degree of court oversight and the involvement of an application for an initial order, accompanied by: a court-appointed officer varies in each case. (a) a 13-week cash-flow statement illustrating that the In a restructuring under the BIA’s proposal provisions, the company will have sufficient liquidity for the initial 10-day debtor company will maintain control and possession of its busi- stay of proceedings; ness operations and assets and will be subject to the oversight of (b) a report containing prescribed representations of the a proposal trustee. Material steps in a restructuring under the debtor company regarding the cash-flow statement; and BIA’s proposal provisions such as obtaining debtor-in-posses- (c) copies of all financial statements prepared during the year sion (“DIP”) financing, the sale of a debtor company’s assets prior to the application or, if no such statements were outside of the ordinary course of business, extensions of time prepared, a copy of the most recent statement. to file a proposal, the implementation of a proposal approved Assuming all of the requisite statutory criteria have been satis- by a debtor company’s creditors, and the creation of certain fied, a court may grant an initial order conferring a broad stay of charges on the debtor company’s property are all subject to proceedings in respect of the debtor company as well as its busi- court approval. ness, property, and current and former directors and officers, As in the case of a restructuring under the BIA’s proposal on any terms it may impose for a period of not more than 10 provisions, a debtor company seeking relief under the CCAA will days. Where the debtor company seeks certain additional statu- maintain control and possession of its business operations and tory or discretionary relief within the initial 10-day stay period, assets. An initial order obtained under the CCAA will appoint it must also establish that such relief is limited to that which is a monitor to oversee the debtor company throughout the course reasonably necessary for its continued operations in the ordi- of its restructuring. Most significant steps in a CCAA restruc- nary course of business during the initial stay period. A debtor turing will be subject to court approval. Such steps include, company will return to court to seek additional relief prior to the among others, the granting of stay extensions, super-priority expiration of the initial stay period. charges and critical supplier orders, approval of DIP financing, and the sanctioning of a plan of compromise or arrangement Restructuring under the CBCA approved by the debtor company’s creditors. It is common – Restructuring under the CBCA generally proceeds in two stages. and in some cases necessary as a matter of law – for the court-ap- The company will commence the proceedings by seeking an pointed monitor to provide its views concerning any material interim order that provides certain initial relief, including a relief sought in connection with the CCAA proceedings. limited stay of proceedings, and approves the calling of a meet- Proposal trustees and monitors under the BIA and the ing(s) of affected creditors to vote on the proposed plan of CCAA, respectively, serve as neutral and objective officers of arrangement. When applying for an interim order, the court the court. As such, their opinion as to the appropriateness or must be satisfied that: necessity of any relief sought during a debtor company’s restruc- (a) the statutory requirements have been met; turing is often instructive for the court. (b) the application has been put forward in good faith; and Of the restructuring procedures discussed herein, the restruc- (c) the arrangement is fair and reasonable. turing of a company’s debt obligations pursuant to a plan of When seeking an interim order, courts typically focus on the arrangement is the only one that does not involve a court-ap- first two of these criteria. The statutory requirements referred pointed officer. Instead, the company seeking to implement the to above include that: proposed plan of arrangement is only subject to the scrutiny of (a) the proposed plan of arrangement constitutes an “arrange- the court when seeking an interim and final order under the ment” within the meaning of the CBCA; CBCA or analogous provincial corporate law statute. (b) at least one of the applicants is not “insolvent” within the meaning of the CBCA; 3.5 What impact does each restructuring procedure (c) it must not be practicable for the company to effect a funda- have on existing contracts? Are the parties obliged to mental change in the nature of the proposed arrangement perform outstanding obligations? What protections under any other provision of the CBCA; and are there for those who are forced to perform their (d) the director appointed under the CBCA has been given outstanding obligations? Will termination and set-off provisions be upheld? notice of the application. While a detailed discussion of the above statutory requirements is beyond the scope of this chapter, it should be noted Upon commencing proceedings under the CCAA or under the that: (i) the CBCA ascribes an expansive definition to the term BIA’s proposal provisions, parties to existing contracts are gener- “arrangement”; (ii) the threshold for establishing impractica- ally precluded from terminating such agreements as a result of bility and good faith is low; and (iii) the solvency requirement the debtor company’s insolvency or filing for protection under can be satisfied at the interim order stage on the basis that at the CCAA or the BIA. Moreover, parties to existing contracts least one of the applicants is solvent and the applicants will may not rely on the debtor company’s insolvency or filing under

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the CCAA or BIA to amend or terminate a contract, or claim companies and loan companies, may be liquidated pursuant to an accelerated payment or a forfeiture of its term. These protec- the Winding-up and Restructuring Act, R.S.C. 1985, c. W-11 (the tions operate regardless of the terms of the contract at issue but “WURA”). Although uncommon, it is also possible to wind do not extend to stay termination where a debtor company fails up a debtor company under the CCAA when and if its restruc- to meet contractual obligations that arise post-filing. turing efforts fail. Both the CCAA and the BIA’s proposal provisions permit debtor companies to seek an order on notice to every party 4.2 On what grounds can a company be placed into to an agreement assigning the agreement. When determining each winding up procedure? whether to make such an order, a court will consider whether (i) the person to whom the rights and obligations are to be assigned is able to perform the obligations, and (ii) it is appropriate to A debtor company may voluntarily initiate winding up under assign the rights and obligations to that person. An assign- the BIA by filing an assignment in bankruptcy for the general ment order cannot be made in respect of (i) an eligible financial benefit of its creditors. Alternatively, a creditor – whether contract, (ii) a collective agreement, or (iii) an agreement entered secured or unsecured – may petition a debtor company into into by the debtor company subsequent to seeking protection bankruptcy involuntarily by applying to a court for a bankruptcy under the CCAA or BIA, as applicable. Importantly, a court order. The latter procedure requires the applicant creditor to must be satisfied that any monetary defaults in relation to the demonstrate that the debtor committed an act of bankruptcy agreement to be assigned (other than those arising solely as a within six months before the commencement of the bank- result of the debtor company’s insolvency) or the debtor compa- ruptcy proceedings and that the debt owed to the creditor is at ny’s failure to perform a non-monetary obligation thereunder least CA$1,000. Whether commenced voluntarily or involun- will be remedied on or before a date to be fixed by the court. tarily, the debtor company must meet the definition of “insol- The CCAA and the BIA’s proposal provisions also permit vent person” under the BIA discussed above to be placed in debtor companies to disclaim agreements, including commer- bankruptcy. cial leases, on 30 days’ notice to the other parties to the agree- A receivership is generally initiated by application for an order ment given in the prescribed form. Notably, the counterparty appointing a receiver over the assets, undertakings and prop- to the agreement may apply to court within 15 days of receiving erty of the debtor company. Appointment of a receiver by court the notice of disclaimer for an order that the agreement is not order is governed by the provincial judicature acts and rules of to be disclaimed. civil procedure as well as the BIA. In appointing a receiver, a Subject to certain exceptions, the CCAA and the BIA each court will have regard to, among other things: expressly preserve the right of set-off. However, in the context of (a) whether certain mandatory procedural requirements have a BIA proposal, pre-filing claims cannot be set off against post- been satisfied, including the provision of reasonable notice filing claims. The ability to set off pre- and post-filing claims of the secured creditor’s intention to enforce its security; under the CCAA has been the subject of some judicial criticism. (b) whether it is in the interests of all of the debtor company’s Restructuring under the CBCA does not afford an applicant stakeholders to have the receiver appointed; company nor its creditors the same statutorily prescribed rights (c) the potential costs of the receiver; and remedies. Rather, the ability to stay certain contractual (d) the relationship between the debtor company and its rights pursuant to an interim order under the CBCA is entirely creditors; discretionary. (e) the likelihood of preserving and maximising the value of the debtor company’s property subject to the proposed receivership; and 3.6 How is each restructuring process funded? Is any (f) whether the receiver’s appointment is just and convenient protection given to rescue financing? in the circumstances. If permitted to do so under the terms of its applicable secu- Companies restructuring under the CCAA or the BIA’s proposal rity agreement, a secured creditor may instead appoint a private provisions frequently require additional financing to facilitate receiver in the event of default. the restructuring process, pay for critical goods/supplies or Regarding proceedings under the WURA, a court may make service and maintain their ordinary course business operations. an order winding up a company to which the act applies where: To this end, debtor companies may seek DIP/interim financing. (a) the period, if any, fixed for the duration of the company by Each of the CCAA and BIA confer authority on courts to the statute, charter or instrument of incorporation of the grant super-priority charges in respect of DIP financing. Such company has expired, or where an event has occurred that charges may rank in priority above the claim of any secured cred- mandates that the company is to be dissolved thereunder; itor. Importantly, differences between the BIA and the CCAA, (b) the company at a special meeting of shareholders has including, among other things, the definition of “secured cred- passed a resolution requiring the company to be wound up; itor” and the meaning of “property” in the former, have impli- (c) the company is insolvent; cations for which claims can be primed by DIP financing under (d) the capital stock of the company is impaired to the extent each statute. of 25 per cent thereof, and when it is shown to the satisfaction of the court that the lost capital will not likely be 42 Insolvency Procedures restored within one year; or (e) the court is of the opinion that for any other reason it is 4.1 What is/are the key insolvency procedure(s) just and equitable that the company should be wound up. available to wind up a company? In addition, a court may grant a winding up order in respect of certain federally regulated entities, where the Superintendent of Financial Institutions has taken control over it or its assets. The Most companies may be wound up under the BIA in the course WURA enumerates precisely which parties are entitled to seek of either bankruptcy or receivership proceedings. Certain a winding up order in these circumstances, which can include types of statutorily regulated companies, such as banks, trust shareholders and creditors owed a prescribed amount.

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4.3 Who manages each winding up process? Is there 4.5 What impact does each winding up procedure have any court involvement? on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld? In a bankruptcy, the debtor’s property automatically vests in a trustee in bankruptcy, subject to the claims of secured creditors. The trustee may be appointed by the debtor in the case of a In a bankruptcy or receivership, existing contracts are not auto- voluntary bankruptcy, or otherwise by a creditor. The appoint- matically terminated (other than contracts of employment in the ment of the trustee is subject to confirmation at the first meeting context of a bankruptcy). of creditors. The trustee in bankruptcy administers the estate A receiver may continue to perform any existing contracts to of the debtor company for the benefit of its unsecured credi- which the debtor company is a party provided it first assumes tors. Secured creditors retain the right to enforce their security, them. Subject to the terms of the receivership order, a receiver provided they prove their claims with the trustee in bankruptcy may also terminate any such contracts. A trustee in bankruptcy may continue to perform any existing before doing so. The winding up process in a bankruptcy is contracts to which the debtor company is a party. Due to the overseen by the court and any dispositions outside the ordinary automatic vesting of the debtor company’s property in the trustee course of business are subject to court sanction. in bankruptcy, there is no requirement that the trustee expressly In a receivership, the receiver takes over control of the debtor assume such agreements. However, if the trustee in bankruptcy company and its property. Where the receiver is appointed does not take affirmative steps to insist on a contract’s comple- privately by a secured creditor, the receiver’s powers are circum- tion within a reasonable period of time, it may be treated at its scribed by the terms of the security agreement. A private end. Under the BIA, contractual rights of set-off are generally receiver is not bound to manage the assets of the debtor for the preserved, albeit pre- and post-filing obligations may not gener- benefit of all creditors, and may be partial to the interests of the ally be set off against one another. The rights of any counter- appointing secured creditor, subject to the duty to act honestly, party to terminate a contract with a bankrupt as a result of the in good faith, and in a commercially reasonable manner. In debtor company’s bankruptcy proceedings are enforceable and contrast, a court-appointed receiver is required to act in the best are not subject to any stay of proceedings. interests of all stakeholders and, as an officer of the court, is subject to judicial oversight. The scope of a court-appointed receiver’s authority to deal with the debtor company’s property 4.6 What is the ranking of claims in each procedure, will be set out in the order appointing it in such capacity. All including the costs of the procedure? material steps in a court-appointed receivership will be subject to approval of the court. The ranking of claims is generally the same across insolvency procedures, albeit it is only comprehensively codified under the BIA. Subject to certain claims afforded a super-priority under 4.4 How are the creditors and/or shareholders able the BIA (such as the prescribed rights of suppliers to repossess to influence each winding up process? Are there any restrictions on the action that they can take (including goods), the claims of secured creditors in bankruptcy receive the enforcement of security)? priority over the claims of all other creditors of the debtor company under the BIA. The priority as between such secured creditors is determined according to the ordering of priorities In a bankruptcy, the debtor’s unsecured creditors are prohib- set out in the Bank Act, S.C. 1991, c 46, and provincial statutes ited, pursuant to an automatic stay of proceedings under the governing the creation, maintenance and enforcement of secu- BIA, from commencing any proceedings against the debtor to rity interests. recover their debts or from exercising any remedy against the Under the BIA, certain unsecured claims become preferred debtor or its property. claims in bankruptcy (including those of landlords for the In a receivership, there is no automatic stay of proceedings maximum amount of accelerated rent permitted under the BIA) against the debtor. However, where a receiver is appointed by and are subject to the ranking enumerated under the act. These court order, the receivership order will typically stay proceedings preferred claims are paid in priority to ordinary unsecured in respect of the receiver as well as the debtor and its property. claims. Such ordinary unsecured claims rank pari passu. Equity Under both bankruptcy and receivership procedures, the claims are paid only after all super-priority, secured claims, debtor’s directors, officers and shareholders cede all authority preferred claims and unsecured claims against the debtor over the debtor’s assets and management to either the trustee or company are satisfied in full. receiver, as applicable. In the event that a liquidation or winding up occurs under the In the event that a debtor company is being liquidated or CCAA, it is noteworthy that the act does not contain a scheme wound up under the CCAA following a failed restructuring, the for distribution like that found in the BIA. Nonetheless, distri- debtor company will still be entitled to request that the court butions under the CCAA generally mirror those under the impose a broad stay of proceedings if it is necessary in order to BIA provided that certain court-order charges may be afforded maximise the proceeds of the liquidation. a super-priority. These charges are generally in respect of (i) In all proceedings involving court supervision of the winding DIP financing, (ii) the fees and disbursements of counsel to up or liquidation process, creditors have the opportunity to the debtor company, the court-appointed monitor and counsel object to certain steps in the proceedings including a sale to the monitor, and (iii) the debtor company’s indemnification in respect of assets in which they hold an economic interest. obligations to its current and former directors and officers. Creditors may also apply for a court order to lift the stay of It is significant to note that, under applicable federal and proceedings, if any, subject to their demonstrating material prej- provincial law, statutory preferences or liens may be created that udice (an onerous test). Notably, in light of the ranking of equity could have priority over claims of secured creditors. Examples claims in insolvency proceedings, shareholders will often have of this would include environmental remediation claims, claims no economic interest in the debtor company, which will temper for amounts deducted from employee wages for remission to their ability to credibly oppose steps in the proceedings. taxing authorities and certain claims associated with any defined benefit pension that the debtor had previously sponsored.

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4.7 Is it possible for the company to be revived in the As the above makes clear, the claims of a debtor company’s future? employees are provided some measure of protection in the context of formal insolvency and restructuring proceedings. Beyond the aforementioned protections, claims of employees can be, and In the event that a company is dissolved, it may be revived in the frequently are, compromised in restructuring proceedings. future by any interested person. Interested persons may include, among others: (a) a director, officer, employee, shareholder, or creditor of 72 Cross-Border Issues the dissolved company; (b) any person with a contractual relationship with the 7.1 Can companies incorporated elsewhere use dissolved company; and restructuring procedures or enter into insolvency (c) any person with a valid reason for applying for a revival, proceedings in your jurisdiction? such as a liquidator or trustee in bankruptcy. Importantly, the revival of a dissolved company will not alter Both the BIA and the CCAA are available to companies incor- its status under the BIA. porated in other jurisdictions where certain threshold conditions are met. In the case of the BIA, “an incorporated company, 52 Tax wherever incorporated”, may seek protection under the statute provided that it is authorised to do business in Canada or has an office or property in Canada and does not otherwise offend 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? any technical requirement under the BIA. Similarly, an incorporated company may have recourse to the CCAA regardless of its jurisdiction of incorporation where it has assets or is doing Formal insolvency and restructuring proceedings do not business in Canada and satisfies the CCAA’s other technical commonly impose any incremental tax risks on debtor compa- requirements. When assessing whether a company has assets or nies. Certain ordinary tax obligations continue to apply in the is doing business in Canada, courts have avoided applying a de context of proceedings under both the BIA and CCAA, espe- minimis standard. cially where the debtor company continues its business operations. Further, certain transactions effected in the course of proceedings under the CCAA and the BIA will be subject to tax 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your liabilities such as the sale of a debtor company’s assets. jurisdiction? 62 Employees Both the BIA and the CCAA permit the recognition of foreign insolvency and restructuring proceedings and have codified, to a 6.1 What is the effect of each restructuring or large extent, the UNCITRAL Model Law on Cross-Border Insolvency. insolvency procedure on employees? What claims would Recognition proceedings are commenced by the application of a employees have and where do they rank? foreign representative of the foreign proceedings. When doing so, the applicant must first establish that it is a “foreign repre- With the exception of a bankruptcy (whether deemed or other- sentative” seeking recognition of “foreign proceedings”, as such wise) where employees are automatically terminated, formal terms are defined in the CCAA or the BIA, as applicable. Where restructuring and insolvency procedures do not invariably these threshold questions are answered in the affirmative, the impact employees. However, it is not uncommon for debtor court will then determine whether the foreign proceedings are companies restructuring under the BIA’s proposal provisions or “foreign main proceedings” or “foreign non-main proceedings”. the CCAA to terminate some or all of their employees. Foreign main proceedings are foreign proceedings occurring Certain claims in respect of a debtor company’s employees in a jurisdiction where the debtor company has the centre of its are afforded a limited priority and/or cannot be compromised main interests (“COMI”). Unless evidence to the contrary is under a proposal or plan of compromise or arrangement. The provided, a debtor company’s COMI will be presumed to be in BIA for instance, affords employees a priority charge up to the jurisdiction in which its registered office is located. Where the maximum amount of CA$2,000 for unpaid wages, salary, greater consideration is given to a debtor company’s COMI, commission or compensation for services rendered up to six courts will have regard to the following: months prior to the initial bankruptcy event. Similarly, the (a) the location where the debtor company’s corporate deci- BIA grants a priority charge in the amount of CA$1,000 in sions are made, its employee administrations functions, favour of the disbursements of travelling salespersons incurred accounting functions and cash management are overseen, in the period six months prior to the initial bankruptcy event. and where pricing decisions and new business develop- Certain employer contributions to prescribed pension plans ment initiatives are established; and deducted but unremitted employee pension contributions (b) whether the enterprise is managed on a consolidated basis; also benefit from a priority charge on a debtor company’s assets (c) the existence of shared management within entities in an under the BIA. organisation; A court is not permitted to sanction a CCAA plan of compro- (d) the seat of the enterprise’s treasury management func- mise or arrangement or approve a proposal under the BIA if the tions; and above-mentioned priority claims purport to be compromised. (e) the centre of the enterprise’s corporate, banking, strategic Equally, a CCAA plan of compromise or arrangement cannot be and management functions. sanctioned and a proposal under the BIA cannot be approved, Where a court is satisfied that the foreign proceedings are absent payment of all employee wages, salaries, commissions or foreign main proceedings, it must make an order, on terms it compensation for services rendered after the commencement of considers appropriate, granting the debtor company a stay of the applicable restructuring proceedings. proceedings and prohibiting the debtor company from selling or otherwise disposing of its property in Canada outside of the

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ordinary course of business. The court is not statutorily obli- such relief to the LPs as they will not independently constitute gated to make such an order where the foreign proceedings are debtor companies to which the CCAA applies. The extension of foreign non-main proceedings. However, it retains discretion to a limited stay of proceedings to non-applicants is also available do so. In the case of either foreign main proceedings or foreign in CBCA restructurings. non-main proceedings, the BIA and the CCAA confer broad The approach to corporate groups incorporated or having discretion on the court to make any order it considers appro- operations in multiple jurisdictions is more nuanced. Such priate where it is satisfied that it is necessary for the protection groups may initiate formal insolvency proceedings in their of the debtor company’s property or the interests of a creditor COMI and thereafter seek recognition of such proceedings in or creditors. Canada as discussed above. This will require an applicant to establish that it is a foreign representative seeking recognition of foreign proceedings within the meaning of the CCAA or the 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other BIA, as applicable. Of course, this approach may be applied jurisdictions? Is this common practice? where the COMI is in Canada and the foreign representative will be seeking recognition of foreign proceedings in a different jurisdiction that is permitted to recognise the same. Although Subject to the laws of the proposed foreign jurisdiction, compa- less common, each member in a corporate group may instead nies incorporated in Canada, whether federally or provincially, commence insolvency proceedings separate from one another are entitled to enter insolvency proceedings in other jurisdic- in their respective jurisdictions. tions. In practice, this issue arises most commonly in international insolvencies where the Canadian debtor is part of a larger corporate group having its COMI outside of Canada. 92 COVID-19

82 Groups 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic?

8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for Like many nations responding to the COVID-19 pandemic, co-operation between officeholders? Canada has established and developed an economic response plan, which aims to stabilise the Canadian economy and financial markets, inject liquidity and support economic activity. As There are multiple approaches to dealing with corporate a part of its response plan, Canada has, among other things, groups upon the insolvency of one or more of its members. introduced business and sector-specific relief measures, which For instance, each member or certain members of a corpo- include commercial rent assistance, emergency business account rate group may seek protection under the CCAA or the BIA’s loans, federal wage subsidies, employee-related bridge financing, proposal provisions, assuming the requisite statutory criteria and the deferral of goods and services and harmonised sales tax. for such filings discussed above are satisfied. In the latter While the full extent of COVID-19-related relief measures case, this will necessitate filing separate NOIs and, there- is beyond the scope of this chapter, there are several note- after, seeking an order procedurally consolidating the proposal worthy measures germane to insolvency that merit mention. proceedings of each debtor company. The former case is more For instance, the conditions under which a consumer proposal streamlined and arises frequently – each member of the corpo- would be deemed to be annulled were relaxed by permitting rate group who requires the protection and benefits afforded by certain payment defaults. Additionally, the time for holding a the CCAA will apply collectively as applicants in the proceed- meeting of creditors in respect of a proposal, consumer proposal ings. As circumstances change, members of the group may be or bankruptcy under the BIA was extended. added to the CCAA proceedings as applicants subsequent to the initial filing. Where the corporate group includes limited part- nerships (“LPs”) that require the benefit of a stay of proceedings under the CCAA, the applicants must seek an extension of

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Kevin J. Zych is a restructuring and insolvency partner and is the co-head of Bennett Jones LLP’s restructuring and insolvency practice. Kevin’s practice focuses on private loan work-outs and judicially supervised restructurings under the Companies’ Creditors Arrangement Act and the Canada Business Corporations Act, including related litigation, with an emphasis on cross-border restructurings. Kevin has acted for lenders in Sherritt International, Jack Cooper Transport, Bellatrix, Concordia, Algoma Steel, Tervita, Lightstream Resources, Nelson Education, Connacher Oil and Gas, Yellow Media, Nortel, OPTI Canada, Ainsworth Lumber, Trident Energy, Pioneer Companies, Doman Industries, Stelco, Ivaco, Parmalat, Teleglobe and AT&T Canada; the borrower in Calfrac Well Services, Stoneway Capital Corporation, Bonavista Energy, NCSG Crane, Quicksilver Resources, Sanjel, Lone Pine Resources, Sino-Forest, Sun Times Media, Pillowtex, General Chemical and Bumble Bee/ Clover Leaf; and estate fiduciaries in Toys“R”Us, U.S. Steel Canada, CHC Helicopter, Cooper-Standard Automotive, AbitibiBowater, Smurfit- Stone, TerreStar Networks, Dura Automotive, Progressive Moulded Products and Quebecor World.

Bennett Jones LLP Tel: +1 416 777 5738 Suite 3400, One First Canadian Place Email: [email protected] P.O. Box 130 URL: www.bennettjones.com Toronto, Ontario M5X 1A4 Canada

Joshua Foster is a restructuring and insolvency associate. Joshua is rapidly developing his practice focus in the financial restructuring of distressed companies in formal proceedings under the Companies’ Creditors Arrangement Act, Bankruptcy and Insolvency Act and Canada Business Corporations Act.

Bennett Jones LLP Tel: +1 416 777 7906 Suite 3400, One First Canadian Place Email: [email protected] P.O. Box 130 URL: www.bennettjones.com Toronto, Ontario M5X 1A4 Canada

Bennett Jones LLP has one of the most experienced and active restruc- counsel in many significant and high-profile U.S.-based restructurings. We turing and insolvency practices in Canada with special expertise in cross- understand, and know how to navigate within, the bankruptcy/insolvency border restructurings. We are also known for our representation of foreign environment on both sides of the Canada-U.S. border. bondholders, foreign banks, insurance companies and other foreign lenders www.bennettjones.com in Canadian restructurings. Our lawyers have also represented debtors in some of the largest and most complex restructurings in Canadian corporate history. Our lawyers have played significant roles in most major Canadian restructurings and, in addition to being involved in restructuring proceedings in every province of Canada, have developed a particular expertise in cross- border matters, including restructurings across Europe, Central America, Australia, and, of course, the U.S. Our lawyers have also acted as Canadian

Restructuring & Insolvency 2021 Chapter 11 59

England & Wales & Wales England

Simon Beale

Macfarlanes LLP Tim Bromley-White

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 England and Wales is traditionally considered a creditor-friendly company in financial difficulties? Is there a specific jurisdiction and remains particularly favourable for secured point at which a company must enter a restructuring or insolvency process? creditors. However, recent reforms have been designed to make England and Wales more debtor-friendly. English law does not prescribe a set point in time at which a company’s directors must file for insolvency. It is the duty of the 1.2 Does the legislative framework in your jurisdiction directors to decide the appropriate time to file (although secured allow for informal work-outs, as well as formal creditors may, in practice, take the decision to enforce and put restructuring and insolvency proceedings, and to what extent are each of these used in practice? the company into an insolvency process prior to the directors taking action). The main impetus for directors in this respect is that a Informal work-outs without any court involvement or the use of director who knew, or should have known, that the company of formal insolvency proceedings are common in the English market. which they are a director had no reasonable prospect of avoiding Such work-outs can take a variety of forms and range from (for entering insolvent liquidation or administration, but caused example) amendments to credit agreements to relax covenant creditors to incur losses after that point, can be personally liable testing levels or extend maturity dates to debt-for-equity swaps. to compensate creditors for those losses. This is known as There are also a number of formal insolvency procedures “wrongful trading”. Consequently, directors are often eager to available under English law. A commonly used insolvency file for insolvency without too much delay, although a premature process is administration, pursuant to which a licensed profes- filing that causes losses to creditors also presents a risk to direc- sional is appointed to manage a company’s affairs in place of its tors. However, as a result of COVID-19 there is a temporary directors. The administrator has extensive powers to trade the suspension of liability for wrongful trading until 30 April 2021. company and may also dispose of the company’s assets, either Further, from the point at which a company becomes insolvent after a period of trading or immediately upon his appointment under English law (either on a “balance-sheet basis” – the compa- (known as a “pre-pack” sale). ny’s liabilities exceed the value of its assets, or on a “cash-flow The alternative to administration is liquidation, which is basis” – the company owes a liability or liabilities that it is unable primarily used in respect of companies which have insuffi- to pay when due), the directors of the company must have their cient remaining assets to be traded or sold and whose affairs are primary regard to the interests of the company’s creditors. Prior therefore being wound down. to that point, it is the company’s shareholders to whom the direc- English law also provides for three formal restructuring tors should have their primary regard. Breaching this duty and procedures where the company remains under the control of causing the company’s creditors to incur losses by doing so also its directors rather than an insolvency practitioner – company risks a director being personally liable to compensate creditors. voluntary arrangements (“CVAs”), schemes of arrangement (“Schemes”) and, as newly introduced in 2020, restructuring plans (“ ”). Whilst there are a number of 2.2 Which other stakeholders may influence the Restructuring Plans company’s situation? Are there any restrictions on the differences between the three processes, each essentially allows action that they can take against the company? For a company to compromise creditor claims (provided that a example, are there any special rules or regimes which specific proportion of its creditors vote in favour) and to take apply to particular types of unsecured creditor (such as other steps to restructure its affairs, which binds all relevant landlords, employees or creditors with retention of title creditors (regardless of whether they voted in favour or not). arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?

The “pari-passu” principle provides that a company’s ordinary, unsecured creditors should be treated the same and without preference between them within an English insolvency process.

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However, certain types of unsecured creditors are granted example, because the counterparty to the transaction was dealing certain additional rights and given a different status notwith- with the company in good faith and it would therefore be unfairly standing the application of that principle: detrimental to that counterparty if the transaction were clawed ■ employees rank ahead of other unsecured creditors to the back), the directors can be ordered to make a compensatory extent of their “preferential claims” against the company payment to the company’s creditors for the losses caused. – these are claims for certain liabilities such as wages and The main types of challenge are: unpaid holiday pay owed to the employee up to certain ■ transactions at an undervalue where the company gifts or prescribed limits. Claims in excess of those limits rank disposes of assets for significantly less than their market alongside all other unsecured claims against the company; value. The transaction must have occurred within two ■ landlords of commercial property are granted certain years of the commencement of the administration or liqui- rights to seize a company’s assets, sell them and apply the dation and the company must have been insolvent at the proceeds towards unpaid rent due by the company, and to time of the transaction or become insolvent as a result; forfeit (i.e. terminate) a lease if it is breached. These rights ■ preferences where a company does something or allows do not automatically terminate upon a company entering something to be done that has the effect of putting a insolvency; however, the moratorium against creditor creditor in a better position upon the company entering action that applies in administrations prevents a landlord administration or liquidation than it would have otherwise from taking any such action without the benefit of a court been. In order to be challenged, the preference must have order or the consent of the administrator. As a temporary occurred within two years (if to a person connected with provision in relation to COVID-19, a landlord is essen- the company) or six months (if to an unconnected person) tially only able to use this remedy to recover arrears that prior to the commencement of the liquidation or admin- pre-date the government-imposed lockdown in response istration. The company must also have been motivated by to COVID-19; and the “desire” to prefer the recipient of a preference for the ■ suppliers of goods to a company may include retention of challenge to be successful; and title clauses in the terms of their supply that provide that ■ invalidation of floating charges (which are a type of secu- the supplier retains title to the relevant goods until those rity that “floats” over a company’s non-fixed, movable goods are, either by themselves or along with all other assets, such as stock) that are entered into by a company goods supplied by that supplier, sold by the company. within two years (for floating charges granted to connected Such clauses survive the company entering an insolvency persons) or one year (for floating charges granted to process and therefore mean that the administrator or liqui- unconnected persons) prior to it entering administration dator either has to set aside the proceeds of a sale of the or liquidation. The charges are invalid only to the extent relevant goods and pay them to the supplier (rather than that they secure “old” consideration. This would apply if, distribute them to all creditors equally) or allow the rele- for example, no new money was advanced by the recipient vant supplier to collect the goods from the company’s of the floating charge when it was granted by the company. premises if they are not necessary to the conduct of the proceedings. 32 Restructuring Options A new standalone moratorium has been introduced. This can be used in conjunction with an informal restructuring or a CVA, 3.1 Is it possible to implement an informal work-out in Scheme or Restructuring Plan. The moratorium lasts initially your jurisdiction? for 20 business days, but may potentially be extended by various means for up to one year. This standalone moratorium provides Yes – there are a number of tools available to companies and a payment holiday for certain pre-moratorium debts. However, creditors who wish to restructure the company’s obligations the use of the new moratorium may be limited in practice. The under English law financing contracts. The Loan Market company has no payment holiday for debts owed under a finan- Association’s (“LMA”) recommended forms of loan facility cial services contract such as a loan and it is also required to keep documentation contain extensive amendment and waiver provi- current with certain payments such as rent during the mora- sions. These govern, amongst other things, the percentage by torium period. A moratorium is not available for parties to a face value of a company’s lenders (usually a “majority” of lenders capital market arrangement (e.g. an issuer of a bond) that is in holding in aggregate more than two-thirds of the participations excess of £10m. under the relevant loan, or for certain exceptional changes, all of A moratorium on creditor action comes into effect upon a those lenders) required to vote in favour of steps such as waivers company entering administration with a two-week interim of debt, conversions of debt into equity, re-setting of financial moratorium also available when a preceding notice of intention covenants and disposals of assets. to enter administration is filed at court. The courts have been willing to use their general case management powers to stay creditor action where preparations 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of for a Scheme are at an advanced stage, which we expect will also distressed companies? Are debt-for-equity swaps be applicable to the new Restructuring Plan. and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) 2.3 In what circumstances are transactions entered to seek an advantage? Do your procedures allow you into by a company in financial difficulties at risk of to cram-down dissenting stakeholders? Can you cram- challenge? What remedies are available? down dissenting classes of stakeholder?

Certain types of transactions entered into by a company prior to CVAs, Schemes and Restructuring Plans allow for a range of its entry into administration or liquidation can be challenged by restructurings to be implemented. This includes extension of the administrator or liquidator. If that challenge is successful, the term of debts, debt-for-equity swaps, debt-for-debt swaps the transaction can be unwound or, if that is not possible (for and transfers of assets.

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Cram down under a CVA by the company’s directors because it is the administrator, rather Creditors are not divided into classes for voting purposes, but a than those directors, who bears the responsibility of ensuring CVA cannot bind secured or preferential creditors without their that the assets are sold for the best possible value. Furthermore, consent. Unsecured creditors will be bound by the CVA so long a pre-pack sale is often executed quickly and can be publicised as the CVA is approved by 75% in value of creditors who vote to creditors and third parties as a successful rationalisation of a and not opposed by more than 50% in value of unconnected business’s liabilities so it can trade on, which reduces the “stigma creditors. of insolvency” for the business.

Cram down under a Scheme 3.3 What are the criteria for entry into each Schemes can bind secured and preferential creditors. Creditors restructuring procedure? vote in classes based on common rights against the company. A dissenting minority can be crammed down so long as 75% by value and a majority in number of creditors in that class approve A company must be insolvent (on either a balance-sheet or cash- the Scheme. However, a Scheme cannot be used to cram down flow basis) in order to be placed into administration by its direc- an entire dissenting class so all classes of creditors must approve tors. In order for a secured creditor to appoint an administrator the Scheme. A company need not involve out of the money to a company, the creditor’s security must be enforceable in creditors whose rights are unaffected by the Scheme. accordance with its terms. Schemes and CVAs can be initiated by the directors of a Cram down under a Restructuring Plan company at any time but, as mentioned above, require a certain Restructuring Plans can also bind secured and preferential cred- threshold of creditors to vote in their favour together with, in itors. As in a Scheme, creditors vote in classes. The threshold the case of a CVA, the consent of any affected secured creditors. for approval by a class is 75% in value of creditors voting, with A Restructuring Plan may only be used by a company that has no additional requirement for a majority in number. However, encountered, or will be likely to encounter, financial difficul- a Restructuring Plan also allows for an entire dissenting class ties that are affecting, or will or may affect, its ability to carry on to be crammed down so long as at least one other class with business as a going concern. a genuine economic interest in the company approves the Restructuring Plan, the dissenting class is at least as well off in 3.4 Who manages each process? Is there any court the Restructuring Plan as it would be in the next most likely alter- involvement? native to the Restructuring Plan and the court considers it fair and just to approve the cross-class cram down. Administration and liquidation A Restructuring Plan can bind creditors with no genuine Only a qualified insolvency practitioner may be appointed as an economic interest in the company even if those creditors were administrator or liquidator of a company and, for all intents and not offered the opportunity to vote. purposes, then manages the company in place of its directors (including to effect a pre-pack). Blocking actions CVAs, Schemes and Restructuring Plans do not automatically CVAs impose a moratorium on creditor action. There is a new stan- In a CVA, a qualified insolvency practitioner will act as “super- dalone moratorium that could be used, though its use so far has visor” and carry out the steps and actions provided for in the been rare because of limitations on its protection (for example, CVA proposal (which sets out the terms of the CVA). The direc- it does not give a payment holiday for rent or interest payments) tors remain in control of the company, although they will co-op- and the kinds of companies eligible (for example, an issuer of erate with the CVA supervisor in order for it to be properly bonds in excess of £10m is ineligible for the moratorium). The implemented. court has been willing to use its case management powers to stay A CVA proposal must be filed at court, but a CVA does not creditor actions when a Scheme is sufficiently well advanced, generally involve a court hearing unless there is a challenge by and we expect the same would apply to Restructuring Plans. creditors. Creditors who feel they have been unfairly prejudiced However, a company will often seek to persuade its key cred- by a CVA or there has been a material irregularity in the CVA itors to agree to a consensual standstill on enforcement and to process may challenge a CVA via a court application within 28 lock-up their support for the restructuring in advance. days of the filing of the creditors’ approval at court. Creditors would normally look to challenge a Scheme or a Restructuring Plan at one of the two court hearings that form Schemes and Restructuring Plans part of these processes. Creditors who wish to challenge a CVA There is no requirement for a qualified insolvency practi- may do so on the grounds of material irregularity or unfair prej- tioner to supervise a Scheme or Restructuring Plan. The direc- udice, but must apply to court for this purpose within 28 days of tors remain in control of the company proposing a Scheme or the filing of the approval of the CVA. Restructuring Plan (unless the company is already in administration or liquidation) and carry out the relevant procedure in Pre-packaged sales accordance with its terms. A Scheme or Restructuring Plan Pre-packaged sales as part of an administration are also involves (at least) two court hearings. At the first hearing the frequently used as a means to restructure a company’s liabili- court considers issues in relation to the composition of the ties by transferring the company’s business and assets to a newly classes of creditors and whether it should order the convening of incorporated subsidiary free of any liabilities that the company the creditors’ meetings. After the creditors’ meetings there will is unable to pay in full, or to effect a sale to a third party. A be a second hearing where the court will consider whether it is pre-pack involves the terms of the sale and the sale documenta- fair and just to give its sanction to the Scheme or Restructuring, tion being negotiated and agreed in advance and then completed including, in the case of a Restructuring Plan, whether it is fair by the administrator immediately upon, or shortly after, their and just to sanction a cross-class cram down. appointment. This is often preferable to the sale being executed

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3.5 What impact does each restructuring procedure assets to meet its liabilities over the next 12 months, or on an have on existing contracts? Are the parties obliged to “insolvent” basis (known as a creditors’ voluntary liquidation perform outstanding obligations? What protections (“CVL”)) where the directors are unwilling or unable to give are there for those who are forced to perform their that statement. Both types of voluntary liquidation are initiated outstanding obligations? Will termination and set-off by a company’s shareholders; however, in an MVL, the share- provisions be upheld? holders nominate the liquidator, whereas in a CVL the creditors have the final say in the choice of liquidator. A company entering into an insolvency or restructuring process Compulsory liquidation is made by filing a petition at court, does not automatically cause contracts to which it is a party to followed by a court hearing. A hearing of the petition is then terminate. New legislation prevents a contract for the supply of held at court and if it can be demonstrated to the court that goods or services to an insolvent company being terminated by one or more prescribed circumstances applies to the company the supplier for insolvency-related reasons. The supplier may (usually that the company is insolvent), the company is placed apply to court to have the restriction lifted if the inability to into liquidation. terminate the contract is causing hardship for the supplier. A well-advised supplier should also engage with the administrator 4.2 On what grounds can a company be placed into or liquidator to ensure that payments for the continued supply each winding up procedure? rank as an expense of the insolvency and not just an unsecured claim. The restrictions on termination of a contract do not affect a supplier’s right to terminate the contract on non-insol- Voluntary liquidations require that the company’s shareholders vency grounds such as for non-payment. pass a resolution (the exact proportion of those shareholders An administrator or liquidator may simply refuse to perform that are required to pass the resolution will be determined by the the company’s obligations under contracts if doing so is in company’s constitutional documents – usually 75%) to initiate the best interests of the company’s creditors. Creditors are the process and, in an MVL, that the directors swear the decla- prevented from court action to enforce breaches of contract ration of solvency referred to above. without the administrator/liquidator’s approval or an order of Compulsory liquidation requires that one or more prescribed the court and even if action is successfully taken, the counter- circumstances apply to the company. Usually, it must be proved party has an unsecured claim against the company that ranks to the court that the company is “unable to pay its debts” alongside all other unsecured creditors (so effectively is not (i.e., is insolvent on either a balance-sheet or cash-flow basis), worth pursuing). which is often demonstrated by serving a prescribed form of A liquidator has additional powers to “disclaim” unprofit- demand (known as a “statutory demand”) on the company to able contracts (including leases) to which the company is party pay amounts owed to the petitioning creditor which, if not paid (which has the effect of determining the counterparty’s rights within 21 days, can then be used as evidence that the company under the contract upon the disclaimer becoming effective and is cash-flow insolvent. entitles the counterparty to an unsecured claim against the company). 4.3 Who manages each winding up process? Is there any court involvement? 3.6 How is each restructuring process funded? Is any protection given to rescue financing? There is court involvement in respect of a compulsory liquidation, which requires a court hearing to order that the company If an administrator or liquidator trades a business, the costs enters liquidation. Voluntary liquidations do not usually require and expenses of the process (including their fees) will usually any court involvement. Once the company has entered liquida- be discharged from the receipts of the trading. An adminis- tion, the liquidation process is managed by the liquidator (with trator or liquidator may also seek additional funding, which is the sanction of shareholders or creditors – see below). then repaid as an “expense of the administration or liquidation” (ranking above ordinary unsecured claims). However, outside 4.4 How are the creditors and/or shareholders able of that possibility, within a formal insolvency process there is no to influence each winding up process? Are there any statutory mechanism for rescue/debtor in possession financing restrictions on the action that they can take (including under English law. the enforcement of security)?

42 Insolvency Procedures Liquidation, unlike administration, does not impose a moratorium on the rights of secured creditors to enforce their secu- 4.1 What is/are the key insolvency procedure(s) rity, so a liquidator will either obtain the consent of the relevant available to wind up a company? secured creditor before dealing with any secured assets or allow that creditor to take its own action in respect of those assets. Compulsory liquidation does, however, impose a stay on court Companies looking to wind down their affairs, and creditors who proceedings, which can only be lifted with the consent of the wish for a company to be wound up, can initiate a liquidation, liquidator or approval of the court. whereby a liquidator realises the company’s assets, distributes the Liquidators (also unlike administrators) can only take certain proceeds to creditors and then winds the company down. actions if sanctioned to do so. In an MVL, this sanction comes There are two types of liquidation: voluntary liquidation; and from shareholders. In a CVL, sanction must be obtained from compulsory liquidation. Voluntary liquidations can either be creditors. It is also common, at least in larger liquidations, for a made on a “solvent” basis (known as a members’ voluntary liqui- committee of three to five creditors to be formed as a representa- dation (“MVL”)) where the company’s directors are willing to tive body and, amongst other things, to scrutinise the steps taken swear a statement to the effect that the company has sufficient by the liquidator and approve certain actions taken by them.

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4.5 What impact does each winding up procedure have 52 Tax on existing contracts? Are the parties obliged to perform 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? Termination is covered above. Set-off provisions in contracts are, however, superseded by mandatory set-off rules, which CVAs, Schemes and Restructuring Plans apply in liquidations and which provide that amounts owed by A company is taxed in the usual way whilst going through a creditor to the company are set off against amounts that the these procedures. However, releases of debt usually incur a tax company owes to the creditor (with only the net balance, if any, charge by the company although this can be avoided if made being claimable by that creditor). pursuant to these procedures (which is an added benefit of these procedures).

4.6 What is the ranking of claims in each procedure, Administration and liquidation including the costs of the procedure? Unpaid tax at the commencement of the administration or liquidation is simply an unsecured debt of the company, although Claims in an administration or liquidation will rank in the certain taxes collected by the company from third parties (for following order: example, VAT) will now rank as preferential claims. Corporation ■ claims of creditors holding “fixed” charges over a compa- tax on gains that arise from the disposal of assets during the ny’s assets (essentially a charge over assets that the period of the administration or liquidation is paid as an expense company is not able to freely deal with, such as property); of the administration or liquidation. ■ expenses of the administration or liquidation (including the remuneration of the administrator or liquidator); 62 Employees ■ claims of preferential creditors. These includes employees’ claims for unpaid wages (up to a maximum of £800 per 6.1 What is the effect of each restructuring or employee), holiday pay and pension contributions. They insolvency procedure on employees? What claims would also now include certain taxes that the company has employees have and where do they rank? collected from customers, employees and contractors on the tax authorities’ behalf, including VAT and PAYE income tax and national insurance contributions that have CVAs, Schemes and Restructuring Plans These procedures have no direct impact on a company’s been deducted from employees’ wages. Direct taxes owed employees. by the company such as corporation tax remain ordinary unsecured claims; ■ a fund of up to £600,000 (if the floating charge was Administration Contracts of employment do not automatically terminate upon created prior to 6 April 2020) or £800,000 (if the floating the appointment of an administrator. There is a 14-day period charge was created on or after 6 April 2020), known as the that commences upon a company entering into administration, “prescribed part”, is set aside for unsecured creditors from during which the administrator can dismiss any employees who realisations of floating charge assets; are not required for the conduct of the administration. Wages, ■ claims of creditors with “floating” charges over the holiday and sickness pay and pensions contributions due to company’s assets (assets that the company can freely deal employees retained after this period are paid as expenses of with, such as stock); the administration. If the administrator sells the company as a ■ claims of unsecured creditors (excluding claims for interest going concern (either after a period of trading or as a pre-pack) accruing during the period of administration or liquida- employees, as well as liabilities owed to those employees, auto- tion); and matically transfer to the buyer. Determining the number of ■ claims by unsecured creditors for interest for the period of such employees and the sums owed to them is therefore a key administration or liquidation. area of diligence in sales by administrators. Any surplus is distributed to shareholders. If the company was in a moratorium in the 12 weeks prior to the entry into administration/liquidation, certain debts have Liquidation A company entering compulsory liquidation automatically super-priority and rank ahead of all claims, except those of fixed causes its employees’ contracts of employment to terminate. charge creditors. The super-priority claims include the mora- The liquidator then has to re-employ any employees needed for torium monitor’s fees and expenses, payment for goods and the conduct of the liquidation. Voluntary liquidation does not supplies supplied during the moratorium and financial indebt- automatically terminate employment contracts, although the edness under a financial services contract or instrument (e.g. a liquidator can simply refuse to perform employment contracts loan) that fell due during the moratorium so long as that finan- (with the result that the affected employee(s) can then claim as a cial indebtedness was not accelerated. creditor of the company for amounts owed to them).

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 Yes, in theory, a company that is wound down and dissolved restructuring procedures or enter into insolvency (which occurs at the culmination of a liquidation) can be proceedings in your jurisdiction? restored for up to six years after it is dissolved by court order, although this is extremely rare. We expect that the main consideration for the English courts when deciding whether to accept jurisdiction over the

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company’s insolvency will continue to be whether the company 82 Groups has its centre of main interests (“COMI”) or an establishment in England and Wales. However, as the EU Insolvency Regulation (re-cast) is no longer applicable to the UK, the English courts 8.1 How are groups of companies treated on the will not be prevented from accepting jurisdiction over the insol- insolvency of one or more members? Is there scope for co-operation between officeholders? vency of a company that has its COMI in an EU Member State. Accordingly, the English courts may accept jurisdiction where a company would meet the common law test of having a “suffi- Each company within a group is, for the purposes of English cient connection” to England and Wales where accepting juris- law, treated as distinct, so there is no concept of group-wide diction would be of benefit to the petitioning creditors. proceedings. Each company in a group will, therefore, need to From even before the UK left the EU, the lower bar of the go into an insolvency process on an individual basis although “sufficient connection” test rather than COMI has been the it is common for the same administrator or liquidator to be jurisdiction test applied to Schemes. There is an established appointed to multiple companies within a group. path of foreign companies using Schemes for restructuring on this basis. The existence of such a connection has been inter- 92 COVID-19 preted widely by the courts over recent years so that companies have been able to (amongst other things) amend the governing 9.1 What, if any, measures have been introduced in law of finance documents to English law in order to establish response to the COVID-19 pandemic? such a connection. We expect that the new Restructuring Plan will also use the sufficient connection test. The UK government has both implemented temporary meas- However, the English courts may be unwilling to sanction a ures in response to the COVID-19 pandemic as well as acceler- Scheme or Restructuring Plan if such sanction would be futile ated the implementation of permanent measures. due to a lack of recognition in relevant jurisdictions such as the Temporary measures include: company’s home jurisdiction. The availability of English law ■ a suspension of directors’ liability for wrongful trading restructuring procedures may then be interdependent on their until 30 April 2021; recognition outside the UK. ■ a restriction on petitions by a creditor for the compulsory winding-up of a company unless the creditor can show it 7.2 Is there scope for a restructuring or insolvency has reasonable grounds to believe that COVID-19 has not process commenced elsewhere to be recognised in your had a financial impact on the company or the company jurisdiction? would have been unable to pay its debts regardless of the financial impact of COVID-19; and The UK no longer recognises EU insolvency processes automat- ■ a suspension of creditors’ ability to rely on statutory ically under the EU Insolvency Regulations. However, recogni- demands (see above) as the basis of a winding-up petition. tion of foreign insolvency processes (whether inside or outside Permanent measures include: of the EU) is provided for in the UNCITRAL Model Law on ■ a new standalone moratorium that may be used in conjunc- Cross-Border Insolvency, which has been enacted into English tion with informal and formal restructuring processes; law. English law does not require reciprocal adoption of the ■ a new Restructuring Plan, which shares many similarities UNCITRAL Model Law by the foreign jurisdiction in order for to Schemes but now allows for cross-class cram downs; the relevant proceedings to be recognised in the UK. and The English courts will not allow an English law debt to be ■ restrictions preventing suppliers of goods or services from compromised by a foreign restructuring or insolvency process terminating contracts on insolvency-related grounds. where the creditors have not submitted to that foreign jurisdiction.

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

Not commonly; because the English system is generally perceived to be creditor-friendly, companies incorporated in England and Wales (and their creditors) will usually want to use English insolvency and restructuring proceedings. The only real exception to this is, whilst also uncommon, companies establishing a link to the USA (which can simply just involve opening a bank account or having a retainer with a law firm) in order to use Chapter 11 bankruptcy and benefit from the extensive automatic stay on proceedings it affords, will generally be recognised by the English courts.

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

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 EC4A 1LT URL: www.macfarlanes.com United Kingdom

Restructuring & Insolvency 2021 66 Chapter 12 Finland Finland

Tuomas Koskinen

Waly & Koskinen Attorneys Ltd. Sami Waly

12 Overview point at which a company must enter a restructuring or insolvency process?

1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions? Under the Finnish Companies Act (624/2006), the directors of a company have a general duty to act in the best interests of the company and to prudently ensure the protection of the interests Finland is more of a creditor-friendly than debtor-friendly juris- of the company. Finnish company legislation does not recognise diction. Both the legal framework and the praxis support the any special interests owed to parent companies or other group enforcement of debt obligations through bankruptcy and execu- companies, and as such, all decisions must be done with the tion. The position of a secured creditor is strong in the event of corporate benefit of each individual company in mind. proceedings. Overall, the bankruptcy process is creditor-driven. The duties of the directors and managers do not differ greatly Simultaneously, the statutory restructuring procedure avail- when managing a company in financial difficulties. However, able to debtors is a debtor-friendly process. Entering into a key consideration is that directors and managers may incur restructuring gives the debtor an extensive protection from the criminal or civil liability if they continue to enter into further enforcement of pre-existing debts. In court practice, debtors are commitments even while being aware that the company will not often allowed to enter into restructuring. However, a successful be able to meet them. A safe course of action for directors in restructuring process requires co-operation between the debtor such a situation is to file for bankruptcy or restructuring if emer- and the various stakeholders. gency financing is not available. Additionally, payment of dividends from a company in financial distress is limited. 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 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 example, are there any special rules or regimes which The Finnish legal system has one formal restructuring and apply to particular types of unsecured creditor (such as one formal insolvency process, restructuring (governed by the landlords, employees or creditors with retention of title Restructuring of Enterprises Act 47/1993) and bankruptcy arrangements) applicable to the laws of your jurisdiction? (governed by the Bankruptcy Act 120/2004), respectively. Are moratoria and stays on enforcement available? According to annual statistics published by Statistics Finland, 2,135 bankruptcy proceedings and 336 restructuring proceed- The legislative framework grants no formal power to stake- ings were initiated during 2020. As such, both proceedings are holders over a company in financial difficulties which has not used in practice. entered any insolvency procedure. From a purely legal point of The Finnish legal framework has no statutory bars on informal view, the debtor company operates as it would during the ordi- work-outs, but it also does not have any support for them. In nary course of business. Any stakeholder influence over the practice, a successful informal work-out requires either a limited debtor is the result of contractual arrangements in place or for pool of creditors or existence of LMA-style documentation and purely business reasons. an intercreditor agreement. Such loan documentation and inter- The primary statutory method of influence granted to stake- creditor agreements are increasingly common among sophisti- holders is the possibility to file for the debtor company’s bank- cated creditors. Such informal work-outs are much rarer than ruptcy or restructuring. A creditor has the right to file for the the formal proceedings, but on average, they also typically debtor’s bankruptcy almost at will, given that statutory require- concern much larger companies with sophisticated creditors. ments for a bankruptcy filing are met. Creditors may also apply for the debtor’s restructuring, but such applications are 22 Key Issues to Consider When the uncommon and have a limited chance to succeed without the Company is in Financial Difficulties debtor’s co-operation. The influence of stakeholders that are not creditors is somewhat more limited. The Finnish enforcement regime contains the possibility to 2.1 What duties and potential liabilities should the stay an enforcement, but this generally requires the debtor or a directors/managers have regard to when managing a company in financial difficulties? Is there a specific third party to provide a security. For this reason, the most practical legal instrument for achieving the effects of a moratorium

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is applying for either bankruptcy or the statutory restructuring Debt-for-equity swaps and pre-packaged sales are possible and described later. The effect of applying for a restricting in prac- used in practice; however, the statutory framework provides no tice acts as a moratorium. tools for forcing such actions. Pre-packaged sales in the form used in, e.g., the United States or the UK, are not used in Finland. Creditors may object to the initiation of restructuring by 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of lodging their formal opinion with the court. Typically, an appli- challenge? What remedies are available? cation with required support is accepted even if some creditors object. The commencement of restructuring provides for a relief period from stakeholder pressure. A security cannot be The legislative framework for challenging, and potentially recov- enforced during the preparation phase of a restructuring plan, ering, transactions entered into by a company in financial distress an exception being if the creditor shows that the secured asset is is the Act on the Recovery of Assets to a Bankruptcy Estate unnecessary for the debtor’s business. (758/1991). The same Act is also applied to a restructuring A restructuring plan is put to creditor vote and it does not need process and execution proceedings. Any transaction favouring a to be adopted unanimously. Adopting the plan requires reaching creditor or other party at the expense of other creditors by either a majority in the different creditor groups, most typically secured reducing the debtor’s assets or increasing the debtor’s liabilities and unsecured creditors. Any dissenting stakeholders are auto- is potentially recoverable by the bankruptcy estate or the admin- matically crammed down if they form a minority. However, a istrator of a restructuring procedure. Primary considerations for majority must be reached in each class of stakeholders and an recovery are whether the debtor is legally insolvent and whether entire class cannot be crammed down. However, the way that the creditor was aware of the debtor’s insolvency. restructuring is set up means that a restructuring has no realistic The most significant ground for a challenge is if a debt was chances of succeeding if a majority cannot be reached. paid during a three-month window prior to commencement of bankruptcy or a restructuring process. Such a payment may be recoverable given three alternative conditions: first, 3.3 What are the criteria for entry into each if the method of payment was unusual (usually, anything else restructuring procedure? than money); second, if the payment was made in advance of becoming due and payable; or, third, in excess of an amount The Restructuring of Enterprises Act stipulates that a company considered significant in relation to the estate’s assets. Court may enter into restructuring proceedings if it lodges its own practice has established that any payment in excess of 10% of the application or a joint application with its creditors. Creditors assets of an estate at the time of bankruptcy is considered signif- have a legal right to apply for restructuring without the debtor, icant in this respect. A counterargument for such recovery is if but in practice this almost never happens. The criteria, one of the payment is considered to have been made in the ordinary which must be met, for entry into restructuring are (1) a joint course of business. application with, or the consent of, two unaffiliated creditors that represent at least 20% of all the debts of the debtor 32 Restructuring Options company, (2) an existing threat of the debtor company becoming insolvent, or (3) the debtor company being insolvent without any 3.1 Is it possible to implement an informal work-out in of the obstacles of restructuring being present. your jurisdiction? Various statutory obstacles for entering into a restructuring procedure exist, with the court having broad power of interpretation over some. Such obstacles include, e.g., that the criteria Yes. The legislative framework has no bars for implementing for initiating restructuring have not been met or that the debtor an informal work-out. However, there is no support for such a is trying to avoid debt collection via restructuring. In legal prac- work-out either. A method used in practice over purely informal tice, courts apply caution in ruling that such obstacles exist, work-outs is one where the largest creditors reach a joint agree- since typically courts lack enough evidence for their existence in ment in advance with the debtor and any opposing minor credi- all but the most extreme cases. tors are dealt with using the formal restructuring process.

3.4 Who manages each process? Is there any court 3.2 What formal rescue procedures are available involvement? in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can A court-appointed administrator manages the restructuring creditors and/or shareholders block such procedures process. Courts have an overseeing role in the process, by initi- or threaten action (including enforcement of security) ating it and affirming the restructuring plan once approved by to seek an advantage? Do your procedures allow you the creditors. Courts also rule on objections made to individual to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? creditors’ debts.

Finnish legislation provides one formal restructuring process: 3.5 What impact does each restructuring procedure the restructuring of a company under the Restructuring of have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections Enterprises Act. The purpose of such a restructuring process is are there for those who are forced to perform their to adopt a restructuring plan acceptable by the creditors. The outstanding obligations? Will termination and set-off restructuring plan allows for changes in the debt obligations, such provisions be upheld? as the repayment schedule, interest, or the principal itself. In practice, the amount of principal owed is reduced almost as a rule. The Restructuring of Enterprises Act has the force of manda- Secured obligations are protected from this, since the principal tory legislation, superseding all conflicting contractual terms of a secured debt cannot be reduced below the secured amount. agreed by the debtor. According to the Act, only terms allowed

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in the Act itself form an exception, and any other contractual 4.3 Who manages each winding up process? Is there terms conditional on entering into restructuring are unenforce- any court involvement? able, such as termination and set-off provisions. In addition, the entry into restructuring is not enough grounds for the debtor’s The bankruptcy process is overseen by the courts in various contractual parties to demand additional security for the contin- stages. Firstly, the bankruptcy process is managed by a uation of their services or the provision of their goods. The Act court-appointed administrator of the bankruptcy estate. The therefore obligates contracting parties to perform outstanding court appoints the administrator based on the views of the obligations irrespective of the initiated restructuring process. largest creditors. Courts are also involved in ending the bank- However, the debtor company entering into restructuring, ruptcy proceedings and approving the distribution list, as well but not creditors, may terminate leases and leasing contracts, as resolving various disputes, such as the existence of a credi- and any termination clauses included therein notwithstanding. tor’s debt or the enforceability of a security given to a creditor. Such termination may lead to additional liabilities owed by the company entering restructuring in the form of compensation for premature termination. Such compensation is subject to 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any the restructuring proceedings and, e.g., haircuts. The debtor restrictions on the action that they can take (including company may also terminate any agreements deemed unusual. the enforcement of security)? Any liabilities incurred by the debtor company after the initiation of restructuring proceedings must be paid in due course and The Finnish bankruptcy process is a creditor-driven process. All they are not subject to haircuts. The same holds true for any obli- major decisions are made by the creditors in a creditors’ meeting. gations agreed prior to restructuring but fulfilled only after the Each creditor has one vote for one euro of debt owed to them. initiation of restructuring. Failure to satisfy new debts accrued Only decisions of lesser implication are done by the administrator after starting the restructuring is sufficient grounds for cessation of the bankruptcy estate alone. The administrator has also the of the provision of further services or supply of further goods. duty to safeguard the interests of all creditors on equal standing. A security may be enforcement as normal during a bankruptcy 3.6 How is each restructuring process funded? Is any procedure. Upon a decision of the administrator, the bankruptcy protection given to rescue financing? estate may temporarily prevent the enforcement of a security for two months if the interests of the bankruptcy estate require such. The costs of restructuring are borne by the company being Typically, secured creditors may ask the administrator to enforce restructured itself. This includes the administrator’s fee. If the and realise securities as part of the bankruptcy proceedings. restructuring fails and the company is declared bankrupt, any In typical bankruptcy proceedings, shareholders have almost debt obligations that have been entered into after the initiation of no influence. Low-ranking creditors, i.e. creditors entitled to pay only after all other creditors, such as shareholders or credi- the restructuring process have precedence over past debts when tors of capital loans (as statutorily defined), are typically barred the proceeds of the bankruptcy are divided between creditors. from voting if their debts are not expected to receive payment. Influence of shareholders in bankruptcy proceedings usually 42 Insolvency Procedures stems from the fact that they have a double role as creditors.

4.1 What is/are the key insolvency procedure(s) available to wind up a company? 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off Finnish law provides for two procedures to wind up a company: provisions be upheld? bankruptcy under the Bankruptcy Act; and liquidation of a company under the Companies Act. Liquidation proceedings The Bankruptcy Act is mandatory legislation and supersedes all are only possible if the company is not insolvent, meaning that conflicting contractual terms of the debtor’s agreements. Upon the company has more assets than liabilities. Liquidation is the commencement of bankruptcy proceedings, the bankruptcy initiated by the shareholders of a company and does not require estate assumes all the rights and liabilities of the bankrupt court involvement. Liquidation is not an insolvency procedure company. In legal praxis, this has been interpreted to mean that in itself, since it is typically used only for companies that cease the initiation of bankruptcy proceedings itself does not change their business for other reasons besides insolvency. For this the rights and liabilities of the bankrupt company. In Finland, reason, liquidation is not considered any further in this chapter. almost all contractual terms conditional on bankruptcy, such as those entitling the creditor to terminate the contract or set off 4.2 On what grounds can a company be placed into liabilities, are unenforceable. each winding up procedure? Parties to a contract are obliged to perform outstanding obligations. The administrator of a bankruptcy estate has the right to terminate any agreements unilaterally regardless of any The statutory grounds for the bankruptcy procedure to be initi- commitments made by the company prior to bankruptcy. If the ated is the insolvency of the debtor, meaning the inability to pay bankruptcy estate upholds any agreements, debts incurred after debts as they fall due other than temporarily. Bankruptcy may the initialisation of bankruptcy proceedings are paid with the be applied by the debtor itself or any of its creditors. In a debtor highest priority before any debts incurred prior to bankruptcy, application, insolvency is presumed and usually not questioned. second only to the administrator’s own fee. A creditor requires either a court ruling (or a debt that is enforceable without one) or a debt obligation that is otherwise indisputable enough. The creditor must also provide proof of the debt- 4.6 What is the ranking of claims in each procedure, or’s insolvency. This is typically accomplished by sending out including the costs of the procedure? a payment demand with the threat of filing for bankruptcy. If such a payment demand is not paid within a week, the debtor is The highest-ranking claims are those incurred by the bank- presumed insolvent. ruptcy estate during the bankruptcy proceedings itself, among

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which the administrator’s fee takes the top priority. Any such 72 Cross-Border Issues debts must be paid in full before any bankruptcy debts can be paid. All other debts get a pro rata share of the liquidated assets of a bankruptcy estate. Exceptions to this primary rule 7.1 Can companies incorporated elsewhere use are secured creditors, creditors holding enterprise mortgages restructuring procedures or enter into insolvency proceedings in your jurisdiction? (floating charges), and creditors with debts owed that were incurred during a restructuring procedure that preceded the bankruptcy. Lower ranking debts consist of statutory capital The primary legislative framework for international insol- loans, various statutory sanctions and junior bonds. vency in Finland is the recast regulation (EU) 2015/848 of the European Parliament and of the Council of May 2015 on insolvency proceedings (the “Recast Insolvency Regulation”), 4.7 Is it possible for the company to be revived in the applied both to bankruptcy and restructuring. The Recast future? Insolvency Regulation grants jurisdiction to the courts of the Member State in which the centre of a debtor’s main interests The Finnish legal framework provides for no method through is situated. The centre of main interests is the primary place which a bankrupt company may be revived once the bankruptcy in which the administration of the debtor is conducted, which, proceedings start. Bankruptcy proceedings may be cancelled unless proven otherwise, is assumed to be the place of the regis- for eight days if legal grounds for this are presented to the court. tered office. This being considered, the jurisdiction of incor- In practice, especially in the case of a smaller company, it is poration is not relevant if the centre of a debtor’s main interests not atypical that a bankruptcy estate sells all or most of its assets, is situated within Finland, which grants jurisdiction to Finnish including the business name to a new entity. Legally, this consti- courts over such a debtor. tutes the establishment of a new legal entity with a common If a debtor having its centre of main interests in another EU name to the bankrupt company. Member State has an establishment in Finland, secondary bankruptcy proceedings (but not restructuring) may be initiated in 52 Tax Finland. Such secondary bankruptcy proceedings are limited to the debtor’s assets located in Finland. Additionally, the Member 5.1 What are the tax risks which might apply to a State in which a real property involved in insolvency proceed- restructuring or insolvency procedure? ings has exclusive jurisdiction over such real property. In addition, a treaty between the countries results in Finnish courts having no jurisdiction over debtors that have entered The processes themselves do not typically give rise to tax liabil- into bankruptcy proceedings in Iceland, Norway or Denmark, ities. In some cases, it is possible that certain actions, such as provided that the debtor was domiciled therein. divestments, may give rise to tax liabilities as a part of an insol- If the Recast Insolvency Regulation does not apply, and there vency procedure. is no relevant treaty in force, the legal starting point is that any The tax creditor is on equal footing with other creditors. For company with a place of business in Finland may enter into example, taxes accrued prior to the initiation of a bankruptcy bankruptcy proceedings before the Finnish courts. This holds procedure are subject to the bankruptcy proceedings and the true regardless of whether the company conducted business in bankruptcy estate is not liable for such taxes. The bankruptcy Finland through a registered establishment or as an unregistered estate is only taxed if it continues to conduct business during the presence. Such bankruptcy proceedings are limited to assets bankruptcy process. Realisation of assets is not typically taxed. situated within Finland. These proceedings are also rare and may require case-by-case evaluation. 62 Employees The legal situation concerning restructuring of companies incorporated in other non-Member State jurisdictions is unre- 6.1 What is the effect of each restructuring or fined. A principle of international law is the equal treatment of insolvency procedure on employees? What claims would bankruptcy and insolvency proceedings (and similar). As such, employees have and where do they rank? it could be entirely possible for a company incorporated out of the EU to enter into restructuring in Finland. However, the An initiated restructuring procedure allows for a shorter notice foreign company must have a business presence in Finland for of termination. If the accepted restructuring plan includes the restructuring to have any desired results. To the authors’ actions that result in the termination of employment, this allows knowledge, such restructuring proceedings of non-EU compa- for the termination of employment contracts with two months’ nies are almost unheard of. notice. Additionally, if the restructuring leads to ceasing or decreasing of work, the same two-month notice period applies. 7.2 Is there scope for a restructuring or insolvency The employee has the right to terminate their employment with process commenced elsewhere to be recognised in your 14 days’ notice during a restructuring process. jurisdiction? When a bankruptcy process is initiated, all employment contracts may be terminated on 14 days’ notice without the If an insolvency process has been commenced in another EU requirement of any further grounds besides the bankruptcy Member State, the Recast Insolvency Regulation applies. This itself. If there are no sufficient funds in a bankruptcy estate leads to the automatic recognition of insolvency processes to pay out salary debts, the state-run pay security scheme pays started in other EU Member States. Under the Recast Insolvency out debts to employees given certain conditions and becomes a Regulation, such insolvency processes are construed according creditor in the insolvency proceedings instead of the employees to the laws of the EU Member State in which such process was themselves. Employee claims are on equal footing with other initiated. unsecured creditors.

Restructuring & Insolvency 2021 70 Finland

In addition, Finland is a party to several conventions on the the critical period, during which challenges to transactions are recognition of foreign judgments, including the Brussels and possible, is longer. Care should therefore be taken to make sure Lugano conventions. These have been largely replaced by appli- that any significant transactions with related parties are done cable EU legislation between Member States. If no convention on an arm’s-length basis, which may also be required for other applies, the recognition of a restructuring or insolvency process reasons (e.g. tax or corporate law). initiated out of the EU requires an exequatur from a Finnish court. 92 COVID-19 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other 9.1 What, if any, measures have been introduced in jurisdictions? Is this common practice? response to the COVID-19 pandemic?

The primary situation in which this happens is when another The Finnish state introduced certain measures in response to the Member State has jurisdiction over a Finnish company based on COVID-19 pandemic in relation to bankruptcy proceedings and the Recast Insolvency Regulation. Enforcement of insolvency execution. First was a temporary national moratorium for most proceedings initiated outside of the EU and concerning compa- creditor-driven bankruptcy filings, which was in effect from 1 nies incorporated in Finland may be difficult. To the authors’ May 2020 to 31 January 2021. During this time, various limi- knowledge, such practices are not commonplace. tations on the ability of creditors to file for their debtors’ bankruptcy were in place. Most bankruptcies during this period were 82 Groups debtor-initiated. On 1 February 2021, a new temporary regime was enacted and is in force until 30 September 2021. During the 8.1 How are groups of companies treated on the new temporary regime, the time window after which a debtor is insolvency of one or more members? Is there scope for deemed insolvent was increased from seven days to 30 days. In co-operation between officeholders? addition to the temporary changes in the bankruptcy proceedings, some minor changes into the execution regime of debts have also been enacted. No major changes to the restructuring Finnish company law and insolvency legislation treats each process have been enacted. company as a fully independent legal entity, regardless of In addition to legislative changes, there have also been whether it has group interests. Thus, the insolvency process of various soft measures applied. These have included, inter alia, each group entity proceeds separately. Legally, a group company more favourable payment terms for applicable taxes, employees’ does not differ in a material way from other stakeholders. pensions, and other mandatory payments. The details and time It should be noted that, from a recovery standpoint, transac- windows for these are outside the general scope of this chapter. tions between related parties are evaluated more stringently and

Restructuring & Insolvency 2021 Waly & Koskinen Attorneys Ltd. 71

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 29 3500 300 Unioninkatu 20-22 Email: [email protected] FI-00130 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 29 3500 300 Unioninkatu 20-22 Email: [email protected] FI-00130 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 (litigation and arbitration), 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. Our practitioners have a shared experience, altogether involving more than 100 bankruptcy estates. The core value we offer to our clients is that we provide effective solutions and 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 excel- lent quality of service without the overhead of a larger firm being priced in. www.wklaki.fi/en

Restructuring & Insolvency 2021 72 Chapter 13 France France

Joanna Gumpelson

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

12 Overview through a restructuring plan or a total or partial sale of its business and/or assets. The liquidation aims to sell the company’s assets (as a whole where possible or on an asset- 1.1 Where would you place your jurisdiction on the by-asset basis) where the rescue of the company appears spectrum of debtor- to creditor-friendly jurisdictions? obviously impossible.

Historically, French bankruptcy law was generally considered 22 Key Issues to Consider When the to be rather debtor-friendly. However, the French Bankruptcy Company is in Financial Difficulties 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 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a ordinance dated 12 March 2014 reformed bankruptcy laws with a company in financial difficulties? Is there a specific view to favouring reorganisation at a preventive stage, strength- point at which a company must enter a restructuring or ening the efficiency of out-of-court proceedings and increasing insolvency process? the rights of creditors. In addition, a bill dated 6 August 2015 introduced the possibility, under certain limited conditions, to The company’s legal representative must file for rehabilitation squeeze-out dissenting shareholders of a bankrupt company in or liquidation (if rehabilitation appears impossible), no later than rehabilitation proceedings, notably to favour debt-for-equity 45 days from the date on which the company becomes insolvent swap restructurings. Finally, a major reform of French bank- (see question 3.3), unless conciliation proceedings (that are also ruptcy laws is expected in the coming months, to implement available to insolvent companies) are pending. Directive (EU) 2019/1023 of the European Parliament and of For certain specific breaches such as using the company’s the Council of 20 June 2019 and, in particular, to reinforce cred- assets or credit for their own benefit or carrying out business itors’ rights in insolvency proceedings (see question 3.2). activities at a loss to further their own interests, directors can Yet, in the context of the COVID-19 pandemic, this balance be forced to assign their equity interest in the company and be has been slightly altered by some of the temporary meas- prohibited from managing any business for up to 15 years. ures adopted to adapt French bankruptcy law to these specific Liability can also arise where, as a result of management errors circumstances, and notably by the introduction of new coer- (other than mere negligence), a company’s assets do not cover its cive measures applicable to dissenting creditors in conciliation debts: an action for mismanagement can lead to an insolvent proceedings (see question 9.1). 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 entity that, although they are not officially a director/manager, restructuring and insolvency proceedings, and to what repeatedly influenced the company’s management or strategic extent are each of these used in practice? 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 trans- ■ Out-of-court proceedings: ad hoc proceedings and concil- ferred company and employees are made redundant: in this case, iation proceedings are flexible, voluntary and confiden- French courts ruled that indemnification actions could be initi- tial proceedings that aim at facilitating work-outs between ated by the laid-off employees against their former employer if a distressed company and its major creditors under the it could be evidenced that the sale was implemented without supervision of a court-agent. Those are frequently used adequate care (“blameworthy lightness”) and that the new owner especially for large groups of companies in the context of had no credible project nor financial capabilities to finance and financial restructurings. run the business. ■ 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 company, to restructure the company’s liabilities whether example, are there any special rules or regimes which

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apply to particular types of unsecured creditor (such as is brought that the contracting party or the beneficiary of the landlords, employees or creditors with retention of title payment knew the company’s insolvency (this knowledge being arrangements) applicable to the laws of your jurisdiction? presumed for companies belonging to the same corporate group). Are moratoria and stays on enforcement available? Finally, if court-monitored proceedings are subsequently opened, the work-out agreement entered into in conciliation is When a company faces difficulties, the French Commercial automatically terminated, meaning that participating creditors Code provides for different types of warning proceedings (procé- recover all their claims (deduction made of any payment already dures d’alerte) to draw the directors’ attention to any matter likely received). A recent (yet debated) case law further ruled that new to jeopardise the continued operation of the company. They can security interests granted as part of the work-out agreement in be triggered by the company’s external auditors, the employees’ consideration of debt rescheduling and/or debt write-off granted representatives, or shareholders, provided that they own at least by the creditors should also be deemed cancelled. 5% of the share capital. Warning proceedings triggered by the company’s external 32 Restructuring Options auditors have been slightly (but temporarily) amended in the context of the COVID-19 pandemic to allow for information to 3.1 Is it possible to implement an informal work-out in be given to the president of the relevant court at the very first your jurisdiction? stage of the proceedings. With respect to creditors, the opening of out-of-court Ad hoc proceedings and conciliation proceedings are confi- proceedings does not trigger an automatic stay. However, the dential and consensual out-of-court proceedings that aim to debtor can apply for a moratorium (for a maximum of two years) facilitate the negotiation of a work-out agreement between a if any creditor attempts to enforce its right while ad hoc proceed- distressed company and its major creditors under the super- ings or conciliation proceedings are pending. In conciliation, vision of a court-appointed agent. Trade creditors and major the debtor’s petition is submitted to the judge who had juris- shareholders can also be invited to take part in the negotiations. diction to open such proceedings during both the negotiation Social and tax authorities can be asked to consent to a debt-re- phase and the implementation phase (that is, after the work-out scheduling plan or a cancellation of debt. agreement has been approved by the court). A work-out agreement accepted by some creditors cannot Moreover, the French government introduced additional be imposed onto other dissenting creditors, as the process is significant coercive measures applicable, in conciliation proceed- consensual and no cram-down can be imposed (subject to the ings only, against a creditor refusing to grant a standstill during subsequent opening of pre-packed safeguard proceedings, the duration of the conciliation proceedings ( ). see question 9.1 see question 3.2). In practice, majority rules provided for in the The opening of court-monitored proceedings triggers a stay existing credit documentation apply. on enforcement (subject to a few exceptions, see question 3.2). In conciliation specifically, the company has two options to implement the work-out agreement: 2.3 In what circumstances are transactions entered ■ It can obtain the president of the court’s approval, which into by a company in financial difficulties at risk of does not involve publicity. challenge? What remedies are available? ■ It can request formal court approval, which encour- ages creditors to extend credit to the company to benefit In rehabilitation or liquidation (but not in safeguard, as those from a super-senior repayment status (see “new money” priv- proceedings are available to solvent companies only), any trans- ilege in question 3.6). Except where fraud has taken place, action entered into during the hardening period (période suspecte) a court-approved work-out agreement is also protected can be subject to claw-back provisions. The hardening period from the risk of being voided in the future (see question 2.3). runs from the date when the company is deemed insolvent and However, this approval must be recorded in a full judg- can be backdated by the court by up to 18 months before the ment accessible to the public and therefore subject to chal- judgment opening rehabilitation or liquidation proceedings. lenge by a third party or appeal. Employees’ represent- If a court-approved conciliation agreement has been entered atives must be informed of the agreement and invited to into prior to the opening of insolvency proceedings, the insol- attend the court hearing. vency date cannot be backdated to a date before the court order Since 2014, the court-appointed agent may be entrusted with approving the conciliation work-out agreement. the mission to arrange a pre-packaged sale of a business in A limited number of transactions are automatically voided if conciliation, which could ultimately be implemented in rehabil- performed during the hardening period, for instance: itation or liquidation proceedings. ■ any deed entered into without consideration transferring a title to moveable or immoveable property; 3.2 What formal rescue procedures are available ■ any bilateral contract in which the debtor’s obligations in your jurisdiction to restructure the liabilities of significantly exceed those of the other party; distressed companies? Are debt-for-equity swaps ■ any payment by whatever means, made for debts that have and pre-packaged sales possible? To what extent can not fallen due on the date when payment is made; creditors and/or shareholders block such procedures ■ any payment for outstanding debts, if not made by cash or threaten action (including enforcement of security) settlement or wire transfers, remittance of negotiable instru- to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- ments, or Dailly-type assignment of receivables or any other down dissenting classes of stakeholder? means commonly used in business transactions; or ■ any mortgage or pledge (both contractually agreed or court ordered) granted to secure a pre-existing debt. Safeguard proceedings In addition, any transaction or payment entered into during Safeguard proceedings allow solvent debtors to be restructured the hardening period is subject to optional voidance (that is, at a preventive stage under the court’s supervision. They begin subject to the court’s discretionary decision) if proper evidence with an observation period of up to six months (which can be

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extended) to assess the company’s financial position. Once As in a safeguard, if shareholder approval is required, the opened, there is an automatic stay of all creditor payment and court can reduce majority rules applicable on first notice. enforcement actions – subject to a few exceptions (and notably Moreover, in rehabilitation proceedings only, if the insolvent claims secured by a security interest conferring a retention right, company’s net equity is not restored and shareholders have claims secured by a trust ( fiducie) and set-off of related claims) refused to increase the company’s equity to at least half of its – against the main debtor and individuals acting as guarantors share value (which is a legal requirement in France), the admin- and joint debtors. istrator can petition the court to appoint an agent in charge of The general outcome of safeguard proceedings is the approval convening the shareholder meeting and to vote, on behalf of the by the court of a safeguard plan that can involve a debt restruc- dissenting shareholders, on the recapitalisation of the company turing, re-capitalisation of the company, debt-for-equity swap, for the amount suggested by the administrator, when the draft sale of assets or a partial sale of the business. However, it cannot plan provides for a change in the share capital in favour of one include a proposal to sell the business as a whole. or several committed investors. For companies of a certain size, three classes of creditors In addition, under certain narrowly defined circumstances, must be arranged, comprising financial institutions, major trade the court can order the squeeze-out of shareholders through creditors and bondholders, which are invited to vote on the draft a forced sale of all or part of their shares should those share- safeguard plan at a two-thirds majority in value for each class. holders have refused to implement the required change in the equity structure and hold directly or indirectly a majority stake Subordination agreements, if any, shall be taken into account by or a blocking minority stake in the capital of the company, or the administrator in the computing of the votes. through an imposed dilution of their equity stake. 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 with each creditor. The court can impose a 10-year maximum term-out 3.3 What are the criteria for entry into each to dissenting creditors, but cannot impose any debt write-off. restructuring procedure? If the plan provides for any operation requiring shareholder approval (e.g. debt-for-equity swap), shareholders must also be The French insolvency test is a pure cash-flow test: a company consulted and vote at a two-thirds majority. However, the court is deemed insolvent (en état de cessation des paiements) when it is can reduce the majority applicable to shareholder meetings on unable to meet its due and payable liabilities out of its available first notice. assets (those in the form of cash or those that can be quickly Once approved by the court, the safeguard plan is enforce- turned into cash), taking into account undrawn committed facil- able against all members of the creditors’ classes, including the ities and other credit reserves and moratoria/standstills accepted dissenting minority within each class. French law, however, does by creditors. not allow inter-class cram-down, as the court cannot impose a Ad hoc proceedings: the company must be solvent, although plan to a dissenting class of creditors when such class rejected there have been some recent precedents where ad hoc proceed- the draft plan. ings were opened for insolvent companies (but for a very short The inter-class cram-down mechanism is very likely to be period of time only). introduced soon by the upcoming reform of French bankruptcy Conciliation proceedings: the company must face legal or laws, as part of the transposition of Directive (EU) 2019/1023 financial difficulties (whether actual or foreseeable) and can be of the European Parliament and of the Council of 20 June 2019. insolvent but for fewer than 45 days before the petition is filed. Mainly relating to the voting process by classes of creditors on Safeguard proceedings: the company must be solvent and the draft safeguard or rehabilitation plan, this pending reform facing difficulties that cannot be overcome, with no restrictions is expected to provide for the set-up of more homogeneous applied to the concept of “difficulty”. classes of creditors and the possibility, under certain conditions Rehabilitation proceedings: the company must be insolvent, that are still to be determined, to impose on dissenting classes but rescue does not appear to be impossible. a plan that was accepted by one class of creditors only. To date, this reform is still being discussed, and is expected to be imple- 3.4 Who manages each process? Is there any court mented by the end of 2021. involvement?

Pre-packaged safeguard proceedings In out-of-court proceedings, the court agent does not have any Two types of pre-packaged safeguard proceedings are avail- management responsibilities. There are no restrictions on busi- able: accelerated financial safeguard; and accelerated safeguard. ness activities. Their global purpose is to enable debtors, for which conciliation In formal court-monitored proceedings, the judgment proved unsuccessful to reach all participating creditors’ consent, opening safeguard or rehabilitation proceedings appoints: to be restructured in a very short timeframe with the consent of ■ An insolvency judge ( juge commissaire) who oversees the a two-thirds majority within creditor classes. whole procedure. He/she must approve all management decisions that go beyond ordinary actions and any decision Rehabilitation proceedings to settle pending disputes. As a whole, rules applicable to the observation period, the auto- ■ An administrator (administrateur judiciaire) who supervises matic stay and classes of creditors are the same as in safeguard. or assists the management to prepare the restructuring Unlike in safeguard, however, there are two main possible plan, but cannot take over any management responsibility outcomes for rehabilitation proceedings: in safeguard proceedings. In rehabilitation proceedings, ■ a rehabilitation plan, where the same principles apply as in he/she can be in charge of assisting the management or safeguard proceedings; and also, in limited situations, taking control of the company’s ■ a sale plan, where the court can authorise the administrator management. to auction the business as a whole or in part. Creditors ■ A creditors’ representative (mandataire judiciaire) who repre- (except for limited exceptions, e.g., creditors benefitting sents the creditors’ interests and assesses proofs of claim, from a retention right) have no say on the choice of the and who can be assisted by supervising creditors (créanciers purchaser made by the court when approving the sale plan. contrôleurs) appointed by the court.

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3.5 What impact does each restructuring procedure In safeguard and rehabilitation proceedings, post-petition have on existing contracts? Are the parties obliged to claims arising for the purpose of funding the observation period perform outstanding obligations? What protections benefit from a certain statutory privilege (see question 4.6). are there for those who are forced to perform their In addition, in the context of the COVID-19 pandemic, an outstanding obligations? Will termination and set-off additional statutory privilege has been introduced, applicable to provisions be upheld? new money injected to ensure the continuation of the business of the company either during the observation period of safe- Out-of-court proceedings guard or rehabilitation proceedings or as part of the implemen- Since the 2014 reform of the French Bankruptcy Code, ipso tation of the safeguard or rehabilitation plan (see questions 4.6 and facto provisions are deemed null and void. More generally, any 9.1). This measure, which is temporary as of the time of writing, contractual provision increasing the debtor’s obligations (or is, however, expected to be permanently introduced under reducing its rights) by that sole reason of the opening of out-of- certain conditions (yet to be defined) by the pending transposi- court proceedings (or of any filing for that purpose) is also null tion of the Directive (EU) 2019/1023 (see question 3.2). and void.

Safeguard and rehabilitation proceedings 42 Insolvency Procedures Notwithstanding any contractual provisions, ongoing contracts cannot be terminated by the sole reason of the opening of such 4.1 What is/are the key insolvency procedure(s) proceedings (or the debtor’s insolvency, according to case law). available to wind up a company? In addition, any contractual provision increasing the debtor’s obligations (or reducing its rights) due to the sole reason of the Liquidation proceedings aim at liquidating a company by selling opening of safeguard or rehabilitation proceedings (or of any its business, as a whole or per branch of activity, or by selling its filing for that purpose) is deemed null and void under French assets one by one. Creditors are repaid according to their rank case law. and privilege with the sale proceeds. The administrator can require the debtor’s contracting party There is a simplified form of liquidation proceedings available to perform ongoing contracts in exchange for the performance for small businesses, which lasts for a maximum of six months of the debtor’s post-petition obligations. However, all contracts or one year, depending on the size of the company. can be terminated by court order at the request of the administrator, 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 The debtor must be insolvent and its rehabilitation must appear will be automatically terminated once a formal notice is sent to as obviously impossible. Liquidation is the only possible outcome the administrator and has remained unanswered for 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 obligations, which will only allow the contracting party the right 4.3 Who manages each winding up process? Is there to file proof of claim. any court involvement? For obligations resulting from certain kinds of financial instruments only, early termination and set-off provisions The judgment opening liquidation proceedings appoints: remain enforceable, irrespective of the opening of insolvency ■ An insolvency judge to oversee proceedings. proceedings. ■ A liquidator, who is responsible for: In terms of protection, when an ongoing contract is assumed ■ collecting all of the company’s assets and paying the by the administrator, the debtor must perform its post-petition creditors to the extent that funds are available; and obligations. In rehabilitation proceedings, when the assumed ■ assessing proofs of claim and representing the credi- ongoing contract involves the payment of a sum of money, the tors’ interests. contracting party can require that the payment be made in cash The liquidator has sole authority to bind the company and on delivery. assumes all management responsibilities. In addition, in both safeguard and rehabilitation proceedings, the contracting party benefits from the statutory privilege granted to certain post-petition claims representing consid- 4.4 How are the creditors and/or shareholders able eration in connection with a business transaction directly to influence each winding up process? Are there any connected to the company’s activities continued during the restrictions on the action that they can take (including observation period (see question 4.6). the enforcement of security)?

3.6 How is each restructuring process funded? Is any Liquidation proceedings trigger an automatic stay of enforce- protection given to rescue financing? ment against the company, subject to few exceptions. Yet, in liquidation only (unlike in safeguard or rehabilitation), secured New money injected in the context of a court-approved work-out creditors benefitting from a pledge can enforce their security agreement, entered into in conciliation, benefits from a statu- interest through a court-monitored allocation process (attribution tory super-senior status if the debtor subsequently files for insol- judiciaire), that is, request the court to be transferred ownership vency. In this case, the new money providers do not have to of the pledged asset(s). suffer any rescheduling in a term-out scenario and cannot have any write-off, debt-for-equity swap or rescheduling imposed through the vote of creditor classes.

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4.5 What impact does each winding up procedure have can be expected from the sale of the company’s business/assets. on existing contracts? Are the parties obliged to perform In the second case, the company shall terminate and cannot be outstanding obligations? Will termination and set-off revived. provisions be upheld? Once closed, liquidation may be reopened if some of the debt- or’s assets have not been sold off, or if a legal action in the inter- The same rules applicable in safeguard and rehabilitation apply ests of the creditors is initiated. to liquidation proceedings, where the liquidator is recognised as having the same prerogatives as the administrator. 52 Tax However, in liquidation proceedings, ongoing contracts where the debtor’s performance consists of the payment of a sum of 5.1 What are the tax risks which might apply to a money are automatically terminated when the contracting party is restructuring or insolvency procedure? informed of the liquidator’s decision not to assume the contract. In addition, in case a sale plan is approved by the court, some supply contracts deemed necessary to continue the transferred A taxpayer remains liable for all taxes while undergoing restruc- activity are judicially assigned to the transferee by the sole effect turing or insolvency proceedings and the French tax authori- of the court’s decision. ties typically benefit from a preferential ranking as creditors. In addition, if the taxpayer benefits from debt waivers granted by creditors as part of these proceedings, the amount of these 4.6 What is the ranking of claims in each procedure, debt waivers will typically be included in its taxable income, including the costs of the procedure? thereby potentially generating additional tax liabilities. If a debt waiver is granted as part of safeguard, rehabilitation or liqui- Where creditors rank on insolvency is complex, and any attempt dation proceedings or pursuant to a court-approved concilia- to provide a simple list can be misleading. However, a simplified tion agreement, the debtor can, however, fully offset its avail- ranking of claims could be summed up as follows: able carry-forward losses against the amount waived. This ■ Arrears of wages (see question 6.1): a portion of employees’ possibility is expressly provided for in the French tax code as an pre-petition claims benefit from a senior preferential exception to the general rule whereby carry-forward losses can status, which protects the last 60 days’ wages in arrears only be used up to an amount, in any given year, of €1 million before the judgment opening insolvency. If the bank- plus 50% of the taxable profits realised in that year. ruptcy estate cannot pay these claims from its available On the creditor side, whether the debt waiver will be treated cash, they are paid as advances by a national wage insur- as a tax-deductible loss will mainly depend on whether it can ance body, which then replaces the employees’ ranking as qualify as a “commercial debt waiver”, in which case it will typi- a creditor. cally be treated as deductible, or as a “financial debt waiver”. A ■ Post-petition court costs, which arose for the purpose of financial debt waiver may be fully or partially tax deductible at the proceedings. the level of the creditor if granted as part of safeguard, reha- ■ “New money” facilities granted in the framework of a court-approved work-out in conciliation proceedings (if bilitation or liquidation proceedings or pursuant to a court-ap- any) also benefit from a senior legal privilege. proved conciliation agreement, subject to limitations where the ■ Post-petition claims: creditor is a shareholder of the debtor. ■ Post-petition claims granted during the observation Instead of granting debt waivers, creditors may subscribe to a period or as part of a safeguard or rehabilitation plan, share capital increase of the debtor by way of offset against their ensuring the sustainability of the company’s busi- receivables, thereby implementing a debt-for-equity swap. This ness activities, benefit from a privileged ranking, just would generally not trigger the recognition of taxable income ahead of other post-petition claims. At this stage, at the level of the debtor, which would then retain its existing such privilege can only be granted until 31 December carry-forward losses intact. This, however, needs to be reviewed 2021, but it is expected to be permanently introduced on a case-by-case basis, also having in mind the resulting conse- (see question 3.6). quences for the relevant creditors. A French corporate cred- ■ Post-petition claims arising for the purpose of funding itor having recorded a depreciation on its receivable and treated the observation period, or representing considera- this depreciation as a deductible expense would need to reverse tion in a business transaction directly connected to that depreciation upon conversion of the receivable into shares, the company’s activities continued during the obser- which would create taxable income at its level. The recording of vation period: as a matter of principle, they must be a depreciation on the shares received in exchange would not be paid when they fall due. If not, they rank ahead of tax-deductible if these shares constitute a participating interest both secured and unsecured pre-petition claims. and a later sale of these shares for a price lower than the initial ■ Secured pre-petition claims. book value of the receivable would also not generate a tax-de- ■ Unsecured pre-petition claims. ductible loss. A successful restructuring will thus also involve ■ Shareholders do not receive any repayment of their capital reconciling the interest of both the creditors and the debtor investment, unless a surplus remains after all the creditors from a tax standpoint. have been paid in full (which is extremely rare). The pandemic has led the French Government to imple- In liquidation proceedings, the creditors’ ranking is the same, ment temporary tax incentives, such as a tax credit for land- except that pre-petition mortgage claims rank ahead of post-pe- lords having granted rent debt waivers to certain lessees or tition claims benefitting from the statutory privilege. the tax deductibility of rent debt waivers to unrelated lessees. More perennial measures have also been enacted, such as those 4.7 Is it possible for the company to be revived in the facilitating the conversion into equity of discounted receiv- future? ables: subject to certain conditions, the creditor is taxed only on the difference between the fair value of the shares received The court closes the liquidation in two circumstances: when all in exchange and the purchase price of the discounted receiv- the creditors are repaid (very rarely); or when no more proceeds able. Under the new rules, provided that the capital increase is

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carried out in the framework of a conciliation agreement, safe- 72 Cross-Border Issues guard proceedings, or rehabilitation proceedings, such favourable regime is applicable even if the seller of the receivable and the debtor are related parties. 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? 62 Employees Under Regulation (EU) 2015/848 of the European Parliament 6.1 What is the effect of each restructuring or of the Council of 20 May 2015 on insolvency proceedings, insolvency procedure on employees? What claims would employees have and where do they rank? reforming Regulation (EC) 1346/2000 on insolvency proceedings and applicable to insolvency proceedings commenced after 26 June 2017 (the Insolvency Regulation), the EU Member State Employment contracts remain in force during the restructuring where a company’s centre of main interests (COMI) is located procedure. shall have exclusive jurisdiction to commence insolvency Subject to certain conditions, lay-offs for economic reasons proceedings regarding such company. may be implemented in this context. However, rules pertaining A company’s COMI is presumed to be the place of its regis- to the process of making staff redundant are complex, and tered office unless it is proven that both: depend on the type of proceedings and on the timing of the ■ its COMI, as defined in the Eurofood decision of the implementation of lay-offs. European Court of Justice, is in a country other than its For instance, the redundancy process during the observation place of incorporation; and period differs between safeguard and rehabilitation proceed- ■ the company’s trade and financial partners are fully ings: while in safeguard, there is no specific feature as to the aware that the COMI of such company is not its place of redundancy for economic reasons; in the context of rehabili- incorporation. tation proceedings, the court-appointed administrator can be Under this framework, a company incorporated in another authorised by the insolvency judge to implement a redundancy EU Member State can commence insolvency proceedings in process for economic reasons if it is deemed urgent, unavoid- France if its COMI is located in France. If it only has an estab- able and necessary. lishment based in France, secondary proceedings can be subse- In the context of liquidation proceedings or following a total quently commenced in France, which shall apply to its assets or partial sale plan of the business activities in rehabilitation located in France. proceedings, lay-offs are implemented by the court-appointed With respect to a company incorporated outside of the EU, administrator or the liquidator, as the case may be, following a where no international treaty applies, French courts have juris- court’s judgment that provides for the dismissal of the employees diction to commence proceedings if such courts find that the that were not transferred to the bidder. company’s COMI is located in France. With respect to employees’ claims, where they rank on insolvency is complex, and any attempt to provide a simple list can be misleading. However, in a nutshell, the following principles 7.2 Is there scope for a restructuring or insolvency apply: process commenced elsewhere to be recognised in your jurisdiction? ■ Regarding their pre-petition claims, and unlike other creditors, employees are exempted from filing proof of claim, and have the status of preferred creditors: If insolvency judgments are made in a jurisdiction that is party ■ A portion of employees’ pre-petition claims benefits from to a treaty with France, they are recognised and enforceable in a so-called “super” senior status and ranks ahead all other France. claims. This includes all forms of pre-petition remuner- In addition, the Insolvency Regulation allows insolvency ation left unpaid for the last 60 days of effective work procedures in different EU Member States to be automatically prior to bankruptcy, and other limited compensations and recognised. However, this principle does not apply to out-of- indemnities (e.g. paid holiday, payment in lieu of notice court proceedings, which are not included within the scope of in case of termination of the employment contract, etc.), the Insolvency Regulation. subject to certain caps. In this case, and for all types of proceedings in jurisdictions ■ Certain other employees’ pre-petition claims benefit from that are not party to a treaty with France (such as the United a “general” senior status less favourable than the super- Kingdom, following Brexit), foreign judgments can only be senior status, such as pre-petition remuneration for the recognised and enforced if they have been subject to an inter last six months prior to bankruptcy, compensations and partes recognition procedure known as exequatur, which is indemnities protected by the super-senior status and other intended to verify that the foreign court had proper jurisdiction, compensation such as severance indemnities (subject to international public policy has been complied with and no fraud certain caps). has taken place. ■ Employees’ post-petition claims benefit from the priority rights offered to post-petition claims: they must be paid 7.3 Do companies incorporated in your jurisdiction when they fall due and if they are not, they rank ahead of restructure or enter into insolvency proceedings in other both secured and unsecured pre-petition claims. jurisdictions? Is this common practice? In addition, employees’ claims are guaranteed, under certain circumstances, by a national wage insurance system (AGS), Some companies incorporated in France have entered into insol- which pays these claims as advances (subject to certain caps). vency proceedings in other jurisdictions, especially in schemes For all sums paid to employees, the AGS is subrogated in the of arrangement in the UK (e.g. Zodiac). However, it is not employees’ rights vis-à-vis the bankrupt estate. common practice.

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Contrariwise, it is far more common for foreign compa- ■ New coercive measures in conciliation proceedings only nies to seek protection under French Bankruptcy Law and to (unless further extended, applicable until 31 December commence insolvency proceedings in front of French courts, 2021) against any creditor that does not accept the request based on the location of their COMI in France (e.g. Coeur made by the court-agent to grant a standstill for the dura- Défense, Mansford, Orco Property Group or NextiraOne). tion of the conciliation proceedings: ■ at the request of the debtor, the president of the court 82 Groups can impose upon such creditor a moratorium of up to two years, following expedited and contradictory 8.1 How are groups of companies treated on the proceedings; and insolvency of one or more members? Is there scope for ■ the debtor may petition the president of the court co-operation between officeholders? to order on an ex parte basis, for the duration of the conciliation proceedings, the stay of any legal action from such creditor aiming at obtaining payment of Under French law, a corporation is deemed to be an autonomous its claims or the termination of a contract because entity, and the company’s assets should not be affected by insol- of a payment default, the stay of any enforcement vency proceedings commenced against other companies within proceedings on the debtor’s assets, and/or a standstill the same group. or a moratorium over amounts due and left unpaid. However, the court can, under certain circumstances, find ■ Statutory duration of certain proceedings and of certain that there is a ground for a consolidation of estates (confusion des legal deadlines have been adapted (e.g., a possible exten- patrimoines), so that the debt of several companies can be paid sion of the duration of conciliation proceedings by up to from a larger consolidated pool of assets. 10 months, and a possible extension of the duration of an In addition, when insolvency proceedings are commenced existing safeguard or rehabilitation plan by up to two years). against a company, the same court has jurisdiction to hear any ■ Waiver of threshold conditions applicable for the opening proceedings relating to a company it controls or is controlled by, of expedited safeguard and expedited financial safeguard and a common administrator and a common creditors’ repre- (applicable as of the time of writing until 31 December sentative may be appointed for all the proceedings. 2021, unless further extended or permanently imple- Furthermore, at least two administrators and creditors’ repre- mented by the pending reform – see question 3.2). sentatives must be appointed by the court, if the net revenues of ■ Introduction of a new statutory privilege attached to new the debtor or of one of the companies mentioned below reach at money facilities granted during the observation period of least a threshold of €20 million and the debtor either: safeguard or rehabilitation proceedings or as part of a safe- ■ t owns a least three secondary establishments located in the guard or rehabilitation plan with a view to ensuring the jurisdiction of another Commercial Court than the one the continuation of the company’s activity and its sustaina- debtor is registered in; bility: should the debtor subsequently file for new insol- ■ owns or controls at least two companies against which vency proceedings, these claims would benefit, under court-monitored proceedings have commenced; or certain circumstances, from a preferential ranking (see ques- ■ is owned or controlled by a company against which tion 4.6) and these creditors would not suffer any forced court-monitored proceedings have commenced and that rescheduling or write-off of their claims unless otherwise owns or controls another company against which court-mon- agreed. Unless further extended (or permanently imple- itored proceedings have commenced. mented, as expected under certain conditions, pending the reform of French bankruptcy law – see question 3.2), such 92 COVID-19 privilege can only be granted until 31 December 2021. In addition, the French government introduced a certain 9.1 What, if any, measures have been introduced in number of support measures including notably (i) French State- response to the COVID-19 pandemic? guaranteed loans, (ii) a partial activity scheme, (iii) the set-up of a solidarity fund available to indemnify certain impaired busi- In the context of the COVID-19 pandemic, a certain number of nesses, (iv) the deferral of payment of certain social and/or fiscal exceptional but temporary measures (unless permanently intro- instalments, and (v) incentive tax measures (see question 5.1). duced by the reform discussed above) have been adopted by way of ordinance to adapt French insolvency law, notably:

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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 has also been recognised by Who’s Who Legal – Restructuring & Insolvency since 2016. Joanna also served as 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 business law firms and currently has 33 partners. Founded in 1993, the Firm has become a key player in French business law and also has a highly regarded international practice. The Firm’s lawyers regularly advise on both domestic and international matters, and clients primarily include large French and overseas corporations. The Restructuring and Insolvency team offers a full range of advisory and litigation services in relation to companies facing financial difficulties. The team regularly advises lending institutions, investment funds, credit insurers, factors and leasing companies, in connection with the drafting and negotiating of all types of agreements, including renegotiating existing loan documentation. The team also represents listed and non-listed companies faced with financial difficulties and/or their shareholders, with respect to their reorganisation or the renegotiation of their debts, with solutions ranging from mandat ad hoc/conciliation to safeguard procedures and continuation plans. www.de-pardieu.com

Restructuring & Insolvency 2021 80 Chapter 14 Germany Germany

Dr Josef Parzinger

Dr Johannes Lappe

Kirkland & Ellis Michael Berger

12 Overview liability for delaying a mandatory insolvency filing. The popu- larity of the new German Scheme remains to be seen; however, it is widely expected that Schemes will become the new go-to 1.1 Where would you place your jurisdiction on the instrument in early crisis stages, and the mere option of the spectrum of debtor- to creditor-friendly jurisdictions? Scheme will facilitate consensual work-outs.

The German insolvency process is aimed at maximising recovery 22 Key Issues to Consider When the for creditors. However, it often takes several years for unsecured Company is in Financial Difficulties creditors to recover low, normally single-digit, percentages of their claims. Creditors’ influence and access to information is limited and the course of proceedings is difficult to predict. 2.1 What duties and potential liabilities should the directors/managers have regard to when managing a The fact that Germany is not a particularly creditor-friendly company in financial difficulties? Is there a specific jurisdiction does not automatically make it a debtor-friendly point at which a company must enter a restructuring or jurisdiction. German law provides for debtor-friendly features insolvency process? such as debtor-in-possession proceedings. But severe sanctions for managing directors if a debtor does not file for insolvency in time put stress on pre-insolvency restructuring negotiations. Generally, and, in particular, when a business is financially The German legislator started to address these weaknesses distressed, directors have to monitor and, if required, adequately back in 2012. The 2012 reform (ESUG) increased creditors’ mitigate existential risks to the business. In order to avoid crim- influence on the appointment of the administrator and the inal liability, directors of a limited liability company or stock course of proceedings and it introduced insolvency plan proceed- corporation have to call a shareholders’ meeting if the compa- ings, including a cross-class cram-down and the option of a ny’s balance sheet shows a loss of 50% (or more) of the regis- debt-equity-swap. tered share capital. On 1 January 2021, a promising new restructuring law came Generally, directors have to attend to their duties with the into effect (StaRUG). This new German Scheme has the poten- standard of care of a prudent and diligent director. Failure to do tial to make a significant step towards international best prac- so results in personal liability vis-à-vis the company. tices and will, amongst other developments, facilitate the Directors are under an obligation to file for the opening of insolvency proceedings (which can aim at a restructuring, . restructuring of promissory notes (Schuldscheine), which do not cf usually contain any collective action clause. section 3 below, or an insolvent liquidation, cf. section 4 below) in cases of illiquidity (Zahlungsunfähigkeit) or over-indebtedness (Überschuldung). 1.2 Does the legislative framework in your jurisdiction ■ Illiquidity/cash-flow insolvency means that the debtor allow for informal work-outs, as well as formal faces an immediate liquidity shortfall, i.e. it does not have restructuring and insolvency proceedings, and to what sufficient liquid funds to pay at least 90% of its due and extent are each of these used in practice? payable liabilities over the next three weeks; in which case the debtor needs to file for insolvency without undue delay German law allows for both informal work-outs and formal and within three weeks at the latest. restructuring and insolvency proceedings. Informal work-outs ■ Over-indebtedness/balance-sheet insolvency means are widely used in the early stages of a crisis and are generally that (i) the debtor’s liabilities surpass its assets (at liqui- preferred to formal procedures (where formal requirements and dation values), and (ii) it is more likely than not that the court involvement increase the implementation risk and which debtor cannot continue its business (i.e., is unable to pay come with more publicity and include a greater degree of unpre- its debts as and when they fall due) within a look-forward dictability). In later stages of a crisis, however, formal proceed- period of 12 months. If a company becomes over-in- ings gain attractiveness, in particular from the management’s debted, the debtor needs to file for insolvency without perspective, as they reduce the management’s risk of personal undue delay and within six weeks at the latest.

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A breach of the filing duty can lead to criminal charges and 3.2 What formal rescue procedures are available personal liability vis-à-vis the company and/or its 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 2.2 Which other stakeholders may influence the creditors and/or shareholders block such procedures company’s situation? Are there any restrictions on the or threaten action (including enforcement of security) action that they can take against the company? For to seek an advantage? Do your procedures allow you example, are there any special rules or regimes which to cram-down dissenting stakeholders? Can you cram- apply to particular types of unsecured creditor (such down dissenting classes of stakeholder? as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement A restructuring can be achieved out of insolvency through restruc- available? turing plan proceedings (Scheme), or in insolvency through insolvency plan proceedings. A plan can be prepared both in regular Creditors are entitled to file for insolvency of a debtor company administrator-led proceedings and in debtor-in-possession on the grounds of illiquidity or over-indebtedness (cf. ques- (DIP) proceedings. DIP proceedings require, amongst others, tion 2.1 above) or to otherwise enforce their claims against the the debtor to have sufficient liquidity for the next six months. debtor or terminate ongoing agreements. Outside of formal In both proceedings, the debtor can apply for a court-invoked proceedings, no stay on enforcements or moratorium protects stay on enforcements. the debtor. The restructuring or insolvency plan can, amongst other Landlords typically benefit from statutory liens whereas things, provide for a pre-packaged sale and a debt-for-equity swap. As trade creditors benefit from retention of title arrangements. no creditor can be forced to take equity, an alternative option for non-consensual creditors is required. The debtor can only terminate executory contracts, e.g. leases, Both the Scheme and the insolvency process prohibits ipso facto in insolvency proceedings. For a termination of employee clauses, i.e. creditors cannot terminate or accelerate contracts contracts see question 6.1 below. based on the filing alone. Shareholders’ governance rights will remain in full effect Shareholders do have some control over the management’s outside of formal proceedings unless shareholder resolutions decision to launch a Scheme. A shift of the debtor’s manage- violated creditor-protecting laws. Dividend payments or repayment’s fiduciary duties from the shareholders to the creditors ments or collateralisation of shareholder loans are restricted or occurs upon the commencement of Scheme proceedings and voidable in a subsequent insolvency. arguably as soon as the debtor becomes imminently cash-flow insolvent. As a consequence, the debtor’s management may not 2.3 In what circumstances are transactions entered need to act in line with shareholder instructions that are not in into by a company in financial difficulties at risk of the best interest of creditors. challenge? What remedies are available? Shareholders cannot hinder the debtor from entering DIP proceedings at a stage of balance-sheet insolvency. This is Generally, transactions entered into in the three months prior different if the debtor is imminently cash-flow insolvent but not to the insolvency filing face a severe claw-back risk. To miti- balance-sheet insolvent, because imminent cash-flow insolvency gate such risks, the company and its creditors should agree on a only provides justification for voluntary filings. contemporaneous and fair market value exchange of goods and A restructuring plan in a Scheme needs to be approved by services, ideally with the creditor being contractually entitled to a 75% majority by value in each group. Affected creditors not receive prepayments from the debtor. participating in the vote are taken to have voted against the plan. Gratuitous transactions are subject to a four-year claw-back By contrast, an insolvency plan is adopted if more than 50% of period. Transactions with the intent to disadvantage other cred- the members in each group by value and by heads vote in favour itors are subject to a four- to 10-year claw-back period and the of the plan. Both regimes allow for a cross-class cram-down. creditors’ knowledge of the debtor’s imminent or actual cash- The German Bond Act allows for a restructuring of German flow insolvency often allows the administrator to prove the law-governed notes by majority decision. Because of low intention to cause harm. A repayment of shareholder loans is quorum requirements for the noteholders’ meeting, in extreme subject to claw-back actions for 10 years. cases a majority of 18.875% of noteholders can make binding As a matter of precaution, any supplier should only deliver decisions for all holders of a specific bond. goods under a retention of title clause, i.e. only transfer the title contingent on full payment of the purchase price. 3.3 What are the criteria for entry into each restructuring procedure? 32 Restructuring Options A Scheme is available to all debtors (other than from the finan- 3.1 Is it possible to implement an informal work-out in cial or the insurance sector) with their centre of main interests your jurisdiction? (COMI) in Germany that are in a state of imminent illiquidity, i.e. it is more likely than not that they will be unable to pay their Yes, informal work-outs are possible in Germany, provided that debts as and when they fall due within a look-forward period of all parties involved come to an agreement (unless, for example, 24 months. the credit documentation or bond indenture requires a lower DIP insolvency plan proceedings with a protective shield are also avail- majority). Where sufficient leverage is available, e.g. there is able to debtors in a state of over-indebtedness (cf. question 2.1 a prospect of a share pledge enforcement or a cram-down of above). DIP proceedings without a protective shield are available to dissenting creditors under a Scheme or insolvency plan, informal debtors in a state of illiquidity (cf. question 2.1 above) as well. work-outs can be achieved and are generally the preferred imple- The German Bond Act is available for German law-governed mentation route. notes, which provide for the application of the German Bond Act in the terms and conditions.

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3.4 Who manages each process? Is there any court ■ Ipso facto clauses: termination provisions may not affect the involvement? right to assume or reject an executory contract; however, material adverse change (MAC) clauses and similar provisions remain effective if and to the extent they are not Scheme proceedings and DIP insolvency plan proceedings are related to the insolvency event itself. managed by the debtor itself. An insolvency plan can also be ■ Set-off: in principle, creditors remain entitled to set off prepared and implemented by an insolvency administrator. their claims against counter-claims brought by the debtor. Court involvement is mostly optional in Scheme proceed- There are, however, various exceptions: (i) the debtor’s ings. On the fast track with minimal court involvement, the claim becomes due prior to the creditor’s claim, and the only mandatory court involvement is a notice to the court upon creditor’s claim becomes due post-commencement of the launching the Scheme and court sanction of the creditor-ap- insolvency; (ii) the creditor becomes a debtor of the estate proved Scheme. On the comprehensive track, the debtor may only post-commencement; (iii) the creditor acquires its opt for additional instruments that require the court’s approval, claim from another creditor post-commencement; (iv) the including a stay on enforcements and a court-led voting proce- creditor acquires its right to set-off through an avoidable dure. The court may also have to appoint a mandatory or transaction; or (v) the creditor’s claim has to be satisfied optional restructuring officer in certain cases. out of the debtor’s free assets. In insolvency plan proceedings, the court likewise primarily exercises administrative functions and judicial control. Proceedings are commenced by a petition to the court to open 3.6 How is each restructuring process funded? Is any preliminary proceedings (either regular or in the form of protec- protection given to rescue financing? tive shield proceedings). If applicable, the court will decide if the debtor should remain in possession, in which case the court Pre-insolvency rescue financing, e.g. under a Scheme, is not will appoint a preliminary supervising trustee; otherwise, the particularly incentivised. Under German law, lenders of a court will appoint a preliminary administrator. The court distressed debtor generally face the risk of being held liable if will further decide on the scope of authority of the prelimi- their actions deepen an existing insolvency or delay an inevi- nary administrator (or trustee), and whether to order prelimi- table insolvency filing (lender liability risk), and of having to nary measures to safeguard the debtor’s assets, e.g. a stay on repay monies or release security that was paid or granted by a enforcements and/or the appointment of a preliminary credi- distressed debtor (claw-back risk). Both risks can be mitigated tors’ committee. The court will also convene and chair: (i) a by relying in good faith on an expert opinion (restructuring creditors’ meeting for, among other things, the appointment of opinion) certifying that the lender contributes to a restructuring a final administrator (or trustee) and to approve the decision attempt that is more likely than not to result in sustained success. to restructure the debtor company; (ii) a claims review hearing Debtors can obtain short-term financing to bridge the period in which the claims filed by (purported) creditors are exam- until a restructuring opinion is available and rescue financing ined; and (iii) a voting hearing in which the creditors vote on once the debtor has obtained a positive restructuring opinion. the proposed insolvency plan. Throughout the proceedings, the Special funding is available for preliminary insolvency court is responsible for sanctioning remedies brought by credi- proceedings, during which the Federal Agency for Employment tors or the creditors’ committee. (Bundesagentur für Arbeit) assumes the debtor’s payroll costs for up to three months (Insolvenzgeld). Rescue financing provided during preliminary or formal 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to insolvency plan proceedings can benefit from an elevation perform outstanding obligations? What protections into administrative claim status (Massedarlehen) (cf. question 4.6 are there for those who are forced to perform their below). This usually gives a high degree of comfort to new outstanding obligations? Will termination and set-off money providers. provisions be upheld? A Scheme or insolvency plan can provide for priority status or priming liens for any exit financing. The launch of a Scheme does not generally affect existing contracts. A Scheme cannot release the debtor from contracts 42 Insolvency Procedures per se (in particular, no termination of, e.g., leases); only individual claims arising from contracts can be subjected to a Scheme and, 4.1 What is/are the key insolvency procedure(s) if such claim arises from an executory contract, only if and to available to wind up a company? the extent the other party has already performed its obligations thereunder. Termination and set-off rights remain untouched. A company can be wound up through a solvent liquidation or an For insolvency plan proceedings, there is a difference insolvent liquidation. A solvent liquidation is a matter of corporate between preliminary proceedings and formal proceedings. The law (and is thus disregarded from further description below), opening of preliminary insolvency proceedings (including protec- whereas an insolvent liquidation is governed by insolvency law. An tive shield proceedings) does not per se affect existing contracts insolvent liquidation can be pursued in administrator-led insol- and has no direct implications for termination or set-off provi- vency proceedings or, upon separate petition, in DIP proceed- sions. The opening of formal insolvency proceedings, on the ings. Both options can be accompanied by an insolvency plan. other hand, has various implications, including: ■ Executory contracts: the debtor in possession (or insolvency administrator) can choose between assuming and rejecting 4.2 On what grounds can a company be placed into executory contracts. The parties to an assumed contract each winding up procedure? are obliged to perform outstanding obligations (and, in return, creditors benefit from an elevation of their claim The company may be placed into insolvency proceedings into an administrative claim). upon imminent illiquidity, and must be placed into insolvency ■ Leases and employment contracts: the debtor in possession (or proceedings upon over-indebtedness or illiquidity (cf. question insolvency administrator) has a special termination right, 2.1 above). This applies to both options, regular proceedings as subject to a three-month notice period. well as DIP proceedings.

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4.3 Who manages each winding up process? Is there by both the debtor and the creditor. The parties to an any court involvement? assumed contract are obliged to perform outstanding obligations and the creditor benefits from admin expense priority for its claim to the estate. An insolvent liquidation is managed either by an insolvency ■ Leases and employment contracts: the insolvency administrator administrator (regular proceedings) or, upon separate petition, (or debtor in possession) has a special termination right, by the debtor management (DIP proceedings) under the super- subject to a three-month notice period. vision of a trustee (Sachwalter). Court involvement mirrors that ■ Ipso facto clauses: termination provisions may not affect the in insolvency plan proceedings ( . question 3.4 above). cf right to assume or reject an executory contract; however, MAC clauses and similar provisions remain effective if 4.4 How are the creditors and/or shareholders able and to the extent they are unconnected to the insolvency to influence each winding up process? Are there any event itself. restrictions on the action that they can take (including ■ Set-off: in principle, creditors remain entitled to set off the enforcement of security)? their claims against counter-claims brought by the debtor. There are, however, various exceptions: (i) the debtor’s For shareholders, the opening of preliminary insolvency proceed- claim becomes due prior to the creditor’s claim, and the ings means losing some control because the court assigns creditor’s claim becomes due post-commencement of the authority to a preliminary insolvency administrator or trustee. insolvency; (ii) the creditor becomes a debtor of the estate Upon the opening of formal proceedings, shareholders lose all only post-commencement; (iii) the creditor acquires its influence over the process. claim from another creditor post-commencement; (iv) the Creditors can file an insolvency petition on the grounds of illi- creditor acquires its right to set-off through an avoidable quidity or over-indebtedness and can thus force the debtor into transaction; or (v) the creditor’s claim has to be satisfied an insolvency procedure. During preliminary insolvency proceed- out of the debtor’s free assets. ings, creditors may exert influence via a preliminary creditors’ committee, which primarily monitors the preliminary adminis- 4.6 What is the ranking of claims in each procedure, trator. During formal proceedings, creditors exert their influence including the costs of the procedure? at the creditors’ meeting and through the creditors’ committee. The court summons the first creditors’ meeting during the first In an insolvent liquidation, funds are allocated in accordance few months of the proceedings. At the first creditors’ meeting, with the following ranking: creditors vote, in particular, on: (i) the final administrator or ■ Separation rights: assets that do not belong to the estate are trustee, as applicable; (ii) the members of the final creditors’ handed over to the owner, including assets under a reten- committee; (iii) the preliminary continuation of the debtor’s tion of title clause. business; and (iv) the approval of material transactions. ■ Secured claims: assets subject to a security interest are either During preliminary proceedings, the creditors’ rights remain (i) sold by the administrator with subsequent distribution in principle unaffected, unless the court orders, e.g., a stay on to the secured creditors, subject to a statutory deduction enforcements as a preliminary measure to safeguard the debt- of ca. 9% for fees (or a higher percentage as asked for and or’s assets (cf. question 3.4 above). Such stay can only encom- agreed with the administrator), or (ii) realised by the cred- pass movable assets, which means that creditors remain entitled itors themselves upon agreement with the administrator, to enforce their security over immovable or intangible assets (e.g. subject to a payment into the estate for costs of usually ca. share pledges or account pledges). 9% of the proceeds. Upon the opening of formal proceedings, unsecured credi- ■ Admin costs of the insolvency proceedings: court costs; fees and tors can only pursue their rights by filing proof of claims. All expenses for each of (i) the preliminary insolvency admin- unsecured claims will be listed in the insolvency schedule and istrator, (ii) the insolvency administrator, and (iii) the cred- will participate in distributions unless the administrator or other itors’ committee. creditors object. Secured creditors remain entitled to enforce ■ Other administrative claims: in particular, claims from their security interests over intangible and immovable assets contracts assumed or concluded by the insolvency admin- and assets not in the administrator’s (or the debtor’s) possession, istrator post-commencement, or by a so-called “strong” subject to limited exceptions. Other collateral is realised by the preliminary insolvency administrator post-petition. administrator (or debtor in possession) on behalf of the respec- ■ Insolvency claims: in particular, all unsecured claims; tive secured creditors and the creditors receive the disposal claims of secured creditors to the extent not satisfied by proceeds minus a cost contribution to the estate. the proceeds of the security enforcement; intercompany claims that have not been re-characterised as shareholder loans. 4.5 What impact does each winding up procedure have ■ Claims subordinated by statute: interest and late fees on unse- on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off cured claims; costs incurred by unsecured claimants provisions be upheld? through their participation in the proceedings; monetary penalties resulting from criminal acts or regulatory offences; claims for gratuitous services/performance The opening of preliminary insolvency proceedings does not per against the debtor; shareholder loans and economically se affect existing contracts and has no direct implications for equivalent claims. termination or set-off provisions. ■ Claims subordinated by agreement: may be fully subordinated The opening of formal insolvency proceedings has various (i.e., paid only after all subordinated claims listed above implications, including: have been satisfied in full), or subordinated to only one or ■ Executory contracts: the insolvency administrator (or debtor more of the above subordinated claim categories. in possession) can choose between assuming and rejecting ■ Residual claims: any residual value is distributed among the executory contracts that have not been fully performed shareholders.

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4.7 Is it possible for the company to be revived in the Pension claims are protected in insolvency. The pension deficit future? is transferred to the German Pension Insurance Association (Pensionssicherungsverein aG, PSV). The PSV then participates as an unsecured creditor in the insolvency proceedings instead of An insolvent liquidation is ultimately concluded by the debtor the employees. The PSV votes in a separate class on insolvency company’s removal from the commercial register because of a lack plans and is usually represented in the creditors’ committee. of assets. Following such removal and the lack of assets, the debtor In case of a sale of the business, all employees transfer to the company ceases to exist and cannot be revived. If additional acquirer as a matter of statutory law. Sometimes employees are assets surface after the conclusion of the insolvency proceedings, transferred to a special purpose transfer entity first and only the realisation proceeds are distributed to the creditors. certain employees are transferred from the special purpose transfer entity to the buyer. 52 Tax 72 Cross-Border Issues 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency German tax law does not provide for a comprehensive set of proceedings in your jurisdiction? legal rules on taxation in insolvency or restructuring situations. As a general rule, taxation remains unaffected by an insolvency Yes, provided such companies have their COMI in Germany. or restructuring. This applies in particular with respect to VAT, For companies from an EU Member State (except Denmark), (corporate) income and trade tax, as well as employment tax. the place of the registered office is presumed to be the COMI, A particularly important aspect of the tax structuring of absent proof to the contrary (Art. 3 Insolvency Regulation, restructuring transactions in Germany is the mitigation of EIR). For companies from outside the EU, such presumption taxable income arising in connection with a debt waiver or regarding the registered office does not apply. economically similar measures such as a debt-to-equity swap. If companies that do not have their COMI in Germany have A specific tax exemption from (corporate) income and trade assets in Germany, these assets can be subject to secondary tax may be available for such taxable income, known as restruc- insolvency proceedings. turing gains (Sanierungsgewinne). Further important tax aspects of restructuring transactions include the forfeiture of tax losses, tax losses carried forward 7.2 Is there scope for a restructuring or insolvency and interest carried forward, a potential real estate transfer tax process commenced elsewhere to be recognised in your charge, and restrictions on the utilisation of bad debt losses in jurisdiction? relation to shareholder debt financings. As the scope of the tax exemption for restructuring gains Processes commenced in an EU Member State (except for as well as the tax treatment of other typical restructuring tools Denmark) and listed in Annex A of the EIR benefit from auto- such as a non-recourse debt hive-up or a debt-to-mezzanine matic recognition in Germany. swap are subject to legal uncertainty under applicable German Insolvency processes in other jurisdictions are recognised tax law, complex restructurings are commonly supported by a as a matter of German conflicts law. This does not apply if binding ruling applied for in advance from the competent tax the debtor does not have its COMI in the jurisdiction where office. Obtaining the latter may have an impact on the timing the process commenced or if recognition would obviously of restructuring transactions. not be in line with material principles of German law (public policy exemption). The German Federal Court confirmed that 62 Employees proceedings under chapter 11 of the U.S. Bankruptcy Code do not fall under the public policy exemption but are recognised 6.1 What is the effect of each restructuring or provided the debtor has its COMI in the U.S. insolvency procedure on employees? What claims would Both under the EIR and German law, certain areas are employees have and where do they rank? exempted from automatic recognition. E.g., employees’ rights would be subject to German law and immovable assets would be subject to the law of the state where the assets are located. The administrator can terminate any employment contracts in In some cases, restructuring proceedings not listed in insolvency proceedings with a maximum notice period of three Annex A of the EIR can be recognised as judgments under the months. The employees’ claims accruing during the notice European Judgments Regulation or the Lugano Convention. period have administrative expense priority. Where a works Some countries outside the EU are party to the Lugano conven- council is in place, a social plan needs to be agreed, but sever- tion and the UK has applied to accede. However, recognition ance payments under the social plan are limited. The require- for Part 26A restructuring plans under Lugano may be difficult ments of the German Dismissal Protection Act continue to following the UK High Court of Justice decision in Gategroup on apply in insolvency. 17 Feb. 2021, EWHC 304 (Ch). The state agency for employment pays salaries for three months (Insolvenzgeld), capped for monthly salaries at EUR 7,100 in former West Germany and EUR 6,700 in former East 7.3 Do companies incorporated in your jurisdiction Germany. The agency for employment then files the employees’ restructure or enter into insolvency proceedings in other salary claims with the insolvency table as unsecured claims. jurisdictions? Is this common practice? To the extent their claims exceed the monthly cap, employees participate in the insolvency as unsecured creditors. However, In the past, a number of larger German companies have used the administrator may pay the full salary to motivate employees foreign, mostly UK, restructuring processes (scheme of arrange- to stay. ment, prepacked administration). Despite the introduction of

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the new restructuring law in Germany, these processes will still Many German companies benefit from reduced hours comp be attractive to German companies because of the existing prec- ensation (Kurzarbeitergeld) provided by the Federal Employment edents and the experience of UK judges. This includes the new Agency. Part 26A Restructuring Plan. Other jurisdictions such as the Aside from such general measures, specific measures that Netherlands, with the newly introduced wet homologatie onderhands were introduced into German restructuring and insolvency law akkoord (WHOA), may also prove popular. However, any such in response to COVID-19 include: forum shopping is not common and is usually only feasible for ■ A suspension of the obligation to file for insolvency (and larger companies. related legal consequences, such as management liability for payments during insolvency): (i) from 1 March 2020 82 Groups until 30 September 2020, for all insolvent debtors; (ii) from 1 October 2020 until 31 December 2020 for all balance- 8.1 How are groups of companies treated on the sheet insolvent debtors; and (iii) from 1 January 2021 until insolvency of one or more members? Is there scope for 30 April 2021 for all insolvent debtors who applied for co-operation between officeholders? pandemic-related state aid, provided, in each case, that the insolvency was a consequence of the pandemic. ■ No equitable subordination of shareholder loans granted German insolvency or restructuring law does not provide for between 1 March 2020 and 30 September 2020 and repaid group proceedings. Proceedings are to be initiated and run on by 30 September 2023. No claw-back claims in respect of an entity-by-entity basis. new money (in the form of loans) or new collateral granted However, German as well as European insolvency law between 1 March 2020 and 30 September 2020 and repaid provides for cooperation obligations between the relevant by 30 September 2023. courts, administrators and creditors’ committees. Such coop- ■ A shortened look-forward period for the over-indebted- eration can be intensified in additional so-called coordination ness test of four months (instead of 12 months) during proceedings, also providing for a “coordination plan” for the 2021 for debtors whose over-indebtedness is a conse- restructuring of the entire group. quence of the pandemic. In practice, courts tend to appoint either the same admin- ■ Further, DIP proceedings remain available during 2021 istrator or administrators from the same firm as the Topco with the same requirements as before (i.e., certain addi- administrator and the administrator for the German subsidi- tional requirements introduced on 1 January 2021 do not aries to ensure and aid coordination. apply) for debtors whose insolvency is a consequence of the pandemic. Protective shield proceedings remain avail- 92 COVID-19 able during 2021 for illiquid debtors (who would otherwise not be eligible) whose illiquidity is a consequence of 9.1 What, if any, measures have been introduced in the pandemic. response to the COVID-19 pandemic?

The German government and legislator have introduced a multitude of measures designed to bolster liquidity and mitigate insolvency risk generally, e.g. tax deferrals, state-backed guarantees and loans (in particular via the state-owned bank KfW), and governmental recapitalisations (via the Economic Stability Fund – WSF). Also, the transposition of the EU directive on preventive restructuring frameworks has been completed on an accelerated schedule with the introduction of, in particular, restructuring plan proceedings (the “German Scheme” – cf. question 3.2 above) on 1 January 2021.

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Dr Josef Parzinger is a restructuring partner in the Munich office of Kirkland & Ellis. He focuses on cross-border restructurings, advising both debtors and creditors on acquisition, disposal and reorganisation of stressed and distressed businesses. Born in Munich, Josef finished his First State Examination at the Ludwig Maximilian University of Munich in 2010. He then earned his doctoral degree in 2013, before eventually graduating with the Second State Examination in 2014. Josef has worked for Kirkland since 2014 and became partner in 2020. His hobbies are running, cycling, travelling, cooking and movies.

Kirkland & Ellis Tel: +49 89 2030 6057 Maximilianstrasse 11 Email: [email protected] Munich, 80539 URL: www.kirkland.com Germany

Dr Johannes Lappe is a restructuring associate in the Munich office of Kirkland & Ellis. He focuses on cross-border restructurings, advising both debtors and creditors on acquisitions, disposals and reorganisations of stressed and distressed businesses. Born in Mainz, Johannes finished his First State Examination at Heidelberg University in 2014. He then earned his doctoral degree, also from Heidelberg University, and graduated with the Second State Examination in 2018. Johannes has worked for Kirkland since 2018.

Kirkland & Ellis Tel: +49 89 2030 6069 Maximilianstrasse 11 Email: [email protected] Munich, 80539 URL: www.kirkland.com Germany

Michael Berger is a restructuring associate in the Munich office of Kirkland & Ellis. He focuses on cross-border restructurings, advising both debtors and creditors on acquisitions, disposals and reorganisations of stressed and distressed businesses. Michael graduated from Heidelberg University in 2015 (First Legal Examination) and finished his legal training in 2019 (Second Legal State Examination). After handing in his doctoral thesis on corporate bond restructurings under German law at Goethe University Frankfurt, Michael joined Kirkland in 2020.

Kirkland & Ellis Tel: +49 89 2030 6065 Maximilianstrasse 11 Email: [email protected] Munich, 80539 URL: www.kirkland.com Germany

Kirkland & Ellis is a global law firm with more than 2,900 attorneys repre- attorneys with specific restructuring experience throughout the Firm, senting clients in private equity, M&A and other complex corporate trans- operates worldwide as one practice to provide seamless service to restruc- actions, litigation and dispute resolution/arbitration, restructuring, and intel- turing clients facing complicated global issues and has experience across lectual property matters. The Firm has 16 offices around the world: Austin, multiple industries. Bay Area (Palo Alto & San Francisco), Beijing, Boston, Chicago, Dallas, Hong www.kirkland.com Kong, Houston, London, Los Angeles, Munich, New York, Paris, Shanghai and Washington, D.C. Kirkland’s market-leading Restructuring Group provides a broad range of business advisory and crisis management skills to navigate clients through the turmoil of situations involving financially troubled companies. With more than 200 attorneys in the Firm’s global offices, the group is a leader in complex domestic and cross-border restructuring and insolvency matters. Kirkland’s Restructuring Group, along with hundreds of other

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Hong Kong Hong Kong

Nick Gall

Ashima Sood

Gall Kritika Sethia

12 Overview company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process? 1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions? General/common law duties As a general rule, directors of a company owe statutory and fidu- Hong Kong’s insolvency regime, like its commonwealth coun- ciary duties to the company and its members. However, as a terparts, has always been very creditor-friendly. In the right company approaches insolvency, a director has a duty to take circumstances, courts even have the power to exercise their into account the interests of the company’s creditors. If he/ discretion to wind up foreign companies. Although the primary she breaches those duties, he/she may be ordered to compen- restructuring tool under the Companies Ordinance of Hong sate the company for any loss or damage that has been suffered Kong by way of a scheme of arrangement is designed to provide as a result of those breaches, or repay, restore or account for the a debtor company with more control than the traditional insol- money or property appropriated or acquired. vency proceedings, the scheme is still required to be approved by the company’s creditors and the court. Misfeasance/breach of duty/breach of trust Where any officer, including a director or manager, has breached 1.2 Does the legislative framework in your jurisdiction his/her duties to the company by misapplying or retaining any allow for informal work-outs, as well as formal money or property, the court can compel repayment of money restructuring and insolvency proceedings, and to what or restoration of property or contribution by way of compensa- extent are each of these used in practice? tion by that officer.

The legislative framework for restructuring and insolvency in Fraudulent trading Hong Kong can be found in the Companies (Winding Up and A director may be personally liable if he/she was knowingly Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), involved in carrying on any business of the company with the the Companies Ordinance (Cap. 622) and other subsidiary intent to defraud its creditors. The court may make an order legislation. that the director be personally liable for all or any of the debts The legislative framework in Hong Kong provides for the and liabilities of the company, without any limitation of liability. following formal restructuring and insolvency procedures for He/she is also exposed to criminal liability and potentially liable companies in financial difficulties: to a fine and imprisonment. (1) a members’ voluntary liquidation; (2) a creditors’ voluntary liquidation; Disqualification (3) a compulsory liquidation; A director may be disqualified for a period of up to 15 years if (4) appointment of a receiver; and he/she: engages in fraudulent trading; is unfit to be concerned (5) a scheme of arrangement. in the management of a company; is convicted of an indictable In practice, most restructurings take place by way of informal offence in connection with the promotion, formation, manage- work-outs, compositions and arrangements essentially made by ment, or liquidation of any company, such as falsifying the agreement of the parties concerned. company’s books; or is found guilty of any other misconduct in relation to the company. 22 Key Issues to Consider When the Whether or not a company must enter a restructuring or insol- Company is in Financial Difficulties vency process will depend on various factors, including whether it is solvent or not. A solvent company will be able to restruc- 2.1 What duties and potential liabilities should the ture using schemes of arrangement at any time. directors/managers have regard to when managing a

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2.2 Which other stakeholders may influence the value of the consideration provided by the company. The liqui- company’s situation? Are there any restrictions on the dator may challenge the validity of any such transactions that took action that they can take against the company? For place five years prior to the commencement of the winding up. example, are there any special rules or regimes which apply to particular types of unsecured creditor (such Unfair preferences as landlords, employees or creditors with retention An unfair preference occurs where a payment has been made of title arrangements) applicable to the laws of your by the company to a creditor when it is insolvent, but before the jurisdiction? Are moratoria and stays on enforcement available? commencement of its winding up, with the effect of putting the creditor in a better position than it would otherwise have been in the liquidation of the company. The liquidator may chal- Insolvency lenge the validity of any such transactions that took place two In a creditors’ voluntary liquidation and a compulsory liqui- years prior to the commencement of the winding up if the credi- dation, generally the creditors have the most significant influ- tors are ‘associates’ (e.g. director or employee), or six months for ence on the company’s situation. In a compulsory liquida- any other creditor. If the challenge is successful, the court may tion, the creditors initiate the process and are also responsible restore the position to what it would have been if the company for nominating and voting for the appointment of a liquidator, had not entered into the relevant transaction. and a committee of inspection to supervise the liquidator in the conduct of the liquidation. In a creditors’ voluntary liquidation, Creation of a floating charge the liquidator nominated by the creditors will normally prevail A floating charge may be declared invalid if created within 12 in the event of a conflict with the liquidators appointed by the months prior to the commencement of a liquidation, where shareholders and creditors. immediately following the creation of the charge the company Secured creditors stand outside the liquidation as they are granting the security becomes insolvent. The period extends generally entitled to be paid out of the proceeds of their security to two years in respect of floating charges created in favour of ahead of all other claims. persons who are connected with the company. Unsecured creditors have limited rights in any liquidation as they are ranked the lowest amongst all creditors. An unsecured Post-petition disposal of assets creditor would not rank higher than other creditors even if leave In case of a compulsory winding up by the court, pursuant to was granted in his/her favour to proceed with or commence an Section 182 of the CWUMPO, any disposition of the property action against the company in compulsory liquidation and that of the company including transfer of shares or alteration in the action was ultimately successful. status of the members of the company, after the commencement A landlord would not be allowed to distrain for rent due of the winding up, is considered void unless the court orders before the commencement of winding up of the company in otherwise. respect of which he/she is a creditor, but will need to prove his/ her debt. Extortionate credit transaction Employees would be considered unsecured creditors of the The court may set aside any extortionate credit transactions company, except in respect of any statutory claims arising under entered into three years before the commencement of a volun- the CWUMPO, which would constitute preferential debts. tary winding up, the date on which a special resolution was Creditors with lien would have the right to hold the assets of passed to wind up the company or on the date of the winding the debtor, although this right would not generally extend to the up order made by the court. A transaction will be consid- power of sale (which should be sought from the court). ered extortionate if, having regard to the risk accepted by the Generally, an unpaid vendor with a retention of title arrange- person providing the credit, the terms require grossly exorbitant ment would be entitled to retain possession of goods that he/she payments in respect of the provision of credit or grossly contra- has sold but not delivered to an insolvent purchaser. vene ordinary principles of fair dealing.

Restructuring In a restructuring (whether formal or not), it is again the credi- 32 Restructuring Options tors who have the most significant influence on the company’s situation. 3.1 Is it possible to implement an informal work-out in your jurisdiction? Moratoria or stay of enforcement There are no provisions available for moratorium or stays on Yes. Most restructurings in Hong Kong take place by way of enforcement. The fact that a company is in the process of informal work-outs, compositions and arrangements essentially restructuring does not prevent an individual creditor from suing made by agreement of the parties concerned. the company, seizing the company’s property or presenting a winding up petition. 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of 2.3 In what circumstances are transactions entered distressed companies? Are debt-for-equity swaps into by a company in financial difficulties at risk of and pre-packaged sales possible? To what extent can challenge? What remedies are available? creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you Transactions at an undervalue to cram-down dissenting stakeholders? Can you cram- A transaction at an undervalue takes place when the company down dissenting classes of stakeholder? makes a gift or enters into a transaction with a person without receiving any consideration, or enters into a transaction for a There are no formal procedures available to achieve a restruc- consideration, the value of which is significantly less than the turing of the company’s debts in Hong Kong. The only exception

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

3.3 What are the criteria for entry into each 4.1 What is/are the key insolvency procedure(s) restructuring procedure? available to wind up a company?

There are no specific criteria to be met by a company before The key insolvency procedures available to wind up a company negotiating a work-out or a scheme of arrangement. That being are as follows: said, restructuring arrangements must be agreed by, and made (1) a members’ voluntary liquidation (it should be noted that binding on, all creditors, otherwise a dissenting creditor may this is a solvent liquidation); frustrate the rescue plan and petition for a winding up. (2) a creditors’ voluntary liquidation; and (3) a compulsory liquidation (by the court). 3.4 Who manages each process? Is there any court involvement? 4.2 On what grounds can a company be placed into each winding up procedure? A work-out is managed by the creditor(s) and the management of the company. A members’ voluntary liquidation is only available where the On the contrary, a scheme of arrangement is substantially company is solvent. Having made a full inquiry into the compa- supervised by the court, although the management of the ny’s affairs, the directors must have also formed an opinion that company remains in place throughout the restructuring process. the company will be able to pay all its debts within 12 months Once a proposal has been devised and presented to the share- of the commencement of the winding up and sign a certificate holders and creditors, an application is made to the court to of solvency to that effect. The shareholders must also pass a convene meetings of the respective classes of shareholders and special resolution to wind up in a General Meeting. creditors. A creditors’ voluntary liquidation will occur where the After the court makes an order that the meetings of the respec- company decides to place itself into voluntary liquidation but tive classes of creditors and shareholders can be convened, the directors are unable to certify the solvency of the company notice of the date and time of these meetings is advertised. At (i.e. the company is insolvent), or the liquidator is at any time of these meetings, a majority of 75 per cent in value and 50 per cent the opinion that the company will not be able to pay its debts in in number is required to approve the proposed scheme. full within the specified period. After approval, a petition for sanction must be issued and, at A compulsory winding up order may be made by the court the hearing of such petition, the court will consider whether or where: not to sanction the scheme. If the scheme is sanctioned by the (1) the company has passed a special resolution for winding court, a copy of the relevant court order must be filed with the up by the court; Companies Registry in Hong Kong. (2) the company has failed to commence its business within one year from its incorporation, or suspends its business for a whole year; (3) the company has no members;

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(4) the company is unable to pay its debts as and when they fall avoidance of transfers after commencement of a voluntary due; winding up. As explained in question 2.3 above, the liquidator (5) an event occurs upon the occurrence of which the articles also has the power to avoid or set aside certain transactions to provide that the company is to be dissolved; or ‘claw back’ assets of the company in order to increase the funds (6) the court is of the opinion that it is just and equitable that available to distribute to creditors. the company be wound up. Set-off applies in liquidation where there have been mutual credits or mutual debts or other mutual dealings between the 4.3 Who manages each winding up process? Is there company and the creditor before a winding up order is made. any court involvement? In case of a winding up, parties can terminate a contract if there is an express provision in the contract to that effect. A voluntary liquidation is managed by the directors of the company until the appointment of the liquidator. After the 4.6 What is the ranking of claims in each procedure, resolution for winding up is passed and before the appointment including the costs of the procedure? of the liquidator, the directors may exercise their powers only with the sanction of the court. The order of payment in a liquidation is generally as follows: In case of a voluntary liquidation by creditors, while the direc- (1) expenses of the winding up, including the liquidator’s remu- tors continue to manage the process, the creditors have a greater neration. The order of priority of the costs in a winding up say. is set out in rule 179 of the Companies (Winding up) Rules A compulsory winding up is commenced by issuing a peti- (Cap. 32H); tion against the company. The court will hear the petition and (2) preferential debts; make an order for compulsory winding up if it is satisfied that (3) any preferential charge on distrained goods; grounds for winding up have been established. It is managed (4) the company’s general creditors; and by a provisional liquidator, Official Receiver or the liquidator, (5) shareholders. as the case may be.

4.7 Is it possible for the company to be revived in the 4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any future? restrictions on the action that they can take (including the enforcement of security)? In a voluntary liquidation, the company will be permanently dissolved three months after the liquidator files the final On the appointment of a liquidator in a members’ voluntary account and return with the Companies Registry in Hong Kong liquidation, all the powers of the directors cease, although a liqui- following the final meeting of creditors. dator or the shareholders in a General Meeting can sanction their In a compulsory winding up, the liquidator can apply to the continuance. Similarly, in a creditors’ voluntary liquidation, the court for an order to permanently dissolve the company once powers of the directors will also cease. However, the committee the affairs of the company have been completely wound up. of inspection or, if there is no committee, the creditors, can sanc- Dissolution brings the company to an end. tion their continuance. In contrast, appointments of directors, agents and employees are automatically terminated when the 52 Tax court makes a winding up order under a compulsory winding up. The rights of the shareholders will also lapse, although it is worth noting that the shareholders may still vote in a General 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? Meeting for the continuance of the directors’ powers in a members’ voluntary liquidation. Unsecured creditors have limited rights in any liquidation If the company continues to trade or sells its assets, it would be as they are ranked the lowest amongst all creditors. When a subject to tax on its profits. winding up order has been made or a provisional liquidator has been appointed, creditors must seek leave from the court to 62 Employees continue with, or commence proceedings against, the company. An unsecured creditor would not be ranked higher than other 6.1 What is the effect of each restructuring or creditors even if leave was granted in his favour to proceed or insolvency procedure on employees? What claims would commence an action against the company in compulsory liqui- employees have and where do they rank? dation and the action is successful. On the other hand, secured creditors stand outside the liquidation as they are entitled to be paid out of the proceeds of Restructuring their security ahead of all other claims. That said, if the secu- Generally, a work-out or a scheme of arrangement has no effect rity created is a floating charge, the preferential debts (e.g. sums on employees. Their employment is not transferred automat- owing to employees and the government) must be paid before ically between entities as a result of the restructuring. Either the floating charge holder. (i) the employee accepts the offer of employment with the new entity, (ii) the employee resigns, or (iii) the employment is terminated by the employer on grounds of redundancy. The employee 4.5 What impact does each winding up procedure have would be entitled to termination payments pursuant to the on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off Employment Ordinance (Cap. 57). provisions be upheld? Insolvency In a compulsory winding up, all employment contracts will be See the answer to question 2.3 above in respect of avoidance automatically terminated, unless the court orders otherwise. of disposition of property after a presentation of petition and

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On the other hand, the commencement of a voluntary liquida- Similarly, the courts have also recognised the appointment of a tion does not automatically terminate the service contracts of foreign provisional liquidator appointed in Bermuda on a ‘soft- employees. In the event that an employee’s contract is termi- touch’ approach basis. In a soft-touch provisional liquidation, nated, that employee becomes a preferential creditor of the the company remains under the day-to-day control of the direc- company in respect of any statutory claims such as unpaid tors, giving them an opportunity to restructure their debts while wages, severance payments, pay for accrued but unused annual being protected against action by individual creditors. In Hong leave, wages in lieu of notice, etc. Once an employer becomes Kong, soft-touch provisional liquidation is generally imper- insolvent, employees may apply to receive ex gratia payments out missible on the basis that the liquidators are appointed for the of the Hong Kong Protection of Wages on Insolvency Fund if purposes of winding up and not for the purposes of avoiding a winding up petition has been presented against the employer. the winding up. The Fund covers wages owed in respect of services rendered In other cases, Hong Kong courts have recognised bank- to an employer during the four months prior to the last day of ruptcy administrators of a company in liquidation in Mainland service (capped at HK$36,000), pay for untaken annual leave China. The bankruptcy administrators had applied to Hong and untaken statutory holidays (capped at HK$10,500), wages Kong courts to prevent a creditor of the Hong Kong subsid- in lieu of notice (capped at HK$22,500) and severance payment iary of the company in liquidation from obtaining a garnishee (capped at HK$50,000 plus 50 per cent of any excess entitlement) order absolute in Hong Kong. In another case, the bankruptcy payable to an employee under the Employment Ordinance. administrators were granted powers (such as obtaining information from third parties, taking control of and exercising all 72 Cross-Border Issues rights that the company had in relation to any entities in which the company had an interest, etc.) that were considered neces- 7.1 Can companies incorporated elsewhere use sary for assisting the bankruptcy administrators in Hong Kong. restructuring procedures or enter into insolvency Hong Kong courts have evidently been forthcoming in cross- proceedings in your jurisdiction? border insolvency co-operation with a view to facilitate cross- border restructuring. The efforts are based on the principle of universalism, which recognises that cross-border co-operation Whilst the United Nations Commission on International Trade does not require foreign insolvency laws to be the same as the Law (UNCITRAL) has adopted the Model Law on Cross-Border domestic insolvency law. Insolvency, there are no statutory provisions in Hong Kong to implement the UNCITRAL Model Law. Notwithstanding this, a foreign liquidator may initiate a new liquidation in Hong Kong 7.3 Do companies incorporated in your jurisdiction against the foreign company. However, the court will only exer- restructure or enter into insolvency proceedings in other cise its discretion to make a winding up order against a foreign jurisdictions? Is this common practice? company if, amongst other requirements, there is sufficient connection within the jurisdiction of Hong Kong. Although it is common for Hong Kong companies to have assets and operations elsewhere, there are obvious difficulties 7.2 Is there scope for a restructuring or insolvency in dealing with insolvencies of such companies in jurisdictions process commenced elsewhere to be recognised in your other than Hong Kong, especially while safeguarding and real- jurisdiction? ising the assets.

Hong Kong courts rely on common law principles for recog- 82 Groups nition of and providing assistance to foreign restructuring and insolvency processes. A foreign liquidator may be able 8.1 How are groups of companies treated on the to protect assets of a foreign debtor in Hong Kong where the insolvency of one or more members? Is there scope for foreign winding up order is extraterritorial (i.e., extends to assets co-operation between officeholders? situated in Hong Kong) and is fair (i.e., does not depart from the pari passu rule for treating all creditors equally). In order to Hong Kong does not have the concept of a group liquidation. achieve this, the foreign liquidator may commence proceedings Generally, in a winding up of a group company/companies, each in Hong Kong seeking a declaration regarding the effect of the company of the group is treated as a separate legal entity and foreign insolvency proceedings and to recover debts. the interest of a single company is not sacrificed for the larger Generally, foreign insolvency proceedings will be recognised interest of the group. To secure co-operation and also for prac- in Hong Kong if the following criteria are satisfied: tical reasons, the court may permit the same liquidator to take (1) the foreign insolvency proceedings are collective insol- control of insolvent companies within a group, subject to any vency proceedings; and conflict of interest. (2) they are commenced in the company’s country of incorporation. 92 COVID-19 In a recent decision, Hong Kong courts rendered recognition and assistance to a Japanese insolvency proceeding as it was clear 9.1 What, if any, measures have been introduced in from the evidence that the company was in a collective insol- response to the COVID-19 pandemic? vency proceeding in its place of incorporation. It was found that the insolvency regime in Japan was similar to that in Hong Kong and accordingly, the trustee in bankruptcy was vested In the recent case of Re China Oil Gangran Energ y Group Holdings with similar powers under Hong Kong laws, including the right Ltd, [2020] HKCFI 825, whilst recognising the appointment of a to take control of the company’s property in Hong Kong and provisional liquidator in respect of a Cayman Islands liquidation, administer it, the right to order an examination of a person the Hong Kong Court expressed the desirability of legislative concerning the affairs of a company, the right to seek docu- provisions for corporate debt restructuring and rehabilitation in ments from a third party concerning the company’s affairs, etc. Hong Kong in line with other common law jurisdictions. The

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Court noted that the problems caused by the lack of such legis- That being said, the government announced in March 2020 lative provisions have been brought to greater focus on account that it would re-introduce the Companies (Corporate Rescue) of COVID-19. Specific reference was made to a desired amend- Bill (Bill) at the Legislative Council in early 2021. The actual ment to section 193 of the CWUMPO to expressly provide for provisions may take time to come into operation; however, if provisional liquidators to be given restructuring powers. the Bill is passed, it will be a milestone development, which is While the Hong Kong government has implemented expected to bring Hong Kong at par with other common law numerous financial relief measures focused on supporting jurisdictions. It is expected to strengthen the already proactive enterprises, such as sector-specific subsidies, reduction of taxes, approach of the courts in Hong Kong not only with respect to enhancing small and medium enterprises (SMEs), financing cross-border insolvencies but also in domestic insolvencies and guarantee schemes, there has been no measure specifically restructuring. catered to insolvency and restructuring.

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Nick Gall is Senior Partner and Head of Litigation at Gall. He has acted for publicly listed companies, senior employees, the Hong Kong Government, the US Government, major international banks and corporations throughout the world. Nick has extensive experience in dealing with multi-jurisdictional fraud and international asset-tracing litigation. His work often requires making cross-border applications, freezing/gagging applications, urgent injunctive relief, the examination of senior executives/bank officers and recovery and enforcement proceedings generally. He also has extensive experience in forcing banks and financial institutions to provide information to assist in tracing and recovery of funds and fending off vulture funds in respect of international sovereign debt recoveries.

Gall Tel: +852 3405 7666 3/F Dina House, Ruttonjee Centre Email: [email protected] 11 Duddell Street, Central URL: www.gallhk.com Hong Kong

Ashima Sood joined Gall in September 2014. She has wide-ranging experience in commercial litigation, arbitration and dispute resolution, focusing on issues involving breach of contract, joint venture and shareholders’ disputes, asset-tracing and Mareva injunctions, SFC and ICAC investigations, enforcement of judgments, as well as tort and negligence claims. Ashima has also handled an array of matters relating to default of payment and commercial fraud, assisting liquidators and creditors in insolvency and bankruptcy matters.

Gall Tel: +852 3405 7628 3/F Dina House, Ruttonjee Centre Email: [email protected] 11 Duddell Street, Central URL: www.gallhk.com 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. Kritika supports the team in the commercial and civil litigation practice as well as the employment practice. She was awarded the University Gold Medal for B.A. LL.B. (Hons.) at the National University of Juridical Sciences, Kolkata, a premier law school in India. She also holds a Bachelor of Civil Law (BCL) degree from the University of Oxford.

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

Gall is a leading dispute resolution law firm in Hong Kong. We specialise and examinations; security enforcement; corporate and personal debt in handling highly complex disputes, many of which involve multi-jurisdic- recovery; and cross-border insolvency issues. tional litigation. Our lawyers have a wealth of experience in a wide variety Our clients also include appointment takers, creditors, bondholders, finan- of litigation, 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

Restructuring & Insolvency 2021 94 Chapter 16 India India

Sachin Gupta

Dhir & Dhir Associates Varsha Banerjee

12 Overview Apart from the above, the Government, vide the Ordinance dated 4 April 2021, introduced a pre-pack insolvency resolution process for micro, small and medium-sized enterprises under 1.1 Where would you place your jurisdiction on the the IBC. spectrum of debtor- to creditor-friendly jurisdictions? 22 Key Issues to Consider When the The Insolvency and Bankruptcy Code, 2016 (IBC or the Code), Company is in Financial Difficulties which as of the date of writing codifies the law as regards insolvency and bankruptcy proceedings in India is clearly tilted 2.1 What duties and potential liabilities should the towards creditors. Under the Code, it is the creditors of the directors/managers have regard to when managing a company, particularly financial creditors, who exercise all-en- company in financial difficulties? Is there a specific compassing rights as regards resolution in case of a company point at which a company must enter a restructuring or undergoing insolvency proceedings. Debtors under the current insolvency process? legal regime have limited rights in terms of participation as well as spearheading the resolution process. Regarding the duties and potential liabilities of Directors/ Managers, in case of companies that are in financial difficul- 1.2 Does the legislative framework in your jurisdiction ties, the provisions of the Companies Act are the only legislative allow for informal work-outs, as well as formal guidance tool available to such Directors/Managers, along with restructuring and insolvency proceedings, and to what the governance norms that such parties are required to fulfil in extent are each of these used in practice? case the debtor company is a listed entity. The provisions of the Companies Act broadly provide that all the actions of Directors/ Managers of companies in financial difficulties should be bona When discussing the legislative framework as regards formal fide and in the interests of the company, and such Directors/ restructuring and insolvency proceedings, one needs to keep in Managers are required to do all such necessary acts that a person mind that such framework consists of the IBC and Companies situated in their position would ordinarily carry out. The said Act, 2013 in India. Under the IBC and Companies Act, the provisions of the Companies Act allow for an indirect statu- mechanism of restructuring and insolvency is formal in nature tory approval under Section 66 of the IBC, wherein Directors/ and neither statute provides for any informal workouts between Managers of companies that were in financial difficulty can be the debtor company and its creditors. Under the provisions made personally amenable to proceedings in cases where such of the IBC, the debtor company is ordinarily not entitled to Directors/Managers failed to exercise due diligence in mini- present any plan for resolution of the company nor take over mising potential losses to the creditors of the debtor company. the company in case of sale as a going concern during the liqui- In India, there is no statutory mandate as regards restruc- dation proceedings. The IBC can, however, facilitate a resolu- turing and/or insolvency proceedings in case of a company in tion by the debtor company itself in case the debtor company is financial difficulties. The provisions of the IBC can be invoked a medium and/or small-scale enterprise (MSME). Other than in cases where the debtor company has defaulted in payment the above, the debtor company may consider proceedings with of either financial or operational debt for an amount of INR 1 voluntary liquidation in case there is an asset liability match. crore or above. The schemes of compromise and arrangement As far as the provisions of the Companies Act are concerned, under the Companies Act are also voluntary without any appli- Sections 230–232 envisage approval of a scheme of compromise cable threshold. or arrangement. In addition, certain categories of company can also apply for voluntary winding up in terms of the Companies 2.2 Which other stakeholders may influence the Winding up Rules, 2020. company’s situation? Are there any restrictions on the In terms of the informal regime, the debtor company has the action that they can take against the company? For option to get a revival plan approved only upon initiation of the example, are there any special rules or regimes which informal restructuring mechanism by the creditors under the apply to particular types of unsecured creditor (such as framework and guidelines issued by the Reserve Bank of India landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? (RBI). As of the time of writing, the RBI Circular dated 7 June Are moratoria and stays on enforcement available? 2019 provides for a revival plan to be approved in case a debtor company has debt of more than INR 2,000 crores to lenders A debtor company undergoing insolvency and restructuring having 75% of the debt by value and 60% in number of debtors. proceedings in India is primarily dependent on the consent

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(relevant majority consent) of its creditors for approval of any 32 Restructuring Options scheme or plan. In case of restructuring under the Companies Act, the consent of both secured and unsecured creditors is required along with the consent of the regulators, if any. 3.1 Is it possible to implement an informal work-out in However, one class of creditors is the driving force when it your jurisdiction? comes to the process of resolution and/or liquidation under the IBC, i.e. financial creditors. Financial creditors are credi- As far as informal workouts for restructuring debtor companies tors who have disbursed money to the debtor company against are concerned, in India, reliance may be placed on the guide- consideration of time value for money. The class of financial lines issued by the RBI. Currently, restructuring of a debtor creditors can make a decision on the resolution of the debtor company can be given effect in terms of the RBI Circular dated company including payments, if any, made to the other category 7 June 2019. The said Circular is applicable in case of multi- of creditors such as the statutory authorities, employees, other party lending and a revival plan under the said Circular can be trade creditors, etc. considered only in case the requisite majority, i.e. 75%, agree to Upon initiation of proceedings under the IBC, there is an such a revival plan. However, the revival plan under the said order of moratorium, which comes into force under Section 14 scheme can only restructure the liabilities of the debtor company of the IBC. Accordingly, on and from the date of commence- towards its lender institution, and the debts of any other credi- ment of proceedings (admission order), there is stay on enforce- tors, apart from such institutions, cannot be restructured. ment of any order against the debtor company as well as initia- Other than the abovementioned RBI Circular, the debtor tion of any recovery action against the debtor company. During company can enter into independent and individual settlements this period of moratorium, the debtor company is entitled to with its creditors on a one-on-one basis either by entering into a supply of essential goods and services as well as continued a one-time settlement, or by conversion of debt into equity or occupation or possession of a property that belongs to a third assignment of the debt. party. However, for the purposes of safeguarding such third- party stakeholders such as landlords and employees, the IBC 3.2 What formal rescue procedures are available envisages payment of lease rental, salaries, etc. as regards the in your jurisdiction to restructure the liabilities of utilisation of such property or services being carried on by such distressed companies? Are debt-for-equity swaps employees/workers during the insolvency resolution process. and pre-packaged sales possible? To what extent can Such payments for services rendered to the debtor company creditors and/or shareholders block such procedures during the insolvency resolution period, being a part of the insol- or threaten action (including enforcement of security) vency resolution process cost, are required to be paid in full and to seek an advantage? Do your procedures allow you also in priority, failing which the contracts can be terminated. to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder?

2.3 In what circumstances are transactions entered Restructuring of the liabilities of a distressed company under into by a company in financial difficulties at risk of the formal rescue proceedings consists of approval of a resolu- challenge? What remedies are available? tion plan under the IBC, sale of the debtor company as a going concern or sale of the business of the debtor company as a going Transactions entered into by a company in financial difficulties concern under the IBC and approval of a scheme of compromise are amenable to challenge in limited circumstances, in accord- or arrangement under Sections 230–232 of the Companies Act. ance with the provisions of the IBC. The broad categories of For approval of a resolution plan, the consent of 66% of the finan- transactions that can be challenged and thereafter annulled are cial creditors is required, and in case of approval of a scheme of (a) preferential transactions, (b) undervalued transactions, (c) compromise or arrangement, the consent of 75% of both secured extortionate credit transactions, and (d) any other transactions and unsecured creditors of the debtor company is required. entered into with the intent to defraud creditors or for any fraud- For the purposes of restructuring the liabilities of a distressed ulent purposes. For transactions to fall within the preferen- company, a proposal for debt-for-equity swaps is permissible in tial, undervalued, or extortionate categories, there is a lookback case the same is consented to by the requisite number of creditors. period of two years from the insolvency commencement date in As of the time of writing, pre-packaged sales in India are statuto- case of transactions entered into with related parties. In case of rily recognised only as regards corporate enterprises classified as transactions with unrelated parties, the lookback period is one micro, small and medium-sized enterprises under the IBC. year. However, in case a transaction is a fraudulent transaction, Under a resolution plan as approved under the IBC as well as the provisions of the IBC can be invoked for all transactions a scheme of compromise and arrangement under the Companies without any restraint as regards the lookback period. In terms Act, the requisite majority are legally entitled to cram down of the provisions of the IBC, any of the above transactions can dissenting stakeholders. In case of a scheme of compromise be annulled, property of the debtor company be restored to the and arrangement, dissenting stakeholders are required to follow company, any security interest created over such property can the line of the majority of the creditors; however, in case of an be released and the Adjudicating Authority can also direct the approved resolution plan under the IBC, the dissenting stake- beneficiary of any such transaction to repay the amount to the holders to the extent of being dissenting financial creditors debtor company while also imposing penalties and punishment can seek a limited relief of being paid in priority against other for carrying out any such transactions. In addition, transactions consenting financial creditors. The dissenting stakeholders do that are fraudulent in nature are also amenable to proceedings not have any right to seek enforcement of security interests or under the Companies Act, Criminal Procedure Code and other block any such restructuring proceedings either under the IBC applicable RBI guidelines/circulars. or the Companies Act.

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3.3 What are the criteria for entry into each services rendered during the period of insolvency proceedings, restructuring procedure? failing which, such parties can refuse to perform their obligations. However, in case a resolution plan is approved by the requisite majority in the ongoing insolvency proceedings, there can Proceedings under the IBC can be initiated either by a financial be a unilateral termination of the existing contracts along with creditor or operational creditor, or the debtor company itself, proposals providing for the setting off of claims of such creditors. in case there is a default in payment of either operational or financial debt exceeding the value of INR 1 crore. A default of INR 1 crore and above is the pecuniary threshold for initiating 3.6 How is each restructuring process funded? Is any proceedings under the IBC. protection given to rescue financing? A scheme for compromise and arrangement under Sections 230–232 of the Companies Act can be formulated by and placed A scheme for compromise and arrangement under the before the jurisdictional National Company Law Tribunal Companies Act, as well as a revival plan under RBI Circular (NCLT) with the requisite consent of the shareholders as well dated 7 June 2019, is required to be funded by the debtor as the class of creditors. company or the creditors or parties proposing such a scheme. Proceedings under the IBC are, however, funded out of the proceeds available from the debtor company. In case the debtor 3.4 Who manages each process? Is there any court company does not have sufficient funds, the financial creditors involvement? who constitute the committee of creditors can approve interim funding to be obtained by the debtor company or, alterna- Restructuring proceedings under the IBC are managed by a tively, contribute funds in proportion to their exposure in the registered insolvency professional who is appointed as the reso- committee of creditors. The amount of interim funding (rescue lution professional in case of a debtor company. Such a reso- financing) is protected in as much as the same becomes part lution professional duly intimates its actions to the concerned of the insolvency resolution process costs, and these are paid Adjudicating Authority, viz. the NCLT, and is also required to in priority and in their entirety from the proceeds as recovered seek prior consent of the committee of creditors as well as the from either the resolution or liquidation of the debtor company. NCLT for certain actions. A scheme of compromise and arrangement under the 42 Insolvency Procedures Companies Act also requires due approval of the NCLT, which is the jurisdictional court providing the seal of approval to a 4.1 What is/are the key insolvency procedure(s) scheme as proposed by a member or creditor. However, the available to wind up a company? process is conducted by the company itself. The revival plan, if any, under the RBI Circular dated 7 June Winding up of a company can either take place under the provi- 2019, however, is not amenable to the supervisory jurisdiction of sions of the IBC or the Companies Act. Section 271 of the any court and is a pure commercial arrangement as entered into Companies Act provides for grounds on which a company can be between the debtor company and its lenders. wound up for reasons other than its inability to pay its debts. In case the debtor company has defaulted in the payment of its debts 3.5 What impact does each restructuring procedure (either financial or operational), proceedings under the IBC can have on existing contracts? Are the parties obliged to be initiated against the debtor company. In addition, a company perform outstanding obligations? What protections can also seek voluntary liquidation under Section 59 of the IBC are there for those who are forced to perform their as well as under the Companies Winding up Rules, 2020. outstanding obligations? Will termination and set-off provisions be upheld? 4.2 On what grounds can a company be placed into each winding up procedure? The restructuring mechanism in case of a scheme of arrangement and compromise under the Companies Act, as well as a Winding up under the Companies Act can take place in cases revival plan under the RBI Circular dated 7 June 2019, does not where the company acts against the sovereignty and integrity of per se extinguish any existing contracts of the debtor company India, the security of the State, public relations with a foreign other than modification of the terms and tenure of payment as State, decency or morality, conducts its affairs in a fraudulent envisaged in such a scheme. Accordingly, there is no provision manner, or defaults in filing its financial annual returns with under the abovementioned restructuring mechanism for parties the Registrar of Companies for five years if the Tribunal is of to be required to perform outstanding obligations forcefully the opinion that it is just and equitable to wind up the company. against their will. In both the abovementioned scenarios, termi- Under the Companies Winding up Rules, 2020, certain cate- nation and set-off of other contractual obligations can be given gories of company that have assets of a book value not exceeding effect to, in terms of the existing contracts, subject to any modifi- INR 1 crore, and as specified by the Government, can make use cation that can be done solely with the consent of the other party. of the mechanism for seeking winding up in terms of Section 361 However, in case of restructuring proceedings under the IBC, of the Companies Act. The said section provides the summary once the company comes within the purview of jurisdiction being procedures for liquidation, wherein an order for liquidation can exercised under the Code, there is a moratorium that comes into be passed by the Central Government as against the NCLT. force. There is no automatic termination of existing contracts, Winding up proceedings under the IBC can be given effect to and parties providing essential goods and services to the debtor in case the committee of creditors decides that the company be company are obliged to perform their outstanding obligations. relegated to liquidation under Section 33 of the IBC. Further, The amendment to Section 14 of the IBC protects landlords upon expiration of a period of 180/270 days from the insol- as well as creditors who are legally directed to continue to give vency commencement date, the debtor company is automati- access to the property/premises and supply goods and services cally relegated to liquidation proceedings under the Code. The to the debtor company, and are entitled to seek payment for Code also envisages that in case no resolution plan is received

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by the Adjudicating Authority within the maximum period, i.e. (c) Wages and unpaid dues owed to employees for a period of 180/270 days, or in case the Adjudicating Authority rejects the 12 months, preceding liquidation. execution plan, then, inter alia, an order of liquidation of the (d) Financial debts owed to unsecured creditors. debtor company is passed. Section 59 of the IBC provides a (e) Equal ranking between amounts due to the Central and mechanism for voluntary winding up in case the assets of the State Governments for a period of two years, preceding company are sufficient to meet its liabilities. liquidation, and debts owed to secured creditors remaining unpaid following enforcement of security interests. 4.3 Who manages each winding up process? Is there (f) Other remaining debts and dues. any court involvement? (g) Preference shareholders. (h) Equity shareholders and partners. In case of winding up under the Companies Act, in terms of Winding up proceedings under the IBC are carried out by a registered insolvency professional who is appointed as a liquidator. its Sections 326–327, workmen’s dues and debts due to secured The processes are under the supervision of the Adjudicating creditors are paid in priority on a pro rata basis after the statu- Authority, i.e. the NCLT. tory dues are payable. For winding up proceedings under the Companies Act, there is an Official Liquidator appointed by the NCLT, who carries on 4.7 Is it possible for the company to be revived in the the process under the supervision of the NCLT. future?

4.4 How are the creditors and/or shareholders able At the end of liquidation proceedings, an order of dissolution is to influence each winding up process? Are there any passed. Dissolution implies the end of the company. However, restrictions on the action that they can take (including even during liquidation proceedings there can be a scheme of the enforcement of security)? compromise and arrangement approved, or the company can be sold as a going concern, thereby meaning that the company can Liquidation proceedings, whether under the Companies Act or be revived in future. the Code, are carried out by the Official Liquidator or liquidator, as the case may be. Creditors, during the process of winding up, 52 Tax are entitled to duly intimate to the liquidator their desire to stand outside the winding up proceedings and exercise their security interests from outside the winding up process. During the 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? process of winding up, shareholders do not exercise any material influence and thus, their rights, if any, pale into insignificance during the said process. Restructuring or insolvency proceedings under the IBC can result in the extinguishment of all past tax dues, and in case the company is taken over by a new management, there are no 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform taxes payable for such change in ownership. However, any sale outstanding obligations? Will termination and set-off of the assets either under the restructuring or insolvency mech- provisions be upheld? anism can attract the applicable tax. Similarly, any scheme of arrangement and compromise shall also require the payment of Liquidation proceedings under the IBC, which come into the requisite stamp duty as well as any other taxes applicable to force from the date on which the order of liquidation is passed, such transfer of ownership. provide for automatic discharge to the officers, employees and workmen of the debtor company, except when the business of 62 Employees the debtor company is continued, during the liquidation process, by the liquidator. Other than the said provision, there is no 6.1 What is the effect of each restructuring or other statutory provision that provides for any automatic termi- insolvency procedure on employees? What claims would nation of the existing contracts. It is noteworthy that unlike employees have and where do they rank? the provisions of Section 14 of the IBC, wherein continuance of essential service is specifically provided, no such provision In case of a scheme of compromise and arrangement, employees exists in case of a company under liquidation. of the company are required to be paid in full and the obliga- Contractual agreements ordinarily have a term as regards tions of the company continue as they are without any modifica- their cessation upon initiation of winding up proceedings. The tion or waiver. Similarly, in case of a revival plan under the RBI relevant parties can exercise their rights of termination of the Circular dated 7 June 2019, employees’ remunerations are not contracts, along with set-off towards their pending claims. affected and are beyond the scope of the revival plan. However, the liquidator appointed in case of companies under- In case of a resolution plan under the IBC, for employees that going winding up can appropriately seek payments, if any, which shall be determined by the NCLT. are a part of the operational creditor, their outstanding dues can be written down or reduced and the terms of employment modified or terminated. However, any treatment of the employees is 4.6 What is the ranking of claims in each procedure, required to be in consonance with Section 53 of the Code, which including the costs of the procedure? is applicable in case of liquidation of the company, and thus entitles employees to the payment of their wages and unpaid dues The ranking of claims under the IBC is as follows: for 24 or 12 months, depending on whether such employees are (a) Insolvency resolution process costs and liquidation costs workmen or not. to be paid in full. (b) Equal ranking between workmen’s dues for 24 months, preceding liquidation and debts owed to secured creditors.

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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?

Companies incorporated outside India cannot seek their restruc- There is no statutory provision for groups of companies being turing under the restructuring regimes as available in India. The treated as a consolidated entity for the purposes of restructuring provisions of the IBC, Companies Act and the RBI Circular and insolvency proceedings. However, under the informal dated 7 June 2019, are applicable solely to companies registered regime, the lenders and the debtor company can address the under the Companies Act. issue of groups of companies having cross holdings as well as assets as a single unit for the purposes of resolution. Similarly, a scheme of compromise and arrangement can also envisage the 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your consolidation of group companies. jurisdiction? Each debtor company is considered a single independent unit under the IBC; however, in case any cooperation is required from any of the group companies, the same can be duly facil- In terms of Sections 234 and 235 of the IBC, restructuring and itated. The IBC incidentally statutorily provides for coopera- insolvency proceedings commenced elsewhere can be recog- tion by all persons having necessary information. The NCLT nised in India in case India has reciprocal arrangements with as a matter of fact has taken cognizance of groups of companies such jurisdiction. However, the said provisions have not been having relevant information and having consolidated certain enforced to date. Section 376 of the Companies Act provides ongoing resolution processes such as in the cases of Videocon, a mechanism for winding up foreign companies in case such Era Infra Engineering as well as IL&FS Group. companies are carrying on business in India and thereafter cease to carry on business in India. 92 COVID-19

7.3 Do companies incorporated in your jurisdiction 9.1 What, if any, measures have been introduced in restructure or enter into insolvency proceedings in other response to the COVID-19 pandemic? jurisdictions? Is this common practice?

The COVID-19 pandemic resulted in an amendment being For companies incorporated in India, the process for seeking made to Section 4 of the IBC, in terms of which the minimum restructuring or insolvency proceedings in other jurisdictions amount of default for initiation of proceedings under the IBC is guided by the applicable law in such jurisdictions. As a part was increased from INR 1 lakh to INR 1 crore. In addition, of the common provision of law, such restructurings are princi- the process of initiating proceedings for default under the Code pally given effect to in cases wherein such entities incorporated during the period of 25 March 2020 to 25 March 2021 was in India have their business operations in such jurisdictions. suspended. However, now the suspension has been lifted and However, any such restructuring and insolvency proceedings as fresh proceedings can accordingly be initiated. regards a company incorporated in India can be recognised in The Government recently introduced an Ordinance on 4 April India only in terms of the law applicable in India. The recent 2021, providing for pre-pack schemes for corporate persons clas- matter of Jet Airways, wherein insolvency proceedings against Jet sified as micro, small and medium-sized. The same seeks to were initiated under Dutch insolvency law, had to yield way to aid small companies that suffered financial stress owing to the the proceedings against Jet Airways being commenced under COVID-19 pandemic. The Ordinance provides a calm period of the IBC. The Indian Courts, while taking cognizance of the 120 days for companies undergoing restructuring under the IBC. proceedings as initiated by Dutch Courts in the said matter, continued to exercise jurisdiction under the applicable Indian law with the direction that the Dutch Administrator be made a participant to the ongoing proceedings under the IBC. Companies incorporated in India, as a matter of common practice, do not exercise restructuring and insolvency proceedings in other jurisdictions other than to the extent of restructuring being carried on for its subsidiaries and other companies incorporated in the said jurisdiction.

Restructuring & Insolvency 2021 Dhir & Dhir Associates 99

Sachin Gupta heads the Corporate Litigation & Dispute Resolution Practice of the firm as a Senior Partner, with his 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, shareholder 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 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 practising 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 Tel: +91 11 4241 0000 D-55, Defence Colony Email: [email protected] New Delhi, 110 024 URL: www.dhirassociates.com India

A full-service law firm, Dhir & Dhir Associates was founded in 1993 to serve Key Awards & Recognition as a single-window service provider in a dynamic commercial environment. ■ The firm’s managing partners and partners have been recognised The firm pursues a philosophy of symbiotic relationships with clients and as Distinguished Practitioner(s), Leading Individual(s) and Litigation works as an integral part of the client’s team. The firm has dedicated prac- Stars by The Legal 500, Chambers & Partners, Benchmark Litigation, tice desks in New Delhi, Hyderabad, Mumbai, Japan (Rep. Off.) along with IFLR1000 and AsiaLaw Profiles up to the present day. global strategic alliances to provide legal services amongst diverse prac- ■ Alok Dhir has been featured in the ‘A-List’ of India’s Top Lawyers tice areas and industry verticals. in 2017, 2018, 2019 & 2020 by IBLJ and recognised as ‘India’s Best The Managing Partner of the firm started the practice of insolvency in Dispute Resolution Lawyer 2020’ by Asian Legal Business. He has the early ’80s when distress asset advisory was practically unknown in also been conferred with the ‘Star Performer of the Year Award’. the Indian context. The firm has been a leader for the last four decades ■ Maneesha Dhir was conferred ‘Woman Lawyer of the Year 2020 in all the legal and regulatory structures relating to resolution of corpo- Award’ by Parliamentarian Mr. Shashi Tharoor, organised by the rate insolvency including BIFR, CDR, S4A, SARFAESI, DRT and M&A in Public Diplomacy Forum. distressed assets. This experience and expertise has propelled the firm to ■ Mr. Alok Dhir was featured in Forbes India news portal, one of the become one of the leading law firms practising in corporate advisory and world’s leading media houses. representation before NCLT, NCLAT, High Courts and the Supreme Court www.dhirassociates.com of India relating to matters under the Insolvency & Bankruptcy Code 2016. The firm diversified rapidly and specialised in telecom and airport regulatory matters. The firm and its members have been ranked globally for their expertise in varied domains and continue to retain their leadership ever since. They are highly ranked in Restructuring & Insolvency, Banking & Finance, Projects, Infrastructure & Energy, Technology, Media & Telecommunications, Project Finance, Corporate/M&A and Private Equity in Chambers & Partners, The Legal 500, India Business Law Journal (IBLJ), IFLR1000, Benchmark Litigation and AsiaLaw Profiles. A highly qualified, innovative and experienced team of lawyers, char- tered accountants, company secretaries and management consultants constantly seek to achieve the highest possible standards of services to a diversified client portfolio. The firm’s members remain the backbone of the firm’s pride.

Restructuring & Insolvency 2021 100 Chapter 17 Indonesia Indonesia

Immanuel A. Indrawan

Indrawan Darsyah Santoso Eric Pratama Santoso

12 Overview If the debtor is no longer able, or has projected that it would not be able to fully pay its due and payable debts, it may consider voluntarily filing for suspension of payments or bankruptcy to 1.1 Where would you place your jurisdiction on the the Commercial Court. spectrum of debtor- to creditor-friendly jurisdictions?

Indonesia is a rather friendly jurisdiction for creditors. The 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the Indonesian Law No. 37 of 2004 on Bankruptcy and Suspension action that they can take against the company? For of Payments (“Bankruptcy Law”) provides consider- example, are there any special rules or regimes which able leverage to creditors. The relatively loose requirements apply to particular types of unsecured creditor (such as to initiate bankruptcy or suspension of payments proceed- landlords, employees or creditors with retention of title ings without having to consider the actual financial condition arrangements) applicable to the laws of your jurisdiction? of the debtor is an example of the creditor’s ascendancy. The Are moratoria and stays on enforcement available? Bankruptcy Law gives creditors significant roles to determine the results of such proceedings. It tends to be more protective Certain creditors (that may be unsecured) may influence the of the interests of the creditors. debtor’s situation, such as lessors or property owners who are entitled to terminate lease or rental agreements following 1.2 Does the legislative framework in your jurisdiction declaration of bankruptcy or suspension of payments by a allow for informal work-outs, as well as formal Commercial Court. The termination normally leads to repos- restructuring and insolvency proceedings, and to what session of leased/rented properties by said creditors. Besides extent are each of these used in practice? that, creditors with retention of title may also influence the debtor’s situation as they have rights to retain properties of the The Bankruptcy Law is silent regarding informal workouts, debtor until their claims are fully paid. but it is not uncommon for debtors and creditors to conduct There are no formal classifications of unsecured creditors. negotiations in view of reaching an out-of-court settlement and However, some of them might have specific rights subject to avoiding the last resort of filing for bankruptcy or suspension their respective terms of agreement as explained above. of payments. The Bankruptcy Law imposes a 90-day stay period during the Formal restructuring is possible in both bankruptcy and bankruptcy and suspension of payments proceedings, in which suspension of payments processes, where debtors may propose period secured creditors are also stayed from taking enforce- a composition plan to creditors. The composition plan shall be ment action. ratified by the Commercial Court subject to the agreement of a qualified majority of the creditors. 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of 22 Key Issues to Consider When the challenge? What remedies are available? Company is in Financial Difficulties Any action undertaken by a bankrupt debtor prior to the decla- 2.1 What duties and potential liabilities should the ration of bankruptcy that is detrimental to creditors will be directors/managers have regard to when managing a company in financial difficulties? Is there a specific subject to cancellation if there is proof that the bankrupt debtor point at which a company must enter a restructuring or and its counterparty were aware or reasonably should have been insolvency process? aware that such action would be detrimental to the creditors. Unless proven otherwise, the bankrupt debtor and its counter- The board of directors must conduct its fiduciary duties in party are deemed aware or should have been aware that an action managing the company, which also include raising funds to taken within one year prior to bankruptcy declaration is detri- relieve the financial difficulties. When the company has a nega- mental to the creditors if it meets any of the following criteria: tive balance, it would presumably be more difficult to obtain (a) The bankrupt debtor was not legally required to perform new third-party loans, hence in such situation the apparent such action. options in view of salvaging the company would be to: (i) seek (b) The action is related to an agreement where the bankrupt for an additional capital injection or loan from the shareholders; debtor’s obligations are disproportionately much bigger or (ii) offer a debt-to-equity swap to its creditors. compared to those of its counterparty.

Restructuring & Insolvency 2021 Indrawan Darsyah Santoso 101

(c) The action is a payment or grant of security for debts that Any dissenting creditor may also challenge the ratification of are yet to be due and payable. the composition plan at the Commercial Court. However, said (d) In the case where the bankrupt debtor is an individual, objection can only be submitted on the following limited stat- the action was done for the interest of his/her family utory grounds: members/relatives or affiliated companies. (a) the value of the debtor’s estate is significantly higher than (e) In the case where the bankrupt debtor is an entity/ the amount agreed under the composition plan; company, the action was done for the interest of direc- (b) there is not enough certainty that the composition plan tors, commissioners, shareholders, controllers and/or their would be implemented successfully; family members as well as relatives. (c) the settlement is reached through fraud, conspiracy or (f) In the case where the bankrupt debtor is an entity/ deceit between the debtor and the creditor(s); and/or company, the action was done for the interest of other (d) fees and disbursements of experts and administrator(s) companies affiliated with it or within the same group of have not been paid or there is lack of guarantee of such companies. payment. Payment for a due and payable debt may also be cancelled upon the occurrence of the following conditions: (a) there is proof that the relevant creditor is aware that a 3.3 What are the criteria for entry into each bankruptcy petition against the debtor had been filed restructuring procedure? when the payment was made; or (b) the payment is a conspiracy between the bankrupt debtor A restructuring, which under the Bankruptcy Law is recognised and certain creditors for the latter’s sole benefit above the as a suspension of payments, can be initiated by: (i) the debtor, interest of other creditors. provided it has more than one creditor and it is no longer able Cancellation of the actions (actio pauliana) mentioned above or, has projected that it would not be able to fully pay its debts; can be done through the filing of a claim by the court-appointed or (ii) the creditor (either unsecured, secured, or preferred credi- receiver to the relevant Commercial Court. tors). Only the relevant government authority is entitled to file a petition for a suspension of payments when the debtor is one of 32 Restructuring Options the following: banks; securities companies; insurance and reinsurance companies; pension funds; or state-owned enterprises 3.1 Is it possible to implement an informal work-out in engaged in the public interest sector. your jurisdiction?

3.4 Who manages each process? Is there any court The Indonesian regulatory framework is silent on the possibility involvement? of informal workouts, but in practice these are implemented, especially when the debtor still has commercial viability. The Commercial Court appoints one or more administrators who, together with the debtor, shall manage its assets throughout 3.2 What formal rescue procedures are available temporary suspension of payments. The joint management of in your jurisdiction to restructure the liabilities of administrator and debtor is supervised by a court-appointed distressed companies? Are debt-for-equity swaps supervisory judge with the aim of getting the debtor through and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures the 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 composition to cram-down dissenting stakeholders? Can you cram- plan by the Commercial Court or if the debtor entered bank- down dissenting classes of stakeholder? ruptcy proceedings where 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 debtors or creditors in case a debtor is have on existing contracts? Are the parties obliged to unable or has projected that it would not be able to fully pay its perform outstanding obligations? What protections 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 The suspension of payments will mainly affect existing contracts in suspension of payments is expected to submit a composition that oblige a debtor to make payments. Such payment obliga- plan to the creditors for their deliberation. In such composition tions shall be suspended pending conclusion of the suspen- plan, the debtor may propose debt-for-equity swaps. Indonesian sion of payments proceedings. Additionally, any enforcement laws do not specifically regulate pre-packaged sales although it is action already initiated by a creditor for repayment of debt will possible to propose such, provided they can maximise the debt- be stayed until after conclusion of the suspension of payments or’s estate so that debt restructuring is more feasible. proceedings. Both secured and unsecured creditors objecting to the composition plan may use their rights to vote against it. Unsecured Provisions of existing contracts remain valid and binding, but creditors that are against the composition plan would be the debtor will need approval from the court-appointed admin- crammed down if most of the creditors give their approving vote istrator to perform obligations that might have a detrimental and the Commercial Court ratifies the plan. On the other hand, effect on its estate. dissenting secured creditors are still entitled to be compensated In cases of contracts entered into prior to suspension of with the lowest value of the security object or actual value of the payments proceedings and the parties have yet to perform or secured debt. have only partially performed their obligations, the debtor’s

Restructuring & Insolvency 2021 102 Indonesia

counterparty may seek whether the administrator will continue A company can also be placed into a bankruptcy procedure performance in a timeframe mutually agreed with the adminis- after it has gone through a suspension of payments process but trator, or if such agreement could not be reached, in a timeframe failed to reach a restructuring due to any of the following: determined by the supervisory judge. (a) the company submitted a composition plan but it was If the administrator fails to respond or is not willing to rejected by the creditors; continue performance, the contract will be terminated, and the (b) the company did not submit a composition plan; or counterparty is entitled to claim for compensation as an unse- (c) the company did submit a composition plan that was cured creditor in the suspension of payments proceedings. The agreed by the creditors, but the Commercial Court refused Bankruptcy Law also provides specific consequences applicable to ratify it. to contracts involving the delivery of goods or rental by debtors. When the termination clause in a contract provides that the 4.3 Who manages each winding up process? Is there counterparty may unilaterally terminate the contract upon the any court involvement? debtor being declared under suspension of payments (or suspension of payments petition is filed against the debtor), such right Specifically in the context of insolvency, winding up (dissolu- to terminate should be upheld but any pre-agreed compensation tion and liquidation) of a debtor is initiated on the following payable as a result of the termination would have to be brought occasions: as unsecured claim in the suspension of payment proceedings. (i) if the debtor, after having been declared bankrupt, is in Set-off may be done during suspension of payments proceed- insolvent condition. In this case the court appoints the ings, provided that: (i) the claim and the debt had existed prior receiver as liquidator; or to commencement of the suspension of payments proceedings; (ii) if the bankruptcy of the debtor is lifted by virtue of final or (ii) the debt and the claim occur as a result of transaction or and binding court decision and the bankruptcy estate is legal act committed prior to the commencement of the suspen- insufficient to even pay for the bankruptcy costs. In this sion of payment proceedings. A debt or claim taken over by case the shareholders will appoint the liquidator. a third party can only be set off if it was taken over in good faith prior to commencement of the suspension of payments proceedings. 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 3.6 How is each restructuring process funded? Is any the enforcement of security)? protection given to rescue financing? If the winding up is voluntary, shareholders have the key influ- The suspension of payments process, which includes all ence, while creditors can merely file a claim against the company expenses incurred during the proceedings (e.g. making news- in liquidation. The shareholders will have to initiate the volun- paper announcements, organising creditors’ meetings, etc.) and tary winding-up process by adopting resolutions approving the the administrator’s fees, is funded by the debtor. dissolution and liquidation of the company as well as appoint- On rescue financing, the Bankruptcy Law allows the debtor ment of the liquidator. From that point on, the liquidator will to secure additional financing from any third party only for manage the process and, upon its conclusion, provide a final the purpose of increasing the value of its estate. If the lender liquidator report for the shareholders’ approval. requires security for the loan, the debtor may provide any of its If the winding up is compulsory, the shareholders’ influence unencumbered assets as collateral. is very minimal unless they are willing to inject additional funds It is important for the debtor to maintain that its estate is into the company. In a compulsory winding-up process, the sufficient for the restructuring. If the suspension of payments liquidation process will be led by the court-appointed liquidator. fails to reach a restructuring, the debtor would immediately be declared bankrupt, but the bankruptcy proceedings can only 4.5 What impact does each winding up procedure have take place if there is sufficient estate. on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off 42 Insolvency Procedures provisions be upheld?

4.1 What is/are the key insolvency procedure(s) Declaration of bankruptcy by the Commercial Court does not available to wind up a company? automatically terminate existing contracts except as agreed otherwise by the parties. The counterparty in a contract that Under Indonesian law, the key insolvency procedure available to has not been performed or has been partially performed may wind up a company is the bankruptcy procedure. ask the court-appointed receiver for assurance on the continuance of such contracts within a certain agreed timeframe. The supervisory judge shall determine such timeframe if the parties 4.2 On what grounds can a company be placed into failed to reach an agreement. If the receiver fails to respond or is each winding up procedure? not willing to continue performance, the contract will be terminated, and the counterparty is entitled to claim for compensa- A company established and/or existing in Indonesia can be tion as an unsecured creditor. If the receiver agrees to fulfil the declared bankrupt by the Commercial Court if it can be summarily contracts, then the receiver must provide a guarantee for such proven that the company has at least two outstanding debts and fulfilment. Note that the foregoing provisions are not applicable one of them is due and payable. Any creditor or the company to contracts containing obligations that must be performed by itself may initiate the bankruptcy procedure if such requirements the bankrupt debtor itself. are satisfied. Any contract concerning delivery of commercial goods by the debtor shall be null and void once the debtor is declared

Restructuring & Insolvency 2021 Indrawan Darsyah Santoso 103

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

4.7 Is it possible for the company to be revived in the 7.3 Do companies incorporated in your jurisdiction future? restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? It is possible to revive/rehabilitate a bankrupt company if any of the following conditions are met: The Bankruptcy Law is silent on the possibility of an Indonesian (a) the company submits a composition plan in the bank- company entering into restructuring or insolvency proceedings ruptcy proceedings, which is agreed on by the creditors in other jurisdictions. In the event that an Indonesian company then ratified by the Commercial Court. The ratification has a significant presence and operations in other jurisdictions, legally ends the bankruptcy; or the possibility for it to enter into restructuring or insolvency (b) all creditors’ claims have been satisfied. In this case the proceedings elsewhere is subject to the insolvency law of such creditors might not receive payment in full for their claims. jurisdictions. Once the relevant creditor agrees on the payment amount (which may be in full or proportionately), said creditor is not allowed to submit a new claim for the unpaid portion.

Restructuring & Insolvency 2021 104 Indonesia

82 Groups 92 COVID-19

8.1 How are groups of companies treated on the 9.1 What, if any, measures have been introduced in insolvency of one or more members? Is there scope for response to the COVID-19 pandemic? co-operation between officeholders? The Supreme Court of the Republic of Indonesia issued Circular Under the Bankruptcy Law, the premise is that a bankruptcy or Letter No. 1 of 2020 on the Guideline for the Implementation suspension of payments petition can only be filed against one of Duties during the Period of Preventing the Spread of Corona non-performing debtor. When there is more than one insolvent Virus Disease (COVID-19) within the Supreme Court and the company within the same group, the creditors will have to file Lower Courts, as lastly amended by Circular Letter No. 5 of their petitions separately for each company (considering each of 2020 (“Circular Letter”). them is a separate legal entity). The Circular Letter allows judges to extend the period of If the insolvent debtor is a parent/holding company of a court proceedings for cases whose timeframe is statutorily regu- corporate group by way of shares ownership, then the parent lated. Although the Circular Letter is not specifically intended company’s shares ownership in its subsidiary companies and for bankruptcy and suspension of payments proceedings, such undistributed dividends therefrom will be held as part of the relaxation may also extend the timeframe of bankruptcy and parent company’s bankruptcy estate. suspension of payments proceedings, which are restricted under In a case where a company is acting as a guarantor for another the Bankruptcy Law. company’s debt, either within the same group of companies or Apart from that, albeit not clearly regulated, there is also not, bankruptcy or a suspension of payments petition can also a precedent of a virtual creditors’ meeting in a suspension of be filed against the non-performing guarantor. payments process, held online. Such meeting is normally held physically in a court building.

Note This chapter provides basic information only and must not be regarded as an analysis of the subject covered, nor be treated as a substitute for legal advice.

Restructuring & Insolvency 2021 Indrawan Darsyah Santoso 105

Immanuel A. Indrawan is a litigation attorney who oversees the commercial dispute resolution practice of the firm. He has acted and defended Indonesian and international clients at all levels of trial from the first instance to the top appellate Indonesian courts in various commercial and business 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 a local goldmine company. Immanuel is also 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 parties on both sides 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 debtors or creditors 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 law firm both contentious and non-contentious. It is always our goal at IDS to that consistently provides direct accessibility, a client-focused approach, provide comprehensive legal advice and a problem-solving approach to all as well as timely and insightful advice to its clients. We commit to listen facets of our clients’ business in Indonesia. and evaluate all details necessary to provide our clients with the best www.idsattorneys.com sensible solution in an efficient and effective manner. Our key trait would be our versatility in handling both corporate and litigation matters. Our lawyers’ complementing backgrounds (corporate and litigation) enable us to provide clients with a one-stop service, where we work with each other and consider various legal aspects surrounding every issue. We are able to work seamlessly in a global environment and relish the opportunity to assist in the most complex and challenging legal matters,

Restructuring & Insolvency 2021 106 Chapter 18 Ireland Ireland

Frank Flanagan

Mason Hayes & Curran Judith Riordan

12 Overview Formal restructuring There are three types of formal restructuring available in Ireland: arrangements binding on creditors; examinership (akin 1.1 Where would you place your jurisdiction on the to Chapter 11); and schemes of arrangement (similar to English spectrum of debtor- to creditor-friendly jurisdictions? schemes). Although the total number of companies availing of exam- Ireland’s corporate insolvency regime has generally been inership remains relatively low, to date it is more widely used regarded as creditor-friendly. In particular, as regards enforce- than schemes of arrangement, although the trend is gradually ment by secured creditors, once a right to appoint has arisen changing. under the security, a receiver can be appointed without any formalities other than executing a deed of appointment. There Winding up is no court involvement at all in a receivership, absent a dispute. There are two types of insolvent liquidation: However the courts are assiduous in protecting the rights of ■ creditors’ voluntary liquidation (“CVL”), where the insol- debtor companies and procedural slips can result, for instance, vent company initiates the process; and in the removal of receivers. ■ court or official liquidation, which is initiated by petitioning the court. 1.2 Does the legislative framework in your jurisdiction Although the company itself can petition the court, more allow for informal work-outs, as well as formal often than not the CVL process is utilised. restructuring and insolvency proceedings, and to what The court process is typically although not exclusively extent are each of these used in practice? commenced by a creditor.

There is a range of options available in Ireland, both formal and 22 Key Issues to Consider When the informal, with differing effects, costs and benefits. Company is in Financial Difficulties

Informal work-outs 2.1 What duties and potential liabilities should the Temporary forbearance or alteration of terms by lenders has directors/managers have regard to when managing a always been, and continues to be, the most commonly used company in financial difficulties? Is there a specific mechanism, where fundamentally sound businesses suffer unex- point at which a company must enter a restructuring or pected difficulties. insolvency process? After the 2008 financial crisis, the appointment of a receiver to realise secured assets was very widely used, in circumstances Once it is clear that a company cannot pay its debts, the directors: where the value of much of the security had fallen significantly ■ owe a fiduciary duty to the general body of creditors and was seen as unlikely to recover in any reasonable timeframe. and may not make payments that benefit either closely However, COVID-19 has changed the position considerably connected companies or themselves; and many essentially sound businesses have effectively been ■ cannot make a payment that would amount to an unfair stopped from trading for just over a year. A large number of such preference of one creditor over another, without the risk businesses have already benefitted from a degree of forbearance that it will be reversed in winding up or that they will be from landlords and banks, and we envisage that once clarity on personally liable; and the timing of a return to normality emerges, they are likely to ■ owe a duty to wind up the company. benefit from more structured informal restructuring. However, the courts have held that the duty to wind up does, Informal restructuring of debt can be accomplished either by of course, depend on all the circumstances of the case and there simple negotiation with one or two key creditors, or by agree- may well be appropriate instances where, at least for a period ment with all creditors. of time, it may be appropriate to postpone winding up pending While not technically an informal work-out process, through attempts to deal with the issues that arise by virtue of the receivership it is possible to restructure businesses (by way of a insolvency. pre-pack receivership), in which the sale of a distressed compa- There is a nebulous zone of financial difficulty before a ny’s assets and business can be negotiated before it enters into company is clearly unable to pay its debts, commonly known as receivership and executed shortly after the receiver is appointed. “the twilight zone”. The courts have held that it is not in the interests of the community that a company ceases trading whenever it

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appears there is a significant risk that it will become unable to pay fall due, may be deemed invalid if made with a view to prefer- its debts. To make a finding of reckless trading, the court must ring one creditor over another where the relevant transaction determine that a director knew or ought to have known that his was entered into within six months of the company going into actions or those of the company would cause loss to creditors. insolvent liquidation. In this context, the courts have taken the view that “loss” does This six-month look-back provision is extended to two not include a minimal loss or a minimal percentage increase in years prior to the winding up if the preference is in favour of a an inevitable loss. Therefore, even where a company is insol- connected creditor. vent it may continue to trade, with limited risk to the directors, provided the directors cause no or minimal further loss to Fraudulent disposition of property the creditors and they reasonably believe that the company can A liquidator or creditor can seek the return of property where recover financially. the disposal of the property had the effect of defrauding the The courts also accept that business decisions are made at a company, its creditors or members. There is no need to prove point in time and such decisions are usually not assessed by a any intent to defraud. The effect of the disposal is what is rele- court with the benefit of hindsight once they are made in an vant, and there is no temporal limitation on the lookback period. informed and prudent way. Accordingly, once a company is verging on insolvency, its Invalidity of certain floating charges directors need to manage the business of the company carefully, A floating charge can, in certain circumstances, be declared with the benefit of up-to-date management accounts and profes- invalid if created within 12 months of the commencement of a sional advice. winding up. This does not apply to the extent that new money was actually advanced. This is extended to two years where the charge is in favour of a connected person. 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 Remedies example, are there any special rules or regimes which Apart from invalidating the transactions, the court may impose apply to particular types of unsecured creditor (such personal liability on directors where a company is in insolvent as landlords, employees or creditors with retention liquidation and the company and directors unfairly preferred of title arrangements) applicable to the laws of your creditors or fraudulently disposed of assets of the company. jurisdiction? Are moratoria and stays on enforcement available? 32 Restructuring Options An automatic stay on enforcement comes into effect on the 3.1 Is it possible to implement an informal work-out in appointment of an examiner and, separately, a stay can be sought your jurisdiction? from the court to permit the implementation of a scheme of arrangement. Other than that: It is possible to implement an informal work-out in Ireland. ■ secured creditors can appoint a receiver once the condi- Informal restructuring work-outs are implemented by agree- tions enabling them to do so have arisen in accordance ment between a company and one or more of its creditors. with the terms of their security; and One significant disadvantage of an informal work-out agree- ■ retention of title creditors can retrieve their goods in ment is that a company is vulnerable to creditor action while the accordance with the terms of their contracts. work-out is being negotiated. The automatic stay on such action In relation to aviation, Ireland has adopted Alternative A to in an examinership is one of the key advantages of that process the Cape Town Convention. This requires the debtor to deliver over an informal work-out. up the aircraft on the occurrence of an insolvency event no later than 60 days after an uncured default and to preserve the aircraft 3.2 What formal rescue procedures are available and its value in the interim. This overrides Irish domestic insol- in your jurisdiction to restructure the liabilities of vency law. distressed companies? Are debt-for-equity swaps In restructuring there is nothing to compel a supplier to and pre-packaged sales possible? To what extent can continue to provide goods or services to an insolvent business. creditors and/or shareholders block such procedures Accordingly, it is not uncommon for certain creditors, whose or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you goods and services are necessary, to be treated as distress cred- to cram-down dissenting stakeholders? Can you cram- itors and to be paid some or all of the pre-appointment debt. down dissenting classes of stakeholder?

2.3 In what circumstances are transactions entered There are three formal rescue procedures available: into by a company in financial difficulties at risk of ■ arrangements binding on creditors; challenge? What remedies are available? ■ examinership; and ■ schemes of arrangement. As part of a liquidator’s investigation, he/she will assess trans- Each requires a different level of creditor approval and each actions entered into by the company prior to the date of liqui- allows for cram-down of dissenting creditors. dation and determine the validity of these transactions. There Debt-for-equity swaps are sometimes used. are various actions that may be taken by a liquidator that could While pre-packaged sales do occur in Ireland, there is no result in a particular transaction being set aside. current legislative basis for a pre-packaged sale.

Unfair preferences Arrangements binding on creditors Under Irish company law, a wide range of transactions entered An arrangement binding on creditors permits the affairs of a into at a time when the company is unable to pay its debts as they company in, or about to be in, liquidation to be compromised

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with a vote of 75% of the members and 75% in number and 3.4 Who manages each process? Is there any court value of the creditors. It then binds all creditors. It can be involvement? achieved without recourse to the courts but can be appealed to the courts by an aggrieved creditor within 21 days. Arrangements binding on creditors Such arrangements are usually company led but typically Examinership designed by an insolvency practitioner engaged by the insolvent Examinership is an Irish court-supervised rescue process company, with the assistance of legal advisors. lasting a maximum period of 100 days (or 150 days during the There is no court involvement unless the arrangement is COVID-19 pandemic as a result of emergency legislation), challenged. during which the company is insulated from creditor action. The examiner reviews the financial position of the company and, where feasible, formulates proposals for a scheme to Examinership The examinership process is commenced by way of a petition ensure the survival of the company and all or part of its under- and is supervised at all stages by the court. Once appointed, taking as a going concern. The proposals for a scheme typi- the examiner controls the examinership process but usually does cally provide for a write down of debt across various classes of creditors, including secured creditors, in conjunction with fresh not take executive control of the distressed company. investment. The fresh investment may be from existing stakeholders or third parties who have had no prior involvement with Schemes of arrangement the company. Where a number of parties express an interest in Schemes of arrangement are generally company led, but an insol- investing in the company, the examiner may select whichever vency practitioner, supported by lawyers, almost invariably runs party he believes will offer the greatest prospect for the compa- the process. Schemes must be sanctioned by the court, which ny’s survival as a going concern. has discretion in making this decision. Once a scheme has been Creditors are divided into classes to vote on the proposed sanctioned, it will bind both assenting and dissenting creditors, scheme. The members of a class must have interests that are and can take a wide variety of legal effects, including the impair- reasonably similar; typical classes would include connected ment and variation of debts. creditors, secured creditors, unsecured creditors, etc. The scheme must be approved by at least one class of credi- 3.5 What impact does each restructuring procedure tors and can then be put to the court for approval. Any creditor have on existing contracts? Are the parties obliged to may oppose the scheme on the basis that it is unfairly prejudicial perform outstanding obligations? What protections to it. While not absolute, in general terms the test is whether the are there for those who are forced to perform their creditor is achieving more under the proposed scheme than they outstanding obligations? Will termination and set-off would do in an insolvent winding up. provisions be upheld? Examinership is broadly equivalent to Chapter 11 in the United States and somewhat similar in terms of its objectives to The impact that a restructuring procedure has on contracts will administration in the United Kingdom. largely depend on the contract itself and the type of restructuring procedure. However, it is normal to find contract provi- Schemes of arrangement sions that trigger termination or the right to terminate on insol- A scheme of arrangement is a court-approved compromise or vency and/or entry into examinership. arrangement between a company, its creditors and/or share- In an examinership, onerous contracts can be repudiated holders that can be used to effect a broad range of compromises as a whole, with the sanction of the court. The terms of such or arrangements, including solvent corporate re-organisations, contracts cannot be varied or amended by the court. Therefore, mergers or de-mergers and insolvent restructurings. any alteration to the terms of a contract that the company wants to retain in an amended form must be agreed consensu- 3.3 What are the criteria for entry into each ally, against the backdrop that the contract could be repudiated. restructuring procedure? Commercially, this works very effectively for a company with a number of leased premises, for example, as a landlord has a choice to accept a variation to the lease or risk vacant premises. Arrangements binding on creditors There are strict rules on the enforceability of guarantees in To avail of this process, the company must be: an examinership. Secured creditors intending to rely on guar- ■ about to be wound up; or antees must be vigilant in transferring voting rights in respect ■ in the course of being wound up. of the proposed scheme to the guarantor in a timely manner to preserve the validity of their guarantees. Examinership Where a company is in examinership, set-off provisions will Examinership is commenced by a petition to court to appoint an be upheld and can be applied. examiner. The court must be satisfied that: Arrangements binding on creditors have no effect on existing ■ the company is insolvent or imminently insolvent; contracts, but entering into a compromise with creditors is typi- ■ no resolution has been passed, nor any court order made, cally an event that allows counterparties to terminate. to wind up the company; and ■ s there i a reasonable prospect of survival of the company and all or part of its undertaking as a going concern. 3.6 How is each restructuring process funded? Is any If a receiver stands appointed for more than three days, the protection given to rescue financing? court cannot appoint an examiner. The costs and expenses of examinership are usually explicitly Schemes of arrangement provided for in the scheme proposed by the examiner and, if A scheme of arrangement can be initiated by the company at any the company ends up being wound up, will rank in priority. At time and there is no necessity that the company be insolvent to a practical level, the costs of the process are typically funded by avail of a scheme. the investor.

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Arrangements binding on creditors and schemes of arrange- It is important to note that where the security is a floating ment may be funded by the company but are often funded by the charge, the expenses of a liquidator as well as any preferential promoters of the scheme, with the scheme itself providing for creditors must be discharged in priority to the secured creditor. the costs to be discharged. As regards rescue funding, an examiner can certify certain 4.5 What impact does each winding up procedure have expenses, which will ensure they are paid in priority in any on existing contracts? Are the parties obliged to perform subsequent winding up. outstanding obligations? Will termination and set-off provisions be upheld? 42 Insolvency Procedures This will largely be influenced by the terms in the relevant 4.1 What is/are the key insolvency procedure(s) contract. Many contracts include a term that an insolvency available to wind up a company? event gives the counterparty the right to terminate the contract. If a liquidator believes any contracts are unduly onerous, he/ There are two procedures available to wind up an insolvent she can apply to the court for an order giving him/her power to company. The most common is a CVL. Somewhat less common disclaim that contract. Equally, the other party to that contract is court, or official winding up. can call on the liquidator to decide whether or not he or she is disclaiming that contract by applying in writing to the liquidator. Following this, the liquidator has 28 days to make a deci- 4.2 On what grounds can a company be placed into sion in relation to that contract. each winding up procedure? Where a company is in liquidation, creditors may exercise contractual or insolvency set-off. A CVL is initiated by an ordinary resolution of the members that At a practical level, many contracts are breached as a result the company cannot continue to trade by reason of its liabilities. of liquidation but, as any claim for loss or damage will result in An official liquidation is initiated by a petition to the High an unsecured claim against the company, it is often not of any Court, most commonly on the basis that the company is material significance where there is a deficit in funds available unable to pay its debts. There are a range of less commonly for creditors. used grounds, including that it is it just and equitable that the company be wound up. 4.6 What is the ranking of claims in each procedure, including the costs of the procedure? 4.3 Who manages each winding up process? Is there any court involvement? The first point to make is that secured creditors holding fixed charges, retention of title claims and title to goods held on trust Each of the winding up processes is managed by the liquidator. fall entirely outside the pool of assets in an insolvent liquidation. In both official liquidations and CVLs, the liquidator and any While there are many nuances, broadly creditors rank in creditor can apply to the court to determine any issue arising in the following order of priority in respect of the distribution of the winding up. monies available from the realisation of company assets: The High Court plays a supervisory role in official liquida- (i) the costs and expenses of an examiner, if one was appointed tions, but this supervision has been significantly reduced in before the winding up was commenced; recent years. Many of an official liquidator’s powers can only be (ii) the costs and expenses of the liquidation; exercised with the sanction of the court or the court-appointed (iii) preferential creditors, including certain payments to committee of inspection. employees and the state; In a CVL, the liquidator will generally have more freedom in (iv) floating charge holders; the exercise of his/her powers. A CVL is often supervised by a (v) unsecured creditors; and committee of inspection or, where no committee is formed, the (vi) if there is any surplus, members. company’s creditors.

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 the enforcement of security)? It is possible, in limited circumstances, to revive a company for up to 20 years from the date of its dissolution. In a CVL, the liquidator is initially nominated by the members. However, the creditors may, by simple majority, replace the 52 Tax members’ nominee. The creditors may also appoint a committee of inspection to oversee the conduct of the liquidation. A cred- 5.1 What are the tax risks which might apply to a itor can also bring an application for directions to the High Court restructuring or insolvency procedure? where that creditor is dissatisfied with the conduct of a liquidation. A petitioning creditor in an official liquidation is entitled to Strictly speaking, the commencement of insolvency proceed- nominate the liquidator. ings does not give rise to a tax liability; however, tax liabilities The rights of secured creditors are generally unaffected by a will continue to be incurred in the usual way in an insolvency liquidation of a company. It is open to a secured creditor to or restructuring procedure. In liquidation or receivership, the appoint a receiver over the secured assets, or it may be satis- liquidator or receiver will register for tax. fied for the liquidator to realise the secured assets for its benefit. Revenue liabilities in a receivership or liquidation will be dealt However, generally, secured creditors tend to appoint a receiver with in the same way as other liabilities and are likely to have in these circumstances. preferential status.

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In an examinership, similar to the company’s liabilities to relatively tenuous links to Ireland under the Brussels Recast other creditors, its liabilities to the Revenue Commissioners can Regulation (for instance, Nordic Aviation Capital DAC). They be reduced as part of the scheme of arrangement approved by have been recognised at common law in the UK and under the court. However, it is important to note that a court will Chapter 15 in the US. not approve the scheme if it is unfairly prejudicial to a creditor, More generally, in light of the Recast Insolvency Regulation, including the Revenue Commissioners. companies with their centre of main interests in Ireland can be The tax consequences of informal restructuring will be wound up in Ireland, irrespective of their place of incorporation. fact-specific and advice should be sought on a case-by-case basis. In particular, debt reduction or write off may give rise to a tax liability for the beneficiary of the write off. 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your 62 Employees jurisdiction?

6.1 What is the effect of each restructuring or The Recast Insolvency Regulation also requires mandatory insolvency procedure on employees? What claims would recognition of relevant insolvency proceedings in other EU employees have and where do they rank? Member States, which can offer particular comfort to local directors of companies in an EU group restructuring. Care should be taken in any insolvency process to comply with If the proceedings are not recognised by the Irish Courts auto- the statutory requirements for consultation in relation to collec- matically, the insolvency office holder (e.g. liquidator, receiver, tive redundancies. and administrator) can make an application to the Irish High Court for an order recognising the proceedings. Proceedings Compulsory liquidation can be recognised at common law but not necessarily to the In a compulsory liquidation, a court order for the winding up of detriment of creditors in the State. a company usually constitutes a notice of dismissal of the compa- Ireland has not adopted the UNCITRAL Model Law on ny’s employees, to commence on the date of the order, and has Cross-Border Insolvency. the effect of terminating employment contracts. However, if the liquidator retains employees on the same terms and conditions as the original contract, the effect of the court order can 7.3 Do companies incorporated in your jurisdiction be waived so that the original contract is deemed to continue. restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? A liquidator may require certain contracts of employment to continue for a limited period or may decide to operate and sell the business as a going concern. This is not common practice. That said, groups of companies with a US connection do, from time to time, avail of Chapter Creditors’ voluntary liquidations 11 in the US, and occasionally groups of companies avail of UK By contrast, employment contracts are not automatically termi- restructuring. nated where a liquidator is appointed in a CVL or in a members’ As noted above, in examinership, while contracts (including voluntary winding up. However, it can often involve fairly leases) can be repudiated, their terms cannot be amended. prompt redundancies, as the company more often than not will Accordingly, where companies are restructured in the UK and cease trading. the restructuring purports to amend the terms of leases, the Irish Courts may not recognise such amendments. Receivership The appointment of a receiver will not automatically terminate employment contracts. 82 Groups

Examinership 8.1 How are groups of companies treated on the Employees’ contracts are not generally terminated in an exam- insolvency of one or more members? Is there scope for inership as its purpose is to enable enterprises to survive for the co-operation between officeholders? benefit of the economy as a whole and to preserve employment. An Irish company will, typically, be dealt with as a separate legal Transfer of business entity. There is no automatic or statutory effect on any related Where a transfer is effected or proposed to be effected of the busi- company as a result of the insolvency of one entity. ness of the company in liquidation, the employees’ and employer’s Irish law provides for certain asset-swelling measures that liabilities to its employees may under the European Communities impact related companies. In that regard, it is possible to apply (Protection of Employees on Transfer of Undertakings) for: Regulations 2003 (S.I. No. 131 of 2003) (“ ”) automati- TUPE ■ a contribution order, which requires a company related to cally transfer to the purchaser. Certain TUPE rules are varied the company being wound up to make a contribution to in insolvency and the factual position should be considered on a the debts in the winding up; or case-by-case basis. ■ a pooling order, where the court may, if it believes it is just 72 Cross-Border Issues and equitable to do so, order two or more related companies to be wound up together as if they were one company. The court also has jurisdiction to appoint an examiner to 7.1 Can companies incorporated elsewhere use a related company in circumstances where the examiner is restructuring procedures or enter into insolvency proceedings in your jurisdiction? appointed and it would be likely that the examinership of the related company will assist in the survival of the company or the related company. Schemes of arrangement fall outside of the EU Recast Insolvency Regulation but have been used for groups of companies with

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92 COVID-19 There is also a consultation ongoing at present on a small company rescue process with potentially no court involvement: https://enterprise.gov.ie/en/News-And-Events/Department- 9.1 What, if any, measures have been introduced in News/2021/February/02010208b.html. This is not a pandemic response to the COVID-19 pandemic? reaction as such, but its importance has been highlighted by the potential effects of the pandemic. The Companies (Miscellaneous Provisions) (Covid-19) Act 2020 (the “Act”) commenced on 21 August 2020 introduced (amongst others) the following amendments that are relevant to insolvency processes during the COVID-19 crisis: ■ creditors’ meetings can be held remotely; ■ the level of debt to ground a winding up petition was increased to €50,000 (from €10,000 for a single creditor and €20,000 for creditors acting together); and ■ an extension of the period of examinership from 100 to 150 days.

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Frank Flanagan is a Partner in the Dispute Resolution team at Mason Hayes & Curran. Frank advises a wide range of clients in relation to commercial disputes, insolvency and restructuring, and communications regulation. Prior to joining our team, Frank had a 20-year career in the communications and computer hardware industries, culminating as Chief Technical Officer of a technology start-up where he was deeply involved in raising significant venture capital funding and in technology licensing/transfer to a Fortune 100 company.

Mason Hayes & Curran Tel: +353 1 614 5250 Barrow Street Email: [email protected] Dublin 4, D04 TR29 URL: www.mhc.ie Ireland

Judith Riordan primarily advises on insolvency and financial restructuring matters, together with all related litigation. She has broad experience advising and protecting the interests of all stakeholders in formal insolvency processes including examinership, liquidation, receivership and bankruptcy. She routinely represents insolvency office-holders (both in court and out of court) and also advises companies and their officers in relation to solvency issues at a time when decision-making is critical. In addition to advising troubled businesses and office holders, Judith frequently advises secured creditors and senior lenders, financial institutions, trade creditors and investors in formal insolvency processes and informal work-out arrangements. She has experience advising both domestic and international clients in cross-border cases. Judith also has extensive experience of insolvency-related litigation. Judith is admitted as an attorney in New York and as a solicitor in Ireland. She is a council member of the Irish Society of Insolvency Practitioners and a member of the International Women’s Insolvency and Restructuring Confederation.

Mason Hayes & Curran Tel: +353 1 614 5201 Barrow Street Email: [email protected] Dublin 4, D04 TR29 URL: www.mhc.ie Ireland

Mason Hayes & Curran is a full-service business law firm providing strategic business and commercial legal advice in Ireland. We have offices in Dublin, New York, San Francisco and London, four of Ireland’s most important conduits for inward investment to Ireland. We understand the challenges domestic and international organisations face in business. We have comprehensive knowledge of issues involved in investing and locating in a foreign country. As a business law firm, we have over 95 partners and total staff in excess of 500. We assist domestic and international clients from and during initial establishment and in meeting their ongoing legal and commercial imperatives through every business lifecycle. Corporate social responsibility is a natural fit with the way we do business. We invest in our society and communities through a range of focused programmes. www.mhc.ie

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Israel Israel

Adv. Aaron Adv. Yehuda Michaeli Rosenthal

Adv. CPA Asher Goldfarb Seligman & Co. (Ashi) Engelman Adv. Inbar Tal

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 The Insolvency and Economic Rehabilitation Law, 5778-2018 directors/managers have regard to when managing a company in financial difficulties? Is there a specific (hereinafter: the “ ”), which has applied in Israel since Law point at which a company must enter a restructuring or September 2019, states that its purpose and goal is to arrange insolvency process? the repayment of debt of a debtor that is or could be in a state of insolvency in order to achieve the following goals: (1) to lead, to the extent possible, to the economic rehabilitation of the debtor; The Law imposes liability on directors and officers of the (2) to increase the percentage of debt repaid to the creditors; and debtor – both for fraudulent management of a corporation (3) regarding an individual debtor – to promote his reintegration and for failure to take reasonable steps to minimise insol- in the fabric of economic life. The legislator’s approach is that vency. With respect to the second type of liability, if the direc- insolvency is not per se a wrongdoing of the debtor, but a real- tors and officers prove that they relied in good faith on infor- isation of a risk inherent in participation in the credit market, mation according to which the corporation is not insolvent, or which increasingly is becoming more developed and advanced. that they took one of the following steps – receiving assistance For this reason, the Law prioritises the recovery of the debtor from experts on corporate restructuring, conducting negotia- over its liquidation. That said, especially with respect to corpo- tions with the corporation’s creditors to reach a debt restruc- rations, the courts see the main purpose of insolvency proceed- turing agreement or commencing insolvency proceedings – no ings, including the rehabilitating of the debtor, to be achieving liability will be imposed on them. If the directors or officers are the maximum benefit for its creditors, and therefore the creditors found liable for fraud or negligence, they can be liable for the have a major say in the process and its outcome. Considering the debts incurred by their actions. Furthermore, it they fail to act above and considering the general attitude of the Israeli courts according to the provisions of the Law, the court can impose on towards insolvency proceedings, Israel stands in the middle them all the corporation’s debts. between creditor-friendly and debtor-friendly jurisdictions. 2.2 Which other stakeholders may influence the 1.2 Does the legislative framework in your jurisdiction company’s situation? Are there any restrictions on the allow for informal work-outs, as well as formal action that they can take against the company? For restructuring and insolvency proceedings, and to what example, are there any special rules or regimes which extent are each of these used in practice? apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? The Law does not prevent informal work-outs between a debtor Are moratoria and stays on enforcement available? and its creditors, but it prevents creditor preferences made by a debtor that is in a state of insolvency or in the zone of insolvency. Accordingly, the risk in effecting an informal work-out Starting from the commencement of insolvency proceedings, rests mainly on the shoulders of the debtor and its management. all creditors are subject to the proceedings and there is no The Law acknowledges debt restructurings achieved through special restriction with respect to any particular type of cred- negotiations between the debtors and the creditors. The Law itors. However, the principle of preference order in creditor- also allows a publicly traded corporation, in specific situations, ship applies in the following order: (1) secured debts; (2) insol- to hold “protected negotiations” toward a debt restructuring vency expenses – all the expenses deriving from actions taken outside the court before entering into insolvency proceedings. by the court-appointed officer or anyone on his behalf in the The protections afforded to the corporation are exclusive to the insolvency proceedings; (3) priority debts such as salary and period of formulating the debt restructuring proposal, including tax, subject to the conditions of the law; (4) debts secured by a preventing the creditors from calling for the immediate repay- floating charge (in an amount that will not exceed 75% of the ment of a debt and preventing them from commencing insol- proceeds from realising the sale of the collateral, the balance vency proceedings. All these options are used in practice, being deemed unsecured debt); (5) unsecured debts and addi- depending on the special circumstances of the debtor, creditors tional interest, the latter of which is the interest that accrued and stakeholders. on the past debts of the corporation (excluding deferred debts)

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from the grant date of the order to commence proceedings until person who may be harmed by an order to commence insolvency their repayment, including interest accrued on secured debts proceedings with respect to the corporation may file an oppo- that cannot be repaid from the collateral, as well as interest sition to the application within the time period prescribed by for delay added until the grant date of the order to commence the Law. The Law provides no specific reference to converting proceedings; and (6) deferred debts – debts to the shareholders liabilities into shares or to an undertaking being able to sell of the corporation deriving from their being shareholders of shares or a business of the company before entering into insol- the corporation and debts to shareholders of the corporation vency proceedings. An economic rehabilitation plan requires the with grounds to suspend the repayment thereof under the Israeli court’s approval following the approval of each class of credi- Companies Law or any other law. tors. The court-appointed officer is entrusted with presenting In addition, a creditor having a pledge over an asset who seeks the plan to the court and he may approach any party, including to realise it cannot do so without court approval, and creditors the public, for devising an economic rehabilitation plan. The with residual ownership rights or a lien may be required by the creditors and shareholders can also influence, block or gain an court to transfer the asset to the court-appointed officer for the advantage regarding the proposed rehabilitation plan by voting corporation’s economic rehabilitation. at class meetings based on the various interests of the parties A stay of proceedings is available but only applies from the time involved, although the shareholders have much less influ- of granting an order for commencing insolvency proceedings. ence regarding the decisions made. The court can approve an economic rehabilitation plan even if it has not been approved in all of the class meetings, in specific situations stated in the Law, 2.3 In what circumstances are transactions entered including if the court is convinced that the proposal is fair and into by a company in financial difficulties at risk of just with respect of each member in a class meeting that did not challenge? What remedies are available? approve the proposal, rejecting the proposal would certainly lead to the liquidation of the corporation, the consideration offered in Transfer of assets by a debtor that is insolvent or in the zone the proposal is not less than the consideration the creditors will of insolvency to a third party (including a creditor) could be receive in liquidation, etc. held by the court to be an unlawful preference of creditors or a fraudulent conveyance and therefore subject to cancellation 3.3 What are the criteria for entry into each by order of the court. In the case of a transfer of an asset to a restructuring procedure? creditor, the period of examination of the transaction is three months before the application for an order to commence insolvency proceedings or one year regarding a transaction with a Under an order to commence solvency proceedings, the court creditor that is a related party of the debtor (such as a holder will order the corporation to be operated toward its economic of a controlling interest, officer or director). In the case of a rehabilitation, for such period as it shall determine, if it is convinced that all the following conditions are met: (1) there transaction in which no or insufficient consideration is paid for is a reasonable chance for its economic rehabilitation; (2) there the asset, the period of examination is two years, or four years is no reasonable concern that its operation will harm the credi- if the transferee is a related party. In the event of a fraudu- tors; and (3) there are means to fund the expenses involved with lent transfer, the transfer may be cancelled within a timeframe its operation. If one of the conditions is not met, the court will of up to seven years following the application to commence order that the corporation be liquidated. If the above-men- insolvency proceedings; in addition, the debtor and its officers tioned conditions are met, the corporation will be operated by and directors may be liable for fraudulent management or the an officer of court as a going concern until its economic rehabil- court may defer the moratorium of the corporation. Actions of itation, for a period of up to nine months. The court may extend unlawfully reserving a repayment right, such as a loan from a this period for additional periods, each of which shall not exceed shareholder made in exploitation of his power in the company, three months, if extending the period is required for preparing may lead to the court deferring the debt. an economic rehabilitation plan or for selling the business operations of the corporation. 32 Restructuring Options 3.4 Who manages each process? Is there any court 3.1 Is it possible to implement an informal work-out in involvement? your jurisdiction? Insolvency proceedings are commenced by filing an applica- See question 1.2 above. tion with the court to grant an order to commence proceedings, which may be filed by the corporation, a creditor or the 3.2 What formal rescue procedures are available Attorney General. Insolvency proceedings are conducted by in your jurisdiction to restructure the liabilities of a district court specialising in insolvency proceedings through distressed companies? Are debt-for-equity swaps an officer of the court (usually an attorney or an accountant). and pre-packaged sales possible? To what extent can The court is involved in every aspect of the process by way of creditors and/or shareholders block such procedures deciding about actions taken by the said officer, applications of or threaten action (including enforcement of security) parties regarding the process, etc. to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? 3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections According to the Law, the recovery of a corporation can be by are there for those who are forced to perform their way of an economic rehabilitation plan, selling its business opera- outstanding obligations? Will termination and set-off tions, or a combination of the two. In the application for an order provisions be upheld? to commence insolvency proceedings that is filed by a corporation, the corporation may request that the court order the contin- Commencing insolvency proceedings does not lead to cancel- uation of its operations for the purpose of rehabilitation. Any lation of contracts or obligations towards the debtor, nor will

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it confer upon other parties to the contract a right to cancel 4.2 On what grounds can a company be placed into it. However, if the court-appointed officer and the counter- each winding up procedure? party to an existing contract agree to cancel it during insolvency proceedings, it will be cancelled. If the court-appointed officer A corporation may file an application for an order to commence believes that an existing contract should be cancelled since it insolvency proceedings if it meets the two following conditions: may be an onerous contract that complicates the rehabilitation (1) the corporation is insolvent or the order will help to prevent and recovery proceedings, but the counterparty does not agree, its insolvency; and (2) the total debts of the corporation exceed the court-appointed officer may apply to the court to cancel NIS 25,000. A creditor may file an application for an order to the contract. The court may cancel a contract if it finds it is commence proceedings in any situation in which the corpora- required for the economic rehabilitation of the corporation or to tion is insolvent, without a minimal debt requirement. A cred- maximise the payments to the creditors. If an existing contract itor of a debt that is not yet due may only file an application is cancelled, anyone who is harmed by the cancellation will be for an order to commence proceedings if one of the following deemed a creditor of the corporation in the amount the damage conditions is met in addition to the corporation’s insolvency: caused him, and the debt will be deemed a past debt. (1) the corporation operates with the aim of deceiving its credi- A creditor’s right to offset will only be available upon fulfil- tors; (2) the corporation operates to divert any of its assets from ment of one of the following conditions: (i) the debts of the its creditors; or (3) the corporation will not be able to repay corporation and the creditor are intertwined; or (ii) the reli- its debt to the creditor, provided that the repayment date of ance on the right of offset is part of the ordinary course of busi- the debt falls within six months of the application filing date. ness of the corporation or creditor and the debt to be offset was The Attorney General may file an application for an order to incurred as part of their mutual business. commence proceedings if the Attorney General found public interest, considering the considerations listed above in respect 3.6 How is each restructuring process funded? Is any of an application filed by a creditor. protection given to rescue financing?

4.3 Who manages each winding up process? Is there A prerequisite for the corporation to enter economic rehabilita- any court involvement? tion proceedings is the filing of an initial outline with the court in which it must show and specify the means for funding its Upon granting an order to commence insolvency proceed- operation. Accordingly, the creditors’ fund will be reduced by ings, the court will appoint an officer of court to implement the the expenses of the corporation, so the corporation will be able proceedings and to realise and distribute the assets, as described to recover and thereby repay its debts or some of them, provided in question 4.1 above. When the debtor is a corporation, the that it will improve its creditors’ position. For funding the competent court is the district court and it is involved with all corporation’s operation as part of the economic rehabilitation, the insolvency proceedings while supervising the work of the the court-appointed officer may enter into a new credit agree- court-appointed officer. ment with the court’s approval. This credit will have priority in repayment out of the creditors’ fund and its status will be as expenses incurred as part of the insolvency proceedings. 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 42 Insolvency Procedures the enforcement of security)?

4.1 What is/are the key insolvency procedure(s) As the proceedings are managed by the court through an available to wind up a company? officer of court, creditors and shareholders can influence the process through applications to the court and dealings with the Under an order to commence insolvency proceedings, the court court-appointed officer on their votes regarding issues brought may order to wind up the corporation if not all of the conditions before them by the court-appointed officer. There are no mentioned in question 3.3 above are met and if it was proved specific restrictions upon the ability of creditors or shareholders that the corporation has some indisputable debt. The corpora- to file motions with the court or dealing with the court-ap- tion will be liquidated by realising the assets of the debtor fund pointed officer regarding the company, the proceedings or deci- and distributing them to the creditors by the order of prefer- sions made by the court-appointed officer or actions taken by ence under applicable law and according to the principle of equal him. A secured creditor or a creditor with a right of lien may repayment of debts to creditors in the same group of prefer- realise a fixed charge subject to the court’s approval. A creditor ence. Each creditor will file a debt claim to the court-appointed who owns an asset subject to an ownership certificate can also officer. The distribution will be made without the court-ap- obtain the possession of the asset subject to the court’s approval. pointed officer withholding funds accumulated from the realisa- The creditors may establish a creditors committee to represent tion, except for funds intended for repayment of the insolvency them with respect of their rights in the proceedings. Usually, expenses. Following realisation of all the realisable assets, upon shareholders have less influence on the proceedings as they are obtaining the court’s approval for the distribution, the court-ap- “last in line” to recover from the corporation. pointed officer will inform the creditors of the final deadline for completing their debt claims prior to the distribution. If any moneys are left in the creditors’ fund after the creditors’ debts 4.5 What impact does each winding up procedure have have been repaid, they will be distributed to the shareholders of on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off the corporation. provisions be upheld?

See question 3.5 above.

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4.6 What is the ranking of claims in each procedure, 72 Cross-Border Issues including the costs of the procedure?

7.1 Can companies incorporated elsewhere use See question 2.2 above. restructuring procedures or enter into insolvency proceedings in your jurisdiction? 4.7 Is it possible for the company to be revived in the future? Insolvency proceedings may only be commenced with respect to a corporation if one of the following conditions is fulfilled The Law acknowledges the possibility to revive a corporation on the day on which the application for an order to commence that has been in a liquidation environment, if the court finds proceedings is filed: (1) the corporation is registered in Israel; that there is a reasonable chance for its economic rehabilitation, (2) the corporation conducts business in Israel; or (3) the corpo- that there are means to fund the expenses involved with oper- ration has assets in Israel. In view of the foregoing, the word ating the corporation, and that there is no reasonable concern “companies”, for the purpose of the Insolvency Law, also that operation of the corporation will harm the creditors. includes “foreign companies”, and therefore, even if a company Without derogating from the above provisions regarding a is incorporated outside the jurisdiction of Israel but has assets company that is in a liquidation environment, it should be clarified or conducts business in Israel, insolvency proceedings may be that according to the Israeli Companies Law, pursuant to an appli- commenced in its regard. cation by any person, the court may order a company’s liquidation to be cancelled if the court finds it justified under the relevant 7.2 Is there scope for a restructuring or insolvency circumstances. After the court issues such an order, it is possible to process commenced elsewhere to be recognised in your take any procedure with regards to the company that would have jurisdiction? been available had the company not been liquidated. It is possible to apply for a cancellation of a company’s liquidation up to two years after its liquidation, but the court may allow such an appli- A foreign officer authorised under foreign proceedings to cation after the two-year term due to exceptional circumstances. conduct the restructuring or insolvency proceedings of the corporation may file to the Israeli court an application to recog- 52 Tax nise foreign proceedings conducted against a corporation in a foreign country in which the corporation’s centre of interests is located, unless otherwise proved, and the foreign officer 5.1 What are the tax risks which might apply to a manages all its assets. In such case, repayment of the corpora- restructuring or insolvency procedure? tion’s past debts and transfers of rights to its assets (or pledging them) will be suspended, and a stay of proceedings against it In general, there are no special provisions relating to taxation will enter into force. The foreign officer may also be author- regarding insolvent companies. However, upon granting an ised to realise and distribute the corporation’s assets in Israel. order to commence insolvency proceedings, the assets of the It is presumed that the corporation is insolvent for the purpose creditors’ fund will be used for repayment of the corporation’s of commencing proceedings in Israel, and proceedings may be past debts and the insolvency expenses only. With respect to commenced against it if it holds an asset in Israel, which proceed- liquidation – if a company fails to be economically rehabili- ings will apply to its Israel-based assets. However, if prior to tated and is liquidated, assuming that there are no past debts recognition of the foreign proceedings, insolvency proceedings but rather ongoing debts incurred after the order was granted, are taking place in Israel, the Israeli proceedings will be given these debts must be repaid and subsequently the profit and loss priority, such that the court will not give any relief that would of the corporation will be examined, such that it will be possible impair the Israeli proceedings. to consider, under the specific circumstances, an offset of the profits against the losses in a way that will obviously affect the corporation’s tax obligation. 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? 62 Employees

This is not a common practice and has been done regarding 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would corporations that are not incorporated in Israel but have busi- employees have and where do they rank? ness or assets in Israel, which seek to gain the advantages of the foreign jurisdiction. In liquidation and restructuring proceedings, the company’s employees are entitled to an annuity from the National Insurance 82 Groups Institute for unpaid wages, up to the limit set by law. However, after commencing proceedings, the wages with respect to which 8.1 How are groups of companies treated on the the employees are entitled to an annuity is limited to a period insolvency of one or more members? Is there scope for of five months preceding the order to commence proceedings. co-operation between officeholders? It should be noted that this provision is about to expire, and it will be re-examined in 2022. Furthermore, if the National The departure point for the relationship between companies Insurance annuity is insufficient to repay the unpaid wages or constituting members of a group, in which one or more compa- severance pay to which an employee is entitled, the wages and nies have undergone insolvency proceedings, is the principle of severance pay of the employee will be deemed priority debts, separate legal personality and limited liability, under which no up to the applicable limit of salary and severance pay that may company will be obliged to repay the debts of another company benefit from this status. that is a member of the same group. However, under the Israeli

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Companies Law, the court has the power to “pierce the corpo- received an option to postpone payments by approximately rate veil” between companies in situations defined in the law. four months and still not be considered to be breaching their In such case, access could be allowed to the assets of a company duty to pay debts. Furthermore, recently an option was given against which no insolvency proceedings have been commenced to corporations to apply to the court for a stay of proceedings, but to which assets have been transferred on behalf of a subsid- to appoint an administrator and receive additional temporary iary or a “sister company” with the aim of discriminating against relief for the purpose of reaching a debt restructuring, in order creditors. The officers and directors in all the companies in to allow a debt restructuring without taking away the corpo- the group are subject to the duties of care and loyalty, including ration’s control of its operations as is otherwise typically done in the period before entering insolvency, and in the event of in ordinary insolvency proceedings. Furthermore, reporting cooperation between officers and directors in various insol- duties were imposed on corporations regarding any substantial vent companies with the aim of concealing assets by transfer- change in their economic condition during the stay of proceed- ring them from one company to the other, they may be liable for ings period, as well as a prohibition to perform extraordinary fraudulent management. transactions or distributions during this period.

92 COVID-19

9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic?

Companies under insolvency proceedings that were unable to meet the monthly payment they are required to make into the creditors’ fund in light of COVID-19 and the lockdowns

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Adv. Aaron Michaeli is Head of the Commercial, Class Action and Insolvency Litigation Department of the firm, and a member of the Executive Committee. Adv. Michaeli, one of the top litigators in Israel, specialises in corporate litigation, complex class actions, derivative actions, and insolvency proceedings, as well as in representing clients in local and international arbitration proceedings. In addition, he possesses unique expertise relating to commercial law, and applies a broad business outlook when advising on project finance proceedings and advising companies and corporations on mergers and acquisitions following a structural change in holdings.

Goldfarb Seligman & Co. Tel: +972 3 710 1635 98 Yigal Alon Street, Tel Aviv Email: [email protected] Israel URL: www.goldfarb.com

Adv. Yehuda Rosenthal is Vice Head of the Commercial, Class Action and Insolvency Litigation Department. Adv. Rosenthal specialises in complex litigation proceedings, specifically in representing respondents in class actions and derivative actions, advising Special Claims Committees, and managing commercial disputes. Adv. Rosenthal possesses unique expertise in representing directors and company executives, and accumulated significant experience advising on directors’ and officers’ liability in insolvency proceedings. In this capacity, Adv. Rosenthal advises and represents companies, directors and company executives in insolvency proceedings, and has vast expertise in advising companies, boards and shareholders in debt (debenture) restructuring proceedings.

Goldfarb Seligman & Co. Tel: +972 3 710 1635 98 Yigal Alon Street, Tel Aviv Email: [email protected] Israel URL: www.goldfarb.com

Adv. CPA Asher (Ashi) Engelman is Head of the Corporate Recovery and Insolvency Practice within the Commercial, Class Action and Insolvency Litigation Department. Adv. CPA Engelman possesses unique expertise in the corporate recovery and insolvency field. He serves as a trustee in stay of proceedings and creditor agreements, as well as receiver and special manager for companies operating in Israel and across the globe. In light of his experience in the field, he is often appointed by the court to various roles in insolvency proceedings, including conducting economic investigations and investigative overview for the courts and other parties, providing financial and operational services to court-appointed officials, and more.

Goldfarb Seligman & Co. Tel: +972 3 710 1635 98 Yigal Alon Street, Tel Aviv Email: [email protected] Israel URL: www.goldfarb.com

Adv. Inbar Tal specialises in commercial litigation, class actions and insolvency. Adv. Tal advises on litigation proceedings in various legal fields, including shareholder disputes, tenders and administrative claims. In addition, she has accumulated unique experience and expertise in complex, high-profile cases. Adv. Tal represents the firm’s clients, particularly international companies, in insolvency proceedings, class actions and derivative actions, before all courts and tribunals.

Goldfarb Seligman & Co. Tel: +972 3 710 1635 98 Yigal Alon Street, Tel Aviv Email: [email protected] Israel URL: www.goldfarb.com

Goldfarb Seligman & Co., one of Israel’s largest law firms, is among the elite banks and secured creditors; creditors’ agreements; stays of proceedings; group of firms that deliver top-tier legal services on international stand- and more. ards. The professional hallmark of the firm, which traces its history back Its professional teams serve as trustees in stays of proceedings and cred- over 90 years, is the unrelenting pursuit of the highest professional and itor agreements, as well as receivers and special managers for companies ethical standards in the service of its clients. operating in Israel and across the globe. In addition, the firm provides Goldfarb Seligman focuses on four core practice areas: corporate and capital ongoing counsel to corporations and individuals in corporate recovery and markets in Israel and overseas; litigation of all types; real estate, planning economic rehabilitation proceedings. and construction of all descriptions; and taxation in Israel and internation- www.goldfarb.com ally. The firm also offers highly specialised practices in industry; labour law; antitrust and competition; infrastructure; regulation; intellectual property and privacy; energy; finance; banking; insurance; environmental law; and more. Goldfarb Seligman possesses unique expertise regarding corporate recovery and insolvency. Its attorneys provide ongoing legal counsel to clients regarding all aspects of the field, including corporate recovery, liquidations, receiverships and debt settlements. In this capacity, the firm handles voluntary and court-mandated liquidations; receivership proceedings on behalf of

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Italy Italy

Studio Legale Ghia Enrica Maria Ghia

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 Italy is known to be a debtor-friendly jurisdiction. This is due company in financial difficulties? Is there a specific to the duration of our judicial proceedings, which allow the point at which a company must enter a restructuring or insolvency process? debtor to delay the timing of payments. Nevertheless, all recent reforms have set rules that will render the debtor’s life as tough as possible. As an example, the Legislative Decree dated 12 Directors/managers of companies must fulfil their duties as set January 2019, n. 14, commonly known as the Insolvency and out by law and the corporate charter with the diligence required Company Crisis Code (Codice della Crisi d’impresa e dell’Insolvenza by “the nature of the position” and “their specific role” (Article – the “Insolvency Code”), which is due to come into force on 1 2392, Civil Code). In general, directors/managers will be liable if September 2021, has established new rules related to groups of they are aware of prejudicial facts and they do not take all the companies, early warning procedures and concurrent proposals necessary measures to prevent, eliminate or mitigate damages. in composition with creditors proceedings, which are concrete The directors/managers also have a duty to the creditors to examples of the efforts made to create a more balanced system maintain sufficient corporate assets to satisfy outstanding debts. to protect all stakeholders’ interests. Italian law does not modify directors’/managers’ responsibilities when the company becomes insolvent: they must avoid aggravating the insolvency of the company. 1.2 Does the legislative framework in your jurisdiction Directors/managers must file, without culpable delay, for the allow for informal work-outs, as well as formal opening of insolvency proceedings if the company is “insol- restructuring and insolvency proceedings, and to what extent are each of these used in practice? vent”. Insolvency occurs when the company fails to fulfil its obligations or through other external factors that demonstrate the debtor’s inability to regularly satisfy his obligations. The scope of the legislative framework is to prevent compa- Directors/managers can be held liable (civilly and criminally) nies from becoming insolvent. Therefore, its provisions incen- for continuing to conduct business when the company is insol- tivise the debtor to take action in advance, before a corporate vent if such increases the company’s debts. This rule implies crisis becomes irreversible. To do so, the new Insolvency Code even larger liabilities for directors/managers when they do not has established out-of-court instruments to facilitate mediation start insolvency proceedings regardless of the warning signs of between debtors and creditors and to manage debt insolvency. insolvency. Additionally, to push entrepreneurs to act in a timely manner, In case of an insolvency declaration, the directors/managers the new Bankruptcy Law provides bonuses to those who volun- of companies lose the power to act on behalf of the company tarily initiate alerting procedures, such as: no liability for bank- and are replaced by a bankruptcy trustee, a liquidator, or a judi- ruptcy offences; reduction of interest rates and tax penal- cial commissioner (Article 2394 bis, Civil Code and Article 146, ties; debt restructuring approval with 60% of receivables; and Bankruptcy Law). the possibility of arrangements with creditors, provided that the payment of at least 20% of unsecured claims is ensured. Insolvency proceedings, on the other hand, have a residual role, 2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the their purpose being only for liquidation and winding up. action that they can take against the company? For All of these measures have a practical application with a example, are there any special rules or regimes which variety of outcomes depending on the court involved, the char- apply to particular types of unsecured creditor (such as acteristics of the company and the stakeholders’ interests. landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?

The stakeholders (i.e. shareholders and members of the supervisory board of the company, if one exists) are not entitled to file for the opening of insolvency proceedings if the company

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is “insolvent”. However, they must report the insolvency to the 32 Restructuring Options directors/managers, asking them to proceed with the opening of insolvency proceedings. If not, they may be exposed to civil and criminal liability for contributing to a delay of the filing for 3.1 Is it possible to implement an informal work-out in insolvency proceedings. your jurisdiction? Creditors can file a claim, and frequently do so, for the opening of bankruptcy proceedings; however, they cannot file a An informal work-out is always possible. Time is value, espe- claim for the opening of composition with creditors and out-of- cially for a company in distress. In order to increase aware- court restructuring proceedings. There are no specific rules or ness and therefore encourage managers to anticipate when it is regimes that apply to unsecured creditors. Nevertheless, land- necessary to take the signs of crisis into consideration, the new lords, employees, or creditors with retention of title arrange- Insolvency Code has introduced early warning tools and preven- ments are considered secured creditors according to Italian law. tion measures (Article 4 – “misure di allerta”), which are the main The new Insolvency Code, which will come into force on 1 innovations of the new reform. September 2021 (barring any further delays due to COVID- Timely intervention allows the company’s value to be 19), contains provisions inspired by the French procédures d’alerte. preserved, while a delay in perceiving the signs of distress These provisions will increase the number of those who will often brings irreversible insolvency. The new Insolvency Code be obliged to report a state of crisis of a company to directors/ ensures that debtors and entrepreneurs have access to early managers, so that they can act promptly and avoid insolvency. warning tools to detect signs of crisis that might lead the busi- These new subjects are identified as “Qualified Creditors”, i.e. ness to deteriorate in the future, requiring them to act as a the Tax Agency and the National Social Security Institution. matter of urgency. The opening of in-court insolvency proceedings (bankruptcy These early warning tools provide incentives for those who use or composition with creditors) triggers a stay on enforcement the measures properly and disincentives for those who do not. actions, granting a moratorium in favour of the debtor. They are also characterised by their non-judicial and confidential nature: it is clear that confidentiality is of great importance, especially if related to the domino effect the news of a crisis may 2.3 In what circumstances are transactions entered create in stakeholders, even if the debtor company is handling into by a company in financial difficulties at risk of the distress perfectly. A breach of confidentiality and therefore challenge? What remedies are available? a leak of information that is not properly managed could lead to reputational risk and jeopardise an enterprise’s business. According to the Insolvency Code, any transaction can be The legislation has also introduced a new type of entity called revoked if accomplished by a company in financial difficulties the Crisis Composition Agency, to support the debtor in this within six months or one year prior to the insolvency decla- early stage. Crisis Composition Agencies shall be established at ration. In those cases, a claw-back action can be filed by the each Chamber of Commerce office. The new Insolvency Code bankruptcy administrator to allow the reconstitution of assets, states that it is up to the debtor to request the intervention of making ineffective all acts that the bankrupt company imple- a Crisis Composition Agency; however, only a few identified mented in the period prior to the declaration of bankruptcy subjects such as qualified public creditors (for example, a tax (known as “periodo sospetto”), in violation of the principle of the revenue agency), boards of directors and auditors may file a peti- equal treatment of all creditors (“par condicio creditorum”). tion before an Agency. After assessing the corporate’s economic The trustee is entitled to exercise a claw-back action (Article situation, the competent Agency will convene with the debtor 67, Bankruptcy Law) when it is proven that: immediately in order to identify the most suitable measures to (a) a third party (e.g. the purchaser of the company’s assets) remedy the crisis and to promote a mutually agreed solution was aware of the debtor’s state of insolvency; between the entrepreneur and creditors in a reasonable time- (b) any transaction for consideration occurred within one frame (not exceeding six months). year prior to the date of declaration of bankruptcy, where What if an agreement is not reached between the debtor and the services rendered, or the obligations assumed by the creditors? The Insolvency Code does not give an answer, leaving company, are disproportionate, exceeding 25% of the it to the market to deal with the problem. In view of this, it can value of the counterpart obligation; be said that early warning tools should serve to shake the entre- (c) the transaction was used to extinguish due debts that have preneur in an effort to wake him up and help him to face reality. not been paid through normal methods of payment and The debtor can always act in a voluntary, informal and out-of- made in the year prior to the declaration of bankruptcy; court composition with creditors, reaching agreements with single (d) any pledge or judicial or voluntary mortgage was granted creditors or creditor categories. Nevertheless, this approach does or set up within one year prior to the declaration of bank- not protect the debtor from the legal action that each creditor may ruptcy for pre-existing non-due debts; start against the company to recover their credit. (e) any pledge or judicial or voluntary mortgage created within six months prior to the declaration of bankruptcy as collat- 3.2 What formal rescue procedures are available eral for those debts comes due; and/or in your jurisdiction to restructure the liabilities of (f) any transaction accomplished for free (such as a donation distressed companies? Are debt-for-equity swaps or a transaction without payment) was carried out by the and pre-packaged sales possible? To what extent can bankrupt company within the two years prior to the decla- creditors and/or shareholders block such procedures ration of bankruptcy. or threaten action (including enforcement of security) The statute of limitations is calculated based on the earlier of to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- three years prior to the declaration of bankruptcy or five years down dissenting classes of stakeholder? from the date of the transaction being declared null and void. In case the declaration of bankruptcy follows a composition with creditors, the aforementioned term starts from the date of regis- The turnaround and restructuring of a company can be achieved tration of the request for a composition with creditors at the through four different procedures that apply to different crisis Companies Register. levels.

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Turnaround plan (Article 67(d), Bankruptcy Law) Once the plan is completely executed, the debtor will no longer This plan is an out-of-court private agreement promoted by be liable and will be free to start a new business or continue the the debtor to the creditors, which is binding on those who old one. This procedure is usually faster and carries a higher approve it. The plan is formed and prepared by advisors to the expectation of recovery for the creditors than liquidation. debtor, and then certified by an expert who must declare its The company can reserve the preventive creditors’ settle- “reasonableness”. ment for a future date, filing a request with the competent court All transactions, occurring within the plan’s timeframe, will that will fix the term to start when the plan and all documen- not be voidable even if the plan turns out to be unsuccessful, tation required by law has been filed (Article 161(6), Bankruptcy and the company is later placed into liquidation or insolvency Law). During this period, the company debtor benefits from proceedings are started. an automatic stay and all creditors’ execution proceedings are Usually, the plan has a three- or four-year duration. The plan suspended. will remain private and confidential, unless the plan fails and the company is later put into liquidation. Extraordinary administration For more serious crises, the Bankruptcy Law provides for Debt restructuring agreement (Article 182-bis, Bankruptcy extraordinary administration and reorganisation proceedings for large companies and corporations, which was introduced Law) A debt restructuring agreement must be proposed by the debtor and implemented by Legislative Decree n. 270, 8 July 1999 (the and approved by at least 60% of the secured and unsecured cred- “Prodi Law”). itors. The agreement is based on a plan assessed by an expert For this procedure to be available, the company must fulfil who must certify its “feasibility”. The plan must provide full minimum size requirements, including that the company has satisfaction to all creditors who do not take part in it. more than 200 employees. The procedure is monitored and regulated by the Ministry for Economic Development, which Although it is private, the agreement must be filed in court and appoints: then published on the Companies Register. The law provides a ■ A Special Commissioner. 30-day period within which dissenting creditors can oppose the ■ A monitoring committee representing the creditors’ inter- plan. However, once the plan is filed, a stay period of 60 days ests and monitoring the Special Commissioner’s activities. is imposed, and the creditors cannot bring an action or enforce The Special Commissioner has a very short time to examine their debt within this time. the situation and to take the appropriate decision as to whether As with the turnaround plan (see above), all transactions to liquidate or turn around the company. In case of liquidation, that occur during the timeframe provided by the plan are not the provisions of the Bankruptcy Law govern the entire process, subject to a claw-back action in the event of a future bankruptcy in particular in relation to directors’, auditors’ and officers’ procedure. liability and related company claims for damages. The agreement is based on the principle that it can be privately The Special Commissioner has very broad authority and, once negotiated without restrictions. Therefore, the law does not the plan is authorised by the Ministry, he/she may take any and provide set content for the agreement, such as a partial with- all actions to save the business. drawal of debt or an ability to repay in instalments. The debtor is free to reach its own arrangements with the creditors, including: ■ Conversion of debt to equity. 3.3 What are the criteria for entry into each ■ Granting of new liquidity. restructuring procedure? ■ Change from a short-term to a medium- or long-term debt financing. Article 1 of the Bankruptcy Law provides the criteria according ■ Transformation of guarantees into revolving credit lines. to which entrepreneurs and companies can apply for insolvency proceedings. Preventive creditors’ settlement or judicial composition The thresholds are established as follows: with creditors (Article 160, Bankruptcy Law) ■ Assets valued at higher than EUR 300,000.00. This settlement is proposed by the debtor when the company is ■ Revenues higher than EUR 200,000.00. insolvent but unable to respect all its obligations even though ■ Debts higher than EUR 500,000.00. it is still active and has assets. This procedure has recently These figures represent the average amounts indicated in the been reformed and become more flexible, although it remains financial statements in the three years previous to the date of complex. filing in court. In this case, the settlement that the debtor presents to the creditors is based on a plan, with the following features: 3.4 Who manages each process? Is there any court ■ The creditors may be split into classes with a similar involvement? legal position and economic interests. The classes can be treated differently within the plan, which may provide different terms and conditions to satisfy their debts. See the answer to question 3.2. ■ The settlement requires the approval of the majority of unsecured creditors and the majority of classes. Once 3.5 What impact does each restructuring procedure approved, the agreement is binding and enforceable over all have on existing contracts? Are the parties obliged to creditors, including creditors that do not agree, imposing perform outstanding obligations? What protections on those unsecured creditors a “cramdown” (imposing are there for those who are forced to perform their reorganisation despite objections from creditors), avoiding outstanding obligations? Will termination and set-off provisions be upheld? the need to make payment in full. ■ The debtor will keep administering its own assets up until the sale. As mentioned, the restructuring procedures start on the debtor’s initiative, who offers the creditors a plan sorting out the company’s exposures. The plan takes into consideration the pending

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contracts and it is on the parties involved to negotiate in good plan along with the plan presented by the debtor. The reason faith to proceed or solve the contracts. The company may indi- for this provision was to create a competitive market within the cate specific suppliers as crucial for the business’s continuity domain of distressed companies. The final plan is chosen by the and, in such case, any credits arising from those contracts will creditors, who will vote on it. The judge appoints a Liquidator be granted a super priority rank. Commissioner, who has the duty of ensuring the punctual implementation of the liquidation plan. A delegated judge is appointed to oversee the proceedings. 3.6 How is each restructuring process funded? Is any protection given to rescue financing? 4.2 On what grounds can a company be placed into each winding up procedure? Each restructuring plan must prove the support of the financing. This condition is proven on the basis of an expert’s evaluation, who has to declare the plan as feasible and sustain- According to Article 5 of the Bankruptcy Law, a debtor is insol- able. Therefore, in setting the plan, the plan must show the vent when he is not able to satisfy his own obligations. The origin of the liquidity required to support the plan; revenues objective requirement for bankruptcy is a pathological and from the ordinary course of business, shareholders’ loans, new irreversible situation involving the entire amount of the debt- shareholders and rescue financing are all possible tools. or’s assets, not allowing him to satisfy the obligations he has Nevertheless, rescue financing released within a composi- assumed. Liquidation occurs when it appears that the only possible tion with creditors plan (Article 182 quater, Bankruptcy Law) or a outcome to satisfy the creditors’ interests is through the conver- restructuring plan (Article 182 bis, Bankruptcy Law), will be granted sion of the bankrupt debtor’s assets into money. a super priority rank as per Article 111 of the Bankruptcy Law. The Bankruptcy Law provides the same treatment to those credits created as a function of the plan’s redaction and certifi- 4.3 Who manages each winding up process? Is there cation, provided that the super priority rank of those credits is any court involvement? clearly indicated in the plan. Finally, as per Articles 2467 and 2497 quinquies of the Italian A bankruptcy claim must be filed before the court where the Civil Code, shareholders’ loans usually rank after the payment of company has its registered office. After a preliminary hearing, other kinds of investors. Nevertheless, according to Article 182 the court will decide on the bankruptcy declaration on the quater of the Bankruptcy Law, super priority rank is also granted grounds of the documents filed by the parties. to 80% of shareholders’ loans if the loans are executed based on Along with the bankruptcy decision, the court appoints the the restructuring plan. trustee who will be in charge of ruling on the full procedure together with a delegated judge and a creditors’ committee. 42 Insolvency Procedures 4.4 How are the creditors and/or shareholders able 4.1 What is/are the key insolvency procedure(s) to influence each winding up process? Are there any available to wind up a company? restrictions on the action that they can take (including the enforcement of security)?

Liquidation of a company can be achieved through the following two types of proceedings: Creditors get involved in insolvency proceedings through the creation of a creditors’ committee, which supervises the work of the trustee, authorises any transactions, and gives opinions in Bankruptcy proceedings the cases provided for by law or when requested to do so by the Bankruptcy proceedings can be filed either by the debtor, one court or the delegated judge. or more creditors and a judge, or a prosecutor in the exercise of As an example, the creditors’ committee authorises acts of their duties. extraordinary administration and can inspect the accounting The court will declare a debtor bankrupt according to records and documents related to the procedure. Article 1 of the Bankruptcy Law (see question 3.3). The deci- The members of the committee must fulfil their duties with sion declaring the bankruptcy can be appealed. the professional diligence required by the nature of the assign- On declaring the bankruptcy, the judge appoints a bankruptcy ment, keeping all facts and documents, of which they are aware administrator (trustee) with at least five years’ professional expe- because of their office, confidential. rience, and a creditors’ committee. Shareholders are not entitled to take part in the bankruptcy The liquidation is implemented according to a liquidation procedure. As a matter of fact, they lose control of the property proposal, which provides for the realisation of all assets and for of the company, which will be temporarily administered by the the creditors’ order of payment. The proposal is presented by trustee in the interests of the creditors. On the contrary, share- the bankruptcy administrator to the creditors’ committee for its holders can be declared bankrupt if the company is not a limited approval. liability company and/or the company has only one shareholder. The court has a specialised division dealing with bankruptcy However, shareholders can always appeal the bankruptcy and insolvency proceedings in general. Each bankruptcy file is decision. assigned randomly to a judge within that division. 4.5 What impact does each winding up procedure have Composition with creditors with the effect of winding up on existing contracts? Are the parties obliged to perform The debtor comes to the proceedings with a plan, which is outstanding obligations? Will termination and set-off examined and approved by the majority of all unsecured cred- provisions be upheld? itors. The plan must provide payment to unsecured creditors of at least 20% of their credit. Law n. 132/2015 introduced the Pursuant to the Bankruptcy Law, without prejudice to the exist- possibility for creditors or third parties to present their own ence of a special regulation for each contract, the execution of

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contracts remains suspended, at least until the trustee, with the Alternative treatment of these credits is allowed in the case of authorisation of the creditors’ committee, declares that it will a composition with creditors. take over the contract on behalf of the bankruptcy – assuming Article 182 ter of the Bankruptcy Law provides the possi- all related obligations – or decides to dissolve the same, in both bility for the debtor to propose partial or deferred payment of cases in the interests of the creditors. tax and contribution credits. This is possible if the business However, in case of consensual contracts performed by one plan provides for the satisfaction of these credits to an extent party, the trustee will not be in a position to release the contract. higher than that which would be achievable in the event of a In particular, the trustee has no right to terminate the following bankruptcy. contracts: ■ contracts with real effects; 62 Employees ■ service contracts when the service has already been performed; 6.1 What is the effect of each restructuring or ■ contracts already solved by the company prior to the bank- insolvency procedure on employees? What claims would ruptcy filing, even if a resolution action is still pending; employees have and where do they rank? and ■ preliminary real estate purchase agreements if registered First of all, it is good to highlight that entering into a restruc- on the public Real Estate Registry. turing or insolvency procedure does not only cause the termination of employment contracts. 4.6 What is the ranking of claims in each procedure, That said, it is essential to distinguish between the hypothet- including the costs of the procedure? ical outcome of a bankruptcy on the one hand, and that of a composition with creditors on the other. Once the bankruptcy assets have been ascertained, it will be necessary to distribute their value among the creditors; in this Insolvency procedure regard, there are three categories of credits: The trustee is the administrator of the bankruptcy assets. This (1) super priority pre-deductible credits (for example: the trus- entails that the decision to suspend or temporarily continue the tee’s compensation, costs of the procedures); business belongs to him/her. This decision has as a consequence (2) secured credits subject to pre-emption (for example: salary, the maintenance or the resolution of the employment contracts. mortgage on property); and In any case, the trustee must, as soon as possible, identify (3) all other unsecured credits. the employment contracts that are still effective, and notify the This ranking of payments is applied in all insolvency proceed- workers of the opening of the insolvency procedure as well as ings whose purpose is the winding up of the company to pay the eventual closure of the business. the creditors. Nevertheless, in case of bankruptcy, the trustee The decision of the trustee to take over the employment contracts that are still effective at the time of the procedure is will pay instalments to creditors from time to time and he/she essentially determined by the evaluation of the opportunity to will simply close the bankruptcy when the procedure runs out preserve the productive potential of the company through the of assets/cash, even if only part of the super priority credits or provisional exercise of the business (even only of a company secured credits have been paid. In case of a composition with branch, pursuant to Article 104, Bankruptcy Law), in the inter- creditors, the plan proposed by the debtor has to foresee and ests of the creditors. ensure the payment of 100% of the super priority and secured The trustee will identify the workers necessary to keep the creditors, together with the payment of at least 20% of the unse- company going on the basis of the business scenario and fore- cured credits. If those requisites are not met, the composition cast. All affected workers will be informed of the continuation with creditors will be declared inadmissible by the court. of the contractual relationship with confirmation of the existing economic and regulatory arrangement. 4.7 Is it possible for the company to be revived in the future? Restructuring procedure In any kind of restructuring, out-of-court or in-court composi- Once the trustee ends the liquidation process, the court will tion with creditors, the debtor has to present a plan that takes issue a closing decree for the procedure. into proper consideration the impact on employees, informing At this point, it is possible to proceed with the cancellation the workers and trade union representatives in due time and of the company from the Companies Register, with the conse- defining how the employment contracts will or will not continue quence that the company cannot be revived in the future. during the procedure. The only exception to this framework is represented by a In a composition with creditors based on the business’s conti- composition with creditors for the liquidation of the company nuity, there is no automatic resolution of existing employment but which, during the plan’s execution, loses the purpose of relationships, which instead continue without interruption. winding up and instead finds a business continuity solution. In any case, the credits owned by the employees can be In such case, once the new plan is completely executed, the asserted through a formal claim and are subject to the privilege company could remain active. pursuant to Article 2751 bis n. 2 of the Civil Code, which means that they enjoy a priority in the ranking of payment. 52 Tax 72 Cross-Border Issues

5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction? Restructuring or insolvency proceedings do not involve an increase in tax risks. Credits claimed by Italian tax authorities According to EU Regulation (EC) 1346/2000 and Regulation are structured with a preferential ranking.

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(EU) 848/2015, a company with branches in more than one EU To avoid the negative impact of this lack of rules, insolvency Member State will be able to start a restructuring or insolvency professionals work with the courts on a case-by-case basis to procedure in the Member State in which the company has the assess how to manage proceedings when a group of companies centre of its main interests (“COMI”). is involved. There have also been cases in which the courts have In particular, a company incorporated in another EU Member requested the filing of as many different bankruptcy proceed- State can enter into insolvency proceedings in Italy if its COMI ings as there are companies involved, but still appointing only is located in Italy and no main insolvency proceedings have been one judge for all the proceedings. opened in respect of the same company in another Member Furthermore, in winding up and restructuring proceedings, State. On the contrary, if the company has an established pres- the different company office holders can be called together by ence in Italy, the only possibility would be to file secondary the court and/or by the creditors’ committee to (i) coordinate proceedings, which shall apply only to its assets located in Italy. with each other to maximise asset values, or (ii) coordinate to For cross-border insolvency matters, according to the UN share particular tasks between the different companies. Model Law and the Italian provisions on international law, if The new Insolvency Code, which will come into force, barring there is no specific bilateral treaty, Italian courts have jurisdic- further extensions, on 1 September 2021, contains provisions tion to start proceedings if such courts find that the company’s inspired by Regulation (EU) 848/2015 regarding insolvency COMI is located in Italy. proceedings for corporate groups. These provisions will be able to increase coordination of insolvency proceedings for companies that are part of a group. 7.2 Is there scope for a restructuring or insolvency More specifically, the new Insolvency Code introduces the process commenced elsewhere to be recognised in your definition of a “group” based on the notion of direction and jurisdiction? coordination provided by Article 2497 of the Italian Civil Code. Furthermore, the new Insolvency Code foresees the possibility Insolvency proceedings opened in another EU Member State for enterprises belonging to the same group to propose a single are automatically recognised in Italy pursuant to insolvency application before a single court for a debt restructuring agree- regulation, and the foreign trustee has the same authority given ment under Article 182 bis of the Bankruptcy Law, a composi- to him/her by the Member State that opened the proceedings. tion with creditors or a judicial liquidation. However, this automatic recognition does not apply to out-of- In order to assess the territorial jurisdiction of the court, the court proceedings, which are not included within the framework European concept of “centre of main interests” must be applied. of Regulation (EU) 848/2015. The positive impact on the procedural costs is absolutely terrific: On the other hand, in the case of a company declared bank- the new Insolvency Code provides for the appointment of just rupt in a country located outside the EU, that is not party to one judge and just one court commissioner (in the case of a a bilateral treaty, the foreign judgment shall be recognised and composition with creditors) or insolvency administrator (in the enforced only when the judgment is not opposed by an inter- case of a judicial liquidation). ested party. In that case, the Italian court must verify the legiti- Finally, the new Insolvency Code has established a rule to macy of the foreign decision in order to decide if it can be recog- protect the par condicio creditorum – equal treatment of creditors nised, based on whether: – keeping separate the creditors of each company and excluding ■ the foreign proceedings provided for a fair hearing; intercompany creditors from the vote in order to mitigate any ■ the opposed decision is final; and potential distortive effects. ■ the opposed judgment does not go against public order. This recognition procedure applies only to insolvency deci- 92 COVID-19 sions and does not relate to the restructuring or turnaround procedures. 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic? 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other The Italian Government, in order to help companies overcome jurisdictions? Is this common practice? the reduction in production and/or sales caused by the COVID-19 emergency, has introduced several legislative remedies. Such Some companies incorporated in Italy have entered into insol- emergency provisions have the scope to distribute loans, guaran- vency proceedings in other jurisdictions. However, it is not a tees and other rescue solutions to companies in need. common practice, because Italian companies tend to restructure Here are the most relevant provisions: or enter into insolvency proceedings in Italy. ■ Decreto Cura Italia: this decree provides SMEs with a COMI in Italy a so-called extra moratorium to freeze the 82 Groups due payment of credit line facilities, loans for advances on credit securities, short-term loans and any due instalments. According to this decree, all bankruptcy filings occurring 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for between 9 March and 30 June 2020 are considered inad- co-operation between officeholders? missible and are dismissed. ■ Decreto Liquidità: with the aim of safeguarding business continuity, this decree has provided for the postpone- Italian law establishes the principle of economic and legal inde- ment of the entry into force of the Insolvency Code to 1 pendence between members of a group of companies. At the September 2021, with the exception of some provisions same time, the current Bankruptcy Law does not provide rules that have been in force since 2019. This postponement was for the insolvency of a group of companies. Therefore, the shown to be necessary in light of the pandemic, especially insolvency of each company member of a group is kept separate considering the fact that the Insolvency Code introduces from the other group members. This duplication of proceed- an “early warning” to diagnose imminent crises, setting ings causes a duplication of costs and a waste of time, contrary thresholds that might be unreachable for most companies to the interests of the creditors. after more than a year of the pandemic economy.

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■ Decreto Ristori: issued in October 2020, this decree has extended access to insolvency procedures (in particular the crisis composition plan or the consumers’ plan) to micro and small businesses that did not previously have access. Article 4 ter of the Decreto Ristori provided for the extension of the effects of the crisis composition plan to micro and small businesses and their unlimited liability shareholders. Moreover, the decree has established that shareholders of a partnership may be considered “consumers” and are therefore able to submit a consumer’s plan proposal to reduce and renegotiate debts deriving from loan agreements supported by salary-backed loans, severance pay or pensions, as well as those deriving from pledged loans.

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Enrica Maria Ghia has been a member of the Milan Bar since 1998 and is admitted to plead before the Superior Courts. Enrica is the managing partner of Studio Legale Ghia, which has offices in Rome and Milan, with 15 lawyers, 10 paralegals and 20 employees. She is an expert in company law, business law, insolvency law and banking law. Since 2008, she has been involved in turnaround and insolvency proceedings. She acts as a legal counsellor for several Italian banking institutions and companies based in Italy or abroad that are active in different industries. Her activity in the above fields is both judicial and out of court, and she has a practical approach and a problem-solving attitude. Enrica is the founder of JurisNet s.t.a. S.r.l., a limited liability company of lawyers with 11 shareholders and more than 150 affiliates all over Italy, and JurisTech S.r.l., a legal tech start-up that develops IT solutions for lawyers and law firms.

Studio Legale Ghia Tel: +39 02 7639 0887 Via Filippo Corridoni 1 Email: [email protected] 20122, Milan URL: www.ghia.legal Italy

Studio Legale Ghia, with offices in Rome and Milan, has more than 50 years of experience dealing with corporate, banking and insolvency law and as a result the firm is one of the most influential law firms in Italy. Our roots in the Italian legal system give us a solid foundation in established precedents, while allowing us to give proactive, cutting-edge advice to our clients in a constantly changing world. Our approach is to provide nothing short of excellence and that shows in our dedication to the client and the passion for our work. This passion is also shared by a large network of law firms worldwide that extends our reach everywhere in the world. www.ghia.legal

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Japan Japan

Mori Hamada & Matsumoto Daisuke Asai

12 Overview Furthermore, any director or officer who engages in fraudulent conduct before the filing of the company’s bankruptcy proceedings may be held liable for such conduct under criminal or tort 1.1 Where would you place your jurisdiction on the law, or both. spectrum of debtor- to creditor-friendly jurisdictions? In general, directors of distressed debtors are not obliged to file restructuring or insolvency proceedings. However, any In restructuring proceedings, the creditor cannot take the initi- liquidator of a company under voluntary liquidation is obliged ative, nor do they have the right to control the proceedings both to (i) file for special liquidation if the company’s debts are institutionally and factually in Japan. For instance, in general, suspected to exceed its assets, and (ii) file for bankruptcy if the debtor in civil rehabilitation proceedings (minji-saisei) or the the liquidator finds that the company’s debts exceed its assets. trustee in corporate rehabilitation proceedings (kaisha-kosei) has Failure to comply with these obligations may result in fines and the right to control almost the entire restructuring proceedings. the liquidator being held liable for damages to the creditors. In addition, the trustee in bankruptcy proceedings (hasan) or the debtor in special liquidation proceedings (tokubetsu-seisan) also has 2.2 Which other stakeholders may influence the the right to control almost the entire liquidation proceedings. As company’s situation? Are there any restrictions on the a result, we believe that Japan is a debtor-friendly jurisdiction. action that they can take against the company? For example, are there any special rules or regimes which 1.2 Does the legislative framework in your jurisdiction apply to particular types of unsecured creditor (such as allow for informal work-outs, as well as formal landlords, employees or creditors with retention of title restructuring and insolvency proceedings, and to what arrangements) applicable to the laws of your jurisdiction? extent are each of these used in practice? Are moratoria and stays on enforcement available?

Informal financial restructurings of distressed companies are Upon the commencement of insolvency/restructuring proceed- allowed and are being increasingly used, especially for small ings, in general, civil actions and civil execution proceedings or mid-sized companies. Such restructurings are encouraged with respect to unsecured claims are suspended, and unsecured through the alternative dispute resolution mechanism avail- creditors are prohibited from commencing new civil actions or able for business revitalisation under the Alternative Dispute civil execution proceedings. However, exercising security inter- Resolution Act (2007) and the Industrial Competitiveness ests is not prohibited, and secured creditors may collect their Enhancement Act (2014), and soft law such as the Guidelines claims regardless of the commencement of such proceedings, for Individual Debtor Out-of-Court Workouts (2013). except corporate reorganisation proceedings which prohibit secured creditors from exercising their security interests. 22 Key Issues to Consider When the Company is in Financial Difficulties 2.3 In what circumstances are transactions entered 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 There are no specific provisions of law that place enhanced the commencement of each of these proceedings. duties on the directors of distressed debtors. However, they There are two elements to the grounds for such challenges. owe obligations under general provisions of the Companies Act, The first pertains to the timing of the transactions, which must such as the duties of diligence and loyalty. Thus, for example, be conducted after the debtor falls into financial crisis. The directors could be held liable for damages to the company or second pertains to the harmfulness of the transactions to the creditors if they breach their duty of diligence. In addition, debtor. certain acts (such as gratuitous ones) by an insolvent company If such challenges are successful, the subject transactions are vulnerable to being challenged as being legally null and void. basically become null and void. Bona fide third parties, however, may be protected from such challenges.

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In special liquidation proceedings, such challenges are not affect any secured creditor’s right to enforce its security interests; available, but creditors may challenge transactions that are however, in exceptional circumstances, the court may impose harmful to creditors based on the Civil Code. This challenge certain restrictions on the secured creditors’ right to enforce- is not unique to insolvency proceedings and may apply to trans- ment. On the other hand, once corporate reorganisation proce- actions in general. dures commence with respect to the debtor company, enforcement of security interests will be subject to certain limitations as contem- 32 Restructuring Options plated in the Corporate Reorganisation Act. Cram-down is permitted under corporate reorganisation 3.1 Is it possible to implement an informal work-out in proceedings. When one or more classes of stakeholders approve your jurisdiction? the reorganisation plan, the court may authorise the reorganisation plan by providing a clause to protect the interests of It is possible to implement an informal work-out, which are dissenting creditors. increasingly being used, in addition to restructuring court proceedings. Restructuring plans in an informal work-out must 3.3 What are the criteria for entry into each be approved by all creditors. restructuring procedure?

3.2 What formal rescue procedures are available The entry requirement is for (i) there to be a risk that the debtor in your jurisdiction to restructure the liabilities of will not be able to pay its debts as they become due or that its distressed companies? Are debt-for-equity swaps debts exceed its assets, or (ii) the debtor to be unable to pay its and pre-packaged sales possible? To what extent can debts already due without causing significant hindrance to the creditors and/or shareholders block such procedures or threaten action (including enforcement of security) continuation of its business. to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram- 3.4 Who manages each process? Is there any court down dissenting classes of stakeholder? involvement?

There are two types of restructuring procedures in Japan: In civil rehabilitation proceedings, the board of the debtor civil rehabilitation proceedings; and corporate reorganisation company remains in control and has the power to manage the proceedings. company’s business. However, the court may require the debtor In civil rehabilitation proceedings, the debtor must propose to obtain permission of the court in order to conduct certain and submit to the court a rehabilitation plan within the period types of activities, including (but not limited to): (i) disposing of specified by the court. Registered creditors also have the right to propose and submit a rehabilitation plan that must be approved at property; (ii) accepting the transfer of property; (iii) borrowing a creditors’ meeting by a majority number of creditors present and money; (iv) filing an action; (v) settling a dispute or entering into voting at the meeting and a majority by value of all creditors who an arbitration agreement; and (vi) waiving a legal right. In prac- hold voting rights. If approved, the court authorises the rehabili- tice, the court appoints a supervisor in most cases and grants tation plan, which will bind the company and the creditors. him or her the authority to give such permission to the debtor on In corporate reorganisation proceedings, the trustee must its behalf in respect of the debtor’s activities. In addition, under propose and submit to the court a reorganisation plan within exceptional circumstances, a court-appointed trustee may take the period specified by the court. The debtor company, regis- over control of the company’s business. tered creditors or stockholders may also propose and submit a In corporate reorganisation proceedings, a trustee must reorganisation plan. The reorganisation plan must be submitted be appointed for the corporate debtor. The trustee, who is to and approved at a stakeholders’ meeting. If approved, the appointed by the court and is usually an attorney with exper- court authorises the reorganisation plan, which will bind the tise in insolvency cases, has control and possession of the debt- stakeholders. Different classes of stakeholders (e.g. unsecured or’s business and its assets. However, the trustee may also be a creditors, secured creditors and shareholders) vote separately, businessperson who is deemed fit to operate the debtor’s busi- and approval must be obtained from each class. The Corporate ness. Even under corporate reorganisation proceedings, there Reorganisation Act sets forth different thresholds for different are increasing numbers of cases in which the court appoints classes (for example, the requisite majority for unsecured credi- trustees from the current management. Such proceedings are tors is a majority by value). called ‘debtor-in-possession-type’ (‘DIP-type’) reorganisation Debt-for-equity swaps are possible in both proceedings. In proceedings, as opposed to traditional ‘administration-type’ corporate reorganisation proceedings, the process necessary for proceedings. In those cases, the court usually also appoints a debt-for-equity swaps set forth under the Companies Act (such as supervisor who monitors the management’s activities. Thus, the a special resolution of the shareholders’ meeting or a resolution of proceedings look similar to civil rehabilitation proceedings. the board of directors) will not apply if debt-for-equity swaps are stipulated in the approved reorganisation plan. In civil rehabilitation proceedings, however, debt-for-equity swaps are subject to 3.5 What impact does each restructuring procedure the above requirements under the Companies Act. have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections Pre-packaged sales, where a sponsor is selected prior to the are there for those who are forced to perform their filing, are commonly used in Japan, especially in civil rehabilita- outstanding obligations? Will termination and set-off tion proceedings. They can be authorised by the court without the provisions be upheld? creditors’ approval and implemented within one to two months after the filing for civil rehabilitation proceedings. Creditors and/or shareholders may file an immediate appeal If the company and its contract counterparty have not yet against the court’s decision to commence civil rehabilitation completely performed their obligations under a bilateral contract proceedings or corporate reorganisation proceedings. Commence by the time of commencement of civil rehabilitation proceed- ment of civil rehabilitation proceedings does not automatically ings or corporate reorganisation proceedings, the company or

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trustee (as applicable) may either cancel the contract or cause is supervised by the court. On the other hand, in special liqui- the company to perform its obligations and request the coun- dation proceedings, the liquidator who has been appointed by terparty to perform. When the counterparty is required to the company continues to hold control and possession of the perform its obligations, the counterparty’s claims are catego- company’s property. The liquidator’s activities are subject to the rised as a common benefit claim that can be paid at any time court’s supervision. without going through the proceedings. Even though existing contracts with the debtor often contain 4.4 How are the creditors and/or shareholders able a termination clause providing that the filing of restructuring to influence each winding up process? Are there any proceedings is a cause for termination, such clauses are often restrictions on the action that they can take (including regarded as void. the enforcement of security)? If a creditor owes a debt to the debtor at the time of commencement of restructuring proceedings, the creditor may set off its In bankruptcy proceedings, creditors are prohibited from claim against the debtor’s claim under certain circumstances. receiving payment in respect of any claim arising from any cause occurring before the commencement of the proceed- 3.6 How is each restructuring process funded? Is any ings (‘Bankruptcy Claim’) or otherwise acting in any manner protection given to rescue financing? that has the effect of satisfying their claim outside the proceedings. Civil actions and civil execution proceedings with respect The costs or expenses of restructuring proceedings are borne by to Bankruptcy Claims are suspended, and the Bankruptcy the debtor. In both civil rehabilitation and corporate reorgani- Claims are prohibited from commencing new civil actions or sation proceedings, the debtor’s or the trustee’s right to borrow civil execution proceedings. On the contrary, exercising secu- new money is subject to the court’s permission. The court will rity interests is not prohibited, and secured creditors may collect grant permission if the debtor proves that new funding is neces- their claims regardless of the filing or commencement of bank- sary to continue trading and maximise the value of the compa- ruptcy proceedings. The shareholders’ rights are not formally ny’s business. The lender can collect its claim outside these affected by the commencement of bankruptcy proceedings. proceedings as a common benefit claim. This places the new Nevertheless, shareholders will have little stake in the proceed- lender in a better position than prior unsecured creditors, but ings because the company’s shares are effectively valueless, and the new funding will not have priority over secured creditors in because both the company and its shares will be extinguished respect of their secured assets. upon closing of the proceedings. In special liquidation proceedings, the company must give 42 Insolvency Procedures public notice in the Official Gazette to request that its creditors register their claims during a certain specified period of time. The company cannot pay or otherwise satisfy creditors’ 4.1 What is/are the key insolvency procedure(s) claims during this period. Claims without security or priority available to wind up a company? are called ‘agreement claims’ and must be paid on a pro rata basis. Exercising security interests is not prohibited, and secured There are two options for court liquidation for insolvent compa- creditors may collect their claims regardless of the filing or nies: bankruptcy proceedings; and special liquidation proceed- commencement of special liquidation proceedings. However, ings, the latter being more flexible than the former. Special liqui- the court may order suspension of the exercise of security inter- dation proceedings allow a director or an officer of the company ests for the general benefit of creditors. Shareholders of the to be the liquidator to execute the liquidation, while bankruptcy company under special liquidation will have little stake in the proceedings require a court-appointed trustee to execute the proceedings because the company’s shares are effectively value- liquidation. less, and because both the company and its shares will be extinguished upon closing of the proceedings. 4.2 On what grounds can a company be placed into each winding up procedure? 4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform A company can be placed into bankruptcy proceedings if: outstanding obligations? Will termination and set-off ■ the company is characterised as being ‘unable to pay its provisions be upheld? debts’ – that is, where the company is generally and contin- uously unable to pay its debts as they become due; or In bankruptcy proceedings, bilateral contracts are not automat- ■ the company is characterised as ‘insolvent’ – that is, where ically terminated. However, when the company and its contract the company’s debts exceed its assets. counterparty have not yet completely performed their obliga- A company can be placed into special liquidation proceed- tions under a bilateral contract by the time of commencement of ings if: the bankruptcy proceedings, the trustee may either: ■ there are circumstances prejudicial to implementation of ■ cancel the contract; or the voluntary liquidation; or ■ perform its obligations and request the counterparty to ■ there is suspicion that the company is ‘insolvent’. perform theirs. However, creditors are not prohibited from offsetting their claims against their obligations to the company except in limited 4.3 Who manages each winding up process? Is there any court involvement? circumstances. In special liquidation proceedings, the proceedings themselves do not automatically affect the legal status of the existing Upon commencement of bankruptcy proceedings, a trustee is contracts. Creditors are not prohibited from offsetting their appointed by the court and takes over control and possession of claims against their obligations to the company except in limited the company’s property. The trustee is usually an attorney and circumstances.

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4.6 What is the ranking of claims in each procedure, 62 Employees including the costs of the procedure?

6.1 What is the effect of each restructuring or In bankruptcy proceedings, creditors’ claims are ranked in the insolvency procedure on employees? What claims would following order: employees have and where do they rank? (i) estate claims (e.g. fees for trustees, administrative expenses, tax claims that became due within one year before the In restructuring proceedings, in general, the company or trustee commencement of bankruptcy proceedings, employee (as applicable) tries to maintain employment contracts with its compensation for their work within three months before employees. If the company or trustee (as applicable) terminates the commencement of bankruptcy proceedings); employment, it must do so in a manner consistent with Japanese (ii) superior bankruptcy claims (e.g. tax claims and employee employment law (which is employee-friendly). Claims for unpaid compensation that are not estate claims); wages before the commencement of restructuring proceedings (iii) ordinary bankruptcy claims; and are treated as claims with general priority, whereas claims for (iv) subordinated bankruptcy claims (e.g. interests after the wages after the commencement are treated as common benefit commencement of bankruptcy proceedings). claims that can be paid at any time outside the proceedings. In special liquidation proceedings, creditors’ claims are In insolvency proceedings, in many cases, the debtor ranked in two categories. Claims in the first category basically company dismisses all or part of its employees before filing for correspond to estate claims and superior claims in bankruptcy commencement of the proceedings. If the company or trustee proceedings. Claims in the second category basically corre- (as applicable) terminates employment after the commencement spond to ordinary bankruptcy claims and subordinated bank- of the proceedings, it must do so in a manner consistent with ruptcy claims in bankruptcy proceedings. The first category is Japanese employment law, which requires 30 days’ notice before superior to the second category. such termination (or equivalent compensation). The company The priority of shareholders is the lowest rank both in bank- or trustee may continue to employ some of the employees so that ruptcy and special liquidation proceedings. Japanese law does they can assist with its administration. In such cases, wages are not have any rule of equitable subordination. treated as estate claims, which can be paid at any time outside the proceedings. Claims for unpaid wages before the commence- 4.7 Is it possible for the company to be revived in the ment of the proceedings are also granted certain priorities. future? 72 Cross-Border Issues In principle, the company will be extinguished and will not be revived if bankruptcy or special liquidation proceedings end. 7.1 Can companies incorporated elsewhere use However, if assets are found after the proceedings have already restructuring procedures or enter into insolvency ended, the company will be deemed to survive its corporate proceedings in your jurisdiction? capacity and a liquidator will be appointed by the court. As long as the company has an office or assets in Japan (although 52 Tax requirements differ depending on the proceedings), debtors incorporated outside Japan can enter into restructuring or insol- 5.1 What are the tax risks which might apply to a vency proceedings in Japan. restructuring or insolvency procedure? 7.2 Is there scope for a restructuring or insolvency In general, tax claims before the commencement of restruc- process commenced elsewhere to be recognised in your turing proceedings are treated as claims with general priority, jurisdiction? whereas tax claims after the commencement are treated as common benefit claims that can be paid at any time outside the Local courts in Japan may recognise foreign restructuring or proceedings. In restructuring cases, it is very important for the insolvency proceedings. The process is initiated by the filing of debtor company to avoid taxation on income from discharge of a debtor or trustee (if applicable) with the Tokyo District Court, indebtedness by applying deductible expenses to such income. which has exclusive jurisdiction over such recognition proceed- Tax claims before the commencement of bankruptcy proceedings. The test for recognition is based mainly on the necessity of ings are treated as estate claims if they became due within one such recognition. For example, if foreign restructuring or insol- year before the commencement of bankruptcy proceedings; vency proceedings are obviously ineffective over assets in Japan, otherwise, they are treated as superior bankruptcy claims. Tax such recognition would be denied. claims after the commencement of bankruptcy proceedings are treated as estate claims if they are categorised as administrative expenses; otherwise, they are treated as subordinate bankruptcy 7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other claims. jurisdictions? Is this common practice? In special liquidation proceedings, tax claims are treated as superior claims that can be paid at any time outside the proceedings. It is not common practice, but companies incorporated in Japan can enter into restructuring or insolvency proceedings in other jurisdictions. For instance, Azabu Buildings Co. Ltd. entered into Chapter 11 bankruptcy proceedings in the U.S. in 2006.

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82 Groups 92 COVID-19

8.1 How are groups of companies treated on the 9.1 What, if any, measures have been introduced in insolvency of one or more members? Is there scope for response to the COVID-19 pandemic? co-operation between officeholders? There have been no legislative measures introduced for restruc- In general, there are no specific legal provisions on how to treat turing or insolvency proceedings in response to COVID-19. group companies in restructuring or insolvency proceedings. However, the Japanese Government has set out several financial However, in practice, group companies will usually file these support measures for businesses, such as government-backed proceedings at the same time because they must resolve guarantee guarantees to facilitate new loans, requests to banks to accept claims with respect to bank loans, typically in situations where the the rescheduling of loan payments, deferral of tax and social parent company has guaranteed its subsidiary’s bank loans. insurance payments, rent support subsidies and an employee There are no specific legal provisions on cooperation between wage-subsidy system. 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 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 trustees. Nevertheless, the same court will have jurisdiction over the group companies in most cases, which makes it easy to proceed with several restructuring or insolvency proceedings at the same time and to construct a cooperative relationship between the trustees.

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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

Mori Hamada & Matsumoto (‘MHM’) is a full-service law firm that has insolvency proceedings, including corporate demergers, securitisations, DIP served clients with distinction since its establishment in December 2002, financings, asset-backed lending and debt-for-equity swaps. The depth and by the merger of Mori Sogo and Hamada & Matsumoto. MHM has an breadth of the firm’s practice enables us to provide comprehensive services extensive insolvency practice, acting on behalf of both debtors and credi- in transactions and proceedings involving financially distressed 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 work-out 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

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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 Until recently, the Dutch jurisdiction was primarily credi- company in financial difficulties? Is there a specific tor-friendly; the primary aim of the Dutch Bankruptcy Act point at which a company must enter a restructuring or insolvency process? (“DBA”) – more specifically 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) The managing directors of the debtor are not under a statu- discharge of debts. However, on 1 January 2021, the Act on tory obligation to file for the opening of insolvency proceed- confirmation of private restructuring plans (Wet homologatie onder- ings. Although the DBA does not contain such obligation, the hands akkoord, the “Dutch Scheme”) came into effect, giving managing directors may become personally liable vis-à-vis the the debtor a remedy to reorganise its business. creditors if the managing directors have allowed the company to incur obligations towards a third party that they know, or should have known, the company will not be able to timely meet. 1.2 Does the legislative framework in your jurisdiction In such circumstances, the managing directors will be required allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what to take appropriate measures, which could – depending on the extent are each of these used in practice? circumstances – include the cessation of trading and the filing for suspension of payments or bankruptcy. A managing director can be held liable for losses suffered The DBA provides for two formal corporate insolvency proceed- by the company due to improper management if the managing ings: bankruptcy ( faillissement; corporate liquidation proceed- director can be seriously blamed (ernstig verwijt), taking into ings); and suspension of payments (surseance van betaling; corpo- account all facts and circumstances, such as the allocation of rate restructuring proceedings). duties within the management board, the management board In both formal insolvency proceedings the debtor can offer guidelines, information that the member of the management a composition plan (akkoord) to its (ordinary) creditors, but this board is or should have been aware of, etc. These proceed- does not happen often. ings can only be initiated by the company, or by the bankruptcy Suspension of payments is rarely successful and is often trustee in case of a bankrupt company. followed by bankruptcy. In practice, bankruptcy is the most Managing directors are liable for the deficit of the estate if used insolvency proceeding. it is plausible that the management board manifestly improp- The legislative framework also allows informal work-outs, for erly managed the company and this was an important cause of example, by means of a plan of composition. Such an informal the bankruptcy. Certain legal presumptions apply. This liability composition currently requires the cooperation of all creditors. towards the bankruptcy estate also applies to a de facto managing As mentioned, the Dutch Scheme entered into force on 1 director. January 2021. The Dutch Scheme introduces a framework that Although the main rule is that only the company (and not its allows debtors to restructure their debts outside formal insol- managing directors) is liable towards third parties such as cred- vency proceedings. The Dutch Scheme combines features of itors of the company, personal liability towards third parties the US Chapter 11 and English schemes of arrangement. The may nevertheless arise if a managing director has committed an purpose of the restructuring can be (i) to restructure the debt unlawful act towards such third party by violating his general duty and equity structure in order to prevent insolvency, or (ii) to of care. In all cases, the standard of liability is that the member of liquidate the assets of the company and distribute the proceeds the management board can be seriously blamed for this. amongst the creditors (see further under section 3). Although Members of the management board may further become jointly the Dutch Scheme was only introduced on 1 January 2021, it is and severally liable for the payment of certain taxes. This liability already actively used in practice. arises in the case of manifestly improper management. If the company or any of the managing directors timely filed a notification of non-payment, the tax authorities have to demonstrate that there was such manifestly improper management. If the company

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or any of the managing directors failed to timely file the notifi- 2.3 In what circumstances are transactions entered cation, it is legally assumed that the non-payment of taxes was into by a company in financial difficulties at risk of caused by the managing director, unless he proves otherwise. challenge? What remedies are available? In conclusion, certain criminal law provisions apply, e.g. in case of fraudulent conveyance. The bankruptcy trustee is entitled to invalidate legal acts of the bankrupt debtor that were carried out before the declaration of 2.2 Which other stakeholders may influence the bankruptcy and that were detrimental to the creditors. No hard- company’s situation? Are there any restrictions on the ening period applies. The burden of proof may be reversed in action that they can take against the company? For respect of voluntary legal acts that took place less than a year example, are there any special rules or regimes which before the debtor was declared bankrupt (e.g. legal acts entered apply to particular types of unsecured creditor (such into with related parties or transactions at undervalue). as landlords, employees or creditors with retention Voluntary legal acts by the bankrupt debtor, of which the of title arrangements) applicable to the laws of your results are detrimental to creditors (which is established when jurisdiction? Are moratoria and stays on enforcement the action is invoked), may be invalidated if both the debtor and available? its counterparty knew or should have known (at the time the legal act was voluntarily entered into) that such legal act would In the Netherlands, it is fairly easy for creditors to obtain leave have a detrimental effect on the creditors. The fact that a trans- for conservatory attachment. Such creditors may also file a peti- action was at arm’s length does not necessarily mean that a trans- tion for bankruptcy. The filing of such petition can trigger action cannot be challenged. contractual clauses that make it possible to terminate existing Also, compulsory legal acts can be invalidated if (a) the cred- contracts. itor knew that the request for bankruptcy was pending, or (b) Dutch law further provides for a broad retention of title if the creditor consulted with the debtor with the intention to regime. Suppliers can arrange to reclaim their goods until all put him in a more favourable position than the other creditors. invoices have been paid. These must be proven by the bankruptcy trustee. There is no Secured creditors (financiers) also have a strong influence. In presumption of knowledge as in the case of voluntary legal acts. practice, a company in financial difficulties will be placed under Outside of formal insolvency proceedings, transactions can the supervision of the financiers’ special management depart- also be challenged. As a matter of Dutch law, every creditor may ment because certain covenants under the financing agreements nullify (by a simple declaration) any legal act entered into by a will be breached. Formally, the secured creditor has no role debtor with a third party if the requirements for voidable prefer- within the company, but in practice the company often coop- ence outside bankruptcy are met. erates with the bank, in the knowledge that the cooperation of In case of a Dutch Scheme, court authorisation can be the financiers is required for any restructuring due to all assets requested for restructuring efforts, such as debtor-in-posses- being pledged. sion (“DIP”) financing. If court authorisation is obtained, such Employees take a special position in the Netherlands. Outside efforts are protected from avoidance actions. of a bankruptcy scenario, the possibilities to dismiss employees The validity and enforceability of the obligations of a debtor are limited. This is one of the reasons why it is difficult to under, e.g. guarantee or security interest, may be successfully successfully restructure a company outside insolvency proceed- contested by a debtor (or its bankruptcy trustee) if the execution ings. Legislation is being drafted to strengthen the position of of the security document is not within the scope of the corpo- employees in case of a transfer of undertaking during bank- rate objects of the debtor (doeloverschrijding) and the counterparty ruptcy proceedings. Also note that it is not possible to affect of such debtor under the security document knew or ought to the rights of employees under employee contracts in the Dutch have known (without enquiry) of this fact. Scheme. In the Netherlands, suspension of payments (moratorium) is 32 Restructuring Options granted on a preliminary basis if a debtor foresees that it will be unable to meet its obligations. During suspension of payments 3.1 Is it possible to implement an informal work-out in proceedings, the debtor cannot be forced to pay his debts and your jurisdiction? all actions in progress to recover those debts are suspended. However, this regime only affects the ordinary creditors. See Until 1 January 2021, the Dutch legislative framework only allowed question 3.2 and further. informal work-outs if all creditors cooperate and approved the A freeze period can apply in the Dutch Scheme, bankruptcy informal work-out. As already briefly mentioned above, as of 1 or suspension of payments (see questions 3.2 and 4.4). January 2021 the Dutch Scheme was introduced, which allows for Stakeholders can have influence in relation to the Dutch work-outs outside formal insolvency proceedings by means of a Scheme. Not only the debtor, but also any of its creditors, court-approved restructuring plan (see question 3.2). shareholders or employee representatives may take the initiative for the Dutch Scheme. In general, the debtor does not require shareholder consent for a restructuring plan in the Dutch 3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of Scheme. An exception applies in case a restructuring expert is distressed companies? Are debt-for-equity swaps appointed as part of a scheme for small or medium-sized enter- and pre-packaged sales possible? To what extent can prises (SMEs). If one of the creditors, shareholders or employee creditors and/or shareholders block such procedures representatives takes the initiative for a restructuring plan or threaten action (including enforcement of security) under the Dutch Scheme, it must request the court to appoint to seek an advantage? Do your procedures allow you a restructuring expert, who will prepare a restructuring plan on to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? behalf of the debtor. The debtor or the restructuring expert can request the court to grant a freeze order for a period of four months, which can be extended by another four months (see As explained, the purpose of a restructuring by means of a Dutch question 3.2). Scheme can be (i) to restructure the debt and equity structure in

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order to prevent insolvency, or (ii) to liquidate the assets of the accept the composition if – in summary – the majority of the company and distribute the proceeds amongst the creditors. The creditors vote in favour of the plan and the plan is approved Dutch Scheme allows for a wide range of possibilities to restruc- by the court. However, in practice, it is difficult to achieve a ture the debt; for example by means of a debt for equity swap, a successful restructuring by way of offering a composition plan. haircut or extension of payment obligations, or through amend- Currently, a pre-packaged sale is also allowed under Dutch ments to contractual terms (see further under question 3.5). It is law. Although there is no specific legislation regarding pre-pack- also possible to restructure guarantees provided by group compa- aged sales yet, the majority of Dutch courts have allowed for nies. The procedure can be finalised in only four to six weeks. pre-packaged sales. Since the European Court of Justice has Once the debtor has announced the restructuring plan, the decided that the transfer of undertaking rules in respect of court can grant a freezing order of a maximum of four months at employment contracts can be applicable in pre-packaged sales, the request of the debtor or restructuring expert. The freezing the pre-packaged sale has not been very popular as there is a order can be extended by four months for a total maximum of risk that employees of the debtor automatically transfer to the eight months. If a freezing order applies, the enforcement of purchaser in a pre-packaged asset sale. Case law from the Dutch security rights is restricted, the court can lift attachments and Supreme Court on this topic is expected. bankruptcy applications and applications for suspension of payments are stayed. 3.3 What are the criteria for entry into each Creditors and shareholders with dissimilar rights are placed in restructuring procedure? different classes. Creditors and shareholders are considered to have dissimilar rights if (i) they have different rights in case of The Dutch Scheme can be initiated when the debtor is in a posi- bankruptcy proceedings, and/or (ii) are offered different rights tion in which it can be reasonably expected that it will not be under the restructuring plan. Only creditors/shareholders whose able to continue paying its debts. For example, when the debtor rights are affected in the restructuring plan are entitled to vote. foresees not being able to repay a loan in six or 12 months’ time The final restructuring plan has to be presented to these creditors and this would result in a bankruptcy of the debtor. and shareholders at least eight days prior to a vote. The voting The debtor can file a petition in court for a suspension of will be done per class and can take place either in a meeting or payments if it foresees that it will be unable to continue to timely electronically. A two-thirds majority in value is required for a meet its obligations. Suspension of payments is immediately particular class to consent to the restructuring plan. granted on a preliminary basis. In theory, the object of a suspen- The debtor or restructuring expert can request the court for sion of payments is to allow the debtor time either to overcome a confirmation of the restructuring plan if at least one class of temporary illiquidity or to propose a settlement to its creditors. creditors voted in favour of the plan. Upon confirmation by the An application for suspension of payments cannot be made by court, the restructuring plan becomes binding on the debtor and creditors or other third parties. all creditors and shareholders who were entitled to vote. The court has to test the restructuring plan at its own motion against the general grounds for refusal and reject the plan if any 3.4 Who manages each process? Is there any court of those grounds applies, e.g. procedural requirements have not involvement? been met, the performance of the plan is not sufficiently guaranteed, the plan is a result of fraud, etc. The court may also reject The intention of the legislator with respect to the Dutch Scheme the restructuring plan at the request of opposing creditors or is, in principle, to minimise the involvement of the court. shareholders, if they would be significantly worse off under the Court involvement can in theory be limited to the confirma- plan compared to a liquidation scenario (best interest of creditors test). tion hearing during which the court will test the plan against the If one or more classes have rejected the restructuring plan, grounds for refusal (see above under question 3.2). However, the court can still confirm the plan if at least one class, which if one of the creditors, shareholders or employee representa- is expected to receive cash payment in the event of bankruptcy, tives takes the initiative for the Dutch Scheme, that same entity has accepted the plan (cross-class cram-down). However, the court must request the court to appoint a restructuring expert who must reject the plan at the request of opposing creditors or will prepare the restructuring plan on behalf of the debtor. A shareholders from a dissenting class when any of the following debtor may also request the appointment of a restructuring apply: (i) the order of priority is disregarded in relation to the expert by the court, for example to avoid any suggestion of a opposing class, unless there is a justifiable reason for that devia- conflict of interest. Regardless of the appointment of a restruc- tion and the relevant creditors or shareholders’ interests are not turing expert, the debtor remains in control of the business and prejudiced (absolute priority rule); or (ii) the plan does not offer the day-to-day management of the company. creditors, other than secured commercial lenders, a distribu- The court can be involved earlier in the process. During the tion in cash of the amount they would receive in cash in a bank- process, the debtor or the restructuring expert can request the ruptcy proceeding of the debtor. In relation to secured creditors, court to issue preliminary judgments on several points such as certain exceptions apply. The supplemental grounds for refusal class formation, eligibility and valuation. are inspired by the US Chapter 11 “best interest of creditors test” Upon granting a preliminary suspension of payments, the and “absolute priority rule”. court will appoint an administrator (bewindvoerder) and usually Suspension of payments is the main formal rescue proce- also a supervisory judge. The administrator and the manage- dure available in the Netherlands. Suspension of payments only ment board will jointly administer the affairs of the debtor and affects the rights of ordinary creditors; the obligations of the investigate the possibilities of a reorganisation of the debtor’s debtor to pay its ordinary creditors are suspended. The rights of company and/or full or partial payment of the creditors through secured and preferential creditors are not affected. a plan of composition. By law, the management and the admin- The debtor can offer a composition plan that provides for a istrator may only act together; the administrator is de facto in full or partial payment of the suspended claims of the creditors, control during suspension of payments. In practice, the prelim- in full satisfaction of their claims. Using the plan of compo- inary suspension of payments is most often swiftly followed sition during suspension of payments may lead to a successful by a bankruptcy, because the administrator considers that a reorganisation. Dissenting ordinary creditors can be forced to successful reorganisation is unlikely.

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3.5 What impact does each restructuring procedure to provide a preferential loan that has a higher rank than other have on existing contracts? Are the parties obliged to debts of the debtor if the bankruptcy trustee or the adminis- perform outstanding obligations? What protections trator agrees. are there for those who are forced to perform their outstanding obligations? Will termination and set-off 42 Insolvency Procedures provisions be upheld?

4.1 What is/are the key insolvency procedure(s) The Dutch Scheme allows for the possibility to restructure debt available to wind up a company? by amending the contractual terms of existing agreements with the exception of employment contracts. The debtor or restructuring expert can propose to its counterparty a voluntary amend- The key insolvency procedure available to wind up a company is ment or termination of an existing agreement. If the counter- bankruptcy. The Dutch Scheme can also be used for a wind-up. party is not willing to accept such proposal, the debtor or the restructuring expert may terminate such agreement against a 4.2 On what grounds can a company be placed into certain termination period with court approval, provided that each winding up procedure? the restructuring plan is confirmed by the court. The court can extend the termination period up to a maximum of three A debtor can be declared bankrupt by a Dutch court if it resides months. The counterparty might have a claim for damages due or has a place of business in the Netherlands and either applies to the early termination of the agreement, but such claim can be for bankruptcy itself or an application for bankruptcy is filed by included in the restructuring plan. a creditor. Ipso facto clauses are temporarily not enforceable. The petition must reveal facts and circumstances that consti- In principle, suspension of payments does not affect existing tute prima facie evidence that the debtor has ceased to pay its agreements. However, the debtor’s payment obligations in debts. This is considered to be the case if there are at least two relation to ordinary claims are suspended. Moreover, these creditors, one of whom has a claim that is due and payable and contracts might contain provisions on the consequences of the that the company cannot or refuses to pay. The DBA does not granting of suspension of payments on any of the parties to require that other creditors support the petition. the agreement, and these remain valid in principle. The same In addition, the administrator in suspension of payments applies to set-off provisions. might have to file for bankruptcy. This would, for example, Although agreements in principle are not affected by suspen- be the case if there is no outlook that the debtor will be able to sion of payments, the administrator/debtor does not have to satisfy its creditors or the debtor acts in bad faith. perform all obligations under agreements as this may conflict In relation to the Dutch Scheme, we refer to the answer to with his duty to treat all creditors equally (e.g. not obliged to make question 3.3. The debtor has to be in a position that it can payments, deliver goods). The counterparty can file its (ordinary) reasonably be expected that it will not be able to continue paying claim in the bankruptcy estate. The administrator/debtor does its debts. have the obligation to passively perform (e.g. honour the lease agreement if the debtor is the lessor). If such obligations are not honoured, the counterparty has a direct claim on the estate. 4.3 Who manages each winding up process? Is there If both the debtor and the counterparty have not or have any court involvement? only partially performed under an agreement, the counterparty can request that the administrator/debtor confirms within a When making the bankruptcy order, the court appoints a super- reasonable time whether they are willing to perform under the visory judge (rechter-commissaris) and at least one bankruptcy contract. If the administrator/debtor does not confirm this, he/ trustee (curator). The bankruptcy trustee is entrusted with the she loses the right to claim performance of the counterparty’s administration of the bankruptcy and is exclusively entitled to obligations. If the administrator/debtor confirms that he/she administer and dispose of the assets. The bankruptcy trustee will perform, the administrator/debtor has to provide security. is usually an attorney of the local bar association and, especially in case of larger bankruptcies, a specialised insolvency lawyer. The supervisory judge’s task is to supervise the bankruptcy 3.6 How is each restructuring process funded? Is any protection given to rescue financing? trustee and he has a statutory duty to approve certain decisions to be made by the bankruptcy trustee. We refer to the answer to question 3.4 in relation to the Dutch Reorganisation of the company will generally be funded by the Scheme. In summary, the debtor or a restructuring expert debtor itself. The debtor can generate money by selling certain manages the process. Court involvement can be limited to only assets in order to pay off debts. the confirmation hearing. In the Dutch Scheme, the restructuring costs, e.g. the costs for the restructuring expert, will be borne by the debtor. Restructuring efforts, such as DIP financing, can be protected 4.4 How are the creditors and/or shareholders able from avoidance actions if the court has granted authorisation for to influence each winding up process? Are there any restrictions on the action that they can take (including such legal act. The court grants authorisation if (i) the relevant the enforcement of security)? legal act is necessary for the continuation of the business during the scheme process at the time of the granting of the authorisation, and (ii) the relevant legal act is expected to be in the interest The management board is not authorised to file for bankruptcy of the joint creditors while interests of individual creditors are without a resolution to do so from the general meeting of share- not substantially prejudiced. holders. Other than that, shareholders have little influence on Rescue financing is not protected in case of a suspension the bankruptcy proceedings. of payments or bankruptcy proceedings. However, after the The court may, depending on the type and size of the bank- opening of insolvency proceedings it is possible for a financier ruptcy, decide to form a creditors’ committee whose task is to

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advise the trustee. If a creditors’ committee is installed, the The Dutch Scheme allows for the possibility to restructure bankruptcy trustee is obliged to seek advice from the committee debt by amending the contractual terms of existing agreements with regard to the subjects referred to in the DBA. In addition, (see question 3.2). However, it is not possible to affect the rights creditors have the right to file a request with the supervisory of employees under employment contracts. judge objecting to acts of the bankruptcy trustee or demanding an order from the supervisory judge. 4.6 What is the ranking of claims in each procedure, Ordinary creditors are not entitled to enforce their claims; all including the costs of the procedure? attachments on the debtor’s assets that benefit specific creditors are replaced by a general bankruptcy attachment that benefits all creditors. Pending legal proceedings are suspended. Creditors The ranking of claims is as follows: have to file any claims on the debtor in the bankruptcy estate. Estate claims (boedelvorderingen) are direct claims against the Creditors that have a right of mortgage or right of pledge have estate. Estate claims have priority over all other claims. An more influence. Subject to any applicable freeze order, secured exception applies to the claims of secured creditors that have creditors are entitled to foreclose their collateral during bank- timely foreclosed their security, as they can act as if there is no ruptcy. The bankruptcy trustee is in principle not entitled to the bankruptcy at all. proceeds of the sale of the secured assets, nor is he entitled to Estate claims are claims that arise by virtue of law (e.g. rental withhold these assets. The secured creditors cannot be charged payments during the bankruptcy, and salaries dating from after with the costs of the bankruptcy. the date of the bankruptcy order), from legal acts performed by However, the bankruptcy trustee may impose on the mort- the bankruptcy trustee in his capacity and resulting from actions gagee or pledgee a reasonable term for selling the collateral. If of the bankruptcy trustee in breach of an obligation or commit- secured creditors do not execute the collateral before the dead- ment applicable to him in his capacity as bankruptcy trustee. The line, the bankruptcy trustee is entitled to liquidate the collat- salary and costs of the bankruptcy trustee are estate claims as well. eral himself, notwithstanding the creditor’s right of priority to Claims of secured creditors are claims of creditors that are the proceeds as a preferential creditor. In that case, the secured secured by a right of mortgage (hypotheek) or a right of pledge creditor has to share in the costs of the bankruptcy, which may (pandrecht). Subject to any applicable freeze order, secured cred- mean that they will receive little or no proceeds. itors are entitled to foreclose their collateral during bankruptcy The supervisory judge may declare a freeze period, during (see above under question 4.4). To the extent that not all claims which recourse can only be sought against (some of the) assets of can be satisfied from the proceeds of the enforcement of the the estate or assets in the possession of the bankruptcy trustee, security rights, the remainder is treated as an ordinary claim. after having obtained authorisation from the supervisory judge. Preferential claims are claims that have a priority right to The freeze period applies for a maximum period of two months the proceeds of all or certain assets of the estate (depending on and may be extended once, for a maximum of two months. the type of claim). The claims of the tax and social authori- In relation to the Dutch Scheme, we refer to the answers to ties (taxes and social insurance contributions) as well as certain questions 3.3 and 3.4. In summary, creditors, shareholders or claims of employees, are the most important categories of pref- employee representatives may take the initiative for the Dutch erential claims. Preferential creditors only receive payment if all Scheme. estate claims are paid. With regard to the proceeds of fixtures and fittings, tax claims take preference over secured claims under certain circumstances. 4.5 What impact does each winding up procedure have Ordinary claims are claims that already existed on the date on existing contracts? Are the parties obliged to perform of the bankruptcy order or were already a part of the legal posi- outstanding obligations? Will termination and set-off tion of the creditor at the date of the bankruptcy order. Ordinary provisions be upheld? claims must be submitted for verification. The ordinary creditors receive a pro rata share of the remainder after the estate In principle, bankruptcy proceedings do not affect the validity claims and preferential claims are paid. or the content of an agreement. Set-off provisions and termi- Post-insolvency claims are claims that arise after the bank- nation provisions will be upheld. The DBA provides for broad ruptcy and do not fall within one of the above-mentioned cate- set-off possibilities. gories. Those claims cannot be submitted for verification. Although agreements are in principle not affected by the bankruptcy proceedings, the bankruptcy trustee does not have to perform obligations under agreements that may conflict with 4.7 Is it possible for the company to be revived in the future? his duty to treat all creditors equally (e.g. not obliged to make payments, deliver goods). The counterparty has to file its claim with the bankruptcy estate. The bankruptcy trustee does have In theory, the bankruptcy can end with a plan of composition the obligation to passively perform (e.g. honour the lease agree- offering the creditors a partial payment of their claim. The ment if the debtor is the lessor). Alternatively, the counterparty bankrupt legal entity then emerges from bankruptcy and can has a direct claim on the estate. continue to do business. In practice, the plan of composition is If both the debtor and the counterparty have not, or have only almost never offered in case of bankruptcy proceedings. partially performed under an agreement, the counterparty can request the bankruptcy trustee to confirm within a reasonable 52 Tax time whether he is willing to perform under the contract. If the bankruptcy trustee does not confirm, he loses the right to claim 5.1 What are the tax risks which might apply to a performance of the counterparty’s obligations. If the bank- restructuring or insolvency procedure? ruptcy trustee confirms that he will perform, he has to provide security. Restructuring and insolvency proceedings can significantly The DBA does grant the bankruptcy trustee the right to affect the tax position of the company. Certainly in group terminate lease agreements and employment contracts. relationships, complex tax regulations can have far-reaching

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consequences that affect not only the distressed company itself, 72 Cross-Border Issues but also the group of companies to which it belongs. Examples of possible tax risks are: (a) Companies in distress are obliged to timely report to the 7.1 Can companies incorporated elsewhere use tax authorities their inability to pay tax debts. Not (timely) restructuring procedures or enter into insolvency proceedings in your jurisdiction? reporting the inability to pay tax debts may lead to directors’ liability. (b) Many groups of companies form a fiscal unity ( fiscale Any debtor residing in the Netherlands or with its centre of eenheid) for corporation tax, VAT, or both. If a company main interests (“COMI”) located in the Netherlands can enter in a fiscal unity goes bankrupt, this may affect and eventu- into insolvency proceedings in the Netherlands. ally terminate the fiscal unity in relation to that company, The Dutch Scheme provides for two types of proceedings: which may lead to Dutch corporate income tax due in the public proceedings and confidential proceedings. year of termination. The Dutch government has requested to place the public (c) If a creditor remits a claim, this can lead to taxable profit proceedings in Annex A to the EU Insolvency Regulation. (kwijtscheldingswinst) for the debtor. Under Dutch law there Once placed in the Annex, the public proceedings will be auto- is a specific regulation concerning these kinds of profits. matically recognised in other EU Member States (with the Remission is also possible within the company’s fiscal unity. exception of Denmark). The Dutch courts have jurisdiction if It is therefore important to map out the distressed company’s the COMI or a branch is located in the Netherlands. tax position adequately and timely. Recognition of the confidential proceedings depends on the private international law regime of the relevant jurisdiction. 62 Employees It is expected that the Dutch Scheme will be recognised in jurisdictions that have incorporated the UNCITRAL Model Law, unless the relevant jurisdiction requires reciprocity. The Dutch 6.1 What is the effect of each restructuring or courts have jurisdiction if any of the affected parties is located in insolvency procedure on employees? What claims would employees have and where do they rank? the Netherlands, or other aspects provide for sufficient connection with the Netherlands.

With authorisation from the supervisory judge, the bankruptcy trustee is entitled to terminate the employment contracts. The 7.2 Is there scope for a restructuring or insolvency applicable termination period depends on the terms of the rele- process commenced elsewhere to be recognised in your jurisdiction? vant employment agreement, but at the longest is six weeks. The salary and pension contributions between the bankruptcy date and the date of termination of the employment agreement There is a difference between proceedings commenced in an rank as estate claims. Claims that pre-date the bankruptcy date EU Member State and those commenced in a non-EU Member and that arose within one year prior to that date are preferential State. claims. Any further claims rank as ordinary claims. The same Insolvency proceedings commenced in EU Member States regime applies in a suspension of payments. (with the exception of Denmark) are recognised pursuant to the In practice, most of the employee’s claims on the estate will EU Insolvency Regulation (recast). be paid by the Employee Insurance Agency (“UWV”) under Proceedings commenced in non-EU Member States are the wage guarantee scheme. It concerns the amount that ranks formally not recognised in the Netherlands absent any treaty, as estate claims (with a maximum of six weeks) and also the but in practice do have some effect. When determining a claim salary for the period until 13 weeks prior to the bankruptcy and for recognition of insolvency proceedings rendered by a court certain other amounts (e.g. holiday pay and holidays for the year in a non-EU Member State, Dutch courts will apply the Dutch preceding the bankruptcy). The UWV in turn will subrogate in private international rules for recognition of foreign judg- the claims of the employees towards the estate. ments. Foreign judgments will be recognised if – in summary In a suspension of payments, the administrator and debtor – the authority of the relevant court is based on internationally acting jointly can terminate the employment contracts together. accepted standards and the foreign judgment does not conflict They require a dismissal permit from the UWV. The termi- with the Dutch public order. The recognition of the foreign nation period can vary depending on the relevant employment insolvency order might, however, be limited by the principle contract. of territoriality. This means that the foreign proceeding, for Under the Dutch Scheme, it is not possible to affect the rights example, cannot impair the rights of creditors to take recourse of employees under employment contracts. on assets located in the Netherlands. European rules on the transfer of undertakings are not applicable in case of an asset sale during bankruptcy proceedings. 7.3 Do companies incorporated in your jurisdiction This, however, might differ in the case of a pre-packaged sale restructure or enter into insolvency proceedings in other due to the recent judgment of the European Court of Justice jurisdictions? Is this common practice? in relation to Smallsteps; see also question 3.2 above. In addition, legislation is being drafted so that the transfer of undertak- Occasionally, companies incorporated in the Netherlands enter ings rules are also applicable in bankruptcy proceedings, unless into insolvency proceedings or restructuring proceedings in the purchase can provide economic, technical or organisation other jurisdictions. Dutch incorporated companies have, in the reasons that justify changes to staff or the employment contracts. 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. We expect that this will happen less frequently now the Dutch Scheme has been introduced.

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82 Groups the application for bankruptcy by a creditor; (ii) suspend other recovery measures taken by a creditor (for example, a debtor may request the provisional judge to terminate or 8.1 How are groups of companies treated on the suspend an attachment or an execution-sale); and (iii) grant insolvency of one or more members? Is there scope for the debtor a temporary stay of payments. In his request, the co-operation between officeholders? debtor has to make summarily plausible that he is in a situation in which he has been unable, solely or principally as a Dutch legislation does not provide for a formal procedure with result of the outbreak of COVID-19, to continue his busi- regard to the insolvency of a group of companies. The main rule ness as usual and is therefore unable to pay his debts. is that each company has to be separately liquidated. ■ The Time Out Arrangement (“TOA”). The TOA purports In exceptional cases, the bankruptcies can be settled jointly to support business owners in distress by preventing bank- by means of what is known as a consolidated settlement. At ruptcy and making them aware of the Dutch Scheme. As the request of the bankruptcy trustee, the appointed supervi- part of the TOA, a credit facility will be introduced for sory judge is authorised to decide whether a consolidated settle- business owners wishing to use the Dutch Scheme. Also, ment is necessary. as part of the TOA, the Tax and Customs Administration Dutch law does not provide for a statutory obligation for wishes to look more flexibly, together with creditors and bankruptcy trustees to cooperate with one another. debt counsellors, at waiving certain (tax) debts, in cases It is possible to restructure guarantees of group companies where a payment arrangement is not sufficient. under the Dutch Scheme. In the event of a group restructuring, ■ Temporary emergency scheme for job retention (Tijdelijke the Dutch courts have ruled that offering a joint composition Noodmaatregel Overbrugging voor Werkbehoud; “NOW”). plan is not possible, but two (or more) separate plans can be Employers with more than 20% turnover loss can apply submitted for confirmation at the same time with the same court. for the Temporary Emergency Bridging Measure for Sustained Employment to receive compensation of their 92 COVID-19 employees’ wages from October 2020–July 2021. NOW 3 is divided into three periods: NOW 3.1 compensates wages 9.1 What, if any, measures have been introduced in from 1 October 2020 until 1 January 2021; NOW 3.2 runs response to the COVID-19 pandemic? from 1 January 2021 until 1 April 2021; and NOW 3.3 from 1 April 2021 until 1 July 2021. The following measures in response to the COVID-19 pandemic are worth mentioning in the Netherlands: ■ f As o 17 December 2020, the Temporary Act COVID-19 (Tijdelijke wet COVID-19) aims to prevent unnecessary bankruptcies as a consequence of the COVID-19 pandemic. At time of writing, the Temporary Act remains in effect until 1 June 2021. A debtor can request the court to: (i) suspend

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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 companies in stress and distress. The team acts on cross-border financial Stibbe is an international law firm advising on the laws of the Benelux restructuring matters and distressed transactions for a range of high-pro- countries and European law, with offices located in Amsterdam, Brussels file borrowers and lenders. It also represents clients in litigation relating to and Luxembourg as well as in Dubai, London and New York. bankruptcy or insolvency and members of the team are regularly appointed Our practice groups include restructuring and insolvency, employment, by the court as administrators and bankruptcy trustees. The team combines pensions and incentives, corporate, mergers and acquisitions, real estate, 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 concerning

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Russia Russia

Alexander Zadorozhnyi

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: managers, shareholders and other persons who may give manda- ■ enhancement of subsidiary responsibility of the persons tory instructions to a company’s management. controlling the debtor, including the presumption of guilt In relation to companies carrying out ordinary business (small for controlling persons under certain circumstances, the and medium-sized businesses), the bankruptcy legislation does challenging burden of which is assigned to the controlling not contain a list of specific measures that the management person. Herewith, the controlling person can be given of the company should take in order to prevent bankruptcy. subsidiary responsibility both outside the bankruptcy However, there is a provision in Russian legislation obliging the matter and in case of its termination; manager to take measures on bankruptcy prevention. ■ special bankruptcy conditions for challenging a debtor Such measures can be taken in the form of re-establishing a transaction that resulted in the withdrawal of assets of one debtor’s solvency. Herewith, the creditors can directly partici- or several creditors provide for a preferential satisfaction pate in such re-establishment through entering into agreements of obligations; with the debtor. Russian legislation specifies financial recovery as one of the ■ banks and tax authorities are entitled to apply for debtor bankruptcy prevention measures, which results in the provision bankruptcy without resolution of the court, as opposed to of financial aid to the debtor by shareholders in an amount suffi- all other creditors, for whom the right to apply for bank- cient to satisfy all the debts of the debtor. ruptcy arises upon a legally effective court decision on debt The regulation of banks’ bankruptcy prerequisites is provided collection; in more detail in the Russian bankruptcy legislation. ■ pledge lenders are entitled to vote in creditors’ meetings The legislation provides the following measures on the on key aspects, including the selection of applicable bank- prevention of bankruptcy in banks, which can also be applied ruptcy proceedings as well as matters referring to removal to ordinary companies: or selection of an insolvency manager 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 cost 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 At the moment, draft amendments to the Law on Bankruptcy of claims arising from the leasing and work contracts concerning restructuring and rehabilitation (the “draft restruc- signed between a debtor and his creditor, provided that turing amendments”) are being prepared for consideration in there is no sign of preference by such creditor over other the Russian parliament, the purpose of which is the introduc- creditors. tion of effective legislation for rescuing businesses. The draft restructuring amendments introduce a debt restructuring procedure to Russian insolvency practice. The debtor is expected to be empowered to agree on a restructuring plan with its creditors

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

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transaction resulted in the alienation of property of the debtor administration, as a rule, in order to enforce the recovery of and the other party was aware of the purpose of the transaction. property at a reduced value, which is defined by tender. A preferential transaction is a transaction made within one The draft restructuring amendments suggest that two formal month prior to or after the adoption of the bankruptcy applica- rescue procedures shall supersede the previous rehabilitation tion if such transaction influences or may influence a preference framework: debt restructuring; and the settlement agreement. towards one of the creditors instead of another creditor. Additionally, shareholders, minority lenders and other persons Reversing the above-mentioned transactions results in a return are not able to obstruct decisions on the implementation of a of the assets that were transferred by the debtor before its insol- bankruptcy procedure that has been adopted by the creditors. vency back to the debtor. In case returning the assets to the The draft restructuring amendments introduce procedures debtor is impossible, the counterparty to the transaction should allowing the cram-down of dissenting stakeholders, but do not pay compensation equalling the market value of the assets as of provide for classes of stakeholders. the moment they were acquired, as well as the damages caused by subsequent changes to the price of such assets. 3.3 What are the criteria for entry into each restructuring procedure? 32 Restructuring Options The observation procedure is the first stage of bankruptcy, 3.1 Is it possible to implement an informal work-out in which can be initiated by both the debtor and the creditor. your jurisdiction? After the observation, on the basis of the decision of the first meeting of creditors, the court makes a decision on which proce- Informal work-out procedures are the more preferred means of dure shall follow the observation. The decision is made at the re-establishing a debtor’s solvency in Russia than the procedures creditors’ meeting by a majority vote. stipulated in the Law on Bankruptcy due to an unsatisfactory In order to participate in the creditors’ meeting, the latter level of legal regulation of rehabilitation procedures and their must be included in the register of creditors’ claims. rare implementation in practice. Financial recovery is introduced at the request of the debtor The draft restructuring amendments suggest that creditors on the basis of the decision of its members, which shall be adopt a restructuring plan before the formal procedure, where approved by the majority of creditors. the court shall confirm such plan as adopted by the creditors. External management is introduced on the basis of the creditors’ decision. 3.2 What formal rescue procedures are available A settlement agreement shall be accepted by a majority of in your jurisdiction to restructure the liabilities of creditors’ votes and is considered accepted once all the creditors distressed companies? Are debt-for-equity swaps secured by the pledge have voted for it. and pre-packaged sales possible? To what extent can Sanation may be carried out only in case of the provision of creditors and/or shareholders block such procedures financial assistance to the debtor by its founders, creditors or or threaten action (including enforcement of security) third parties. Provision of financial assistance may be accompa- to seek an advantage? Do your procedures allow you nied by the commitment of the debtor or other persons in favour to cram-down dissenting stakeholders? Can you cram- of the persons who have provided financial assistance. down dissenting classes of stakeholder? The draft restructuring amendments suggest that the restructuring procedure shall be introduced by the court, after which The restructuring can be carried out at several stages of the bank- the stakeholders must approve the restructuring plan. ruptcy procedure, which consists of observation, external management, financial recovery, settlement agreement and bankruptcy administration. The following procedures cover solvency rehabil- 3.4 Who manages each process? Is there any court involvement? itation: financial recovery; external management; and settlement agreement. Further, the Law on Bankruptcy provides for the mechanism In bankruptcy procedures, debtor management is carried out of “sanation”. Sanation is a provision of financial assistance by by an insolvency officer that is approved by a majority vote at the shareholders of the company in order to re-establish the debt- the creditors’ meeting. The functionality and obligations of or’s solvency. Russian legislation does not contain detailed regu- the insolvency officer vary depending on the stage of the bank- lation of sanation. The provision of financial assistance can be ruptcy procedure. accompanied by obtaining obligations by the debtor or other The whole bankruptcy procedure is under the control of the persons in favour of the persons who provide financial assistance. court that is making decisions on key aspects of the procedure, A financial recovery procedure is applied in respect of the including: approval of an insolvency officer candidate selected debtor in order to re-establish its solvency and debt repayment by the creditors; approval of the bankruptcy stage selected by in accordance with an approved schedule. the creditors; consideration of individual disputes within the The purpose of external management is financial recovery of bankruptcy matter referring to the inclusion of creditors on the the enterprise with the transfer of management authorities of list of creditors; claims of actions/omission of the insolvency the debtor to the receiver. External management is carried out officer; the recovery of the damages; the question of challenging in accordance with the schedule approved by the creditors. transactions made by the debtor with preference or fraudulent A settlement agreement can be concluded at any bankruptcy conveyance; and vicarious liability of the controlling persons stage, and should contain the conditions of the procedure and (piercing the corporate veil). the terms of the debtor’s performance of its obligations in mone- The draft restructuring amendments suggest the introduc- tary form. tion of a turnaround manager, whose function is to restructure In respect of the pro-creditor orientation of regulation, the debtor. The turnaround manager shall be appointed by the the procedures aimed at recovering the company are rarely court. The main role of the turnaround manager is to ensure the applied in practice. The creditors usually choose bankruptcy fulfilment of the restructuring plan.

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3.5 What impact does each restructuring procedure 4.2 On what grounds can a company be placed into have on existing contracts? Are the parties obliged to each winding up procedure? perform outstanding obligations? What protections are there for those who are forced to perform their Any winding up procedure is introduced only by a decision of outstanding obligations? Will termination and set-off provisions be upheld? the court based on the application received from the owners of the company, creditors of the company or tax authority. The reorganisation of the company with subsequent liquida- From the date that the debtor is recognised as bankrupt, the tion of the debtor requires a relevant decision from the creditors’ period for fulfilment of obligations under any contracts arising meeting and involvement of a company’s CEO in the event the prior to the recognition of the debtor as bankrupt is considered reorganisation helps to restore the company’s solvency. to have occurred. Therefore, all creditors have the right to demand performance of the contract by filing an application for inclusion of 4.3 Who manages each winding up process? Is there their claims in the register of creditors, after which the arbitra- any court involvement? tion court can verify the grounds of such claims. The external management procedure provides for the right of Each winding up process is managed by a liquidation manager. the debtor to refuse to execute transactions if they interfere with An insolvency winding up procedure develops within a the restoration of the debtor’s solvency. In this case, the coun- particular matter of the court under regular control of the judge. terparty has the right to demand compensation from the debtor for damages caused by the refusal. This waiver cannot be filed 4.4 How are the creditors and/or shareholders able in respect of transactions concluded during the observation with to influence each winding up process? Are there any the consent of the insolvency manager or during the financial restrictions on the action that they can take (including rehabilitation. the enforcement of security)? After the bankruptcy procedure has begun, the creditors are not allowed to introduce claims against the debtor. Shareholders have no influence on the winding up process, as The draft restructuring amendments suggest that the debtor the shareholders’ meeting can lose its power after an insolvency will have the right to refuse execution of any of the debtor’s manager enters into power. In the meantime, creditors have all contracts concluded before the initiation of the bankruptcy the influence on the process due to the key role of the resolu- procedure, in the event that the execution of such contracts tion of the creditors’ meeting. Actions decided during the cred- significantly complicates the restoration of the debtor’s solvency itors’ meeting have no restrictions subject to its compliance with or entails losses for the debtor in comparison with similar trans- the law. For example, the right to determine the procedure and actions concluded under comparable circumstances. In this conditions for the sale of the pledged property in the bank- case, such contracts shall be considered terminated from the ruptcy proceedings, as well as the right to first priority satisfac- date of receipt of the debtor’s refusal to perform the contract by tion of their claims from the money raised from the sale of the the counterparty. pledged property, is granted only to the secured creditors.

3.6 How is each restructuring process funded? Is any 4.5 What impact does each winding up procedure have protection given to rescue financing? on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off As a general rule, the bankruptcy procedure is financed through provisions be upheld? the account of the debtor’s property. If the property of the debtor is insufficient for financing the Refusal to execute existing contracts and other transactions of a procedure, the court may assign creditors to finance the proce- debtor can be declared if such transactions impede the restora- dure with their consent. The court may also require the creditor tion of the debtor’s solvency or if the debtor’s execution of such to transfer funds into a special deposit account held by the court. transactions entails losses for the debtor as compared to similar If the property of the debtor is insufficient or consent of the transactions concluded with comparable circumstances. creditors is not obtained, the court may terminate the bank- It is not allowed to terminate the debtor’s monetary obliga- ruptcy procedure. tions by offsetting a homogeneous claim, if this violates the legal order of satisfying creditors’ claims. 42 Insolvency Procedures 4.6 What is the ranking of claims in each procedure, 4.1 What is/are the key insolvency procedure(s) including the costs of the procedure? available to wind up a company? It is necessary to distinguish between competitive and current The bankruptcy of a debtor being liquidated is the key insol- (extraordinary) lenders. vency procedure available to wind up a company. The debtor is Only those creditors of a debtor whose monetary claims liquidated in the manner prescribed by the Law on Bankruptcy, arose before filing an application to the court of arbitration for if the value of the property of the debtor, in respect of which the declaring a debtor insolvent (bankrupt) can be recognised as decision on liquidation was made, is insufficient to satisfy the bankruptcy creditors. If the claims against the debtor appeared claims of the creditors. after the introduction of the monitoring procedure, then such In addition to the bankruptcy of the debtor being liquidated, creditors are current creditors. the meeting of creditors or the person providing security during Claims of current creditors are satisfied in the course of insol- the financial rehabilitation of the debtor has the right to decide vency procedures, regardless of the transition to settlements on the reorganisation of the debtor through merger, accession, with creditors, while satisfaction of the requirements of bank- division, separation or transformation, while the debtor ceases ruptcy creditors occurs only in the case of transition to settle- to exist in all types of reorganisation, except for separation. ments with creditors.

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Current claims are ranked in the following order: The debtor at any bankruptcy stage remains a taxpayer until ■ The first order: current payments of the debtor, to include the bankruptcy management procedure is finished. payment for the services of an arbitration manager, The debtor should continue to pay property taxes (property court costs and other costs associated with property tax and land tax) and keep a record of property sales operations management. for income tax and VAT calculation subject to recovery and ■ The second order: requirements of the employees who payment to the budget, if VAT paid to the seller had been previ- quit both before and after the declaration of bankruptcy. ously declared by the debtor as a tax deduction by acquisition Payment of wages for the worked period and severance pay of respective assets. Such taxes are subject to being recorded is carried out, except wages of the head, chief accountant, as current receivables that are to be satisfied prior to the other their deputies, etc., which shall be paid after the repayment listed claims. of debt to the first three orders of creditors. Income tax will occur as the property can be sold at a price ■ The third order: payment for the services of persons higher than the remaining cost according to balance, and engaged by an arbitration manager for bankruptcy taxable income will originate. This income will be reduced to proceedings and property management. current losses from the collection of receivables and other prop- ■ The fourth order: payment of utility and energy supplying erty (if the cost of its sale proved to be lower than remaining services. cost), to losses formed by uncollectible debt relief and so on. At ■ The fifth order: satisfaction of requirements for other the same time, there can be different situations, and, notwith- current payments. standing specified provisions, the final financial result can be The fulfilment of obligations within the queue takes place in positive. Current income formed during bankruptcy manage- chronological order. ment can be redeemed by the losses of previous years. But such The following expenses are redeemed out of ranking (before redemption can take place under the condition of documentary current claims): confirmation of business transactions for the period of losses ■ claims of creditors for current payments to creditors formation, and cannot cause income tax reduction for more whose claims arose before the application for declaring the than 50%. Thus, a positive financial result from the sale of the debtor bankrupt; and property of the debtor under bankruptcy management is subject ■ the cost of carrying out activities to prevent the occur- to income tax. rence of man-made and/or environmental disasters, or As a general rule, asset disposition operations and the sale of death. property of the debtor are not subject to VAT taxation. However, Claims of bankruptcy creditors are satisfied in the following the operations on the performance of works, services and provi- order: sion of property for use are not excluded from the operations ■ The first order: payments for causing harm to the life or subject to VAT taxation. That is, if the debtor continues to carry health of citizens. out income activity during bankruptcy management, the obliga- ■ The second order: payment of severance payments and/or tion to pay VAT will arise. wages to persons working under an employment contract, There is also a risk that tax amounts adopted by the debtor to remunerations to the authors of intellectual property. be deducted by the acquisition of property used in the activity, ■ The third order: payments to the other creditors. within which the operations on products (works, services) sales Payment to the creditors for a transaction declared invalid subject to VAT taxation were carried out, are subject to recovery. in bankruptcy proceedings are made after settlements with the That is, if bankruptcy management is introduced in respect of other creditors of the third order. the company and the depreciation term of the property is not The claims of creditors for obligations secured by the pledge expired by the time of its sale, the amount of the previously of the debtor’s property are satisfied at the expense of the value calculated tax deduction should be recalculated, as there may of the collateral. be a situation when VAT tax burdens in respect of bankruptcy Claims of the owners of bonds with no maturity are satisfied assets will arise. after the claims of all other creditors are satisfied. 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 the right to acknowledge losses formed due to bankruptcy of future? 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. That is, if bankruptcy management is introduced in respect of 5.1 What are the tax risks which might apply to a the company and the depreciation term of the property has not restructuring or insolvency procedure? expired by the time of its sale, the amount of the previously calculated tax deduction should be recalculated and there may Due to the initiation of a bankruptcy matter, the debtor and the be a situation where the VAT tax burden in respect of bank- creditor have the following tax consequences. ruptcy assets will arise.

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From a creditor’s point of view, once the bankruptcy proce- There is a general provision in the Arbitration Procedure dure of the debtor has finished, the creditor obtains the right to Code that allows Russian courts to consider disputes involving acknowledge losses formed due to bankruptcy of the counter- a close connection of the legal relationship in dispute with the party for the purpose of income taxation, which is considered to territory of the Russian Federation, and there have been cases be a compensatory measure for taxpayers. of carrying out the bankruptcy procedure of foreign citizens on this basis because they conducted their main activity in Russia. 62 Employees However, there are no bankruptcy procedures of foreign entities in the Russian Federation in practice. 6.1 What is the effect of each restructuring or That aside, foreign companies may file their claims in the insolvency procedure on employees? What claims would creditors’ claims register for Russian insolvent companies. employees have and where do they rank? 7.2 Is there scope for a restructuring or insolvency The employees and former employees are entitled to apply for process commenced elsewhere to be recognised in your bankruptcy of the debtor along with the other creditors. The jurisdiction? manager of the debtor should inform employees about the implementation of the bankruptcy procedure. Resolutions of foreign courts, including bankruptcy matters, The insolvency officer should call a meeting for employees are recognised and enforced in Russia by judicial procedure as and former employees, where they will elect a representative to well as upon international contracts and principles of mutu- participate in the bankruptcy procedure; however, it can be held ality. However, Russian legislation does not consider that bank- earlier upon the initiative of the employees or the manager of the ruptcy is an extended process and requires separate recognition organisation. Herewith, the payment for services of the repre- of every judicial act under one case. sentative of the employees should be carried out on account of the debtor. The representative of the employees has the right to participate in the meeting of the creditors but does not have 7.3 Do companies incorporated in your jurisdiction the right to vote. He has the right to apply for bringing the restructure or enter into insolvency proceedings in other controlling persons of the debtor to subsidiary liability. jurisdictions? Is this common practice? The representative of the employees participates in the insolvency process in the common interest of all the employees, and There are no cases of restructuring or bankruptcy of Russian the employees themselves are not entitled to participate in the trial. companies in other jurisdictions. Nevertheless, in case the interests of some employees contradict others (e.g. when the order of priority in paying off their 82 Groups claims is violated), such employees have a right to appeal separately against the insolvency officer. The insolvency officer of the debtor is entitled to dismiss 8.1 How are groups of companies treated on the employees by compliance with the established procedure. insolvency of one or more members? Is there scope for co-operation between officeholders? The requirement to pay remunerations and discharge allowances takes second priority in the claims of the creditors on current payments (arose upon bankruptcy application and payable Russian legislation does not contain any provisions on the bank- prior to listed claims) – after payment of expenses in respect of ruptcy of corporate groups, and manager co-operation is not a bankruptcy procedure, but before the rest of current claims. specifically regulated. Employee claims have second priority in the list of creditors – right after the claims concerning personal injury and before the 92 COVID-19 rest of the claims of the creditors. Upon the application of an insolvency officer, the court has 9.1 What, if any, measures have been introduced in the right to reduce the wage rate of the employees, in the event response to the COVID-19 pandemic? the wage rate was increased within six months before the bankruptcy application was made. In the event of a bankruptcy of a town-forming enterprise (an Due to the COVID-19 pandemic, the Russian Government enterprise with a number of employees exceeding 5,000, or an took measures to protect the businesses most affected by the enterprise for which no less than 25% of a town’s population crisis. In particular, legislative restrictions on the initiation of works) additional guarantees to employees can be provided. That insolvency proceedings were introduced. Such moratorium was way, by the sale of an enterprise during bankruptcy, the obliga- imposed on companies that operated in the industries that were tion of the buyer to retain no less than 50% of workplaces within most affected by the COVID-19 pandemic. a specified term (no more than three years) can be established. The legislative restrictions are as follows: The draft restructuring amendments suggest that representa- 1. Limitation of creditors’ rights: tives of employees have the right to initiate a meeting of credi- ■ creditors do not have the right to apply for bank- tors and to submit a debt restructuring plan. ruptcy of the debtor; ■ applications for recognition of the company as insol- 72 Cross-Border Issues vent have been suspended; ■ no financial or other penalties may be charged for the late performance of payment obligations; 7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency ■ enforcement proceedings on property penalties have proceedings in your jurisdiction? been suspended (while seizure and other restrictive measures on the disposal of property have not been This is not regulated by Russian legislation and it does not lifted); contain any direct prohibition for foreign persons to go through ■ s there i a prohibition on the foreclosure of pledged the procedure of restructuring or bankruptcy in Russia. property;

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■ s there i a prohibition of set-off if it violates the The amendments are aimed at expanding the use of “reha- priority rights of the creditors; and bilitation mechanisms” in relation to legal entities and provides ■ a simplified procedure for concluding a settlement for a new variable procedure – debt restructuring. The Ministry agreement when initiating insolvency proceedings of Economic Development proposes to abandon supervision, within three months of the end of the moratorium financial recovery and external management and concentrate on has been introduced. one rehabilitation and one liquidation procedure. 2. Measures aimed at preventing the withdrawal of assets by The Ministry of Economic Development in its explanatory unscrupulous debtors: note drew attention to the fact that it provides for “improving ■ if bankruptcy proceedings are initiated within three the priority and the possibility of subordination of creditors’ months of the end of the moratorium, all transac- claims and securing collateral for mandatory payments, creating tions of the debtor made during the moratorium are new mechanisms for corporate managers of certain categories considered null and void, with the exception of trans- of debtors and saving the debtor’s business, including improve- actions made in the ordinary course of business, the ment of the tools for replacing debtors’ assets”. amount of which does not exceed 1% of the total In addition to the above, the draft restructuring amendments book value of the assets; provide for other innovations that, according to the Ministry of ■ in other cases, creditors have the right to challenge Economic Development, will help to speed up the bankruptcy transactions concluded by the debtor within one year procedure and reduce costs, such as: of the commencement of the moratorium, during the ■ Information on the formation and implementation of the moratorium and within one year following the mora- insolvency estate auctions is to be disclosed in a unified torium, on special grounds set forth in Russian bank- information system. ruptcy legislation; ■ A change to the estimation of the initial sale price of the ■ s there i a prohibition on the exclusion of a partici- debtors’ property and a new bidding mechanism will be pant from a limited liability company with repayment introduced, which shall allow the price to be increased of the actual value of the share; and during the auction within the framework of one proce- ■ s there i a prohibition on the payment of dividends dure. In the absence of applications, the price may be and the distribution of profits. reduced until the first offer is received, and the auction 3. Elaboration of the draft restructuring amendments to the restarted thereafter to increase the auction price. Law on Bankruptcy was intensified by the Ministry of ■ Bidding in the form of a public offer will be eliminated and Economic Development after the pandemic period. a change of the requirements for electronic platforms will The explanatory note for the nearly 500 pages of amend- be introduced. ments says that its goal is a comprehensive reform of the institution of bankruptcy, since current legislation provides inefficient mechanisms in rehabilitation procedures, which are rarely used in practice and rarely end with the recovery of the debtor.

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Alexander Zadorozhnyi is a Russian lawyer with more than 15 years’ experience of specialising in litigation, bankruptcy and corporate law. Alexander has successfully aided in legal disputes as a result of which the principals were able to retain ownership of property constituting an energy business, large land plots for development and corporate rights. Alexander has a wealth of experience in supporting bankruptcy proceedings, protecting the interests of both creditors and debtors, and has experience of participating in bankruptcy proceedings of credit organisations. Alexander is a regular contributor to the Russia Bankruptcy Law Digest, 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 1st Floor, Volkonskiy Pereulok 13/2 Email: [email protected] Moscow, 127473 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 a unique experience of developing the laws for the constituent entities of the Russian Federation that regulate economic activities, and co-authors the Russia Bankruptcy Law Digest. Artem’s experience includes working in international law firms such as DLA Piper and Gide Loyrette Nouel. Artem graduated from Rostov State University and studied in 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 1st Floor, Volkonskiy Pereulok 13/2 Email: [email protected] Moscow, 127473 URL: www.synum.ru Russia

Synum ADV is a Russian law firm specialising in litigation, bankruptcy and Synum ADV’s lawyers have a long record of successfully consulting corporate conflicts. Due to its rapid development, Synum ADV currently companies in respect of a wide range of legal issues, as well as providing successfully represents the interests of major Russian and international constant integrated legal support for businesses. companies both in legal consultation 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 in advising its clients on corporate law issues, the legal support of investment projects and merger and acquisition deals. According to the ratings agencies Pravo 300 and IFLR1000, Synum ADV is consistently ranked among the best law firms in Russia in the fields of bankruptcy and arbitration.

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Spain Spain

Pedro Moreira

SCA LEGAL, SLP Isabel Álvarez

12 Overview There are several reasons for the aforesaid insolvency scenario that the insolvency legislation has so far failed to improve, one of them being the fact that a high number of debtors file for bank- 1.1 Where would you place your jurisdiction on the ruptcy at a very late stage of financial stress, where even liquidity spectrum of debtor- to creditor-friendly jurisdictions? available to pay debts generated after the bankruptcy declaration may be scarce, something that makes recovery much more diffi- Historically, Spain has been a creditor-friendly jurisdiction, in cult than at an earlier stage. Nonetheless, other reasons thereto the sense that the law – only in very limited terms – allowed for have to do with certain options followed by the legislator, based limitations of the creditors’ rights or for any reductions of the on the principle that credits are to be honoured, such as (i) the debt burden imposed on the creditors. Under such scenario, high majorities required for the approval of a creditors’ agree- creditors’ rights are fully enforced, no matter the financial ment (article 376 RSIA), (ii) the protections given to creditors condition of the debtor, in terms that, in many cases, ended with security on the debtor’s assets, which in practical terms with the liquidation of the debtors’ assets on a “first come, first leaves them almost immune to the effects of the bankruptcy served” basis. In practical terms, this does not mean that cred- proceedings (articles 145–149 RSIA), and (iii) the fact that senior itors end up recovering their credits in better terms than they credits (tax and social security contributions, among others) are would otherwise do, but the fact is that, at least from a legal excluded, to a certain extent, now somehow tighter than under perspective, the law has been always on the creditors’ side. the SIA 2003, from the mandatory effects of a creditors’ agree- This scenario has not substantially changed with the passing ment on which their holders did not vote favourably (article 397 of the first insolvency legislation in 1922 nor with the enact- RSIA), which means that such credits will not be subject to the ment, in 2003, of Law 22/2003, as of 9 July, on Insolvency, nor with pardons and/or delays foreseen in such an agreement. the restatement of this piece of legislation, recently approved And, last but not least, the RSIA has maintained the technical by Royal Legislative Decree 1/2020, already in force (herein- option followed by the SIA 2003, which consists of providing after “RSIA”). With the now repealed Insolvency Act of 2003 for a unique type of bankruptcy proceedings, though with an (hereinafter “SIA 2003”), Spain had already gained a modern alternative development that avoids a winding up (the approval insolvency legal framework, although, in general terms, neither of a creditors’ agreement), which also plays a role in the bad debtors nor creditors were able to use it in a manner that gener- fate of most of the bankruptcy proceedings held in Spain. Due to the abovementioned unique type of bankruptcy proceedings, ated better ratios of credit recovery and fewer winding ups of with long and complex steps, in cases where simple and rapid debtors. In our view, this scenario will not change substantially steps could have made a difference, debtors find themselves in with the RSIA, at least in the near future. a scenario where, much to the regret of some if not all stake- The purpose of the RSIA may seem at first modest, as the holders, winding up is the most common outcome. wording of most of its rules is the same as that of the repealed Therefore, from a legal point of view, Spain is definitely more SIA 2003, and on the ground that the legislator failed to seize a creditor- than debtor-friendly jurisdiction, although, in our this opportunity to transpose Directive (EU) 2019/1023, of 20 opinion, the RSIA has somehow led it to be now slightly more June 2019, on preventive restructuring frameworks, on discharge debtor-friendly than before. Nonetheless, in practical terms, the of debt and disqualifications, and on measures to increase the insolvency regime may lead to undesired outcomes for creditors, efficiency of procedures concerning restructuring, insolvency as the winding up of bankrupt debtors, to which most are fated, and discharge of debt, something that would have meant impor- tends to generate insufficient proceeds, resulting in most of the tant changes to the SIA 2003. Although the number of articles credits, notably non-senior ones, being left unpaid. This is the has almost tripled (from around 250 to more than 750), with a most common scenario, at least in the case of small and mid-size few exceptions, what the 2020 legislator has done is a reorgan- companies in the services area, which tend to operate with few ising of the structure of the Act, by splitting the text of the arti- easily tradeable assets (real property, machinery, vehicles, etc.) cles of the SIA 2003 into new shorter articles and clarifying and and, as such, generate scarce proceeds at the time of being liqui- harmonising the wording of the new articles. Anyway, although dated via bankruptcy proceedings. we cannot say that the RSIA has brought many truly new rules, the restructuring of the articles of the repealed SIA 2003 has 1.2 Does the legislative framework in your jurisdiction certainly brought with it some positive developments, one of allow for informal work-outs, as well as formal them being certain adjustments made in the wording to take restructuring and insolvency proceedings, and to what in several case-law solutions upheld in court rulings from the extent are each of these used in practice? Supreme Court and several Courts of Appeals, given in the years when the SIA 2003 was in force. From a legal perspective, nothing prevents informal work-outs

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between creditors and debtors who are interested in negotiating bankruptcy of the debtor (article 594); and (ii) no enforcement an arrangement. If all creditors accept a certain work-out, this of credits against assets used by the debtor in its activities can agreement would be fully enforceable and there would be no be initiated or, in case they had already been, will be subject to a need for the debtor to initiate insolvency proceedings. stay (articles 588–590). If the debtor could not reach, during the Nonetheless, in most situations, with a reasonable number of said four-month period, any such arrangements that exclude it creditors, it is not easy for a debtor to bring in all its creditors. from the obligation, foreseen in article 5 of the RSIA, to request Therefore, in most cases, only some of the creditors would end the court to initiate bankruptcy proceedings, then it is manda- up engaging in a work-out, and this is where insolvency legisla- tory for the debtor to do so (article 595). tion can bring in effective solutions. The use of the insolvency proceedings is much more wide- In practice, informal work-outs are not used as much as they spread than that of the informal work-outs and formal restruc- could be, because creditors (notably, banks and other providers turing, although, in more recent times, the use of informal of finance) tend to refuse to engage in these sorts of arrange- work-outs and refinancing agreements has been on the increase, ments, as they see them as bearing the risk of being repealed notably by highly indebted large and mid-size companies. in case the debtor initiates bankruptcy proceedings. If not for any other reason, they do this because they tend to see them as 22 Key Issues to Consider When the an undue intent of the debtor to sweeten its obligations under the initial finance agreements, or, in the best case, as an attempt Company is in Financial Difficulties to treat the creditors that participate in the arrangement in terms less favourable than those applied to the holdout credi- 2.1 What duties and potential liabilities should the tors. Informal refinancing tends to be accepted by banks when directors/managers have regard to when managing a negotiated in advance by smarter debtors who, at the time of the company in financial difficulties? Is there a specific point at which a company must enter a restructuring or negotiations, are still in good standing. insolvency process? As for formal restructuring and insolvency proceedings, both are provided by the RSIA. The RSIA provides two types of formal restructuring: refinancing agreements, under articles As a rule, the directors of a company are not liable for the 596–630; and out-of-court payment arrangements, under arti- company’s debts. Nonetheless, in case the company is declared cles 631–694. insolvent within bankruptcy proceedings, the directors may be Pursuant to article 596 RSIA, refinancing agreements are liable for the unpaid debts, or a part thereof, in case they took arrangements including some sort of refinancing that avoid the decisions that are considered, by the court that hears the case, debtor being declared bankrupt by the court. They may cover all as the cause of the debtor’s inability to pay its debts or a part the creditors, so-called “collective agreements”, set out in arti- thereof, insofar as those decisions lead such court to qualify the cles 597–603, or some of the creditors, so-called “singular agree- bankruptcy as blameworthy (articles 441–444, 1st, RSIA). ments”, that were not foreseen in the SIA 2003, set out in articles Article 5 (1) RSIA provides that the debtor must file for a 604–694. Only collective agreements can be ratified by the court bankruptcy process in the two months following the time when (article 605 (2) RSIA), such approval having the effects of, among it acquires knowledge that it cannot comply with its due obliga- others, (i) extending the agreement to creditors that have not tions, i.e., that its available liquidity is not enough to allow it to approved the refinancing (article 613 (2) RSIA), and (ii) termi- comply with its obligations (article 2 (3) RSIA). nating any adjourned singular enforcement of credits against the In the case of companies, the obligation to file for a bank- debtor (article 613 (3) RSIA). For a refinancing agreement to ruptcy process lies on the directors of the bankrupt company. obtain court approval, it must meet several requirements, such as Failure by the debtor to comply with this obligation is a ground that it (i) is part of a viability plan that allows the continuation of for the court to qualify the bankruptcy as blameworthy under the the debtor’s activity in the short- and mid-term, (ii) significantly aforesaid article 444 (1st) RSIA. In such scenario, those persons increases the amount of credit available to the debtor, and (iii) (directors, shareholders, etc.) who failed to file for bankruptcy at has been approved by creditors representing no less than 55 per the time foreseen by the RSIA may be deemed personally liable cent of the debtor’s financial liabilities (article 606 RSIA). for the unpayable debts of the bankrupt debtor. Regarding out-of-court payment arrangements, these can be used by debtors already bankrupt or on the verge of being so, 2.2 Which other stakeholders may influence the provided that their debts and assets do not amount to more than company’s situation? Are there any restrictions on the €5 million each or that the number of creditors is fewer than 50 action that they can take against the company? For (article 633 RSIA). These arrangements need to be managed by example, are there any special rules or regimes which an official bankruptcy mediator, appointed either by a notary apply to particular types of unsecured creditor (such as public or the Companies’ Registrar (articles 631 and 635 RSIA). landlords, employees or creditors with retention of title If successful, these arrangements end up with an agreement arrangements) applicable to the laws of your jurisdiction? that can include any of the following measures: (i) a delay of Are moratoria and stays on enforcement available? no more than 10 years; (ii) an acquaintance; (iii) an assignment to the creditors of the debtor’s assets to cover its debts, either The most important stakeholders are creditors (creditors in in full or partially; (iv) debt-for-equity swaps, where credits are general, employees and public creditors) and employees and converted into new equity to be issued by the debtor; or (v) the landlords, not only as creditors but as parties interested in conversion of such credits in loans or financial instruments keeping their respective condition of suppliers of labour and (callable preferred stock, convertible bonds, debt instruments offices/land to the debtor in the future. where interest is paid in debtor’s shares, junior debt, etc.) of a Creditors play an important role in the sense that, when the type, seniority and maturity different from those of the debtor’s debtor does not request its winding up, either at the time of stressed ones (article 667 RSIA). filing for bankruptcy or at a later stage during the bankruptcy Pursuant to the RSIA, the initiation of negotiations aimed proceedings, the survival of the debtor, under a creditors’ agree- at reaching a refinance agreement or an out-of-court payment ment, will basically depend on their will to approve such an arrangement give the debtor a four-month period, during which: agreement, which will mean, to some of the credits, pardons (i) no creditor is allowed to request the courts to declare the and/or delays.

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When a court declares the bankruptcy of a debtor, this auto- certain other requirements are met and when those measures can matically imposes a moratorium or a stay on the enforcement of be deemed part of a viability plan that forecasts the continuation the creditors’ rights. From that point on, their credits will be of the debtor’s activity in the short- and mid-term. Provided enforceable under the less favourable terms of a creditors’ agree- that some other requirements are also met, the arrangements ment, in case this comes to be approved, or within the liquida- can be ratified by the court, in which case they could not be tion process, in case it does not. repealed at a later stage, either by the receiver or the creditors Therefore, new individual enforcements are never allowed (articles 605–608 RSIA). during the bankruptcy proceedings (article 142 RSIA), save in case of enforcement of credits secured by assets, which are 3.2 What formal rescue procedures are available allowed, though in some cases with a moratorium of one year in your jurisdiction to restructure the liabilities of (articles 145–148 RSIA). As for stays on enforcement, pursuant distressed companies? Are debt-for-equity swaps to article 143 of the RSIA, the fact that a debtor is declared bank- and pre-packaged sales possible? To what extent can rupt by a court necessarily determines such stay, though with creditors and/or shareholders block such procedures several exceptions (enforcement of administrative rights and or threaten action (including enforcement of security) labour credits, provided that the seizure of any of the debtor’s to seek an advantage? Do your procedures allow you assets had been ordered before the bankruptcy declaration and if to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholders? those assets are not necessary for the debtor’s business activity).

The RSIA provides for a unique bankruptcy process (“process”), 2.3 In what circumstances are transactions entered though with two different types, the main and the abridged (arti- into by a company in financial difficulties at risk of challenge? What remedies are available? cles 508–521 and 522–531 RSIA, respectively), whose use does not depend on who files for bankruptcy (the debtor or any of its creditors) but on the complexity of the case. Less complex The RSIA sets forth that certain transactions entered into by the cases are, as a rule, to be handled by the court in accordance with debtor in the two years before the date when a company initiates the guidelines set forth in article 522 (1) (fewer than 50 credi- an insolvency process can be challenged (article 226), either by tors, liabilities not exceeding €5 million and debtor’s assets with the insolvency practitioner (“receiver”) (article 231) or, in case an estimated value not exceeding that amount either), and so the this fails to do it, by any of the creditors (article 232), whenever procedure may follow the abridged rite. The court may also opt such transactions can be deemed detrimental to the debtor’s assets. for the abridged rite when the debtor comes up with an antici- Defiance of those transactions in court can lead the court to pated proposal of a creditors’ agreement or with any of such type declare them void, in which case their effects will be repealed, of proposal that foresees the assignment of all the debtor’s assets e.g., in case of a sale of a debtor’s asset that is declared void by the and debts (article 522 (2) RSIA). In addition, the RSIA foresees court, such asset is to return to the debtor’s balance sheet and some situations where, waiving the regime set forth in article 522, any monies paid by the buyer are to be returned to the debtor it is mandatory for the court to follow such rite (article 523). (articles 235 and 236 RSIA). The process begins with a common phase, where the finan- Nonetheless, as mentioned before, the transactions entered by cial situation of the debtor is fully assessed and two reports are the debtor with the aim of avoiding insolvency can be excluded submitted by the receiver, where it discloses the debtor’s assets from any challenges if they meet certain requirements, as is the and their debts at the time of the declaration of bankruptcy, with case of the refinance agreements, either collective or singular, the grade assigned to them ( first order, senior, ordinary and/or junior) carried out under articles 596 et seq. RSIA, as mentioned in the by the receiver. answer to question 1.2. From this point on, the process can either proceed to the negotiation of a creditors’ agreement or to the winding up of the debtor. 32 Restructuring Options In the first case, both debt-for-equity swaps and pre-packaged sales of assets, as well as other business measures (e.g., the closing 3.1 Is it possible to implement an informal work-out in of a business unit) can be foreseen in a creditors’ agreement, if your jurisdiction? the party that proposes such an agreement deems those measures beneficial to the debtor’s financial panorama and its capability to An informal work-out between a debtor and its creditors is comply with the obligations foreseen in the same. always possible under Spanish law if the parties agree to engage In the last case, the debtor will be extinguished, and its assets in such an arrangement. Once the parties reach an agreement, sold, with a view to use the proceeds of the sales to pay the creditors. unless it breaches any mandatory regulations, in principle, this This phase begins with the approval of a liquidation plan (where would be enforceable between them. pre-packaged sales may definitely be carried out) and, once this is However, if the debtor fails in convincing all its creditors to approved, the receiver begins with the sale of the assets. Once the accept the terms of the work-out and if the debtor, no matter the proceeds have been collected, the receiver starts paying the credits existence of such an arrangement, is still unable to comply with in accordance with their grade, from the highest to the lowest. In its obligations before any holdout creditors, any of the latter may case the proceeds are not sufficient to pay all credits qualified with request the court of commerce to declare the debtor in bank- the same grade, the receiver will pay them in proportion. ruptcy. And if bankruptcy is actually declared, the arrangements Creditors have a say in the outcome of the process, in the sense reached by the debtor with some of the creditors may be turned that, if the majority of the ordinary creditors, as foreseen in article down by the court, on request of the receiver or a creditor. 376 RSIA, does not accept the terms of a creditors’ agreement Nonetheless, articles 597 and 598 RSIA waive the possibility submitted either by some of the creditors or by the debtor, the of collective refinancing arrangements (reached with some of company will automatically be wound up. Therefore, creditors the creditors before the debtor is declared bankrupt by a court) actually have a limited power to block any restructuring of the being repealed by the court if they increase credit available to credits and the survival of the debtor. Anyway, small dissenting the debtor or modify or extinguish debts of this, provided that minorities, below the threshold set out in the said article, are subject to a cram-down by the majority and the troubled debtor.

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The debtor also has a say in the process in the sense that it can Out-of-court payment arrangements are negotiated by a bank- either request the court to wind it up (article 406 RSIA) or submit ruptcy mediator, whose functions cease once they have been a draft of a creditors’ agreement (article 337 RSIA). However, it approved by the shareholders who agreed to engage in the nego- cannot avoid the winding up if it fails to convince the required tiation. These arrangements in no way require court involve- majority of creditors to accept the creditors’ agreement submitted ment, save in case one creditor decides to challenge them, in to them. which case it would be up to the court to rule on the dispute As the decisions to be taken by the debtor under the RSIA, as (articles 687–691 RSIA). a rule, lie in the hands of the debtor’s directors or former directors, the debtor’s shareholders tend to have very limited input in 3.5 What impact does each restructuring procedure the process. have on existing contracts? Are the parties obliged to The only area in which shareholders can play a significant role perform outstanding obligations? What protections is in the case of debt-for-equity swaps, as the issue of new equity are there for those who are forced to perform their is a matter reserved for the shareholders’ meeting (article 160 of outstanding obligations? Will termination and set-off provisions be upheld? the Spanish Companies Act). Nonetheless, if the shareholders’ meeting refuses to authorise an increase of the share capital within a debt-for-equity swap, foreseen in work-outs or refinancing agree- The fact that a debtor is declared bankrupt does not in itself lead ments, this may lead to the inability to reach such arrangements, to the termination of the contracts in force at the time of the as the law does not foresee any sort of cram-down of dissenting declaration of bankruptcy (articles 156–158 RSIA). Any termi- shareholders. Such inability would then lead to the obligation of nation or set-off provisions to be applied in case of bankruptcy the debtor to file for bankruptcy (article 695 RSIA). Bankruptcy of one of the parties to an agreement would breach the provision declared under such a scenario should be deemed by the court as set forth in the said articles and, as such, would be deemed void. blameworthy, with the shareholders voting against the said share Nonetheless, pursuant to article 165 RSIA, the receiver, in capital increase bearing the risk of being deemed liable for the case the directors of the debtor have been removed, or other- unpaid credits, save if the debtor provides sufficient evidence that wise the debtor, with the receiver’s approval, can request the court to order termination of the agreements if they deem this the bankruptcy was not caused by it (article 700 RSIA). convenient to the interest of the process. The court will hear the other party to the agreements and in case the parties do not 3.3 What are the criteria for entry into each reach a termination agreement, uphold the claim in case it also restructuring procedure? considers that termination is convenient for the case. This decision is a court ruling just like any other and should be enforce- Under the RSIA, the decision to enter into a restructuring able on the very same terms. procedure always lies in the hands of the debtor. Nonetheless, The other party to an agreement in force at the time the the requirements that must be met in the case of refinancing debtor is declared bankrupt cannot terminate that agreement on agreements are different from those applicable to out-of-court the ground of such declaration. Although the credits generated payment arrangements. Contrary to the latter, which can be to such party after the declaration of bankruptcy will be treated initiated only when the debtor is insolvent or on the verge of as first order credits, i.e., credits excluded from the bankruptcy being declared so (article 605 RSIA), a regime quite similar proceedings and that are to be paid once they become due (“first to that applicable to the initiation of bankruptcy proceedings grade credits”). The risk of non-settlement of this type of credit (article 5 (1) in relation to article 2 (2)), a refinancing agreement, is small, although in no way non-existent. can be reached at any time; i.e., not only when the debtor is bank- In addition, the RSIA allows the receiver, either on its own rupt or on the verge of being so, but also at an earlier stage, initiative or at the request of the debtor, to reinstate, in favour of the latter, certain financing and lease agreements terminated by where it may have reasons to think that, without restructuring, it the other party on the ground of the breach of the debtor’s obli- will fail to comply with those obligations in the future. gations under the same (articles 166–168).

3.4 Who manages each process? Is there any court 3.6 How is each restructuring process funded? Is any involvement? protection given to rescue financing?

Bankruptcies declared by a court are managed by the receivers The funding of any restructuring process depends on the will of appointed thereto by the court. Receivers are in charge of iden- the creditors or any third parties to provide funds that allow the tifying the assets and liabilities of the debtor, managing the debtor to leave the state of insolvency. Funding can be either in company in certain cases, or authorising the decisions taken the form of a pardon, a delay, a debt-equity swap, or fresh credits. by the directors in other cases, preparing reports for the court, Fresh credits granted after the declaration of bankruptcy will requesting the court to declare void certain transactions on the be qualified as first grade (article 242, 8th, RSIA), and as such ground of damaging the creditors, liquidating the company, payable before any others with different grades. Regarding requesting the court to declare the bankruptcy as blameworthy, etc. credits granted before such declaration, the RSIA sets forth Some of the decisions taken by the receiver can be defied by that those granted under a collective refinancing agreement are the creditors or even the debtor before the court of commerce graded as senior in the amount not qualified as first grade (article that is hearing the case. The court will rule on the dispute after 280, 6th, RSIA). hearing the other party or parties. Rescue finance can also be granted as a condition for the cred- Nonetheless, the most important decisions in the process are itors to approve a creditors’ agreement. It can be provided either up to the court hearing the case, notably the decisions to initiate by a third party (a shareholder, existing or new, a bank, etc.) or (articles 10 and 14 RSIA) and terminate the process (chapter XI, a creditor. In such scenario, the protection granted to the new Section 2 of RSIA), approve a creditors’ agreement (article 372 (4) funding will be agreed between the rescuer and the creditors, RSIA), wind up the debtor (articles 406–409 RSIA) and declare provided that it does not breach the rules on creditors’ agree- the bankruptcy as fortuitous or blameworthy (article 455 RSIA). ments foreseen by the RSIA.

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42 Insolvency Procedures to be done is the sale of the debtor’s assets in accordance with such plan and the use of the proceeds to pay the creditors in accordance with each credit’s grade. Though the legality of each 4.1 What is/are the key insolvency procedure(s) decision taken by the receiver at this stage can still be defied available to wind up a company? in court, what is at stake is no longer how the process should evolve in the future but only whether the measures adopted by The RSIA provides a unique insolvency procedure, during the receiver to liquidate the company comply with the law and which the court, under certain circumstances, can order the the liquidation plan. winding up of the debtor. When, in the end of the so-called The rights of the creditors with security on a certain debtor’s “common phase” of this process, the court rules in these terms, assets can be enforced at any stage during the process in separate the winding up phase is initiated. enforcement proceedings or within the process. Their rights Basically, the winding up of a company consists of two will in no way be affected by the winding up, as the proceeds of steps: first, the court orders the winding up, at which point the the sale of the secured asset will be assigned to the secured credit company immediately ceases to be a legal person with organs and only the remaining amount, if any, after this settlement, will and assets and liabilities (article 413 (3)); and secondly, a liqui- be available to pay any other credits (article 430 RSIA). dation process begins, where the remaining assets that once belonged to the debtor are sold and the proceeds therefrom used 4.5 What impact does each winding up procedure have to pay its debts or, in most cases, a part thereof (articles 414 et on existing contracts? Are the parties obliged to perform seq. RSIA). outstanding obligations? Will termination and set-off The liquidation process shall follow the mandatory rules fore- provisions be upheld? seen thereto in the RSIA (articles 406–422) and those included in the liquidation plan to be approved by the court under arti- The decision in itself to wind up a company does not automat- cles 416 and 417. As a rule, the assets need to be sold in auctions ically determine the termination of all agreements (article 156 organised by the court, though, in some cases, a direct sale to a RSIA, which is applicable to the winding up phase ex vi article certain buyer can be authorised by the court if certain require- 411 of the said body of law), although, at the end of the liqui- ments thereto are met. In addition, though the rule is that each dation process, all agreements necessarily terminate, unless an asset shall be sold in an independent manner, the RSIA provides assignment of the same could be worked out before that point. a subsidiary rule for the sale of business units, under which Nonetheless, while the agreement has not been validly termi- terms this type of unit should preferably be sold as a whole nated by either of the parties (e.g., on the ground of a breach of its (article 422 (1)). obligations by the other party or in the interest of the process), it remains in force during the winding up procedure, and this, in itself, is no ground for termination by the other party. 4.2 On what grounds can a company be placed into each winding up procedure? 4.6 What is the ranking of claims in each procedure, A bankrupt company can be placed into a winding up process at including the costs of the procedure? its own request, at any time during the bankruptcy proceedings (article 406 RSIA). In addition, if the creditors do not agree on The ranking of credits follows the rules set forth in the RSIA a creditors’ agreement during these proceedings, the same will (article 242). necessarily end with the winding up of the company (article 409 The main distinction is between the credits out of the bank- RSIA). ruptcy proceedings (“outs”) and those in these proceedings (“ins”). The outs are credits of first order, in the sense that they are 4.3 Who manages each winding up process? Is there payable once due and in any case before the ins (article 429 RSIA). any court involvement? With a few exceptions (certain labour credits, the cost incurred by the debtor in the declaration of the bankruptcy claim, etc.), The winding up process consists of two subphases; first, a deci- almost all of the outs are credits generated after the declaration of sion to wind up the debtor is taken by the court, and second, bankruptcy (article 242 RSIA), and the reason for their priority the so-called “liquidation” begins, where the debtor’s assets are is the intent to avoid the debtor being banished from engaging sold, and the proceeds are used to pay the creditors. Whereas in any transaction after its bankruptcy declaration, as the risk of the first subphase always lies in the hands of the court upon a non-settlement for the other party (provider, seller, etc.) would request of the debtor or in case of a failure to approve a cred- be too high. Among the outs, set out in article 242, it is worth itors’ agreement, the second is managed by the receiver, previ- mentioning here those incurred with (i) the insolvency process, ously appointed by the court and under the supervision of the (ii) the defence and representation of the debtor and the receiver, court. The receiver will liquidate the assets and pay the cred- in the interest of the bankrupt person, either in the bankruptcy itors in accordance with the rules provided by the RSIA (arti- proceedings or in other proceedings, and (iii) the remuneration cles 416–440). of the receiver. As for the ins, all credits qualified in these terms are credits due, although unsettled, at the time of the bankruptcy declara- 4.4 How are the creditors and/or shareholders able tion. These credits, if admitted by the receiver in the listing of to influence each winding up process? Are there any restrictions on the action that they can take (including such credits to be approved in the first phase of the process, will the enforcement of security)? 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 The ability of the creditors and/or shareholders to influence the security over the debtor’s assets); ordinary; or junior. winding up process is nil. Once the court orders the winding Ordinary credits are ins that, pursuant to the RSIA, should up of the debtor and approves the liquidation plan, all that is left not be qualified either as senior or junior (article 269 (3)).

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Senior credits will be paid after the outs and no ordinary credits in terms of corporate tax (article 17 (2) of the said Law 27/2014 are payable until all seniors have been paid in full. Nonetheless, as interpreted by the Tax General Directorate in its binding the proceeds from the senior secured credits will be used to resolution V3463-16, passed on 20 July 2016). pay the creditors secured by them and only in case the senior secured credits have been paid will the remaining proceeds be 62 Employees used to pay unsecured senior credits. Once all senior credits have been paid in full and there is still 6.1 What is the effect of each restructuring or liquidity outstanding, this will be used to pay the ordinary ones. insolvency procedure on employees? What claims would And if such liquidity is enough to pay all the ordinary credits and employees have and where do they rank? there is still liquidity outstanding, then payment of the juniors will begin. A distinction should be made between employees’ credits and As mentioned before, if the proceeds available are not suffi- jobs. cient to pay all credits qualified with the same grade, they will As for employees’ credits, the RSIA distinguishes between be paid in proportion. credits for salaries earned in the last 30 days of work before the initiation of the debtor’s bankruptcy process and up to the 4.7 Is it possible for the company to be revived in the double of the minimum salary, which are subject to the regime future? provided in article 242 RSIA, and any other labour credits. The regime provided in article 242 is the most protective for the creditors, in the sense that it allows payment of the credits to Under the Spanish Companies’ Act, a decision to wind up a which it applies – the outs mentioned in the answer to question non-bankrupt company will not prevent it from being revived 4.6 – before any other credits. Credits covered by article 242 are if the shareholders agree (article 370 (1)), although such decision first grade credits, payable once they become due, and the said cannot be taken after the termination of the liquidation process. labour credits are among them (1st type of first grade credits). If it were taken thereafter, instead of a revival, the shareholders Concerning the remaining labour credits, the RSIA distin- would have to set up a new company, foreseeably with the same guishes between certain labour credits (salaries and indemnities name, though with a different tax number and fully independent, for labour accidents and/or illnesses), which are deemed senior in terms of assets and liabilities, from the wound-up company. under article 280, and the remaining ones, which may be ordi- Nonetheless, in case of a company engaged in insolvency nary (article 269 (3)) or even junior (article 281). proceedings, after the court has decided to wind it up, its revival In terms of jobs, the initiation of a bankruptcy process does would be possible only in case those proceedings could be termi- not in itself determine the termination of any labour contracts nated on the ground of the full payment of its debts (article 465 or a change in the terms of these. During the bankruptcy RSIA). In such a scenario, though the RSIA does not expressly process, those agreements can be either terminated or modi- provide so, there is no legal reason why the company could not fied by the debtor’s appointed receiver, under the rules foreseen be revived, and this is the logical outcome of the company if it in the labour legislation with the specialties set forth in articles succeeds in paying all its debts. 169–185 RSIA, in relation to ordinary labour agreements, and articles 186–188, in relation to senior management labour agree- 52 Tax ments. Nonetheless, with some exceptions, the most important labour disputes or issues arising (collective dismissals, amendments, or suspension of labour contracts) during the bankruptcy 5.1 What are the tax risks which might apply to a process will not be heard by a labour court but by the court of restructuring or insolvency procedure? commerce where such process is pending (article 53 RSIA). Any dismissals, amendments, or suspension of labour contracts of a Tax creditors share the risks borne by any creditors, in the sense number below the figure foreseen in the Spanish Labour Act that, if the debtors’ assets are not enough to cover all their liabil- above which they would be deemed collective, would be heard by ities, creditors may face losses. a labour court. However, part of the tax credits is graded as senior, some- Whereas, as we have said, the initiation of a bankruptcy thing that increases their chances of being paid, if not in full at process does not in itself determine the termination of any least in part. This is on the ground that they will be paid before labour contracts, the initiation of a winding up process neces- any lower graded credits, but also because, as mentioned before, sarily leads to the termination of all labour agreements at the end in case of approval of a creditors’ agreement, senior credits are of the liquidation or even before that, save in case the company excluded from it, which is something that will eradicate them is revived on the terms mentioned in the answer to question 4.7 from any pardon or delay. or in case of a sale of a business unit of the debtor, as provided From the debtor’s perspective, a restructuring or insolvency in labour legislation (article 44 of the Spanish Labour Act). In procedure does not lead to incurring specific tax risks. However, this last case, if a business unit of the debtor is sold to a third in case the bankruptcy proceedings are qualified as blameworthy, party, the debtor’s employees that worked in that unit are auto- the unpaid tax credits will stand, just like any other credits, at matically assigned to the acquirer and therefore their contracts the time of determining the bulk of the unpayable credits of the are not terminated. debtor for which certain persons provided by the RSIA may be deemed personally liable. 72 Cross-Border Issues In addition to the above, it is worth bearing in mind that, in case of pardons granted by the creditors in a creditors’ agree- 7.1 Can companies incorporated elsewhere use ment, this would generate capital gains in the debtor, which restructuring procedures or enter into insolvency would be taxed in accordance with the corporate tax regulations proceedings in your jurisdiction? (article 15 of Law 27/2014, on Corporate Tax). In view of this, debt-for-equity swaps arranged between the debtor and any of Articles 45 and 49 RSIA lead to a distinction between main its creditors, in principle, would not have any tax effects, at least and territorial insolvency proceedings, the former being any

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proceedings initiated in the country where the debtor has its In addition, during a bankruptcy process, either the debtor or registered office and/or its main place of business, in which case the receiver can also request that two or more pending processes they cover its worldwide assets, and the latter being any proceed- be merged into a single one, if those processes pertain to compa- ings that pertain only to assets owned by the debtor in the terri- nies that belong to a group (article 41 RSIA). tory where such proceedings are pending. Both in case of joint or merged processes under articles 38, According to the RSIA, insolvency proceedings can be initi- 39 and 41 RSIA, respectively, as a rule, neither the assets nor ated in Spain in relation to a company incorporated elsewhere, the liabilities of each of the bankrupt companies can be consol- provided that such company has its main place of business in idated (article 42 RSIA); the only effect of the joint handling Spain, in which case the proceedings will be deemed main, or, in of the cases being that they will be handled in a coordinated case it does not, provided that it runs a business in Spain, such manner. Nonetheless, article 43 RSIA allows for such consol- proceedings will be deemed territorial. idations under certain exceptional circumstances in which the application of the ordinary regime would lead to higher costs or slower processing. 7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction? 92 COVID-19

As a rule, insolvency processes that have commenced elsewhere 9.1 What, if any, measures have been introduced in will not be recognised in Spain until the corresponding rulings response to the COVID-19 pandemic? given in a foreign country obtain exequatur when they meet the requirements thereto (article 742 RSIA). Nonetheless, in the case With a view to support debtors affected by the economic down- of processes initiated in another EU Member State, they would turn generated by the sanitary measures passed to curb the be fully recognised in Spain without any exequatur, pursuant to COVID-19 epidemic, both the Spanish Parliament and the Regulation (EU) 2015/848 of the European Parliament and the Government have approved several legislative measures that, Council, of 20 May 2015, on insolvency proceedings. in one way or another, temporarily modify or impose a stay on certain provisions of the insolvency legislation, the most impor- 7.3 Do companies incorporated in your jurisdiction tant of them being the one that imposes a stay on the obliga- restructure or enter into insolvency proceedings in other tion of insolvent debtors to file for bankruptcy. An amendment jurisdictions? Is this common practice? recently passed by Royal Decree-Law 5/2021 has extended the said temporary regime until the end of 2021. Pursuant to the abovementioned EU Regulation 2015/848, a Other – reform proposals company incorporated in Spain can initiate insolvency proceed- For the time being, no reform of the Spanish corporate rescue ings in other EU jurisdictions if it has its main place of busi- and insolvency regime has been announced. Nonetheless, the ness in such jurisdiction, in which case those proceedings abovementioned EU Directive (EU) 2019/1023 should be trans- should be deemed main, or if it runs a business in such jurisdic- posed by all EU Member States by no later than 17 July 2021. tion, they should be deemed territorial. The same would apply to Therefore, although the Government has not yet even disclosed any other jurisdictions in case they provide for the initiation of the draft of the piece of legislation that needs to be passed for insolvency proceedings by companies incorporated elsewhere. the transposition of the said Directive, this will foreseeably Nonetheless, so far, it is not common practice for Spanish happen in the early months of 2021. That piece of legislation companies to file for bankruptcy either in other EU Member will certainly entail an amendment of several provisions of the States or somewhere else. recently enacted RSIA. 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?

The RSIA provides that any members of a group of companies can file for bankruptcy in a single petition and creditors are also allowed to request the declaration of bankruptcy in the same proceedings of any such members (articles 38 and 39 RSIA).

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Pedro Moreira, a founding Partner of SCA LEGAL, SLP, has 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, shareholder 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 also advises on a regular basis in non-contentious matters, mostly in commercial and corporate law. Mr. Moreira has also been appointed as a 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 has a B.A. in Law from the Catholic University of Portugal, 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 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 more than 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 in 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 creditors of bankrupt companies, bankrupt companies, and directors of firm with offices in Madrid and representative offices in São Paulo (Brazil) bankrupt companies in liability lawsuits filed against them. and Buenos Aires (Argentina). In addition, one of the firm’s partners has been appointed as a receiver in The firm has a team of lawyers that works on international transactions several bankruptcy cases heard by some of Madrid’s Courts of Commerce. involving different sets of laws, has the flexibility to adapt to clients’ needs, www.sca-legal.com and has 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, the commercial and corporate practice is still one of the most thriving. Within this, insolvency has been one of the busiest areas, with the firm advising, on a regular basis,

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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 point at which a company must enter a restructuring or insolvency process? (CO) and the Swiss Debt Enforcement and Bankruptcy Act (DEBA). The CO and the DEBA generally strike a fair balance of rights and obligations of both debtors and creditors. In The CO provides for various inalienable and non-transferable 2014, the DEBA was amended to make in-court restructuring responsibilities of the directors of a Swiss company that specif- options more appealing to debtors. Based on our experience, ically apply in financial distress. The regime is identical for the this has slightly shifted the balance. That said, Switzerland is corporate forms most frequently used in practice, i.e., corpora- lagging behind the current international trend of establishing tions (Aktiengesellschaften/sociétés anonymes) and limited liability more powerful pre-insolvency restructuring tools that allow companies (Gesellschaften mit beschränkter Haftung/sociétés à résponsa- the debtor to propose tailored solutions for individual creditor bilité limitée). In June 2020, the Swiss Parliament adopted a revision classes with cram-down options. of Swiss corporate law, which comes, inter alia, with a number of changes aimed at clarifying certain elements in relation to insolvency triggers and bankruptcy filing obligations. It is expected 1.2 Does the legislative framework in your jurisdiction that the new law will enter into force in 2022 at the earliest. allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what If, based on the last financial statements, half of the share extent are each of these used in practice? capital and the legal reserves of the company are no longer covered by its assets (article 725 par. 1 CO, Kapitalverlust/perte de capital), the directors, inter alia, have to convene an extraordi- There are two main types of formal insolvency and restruc- nary shareholders’ meeting and to propose appropriate restructuring proceedings in Switzerland: bankruptcy (i.e., liquida- turing measures. When the revised CO enters into force, such tion) proceedings (Konkursverfahren/faillite); and composition convening of a restructuring shareholders’ meeting will no proceedings (Nachlassverfahren/concordat). Whereas in bank- longer be mandatory, which is generally welcomed in practice. ruptcy proceedings a company is eventually wound up, compo- If a Swiss company is over-indebted (überschuldet/surendetté) sition proceedings can either: (i) be used to liquidate and realise within the meaning of article 725 par. 2 CO, i.e., if its assets no the debtor’s assets in a more flexible manner than in bankruptcy longer cover its liabilities, the board of directors must notify the (composition agreement with assignment of assets); (ii) result court without delay unless certain creditors are willing to subor- in a debt restructuring (be it through a debt-rescheduling or a dinate their claims to those of all other company creditors in dividend agreement or a combination thereof); or (iii) be used an amount sufficient to cover the capital deficit and any losses as a mere restructuring moratorium, which may be terminated anticipated to be incurred in the next 12 months. Notification without the need to reach a composition agreement or to open of the court will typically lead to the opening of bankruptcy bankruptcy liquidation proceedings if the debtor can be success- proceedings or, if so requested by the board of directors, the fully restructured during the moratorium with the consent of all grant of a composition moratorium. The revised CO will not relevant creditors. It is fair to say that although both types of alter the substance of the obligations in case of over-indebt- formal proceedings are used in practice, bankruptcy proceed- edness, but certain clarifications will be made. Furthermore, ings are opened significantly more frequently than composition bankruptcy proceedings have to be initiated if a meeting of proceedings. Special insolvency regimes exist for certain types shareholders resolves on the dissolution of the corporation as of companies, most notably banks, securities dealers, insurance a result of its illiquidity (zahlungsunfähig/insolvable) pursuant to companies and other players in the financial industry. article 191 DEBA. Further, Swiss law provides for the possibility of an informal The revision of the CO will introduce a number of amend- work-out. It is frequently chosen in practice where (financial) ments relating to the duties of the board of a company in finan- creditors are supportive of the process. cial distress. Most notably, the board’s duty to monitor the company’s solvency will be stated explicitly in the CO together

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with an obligation to adopt measures to ensure liquidity in case where legal title has been transferred for security purposes may there is a risk of imminent illiquidity (drohende Zahlungsunfähigkeit/ still occur despite a composition moratorium and certain types menace d’insolvabilité), or propose such measures to the share- of intermediated securities may also be realised during a stay. holders’ meeting if it is within the latter’s competence (e.g. As to the possibility of other stakeholders to influence the capital increase). It is the general view among practitioners that company’s situation, it should be noted that the company’s stat- such new obligations do not lead to a conceptual change for utory auditors (Revisionsstelle/organe de révision) must notify the board members as corresponding obligations already existed court if the company is manifestly over-indebted and the board under the current fiduciary duty concept. of directors fails to notify the court itself. In addition, credi- Non-compliance with the aforementioned duties may lead to tors may petition the court to open bankruptcy proceedings personal liability for the directors. The general legal basis as or composition proceedings in respect of the company under regards the civil liability of directors (Haftung für Geschäftsführung/ certain circumstances. As long as no such proceedings have been responsabilité dans la gestion) is article 754 CO, pursuant to which opened by the court, creditors may take the same debt enforce- the members of the board of directors and any person entrusted ment actions against a company in financial distress as they with the management or the liquidation of a corporation shall may against a company in good standing (including attachment be liable for damages “caused by wilful or negligent violation of orders or interim relief to prevent certain acts of disposition). their duties”. Accordingly, the liability of a director requires: Available enforcement actions under the DEBA are gener- (i) a breach of the director’s duties; (ii) damages caused to the ally the same for all unsecured creditors. This notwithstanding, corporation or a particular creditor; (iii) a wilful or negligent the claims of certain creditor categories such as employees or conduct (fault); and (iv) a causal link between the breach and social security institutions are privileged in the context of insol- the damage. In a distressed context, courts have specifically vency proceedings (see also question 4.6 below) and some held directors liable who failed to take the steps required by creditors may have additional rights vis-à-vis the debtor under law by not notifying the court about the over-indebtedness of their contracts or Swiss statutory laws (such as termination or the company. In such scenarios, damages typically cover the retention rights in financial distress). Landlords benefit from increase of loss that occurred between the moment the direc- a specific lien (Retentionsrechts des Vermieters/droit de rétention du tors should have known of the corporation’s distressed situation bailleur) which, under certain circumstances, provides that the and failed to take appropriate actions and the moment the bank- inventory kept in the premises leased under a commercial lease ruptcy was actually declared (Konkursverschleppung/retard de la pron- serves as collateral to secure outstanding rent payments for a oncé de la faillite). Further civil law liability risks may arise in case period of up to one-and-a-half years. of mismanagement or the context of transactions that are at risk While retention of title arrangements can be established of being challenged (see question 2.3). under Swiss law, the formal requirements are high and the reten- Swiss social security laws provide for a strict civil and crim- tion of title does not protect against the bona fide acquisition of inal liability regime for board members in case of a failure to pay title by a third party. Consequently, such arrangements are of certain social security contributions. The relevant social secu- very little relevance. rity institutions actively pursue such claims. Certain actions or inactions by a director in a distress situ- 2.3 In what circumstances are transactions entered ation may also entail the risk of criminal sanctions under the into by a company in financial difficulties at risk of Swiss Criminal Code (CrimC). Among the provisions that are challenge? What remedies are available? most often applied in financial distress is article 165 CrimC, which punishes debtors whose acts of mismanagement have According to the DEBA, certain preferential or fraudulent acts caused the company’s bankruptcy (Misswirtschaft/gestion fautive). made by the debtor within certain suspect periods may become Mismanagement may exist, e.g., where an insufficient capital subject to challenge. The avoidance regime set forth in articles endowment causes or aggravates a company’s over-indebted- 285 et seq. DEBA provides for three different avoidance actions ness. Special attention must also be paid to article 167 CrimC, (Anfechtungsklage/action révocatoire), i.e.: (i) the action to avoid which targets preferences granted to certain creditors by an insol- gratuitous transactions (Schenkungsanfechtung/révocation des libéral- vent debtor that is subsequently declared bankrupt (Bevorzugung ités), which targets, in particular, all gifts and other dispositions eines Gläubigers/avantages accordés à certains créanciers). The standard made by the debtor without any, or without adequate, considera- sanctions for the relevant criminal offences are (conditional or tion during the year prior to the opening of bankruptcy proceed- unconditional) fines or imprisonment. Theoretically, a disqual- ings, the granting of a moratorium or the seizure of assets; (ii) ification preventing an individual from exercising its profession the voidability of certain specified transactions during the year (Berufsverbot/interdiction d’exercer une profession) may be ordered by prior to the opening of bankruptcy proceedings, the granting of the court, but this is rarely applied in practice. a moratorium or the seizure of assets while the debtor is already over-indebted (Überschuldungsanfechtung/revocation en cas de surendet- 2.2 Which other stakeholders may influence the tement), i.e., the granting of a security interest for existing debts company’s situation? Are there any restrictions on the without being, by prior agreement, contractually obligated to action that they can take against the company? For create the relevant security interest, the settlement of a mone- example, are there any special rules or regimes which tary claim in a manner other than by usual means of payment, apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention or the payment of a debt which was not yet due, in each case of title arrangements) applicable to the laws of your provided that the recipient is unable to prove that it was unaware jurisdiction? Are moratoria and stays on enforcement and must not have been aware of the debtor’s over-indebted- available? ness; and (iii) the avoidance for intent (Absichtsanfechtung/révoca- tion pour dol), which targets dispositions and other acts made by Moratoria and stays on enforcement are generally available the debtor within a period of five years prior to the opening of under Swiss insolvency law (see question 1.2 above and question bankruptcy proceedings, the granting of a moratorium or the 3.2 et seq. below). They would not, however, prevent foreclosure seizure of assets if the disposition was made by the insolvent in all types of collateral. Most importantly, foreclosure in assets with the intent to disadvantage its creditors or to prefer certain

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creditors to the detriment of other creditors, and if the privi- First, composition proceedings may be used as a mere restruc- leged creditor knew or should have known of such intent. For turing moratorium (article 296a DEBA). A termination is only all challenges, it is further required that the challenged transac- possible if it can be established before the court that the debtor tion has caused damages to other creditors of the debtor. The is restructured (without the need for a debt rescheduling or a rules regarding avoidance for intent as well as avoidance of dividend agreement). An individual agreement must be reached gratuitous transactions provide for an inversion of the burden with each single creditor or contractual group of creditors that is of proof whenever these transactions are entered into by related expected to make a concession. parties (including affiliated entities). Accordingly, in such cases Second, where it is not possible to receive consent from each the benefitting party must prove that it could not have been single creditor or contractual group of creditors, a composition aware of the disproportion between performance and consider- agreement may be proposed. In a debt-rescheduling agreement ation (in case of avoidance of gratuitous transactions) or of the (Stundungsvergleich/concordat moratoire) the debtor offers the cred- intention of the insolvent debtor to prefer certain creditors over itors full discharge of their claims according to a fixed time others (in case of avoidance for intent). schedule and, hence, the contractual terms and conditions of If all prerequisites are met, the court orders the defendant to the credits are modified. In a dividend agreement (Prozent- oder return the specific assets to the estate. If the return of a specific Dividendenvergleich/concordat dividende), the debtor offers the credi- asset is no longer possible, the court may order the defendant to tors only a partial payment of their claims in connection with a compensate the estate in cash. creditors’ waiver of the remainder. The debtor is not wound up as a consequence of such debt-rescheduling or dividend agree- 32 Restructuring Options ment and once such agreement has been adopted by the required quorum of creditors and the competent court, the debtor would have full power to manage the company’s affairs. 3.1 Is it possible to implement an informal work-out in Debt-for-equity swaps and/or composition agreements with your jurisdiction? incorporation of a company (Nachlassvertrag mit Gesellschaftsgründung/ concordat avec constitution de société) are admissible in Switzerland. In Under the CO in its current form, the board of directors must a typical debt-for-equity swap, creditors receive interests in the convene an extraordinary shareholders’ meeting and propose debtor in proportion to their recognised claims. Under a compo- appropriate restructuring measures in case of a loss of capital sition agreement with incorporation of a company, the debtor (Kapitalverlust/perte de capital; article 725 par. 1 CO, see question undertakes to assign its assets to a newly created company in 2.1). No court needs to be involved for the proposition or imple- which the creditors obtain interests in proportion to their recog- mentation of such measures. nised claims. Furthermore, pre-packaged sales are possible under While, according to article 725 par. 2 CO, there is a general Swiss law. Such sales may require the consent of the court-ap- obligation to notify the court in case of over-indebtedness pointed administrator (Sachwalter/commissaire) and the court. (Überschuldung/surendettement), court precedents hold that an Specific rules apply to debt-for-equity swaps for certain enti- informal work-out may be carried out without court involvement ties that are subject to a special insolvency regime, most notably in case of good prospects of success (see question 1.2 above). to banks. When the new CO enters into force (see question 2.1 above), this During the moratorium, creditors of claims are not enti- option will be addressed explicitly. The new CO will clarify that tled to commence or continue debt enforcement proceedings the board may abstain from notifying the court in case (i) there is (Betreibung/poursuite). This restriction does not apply to credi- well-founded prospects that the over-indebtedness will be elim- tors whose claims are secured by real estate who are, however, inated in due course; however, by no later than 90 days as of the precluded from foreclosing on the real estate. For further limi- date on which audited financial statements are available, and (ii) tations on the effects of a stay, see question 2.2. creditors’ claims are not jeopardised any further. As soon as a draft composition agreement (Nachlassvertrag/ Furthermore, the court may, at the request of the board of concordat) is proposed, the administrator convenes a creditors’ directors or a creditor, postpone the adjudication of bank- meeting. Only creditors who have filed claims in time are given ruptcy, provided that there is the prospect of a financial reor- the right to vote in the creditors’ meeting. Other than the right ganisation (Konkursaufschub/ajournement de la faillite). Such reor- to vote in the creditors’ meeting, creditors are generally not able ganisation may occur under the supervision of an administrator, to influence composition proceedings. which is instated by the court. That said, the opening of compo- Approval of the proposed composition agreement requires an sition proceedings (see question 3.2 below) is requested more affirmative vote by a quorum of either (i) a majority of creditors frequently in such instances. The postponement of bank- representing two-thirds of the total debt, or (ii) one-quarter of ruptcy will be abolished with the revision of the CO, leaving the the creditors representing three-quarters of the total debt. All restructuring moratorium as the only court-sanctioned restruc- creditors entitled to vote form one single voting class. Creditors turing procedure. with privileged claims and secured creditors (to the extent that their claims are covered by the estimated liquidation proceeds of the collateral) will not be entitled to vote on the composi- 3.2 What formal rescue procedures are available tion agreement. After approval by the creditors, the composi- in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps tion agreement requires confirmation by the composition court. and pre-packaged sales possible? To what extent can With the court’s confirmation, the composition agreement creditors and/or shareholders block such procedures becomes valid and binding upon all creditors of claims subject or threaten action (including enforcement of security) to the composition agreement, whether or not they have partic- to seek an advantage? Do your procedures allow you ipated in the composition proceedings and irrespective of their to cram-down dissenting stakeholders? Can you cram- non-approval of the composition agreement. It is thus possible down dissenting classes of stakeholder? to cram-down dissenting creditors in such proceedings. In turn, Swiss law does not provide for different classes of creditors that Formal rescue procedures are available in the form of compo- are subject to a composition agreement, hence no cram-down of sition proceedings. The restructuring of liabilities may be dissenting classes of creditors is available and a strict equal treat- achieved in two ways, with or without a cram-down element: ment rule of creditors applies.

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As opposed to the creditors, shareholders have no voting rights 3.5 What impact does each restructuring procedure over court-adjudicated composition agreements. The DEBA, have on existing contracts? Are the parties obliged to however, provides that in order for an ordinary composition perform outstanding obligations? What protections agreement to be approved by the court, the equity holders must are there for those who are forced to perform their make an appropriate contribution to the restructuring efforts. outstanding obligations? Will termination and set-off provisions be upheld?

3.3 What are the criteria for entry into each Contractual relationships between the debtor and its coun- restructuring procedure? terparties generally continue to be effective unless (i) there is a specific statutory provision under applicable contract law Composition proceedings are typically initiated by the debtor. providing for an automatic termination of the relevant agree- No specific trigger event exists that must have occurred for ment or a termination right upon the grant of a moratorium, or the debtor to be entitled to request the opening of composi- (ii) the specific contract provides for an automatic termination tion proceedings. In particular, it is not required for the admis- or a termination right upon the grant of a moratorium. If so, the sibility of composition proceedings and the grant of a morato- termination would generally be valid and enforceable vis-à-vis the rium that the company is over-indebted within the meaning of Swiss debtor and the administrator from a Swiss insolvency law article 725 CO or that it is unable to pay its debts within the perspective. Notwithstanding the foregoing, there are certain meaning of article 190 par. 1 section 2 DEBA. That said, some restrictions (see question 3.4) that may prohibit the debtor from degree of financial distress must exist, which may be in the disposing of its assets or continuing its business. form of looming illiquidity or over-indebtedness. In addition, If, in contrast, a contract is not terminated, while the both creditors entitled to request the opening of bankruptcy contracting party would generally have to perform its obliga- proceedings and the bankruptcy court may request the opening tions in kind, it may demand that security be provided if the of composition instead of bankruptcy proceedings. debtor’s restructuring has an adverse effect on the counterpar- Upon receipt of a request to this effect, the court grants a ty’s claim (which would typically be the case). In the event that provisional moratorium (provisorische Nachlassstundung/sursis provi- no security is provided in due course – with the applicable time soire) of up to four months, which may be extended for a further period depending on the underlying circumstances – the coun- four months in exceptional cases. Furthermore, a provisional terparty is entitled to unilaterally rescind the relevant agree- administrator (provisorischer Sachwalter/commissaire provisoire) may ment. In case of long-term contracts (Dauerschuldverhältnisse/ be appointed by the court to assess the prospects of a successful contrats de durée), to the extent the counterparty performs its obli- reorganisation or of a composition agreement. gations during a moratorium with the consent of the adminis- If the court finds that there are reasonable prospects for a trator, its claims against the debtor constitute so-called debts of successful reorganisation or that a composition agreement is the estate (Masseverbindlichkeiten/dettes de la masse) and have to be likely to be concluded, it must grant a definitive moratorium paid with priority (prior to all other non-secured creditors). (definitive Nachlassstundung/sursis concordataire) for a period of four Further, the administrator has the authority to order conver- to six months and appoint an administrator (Sachwalter/commission of a performance owed by the debtor in kind into a mone- saire). Upon application by the administrator, the duration of tary claim of corresponding value, which will then become the moratorium may be extended to up to 12, and in particularly subject to the terms of the composition agreement. Set-off complex cases 24, months. rights are modified upon the grant of a moratorium in much the 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 require the be paid with priority from funds available at the outset of 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, a distinction needs to be made ited from divesting, encumbering or pledging fixed assets and to between funds made available prior to the opening of insol- grant guarantees or to make gifts. vency proceedings and funds granted in the context of compo- Major steps in the composition proceedings require the sition proceedings: involvement of the court. This holds true for the opening of ■ If financing is made available during the moratorium, the composition proceedings, the appointment of an administrator, administrator’s consent to such financing will lead to a the approval of certain transactions involving the debtor and, super-priority status of the relevant claims insofar as they finally, the approval of the composition agreement. qualify as debts of the estate (Masseverbindlichkeiten/dettes de la masse), which are paid with priority before any distributions are made to other creditors. In addition, if collateral is

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granted for such financings with the approval of the compe- office as well as a creditors’ committee, which has certain tent court or – if applicable – the creditors’ committee, the supervisory (and limited decisive) competencies. A granting of collateral is exempted from the scope of avoid- second creditors’ meeting is convened to pass resolutions ance actions as described in question 2.3 above. as to all important matters, including the commencement ■ Rescue financing granted prior to the opening of insol- or continuation of claims against third parties and the vency proceedings does not benefit from super-priority method of realisation of the assets belonging to the bank- status. That said, in a most recent court precedent, the ruptcy estate (the actual realisation, however, is reserved to Swiss Federal Supreme Court clarified that pre-insolvency the bankruptcy administrator). rescue financing (so-called Sanierungsdarlehen/prêt accordés ■ In summary proceedings (which are the rule in practice dans un but d’assainissement) may benefit from claw-back with the exception of a few large-scale bankruptcies), protection. A loan to a debtor in financial distress qualifies no creditors meetings are held and there is no option to as protected rescue financing if (i) the debtor attempts to appoint a private bankruptcy administration. Creditors restructure the company, (ii) the efforts to restructure the may be approached by circular letter, though, and may company support a legitimate view that justifies the proba- so resolve on certain matters (including whether or not bility of a favourable prospect, and (iii) the loan is granted certain claims should be pursued by the estate or should for the very purpose of such restructuring. Whether or be offered for assignment to creditors). not such criteria are met will have to be assessed on a case- Following distribution of the proceeds (according to ques- by-case basis and involve some (court) discretion. tion 4.6 below), the bankruptcy administration submits its final report to the bankruptcy court. If the court finds that the bank- 42 Insolvency Procedures ruptcy proceedings have been completely carried out, it declares them closed. For composition proceedings with assignment of assets, 4.1 What is/are the key insolvency procedure(s) please refer to question 4.1 above. Once a composition agree- available to wind up a company? ment with assignment of assets has been approved by the creditors and confirmed by the court, the liquidator will take over the The key insolvency procedure that leads to the winding up of a realisation of the assets. company is bankruptcy. Additionally, composition proceedings can be used to liquidate and realise the debtor’s assets in a more 4.4 How are the creditors and/or shareholders able flexible manner than in bankruptcy (composition agreement to influence each winding up process? Are there any with assignment of assets, Nachlassvertrag mit Vermögensabtretung/ restrictions on the action that they can take (including concordat par abandon d’actif ) but with the same result, i.e., winding the enforcement of security)? up of the company. Once bankruptcy proceedings have been opened, all debt 4.2 On what grounds can a company be placed into enforcement proceedings come to an end and creditors may each winding up procedure? not commence new debt enforcement proceedings against the debtor. Apart from attending the creditors’ meetings (see question 4.3 above), unsecured creditors have no individual rights A company may be placed into bankruptcy proceedings by the to enforce their claims. Secured creditors have to (i) notify the competent court: (i) if a creditor whose claim has not been settled bankruptcy administrator if they are holding assets owned by but upheld within the course of debt enforcement proceedings the debtor within 30 days as from the public announcement of has successfully requested the opening of bankruptcy proceed- the creditors’ call, and (ii) hand in the collateral to the bank- ings (Konkursbegehren/réquisition de faillite); (ii) upon a debtor’s ruptcy administrator. As a rule, contractual or statutory rights request by declaring to the court that it is insolvent; (iii) upon to privately realise such collateral are no longer enforceable a creditor’s request if the company has committed certain acts in bankruptcy. Notable exceptions exist with respect to indi- to the disfavour of its creditors or if it has ceased payments or if vidual assets, most importantly for certain intermediated securi- certain events have happened during composition proceedings; ties. Furthermore, the restrictions do not apply to certain types or (iv) upon a notification of the court by the board of directors of security interests involving an outright transfer of title. In (or the statutory auditors) of the company that the company is any event, the secured creditors keep their preferential rights over-indebted. As to the opening of composition proceedings with respect to the collateral and will be satisfied out of the net with the intention of concluding a composition agreement with proceeds of the sale of such collateral in priority to any other assignment of assets, see question 4.1 above. creditors. Real estate mortgages are only realised and proceeds paid out to creditors if their claims against the debtor are due; 4.3 Who manages each winding up process? Is there claims secured by real estate mortgages that are not yet due are any court involvement? transferred to the acquirer of the real property. For composition proceedings with assignment of assets, please Bankruptcy proceedings are opened by the competent court refer to question 4.1 above. Once a composition agreement with and, within the course of bankruptcy proceedings, the insolvent assignment of assets has been approved and confirmed by the company is represented exclusively by the bankruptcy adminis- creditors and the court, private realisation of collateral is avail- tration. The bankruptcy administration publishes a notice of able for movable assets on the basis of article 324 DEBA. bankruptcy instructing all creditors and debtors to file their claims and debts within one month. For the further process, 4.5 What impact does each winding up procedure have ordinary proceedings must be distinguished from summary on existing contracts? Are the parties obliged to perform proceedings: outstanding obligations? Will termination and set-off ■ In ordinary proceedings, creditors are invited to a first provisions be upheld? creditors’ meeting together with the creditors’ call. The first creditors’ meeting may appoint a private bankruptcy Whether existing contracts are terminated upon the initiation administration acting instead of the state bankruptcy of winding up procedures is primarily governed by statutory

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contract law and the specific terms of a contract, which are of the collateral. Should the proceeds not be sufficient to satisfy generally upheld in a Swiss winding up proceeding. Under Swiss the claim of a secured creditor, such creditor shall rank as an contract law, certain types of contracts are terminated ex lege, unsecured and non-privileged creditor for the outstanding whereas others can be terminated immediately by one party in amount of its claim. case of bankruptcy of the other. Unsecured claims are ranked within three classes of claims. If contracts are not terminated, the contracting party would Leaving aside claims that are irrelevant in a corporate context, generally be bound to accept a dividend rather than full payment the classes are composed as follows: the first class consists of or specific performance. Whether or not the contracting party claims of employees: (i) derived from the employment relation- would have to perform itself in kind is disputed. However, ship that arose during the six months prior to the opening of should the bankruptcy administration elect in its sole discre- bankruptcy proceedings and which do not exceed the maximum tion to pursue the performance of a contract that was not or insurable annual salary as defined by the Federal Ordinance was only partially fulfilled at the time of opening of the bank- on Accident Insurance (which is currently CHF 148,200); (ii) ruptcy proceedings, the counterparty may demand that security in relation to the restitution of deposited security; and (iii) be provided, and it may further expect full performance by the derived from social compensation plans that arose during the bankruptcy administration. In turn, it would have to perform six months prior to the opening of the bankruptcy proceedings. its obligations as well. The right of the bankruptcy adminis- The first class also includes claims of the assured derived from tration to elect performance of the contract is excluded in the case of financial future, swap, option and similar strict dead- the Federal Statute on Accident Insurance and from faculta- line transactions, if the value of the contractual performance tive pension schemes, as well as claims of pension funds against can be determined based on market or stock exchange prices employers. The second class includes claims of various contri- at the time of the opening of the bankruptcy. The bankruptcy butions to social insurances. All other claims are comprised in administration and the contractual partner are each entitled to the third class. Claims in a lower ranking class will only receive claim the difference between the agreed value of the contractual dividend payments once all claims in a higher ranking class have performance and the market value at the time of the opening of been satisfied in full. Claims within a class are treated on a pari the bankruptcy proceedings. passu basis. Special insolvency rules apply to long-term contracts. Even if The costs incurred during the bankruptcy proceedings are they are not terminated upon the opening of bankruptcy proce- debts of the estate (Masseverbindlichkeiten/dettes de la masse) and dures, future claims arising under such long-term contracts have to be paid with priority, i.e., before any other creditor is will only be admitted to the schedule of claims for the period paid. until the next possible termination date (calculated from the opening of bankruptcy) or until the end of the fixed duration 4.7 Is it possible for the company to be revived in the of a contract. If the bankruptcy estate has made full or partial future? use of performances under the long-term contracts, article 211a DEBA provides for the indemnification thereof to be a claim against the bankruptcy estate (Masseverbindlichkeiten/dettes de la Once the bankruptcy proceedings have been terminated, this is masse) and, thus, to be paid with priority. generally not possible. In this scenario, following distribution Set-off rights are also available in cases of bankruptcy, but of the proceeds, the bankruptcy administration submits its final the substantive set-off rules are subject to certain modifications report to the bankruptcy court, which declares the bankruptcy in bankruptcy. First, a distinction needs to be made between proceedings closed if it finds that they have been completely (i) claims of the insolvent party forming part of the insolvency carried out. As a consequence, the company ceases to exist and estate and claims against the insolvent party (Konkurs- oder will be removed from the commercial register. However, in case Nachlassforderungen/créances dans la faillite ou le concordat) to be satisfied previously unknown assets of the insolvent are discovered after with a dividend payment out of the proceeds of the insolvency the bankruptcy proceedings have been closed, the bankruptcy estate on the one hand, and (ii) claims of, and against, the insol- administration distributes the proceeds of such assets without vency estate (Masseforderungen und -verbindlichkeiten/créances et dettes de further formalities. la masse) which are mainly characterised by the fact that they have In contrast, there are limited options for the debtor to have come into existence only after the opening of insolvency proceed- bankruptcy proceedings revoked during the course of proceedings with the consent of the insolvency administration. As a rule, ings. At the outset of bankruptcy proceedings, the debtor has set-off is only possible between claims of the same category. In the possibility to appeal the declaration of bankruptcy ordered addition, set-off of claims of the first category is not admissible if by the competent court within 10 days. To this effect, the debtor (i) the debtor of the insolvent party became a creditor of the latter must (i) make it plausible that it is able to pay its debts (zahlungs- only after the opening of bankruptcy proceedings or the grant of a fähig/solvable), and (ii) provide evidence that the relevant claim has moratorium, respectively, or (ii) the creditor of the insolvent party been settled or deposited with the court on behalf of the respec- did not become a debtor of the insolvent party or the insolvency estate until after the opening of the bankruptcy proceedings or tive creditor or that the creditor having requested the opening the grant of a moratorium, respectively. Furthermore, set-off is of bankruptcy proceedings renounces that such proceedings voidable if a debtor of the insolvent party acquires a claim against be carried out. Alternatively, at a later stage, as from the expi- the latter prior to the opening of bankruptcy proceedings or the ration of the deadline for the creditors’ call (Schuldenruf/appel grant of a moratorium, respectively, but in awareness of the insol- aux créanciers) until the closure of proceedings, the debtor may vency in order to gain an advantage for himself or a third party to request the competent court to revoke bankruptcy (Widerruf des the detriment 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 gage) are satisfied directly out of the net proceeds from the realisation

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52 Tax of deposits, and (iii) social compensation plans (Sozialplan/plan social) that came into existence or fell due no earlier than six months prior to the opening of insolvency proceedings. Claims 5.1 What are the tax risks which might apply to a exceeding such maximum amount are allocated to the third restructuring or insolvency procedure? class of (unsecured and non-privileged) creditors while claims in relation to social insurance contributions are privileged and As a rule, companies in financial difficulties do not benefit rank in the second class. from any special tax treatment under Swiss law. In particular, dissolving hidden reserves or the forgiveness of debt granted by 72 Cross-Border Issues third parties is generally considered a taxable profit. However, a company in financial difficulties has generally incurred losses 7.1 Can companies incorporated elsewhere use in previous years that can be set off against these profits. In restructuring procedures or enter into insolvency this context, one must note that as a general rule Swiss tax law proceedings in your jurisdiction? enables set-off with reported losses of the seven prior years only. For companies with a loss of capital (Kapitalverlust/perte de capital; Pursuant to the DEBA, bankruptcy and composition proceed- article 725 par. 1 CO, see question 2.1), this time limit for offset- ings may only be opened in respect of companies incorporated ting of prior losses does not generally apply. Such companies in Switzerland, meaning that such company must be registered may therefore use all of their reported losses incurred to the with the Swiss commercial register (Handelsregister/register du extent these were not already set off with profits of prior years. commerce). A Swiss court is not competent to order the bank- The forgiveness of debt granted by shareholders is, under certain ruptcy or composition of a company with its registered seat circumstances, treated as a contribution for no remuneration and outside of Switzerland, even if such company has substantial is subject to an issuance stamp duty (Emissionsabgabe/timbre d’émis- trade and business activities in Switzerland. A company incor- sion) of one per cent, as is the case with respect to an increase porated outside of Switzerland may therefore only restructure of capital. The same analysis prevails in case of a reduction of or enter into insolvency proceedings in Switzerland after such the share capital followed by an increase of the share capital or company has re-domiciled in Switzerland. the contribution for no remuneration (Harmonika). However, For the sake of completeness, it should be noted that Swiss in case of a financial restructuring, a company may apply for legal doctrine discusses the availability of main Swiss proceed- a waiver of issuance stamp duty to the extent that the increase ings for a non-Swiss incorporated entity in exceptional circum- of share capital, the contribution for no remuneration or the stances where main insolvency proceedings in the jurisdiction at forgiveness of debt does not exceed CHF 10 million and further the registered seat are either unavailable or impracticable (high provided that such amount covers losses of the company. In requirements) and that there is a close nexus to Switzerland addition, even if such threshold is exceeded, a waiver of stamp (which may be satisfied through a debtor’s centre of main inter- duty can be obtained if levying such duty would be excessively ests (COMI) in Switzerland). We are not, however, aware of harsh for the company. a precedent that would have opened main proceedings in Switzerland on the basis of this theory. This notwithstanding, 62 Employees in case a debtor incorporated outside of Switzerland operates a branch in Switzerland, Swiss insolvency proceedings may be opened against such debtor in the jurisdiction where the Swiss 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would branch is located (Niederlassungskonkurs/faillite de la succursale). employees have and where do they rank? Such proceedings, however, are limited to obligations incurred by the branch (article 50 DEBA). Employment agreements are not automatically terminated upon the opening of insolvency proceedings of the employer. 7.2 Is there scope for a restructuring or insolvency In case the employer becomes insolvent, though, an employee process commenced elsewhere to be recognised in your jurisdiction? may terminate the employment relationship without notice unless such employee is provided security for claims arising from the employment relationship. Subject to such termina- In bankruptcy matters, Switzerland follows the principle of tion rights, the bankruptcy administration may decide to main- territoriality. Accordingly, a foreign bankruptcy or any similar tain some employment contracts, in which case salary payments proceeding has no effect in Switzerland unless it has been recog- become obligations of the estate. The administration may also, nised. The recognition of foreign proceedings (Anerkennung/ as happens in the majority of cases, cease the business and there- reconnaissance) is governed by a special chapter in the Swiss Private fore decide to terminate the work contracts. When doing so, it International Law Act (PILA). The conditions for recognition has to comply with the applicable notice period. Unpaid sala- are as follows: (i) the insolvency decree must have been rendered ries have to be claimed and scheduled. Composition proceed- in the state of the debtor’s domicile or where the debtor has its ings generally have a legal effect that is similar to bankruptcy COMI outside of Switzerland; (ii) the petition for recognition with respect to employment contracts. That said, it is much has been introduced by the bankruptcy’s administrator, by the more common to maintain employment contracts in composi- debtor itself or by a creditor; (iii) the bankruptcy decree must be tion proceedings than in bankruptcy. enforceable in the state where it was rendered; and (iv) the bank- Employee claims are privileged claims and rank in the first ruptcy must not be inconsistent with Swiss public policy and class of creditors. They comprise (i) claims having their basis in the fundamental principles of Swiss procedural law. Since 2019, the employment relationship which arose during a period of six reciprocity is no longer a requirement. As soon as the petition for recognition has been filed, the court may, on application of months prior to the opening of insolvency proceedings, up to a the petitioner, order conservatory measures. In principle, once maximum amount determined by Swiss accident insurance legis- the recognition is granted, the foreign bankruptcy decree has lation, which is currently equivalent to CHF 148,200 (see also the same effects as a Swiss bankruptcy decree with regard to the question 4.6 above), as well as employee claims for (ii) return debtor’s assets located in Switzerland.

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Prior to a revision of the PILA entering into force in 2019, 82 Groups the opening of Swiss ancillary proceedings in case of bankruptcy was mandatory whereas, under certain circumstances, such ancillary proceedings were not necessary in the case of 8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for restructuring-type proceedings (Nachlass- oder ähnliches Verfahren/ co-operation between officeholders? concordat ou procedure analogue). Under the revised PILA, effective since January 1, 2019, it is also possible for the Swiss courts to waive the opening of ancillary proceedings in case of a recogni- Swiss insolvency law is based on the principle of “one company, tion of a foreign bankruptcy decree, provided that (i) a request one proceeding”. Hence, in case multiple members of the same to this effect is made by the foreign bankruptcy administration, corporate group request the opening of insolvency proceedings, (ii) there are no creditors in Switzerland the claims of which are there will be separate insolvency proceedings for each group privileged or secured by a pledge, and (iii) the claims of non-priv- member. The group itself is not subject to insolvency. This prin- ileged and unsecured creditors in Switzerland are adequately ciple notwithstanding, pursuant to article 4a DEBA, Swiss bank- taken into account in the foreign proceedings and such credi- ruptcy authorities have to coordinate their actions to the extent tors were granted an opportunity to be heard. In case no ancil- possible in a group insolvency scenario. In particular, based on lary proceedings are opened, the foreign insolvency administra- article 4a DEBA, it would be possible to appoint one sole admin- tion may carry out all actions for which it is authorised pursuant istrator in the insolvency proceedings of affiliate entities within to the applicable foreign law in Switzerland, including, most the same group or to decide on the exclusive jurisdiction of the notably, the transfer of assets of the foreign debtor located in insolvency courts and authorities that are competent for one Switzerland to the foreign insolvency estate. In this context, group entity for all affected group entities, subject to prior agree- the foreign insolvency administration must ensure that it is at all ment of all involved authorities. However, as this provision was times compliant with all applicable Swiss laws. In particular, it introduced only recently, there is little guidance available with must not perform any official acts, use any means of coercion or regards to how such coordination is handled in practice. adjudicate on any disputes. This duty to cooperate does not extend to foreign insolvency If, by contrast, ancillary insolvency proceedings are opened, proceedings of group members outside of Switzerland. In prac- pursuant to article 172 par. 1 PILA, only certain claims may be tice, however, Swiss bankruptcy authorities in charge of liqui- included in the schedule of admitted debts, i.e., (i) the claims dating a Swiss group member often enter into mutual agree- secured by pledged assets located in Switzerland according to ments with foreign insolvency administrations, settling mutual article 219 pars 1 to 3 DEBA, (ii) the unsecured but privileged claims amicably. claims of creditors having their domicile in Switzerland according to article 219 par. 4 DEBA (first and second classes), and (iii) 92 COVID-19 claims for liabilities on account of a branch (Zweigniederlassung/ succursale) of the debtor registered in the commercial register 9.1 What, if any, measures have been introduced in in Switzerland. After the satisfaction of these creditors, any response to the COVID-19 pandemic? remaining balance is remitted to the foreign bankruptcy estate (article 173 par. 1 PILA). This transfer, which represents the On April 16, 2020, the Swiss Federal Council enacted the result of the Swiss ancillary bankruptcy, requires, however, the COVID-19 Insolvency Ordinance. One of its main goals was prior recognition of the foreign schedule of claims, whereby the to relieve pressure on the executive bodies of Swiss entities to Swiss courts review, in particular, whether the creditors domi- request the opening of insolvency proceedings, allowing them ciled in Switzerland were fairly treated in the procedure and were a temporary suspension of the obligation to notify the courts granted an opportunity to be heard. of an existing balance sheet over-indebtedness and to continue Special provisions exist for banks and other financial institu- trading on the basis of an overall positive assessment of the tions where foreign insolvency proceedings are recognised by future ability of the company to restructure its balance sheet by the Swiss Financial Market Supervisory Authority (FINMA). December 31, 2020. Accordingly, companies did not have to comply with insolvency filing requirements established under 7.3 Do companies incorporated in your jurisdiction Swiss law (see question 2.1), if (i) there were prospects that the restructure or enter into insolvency proceedings in other company would have a “clean” balance sheet (no over-indebt- jurisdictions? Is this common practice? edness) by December 31, 2020, and (ii) the company was not over-indebted as per December 31, 2019. In addition, the Swiss Federal Council put in place a special As stated in question 7.1 above, Swiss courts have exclusive COVID-19 moratorium. Such “moratorium-lite” was supposed jurisdiction over companies registered in Switzerland for the to facilitate SMEs’ fast access to a protective moratorium with opening of insolvency proceedings. The fact that a company less formal requirements than would otherwise apply under the domiciled and registered in Switzerland has already requested general composition moratorium. It replaced a general suspen- the opening of insolvency proceedings outside of Switzerland sion of debt enforcement proceedings ordered by the Swiss would not prevent the Swiss court from opening separate Swiss Federal Council earlier in the COVID-19 crisis, which expired on main proceedings. In fact, the Swiss authorities would not April 19, 2020. Until this date, debtors were generally protected accept any proceedings outside of Switzerland in such instances. from such proceedings on the basis of the suspension of limi- This notwithstanding, we note that Swiss companies are occa- tation periods for the entire collection system. Finally, certain sionally looking abroad for restructuring tools that are currently amendments had been implemented for the general morato- unknown in Switzerland (see question 1.1 above). So far, this rium. In particular, applicants were not requested to provide has happened only a few times, and the underlying facts have a restructuring plan to the court together with the request for been very specific. Given that any such proceedings cannot be the grant of a provisional composition moratorium. Further, recognised in Switzerland, we do not expect this to become a the maximum duration of the provisional moratorium has been major trend but rather a niche option to be analysed carefully. extended to six months.

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On October 14, 2020, the Swiss Federal Council decided not to financial pressure on companies and to avoid layoffs. In particular, extend the temporary suspension of notification obligations and it decided to extend the existing short-time work compensation, the access to the “moratorium-lite”. The latter was not widely namely extending its scope of application and the maximum dura- used in practice and the common expectation is that distressed tion. Furthermore, the Swiss government provides financial aid entities will now opt for the general moratorium if there is a pros- in form of loans, sureties, guarantees and non-repayable contri- pect that the entity may be restructured. In partial compensation butions to companies hit particularly hard by the COVID-19 for the abolishment of the “moratorium-lite”, the Swiss Federal pandemic, namely those that have to close their business as a Council extended the duration of the provisional moratorium result of the imposed lockdowns and in severely affected sectors from four to a maximum of eight months (see question 3.3). such as the aviation, tourism and event industries. In addition to these insolvency-related measures, the Swiss Federal Council took further measures to mitigate the impact of the COVID-19 pandemic on the Swiss economy, to ease the

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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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Turkey Turkey

Gökben Erdem Dirican

Dirican | Gözütok Ali Gözütok

12 Overview point at which a company must enter a restructuring or insolvency process?

1.1 Where would you place your jurisdiction on the spectrum of debtor- to creditor-friendly jurisdictions? In the event of suspicion that a company is in debt, the board of directors must prepare an interim balance sheet. Pursuant to Article 179 of the EBL and Article 376 of the Turkish Under Turkish law, the collection of receivables, bankruptcy and Commercial Code (Law No. 6102) (published in the Official restructuring procedures are mainly governed by the Execution Gazette dated 14 February 2011, No. 27846) (“TCC”), in case and Bankruptcy Law (Law No. 2004) (“EBL”) (published in the the liabilities of the company exceed its assets and/or it is under- Official Gazette dated 19 June 1932, No. 2128). The EBL sets stood from the interim balance sheet that the company is deeply provisions tending to balance the interests of the creditor and in debt, the board of directors must apply to the Commercial the debtor. As an example of such tendency, while the creditor Court with a bankruptcy request. As per Article 377 of the may initiate an execution proceeding against the debtor without TCC, the members of the board or a creditor may also request basing its claims on any document or court judgment, the debtor concordat restructuring during the trial process of bankruptcy may suspend such proceeding by merely raising an objection. at the court. Article 85 of the EBL provides that the execution officer must Article 345(a) of the EBL provides that in case the author- equilibrate the interests of both parties. The EBL sets forth ised individuals of a company fail to apply for bankruptcy, they provisions aiming to prevent the immoderate violation of the must be punished with imprisonment for up to three months debtor’s right of property, such as certain assets of the debtor upon a complaint filed by one of the company’s creditors. The necessary for the conduct of the debtor’s business and his house board of directors shall be liable for the damages arising from that is proper to his financial situation, and which cannot be such failure. attached.

2.2 Which other stakeholders may influence the 1.2 Does the legislative framework in your jurisdiction company’s situation? Are there any restrictions on the allow for informal work-outs, as well as formal action that they can take against the company? For restructuring and insolvency proceedings, and to what example, are there any special rules or regimes which extent are each of these used in practice? apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title The financial restructuring may be conducted in an informal arrangements) applicable to the laws of your jurisdiction? way with an agreement executed between the debtor and its Are moratoria and stays on enforcement available? creditors. Such a financial restructuring would not be binding on creditors who are not parties to such agreements. The agree- When a joint stock company suffers losses that reduce its paid-up ments must not be executed to hide assets from other creditors share capital by two-thirds, the board of directors is required to in a way that prevents them from collecting their receivables and call an extraordinary general assembly meeting. At this meeting, causes them to incur losses. The debtor who executed agree- the shareholders must resolve either to compensate the company ments with the intention of causing his creditors damage shall in cash for the accumulated loss or to decrease the company’s be considered fraudulently bankrupt and shall be punished as paid-up share capital to one-third of its existing share capital. If per the Turkish Criminal Code (Law No. 5237) (published in the shareholders do not take one of these steps, the board of direc- the Official Gazette dated 12 October 2004, No. 25611). Both tors is required to file a lawsuit before the relevant Commercial informal work-outs and formal restructuring and insolvency Court for bankruptcy. Please also see question 4.2. There are proceedings are widely used in practice. special debt collection procedures available for some creditors such as landlords, creditors with retention of title arrangements, 22 Key Issues to Consider When the banks, and creditors bearing negotiable instruments. There are Company is in Financial Difficulties also special rules for a sped-up trial process for employees. The creditors can make an agreement to enter into a stay or moratorium. The creditors will not, during the standstill period, 2.1 What duties and potential liabilities should the take action to enforce security, make demands or speed up directors/managers have regard to when managing a company in financial difficulties? Is there a specific loans or other debt claims, bring legal proceedings against the company and, possibly, not exercise rights of set-off.

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The postponement of bankruptcy provisions enabling an ways: an ordinary concordat; a concordat in bankruptcy; and a insolvent company or person to avoid declaring bankruptcy if concordat through asset abandonment. Some restrictions are and to the extent that its financial situation is improvable is abol- imposed on creditors enforcing their rights over companies ished by Law No. 7101 (published in the Official Gazette dated under a temporary period and a precise period of concordat. 15 March 2018, No. 30361) amending the EBL. During the temporary period and precise period of concordat, no Stays on enforcement can be applicable depending on precau- proceedings may be filed against the company and any proceed- tionary measures that may be taken by court. ings previously initiated are suspended. Prescription periods and statute of limitations deadlines shall be suspended. Preliminary 2.3 In what circumstances are transactions entered injunctions shall not be applicable. Foreclosure proceedings, into by a company in financial difficulties at risk of mortgage claims and commercial pledges may be initiated/ challenge? What remedies are available? continued, provided that protective measures cannot be taken by creditors and the sale of pledged property cannot be performed. The hardening period is a key concept in insolvency and bank- Amicable restructuring is applicable for capital stock compa- ruptcy proceedings, providing that a transaction entered into nies and co-operatives. If a company is not able to pay its during a hardening period may be deemed invalid by a court. debts, its receivables are not enough to recover its debts, or During the debt collection and liquidation process, the trans- if the company is under the threat of facing these steps, such actions of the insolvent/bankrupt completed prior to its insol- company may apply to a Commercial Court in order to request vency/bankruptcy, particularly transactions within the hard- an amicable restructuring. ening period, shall be considered and reviewed, which may With regard to debt-for-equity swaps, it is known that the result in the cancellation of such transactions provided that such principal element of any debt-for-equity swap is a restructuring fall within the scope of Articles 278, 279 and 280 of the EBL, of the balance sheet of a corporate debtor so that the relevant stating three different hardening periods. participating creditors receive equity interests in a reorganised The one-year hardening period applies to (i) security inter- capital structure in consideration for reducing their debt claims ests if such security interests are created to secure an existing against the company. debt and the security collateral provider has not committed to Pursuant to Article 329 and Article 602 of the TCC, joint provide security interests at the time of incurring a debt, (ii) stock companies and limited liability companies are liable for payments made via instruments other than cash or ordinary their debts only by their assets owned as a legal entity. It is not payment instruments, (iii) payments made before their due date, possible to impose an attachment on a shareholder’s shares due and (iv) certain annotations to the title deed registries. These to a debt of the company as a legal entity. Pursuant to Article transactions should have been made within one year prior to the 133 of the TCC, in equity companies, in the event the creditors bankruptcy of the debtor or the attachment of its assets in order have a receivable from a shareholder, the relevant creditors are for the transactions to be annulled. entitled to request that the shares owned by the debtor share- The two-year hardening period applies to donations or gifts. holder be attached as per the relevant provisions of the EBL The five-year hardening period applies to transactions made regarding movable assets and request that such be sold and by the debtor with one of its creditors with the aim of harming 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. Please also note that the abovementioned provision they should have been made within five years prior to the initia- does not hinder the creditors from applying for the assets of the tion of bankruptcy or execution proceedings. debtor shareholders out of the company. With respect to pre-packaged sales, under Turkish law, 32 Restructuring Options a pre-packaged sale is possible in terms of Article 538 of the TCC. Pursuant to the said Article, unless decided otherwise 3.1 Is it possible to implement an informal work-out in by the general assembly, the liquidator can perform the sale your jurisdiction? of the active assets of the company by way of negotiation. If the subject of the sale constitutes a wholesale of a significant Please see question 1.2. amount, then a general assembly resolution is required. The sale shall then be conducted by the liquidators. Concerning the concordat restructuring, in case the court 3.2 What formal rescue procedures are available does not approve the concordat or cancels the concordat period, in your jurisdiction to restructure the liabilities of it will immediately decide on the bankruptcy of the debtor upon distressed companies? Are debt-for-equity swaps the report of the concordat commissar. Creditors may apply to and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures the court for the termination of the concordat restructuring if it or threaten action (including enforcement of security) is found that the debtor acted in bad faith in having the restruc- to seek an advantage? Do your procedures allow you turing proposal approved or that the debtor breached the provi- to cram-down dissenting stakeholders? Can you cram- sions of the concordat. down dissenting classes of stakeholder? Concerning the amicable restructuring, if the restructuring project is successful, the debtor will continue to operate. If the Under Turkish law, the main types of restructuring are concordat company breaches the terms of the amicable restructuring, the restructuring and amicable restructuring. company should seek to agree with creditors and to have an Concordat restructuring is proposed by the debtor or a cred- amendment to the restructuring proposal approved by the court. itor to compromise certain liabilities in accordance with a plan. In the absence of an agreement, a creditor may apply to the court The key aim is to present a probable success through a concordat for the termination of the restructuring. In case the court real- plan, with no intention to cause any damage or loss to the cred- ises that the company did not fulfil its obligation arising from itors. The restructuring can be implemented in three different the amicable restructuring, it will decide on bankruptcy.

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There are no other cram-down provisions in the Turkish will have the authority to supervise and monitor whether the insolvency legislation. Concordat and amicable restructuring plan is being fulfilled and to report on the situation to the cred- may include terms that provide for the cram-down of creditors itors (Article 309(p) of the EBL). as a whole.

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

3.4 Who manages each process? Is there any court 3.6 How is each restructuring process funded? Is any involvement? protection given to rescue financing?

Concerning concordat restructuring, the concordat commissar As per Article 285 of the EBL, the court expenses and charges is liable to supervise the acts of the debtor, report to the court shall be deposited in advance by the applicant. Pursuant to and inform the creditors regarding the concordat period (Article Annex 1 of the Law of Charges, a fixed charge shall be paid 290 of the EBL). The creditors’ board shall supervise the acts of while applying for a concordat request. There are other fees and the commissar and has the right to request a new appointment of charges applicable such as expert examination fees, announce- a new commissar from the court when and if necessary. ment expenses, concordat commissar expenses and other service Concerning amicable restructuring, if the court takes meas- expenses, which shall also be paid by the applicant in advance. ures to protect the debtor’s assets until its decision on ratification or rejection of the amicable restructuring plan, the creditors 42 Insolvency Procedures and debtor – or, if the same fail to agree on one, the court – can appoint one or more mid-term auditors to assume responsibility 4.1 What is/are the key insolvency procedure(s) for directing, managing and supervising the debtor’s activities available to wind up a company? from the date of appointment until the court’s ratification or rejection of the plan (Article 309(ö) of the EBL). In the event that the plan is ratified by the court, it may in its The insolvency procedure types provided by the EBL are: volun- ratification decision appoint one or more plan supervisors, who tary bankruptcy; and bankruptcy.

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4.2 On what grounds can a company be placed into suspended lawsuits shall continue or not, sale of certain goods each winding up procedure? by bargaining and the concordat offer made by bankruptcy. The bankrupt’s estate shall be sold and distributed by the When a joint stock company suffers losses that reduce its paid-up bankruptcy administration. The administration shall request share capital by two-thirds, the board of directors is required to the closing of bankruptcy by presenting a final report, and the call an extraordinary general assembly meeting. At this meeting, Commercial Court that has commenced the bankruptcy has to the shareholders must resolve either to compensate the company decide on closing as well. in cash for the accumulated loss or to decrease the company’s paid-up share capital to one-third of its existing share capital. 4.4 How are the creditors and/or shareholders able Otherwise, the board of directors is required to file a lawsuit to influence each winding up process? Are there any before the relevant Commercial Court of First Instance for restrictions on the action that they can take (including bankruptcy. If the board of directors does not file a voluntary the enforcement of security)? bankruptcy lawsuit, each director shall be personally, jointly and severally liable for any and all real damages incurred by the cred- Any proceedings with an attachment request that were started itors and the shareholders. against the debtor for debt recovery before its bankruptcy are suspended on the commencement of bankruptcy (that is, the Bankruptcy judgment of the court) and terminated when the bankruptcy Ordinary bankruptcy decision becomes conclusive (that is, after the finalisation of the Ordinary bankruptcy involves a creditor bringing bankruptcy appeal process). proceedings against a debtor. Bankruptcy can only apply to A creditor with a prior perfected pledge/mortgage has a pref- merchants (that is, an entity or a person engaged in the purchase erential right to the proceeds of the pledged property. The and sale of commodities for profit), in relation to their unpaid pledged/mortgaged assets will be sold at the earliest and most (and due) debts. appropriate time by the bankruptcy administration and the Special bankruptcy proceeds will be paid to the pledgee/mortgagee without waiting A creditor who holds negotiable instruments (cheques, bonds or for the end of the 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 previ- Direct bankruptcy ously filed execution proceedings against the bankruptcy estate A creditor who holds negotiable instruments (cheques, bonds or following the declaration of the bankruptcy. If the pledged/ promissory notes) can bring special bankruptcy proceedings for mortgaged property is insufficient to discharge the debt, the negotiable instruments against the debtor. Direct bankruptcy is pledgee will be an unsecured creditor for the remainder. possible where the debtor’s liabilities are greater than its current In case the bankrupt’s claim was deemed unnecessary to assets. Individuals authorised to manage and represent those pursue by the bankruptcy administration, such claim may be companies, co-operatives or any of the creditors, can apply for transferred to any requesting creditor. If the latter succeeds in the debtor’s bankruptcy. A separate direct bankruptcy reason is such claim, the amount to be obtained will be received by the foreseen in the law for companies, which occurs when the liabil- relevant creditor after deducting the expenses. ities of a company are more than its assets. 4.5 What impact does each winding up procedure have 4.3 Who manages each winding up process? Is there on existing contracts? Are the parties obliged to perform any court involvement? outstanding obligations? Will termination and set-off provisions be upheld? Following the bankruptcy decision, the court notifies such decision to the Bankruptcy Office, which prepares a list of assets, The effect of the opening of the bankruptcy on the existing takes the necessary measures and calls a first creditors’ meeting. contracts of the bankrupt can be a very complex issue depending At the first creditors’ meeting, the candidates for the on the type and conditions of the contract. Some of the existing bankruptcy managers are notified to the Execution Court. contracts might be deemed terminated upon the opening of Accordingly, the Execution Court appoints the bankruptcy the bankruptcy. For instance, contracts related to usufructuary managers that constitute the bankruptcy management. lease, financial lease, mandate, commission, agency, ordinary Within one month after the declaration of the bankruptcy, the partnership and current account might be deemed automatically creditors shall register with the bankruptcy management. After terminated upon bankruptcy. On the other hand, some of the the registry period provided for the creditors has expired and existing contracts are not terminated despite the bankruptcy. the bankruptcy management has been elected, the bankruptcy For instance, contracts related to sale, barter, donation, ordinary management examines the registrations, and prepares a list of lease, commodatum, mutuum, employment, construction, insur- creditors, stating the orders of the creditors for the payment, ance and surety might still be deemed not terminated despite submits the relevant list to the Bankruptcy Office, and notifies the opening of the bankruptcy. the creditors by way of announcement. While it is possible to continue the business operation for The bankruptcy administration, after determining the cred- the management of the company until the bankruptcy deci- itors, shall invite to the second meeting the creditors whose sion is rendered, after the opening of the bankruptcy, since claims are accepted by the bankruptcy administration in part or the management will have no disposal and/or representation in whole and who have filed a suit for inclusion in the schedule authority, continuance of the business operation by the manage- of ranking, and accepted to attend the meeting. ment is not legally possible. The powers of the second creditors’ meeting are more exten- Following bankruptcy, the bankruptcy administration will sive than the first meeting. The second creditors’ meeting be entitled to continue to execute the existing (but not yet decides as to whether the bankruptcy administration shall executed/performed) contracts, but is not obliged to do so. continue its work or not, claims of ownerships, whether the If execution of the contract (performance of the bankrupt’s

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obligation arising from the contract) is more beneficial for the 4.7 Is it possible for the company to be revived in the bankrupt’s estate, the bankruptcy administration shall prefer to future? execute the contract. Otherwise, the subject of the contract will be converted into money and registered as bankruptcy receiv- As per Article 547 of the TCC, if it is determined that the liqui- able on the bankrupt’s estate. dation 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 tion of assets between the shareholders. creditors are firstly taken into consideration by the Bankruptcy Office. Ordinary creditors shall be paid only after the preferred 52 Tax creditors are fully satisfied. Concerning a receivable arising from a contract, please kindly note that such receivable is in 5.1 What are the tax risks which might apply to a principle an ordinary receivable unless it is secured by a pledge restructuring or insolvency procedure? or mortgage. The liabilities of the estate are determined by a schedule of A corporation that goes bankrupt shall be subject to the liqui- ranking. The accepted portion and rank of every credit regis- dation process, which is regulated under Article 17 of the tered to the estate and every claim other than ownership claims Corporate Income Tax Code (the “CIT Code”) (Law No. 5520) shall be shown in a schedule of ranking. Once the costs of procedure are paid, property that is (published in the Official Gazette dated 21 June 2006, No. pledged/mortgaged forms part of the bankruptcy estate, and a 26205). The liquidation period shall be considered instead of party with a prior perfected pledge/mortgage has a preferen- the fiscal period. tial right to the proceeds of the pledged property. The pledged/ According to subparagraph (a) of Article 17 paragraph (1) of mortgaged assets will be sold at the earliest and most appro- the CIT Code, the liquidation process starts on the registration priate time by the bankruptcy administration and the proceeds date of the General Assembly resolving that the company goes will be paid to the pledgee/mortgagee without waiting until the into liquidation and such process is completed on the registra- end of the liquidation. tion date of the liquidation resolution. The pledgee/mortgagee may initiate an execution by way In cases where liquidation is closed with loss, the liquida- of foreclosure of the pledge/mortgage against the bankruptcy tion result shall be corrected towards the previous liquidation estate following the declaration of the bankruptcy. periods and the taxes overpaid in the previous periods shall be If the pledged/mortgaged property is insufficient to discharge refunded to the taxpayer. the debt, the pledgee is an unsecured creditor for the remainder. If the liquidation process starts and concludes within the The receivables secured but not covered by a pledge/mort- same calendar year, the liquidation tax return shall be submitted gage, or unsecured receivables are registered in order to be paid to the affiliated tax office within 30 days following the date in the following order: on which the liquidation is concluded. If these are realised ■ First Rank: Receivables of the employees including sever- in different calendar years, the liquidation tax return for each ance and notice pays arising from the employment relation liquidation period shall be submitted to the tax office from the th and accrued for the year before the opening of the bank- first day until the evening of the 25 day of the fourth month ruptcy together with the severance and notice pay they following the month when the liquidation period closed. earn due to the termination of the employment relation As per Article 17 paragraph (4) of the CIT Code, the tax due to bankruptcy. base of a corporation that goes into the liquidation shall be the The debts of the employers to the foundations and insti- liquidation profit. The liquidation profit is the positive differ- tutions that had been established in order to form provi- ence between the value of the assets at the end of the liqui- dent funds or other aid institutions for the employees and dation period, and the value of the assets as at the date of the in order to perpetuate such. commencement of the same. All kinds of alimony receivables arising from family law During the calculation of the liquidation profit: which had accrued for the year before the opening of the ■ any and all kinds of payments that were made to the share- bankruptcy. holders or to the owners of the corporation as advanced or ■ Second Rank: Receivables of the persons whose proper- otherwise shall be added to the value of the assets, which ties are entrusted to the debtor because of parentship and is calculated at the end of the liquidation; and appointed guardianship. ■ the payments that were made by the shareholders or the ■ Third Rank: Receivables which had been determined as owners of the corporation in addition to the current preferential receivables. capital, and the earnings and the proceeds obtained during ■ Fourth Rank: Unprivileged claims. the liquidation, which were exempt from tax, shall be All creditors in a category must be satisfied before creditors added to the value of the assets, which is calculated at the in the following category are paid. If the remaining money is beginning of the liquidation period. not sufficient for the unprivileged receivables, it will be distrib- During the calculation of the liquidation profit, related provi- uted between those creditors in proportion to their receivables. sions of the CIT Code in relation to the deductible expenses, The expenses of the Bankruptcy Office or Bankruptcy loss deduction, other deductions and non-deductible expenses Administration can be requested from the bankrupt’s estate. shall be taken into consideration. Upon calculation of the net Expenses regarding the announcement of the bankruptcy deci- liquidation profit, the corporate income tax at the rate of 20 per sion, protection of the assets, fees of the liquidators, etc., consti- cent shall be declared and paid over such profit. tute some examples of these expenses. The payments regarding Without setting aside a provision in accordance with Article estate debts have priority over bankruptcy receivables. 207 of the EBL for (i) taxes already accrued on behalf of the

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company, (ii) taxes calculated according to the liquidation tax 7.2 Is there scope for a restructuring or insolvency returns, and (iii) other disputed tax assessments, liquidation process commenced elsewhere to be recognised in your officers cannot pay to the creditors stated in Article 206 of the jurisdiction? EBL and cannot make distribution to the shareholders. From any and all kinds of tax assessments and tax penalties Please refer to question 7.1. Turkish authorities do not recog- owed by companies who have been already liquidated and the nise and execute bankruptcy judgments of other jurisdictions legal personality of whom have been cancelled from the trade granted for a Turkish entity. A decision given for a foreign registry, those which pertain to the pre-liquidation period shall entity may be enforced in Turkey following the enforcement and be imposed on behalf of one of the liquidator officers, and those recognition process. which pertain to the liquidation period shall be imposed on behalf of the legal representatives as they will be held as severally liable. 7.3 Do companies incorporated in your jurisdiction For the public receivables pertaining to the pre-liquidation restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice? period, shareholders of limited companies shall be held liable limited to the proportion of the share capital that they invested in the company. The liquidation officer’s liability is limited with As explained above under question 7.2, since the competence of regard to the amount distributed as a result of the liquidation. Turkish Courts over the bankruptcy and restructuring proceedings pertains to the matter of public order, Turkish authorities 62 Employees do not recognise or execute bankruptcy procedures and bankruptcy judgments of other jurisdictions granted for Turkish entities. 6.1 What is the effect of each restructuring or Therefore, it is not a common practice for Turkish companies insolvency procedure on employees? What claims would employees have and where do they rank? to enter into insolvency or restructuring proceedings in other jurisdictions. In all procedures, credits arising from the compensation to be paid by the employers regarding the employment agreements are 82 Groups determined to be the first rank of unsecured credits. Please also see our answer to question 4.6. 8.1 How are groups of companies treated on the The employees may claim receivables of the employees insolvency of one or more members? Is there scope for co-operation between officeholders? including severance and notice pay arising from the employment and accrued for the year before the opening of the bankruptcy together with the severance and notice pay arising from There is no specific provision pertaining to the insolvency of the termination of their employment. In case of bankruptcy, the members of groups of companies and co-operation in this the receivables of employees are accepted as privileged receiva- regard. bles at the first rank. 92 COVID-19 72 Cross-Border Issues 9.1 What, if any, measures have been introduced in 7.1 Can companies incorporated elsewhere use response to the COVID-19 pandemic? restructuring procedures or enter into insolvency proceedings in your jurisdiction? Due to the COVID-19 epidemic, as in many countries, many legal measures have been taken in Turkish law to reduce the Pursuant to Article 154 of the EBL, the competence of the effect of the pandemic. As per Presidential Decree No. 2279 Commercial Court at the place where the debtor’s business (published in the Official Gazette dated 22 March 2020) as part centre is located pertains to the matter of public order and of the measures taken to prevent the spread of the COVID-19 is exclusive. The Commercial Court at the place where the epidemic, all enforcement and bankruptcy proceedings debtor’s business centre is located has jurisdiction over the have been suspended, except execution requests for alimony concordat restructuring and amicable restructuring applica- payments, and any proceedings thereof were not carried out tions. Therefore, companies incorporated abroad cannot enter from 22 March 2020 until 30 April 2020. As per Presidential into insolvency proceedings in Turkey. Decree No. 2480 (published in the Official Gazette dated 30 April 2020), the deadline was extended until 15 June 2020.

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Gökben Erdem Dirican, recognised by European Legal Experts as one of the few top-tier litigators in Turkey and by The Legal 500 as a leading individual, is a co-founder of Dirican | Gözütok. Gökben represents mainly international clients in matters of litigation, arbitration and alternative dispute resolution. She is also a well-known specialist with more than a decade’s experience advising multinationals and financial institutions on complex cross-border transactions in a variety of industries. She has advised extensively on legal and regulatory regimes and corporate structures.

Dirican | Gözütok Tel: +90 212 278 3170 Nispetiye Caddesi 4/1 Levent Email: [email protected] 34340 Beşiktaş, Istanbul URL: www.dgb-law.com Turkey

Ali Gözütok is a 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, and 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 Levent Email: [email protected] 34340 Beşiktaş, Istanbul URL: www.dgb-law.com Turkey

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

Restructuring & Insolvency 2021 174 Chapter 27 Ukraine Ukraine

Dmytro Donenko

ENGARDE Attorneys at law Artem Parnenko

12 Overview The debtor’s rehabilitation procedure is applicable in cases where the debtor and the majority of creditors, as well as the secured creditors, are in friendly relations. In practice, this does 1.1 Where would you place your jurisdiction on the not happen often. Therefore, bankruptcy cases are more often spectrum of debtor- to creditor-friendly jurisdictions? considered according to the normal procedure.

Bankruptcy issues in Ukraine are currently regulated by the 22 Key Issues to Consider When the recently adopted Code of Ukraine on Bankruptcy Procedures, Company is in Financial Difficulties which entered into force on October 21, 2019 (with subsequent amendments; the current edition is dated March 1, 2021). 2.1 What duties and potential liabilities should the An application for opening a bankruptcy case can be filed directors/managers have regard to when managing a both by the debtor and by the creditors. Following the introduc- company in financial difficulties? Is there a specific tion of the relevant procedure, control over the procedure is held point at which a company must enter a restructuring or by the majority of creditors. Operational management is carried insolvency process? out by the arbitration manager. At the stage of disposing of the bankrupt’s property, the court appoints the arbitration manager The legislation of Ukraine provides that, if there are signs of at the request of the creditor if the procedure was initiated by bankruptcy, the head of the debtor is obliged to send a notice to such creditor, or selected by the automated system if the proce- the founders (participants, shareholders) of the debtor and the dure was initiated by the debtor. At the stage of rehabilitation, property owner (the body authorised to manage the property) of the arbitration manager is appointed by the court at the request the debtor, informing them of the signs of bankruptcy. of the creditors’ committee. At the liquidation stage (the stage at In general, the debtor is obliged to apply to the court with an which the debtor loses control over the activity of the company), application to initiate a bankruptcy case within one month, if: the arbitration manager is also appointed by the court at the ■ fulfilling the claims of one or several creditors will make it request of the creditors’ committee. impossible for the debtor to fulfil its monetary obligations In general, the legislator is trying to maintain a balance in full to other creditors (insolvency threat); or between the rights of the debtor and creditors, but in practice, a ■ in other cases, which are stipulated by the legislation. better-trained participant always has an advantage. It should be 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 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 In Ukraine, the debtor’s rehabilitation procedure can be applied example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as before the opening of bankruptcy proceedings. The debtor, by landlords, employees or creditors with retention of title the decision of the founders (participants, shareholders), has arrangements) applicable to the laws of your jurisdiction? the right to initiate such a procedure. The debtor’s rehabilita- Are moratoria and stays on enforcement available? tion procedure before the opening of bankruptcy proceedings is performed according to the rehabilitation plan of the debtor The creditors and the arbitration manager have the main influ- (hereinafter, “the rehabilitation plan”). ence on the company during the bankruptcy proceedings. The rehabilitation plan must be approved by each category Creditors are persons who have monetary claims against the of non-secured creditors, meaning that more than 50 per cent debtor. At the same time, Ukrainian legislation distinguishes of the total unsecured claims included in such categories shall the creditors depending on whether their claims are collateral- agree on the rehabilitation plan. The claims of non-secured ised or not. Creditors whose claims are not secured by collat- creditors that are interested parties concerning the debtor are eral have the right to vote at a creditor meeting. Moreover, not counted for the purposes of voting for the approval of the the pledge creditors have the right to coordinate/veto the sale rehabilitation plan. of pledged property and the rehabilitation plan. The Code Afterwards, the rehabilitation plan must be approved by the provides additional measures for termination of the moratorium court. for the pledge creditors.

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The legislation also provides the order in which the creditors’ The debtor’s rehabilitation plan must meet the following claims are prioritised. First of all, the wage claims of former and requirements: current employees are met; second, the demands arising out of ■ for approval of the rehabilitation plan, the debtor must harm to health and injuries and relevant social taxes; third, the summon the creditors to a meeting by written notice to demands for paying taxes and fees; and fourth, the claims of all creditors who, according to the rehabilitation plan, are non-secured creditors, etc. The claims of secured creditors at involved in the rehabilitation procedure. The meeting the expense of a bankrupt’s property that is the subject of collat- shall be convened no earlier than 10 days after the eral are carried out in an extraordinary manner. announcement; At the opening of a bankruptcy case, the court renders a ■ if the rehabilitation plan includes the participation of ruling that, among other things, introduces a moratorium on secured creditors in rehabilitation, a rehabilitation plan the satisfaction of creditors’ claims. Also, such a court ruling must be approved by two-thirds of the creditors of the resolves the issue of taking measures to secure creditors’ claims total secured claims included in the rehabilitation plan of by prohibiting the debtor and the property owner (the body each category. Moreover, the claims of secured creditors authorised to manage the property) of the debtor to make deci- who are interested parties of the debtor are not counted for sions on liquidation and on the reorganisation of the debtor, as the purposes of voting for the approval of the rehabilita- well as to alienate fixed assets and pledged items. The court is tion plan; also entitled, at the request of the parties or participants in the bankruptcy case or on its own initiative, to take other measures ■ if the rehabilitation plan provides for a change of priority to secure the claims of creditors. of claims of secured creditors, the rehabilitation plan must be approved by each such creditor; and/or ■ in case of applying for refusal of securing by the secured 2.3 In what circumstances are transactions entered creditor, such provisions shall be included in the rehabili- into by a company in financial difficulties at risk of tation plan. Such creditor shall be deemed a non-secured challenge? What remedies are available? creditor in part of the claims concerning which the creditor refused to secure. Deals committed by a debtor after initiating a bankruptcy case, The rehabilitation plan must be approved in each category of or within three years prior to initiating a bankruptcy case, may non-secured creditors who own more than 50 per cent of the be invalidated by the court in bankruptcy proceedings upon the total unsecured claims included in the rehabilitation plan in such application of an arbitration manager or creditor according to categories. The requirements of non-secured creditors who are the following grounds: interested parties concerning the debtor are not counted for the ■ the debtor has fulfilled their property obligations before purposes of voting for the approval of the rehabilitation plan. the deadline; The rehabilitation plan must be approved by the court. ■ the debtor assumed obligations before initiating a bank- The ruling on the acceptance of the debtor’s application for ruptcy case, as a result of which he became insolvent or his monetary obligations to other creditors became completely approval of the rehabilitation plan stipulates the implementation or partially impossible; of a moratorium on the satisfaction of creditors’ claims. The ■ the debtor alienated or acquired the property at prices commercial court may then limit the moratorium in exceptional lower or higher than the market price, provided that at the cases, e.g., if the moratorium may result in a loss of collateral of time of the commitment or as a result of its fulfilment the the secured creditor. debtor’s property was (became) insufficient to satisfy the The rehabilitation plan is subject to approval by the court creditors’ claims; within one month of acceptance of the application for consid- ■ the debtor has paid the creditor or accepted the property eration. At the same time, the court is obliged to approve it, in order to fulfil the monetary claims on the day when the except in cases when: sum of the claims of the creditors to the debtor exceeded ■ the law was violated when approving the rehabilitation the value of the property; or plan in a way that could affect the voting outcome of the ■ the debtor assumed secured liabilities to ensure the fulfil- general meeting of creditors; ment of monetary claims. ■ a creditor who did not participate in voting, or voted Deals committed by a debtor within three years prior to against the adoption of a rehabilitation plan, proves that initiating a bankruptcy case may also be invalidated by the court if the debtor was liquidated, the creditor’s claims would be in bankruptcy proceedings upon the application of an arbitra- satisfied in an amount exceeding the amount of claims that tion manager or creditor according to the following grounds: will be satisfied in accordance with the terms of the reha- ■ the debtor alienated the property for free, assumed obliga- bilitation plan; or tions without corresponding property actions of the other ■ the debtor provided false information that was essential in party, and waived its own property claims; determining the success of the rehabilitation plan. ■ the debtor concluded an agreement with interested parties; A ruling approving the rehabilitation plan cancels the mora- or torium. A ruling of refusal of the rehabilitation plan cancels the ■ the debtor concluded a gift agreement. moratorium and any other measures taken by the court. Upon satisfying the claims of creditors secured by the debtor’s prop- 32 Restructuring Options erty that is the subject of security, the moratorium is terminated automatically 60 days from the date of acceptance for considera- 3.1 Is it possible to implement an informal work-out in tion of the debtor’s application for approval of the rehabilitation your jurisdiction? plan, if the commercial court during this time does not consider the application. The debtor’s rehabilitation procedure before the opening of bankruptcy proceedings is performed according to the rehabilitation plan before the opening of bankruptcy proceedings.

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3.2 What formal rescue procedures are available During the disposal of the property (which shall be adminis- in your jurisdiction to restructure the liabilities of tered for up to 170 days), a search and subsequent approval by distressed companies? Are debt-for-equity swaps the court of the register of creditors – the formation of a credi- and pre-packaged sales possible? To what extent can tors’ committee – shall be carried out by a body representing the creditors and/or shareholders block such procedures interests of all creditors. or threaten action (including enforcement of security) The rehabilitation procedure shall be introduced by a court to seek an advantage? Do your procedures allow you decision at the request of the creditors’ committee. During to cram-down dissenting stakeholders? Can you cram- down dissenting classes of stakeholder? the rehabilitation, a rehabilitation plan shall be developed and further approved by the court with the participation of prospective investors. According to Ukrainian legislation, the following bankruptcy The rehabilitation procedure shall be terminated prematurely procedures are applied to debtors that are legal entities: in case of a failure to fulfil the conditions of the rehabilitation ■ disposal of the debtor’s property; plan and/or in case of a debtor’s failure to fulfil its current obli- ■ rehabilitation of the debtor; and gations, in which case the court shall declare the debtor as bank- ■ liquidation of the debtor. rupt and open the liquidation procedure. The disposal of the debtor’s property or the property’s The liquidation procedure shall be introduced by the court, management is understood as a system of measures to supervise as well as by virtue of the creditors’ request, in cases where the and control the management and disposal of the debtor’s prop- debtor’s rehabilitation cannot be implemented, and the amount erty in order to ensure the preservation and effective use of the of the debtor’s assets is not enough to satisfy the claims of all debtor’s property assets, analyse its financial position, and deter- creditors. mine the optimal procedure (rehabilitation or liquidation). Rehabilitation is understood as a system of measures taken during the bankruptcy proceedings to prevent the debtor from 3.4 Who manages each process? Is there any court being declared bankrupt and his liquidation, aimed at improving involvement? the debtor’s financial and business situation, as well as meeting the creditors’ claims in full or in part through restructuring of Since the introduction of the property disposal procedure, the the enterprise, debts and assets and/or changes in the organisa- court shall appoint a property manager at the request of the cred- tional, legal and production structure of the debtor. itor if the procedure was initiated by such creditor, or selected The liquidation procedure in a bankruptcy case is understood by the automated system if the procedure was initiated by the as a system of measures for the complete cessation of the debt- debtor. The appointment of the property manager shall not be a or’s activities, its liquidation, the sale of its property and the ground for termination of the powers of the head of the debtor satisfaction of creditors’ claims in full or in part. or its managing body. At the same time, after the appoint- In Ukrainian legislation, there are no provisions that directly ment of the property manager and prior to the termination of regulate the procedure for converting the payables into author- the property disposal procedure, the debtor’s governing bodies ised capital. At the same time, the legislation stipulates that the are not entitled, without the consent of the property manager, rehabilitation plan may contain conditions on the satisfaction to make a number of corporate decisions (including on reor- of creditors’ claims in other ways that do not contradict the law. ganisation, the establishment of other legal entities or branches, If the rehabilitation plan includes participation in the reha- payment of dividends, withdrawal from other entities, etc.). bilitation of secured creditors, a rehabilitation plan must be In addition, the head or managing body of the debtor shall, approved by two-thirds of the creditors of the total secured exclusively with the consent of the property manager, conclude claims included in the rehabilitation plan within each category. transactions regarding: Moreover, the requirements of secured creditors that are inter- ■ alienation or encumbrance of the debtor’s immovable ested parties of the debtor are not counted for the purposes of property, including its lease, pledge, contributing such voting for the approval of the rehabilitation plan. If the rehabil- property to the authorised capital of another company or itation plan provides for a change of priority of claims of secured business entity, or disposing of the debtor’s immovable creditors, the rehabilitation plan must be approved by each such property in any other way; creditor. In case of applying for refusal of securing by the ■ obtaining and granting loans (credits), providing guaran- secured creditor, such provisions shall be included in the reha- tees, warranties, assignment of demand, transfer of debt, bilitation plan. Such creditor shall be deemed a non-secured and also the transfer of the debtor’s property to trust creditor for claims concerning which the creditor refused to management; and secure. ■ the disposition in any way of another debtor’s property, the The main influence on the development of bankruptcy book value of which is more than one per cent of the book proceedings is carried out by the debtor’s creditors. As a general value of the debtor’s assets, and the conclusion of other rule, decisions are made by a majority of lenders. Such deci- major transactions. sions are binding on all lenders. The debtor is not entitled to If the debtor’s managing bodies fail to fulfil their obligations vote at the meetings of creditors. At the same time, the mort- properly, the court shall, at the request of the creditors, termi- gage lenders, while not having the right to vote, have the right to nate the powers of the debtor’s managing bodies and transfer veto the sale of the pledged property and the rehabilitation plan. them temporarily to the debtor’s property manager. Since the introduction of the debtor’s rehabilitation procedure, the court will appoint a rehabilitation manager, who shall 3.3 What are the criteria for entry into each restructuring procedure? implement the debtor’s rehabilitation procedure. From the moment the debtor’s rehabilitation procedure is introduced, the head of the debtor shall be dismissed. Management of the The general process is for the application of the property debtor shall be passed to the rehabilitation manager. At the disposal procedure with the subsequent transition to the reha- end of the rehabilitation procedure, the rehabilitation manager bilitation or liquidation procedures. should provide a report, which must be approved by the court.

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After the introduction of the debtor’s liquidation proce- The offset of the counterclaims of the debtor and third parties dure, the court will appoint a liquidator who shall perform all is considered through the prism of recognition of the claims of the functions of managing the debtor, as well as implementing such a party to the debtor (entry in the register of creditors). The the liquidation procedure of the debtor who has been declared legislation provides that, for the satisfaction of creditors’ claims, bankrupt and ensure the satisfaction of the creditors’ claims. offsetting counterclaims shall be made with the consent of the After completion of all settlements with creditors, the liquidator creditor(s) in cases where it does not violate the property rights must provide a report and liquidation balance sheet, which must of other creditors. be approved by the court. The acts or omissions of any of the arbitration managers at 3.6 How is each restructuring process funded? Is any any stage may be appealed in court. protection given to rescue financing?

3.5 What impact does each restructuring procedure All expenses associated with the bankruptcy proceedings in the have on existing contracts? Are the parties obliged to court are firstly subject to reimbursement from the sale of the perform outstanding obligations? What protections bankrupt’s property. A debtor’s rehabilitation plan may provide are there for those who are forced to perform their for a special procedure for the reimbursement of such expenses. outstanding obligations? Will termination and set-off Creditors can create a fund for the advancement of monetary provisions be upheld? remuneration and reimbursement of expenses of the arbitration manager. The formation of the fund and the use of its resources Simultaneously with the beginning of the disposal of property, a shall be determined by the decision of the creditors’ committee moratorium on the satisfaction of creditors’ claims shall be intro- and approved by the court. However, the creditor who initiates duced. The moratorium on the satisfaction of creditors’ claims the bankruptcy proceedings must pay in advance the remunera- provides, inter alia, the suspension of the debtor’s fulfilment of tion of the arbitration manager for three months. monetary obligations, the maturity of which is prior to the moratorium day, and the termination of measures aimed at ensuring 42 Insolvency Procedures the fulfilment of these obligations applied prior to the moratorium day. During the moratorium, no penalty (fine, default 4.1 What is/are the key insolvency procedure(s) interest) shall be charged, and no other financial sanctions shall available to wind up a company? be applied for non-fulfilment or improper fulfilment of obligations to satisfy all claims to which the moratorium applies. Also, The debtor may be liquidated under the liquidation procedure. during the moratorium, the running of the limitation period If, according to the results of the liquidation procedure and stops and the inflation index does not apply for the entire period after the satisfaction of the creditors’ claims, there is no prop- of delay in the performance of a monetary obligation, etc. erty left, the court shall decide to liquidate the legal entity as The moratorium does not apply to claims of current creditors, bankrupt. If the bankrupt’s property was enough to satisfy the i.e. on contractual obligations that arise after the initiation of a creditors’ claims in full, it shall be considered to be debt-free and bankruptcy case, on the payment of wages, claims on enforce- can continue its business. ment documents of a non-property nature, obliging the debtor to perform certain actions or to refrain from committing them, 4.2 On what grounds can a company be placed into as well as a number of other obligations. each winding up procedure? In this case, the presentation of claims by current creditors to the debtor and their satisfaction shall also be carried out in a The liquidation procedure shall be introduced by the court, as special procedure. well as by virtue of the creditors’ request, in cases where, as a The action of the moratorium stops on the day the bank- rule, the debtor’s rehabilitation cannot be implemented, and the ruptcy proceedings are terminated. amount of the debtor’s assets is not enough to satisfy the claims During the rehabilitation procedure, the sale of property of all creditors. and the satisfaction of creditors’ claims shall be carried out in accordance with the rehabilitation plan. At the same time, since the opening of the liquidation 4.3 Who manages each winding up process? Is there procedure: any court involvement? ■ the maturity of all monetary obligations of the debtor is considered to have occurred; A liquidator is a person who manages the liquidation procedure. ■ the debtor shall not have any additional obligations, except He shall perform all the functions of managing the debtor, as for expenses related to the implementation of the liquida- well as implement the liquidation procedure of the debtor who tion procedure; has been declared bankrupt and ensure the satisfaction of the ■ the imposing of penalties (fines, default interest), interest creditors’ claims. After completion of all settlements with credi- and other economic sanctions on all types of bankruptcy tors, the liquidator must provide a report and liquidation balance debts shall discontinue; and sheet, which must be approved by the court. ■ claims on the debtor’s bankruptcy obligations arising during the bankruptcy proceedings may be made only 4.4 How are the creditors and/or shareholders able within the liquidation procedure within two months from to influence each winding up process? Are there any the date of the official publication of the information on restrictions on the action that they can take (including the declaration of the debtor’s bankruptcy and the opening the enforcement of security)? of the liquidation procedure. As for the obligations under contracts to the debtor, they The impact of the debtor’s shareholders on the liquidation remain in force unless otherwise provided by such contracts, procedure is very limited and may be exercised exclusively in and in the future may be attributed to the property of the debtor, cases where the state holds more than 25 per cent of the share which is subject to sale in order to satisfy the claims of creditors. capital of the debtor.

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Creditors have a larger impact on the liquidation procedure, 4.7 Is it possible for the company to be revived in the during which the liquidator reports to the creditors’ committee future? at least once a month about its activity, as well as financial status and property of the debtor on the day of opening and during A company may renew its status after the commencement of the liquidation procedure, and the use of the debtor’s assets and other information at the request of the creditors’ committee. bankruptcy proceedings if claims of creditors are recognised as If the liquidator does not perform its obligations or performs unjustified if the rehabilitation procedure is complete. If the them inadequately, the commercial court at the request of the company is liquidated, the liquidation balance sheet is approved creditors’ committee may terminate its powers and appoint a and changes are implemented in the registry of companies of new liquidator. Ukraine – there is no procedure for the revival of such company Besides that, after the opening of the liquidation procedure in Ukrainian law. at the request of the creditors’ committee, the court may rule to implement the rehabilitation procedure if there is a rehabil- 52 Tax itation plan and if it happens before the start of the sale of the bankrupt’s property. 5.1 What are the tax risks which might apply to a The sale of the bankrupt’s property, which is collateral, is restructuring or insolvency procedure? carried out with the permission of the court or the creditor, whose claims it enforces. The report of the liquidator presented at the end of the liqui- Ukrainian bankruptcy legislation prevails over tax legislation. dation procedure must be approved by the creditors’ committee. Therefore, the special regime of discharge of obligations in the Upon completion of all payments to creditors, the liquidator bankruptcy procedure extends to tax obligations. shall submit to the commercial court a liquidation balance sheet At the same time, it is worth noting that the commence- and report on liquidation. ment of bankruptcy proceedings is a ground for an unscheduled inspection by the tax authorities.

4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform 62 Employees outstanding obligations? Will termination and set-off provisions be upheld? 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would From the moment of opening the liquidation procedure: employees have and where do they rank? ■ all of the debtor’s financial obligations mature; ■ no additional obligations of the debtor arise, apart from The debtor’s employees’ claims are included in the general expenses, related to the liquidation procedure; registry of creditors and are to be settled in the first queue. ■ penalties (late charges, fines), interest and other economic During the course of rehabilitation, employees of the debtor, sanctions stop accruing on all of the bankrupt’s debts; and who may not be engaged in the process of enforcement of the ■ claims on liabilities of the debtor that has been declared rehabilitation plan, are dismissed. From the moment the liqui- bankrupt that arose during the bankruptcy procedures may dation procedure commences, all of the debtor’s employees shall be advanced only within the liquidation procedure and no be dismissed. later than two months after official notification of bankruptcy and commencement of the liquidation procedure. Third-party obligations to the bankrupt debtor remain in 72 Cross-Border Issues force unless otherwise specified by the contract. Settlement of creditors’ claims by setting off similar counterclaims is 7.1 Can companies incorporated elsewhere use conducted upon the authorisation of the creditor in cases where restructuring procedures or enter into insolvency it does not infringe the property rights of other creditors. proceedings in your jurisdiction?

4.6 What is the ranking of claims in each procedure, Ukrainian bankruptcy legislation regulates procedures regarding including the costs of the procedure? debtors incorporated in Ukraine only.

Ukrainian law utilises a queue system to rank the order of settle- 7.2 Is there scope for a restructuring or insolvency ment of claims: process commenced elsewhere to be recognised in your ■ First queue: payments to employees and related claims; jurisdiction? claims by creditors based on insurance agreements; and expenses related to bankruptcy proceedings, etc. Ukrainian legislation provides for the possibility to recognise ■ Second queue: claims on obligations, arising out of harm foreign bankruptcy proceedings. to health and injuries; and claims of contributors to trust Foreign bankruptcy proceedings may be applied in accord- institutions. ance with the international treaties of Ukraine and the reci- ■ Third queue: tax payment claims. procity principle. ■ Fourth queue: claims of unsecured creditors. Recognition of a foreign bankruptcy proceeding includes the ■ Fifth queue: claims of payment of dues of members of the recognition of foreign judicial decisions as well as decisions on workforce to the statutory capital of the enterprise; and appointment, dismissal or replacement of a foreign receiver, claims of additional remuneration to the manager of the rehabilitation or the liquidator. decisions regarding the status of the foreign proceeding, and its ■ Sixth queue: other claims. suspension or termination. The settlement of claims of secured creditors at the expense of the debtor’s property, which is collateral, is free of queues.

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7.3 Do companies incorporated in your jurisdiction Through this Law, the legislator envisaged several exceptions restructure or enter into insolvency proceedings in other to the rules of the Code of Ukraine on Bankruptcy Procedures. jurisdictions? Is this common practice? Among other things, creditors’ meetings can be held remotely and conducted by poll, arbitration managers are released from Ukrainian legislation envisages a principle, according to which liability for failure to perform due acts if such acts cannot be the bankruptcy proceeding regarding a debtor that is incorpo- committed under the conditions of the quarantine, and there rated and conducts activity in accordance with Ukrainian law and have been changes to: the terms of preliminary court hearings on the territory of Ukraine is the main proceeding in compar- in bankruptcy cases; applications for invalidation of transac- ison to any other foreign proceedings. In light of this principle, tions committed by debtors; moratorium terms; terms regarding the possibility of initiating bankruptcy proceedings regarding auctions; the implementation of reorganisation plans or restruc- Ukrainian debtors in other jurisdictions is questionable. turing of the debtor’s debts; procedures for disposing of property; liquidation; and repayment of the debtor’s debts. 82 Groups Also, according to the aforementioned Law: it is not permitted to open bankruptcy proceedings against debtors that are legal entities at the request of creditors on claims against the debtor 8.1 How are groups of companies treated on the that arose on or after March 12, 2020; the obligatory term for insolvency of one or more members? Is there scope for the debtor to apply to the court with an application to initiate a co-operation between officeholders? bankruptcy case may be prolonged due to the conditions of the quarantine; auctions for the sale of the debtor’s property may be Ukrainian bankruptcy legislation does not contain special provi- suspended; and a special regime applies for the obligations of sions regarding the bankruptcy of a debtor belonging to a group debtors under a rehabilitation plan. of companies. All these exceptions are effective only for the period of quarantine introduced by the Cabinet of Ministers of Ukraine. 92 COVID-19 According to the Resolution of the Cabinet of Ministers of Ukraine, No. 1236, dated December 9, 2020 (with the subse- 9.1 What, if any, measures have been introduced in quent changes), the quarantine in Ukraine is effective until April response to the COVID-19 pandemic? 30, 2021. However, this date is subject to change depending on how the situation regarding COVID-19 develops in Ukraine. On June 18, 2020, the Parliament of Ukraine adopted the Law on the introduction of amendments to the Code of Ukraine on Bankruptcy Procedures concerning prevention of abuses in the sphere of bankruptcy for the period of implementation of the measures for the prevention of the emergence and distribution of COVID-19.

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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 involved in important projects in many areas of finance and banking law. In the course of his work as an associate at ENGARDE, an in-house lawyer for a leading leasing company and an industrial corporation, Artem has 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 proc esses. 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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USA USA

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 reorgan- by the business judgment rule, even when a company is insol- isation-friendly. On the one hand, the United States could be vent. Civil liability may arise if the directors fail to adhere to considered comparatively debtor-friendly in that management their duties of loyalty or care. is typically permitted to retain operating control of the busi- In general, when a company becomes insolvent, the direc- ness, there is a very broad stay of creditor enforcement actions, tors must exercise their fiduciary duty in the best interests of debtors have exclusive authority to propose a plan of reorgan- the corporation, taking into account the interests of, among isation at the outset of a case, and debtors are given powers, others, creditors. Upon insolvency, creditors may under certain such as the option to reject unprofitable contracts, that they are circumstances bring derivative claims on behalf of the corpo- not afforded outside of formal insolvency proceedings. On the ration against directors. Causes of action for breach of fidu- other hand, the United States could also be considered credi- ciary duty, fraud and fraudulent conveyance may be appropriate tor-friendly in that creditors are afforded significant protections to challenge the wrongful actions of directors of insolvent by the Bankruptcy Code, the bankruptcy process is designed corporations. to be public and transparent, and creditors are given a voice at In addition, directors may be criminally or civilly liable under every stage of the restructuring process. federal and state laws for failure to comply with certain disclo- sure 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 of title parties, there is no specific legislative framework to sanction arrangements) applicable to the laws of your jurisdiction? such work-out procedures. The relevant statute, the Bankruptcy Are moratoria and stays on enforcement available? Code, provides for formal court-supervised proceedings, although the Bankruptcy Code has several provisions that encourage pre-petition restructuring negotiations. While in financial difficulty, but prior to a bankruptcy filing, a company’s creditors, contract counterparties, employees, and interested acquirers, among others, may all attempt to influ- 22 Key Issues to Consider When the ence the company’s situation within the bounds of whatever Company is in Financial Difficulties contractual agreements may exist and applicable law. For this reason, and to make any potential insolvency process smoother, 2.1 What duties and potential liabilities should the a company in financial distress will oftentimes seek to engage directors/managers have regard to when managing a its stakeholders in restructuring discussions prior to beginning company in financial difficulties? Is there a specific an insolvency process. The commencement of a bankruptcy point at which a company must enter a restructuring or case, however, effects an automatic stay that enjoins secured and insolvency process? unsecured creditors from taking most actions against the debtor or property of the estate absent further order of the court. Directors are not personally liable for continuing to trade while The Bankruptcy Code also prescribes special rules for certain the company is in financial distress. categories of creditors. For example, certain types of pre-pe- The fiduciary duties of a company’s directors are defined tition claims (such as domestic support obligations, employee by the law of the state of the company’s incorporation. The wages up to $13,650 per individual, and certain tax obligations) primary duties of directors are those of care and loyalty. The are entitled to priority over other general unsecured claims. In

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addition, counterparties to executory contracts and unexpired recognition of foreign insolvency or restructuring proceedings leases with the debtor enjoy certain special rights. See question and for conducting ancillary proceedings in the United States. 3.5 for further detail. Ancillary proceedings are those in aid of a “foreign proceeding” administered by a foreign representative and designed to foster cooperation between US and foreign courts. 2.3 In what circumstances are transactions entered Debt-for-equity swaps are commonplace both in court and into by a company in financial difficulties at risk of challenge? What remedies are available? out of court. Depending on the terms of the debt-for-equity swap, existing equity may be substantially diluted or, if the valuation supports it, eliminated altogether. Transactions entered into by an entity in financial distress may “Pre-packaged” sales may be achieved either by means of (i) be attacked as an actual or constructive fraudulent transfer or as a pre-packaged chapter 11 plan, which the Bankruptcy Code a preference under the Bankruptcy Code and/or state law. is designed to facilitate, or (ii) a sale under section 363 of the Under the Bankruptcy Code, a transfer may be avoided as Bankruptcy Code, which has been negotiated by the parties and fraudulent if it occurred within two years before the bankruptcy documented prior to the chapter 11 petition being filed. filing, and the debtor made the transfer with actual intent to The filing of a voluntary bankruptcy petition automatically defraud creditors, regardless of whether the debtor was insol- operates as a stay that enjoins secured and unsecured creditors vent. In addition, a trustee (or debtor in possession) may recover from taking most actions against the debtor or property of the a transfer as constructively fraudulent that occurred within two estate absent further order of the court. The stay of actions against years before the bankruptcy filing if the debtor received less the debtor’s property generally continues until such property is no than reasonably equivalent value in exchange for such transfer, longer property of the estate or the case is closed 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 would incur debts beyond its ability to repay, or (iv) made such the company’s creditors to agree on a value-maximising path transfer to, or for the benefit of, an insider under an employ- forward for the company. Shareholders and creditors alike are ment contract and not in the ordinary course. Bankruptcy trus- welcome to propose transactions that could lead to the compa- tees (or debtors in possession) can also invoke state fraudu- ny’s emergence from bankruptcy; however, only the company lent transfer laws, which may have longer reachback periods, to has the right to propose a plan of reorganisation and solicit its recover transfers for the benefit of the estate. acceptance for at least the first 120 days following the date of the A transfer of an interest of the debtor in property made on filing; such time period is often extended beyond 120 days by account of an antecedent debt, while the debtor was insolvent the court but may not be extended beyond 18 months following and within the 90 days prior to a bankruptcy filing (or within the date of the filing. one year before the bankruptcy filing if the transferee was an Secured creditors have certain special rights, however. A insider) that enables the creditor to receive more than it would secured creditor may be entitled to adequate protection in the have received in a liquidation, can be avoided as a preference, form of cash payments, replacement liens or the “indubitable subject to certain exceptions. There is a rebuttable presumption equivalent” of the value of its collateral to the extent such value that a debtor is insolvent during the 90 days before the bank- is depreciating as a result of the stay or the debtor’s use of such ruptcy filing. collateral. If secured creditors are oversecured, they have the Transactions determined to be preferential or constructively right to receive post-petition interest generally at the applicable fraudulent can be avoided or reversed so as to return the parties contract rate. Secured creditors may also be well positioned to their original positions. This can be effectuated through the to provide debtor-in-possession financing, which may provide recovery of payments or unwinding of entire transactions. the secured creditor greater influence over the reorganisation process. Secured creditors generally are also afforded the right 32 Restructuring Options to credit bid in a sale of their collateral. Cramdown 3.1 Is it possible to implement an informal work-out in Dissenting stakeholders may be outvoted and bound by the your jurisdiction? votes of the majority in their respective class. In the case of creditors, a plan is accepted by the class if creditors holding at While out-of-court restructurings are commonplace and are least two-thirds in amount and more than one-half in number of typically implemented by contract by and among the relevant allowed claims vote for the plan. In the case of equityholders, parties, there is no procedure by which a court will sanction the class is deemed to accept the plan if at least two-thirds in such work-outs. To receive the sanction of a court, a case must amount of allowed equity interests vote for the plan. A non-con- be filed under the Bankruptcy Code. senting creditor or equityholder must receive at least as much under the plan as such stakeholder would receive in a liquidation of the debtor under chapter 7. 3.2 What formal rescue procedures are available In a chapter 11 case, a dissenting class of claims or inter- in your jurisdiction to restructure the liabilities of ests may be crammed down if, among other things: (i) the plan distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can does not discriminate unfairly; (ii) the plan is “fair and equi- creditors and/or shareholders block such procedures table”; and (iii) if a class of claims is impaired under the plan, at or threaten action (including enforcement of security) least one class of impaired claims has voted to accept the plan, to seek an advantage? Do your procedures allow you without counting the votes of “insiders”. to cram-down dissenting stakeholders? Can you cram- It is generally understood that a plan does not unfairly down dissenting classes of stakeholder? discriminate if the dissenting class receives relatively equal value under the plan as compared to similarly situated classes. Chapter 11 is the primary procedure by which companies A plan is fair and equitable if it complies with the absolute restructure, although it may also be used for the purposes of priority rule. With respect to secured creditors, members of an orderly liquidation. Chapter 15 provides the procedure for the class must either: (i) retain their liens and receive deferred

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payments with a value equal to the allowed amount of their termination upon a bankruptcy filing are typically unenforce- secured claims, valued as of the effective date of the plan; (ii) able under the Bankruptcy Code, though there are exceptions. receive the proceeds from the sale of their collateral, if such A debtor’s counterparties also enjoy certain protections under property is to be sold, including the right to credit bid at any the Bankruptcy Code. For example, a debtor must continue to such sale; or (iii) receive the “indubitable equivalent” of their pay rent under a non-residential real estate lease prior to its deter- secured claims. mination whether to assume or reject such lease. In addition, a A plan is fair and equitable with respect to unsecured credi- counterparty may seek adequate protection of its interests in any tors if the members of the class receive property of a value equal property leased, used, or sold by the debtor. Furthermore, to 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 that the holder of an administrative expense claim agrees to different treatment, a chapter 11 3.3 What are the criteria for entry into each plan can only be confirmed if it provides for cash payment of the restructuring procedure? 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 due, as a personal services contract. or that a custodian was appointed within 120 days of the peti- A debtor may reject a contract where it determines that tion date. Involuntary petitions filed in bad faith may result in performance of the contract would be unduly burdensome. damages 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 claim for damages. 3.4 Who manages each process? Is there any court If a contract or lease has been assumed, the debtor usually involvement? may assign it, notwithstanding a provision in the contract that prohibits or conditions such an assignment. Under chapter 11, management retains control, remains “in The Bankruptcy Code generally preserves a creditor’s possession”, and continues to run the daily business oper- non-bankruptcy set-off rights. A set-off right is treated as a ations of the debtor company, subject to oversight by the secured claim and a creditor seeking to exercise such right must company’s board of directors. A chief restructuring officer or first obtain relief from the automatic stay. However, creditors similar professional often is added to the management team. that possess set-off rights under certain types of repurchase Transactions that are not in the ordinary course of business agreements and other specified financial contracts may exercise require bankruptcy court approval. Official and unofficial such rights without violating the stay. committees generally consult with the debtor concerning the administration of the estate, may investigate the conduct, assets 3.6 How is each restructuring process funded? Is any and liabilities of the debtor and participate in the formulation of protection given to rescue financing? a plan. A chapter 11 trustee may be appointed where there has been gross mismanagement or fraud. A trustee or debtor in possession may use free cash in the ordi- The court closely supervises proceedings under chapter 11. nary course of business without notice or a hearing, unless the court orders otherwise. The debtor may not use encumbered 3.5 What impact does each restructuring procedure cash unless each entity with an interest in the cash collateral have on existing contracts? Are the parties obliged to consents or the court authorises such use upon a finding of perform outstanding obligations? What protections adequate protection. are there for those who are forced to perform their A trustee or debtor in possession may also obtain unsecured outstanding obligations? Will termination and set-off financing in the ordinary course of business that will be allowed provisions be upheld? as an administrative priority expense to pay the actual and necessary costs of preserving the estate, including the payment A chapter 11 debtor may assume or reject most executory of wages and salaries after the commencement of the case, as contracts or unexpired leases, subject to the court’s approval. well as taxes. Subject to time limits applicable to non-residential real estate If the trustee or debtor in possession is unable to obtain unse- leases, the debtor may assume or reject a contract or lease at any cured financing that would be allowed as an administrative time before confirmation of a plan, but the court may order the priority expense, the Bankruptcy Code contains a framework debtor to act within a shorter time. In most cases, the debt- for permitting other types of debtor-in-possession financing, or’s counterparty must continue to perform until the debtor including: (i) unsecured financing allowed as a “superpriority” assumes or rejects the contract or lease. Provisions providing for expense with priority over all other administrative priority

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expenses; (ii) financing secured by unencumbered estate prop- 4.6 What is the ranking of claims in each procedure, erty; (iii) financing secured by a junior lien on previously including the costs of the procedure? encumbered estate property; and (iv) financing secured by an equal or priming lien on previously encumbered property (so Claims of secured creditors are entitled to priority with respect long as the trustee or debtor in possession is unable to obtain to their interests in collateral and are secured only to the extent financing otherwise and each holder of a lien on such property of such interests. If a creditor is undersecured to some extent, is adequately protected). such portion is generally treated as a general unsecured claim. The Bankruptcy Code confers priority on various categories of 42 Insolvency Procedures claims. All claims in a higher priority must be paid in full before claims with a lower priority may be paid. First priority is reserved 4.1 What is/are the key insolvency procedure(s) for unsecured claims for certain domestic support obligations available to wind up a company? (if the debtor is an individual). Second priority is conferred on claims for expenses incurred in connection with the administra- Chapter 7 provides the procedure for liquidation of a company. tion of the estate. Administrative priority expenses include wages As noted above, although chapter 11 is the primary procedure and salaries for employees for post-petition services rendered and by which companies restructure, it may also be used for the compensation for professionals retained in the case, including a purposes of an orderly liquidation. chapter 7 trustee. Lower priority categories include claims for certain pre-petition wages, employee benefit plan contributions, 4.2 On what grounds can a company be placed into and pre-petition tax claims, among others. General unsecured each winding up procedure? claims generally rank equally with each other.

Insolvency is not a prerequisite for chapter 7 or chapter 11 relief. 4.7 Is it possible for the company to be revived in the A company may file a voluntary case under chapter 7 or chapter future? 11 if the company has a domicile, place of business or property in the United States. While the company as an entity is typically dissolved after its The grounds for commencing an involuntary case under assets are liquidated, assets of the company, such as the brand chapter 7 are the same as the grounds for commencing an invol- name or business model, may be acquired for use in a new untary case under chapter 11. See question 3.3 for further detail. venture.

4.3 Who manages each winding up process? Is there 52 Tax any court involvement? 5.1 What are the tax risks which might apply to a In chapter 7, a trustee is appointed to marshal the assets of the restructuring or insolvency procedure? company, reduce them to cash and pay creditors. Officers and directors are displaced. Courts closely supervise the chapter The bankruptcy process does not, in itself, impose additional tax 7 process. As discussed in question 3.4, management gener- risks on the debtor. Day-to-day tax liability is incurred during a ally remains in possession during a chapter 11 case, even if the bankruptcy case and claims for such liability are generally paid company is liquidated during such case. 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 tax law, debt cancelled in a chapter 11 or chapter 7 case is not to influence each winding up process? Are there any included as taxable income. restrictions on the action that they can take (including the enforcement of security)? 62 Employees

Secured creditors are prevented from enforcing their security in 6.1 What is the effect of each restructuring or the same manner in chapter 7 as they are in chapter 11. See ques- insolvency procedure on employees? What claims would tion 3.2 for further detail. Unsecured creditor interests are most employees have and where do they rank? often represented by an official committee. While shareholders have standing to be heard, they generally have less influence in a chapter 7 case because the company is set to be liquidated by the 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 and wages, claims therefor will be entitled to priority status but 4.5 What impact does each winding up procedure have only to the extent of $13,650 for each individual earned within on existing contracts? Are the parties obliged to perform 180 days before the bankruptcy filing. outstanding obligations? Will termination and set-off The Bankruptcy Code restricts payments to “insiders”. provisions be upheld? Before a company incurs an obligation to retain such a person, the court must determine, among other things, that the obliga- A chapter 7 trustee or chapter 11 debtor may assume or reject tion is essential because such person has received a job offer at most executory contracts or unexpired leases, subject to the the same or greater rate of compensation and that the obligation court’s approval. See question 3.5 for further detail. incurred is not greater than 10 times the amount of an obligation In chapter 7, the trustee must assume a contract or lease within incurred to non-management employees. A severance payment 60 days of the order for relief or it will be deemed rejected, to an “insider” officer or director may not be allowed or paid unless an extension of time is granted by the court within such unless the payment is part of a programme generally applicable 60-day period.

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to all full-time employees and the amount of the payment is 7.3 Do companies incorporated in your jurisdiction not greater than 10 times the mean amount of severance pay restructure or enter into insolvency proceedings in other provided to non-management employees. jurisdictions? Is this common practice? A chapter 7 trustee will likely terminate most employees. They will hold administrative priority claims for post-petition It would be unusual for a company incorporated in the US to labour and lower priority claims for any pre-bankruptcy filing enter into plenary insolvency proceedings in other jurisdictions, wages owing to the extent described above. although this has occurred from time to time.

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 any 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 judicial or each entity must file its own case under the Bankruptcy Code. administrative proceedings 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 7.2 Is there scope for a restructuring or insolvency same professional advisors. In addition, their cases generally are 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 Yes. Chapter 15 is the US version of the UNCITRAL Model Law for the first day of a bankruptcy case to be devoted to motions on Cross-Border Insolvency. Chapter 15 cases are commenced designed to maintain the “status quo” during the pendency of by a foreign representative filing a petition for recognition the case or cases; courts often grant motions to continue a group of foreign proceedings in a US bankruptcy court. Foreign cash management system, group shared services agreements and proceedings are collective judicial or administrative proceed- other inter-group arrangements during these so-called “first-day ings in a foreign country in which the assets and affairs of a hearings”. debtor are subject to control or supervision by a foreign court for the purposes of reorganisation or liquidation. In chapter 15, 92 COVID-19 the foreign representative may use such proceedings to request assistance from the US court for such relief as entry of a stay to 9.1 What, if any, measures have been introduced in protect property located in the United States. response to the COVID-19 pandemic? A bankruptcy court will recognise the foreign proceedings if: (i) the foreign proceedings qualifies as “foreign main proceed- The Consolidated Appropriations Act was signed into law on ings” (foreign proceedings pending in the country where the December 27, 2020. The act includes, among many other provi- debtor has the centre of its main interests) or “foreign non-main sions, a number of temporary amendments to the Bankruptcy proceedings” (foreign proceedings pending in a country where Code relating to the COVID-19 pandemic. Although most of the the debtor conducts non-transitory operations); (ii) the foreign amendments relate to the bankruptcies of individuals and small representative applying for recognition is a person or body businesses, a few changes have general application. For example, authorised to administer the reorganisation or liquidation of the amendments prevent the avoidance of certain payments of the debtor; and (iii) the petition is accompanied by sufficient rental or supplier arrearages that would otherwise be avoidable evidence of the commencement of the foreign proceedings and preferential transfers. This protection is intended to incentivise of the appointment of the foreign representative. commercial landlords and suppliers to enter into forbearance Once the court has entered a recognition order concerning agreements with distressed debtors. It applies to all bankruptcy foreign main proceedings, several provisions of the Bankruptcy cases commenced before December 27, 2022. In addition, the Code take effect automatically, including the automatic stay and amendments extended the deadline for a debtor to decide whether provisions governing the use, sale or lease of property of the to assume or reject an unexpired lease of non-residential real debtor in the US, and other relief may be available upon request property from 90 days after the commencement of the debtor’s to the court. While such relief is not automatically available with bankruptcy case to 210 days after commencement of the case (in respect to foreign non-main proceedings, the court has discre- each case, subject to a potential 90-day extension for cause). This tion to grant similar relief. change is scheduled to expire on December 27, 2022.

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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. Alan’s cross-border and domestic debtor representations have included advising David’s Bridal, Bumble Bee Foods, CGG S.A., Noranda Aluminium, EnQuest, Quiznos, and Houghton Mifflin Harcourt Publishing Company. Alan also has extensive creditor-side experience, including representing creditors in the restructurings of Westinghouse Electric, Tops Markets, Texas Competitive Electric Holdings Company, Tidewater, Pacific Exploration and SquareTwo. Alan represented the California Public Utilities Commission in the chapter 11 cases of PG&E Corporation and its primary operating subsidiary, Pacific Gas & Electric Company, California’s largest investor-owned public utility and the largest public utility in US history to file for bankruptcy relief. Recognised as a Band 1 practitioner by Chambers Global, Alan has been ranked by Chambers USA for more than a decade and is recognised in the “Hall of Fame” by The Legal 500, among many other accolades. 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 is a partner in the Restructuring Department, specialising in the areas of corporate restructurings and bankruptcy. She has been involved in major restructurings and bankruptcies representing debtors, creditors and acquirers of assets. Elizabeth’s recent creditor matters include advising key stakeholders in the restructurings of California Resources Corporation, Country Fresh, The McClatchy Company, Denbury Resources, Seadrill, Dean Foods, FULLBEAUTY Brands, Pacific Drilling, GenOn, Oro Negro, Armstrong Energy, Ultra Petroleum and SquareTwo Financial, and her noteworthy debtor representations include McGraw Hill, Pioneer Energy Services Corp., David’s Bridal, The Bon-Ton Stores and Noranda Aluminium. Elizabeth is widely recognised as a leading restructuring practitioner, including by Chambers USA, IFLR1000 and Lawdragon, and is listed as a “Leading Lawyer” by The Legal 500. Her work has also been recognised by numerous industry publications, including The M&A Advisor and The Financial Times. Elizabeth currently serves on the Bankruptcy and Corporate Reorganization 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 multi- of our Corporate, Finance, Securities, Tax, Litigation, Employee Benefits, disciplinary services are the foundations of the Paul, Weiss Restructuring Real Estate and Environmental Departments, we are able to tailor our 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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Digital Edition Chapters 188 Chapter 29 Portugal Portugal

Filipa Cotta

Vieira de Almeida Catarina Carvalho Cunha

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 As per the law’s express determination, insolvency is described as company in financial difficulties? Is there a specific a universal enforcement procedure aimed at satisfying the cred- point at which a company must enter a restructuring or insolvency process? itors via an insolvency plan devised to recover the undertaking encompassed in the insolvent estate, or when such recovery is not possible, via the liquidation of the debtor’s assets. This Under Portuguese law, company managers/directors are gener- means that the legislator’s incentive has evolved to satisfy credi- ally bound to duties of care and loyalty and expected to perform tors primarily through the debtor’s recovery, and only when this their duties with the diligence of an orderly manager, abide by proves to be impossible will creditors be satisfied with recourse criteria of financial rationality and bear in mind the interests of to the universal liquidation of the debtor’s assets. the company, its shareholders and stakeholders. It follows that It follows that whilst the law’s main goal is to accommo- managers/directors who do not act in accordance with the best date creditors’ interests, there is also a strong focus on reviving interest of the company and its stakeholders, and instead pursue companies that are still capable of continuing with their business. personal interests, may be held liable for the damages caused to This incentive to recover companies is also what has driven the company as a result of their own acts or omissions. the legislator over recent years to create judicial and extrajudi- With respect to companies in financial distress, the compa- cial restructuring procedures aimed at keeping businesses afloat ny’s management bodies are also under a general duty to file for when they are still solvent, though facing financial distress. insolvency within a 30-day period from the date they acknowledge (or could not ignore) that the company is insolvent. For legal entities, there is a presumption that such knowledge exists 1.2 Does the legislative framework in your jurisdiction when for three months such entity has failed to meet certain allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what types of obligations (e.g. tax obligations, rents). It should be extent are each of these used in practice? noted that the non-fulfilment of the duty to file for insolvency within the legal deadline may qualify the insolvency as culpable. This, in turn, may generate civil liability of the relevant compa- Yes. Besides regulating the insolvency procedure under which ny’s managers and directors and/or specific inhibitions that may an insolvent company can either be (i) rescued pursuant to an be prolonged in time. insolvency (recovery) plan, or (ii) liquidated (in accordance with However, companies are currently not bound to file for insol- either the statutory/legal regime or through an insolvency (liqui- vency within the typical deadline and rather benefit from a stay dation), the law also provides for judicial/formal restructuring on this deadline, which is expected to last whilst exceptional and procedures such as the PER (processo especial de revitalização), an temporary measures in response to COVID-19 remain in force. urgent judicial procedure aimed at allowing debtors not yet legally insolvent to negotiate their recovery with their creditors, or the PEVE (processo extraordinário de viabilização de empresas), 2.2 Which other stakeholders may influence the which is a temporary extraordinary procedure set to be in force company’s situation? Are there any restrictions on the until December 2021. The PEVE is aimed at aiding companies action that they can take against the company? For example, are there any special rules or regimes which and individual businessmen struck by the COVID-19 pandemic apply to particular types of unsecured creditor (such to restructure themselves. as landlords, employees or creditors with retention Besides these judicial/formal proceedings, companies are of title arrangements) applicable to the laws of your also allowed to resort to informal work-outs such as the RERE jurisdiction? Are moratoria and stays on enforcement (regime extrajudicial de recuperação de empresas), an extrajudicial legal available? regime that allows companies to negotiate their recovery with groups of creditors. However, practice shows that, to date, There are generally no restrictions on the actions a cred- these informal work-outs are not as commonly used by debtors itor may take to safeguard its credit against a company simply in financial distress. because it is in financial distress. This will only be the case if the company has resorted to/filed for one of the extrajudicial

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or judicial restructuring mechanisms provided for by the law or The extent to which creditors and/or shareholders block such insolvency proceedings for that matter. What stakeholders may procedures or threaten action is not possible from the moment do, however, if they find the company is unable to meet its due these proceedings are initiated. To begin with, pending suits for obligations, is request for it to be adjudicated as insolvent by a the collection of debts are suspended immediately, creditors and court of law. stakeholders being prohibited from launching new proceedings as such until the proceedings are over. The only means available to block the debtor’s recovery is by voting against the proposed 2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of plans. However, when the underlying plans are voted on favour- challenge? What remedies are available? ably by the majority of creditors imposed by the law, all other creditors will be bound to the plan’s exact terms if subsequently sanctioned by the court. It follows that should one of the meas- Once a company is adjudicated as insolvent, acts performed or ures be to cram down a certain class of creditors, all creditors in omitted within the two years leading up to the beginning of the such class – including those that are dissenting – will be bound insolvency proceedings may generally be subject to claw-back to such measure. However, there are limits on how creditors may if they are (i) found to be detrimental to the insolvency estate be crammed down; to begin with, creditors from the same class (i.e., actions that reduce, frustrate, obstruct, jeopardise or delay must be treated equally; also, courts have understood that when a the payment to the debtor’s creditors), and (ii) have been carried recovery plan is simply based on cramming down a given class of out in bad faith. The insolvency administrator has six months creditors, there is a basis to refuse to sanction such a plan. to challenge these acts from the moment he becomes aware of them, but will, as a rule, be inhibited from doing so after two years have elapsed from the declaration of insolvency. Bad faith 3.3 What are the criteria for entry into each for these purposes is defined as the knowledge, as of the date restructuring procedure? of the transaction in question, that (i) the debtor was already insolvent, (ii) insolvency proceedings had already been initiated The RERE applies to negotiations and deals involving debtors against the debtor, or (iii) the transaction in question would be that are corporate entities and find themselves in a difficult detrimental to the debtor’s creditors and the debtor was in an economic situation or face imminent insolvency but are still imminent insolvency situation. There is a presumption of “bad susceptible to being recovered. This reality must be attested by faith” if the transaction is carried out in the two years prior to a certified public accountant. the commencement of insolvency proceedings and is made with Resorting to a RERE is appropriate essentially when recov- certain related parties, even if no relationship existed between ering the company is possible without the intervention of all its them at the time. creditors. This regime is also appropriate when the company There are certain acts/transactions that are automatically (iuris intends to restructure its economic activity, its assets, its legal et de iuri) considered as hindering the insolvency estate and may structure, its loans and/or guarantees. be cancelled irrespective of other requirements, subject only to The regime is not available to public companies, public corpo- the exceptional legal rules that require the existence of bad faith rate entities, insurance companies, credit institutions, finance or other mandatory requirements. companies and collective investment entities. It should be noted that when there is a certain act or trans- Should parties wish to subject negotiations to the RERE action found detrimental to the estate that has not been clawed regime, the debtor, along with creditors that represent at least back by the judicial administrator, creditors may still react to it 15% of the total non-subordinated liabilities (pursuant to an by launching specific judicial proceedings aimed at challenging accounting statement issued by a certified accountant in the it; these proceedings are named impugnação pauliana proceedings. last 30 days) must sign a negotiation protocol and promote its deposit with the Commercial Registry. 32 Restructuring Options Resorting to this regime is voluntary as is the participation by the company’s creditors in the underlying negotiations. The 3.1 Is it possible to implement an informal work-out in debtor can convene all or just a few of its creditors. However, your jurisdiction? if the tax authorities and/or the social security authorities are creditors to the company, they will mandatorily participate in the negotiations, even if they do not subscribe to the negotia- Yes; please refer to question 1.2 above. tion protocol. The same is said of employees and organisations representing the same. 3.2 What formal rescue procedures are available As to the PER procedure, it is available to companies defined in your jurisdiction to restructure the liabilities of as such in the Insolvency Code’s article 5 (“any organization of distressed companies? Are debt-for-equity swaps capital and work aimed at developing an economic activity”) that face a and pre-packaged sales possible? To what extent can difficult economic situation or imminent insolvency but are still creditors and/or shareholders block such procedures susceptible to being recovered. or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you These proceedings typically begin with a joint statement by to cram-down dissenting stakeholders? Can you cram- the debtor and at least one of its creditors (holding at least 10% down dissenting classes of stakeholder? of the non-subordinated liabilities, though we find that there will be room for courts to loosen this pre-requirement in the near future) –filed with the court of the debtor’s registered As highlighted in question 1.2 above, companies facing finan- offices – manifesting their intent to initiate negotiations aimed cial distress may resort to formal/judicial procedures such as the at attaining a recovery plan (other creditors being allowed to PER or the PEVE. As also follows from questions 1.1 and 1.2 adhere to the negotiations at all time while they endure). above, insolvent companies may also be recovered via an insol- The mentioned joint statement shall declare that the debtor vency (recovery) plan. fulfils the conditions necessary for its recovery and shall be filed Debt-for-equity swaps and pre-packaged sales are generally alongside a statement issued by a certified accountant, in the last available under these procedures, provided that all legal require- 30 days, confirming that the company is not yet insolvent. ments to such ends are met and complied with.

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Finally, the PEVE regime is available to companies and indi- 42 Insolvency Procedures vidual businessmen in a difficult economic situation who face imminent insolvency or are already insolvent as a result of the COVID-19 pandemic, are not undergoing a PER or similar, and 4.1 What is/are the key insolvency procedure(s) available to wind up a company? who are (i) susceptible to being recovered, and (ii) able to show that by the end of 2019, its assets surpassed its liabilities. The proceedings begin with the submission of the recovery plan Under the relevant law, insolvency is defined as the debt- dully signed by the company and its creditors representing at or’s inability to meet its due obligations. When the debtor is a least 50% of all recognised creditors with voting rights. company, it will also be deemed to be insolvent when the aggregate value of its liabilities is higher than the value of its assets. Nowadays, there is only one sort of insolvency proceedings 3.4 Who manages each process? Is there any court (processo de insolvência) available, under which a company can involvement? either be (i) rescued pursuant to an insolvency (recovery) plan approved to that effect by the necessary creditor majority, or The RERE is an extrajudicial procedure. It is essentially (ii) liquidated (in accordance with the applicable statutory/legal managed by the debtor and the creditors, although these may regime or through an insolvency (liquidation) plan). benefit from the help of a mediator, commissioned to diagnose the debtor’s economic and financial situation, mediate the nego- 4.2 On what grounds can a company be placed into tiations and collaborate in drafting the restructuring deal. each winding up procedure? In what concerns the PER, the court will review the initial joint statement filed by the debtor alongside at least one of its creditors. If it finds that the legal prerequisites for the proceed- After creditors have filed their credit claims to the proceedings to proceed are met, the court will then declare the proceedings, it will fall to the appointed insolvency administrator to ings initiated and appoint a Provisional Judicial Administrator draw up both a provisional list of recognised and non-recog- (“PJA”) thereto. The PJA’s role is to supervise and control the nised creditors and a report on the company’s financial and accounting status. In this report, the insolvency administrator debtor’s assets while negotiations are ongoing; he should also will also express his formal recommendation as to whether he assist parties during these negotiations. believes that the company is still viable and there are conditions A PJA is also immediately appointed by the court in the to recover it through an insolvency plan or that if it should be PEVE procedure. liquidated. It will then fall to the creditors, at the first creditor assembly, to resolve on this matter. 3.5 What impact does each restructuring procedure Insolvency plan proposals can be filed by the debtor’s manage- have on existing contracts? Are the parties obliged to ment, by the insolvency administrator himself, or even a creditor perform outstanding obligations? What protections or group of creditors that make up more than one fifth of the are there for those who are forced to perform their non-subordinated credits. outstanding obligations? Will termination and set-off provisions be upheld? 4.3 Who manages each winding up process? Is there any court involvement? Contrary to what occurs when a company is adjudicated as insolvent, resorting to formal or informal restructuring proceedings such as the RERE, PER and PEVE does not generally impact As a rule, once the debtor is adjudicated as insolvent, its continued existing contracts. However, those incumbent in rendering management will fall upon the appointed insolvency adminis- essential services to the company are generally prohibited from trator. Management may, however, be kept by the debtor so long interrupting the same on account of credits existing prior to the as (i) it is expressly requested by same, (ii) the debtor has already beginning of these proceedings. filed – or commits to do so within 30 days from the insolvency Thus being, termination and set-off provisions in such adjudication – an insolvency plan, (iii) it is not expected that said contracts will generally be upheld, again contrary to what occurs management will in any way delay proceedings or be disadvan- in an insolvency scenario. tageous to creditors, and (iv) the third party that has launched the proceedings does not oppose it. Management may also fall to the debtor without the need to fulfil points (iii) and (iv) if it 3.6 How is each restructuring process funded? Is any is requested by the latter and voted on favourably by a simple protection given to rescue financing? majority of creditors at the 1st Creditors’ Assembly.

In a RERE, if the deal attained between the debtor and its cred- 4.4 How are the creditors and/or shareholders able itors is deposited with the Commercial Registry, the funding to influence each winding up process? Are there any granted to the debtor thereunder as well as its guarantees will restrictions on the action that they can take (including benefit from protection. Such contracts will not be susceptible the enforcement of security)? to being set aside in the context of future insolvency proceedings of the debtor. As a rule, the performance of certain acts that are relevant Guarantees and funding agreed on during the PER or PEVE, to the insolvency estate requires the consent of the creditors’ as means to provide the debtor with the financial means neces- committee (in case it exists) or of the creditors’ assembly (i.e. the sary to pursue its activity, benefit from special protection even if sale of company). the debtor is adjudicated as insolvent in the following two years. The sale of the company’s assets is carried out by the insol- In the context of insolvency proceedings, these creditors enjoy vency administrator. However, secured creditors must be heard a first lien over personal property that ranks above the credits on the sales covered by their guarantees and may propose that held by employees that enjoy that same privilege. the relevant assets be acquired (for themselves or a third party) at a price higher than the one set.

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Upon the opening insolvency proceedings, creditors and or shareholders or shareholders in a group relationship. shareholders will not be able to enforce their security, other than Subordinated creditors have very limited chances of under financial collateral arrangements created pursuant and collection, as a result of the ranking established by law. subject to the terms of Directive 2002/47/EC, as implemented. The costs of the insolvency proceedings (i.e. judicial fees, remuneration of the insolvency administrator) are paid with priority over all the categories mentioned above. 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?

Generally, bilateral contracts to which the company is a party If the debtor is liquidated, it cannot be revived in the future. and that have not yet been entirely performed, are suspended until the insolvent administrator decides to proceed with the 52 Tax same or terminate them. This will not occur, however, with lease agreements and contracts for lasting rendering of services that will be kept in full force whilst the company is not defi- 5.1 What are the tax risks which might apply to a restructuring or insolvency procedure? nitely wound up. Employment contracts continue in full force until the company’s business is closed and will be subject to termination under Portuguese labour law (without prejudice to Restructuring or insolvency procedures may also trigger the transfer of the employment contracts that may be part of a concerns with respect to VAT on invoices issued by the compa- future sale of any part of the debtor’s business). ny’s suppliers. The Portuguese VAT Code provides for a specific As to termination provisions, the rule is that clauses deter- regime allowing suppliers to claim back VAT assessed in relation mining insolvency as an event of default are null and void. to bad debts and irrecoverable credits provided certain condi- As to set-off provisions, under Portuguese law, set-off is tions are met. These conditions may vary depending on certain recognised as one of the means to discharge obligations when- factors such as the date of the credits, which stage the insolvency ever two entities are reciprocally creditor and debtor. procedure is in, among others. For the suppliers, this typically Legal requisites for set-off to apply include: (i) the relevant involves a close monitoring of the unpaid credits in order to credit entitlement is judicially enforceable, and no defence is ensure that they are able to recover the tax. From a corporate applicable thereto; and (ii) both obligations are fungible and of tax perspective, all the procedures regarding restructuring or the same kind and quality. insolvency regimes should be duly complied with in order for Among other requisites, in an insolvency scenario, set-off is unpaid credits to be qualified as tax deductible costs. only permitted up to the date on which insolvency is declared Another factor to always have in mind is the fact that in and provided the alluded legal requisites are met prior to insol- insolvency proceedings, credits held by the Portuguese Tax (in vency having been declared. particular, Municipal Real Estate Taxes) and Social Security Authorities and credits held by employees against their employer will rank higher than the remaining credits (as referred to in 4.6 What is the ranking of claims in each procedure, question 4.6. above). In addition, directors may be personally including the costs of the procedure? liable for the company’s tax or social security debts and penalties since tax authorities hold the power of reverting unpaid obliga- Under Portuguese law, creditors are grouped into the following tions to the directors, provided certain conditions pursuant to categories: the law are duly complied with. ■ Secured credits, which are credits secured by in rem guarantees (garantias reais) including special statutory liens (priv- 62 Employees ilégios creditórios especiais). Examples of such guaranteed credits include: real estate special statutory liens (such as state credits related with real estate property tax “IMI”); 6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would third party credits secured by mortgages; income assign- employees have and where do they rank? ments; and pledges and movable assets special statutory liens (such as credits resulting from justice expenses incurred in the interest of the creditors). Please refer to questions 3.5, 4.5 and 4.6 above. ■ Privileged credits, which are credits secured by general statutory liens (privilégios creditórios gerais) over assets inte- 72 Cross-Border Issues grated in the insolvent estate up to the amount corresponding to the value of the assets granted in guarantee 7.1 Can companies incorporated elsewhere use or the general statutory liens. Examples of such privileged restructuring procedures or enter into insolvency credits include labour, tax and social security debts as well proceedings in your jurisdiction? as real estate general statutory liens. ■ Common credits, which are all credits not included in any Yes. Under Regulation (EU) 2015/848, companies incorpo- other category. rated elsewhere but which have their centre of main interests ■ Subordinated credits, which are classified as such by (the place where the company conducts its interests on a regular virtue of the underlying credit agreement or pursuant to basis and which is ascertainable by third parties) in Portugal can the law. Examples of subordinated credits include credits enter into insolvency proceedings in Portugal. held by parties in special relationships with the debtor, Portuguese courts also have jurisdiction to open secondary such as, in the case of an individual, credits held by his/ insolvency proceedings when the centre of main interests of the her relatives; in the case of a legal entity, credits held by company is in another Member State and if the company has the administrators, group of companies and controlling interests in Portugal (i.e. commercial establishment, real estate).

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7.2 Is there scope for a restructuring or insolvency 92 COVID-19 process commenced elsewhere to be recognised in your jurisdiction? 9.1 What, if any, measures have been introduced in response to the COVID-19 pandemic? The reply to this question differs of course depending on whether the foreign debtor is based in the EU or not. The effects of restructuring or insolvency proceedings insti- Besides the PEVE (please refer to question 2.1 above) and the tuted in an EU Member State (excluding Denmark) are auto- suspension of the duty to file for insolvency when a company matically recognised in all other Member States, according to is legally insolvent (please refer to question 2.1 above), the Regulation (EU) 2015/848. Portuguese legislator has responded to support companies on Proceedings instituted in other foreign countries will have several levels, including adopting: (i) simplified lay-off meas- to be reviewed and recognised in Portugal through recogni- ures; (ii) bank moratoria (including capital and interests); (iii) tion proceedings filed with a Portuguese court. Only after the creation of credit lines (in particular for SMEs); and (iv) mora- relevant judgment has been successfully subject to this court’s toria of rents in lease agreements. review will the effects flowing therefrom be binding in Portugal. Acknowledgment

7.3 Do companies incorporated in your jurisdiction The authors would like to acknowledge the invaluable contri- restructure or enter into insolvency proceedings in other butions of Ricardo Seabra Moura (Managing Associate, Tax) jurisdictions? Is this common practice? and Roberto Ornelas Monteiro (Associate, Restructuring & Insolvency) to this chapter. Companies incorporated/with their centre of main interests in Portugal may enter into in secondary insolvency proceedings in other Member States to protect the interests they may have. However, it is not a 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?

Groups of companies do not receive special treatment, albeit parties may request that the relevant proceedings be conjoined and the same insolvency administrator can be appointed for both.

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Filipa Cotta joined VdA in 2020 and, as a Partner, heads the Restructuring & Insolvency Practice. Filipa boasts over 20 years’ experience and a recognised track record in this area, including in transnational cases in Switzerland, Luxembourg and Brazil, to name a few. Filipa Cotta has been involved in some of the most high-profile corporate restructuring and insolvency cases of recent years.

Vieira de Almeida Tel: +351 21 311 3400 Rua Dom Luís I, 28 Email: [email protected] 1200-a5a Lisboa URL: www.vda.pt Portugal

Catarina Carvalho Cunha is a Managing Associate with the firm’s Litigation & Arbitration and Restructuring & Insolvency practices where she is actively involved in insolvency and restructuring matters (as well as civil and commercial litigation and arbitration) in a wide range of sectors, notably telecommunications, banking & finance, energy, oil and gas and automobiles. She regularly advises clients on such matters in Portugal, Angola, Mozambique, Guinea-Bissau, São Tomé and Príncipe, Cabo Verde and Timor-Leste.

Vieira de Almeida Tel: +351 21 311 3400 Rua Dom Luís I, 28 Email: [email protected] 1200-a5a Lisboa URL: www.vda.pt Portugal

Vieira de Almeida (VdA) is a leading international law firm with more than 40 years of history, recognised for its impressive track record and innovative approach in corporate legal services. The excellence of its highly specialised legal services covering several industries and practice areas enables VdA to overcome the increasingly complex challenges faced by its clients. VdA offers robust solutions grounded in consistent standards of excellence, ethics and professionalism. Recognition of the excellence of our work is shared by the entire team, as well as with clients and stakeholders, and is acknowledged by leading professional associations, legal publications and academic entities. VdA has been consistently recognised for its outstanding and innovative services, having received the most prestigious international accolades and awards of the legal industry. Through the VdA Legal Partners network, clients have access to 12 jurisdictions, with a broad sectoral coverage in all Portuguese-speaking and several French-speaking African countries, as well as Timor-Leste. Angola – Cabo Verde – Cameroon – Chad – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Mozambique – Portugal – São Tomé and Príncipe – Timor-Leste www.vda.pt

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