International & Report 2020/21

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Insolvency cover 2020.indd 1 28/05/2020 11:32:49 International Colloquium on Applicable in Insolvency Proceedings Vienna, 11 December 2020

The secretariat of the United Nations Commission on International Law (UNCITRAL) is holding an International Colloquium on Applicable Law in Insol- vency Proceedings in cooperation with the Hague Conference on Private Inter- national Law (HCCH), on 11 December 2020.

The main objective of the Colloquium will be to gather information to enable the Secretariat to delineate carefully the scope and nature of the work that UNCITRAL could undertake in this eld.

More information: Contact and Registration: uncitral.un.org [email protected] International Insolvency International Insolvency & Restructuring Report 2020/21 & Restructuring Report 2020/21

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Insolvency cover 2020.indd 1 28/05/2020 11:32:49

Contributors AZB & Partners Ernst & Young LLP Fangda Partners Felsberg Advogados Gilbert + Tobin GLAS Harneys INSOL International International Bar Association International Insolvency Institute Kargman Associates Kvale Advokatfirma DA PUNUKA Attorneys & Solicitors UNCITRAL Secretariat, Office of Legal Affairs, United Nations Walder Wyss Ltd. Whiteford, Taylor & Preston, LLP WongPartnership LLP Zhong Lun Law Firm

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CAP9222 II&RR_pIFC A-D_Title_Contents_Credit.indd 1 24/06/2020 10:32 Editor: Lisa Paul Editorial Research: Maria Young Marketing: Rachel Johnson Publisher: Adrian Hornbrook Editorial Office: 35 North Hill, Colchester, Essex CO1 1QR, UK Tel: +44 (0)1206 579591 Email: [email protected] Website: www.capital-markets-intelligence.com Origination by: Trait Design Limited,Tiptree, Essex, UK Printed by: Walstead Roche, St Austell, Cornwall, UK

Although every effort has been made to ensure the accuracy of the information contained in this book the publishers can accept no liability for inaccuracies that may appear. All rights reserved. No part of this publication may be reproduced in any material form by any means whether graphic, electronic, mechanical or means including photocopying, or information storage and retrieval systems without the written permission of the publisher and where necessary any relevant other copyright owner. This publication – in whole or in part –­ may not be used to prepare or compile other directories or mailing lists, without written permission from the publisher. The use of cuttings taken from this directory in connection with the solicitation of insertions or advertisements in other publications is expressly prohibited. Measures have been adopted during the preparation of this publication which will assist the publisher to protect its copyright. Any unauthorised use of this data will result in immediate proceedings. © Copyright rests with the publishers. ISBN 978 1 9996098 9 4

CAP9222 II&RR_pIFC A-D_Title_Contents_Credit.indd 2 24/06/2020 10:32 Contents

Foreword 01 by Debra Grassgreen, President, International Insolvency Institute, and Partner at Pachulski, Stang, Ziehl & Jones LLP

GLOBAL AND REGIONAL REVIEWS

A case for the European Preventive Restructuring 03 Framework in times of COVID-19 Ernst & Young LLP

The current work by UNCITRAL in the area of insolvency law 07 UNCITRAL Secretariat, Office of Legal Affairs, United Nations

Challenges of emerging market in the 12 age of COVID-19 Kargman Associates

INSOL International: New challenges 19 INSOL International

China’s recognition of foreign insolvency proceedings 22 and VIE structures Fangda Partners and Harneys

The role of the Insolvency Section of the International 28 Bar Association International Bar Association

The changing face of the CVA and schemes of arrangement: 30 A agent’s perspective GLAS

COUNTRY REVIEWS

Managing uncertainty: ’s response to COVID-19 34 for distressed Gilbert + Tobin

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The insolvency scenario in Brazil: Certain relevant issues 38 Felsberg Advogados

Overview of China’s regime 42 Zhong Lun Law Firm

India: Liability of directors for ‘’ under the 46 Insolvency & Bankruptcy Code AZB & Partners

Old and new issues in cross-border insolvency proceedings 50 in Japan Sakura Kyodo Law Offices

Insolvency and restructuring in Nigeria 56 PUNUKA Attorneys & Solicitors

New reconstruction legislation in Norway: Market 61 perspective on the retail and airline industries Kvale Advokatfirma DA

The emergence of a restructuring regime for corporate 65 groups in Singapore WongPartnership LLP

Quick and unbureaucratic – The Swiss answer to prevent 69 a wave of because of the Corona Pandemic: COVID-19 Insolvency Law Ordinance Walder Wyss Ltd.

Why the tornado-like headwinds confronting the energy 73 industry will likely produce a surge of bankruptcy transactions in the US Whiteford, Taylor & Preston, LLP

Contributors 77

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by Debra Grassgreen, President, International Insolvency Institute, and Partner at Pachulski, Stang, Ziehl & Jones LLP

Alan Bloom, Past President of the International Insolvency Institute, last offered a Foreword to this publication to coincide with the Institute’s conference in Barcelona in June of 2019 and this Foreword was intended to coincide with our annual meeting in New York that was scheduled for June of this year. What a difference a year makes! If someone would have told me a few months ago that I would be writing at a time when our global economy has been shut down with virtually no notice, our health is potentially at risk simply by leaving our homes, and our way of working has been completely transformed, I don’t think I would have believed it. As surreal as it is, this is where we find ourselves today. And at this critical time, there is no legal and financial industry more important than the restructuring industry. The global pandemic has presented unique challenges. However, our profession’s swift response to these challenges is admirable. Courts and advocates around the world quickly modified their way of doing and have been flexible in a way that is truly unprecedented. Academics and practitioners in the insolvency field have identified numerous ways that insolvency-related can be made more flexible to help struggling companies survive the disruption to their businesses. Governments in many countries, including the , , Spain, the United States, , Australia and Singapore, among others, have quickly adopted those recommendations, at least temporarily, in order to ease the impact of this crisis. For the most part, these reforms involve lifting requirements to commence proceedings that under most insolvency regimes would likely result in . For instance, Germany and Spain have suspended the duty of corporate directors to file for bankruptcy. Such legislation is also in the works in Italy and Poland. In Germany, directors are required to file for bankruptcy within three weeks since they knew or should have known that the company is insolvent on a balance-sheet or a cash-flow basis. Its COVID-19 bill suspends the filing obligation until at least September 30, 2020 (though the reason for insolvency must be COVID-19). Likewise, in Spain, where corporate directors are required to file for bankruptcy within two months after they learn the company became insolvent, that duty was suspended, but only until the end of the state of emergency (which as of this writing has been extended to April 26, 2020). Similarly, some countries have temporarily relaxed laws holding directors liable for trading when the company is within the zone of insolvency, such as Australia, the UK, Switzerland, Spain and Singapore. Australia now has a six-month safe harbour. The ability of to file involuntary bankruptcy petitions has been suspended in Spain, France and Singapore, at least, or has been restricted by increasing the debt requirements, such as in Australia, Singapore and India. For instance, in Australia the debt threshold was increased from A$5,000 to A$20,000, and in Singapore from S$10,000 to S$100,000, while also extending the period for responding to demands from three weeks to six months. Hungary has increased the threshold for corporate to US$130,000, and may suspend companies from being forced into bankruptcy for six months. The French Emergency Act of March 23, 2020 suspended the ability to force companies to go into insolvency, and the application of the “Cessation of Payments” test, which requires debtors to file for bankruptcy within 45 days of the time that a company’s current exceed its liquid assets. This effectively extends the time in which French companies may commence a“safeguard” proceeding, similar to the regime provided under Chapter 11 of the US Bankruptcy Code. This proceeding, which can be initiated only prior to the “cessation of payments,” allows the company to get court protection 1

CAP9222 II&RR p01-02 Foreword.indd 1 24/06/2020 10:08 and trigger payments for their employees. Numerous deadlines have been extended in connection with a “safeguard plan” or “recovery plan” (i.e. a plan approved by the court upon exit from “safeguard” or “judicial recovery” proceedings). The United States has also expanded the opportunity to utilise bankruptcy laws for reorganisation purposes, at least for small businesses wishing to take advantage of new streamlined small business reorganisation provisions under the Small Business Reorganisation Act (SBRA). Previously limited to companies with debts of less than US$2.75m, the debt limit has been increased to US$7.5m under the CARES Act, effective for one year. The SBRA’s key provisions include: exclusivity (but a 90-day limit for filing a plan except in certain circumstances); no creditors‘ committees or their professionals (replaced by a standing trustee to oversee such cases); the ability to confirm a plan without any creditor support if certan requirements are met (principally the dedication of 3-5 years of projected disposable income). In another step forward for reorganisation legislation, the UK government has announced plans to fast-track proposals that have been under study that would introduce a number of new restructuring tools, including a debt payment moratorium, a prohibition on suppliers exercising termination rights, and the ability to confirm a restructuring plan that is binding on dissenting classes of creditors. These legal reforms are part of a global effort to preserve enterprise value during the months ahead. Of course, they are only part of much broader economic and financial initiatives by governments across the world, intended to help businesses stay afloat during this perhaps unprecedented interruption to global economic activity. The Institute is harnessing the resources of its members and is creating a depository of information on worldwide reforms. We are also hosting open forums in each of our regions so that our members can share their respective experiences. Working together, we hope to mitigate this crisis. I hope that by the time this goes to press, the health part of this crisis will be on the decline. However, I expect the economic fallout for our profession to continue. Perhaps we will be able to present a different picture next year. Until then, I share the best wishes of the Institute with all of your readers.

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A case for the European Preventive Restructuring Framework in times of COVID-19

By Dr. Rainer Bizenberger, Dr. Gunnar Gerig and Richard Koch, Ernst & Young LLP

The COVID-19 pandemic is having an immense effect on our economic ecosystem; as a result, numerous companies are facing distress and need to look out for the optimal path through restructuring. In addition to the three basic instruments for restructuring in and out of court – (i) Consensual solutions with all stakeholders outside of insolvency, (ii) early insolvency instruments (e.g. protective shield procedure) and (iii) regular insolvency proceedings – a new “Preventive Restructuring Framework” will need to be transitioned into national law of the EU member states by the end of June 2021 at the latest. The following article provides an outline of the degree companies are affected by the pandemic and for which groups of companies the new framework might be facilitating the way through the crisis.

Introductory remarks – an by reducing the length of overview of instruments for restructuring procedures. As such, higher recovery rates for creditors are achieved as, restructuring in and out of court normally, the passing of time only results Today, when a company is facing distress, three in a further loss of value for a company in basic instruments for restructuring in and out distress.1 of court are available. Depending on the degree In this context, the EU Directive explicitly of pressure for financial and operational focuses on small- and medium-sized restructuring, the following instruments are enterprises (SMEs), which includes the vast deployed by various European jurisdictions: majority of businesses in the EU, as these (i) Consensual solutions with all stakeholders companies are more likely to be liquidated outside of insolvency (e.g., based on an than restructured. SMEs are often unable independent business review or restructuring to carry the higher restructuring costs that concept); (ii) early insolvency instruments (e.g. come with the more efficient restructuring protective shield procedure, insolvency under procedures of some Member States, such self-) based on an insolvency as the early insolvency instruments2 plan and approved by the insolvency court; and previously mentioned. (iii) regular insolvency proceedings executed by Member States have until mid-2021 to the insolvency administrator and approved by transition the EU Directive on preventive the insolvency court. restructuring frameworks into national A fourth restructuring option, which law. The national legislators are currently only comprises minor “in court” elements, working on a “system-oriented” integration has recently been developed by the EU. of the pre-insolvency restructuring plan, After lengthy negotiations, the EU Directive since a legal framework outside of the 2019/1023 on “Preventive Restructuring insolvency proceedings is planned in Frameworks, on discharge of debt and various jurisdictions. disqualifications, and on measures to increase the efficiency of procedures concerning Effects of COVID-19 on restructuring, insolvency and discharge of different groups of companies debt” was published in the Official Journal The COVID-19 pandemic is having an of the European Union on June 26, 2019. immense effect on our economic ecosystem The European Preventive Restructuring and is an unprecedented shock that will Framework aims at effective preventive significantly impact future economic restructuring of viable companies in development. 3

CAP9222 II&RR p03-06 EY.indd 3 25/06/2020 08:46 Figure 1: Exemplary sectors and restructuring need l Retail (non-essential)

ring ctu stru re or

g need f sin Automotive ea essed business mode prior to COVID-19 Incr Distr

Airlines

Oil and Gas

Hospitality

Advanced TMT Manufacturing prior to COVID-19 Healthy business model

Temporary negative impact Permanent negative impact

As the first wave of the COVID-19 pandemic or vaccine for COVID-19. Many sectors will spread across the globe, lockdown and social see a return to a “new normal,” and will distancing measures led to a plunge in demand not need to change their existing business and supply. Supply chains have been massively model. Such sectors may include hospitality disrupted from the outset of the pandemic and (e.g. hotels and restaurants), advanced continue to struggle even as regional clusters manufacturing, oil and gas, or technology, start to reopen. As the crisis has developed, media and telecoms (TMT), which has seen four groups of companies in different sectors some success in the COVID-19 crisis. have emerged. There are companies that had a • Other sectors are experiencing a different healthy and functioning business model before impact. Shocks due to COVID-19 have been COVID-19 and companies with business models disruptive and may lead to permanent that were already under pressure going into the change due to changes in customer crisis; and these can be divided into those that behaviour, due to fear, regulation or a shift are likely to be temporarily negatively affected in values. Their previously healthy business and those for which the negative changes may models will therefore need to adapt; for be permanent. example, airlines are not only experiencing Figure 1 illustrates these four groups of a drop in demand of more than 90% but also companies with a categorisation of sectors as fear longer-lasting effects. Ongoing travel described below, indicating their potential need restrictions impacting personal travel, plus for restructuring. new ways of working, and the economic downturn causing businesses to defer Healthy business models travel, have the potential to reduce overall • Depending on industry and company, shocks demand for air travel permanently. from COVID-19 may be temporary. We are already starting to see demand returning Stressed business models in some sectors. In many cases, however, • Other companies in various sectors, were companies are struggling with ongoing already under pressure before COVID-19. disruption. This is expected to continue for These companies have been impacted by the remainder of 2020, and any solution will the current crisis in a different way. The depend largely on the availability of a cure pandemic has served as more of a catalyst 4

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for existing problems and in some cases and repayment of debt will depend heavily on the revealed the true extent of their problems. underlying business models and their relevance The crisis has led to an immediate need throughout the crisis and beyond. This may lead for action, shortening the time available to a significantly increased need for financial to react to underlying issues and to and operational restructuring, and requires prepare a structured response. It may be a case by case view on the most appropriate a chance for many to address the need for instrument available. structural change, but with a significantly As indicated earlier, the instruments more negative impact in the shorter currently available represent a valid basis for term due to COVID-19. For example, the restructuring and addressing distress prior to automotive sector has been struggling with . However, identifying the appropriate overcapacity and the need for structural instrument needs to be approached case by change for some time. To respond to the case. In these uncertain times, with a buildup COVID-19 crisis and master what lies of non-performing looming, the European beyond, companies need to address these Preventative Restructuring Framework could issues more urgently. Non-essential be a helpful instrument to complement those stationary retail has also been heavily already available. impacted by an immediate drop in demand due to lockdown. Changes in consumer Relevance of European behaviour and the increasing shift to online Preventive Restructuring channels presented challenges to this sector before the crisis. Companies need to Framework in times of COVID-19 take action to make the necessary changes The European Preventive Restructuring in their business models to be able to Framework focuses on financial restructuring compete during the crisis and to remain measures, particularly capital measures, relevant in the future. even though the definition of “restructuring” • Some companies will experience a similar in the EU Directive also explicitly includes acceleration of challenges as a result of performance-related restructuring measures the COVID-19 disruption but will not be (“operational changes,” cp. Art. 2, 1. (2) of able to restructure or turn their business the EU Directive). The need for financial around. They will find that the sustained restructuring is especially valid for companies changes caused by COVID-19 have with healthy business models that have had rendered their business model obsolete, to increase debt levels due to COVID-19 and and it will remain so once the crisis are facing temporary problems, rather than has passed. companies whose business models were under Regardless of the robustness or relevance pressure before COVID-19 and that require of business models before COVID-19, the operational restructuring measures. immediate impact of the crisis has created The new framework could therefore be financial stress for affected companies. particularly suitable for companies whose Short-term liquidity problems can be seen increased level of debt is no longer covered by across almost all sectors, with operational sustainable EBIT, but who do not have an acute cash requirements often remaining very high, liquidity problem and therefore do not qualify for while turnover is drastically reduced. Short- an in-court restructuring procedure. term financing instruments, often in the form A pre-insolvency restructuring procedure of state aid, are being widely deployed to help under the framework could be appropriate for companies survive the crisis. fundamentally viable companies in cases where This short-term financing “solution” leads a complete consensus cannot be reached, but to a significant change in debt levels, putting a where the vast majority of creditors prefer burden on the financial stability of companies a restructuring over a formal insolvency in the future. The ability of companies to procedure. generate a sustainable Earnings before Where minority stakeholders are obstructing as Taxes (EBIT) for interest payments a solution, the possibility of a “cross-class cram- 5

CAP9222 II&RR p03-06 EY.indd 5 24/06/2020 11:09 down” may be a valid argument for introducing Notes: the preventive restructuring framework. The views reflected in this article are the views It remains to be seen whether the new EU of the author and do not necessarily reflect Directive can meet the official aim of creating a the views of the global EY organisation or its suitable restructuring instrument – especially member firms. for SMEs – with lower restructuring costs as 1 EU Directive Explanatory Note (16). compared to early insolvency instruments 2 EU Directive Explanatory Note (17). that are available in only a few Member States. To make restructuring a better option Authors: than liquidation in the eyes of the various Dr. Rainer Bizenberger, Partner – EY EMEIA stakeholders in SMEs, the rules of the European Head of Turnaround and Restructuring Strategy Preventive Restructuring Framework need to be Ernst & Young LLP easy to understand and follow. Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Conclusion Friedrichstraße 140 Our appraisal of business models and the Berlin 10117, Germany effect of COVID-19 show that the four groups Tel: +49 30 25471 26931 of companies we have outlined in this article Email: [email protected] will involve restructuring via one of the Website: www.ey.com/restructuring available instruments. In many cases, financial restructuring measures will suffice to enable Dr. Gunnar Gerig, Partner – Turnaround and these companies with valid business models, Restructuring Strategy, EY in affected sectors such as hospitality, TMT Germany or advanced manufacturing, to return to Ernst & Young - Germany profitability. In other cases, more operational Ernst & Young GmbH restructuring measures will be necessary to Wirtschaftsprüfungsgesellschaft turn around business models, e.g., in the retail Rothenbaumchaussee 78 and automotive sectors, and the higher level of 20148 Hamburg, Germany distress will require more formal restructuring Tel: +49 40 36132 12358 procedures, including the involvement of the Email: [email protected] insolvency court. Website: www.ey.com/restructuring In view of the expected significant increase in companies facing financial difficulties, the Richard Koch, Director – Turnaround and rapid enactment of the European Preventive Restructuring Strategy, EY Restructuring Framework into national law Germany is necessary in order to compete against the Ernst & Young - Germany UK and the Ernst & Young GmbH US Chapter 11 as alternative restructuring Wirtschaftsprüfungsgesellschaft locations. As a result, the implementation of Mergenthalerallee 3-5 the EU Directive would provide safeguards 65760 Eschborn, Germany against abusive relocation of the debtor’s Tel: +49 6196 996 22834 centre of main during cross-border Email: [email protected] insolvency proceedings. Website: www.ey.com/restructuring

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The current work by UNCITRAL in the area of insolvency law

by Samira Musayeva, UNCITRAL Secretariat, Office of Legal Affairs, United Nations1

The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966 as the core legal body within the United Nations system in the field of international trade law. Considering that divergencies arising from laws of different States in matters relating to international trade constitute one of the obstacles to the development of world trade, the Commission was entrusted with the mandate to further the progressive harmonisation, modernisation and unification of the law of international trade.

Overview of UNCITRAL texts in jurisdictions had, at that time, any legislation the area of insolvency law enabling cross-border judicial cooperation in insolvency cases, but also because insolvency Since the early 1990s UNCITRAL has adopted law had long been considered to be too various legislative texts in the field of insolvency sensitive a topic for legal harmonisation. The law, addressing both domestic and cross-border positive experience with the development and aspects of insolvency. Those texts have been subsequent implementation of the MLCBI used worldwide as a benchmark for insolvency encouraged UNCITRAL to tackle the substantive law reform. insolvency law and other aspects of international The first of UNCITRAL insolvency text was cooperation in insolvency. the UNCITRAL Model Law on Cross-Border Throughout the 2000s, UNCITRAL worked Insolvency with its Guide to Enactment (1997) (the MLCBI). It provides a legal framework on its Legislative Guide on Insolvency Law for the cross-border recognition of insolvency addressing such key aspects of substantive proceedings involving a single debtor. The goal insolvency law as liquidation, reorganisation, of the text is to minimise formality, time and avoidance, treatment of claims, composition, costs for obtaining such recognition and to protection and realisation of the insolvency ensure the availability of appropriate relief and estate, distribution of proceeds and discharge. the protection of creditors. To the knowledge of Parts one and two of the Legislative Guide the UNCITRAL secretariat, the MLCBI has been adopted in 2004 were supplemented in 2010 by used as the basis for enacting domestic cross- part three addressing treatment of enterprise border insolvency legislation in 49 jurisdictions.2 groups in insolvency and in 2013 by part four Some case law on the MLCBI has raised addressing directors’ obligations in the period questions relating to the interpretation of certain approaching insolvency. provisions of the MLCBI, in particular, the The last two parts of the Guide were meaning of “centre of main interests” (COMI), expanded in 2019 by the newly adopted the scope of the public policy exception and UNCITRAL texts – the UNCITRAL Model Law application of the relief provisions. To provide on Enterprise Group Insolvency (MLEGI), its additional information and clarify those issues Guide to Enactment and a text on obligations of interpretation and application, the 1997 of directors of enterprise group companies – Guide to Enactment accompanying the MLCBI designed to equip States with modern legislation was revised, and on the basis of a revised text, addressing specific issues arising from the without changing the substance of the MLCBI domestic and cross-border insolvency of itself, the Commission adopted the Guide to enterprise groups (see below). Enactment and Interpretation of the UNCITRAL In 2018, UNCITRAL adopted the UNCITRAL Model Law on Cross-Border Insolvency in 2013. Model Law on Recognition and Enforcement The MLCBI was a ground-breaking of Insolvency-Related Judgements (the MLIJ) instrument not only because very few with its Guide to Enactment, designed to allow 7

CAP9222 II&RR p07-11 Uncitral.indd 7 24/06/2020 10:10 any foreign insolvency-related judgment to be the six official languages of the United Nations, enforced, including a judgment relating to the abstracts of judicial decisions (and, where recovery of assets of the debtor located in a applicable, arbitral awards) that interpret jurisdiction whose insolvency proceedings would conventions and model laws emanating from the be neither a main nor a non-main proceeding work of UNCITRAL. The full, original decisions under the MLCBI. are available, upon request. There are currently By adopting the MLIJ, UNCITRAL addressed 127 case law abstracts on the MLCBI in the both the lack of an international instrument system.3 They are being systematised in a covering the recognition and enforcement of digest of case law on the MLCBI expected to be insolvency-related judgments, as well as some published soon. With the enactment of the MLIJ uncertainty as to whether the MLCBI explicitly and MLEGI by States and ensuing case law, the provides the necessary authority for such CLOUT system will also include the MLIJ and recognition and enforcement. Article X of the MLEGI-related case law. MLIJ, addressed to States that have enacted legislation based on the MLCBI, clarifies that, Most recent developments notwithstanding any prior interpretation to The 2019 UNCITRAL Model Law on Enterprise the contrary, the relief available under article Group Insolvency with its Guide to Enactment 21 of the MLCBI includes recognition and At its 52nd session in 2019, UNCITRAL enforcement of a judgment. adopted the Model Law on Enterprise Group In addition to the legislative texts, UNCITRAL Insolvency (the MLEGI) and its Guide to has authored a number of practical tools of a Enactment, complementing the MLCBI and particular relevance to judges in response to extending recommendations of part three of the experience with the use of the MLCBI. In the UNCITRAL Legislative Guide on Insolvency 2009, UNCITRAL adopted the Practice Guide on Law. The MLEGI consists of two parts: Part A Cross-Border Insolvency Cooperation, which is a set of core provisions, dealing with matters expands on article 27 of the MLCBI, discussing that are regarded as key to facilitating the the various ways in which cooperation in cross- conduct of enterprise group ; and border insolvency cases can be achieved and Part B, comprising articles 30–32, is a set of compiling experience with the use of cross- supplemental provisions included for States that border insolvency agreements. may wish to adopt a more extensive approach In 2011, “UNCITRAL Model Law on Cross- with respect to treatment of the claims of Border Insolvency: The Judicial Perspective” foreign creditors. was adopted, which was subsequently updated The MLEGI is based upon several widely- in 2013 (further updates to that publication agreed fundamental principles: preservation should be expected). It identifies issues that of the jurisdiction of the State in which each may arise on an application for recognition or group member has its COMI; preservation of cooperation under the MLCBI and discusses the ability to commence insolvency proceedings approaches that courts have taken in countries in respect of a group member as and when that enacted the MLCBI. such proceedings might be required; and The UNCITRAL secretariat assists States protection of the interests and expectations of with the use of UNCITRAL texts, in particular creditors and other interested persons. What by providing technical assistance with drafting distinguishes the MLEGI from the MLCBI is the legislation based on those texts. Following focus on insolvency proceedings relating to the adoption of the MLIJ and the MLEGI, the multiple debtors that are members of the same Commission requested the Secretariat to enterprise group. prepare materials explaining to States how three The MLEGI provides for the following UNCITRAL model laws in the area of insolvency measures to achieve centralisation of such law interact. They are under preparation. proceedings: (a) the development of a group In addition, harmonised interpretation of insolvency solution for the whole or part of an UNCITRAL legal texts is facilitated by the Case enterprise group through a planning proceeding Law on UNCITRAL Texts (CLOUT) system, under commenced at the location where at least which the UNCITRAL secretariat publishes, in one group member has COMI; (b) voluntary 8

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participation of multiple group members With the addition of that text, part four of the in a planning proceeding for the purposes UNCITRAL Legislative Guide on Insolvency Law of coordinating a group insolvency solution now addresses the key elements of directors’ for relevant enterprise group members; obligations in both contexts: of an individual (c) appointment of a group representative company when that company faces imminent to coordinate the development of a group or unavoidable insolvency; and of an enterprise insolvency solution in a planning proceeding; group, when the group as a whole or one or (d) cross-border recognition of a planning more of its members are in such situation. proceeding as well as measures to support The need for the additional text arose the recognition and formulation of a group because many States adhere to the separate insolvency solution; and (e) measures designed entity approach under which directors are to minimise the commencement of insolvency typically required to promote the success and proceedings relating to enterprise group pursue the interests of the company they direct, members participating in a planning proceeding respecting its limited liability and ensuring by according the appropriate treatment to that its interests are not sacrificed to those of claims of creditors of those enterprise group the enterprise group. That is to be achieved members in the main proceeding. irrespective of the interests of the enterprise The MLEGI introduces new terms not group as a whole, the position of the director’s found in the MLCBI or part three of the company in the enterprise group structure, the Legislative Guide (“group insolvency solution”, degree of independence or integration among “group representative” and “planning enterprise group members and the incidence of proceeding”). Other terms, such as “insolvency ownership and control. representative”, “insolvency proceeding”, “main” However, where that company’s business and “non-main” proceeding, “enterprise”, is part of an enterprise group and reliant, at “enterprise group” and “control”, are used least to some extent, on other enterprise group in those other UNCITRAL insolvency texts or, members for the provision of vital functions (e.g. like “group representative” are based upon financing, , legal services, suppliers, definitions included in those texts. markets, or intellectual property), MLEGI is similar to those other texts in other addressing the financial difficulties of that respects, in particular as regards provisions company in isolation is likely to be difficult, and, on public policy exception, cooperation and in some cases, impossible. coordination, relief, recognitions and protection The requirement to act in the interests of the directed company may be further complicated of creditors and other interested persons. in the enterprise group context when a director The Guide to Enactment that accompanies of one enterprise group member performs that the MLEGI provides background and explanatory function or holds a managerial or executive information on the MLEGI. That information position in one or more other enterprise is primarily directed to executive branches group members. In such a situation, it may be of Governments and legislators preparing difficult for the director to separately identify legislative revisions necessary to enact the the interests of each of those enterprise group MLEGI but may also provide useful insight members and treat them in isolation. to those charged with interpretation and Moreover, the interests of those enterprise application of the MLEGI as enacted, such as group members may be affected by the possibly judges, and other users of the text, such as competing economic goals or needs of other practitioners and academics. enterprise group members and those of the Text on obligations of directors of enterprise enterprise group collectively. group companies The newly added text, as the rest of part four, At its 52nd session, in 2019, UNCITRAL also focuses on directors’ obligations in the proximity adopted a text intended to serve as legislative of insolvency that may be included in the law guidance for policymakers and legislators on relating to insolvency and become enforceable obligations of directors of enterprise group once insolvency proceedings commence (i.e. the companies in the period approaching insolvency. liability of directors under criminal law, company 9

CAP9222 II&RR p07-11 Uncitral.indd 9 24/06/2020 10:10 law or tort law is excluded from the scope of the insolvency estate, creditor disengagement and text). It acknowledges that those obligations and concerns over stigmatisation). the rationale for imposing them are the same in At its most recent session (December 2019), the enterprise group context as in the context the Working Group focused on: (a) measures of an individual company. At the same time, to ensure a proper use and functioning of a the text recognises complexities arising in the simplified insolvency regime; (b) appropriate enterprise group context as well as threats and ways to deal with “no asset, no income, no pitfalls that may result from overly draconian fraud” cases; and (c) mechanisms to protect rules. Accordingly, it identifies the extent to creditors’ rights without jeopardising other which a director of an enterprise group member equally important considerations in a simplified may take account of considerations beyond the insolvency regime.4 The Working Group enterprise group member managed by that proceeds cautiously recognising that, in devising director in the period approaching insolvency a simplified insolvency regime, the balance and the safeguards that should apply. between competing goals and interests would Additional recommendations have been need to be achieved and that insolvency law included to address the situation where a measures would need to be supplemented by director is appointed to, or holds a managerial other legislative and institutional measures (in or executive position in, more than one particular, by making available standard forms, enterprise group member and a conflict arises online procedures and assistance to MSEs in discharging the obligations owed to the throughout insolvency proceedings). different members. At its next session, the Working Group is expected to consider, in addition to revised Simplified insolvency regime recommendations and commentary, interaction UNCITRAL Working Group V (Insolvency of the text on a simplified insolvency regime with Law) is working on a simplified insolvency the UNCITRAL Legislative Guide on Insolvency regime, developing mechanisms and solutions Law and with the work of Working Group I to address the insolvency of individual on access of MSMEs to and financial entrepreneurs and micro and small businesses services. of an essentially individual or family nature In the light of the impact of COVID-19 with intermingled business and personal debts measures on businesses, in particular MSEs, (collectively referred to as MSEs). the work on the subject by the Working Group The end product is expected to contribute has turned out to be especially relevant and to UNCITRAL texts aimed at reducing the legal timely. Although there may be an urge to obstacles faced by micro, small and medium- complete that work as soon as possible, the May sized enterprises (MSMEs) throughout their 2020 session of the Working Group had to be life cycle. The work therefore proceeds in close postponed because of COVID-19 travel and other cooperation and coordination with UNCITRAL restrictions, which means that the Working Working Group I (MSMEs). It is also coordinated Group will have a chance to look into MSE with the World Bank Group that is updating the insolvency issues again earliest at its December World Bank Principles for Effective Insolvency 2020 session in Vienna. and Creditor/Debtor Regimes to deal with The time until the next session of the Working specifics of the MSEs insolvency. Group gives its delegates and observers an The UNCITRAL Legislative Guide on opportunity to reflect on the experience of Insolvency Law serves as the starting point, States with COVID-19 insolvency-related assisting the Working Group to identify: (a) legislative measures, which are being put in issues that are not addressed in the Legislative place in particular to address difficulties faced Guide but need to be addressed in the context by MSEs. The Working Group’s end product of a simplified insolvency regime; and (b) issues on MSE insolvency, when it is presented to that are addressed in the Legislative Guide but UNCITRAL for its finalisation and adoption, as require a different treatment in the light of the scheduled, at its session in the summer of 2021, MSEs insolvency specifics (e.g. unsophistication can only be enriched by results of the thorough of MSEs, the lack of (sufficient) assets in the assessment of that experience. 10

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Notes: textTypes.textType_s1%3aModel%5c+Law%5 1 The views expressed in this article are those c+on%5c+Cross%5c-Border%5c+Insolvency% of the author and do not necessarily reflect 5c+%5c(1997%5c). those of the United Nations. 4 For the report of the session, see A/ 2 A list of MLCBI enacting jurisdictions is CN.9/1006, available at https://uncitral. available at uncitral.un.org. As of March un.org/en/working_groups/5/insolvency_law 2020, the Dubai International Financial Centre was the latest jurisdiction ascertained by the UNCITRAL secretariat as having Author: enacted MLCBI. The UNCITRAL secretariat Samira Musayeva, Legal Officer, is currently ascertaining whether the new Secretary, Working Group V (Insolvency Law) insolvency law of Myanmar, adopted in International Trade Law Division February 2020, had enacted the MLCBI as (UNCITRAL secretariat) has been reported. Office of Legal Affairs 3 Available at http://www.uncitral.org/clout/ United Nations search.jspx?f=en%23cloutDocument. Website: uncitral.un.org

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CAP9222 II&RR p07-11 Uncitral.indd 11 24/06/2020 10:10 Challenges of emerging market restructurings in the age of COVID-19

by Steven T. Kargman, Kargman Associates

Since the onset of the COVID-19 pandemic, the global economy has entered fairly treacherous territory. Global economic growth has already contracted very sharply in the first half of 2020, and in a recently released report, the World Bank forecast in a baseline scenario that global GDP could shrink by 5.2% for the full calendar year 2020 which the World Bank indicated would be the deepest global recession since World War II.

According to the World Bank report, in 2020 therefore eventually face shortages of vital advanced economies are forecast to shrink equipment such as respirators, surgical masks, 7% and emerging economies and developing and other personal protective equipment. countries are forecast to shrink by 2.5% (which COVID-19 arrived in the emerging economies the World Bank said would be the lowest rate of at a particularly inauspicious moment, as there growth for emerging and developing economies were already significant negative economic since at least the 1960s). However, in its trends affecting the emerging economies. baseline scenario, the World Bank forecast the Most notably, there was already a collapse of possibility of a moderate recovery for the global key commodity prices underway, starting with economy in 2021. the price of oil but extending to a broad array Our focus in this article are the emerging of other commodities such as various metals economies, and the rather bleak outlook for the including copper and zinc. And the global emerging markets in particular represents a economic slowdown associated with COVID-19 sharp turnaround for the emerging economies has led to decreased demand for a range of since many of those economies have been commodities, thereby putting further downward performing fairly well in the last few years. But pressure on commodity prices. many of the gains the emerging economies have Since many of the emerging economies are made in recent years risk being wiped out by the heavily dependent on commodity exports as current COVID-19-related economic crisis — one of the central pillars of their economies, with the possibility, for example, that millions of the price collapse of commodities has been citizens of these countries could be thrown back an especially serious blow to many emerging into poverty — and it is expected that the impact economies, particularly in many oil-producing of the current economic slowdown on emerging countries around the globe. For example, economies could be long-lasting. in Africa, oil-producing countries such as The COVID-19 pandemic has generally Nigeria, Angola, and Algeria, among others, are arrived in the emerging economies and likely to face major financial pressures since developing countries later than it arrived in their economies and national budgets are so various advanced economies. But the public dependent on oil revenues. health impact of the COVID-19 crisis could Many emerging market economies also rely be particularly pronounced if and when the to a significant extent on the tourism sector. pandemic makes major inroads into the Indeed, in a number of emerging economies emerging economies and developing countries. and developing countries, tourism may account Many of these countries do not necessarily have for as much as 10% or more of GDP (and, in strong healthcare infrastructure to begin with. some cases, even 20% or more of GDP), and the Furthermore, a number of emerging tourism sector may also be a major source of economies and developing countries enter the employment in these countries. However, the COVID-19 health crisis starting from a fairly lockdowns around the world and the closing of low base of available medical supplies and may national borders essentially shut down most 12

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international air travel which in turn led to a make greater expenditures on health care as well drying up in many emerging economies of the as fund economic stimulus measures, thereby revenues generated from foreign tourists. further unbalancing its budget. In recent months, there has been a significant With more of a whimper than a bang, weakening of the of many emerging Argentina entered into default once again on economies. For instance, there have been May 22, 2020, by some counts the ninth such sharp declines in the value of emerging market default in its history as an independent nation. currencies such as, among others, the Turkish As of this writing in mid-June 2020, Argentina lira, the Brazilian real, the Mexican peso, the was still engaged in discussions with its South African rand, the Nigerian naira, the creditors to see whether a restructuring deal Colombian peso, and the Indonesian rupiah. could be reached. These widespread declines in the value Another Latin American sovereign, Ecuador, of emerging market currencies could pose which has been dealing with the economic a serious challenge to emerging economies fallout from the drop in the price of oil as well because many of these economies — both at the as one of the worst coronavirus-related public sovereign and corporate level — have incurred health crises in Latin America , reached an debt denominated in hard currencies such agreement in April 2020 with its bondholders to as the US dollar. These depreciations in the postpone for four months debt service payments value of emerging market currencies threaten on bonds in the amount of US$800m. to make the servicing of foreign - Other non-Latin American countries were denominated debt that much more difficult. also experiencing financial distress prior to In this article, we will briefly discuss how the COVID-19, including countries such as Lebanon COVID-19 economic crisis could affect different and Zambia. Lebanon defaulted on a US$1.2bn types of emerging market restructurings in March 2020, and Zambia, a copper- involving sovereign debt, corporate debt, producing country which has been hard hit and infrastructure projects, and we will also by the major drop in copper prices and the discuss related issues concerning state-owned decline in its currency vis-à-vis the US dollar, enterprises and non-performing loans. is exploring options for restructuring its debt burden of approximately US$11bn. Sovereign debt restructurings As the COVID-19 crisis takes a greater toll Even before the COVID-19 crisis began, there on emerging economies with the passage of were a number of emerging market sovereigns time, it is expected that many more countries that were experiencing financial distress to one will enter into debt distress, triggering either extent or another. Yet, the COVID-19 crisis is debt restructurings or debt defaults. As a only likely to make these particular sovereign possible harbinger of the troubles to come, debt situations even more challenging. approximately 100 countries have already In Latin America, there are several countries approached the International Monetary Fund that had sovereign debt travails prior to the for emergency financial assistance. arrival of COVID-19. Venezuela, for instance, has It should be noted, though, that there are been in default on its outstanding debt for over even concerns in some quarters that the IMF, two-and-a-half years, and it has a huge of which currently has resources of approximately outstanding debt and other liabilities (estimated US$1 trillion at its disposal, may nonetheless to be US$150bn or more). The pandemic not have enough available firepower to deal with only potentially aggravates the existing grave all of the financing requests it may ultimately humanitarian/social crisis in Venezuela (which is receive from distressed sovereigns around also accompanied by a financial/economic crisis the globe. and a political crisis). Moreover, in a further sign of the seriousness Argentina, with its well-deserved reputation as of the current situation, the G-20 countries, in a serial defaulter, was already facing a their capacity as bilateral creditors, recently before the arrival of COVID-19, and the pandemic agreed to a debt service moratorium vis-à-vis has only exacerbated the difficulties facing the poorest 77 countries in the world that will Argentina. The Argentine government must now last until December 31, 2020. 13

CAP9222 II&RR p12-18 Kargman Associates.indd 13 24/06/2020 10:12 A number of recent issuers of sovereign to back up its loans in exchange for any debt debt were first-time issuers which were taking relief that China grants to sovereign debtors. advantage of the ample supply of liquidity China is not a member of the long- in the international capital markets and the established Paris Club of bilateral creditors, relatively low interest rates associated with so China does not need to abide by any of the the Federal Reserve’s low policy Paris Club principles (e.g. the principle of in the years after the 2008-09 financial crisis. transparency) nor does it need to feel obligated For example, in Sub-Saharan Africa, first-time to work in concert with other bilateral creditors issuers included, among others, countries such that are members of the Paris Club. Yet, in as Ghana, Gabon, Senegal, Namibia, Nigeria, a multi-creditor situation, the non-China Zambia, and Rwanda. However, in the current bilateral and multilateral creditors may well be adverse global economic environment, countries disinclined to grant to a sovereign such as these may now face serious debt if they believe that China will not make any sustainability issues, and this could ultimately comparable sacrifices. give rise to the need for some form of debt These non-Chinese creditors may be restructuring and/or debt relief. concerned that whatever debt relief they grant Traditionally, in the sovereign debt world, the sovereign in question will end up being the International Monetary Fund (IMF) — the used to repay debts to China (and, importantly, multilateral institution that financially stressed will not be used by the governments to fund countries would invariably approach for financial necessary public health expenditures and assistance in their hour of need — has occupied economic stimulus measures). centre stage in many, if not most, sovereign debt A first test case of this multi-creditor restructurings. Yet, in the current environment, scenario may arise in Zambia which as there is a new player that cannot be ignored: mentioned above is seeking to restructure its China. China has become the world’s largest loans with external creditors. Zambia apparently official creditor, and its global lending now owes approximately US$3bn on US dollar bonds, apparently dwarfs lending from the World Bank and it also owes approximately US$3bn to China. and the IMF combined. And at the same time Zambia has also sought Nevertheless, China’s lending arrangements financing under a so-called rapid credit facility in the emerging economies and developing from the International Monetary Fund to help it countries have been marked by a fair amount address the fallout from the coronavirus crisis. of opacity, and it is not clear what approaches How Zambia’s debt situation is ultimately or principles will guide China in dealing with resolved could shed light on whether China will sovereign debt restructurings in the current be able to pursue a go-it-alone approach in COVID-19-related economic environment. debt restructurings even where there are other In some recent cases, China has apparently external creditors and financing sources, or been willing to grant only limited debt relief to whether China will eventually have to work with sovereign debtors (although in an article a year other parties in such multi-creditor situations ago The Economist cited a study that found that in order to reach an overall China engaged in at least 140 restructurings and solution. write-offs of since 2000). Separately, another issue worthy of our In other cases, such as in the case a attention is how holdout creditors — sometimes few years ago of the Sri Lankan port of referred to a “vulture funds” — will seek to Hambantota, China essentially effectuated maximise their recoveries in the next round of a debt-for-equity swap when the Sri Lankan sovereign debt restructurings. In connection government could not repay a from China. with Argentina’s default in 2001 and the ensuing In that case, China effectively exchanged the restructurings, a group of hedge funds pursued debt owed by Sri Lanka for a 99-year lease a strategy of fairly aggressive litigation focused of the Sri Lankan port (which happens to be on advocating a somewhat unconventional strategically located on the Indian Ocean). In interpretation of the clause in yet another set of cases, China is reportedly the relevant New York law-governed bond believed to be trying to take additional documentation. 14

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What will be their legal hook this time? It in many emerging markets around the globe. may be hard to say now with any specificity until While creditors can take some comfort from the some concrete sovereign debt restructuring fact that the insolvency laws in many emerging disputes develop. Yet, distressed debt funds market economies have been modernised, they can be expected to scour the underlying bond must still reckon with the fact that there could documents to identify any clauses that they be a gap, sometimes even a very substantial believe they might be able to use to their gap, between law and practice. For certain advantage in any potential litigation against the creditors which do not have extensive experience sovereign in question. Crucially, the willingness in the emerging markets or lack a sophisticated of some distressed debt funds to pursue bold understanding of the restructuring dynamics in and fairly aggressive — and even costly and these markets, this realisation could come as a drawn-out — legal strategies should not be rude awakening. underestimated, especially given the possibility Furthermore, creditors may be confronted of such funds achieving hefty returns if their with the harsh reality that some local courts strategies and plans work out successfully. in certain emerging market jurisdictions At a very practical level, to the extent that may suffer from a lack of independence and the situation presents itself, one could also look capacity, and that, in certain situations, some for holdout creditors to exploit series-by-series of those courts may even possibly be tainted by voting in the first-generation collective action corruption. clauses (CACs)adopted in the early 2000s. In It should be noted that, in response to the pursuing such a strategy, a holdout creditor COVID-19 pandemic, numerous jurisdictions would seek to amass a blocking position in around the world have modified their insolvency a particular series of the sovereign’s debt and laws in a variety of different ways, such as thereby prevent the restructuring of the series among things the steps taken in certain of debt in question. That would free jurisdictions to temporarily suspend for the the holdout creditor to pursue litigation to duration of the pandemic any mandatory duty to recover the full face value of the debt of that file for insolvency that would apply under normal series (notwithstanding the fact that the circumstances. Thus, debtor companies and holdout may have purchased the debt at a their creditors should familiarise themselves substantial discount). with any changes that have been made to the relevant jurisdiction’s insolvency law in response Corporate debt restructuring to the pandemic. In recent years, companies in the emerging Creditors in emerging market jurisdictions markets borrowed heavily in the capital — particularly foreign creditors — also need to markets, particularly with interest rates being recognise that, as a general matter, they may as low as they were. Even before the COVID-19 well not be playing on a level playing field with crisis, many of these companies were possibly the debtor. In the emerging markets, a large overleveraged, and thus with COVID-19 related number of companies are controlled by so- global economic slowdown, many of these called controlling shareholders, who are often companies may face financial distress as they powerful and influential families in the local navigate a landscape in which their revenues jurisdictions. decline due to the overall economic slowdown. In certain emerging market restructurings, This recalls in some respects the situation the controlling shareholders may strongly resist in the wake of the Asian financial crisis when any restructuring plan, whether formulated there was widespread financial distress in the in an in-court or out-of- court process, that corporate sector in countries such as Thailand, seeks to diminish or set limits on their control Indonesia, the Philippines, and Korea, and of the company in question. This may be the numerous companies fell into default or sought case, for example, with restructuring plans a debt restructuring. involving debt-for-equity swaps that would In a positive development in the last two give the creditors a large equity stake in the decades — dating to the Asian financial crisis company and which would therefore diminish itself — insolvency laws have been reformed the control of the controlling shareholders over 15

CAP9222 II&RR p12-18 Kargman Associates.indd 15 25/06/2020 08:52 the company. Accordingly, circumstances may served by undertaking comprehensive and force creditors to realign their expectations as thorough due diligence on the debtor company. to potential recovery values on their outstanding In some restructurings in recent years, debt in light of these stubborn realities on certain emerging market debtors have turned to the ground. foreign jurisdictions to take advantage of more Foreign creditors, in particular, will also need favourable insolvency laws to reach a successful to be mindful of the fact that they cannot simply restructuring outcome. For example, such extrapolate from their restructuring/insolvency debtors have proceeded under a UK scheme of experiences in their developed home country arrangement (as in a situation several years ago jurisdictions. Those experiences and their involving Vinashin, a Vietnamese state-owned knowledge of the home country insolvency laws shipbuilder, in which it was seeking to bind generally may be of little avail and/or relevance holdout creditors) and under Chapter 11 in the when these foreign creditors are addressing US (as in the recent filings by two of the largest restructurings in emerging market jurisdictions, Latin American airlines, Avianca Holdings SA particularly where cases end up (or there is and LATAM Airlines Group SA). a possibility that they might end up) in a local Of course, as is true in the world of insolvency proceeding. Moreover, strategies that international restructuring generally, many might work in their home country jurisdictions emerging market debtors have sought — e.g. a “loan to own” strategy — may have recognition of the local insolvency proceeding difficulty gaining any traction in many emerging in a foreign jurisdiction. For instance, this has economy jurisdictions. become fairly routine for many Brazilian debtors There is another pitfall that creditors in recent years where those debtors, acting in emerging market restructurings need through a foreign representative of the local to be aware of in certain emerging market insolvency proceeding, have sought Chapter jurisdictions, and that is the potential on the 15 recognition in the US in order to bind US part of certain debtors/controlling shareholders bondholders to a plan approved in the relevant for corporate frauds or malfeasance on a scale Brazil reorganisation (recuperação judicial) that can be truly mind-boggling. The debtor proceeding. companies and in particular their controlling shareholders may have diverted corporate funds Infrastructure project through sham sale transactions, the deposit of corporate funds in offshore banks wholly restructurings owned by the controlling shareholders, and/or In the last decade or longer, many emerging various types of non-transparent related party economies have undertaken ambitious transactions, and they may have earlier incurred infrastructure projects, whether in the form of substantial financial losses that were not new power/renewable energy projects, ports, previously disclosed to creditors. airports, toll roads, telecom projects, and so Yet, these diversions of funds and losses forth. Many such projects were structured as can literally run into the hundreds of millions public-private partnerships (PPPs), where the of dollars (as was the case in several suspect host governments granted concessions of one transactions in the US$13.9bn Asia Pulp type or another to private parties and where & Paper restructuring in the early 2000s), there was equity investment provided by private and these diversions and losses, of course, sponsors and debt financing provided by, among can represent a substantial loss of value for others, banks and bondholders. creditors. That is why creditors, to the extent Nonetheless, the COVID-19 crisis could put possible, are well advised to press debtors/ a great deal of pressure on these projects, just controlling shareholders early in any emerging as the Asian financial crisis put a great deal market restructuring process to establish cash of pressure on the infrastructure projects of monitoring programs for the debtor companies that era, particularly those in Southeast Asia. so that the creditors can carefully and closely Ultimately, many of those projects from that monitor future cash outlays by the company. era required major restructurings, and the Similarly, the creditors would also be well restructurings were often incredibly complex 16

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and very messy and not infrequently took several or arbitration. years to complete. Any discussion of infrastructure projects in There are two basic sources of potential the emerging economies would not be complete pressure for the recent crop of infrastructure without a reference to China’s expansive and projects structured on a PPP basis. The first is ambitious Belt and Road Initiative (BRI). China that if the COVID-19 economic crisis plays out in has financed and constructed BRI projects the same way that the Asian financial crisis did, around the world, but in the current COVID-19 any severe slowdown in the affected national environment, many of these projects may be economies could lead to a sharply lower level rendered uneconomic by the downturn in the of demand for the services provided by or the local economies where the projects are based product produced by the infrastructure project and may require renegotiation with the relevant in question. Chinese parties. For instance, such a scenario could lead Even pre-COVID, certain countries such as potentially to a far lower level of demand from Malaysia were already trying to renegotiate the offtaker for the power being produced by some of their BRI projects with China. Malaysia, an independent power project (IPP). Thus, the for example, claimed that the costs of the BRI basic economics of the affected projects could projects in question in Malaysia were too high come under stress as the project may not be and needed to be renegotiated. generating the expected revenues due to the As China has BRI projects far and wide in lessened demand. so many emerging economies, it will be very The second basic source of pressure could interesting to see whether over time China flow from any major depreciation of the local develops a standard playbook for dealing with currency. If there has been a sharp depreciation situations of distressed BRI projects, and if so, of the local currency (and the currency risk what that playbook entails. To be sure, the way has not been hedged), then it could become that China deals with distressed BRI projects unaffordable for, say, an offtaker of power may be intertwined with China’s approach from an IPP to pay the tariff at the contractual to dealing with sovereign debt issues where rate set forth in the original power purchase sovereign borrowers are experiencing agreement. The basic problem is that there financial distress. is a currency mismatch: the offtaker receives revenues from its customers in the local State-owned enterprises (SOEs) currency, and yet the offtaker needs to pay the project effectively in a hard currency. and non-performing loans (NPLs) The scenarios described above of lower As a final matter, two other areas bear demand and a depreciated local currency mentioning in any discussion of emerging could lead to serious pressures on the original market restructurings: state-owned enterprises contractual arrangements. The project may wish (SOEs) and non-performing loans (NPLs). We to hold its counterparty (e.g. the offtaker) to the will highlight selected key issues related to original contractual arrangements, whereas the SOEs and NPLs in the brief overview discussion project’s counterparty may argue that it should that follows. no longer be bound by the original contractual In many emerging markets, there may be a arrangements since there has been a major not insignificant presence of SOEs in the local change of circumstances since the relevant economy. And yet many of these SOEs may be contracts were entered into. unprofitable, and, despite this, often the relevant These conflicting perspectives on the part national governments continue to pour money of the project and its counterparties could into these SOEs on an ongoing basis from year result in a default under the relevant operating to year to keep them afloat. agreements (and even ultimately under Due to the pressures on a sovereign’s public the financing documents), a renegotiation/ finances from the COVID-19 crisis, a moment of restructuring of the project’s operating and/ reckoning may have finally arrived for a number or financing arrangements, or even a dispute of national governments in terms of how they between the parties in the form of litigation handle unprofitable (and possibly even insolvent) 17

CAP9222 II&RR p12-18 Kargman Associates.indd 17 24/06/2020 10:12 SOEs. Specifically, the governments may have explore whether there are any private investors to face a stark choice. They will have to decide interested in purchasing the NPLs at a discount whether such SOEs will need to be restructured from their face value (either individually or as (if that is possible) and/or privatised (either part of a portfolio of NPLs). This would be a through a public sale of stock or by a sale to relatively straightforward way for the banks to a private investor), or whether they will need clean up their balance sheets. to be liquidated. As to the national governments, they might A separate issue relates to non-performing consider an approach that has been used in loans (NPLs) in a national banking system. prior situations where national banking systems It is likely that, in view of the financial are confronting a huge volume of NPLs: distress that many companies in emerging establishing a so-called asset management market jurisdictions are likely to face in company (AMC). The AMC would acquire the the current crisis, the banks in the relevant NPLs from the banks for a negotiated purchase emerging market jurisdiction will start to price, and the AMC would then be tasked with accumulate many non-performing loans on realising value on the NPLs it had acquired. their balance sheets. Perhaps the COVID-19 economic crisis will If the banks just sit on the NPLs and do not stimulate creative new thinking on innovative take any action to remediate the NPLs, the approaches for handling NPLs on a large ability of the banks to lend will be curtailed to scale beyond the tried-and-true approach of the extent that the banks are required to set establishing AMCs. The bottom line, though, aside loan loss reserves in connection with is that there will need to be effective ways to the NPLs. This will not be beneficial to the address the issue of NPLs so that, first, the banks since after all they are in the business health of the banks and the banking system can of lending, and it will not be beneficial to the be preserved, and, second, new lending (and national economy because lending is key to therefore new or renewed economic activity) spurring new economic activity. can take place. Thus, banks and national governments will have to develop effective strategies for addressing any significant build-up of NPLs in Author: the national banking system. For banks, if they Steven T. Kargman, President do not already have such a capability in place, Kargman Associates they will need to establish a unit within the 500 East 77th Street bank that is dedicated exclusively to handling Suite 1714 the bank’s NPLs with the aim of maximising New York, NY 10162 recovery on the NPLs. US In addition to considering recovery options Tel: +1 212 286 1500 based on litigation, restructuring, and/or Email: [email protected] an insolvency filing, banks might seriously Website: www.kargmanassociates.com

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INSOL International: New challenges

by Julie Hertzberg, President, INSOL International

It is a privilege to be invited to contribute to this publication at the conclusion of my first year as President of INSOL International. I think back to one year ago and the initiatives we began to implement and the strategies we had developed for additional member engagement.

I began my Presidency in Singapore at the recommendations of our Task Force 2021 conclusion of our annual conference with strategic review, including opening a hub in over 950 participants from 69 countries. Asia, and launching the online Foundation Approximately 112 judges from those Course. Furthermore, we have continued to countries participated in a closed-door Judicial hold successful conferences and seminars, Colloquium, brainstorming ways to enhance welcomed new Fellows, and published cooperation within cross-border legal disputes. regular papers. Like all of you, I never could have imagined we would be faced with a global pandemic within 12 Asian Hub months of that event. Having operated solely from headquarters in As professionals within the crisis London since 1982 we are delighted to have management and restructuring community, launched the INSOL Asia Hub at Singapore’s we are accustomed to approaching each new Maxwell Chambers Suites in August 2019. With hardship as a challenge and that of COVID-19 is a large membership in the Asia Pacific region, no different. It has been energising and inspiring the INSOL Asia Hub has enabled INSOL to to work with the Board and staff at INSOL in increase engagement with existing members rising to this challenge and building on the and other key stakeholders and provided more successes of my predecessor, Adam Harris to opportunities to help with the education and ensure we remain forward focused, relevant and training of practitioners in the region. Going achieve another year of valuable contributions forward, this will be the on- the-ground platform to our members and the global insolvency and to assist in the development of best practices restructuring industry at-large. for insolvency and restructuring systems in While much of our focus is on the future Asia, and strengthen relations with government and the uncertainty we are currently facing, I agencies, regulators, the judiciary, and global would like to take this opportunity to reflect on agencies operating on the ground. some of the positive achievements within the The need for an office in Asia to broaden past 12 months, acknowledging how we excel and deepen INSOL’s engagement in the region in coordinating global programs and projects was identified as part of the strategic review to facilitate greater international cooperation. undertaken by INSOL International in 2016 and Our growing membership and comprehensive we have been delighted by the enthusiastic global network are testament to the strength response to this initiative from members across of our organisation and I am filled with pride the globe, and especially in Asia. to consider the depth of our membership of approximately 10,000 professionals through Education over 40 Member Associations. It is our members Our thriving Global Insolvency Practice Course lending their deep expertise to our association (GIPC), the only route to becoming a Fellow which enables us to continue to strive to attain of INSOL International, has now been running our vision. with great success for 10 years. In this time, This past year, we have made great we have seen 171 professionals achieve the strides in delivering more of the strategic accreditation of Fellow, INSOL International. 19

CAP9222 II&RR p19-21 INSOL International.indd 19 24/06/2020 10:13 Twenty-five of these from 13 countries were practice and younger members meetings, and welcomed in 2020, and we eagerly anticipate the fifth annual INSOL Fellows forum, in addition significant engagement in the future with them to a well-rounded technical programme built together with our existing Fellows. It is these on the theme of looking to the future: what to highly engaged individuals who help to shape expect and how to prepare. the future of INSOL and ensure that we maintain Professor Richard Susskind provided an our position as thought leaders within the excellent and thought-provoking keynote restructuring and insolvency community. session and the conference was closed with In 2019 we were proud to have launched a a dynamic question and answer panel featuring complementary qualification to sit alongside our an array of market experts and chaired by GIPC. As part of our strategic review in 2016, broadcast journalist Rico Hizon. Conferences leading to the adoption of Task Force 2021, like this remind all of us how cooperation is we identified a void within the international critical to establishing seamless cross border insolvency profession, particularly in developing insolvency and restructuring regimes which jurisdictions, for an introductory cross-border encourage lending and better global training course. This prompted the creation business practices. and launch of the postgraduate Foundation Our global programme of one-day seminars Certificate in Insolvency Law which is delivered was also highly successful in 2019, attracting entirely online. The certification represents the over 850 delegates from 34 countries at seven culmination of two years’ research, planning individual seminars. We held our second and hard work from a dedicated course Nordic European seminar with great success committee and has already attracted 119 in Stockholm in May 2019 focusing on specific students from 35 countries who began studying regional restructuring issues and the EU in September 2019. Directive. In June, Sandra Särav encouraged Candidates are required to complete eight proactive thought on digital technologies’ modules which can be chosen to suit the differing use across countries, illustrating interests and local needs of each individual, with Estonia’s transformation from a soviet state at three compulsory elements to ensure a core our Channel Islands seminar held in Guernsey. understanding of international insolvency law. We hosted four seminars in Eastern Asia Being wholly online means the course is open throughout October and November. Highly to anyone with regular access to a computer successful seminars in Beijing and Shanghai and internet connection. I am anticipating were followed by our second annual seminar in great things from these individuals who do this and first visit in many years to Tokyo. course, allowing younger practitioners entry into All these events received high praise for the the industry, broadening our network into even interesting range of region-specific topics and more remote areas of the world and deepening selection of relevant and noteworthy speakers. our understanding of developing jurisdictions. Finally, our established Offshore seminar, in association with member association RISA Events Bahamas, welcomed 135 delegates to The Historically, INSOL has been known for providing Bahamas in December, with a keynote address the opportunity to bring together peers and from Hon. Judge Kevin Carey focusing on recent colleagues from around the globe, to facilitate trends in cross-border insolvencies. the sharing of ideas and building of cross-border relationships. Our events programme has been an instrumental part of this goal and, as ever, INSOL International 2019 included a constructive roster of events. Technical Publications Singapore was host to INSOL’s annual The regular production of technical publications conference in April 2019, where we were is a valuable benefit to INSOL’s members and delighted to welcome over 950 delegates from the technical library available on the INSOL 69 countries. The conference saw filled-to- International website is a comprehensive capacity ancillary programming for the Judicial resource covering an array of topics and cutting- and Academic Colloquia, the offshore, small edge developments. The production of these 20

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publications would not be possible without the connect with our colleagues around the world knowledge and experience of our members, and be reminded of why it is so essential that many of whom are instrumental in the creation we all pull together to help rebuild the global of these publications which include books, economy. I am proud to be a part of a community special reports, a technical paper series, and a which looks forward and concentrates on series specifically aimed at small practices. positive change instead of dwelling on things In the past 12 months we have published outside of our control. Together, we will get books covering current employee entitlements through these monumental times. and bank resolution. There have been special reports examining contemporary issues such Author: as artificial intelligence and cryptocurrency, Julie Hertzberg our technical papers have included aircraft President - INSOL International repossession upon a default and the new 6-7 Queen Street bankruptcy laws in Morocco and Bahrain London EC4N 1SP amongst many others, not to mention three UK additions to our small practitioners’ technical Tel: +44 (0)20 7248 3333 paper series. The wealth of expertise available Email: [email protected] is expansive and cannot be done justice Website: www.insol.org here in one small paragraph. Suffice to say it is a worthwhile point of reference for any Managing Director - Alvarez & Marsal professional concerned with insolvency and 755 W. Big Beaver Rd, Suite 650 restructuring, and it will continue to be so. Troy, MI 48084-4900 Looking ahead, I promise, INSOL US International will grow from the challenges Tel: +1 248 936 0850 it and the world are facing. We will be more Email: [email protected] creative about online learning, find new ways to Website: www.alvarezandmarsal.com

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CAP9222 II&RR p19-21 INSOL International.indd 21 24/06/2020 10:13 China’s recognition of foreign insolvency proceedings and VIE structures

A collaboration between Fangda Partners and Harneys: By Lingqi Wang, Vicky Lord, Jessica Li and Jolin Lin

In the last decade, VIE (variable interest entities) structures have become increasingly popular in the People’s Republic of China (PRC1 or China) as a mechanism to allow foreign investments into China.

For those unfamiliar, a VIE Structure is akin may, if the business is successful or to an agreement-based form of corporate capable of promotion, later be listed on an control, designed mainly: international stock exchange, whether in a) to allow foreign investors to hold a China, or overseas; controlling interest in a business operating • the Cayman company establishes a shell in China (typically in the e-commerce company in Hong Kong;2 sectors); and • the Hong Kong company establishes a b) as a mechanism for Chinese domestic WFOE in China; entities to gain access to international • the Chinese WFOE controls the Chinese capital markets and foreign mergers and target companies through a VIE structure. acquisitions through offshore listings. This is achieved by the WFOE signing In summary, through a VIE Structure, a series of agreements (known as VIE foreign investors together with one or more Agreements) with a domestic licensed PRC persons (legal or natural) (PRC Founders) company in PRC which holds the necessary are able to control an onshore wholly licences to operate in the PRC. foreign-owned enterprise (WFOE) which in Cross-border insolvency issues may arise turn may enter into arrangements with PRC in such a structure if the founder or the group domestic companies on exclusive licensing or encounters financial difficulties. If the offshore distribution bases. entities in this structure enter insolvency The key concept which underpins a VIE proceedings, recognition and enforcement Structure is that the control and ownership of foreign insolvency proceedings may be of the domestic licensed company is obtained required in any of the relevant jurisdictions through various service agreements instead of incorporation – much will depend on of through direct share ownership. The where the value lies and how the debts are arrangements are often complex, with checks structured. Typically one finds that there will and balances by way of share pledges on- be a trigger default in the operational ultimate shore and guarantees offshore by those subsidiary or its VIE domestic company, which holding shares in the ultimate investment causes defaults further up the chain and parent. Through the VIE Agreements, may lead to calls on guarantees given by the foreign investors are able to invest in, obtain Founders who are natural persons. access to and share in the domestic PRC To facilitate access to capital markets company’s profits. and to ensure investment into China by Foreign investment into a Chinese entity international investors, increasingly the through VIE is typically structured as follows: judicial trend in China has tended toward • the PRC Founders incorporate a company foreign creditor friendly approaches, to permit or companies in the investors to have confidence in the safety of (BVI ); their investment, whether direct or via a VIE. • the BVI company and the financial investors Below we look at how that works in practise incorporate a company in Cayman Islands and how this impacts on the interplay with BVI (Cayman), and this Cayman company and VIE structures. 22

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Recognition of foreign insolvency foreign insolvencies, particularly in the following proceedings in China circumstances: • The relevant jurisdiction where the insolvency Article 5 of China’s Enterprise Bankruptcy has been commenced has already recognised Law (EBL) provides the basis and criteria for Chinese insolvency proceedings. A few recognising foreign insolvency judgements jurisdictions have recently done so. Courts in and orders. Under Article 5, Chinese courts the US recognised the Chinese bankruptcy may recognise and enforce foreign insolvency proceedings of Zhejiang Topoint Photovoltaic judgements and orders affecting a debtor’s Co, Ltd. and Reward Science and Technology assets within China on the following conditions: Industry Group respectively in 2014 and 1) the request for recognition and enforcement 2019. More recently, a Hong Kong court is based on a treaty or convention to which recognised the appointment of bankruptcy China is a party or the principle of reciprocity; administrators of a Chinese company, CEFC 2) granting recognition and enforcement will not Shanghai International Group Limited in violate the basic principles of Chinese law; January 2020, which was the first cross- nor will it be against the national sovereignty, border insolvency case recognising Chinese national security or public interest, or bankruptcy administrators in Hong Kong. prejudice the legitimate interests of the • Even where a relevant jurisdiction has not yet creditors in China. recognised Chinese insolvency proceedings, The considerations are not atypical of many the Chinese Court may also look to whether western insolvency recognition regimes. Whilst the jurisdiction could theoretically recognise there has been no reported foreign insolvency Chinese insolvency proceedings where there judgement or order recognised by Chinese to be a hypothetical application. For instance, courts under Article 5 of the EBL, the reason jurisdictions that apply the UNCITRAL Model for that may lie in the fact that China has not Law and certain common law jurisdictions adopted the UNCITRAL Model Law on Cross- may not require de facto reciprocity to be border Insolvency (UNCITRAL Model Law) nor demonstrated for cross-border insolvency entered into any treaties for the cross-border recognition to be effected; where such recognition of insolvency proceedings. However, jurisdictions may incline to recognise Chinese courts have long adopted de facto Chinese insolvency proceedings, the Chinese reciprocity, albeit a stringent standard, to permit Court may consider that a factor when the establishment of recognition, which in determining recognition. recent years has gained prominence in China. That being said, the standard of reciprocity The 2018 meeting minutes of the Supreme for cross-border insolvency has yet to be tested People’s Court (SPC) on bankruptcy cases before the Chinese courts and as such it is an encouraged Chinese courts to explore a “new area of increasing interest amongst academics, method” of applying reciprocity: this was taken lawyers and the investment community alike. largely to refer to the recent developments In the VIE structure as mentioned above, on the expansion of reciprocity in civil and financial investors as creditors (whether as commercial areas. For instance, the SPC issued redeeming shareholder or under the VIE opinions regarding the Belt and Road Initiative arrangements) may initiate their recoveries successively in 2015 and 2019, proposing a against an individual founder. Typically, that will loosening of the criteria for reciprocity so as to occur offshore given the prevalence of interests promote mutual recognition and enforcement held through offshore entities. Given that the of judgements. That broadening of what was individual founder will usually have assets in once a more restrictive approach in the civil China, an issue will arise as to whether the and commercial judicial sphere may increase enforcement can be recognised or whether the chances of reciprocity in cross-border insolvency proceedings of the individual founder insolvency matters. may be brought in China. However, in China, Consequently, Chinese courts are arguably there is currently no personal bankruptcy law. more likely to acknowledge the existence of Certain cities in Zhejiang Province are reciprocity as a principle for recognition of exploring a centralised clean-up of personal 23

CAP9222 II&RR p22-27 Harneys Fangda.indd 23 24/06/2020 10:15 debts, which system has characteristics recognition of the appointment of the foreign consistent with a personal bankruptcy regime. insolvency officeholders. Shenzhen City is exploring the question of However, without a Chinese courts’ personal bankruptcy system but the draft recognition of the foreign insolvency of the regulation remains at the time of judgement/order, the foreign insolvency writing under review. officeholders will not be granted judicial Due to the lack of definitive personal assistance and are therefore unable to perform insolvency regime, it is unlikely that a Chinese their functions in full in China. For example, court will find itself able to recognise foreign without the assistance granted by the court, insolvency proceedings brought against an the foreign insolvency officeholders are unable individual. The Chinese court may find such to protect the foreign debtors’ assets in China, recognition against the public interest and such as by preventing any disposal of the accordingly refuse to recognise any foreign debtors’ assets in China. personal insolvency order. In order to perform their functions, the insolvency officeholders may apply to a Chinese Recognition of foreign court for recognition of the relevant foreign insolvency judgement/order. However, it insolvency officeholders remains unclear what assistance the court Although Chinese courts have not yet may grant to foreign insolvency officeholders recognised foreign insolvency proceedings if the court recognises the relevant foreign under Article 5 of the EBL, they have insolvency judgment/order. Other than Article recognised the status of a foreign insolvency 5, the EBL does not provide any detailed rules officeholders’ appointment. The SPC meeting on cross-border insolvency. The SPC meeting minutes on maritime and commercial cases minutes on bankruptcy cases issued in 2018 with foreign elements issued early in 2005 considered that cooperation on cross-border made clear that, if the foreign party to the legal insolvency should be promoted, but did not proceedings in China becomes bankrupt or provide any specific guidance on the extent and enters liquidation during the proceedings, the type of assistance that may be granted by the court shall notify its insolvency officeholder to Chinese courts. participate in the proceedings. The specific guidance not having been In judicial practice, Chinese courts have also promulgated, were a Chinese court to recognised the capacity of foreign insolvency recognise foreign insolvency proceedings, officeholders to represent the debtor in the assistance should be granted as if the legal proceedings. An important case is Sino- foreign debtor had entered into bankruptcy Environmental Technology Group v Thumb proceedings in China. Given that this is not Environmental Technology Group 3 heard by the made clear by the EBL, the recommended SPC in 2014. Without specifically requiring the approach is to ensure that powers and recognition of the appointment of the foreign effects are included in the order of the insolvency officeholders, this case confirms Chinese court recognising foreign insolvency that foreign insolvency officeholders can act on proceedings. For instance, once the Chinese behalf of the debtor in the PRC in accordance court recognises the foreign court judgement/ with the law of the place where the debtor order on initiation of the foreign insolvency is registered. proceeding, a stay should be available as if This may facilitate foreign insolvency this were a bankruptcy proceeding in China, in officeholders taking certain actions in China which case any preservation measures existing without applying for recognition. For instance, on the debtor’s assets would fall away, and any in the VIE structure as mentioned above, if the enforcement proceedings against the debtor offshore company in liquidation has Chinese should be suspended, etc. debtors, the foreign insolvency officeholders Even if the Chinese court recognising may, on behalf of the offshore company, initiate foreign insolvency proceedings issues such a legal proceedings in China against its Chinese detailed order including therein specific powers debtors, without applying to a Chinese court for and effects, it is still quite uncertain whether 24

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and how other courts and arbitration judgment creditor to enforce its judgment in institutions in China will honour such orders, the short term. due to lack of detailed rules and precedents. In the absence of a personal bankruptcy According to a speech of a SPC judge in a regime in the PRC, the decision in Industrial bankruptcy forum, the SPC is currently Bank allows recovery as against individuals promoting amendments to the EBL, which will offshore as well as opening the door to comity provide more detailed rules on cross-border for BVI judgments in the PRC. This is likely insolvency, including but not limited to to be treated as the first step to permitting jurisdiction, status of foreign insolvency wider recognition of cross-border insolvency officeholder and foreign creditors, conditions between both BVI and PRC, particularly where and methods of provision of assistance. neither has enacted the UNCITRAL Model law. Since the relevant laws at present preclude In the event of any developments in terms personal bankruptcy, this is only of interest of personal bankruptcy laws, cross-border where the debtor is a corporate as opposed recognition on the basis of comity will likely to an individual natural person. So where follow, if that regime is developed in the PRC. does that leave enforcement of debts as In the meantime, investors can take comfort against individuals domiciled in China with that both China and the BVI have a clear path assets offshore but where the value is locked of actual comity to allow for enforcement in the PRC? should the need arise. The case of Industrial Bank Financial Leasing Co Ltd v Xing Libin BVIHC (Com) Singapore and Hong Kong 0032 of 2018 (Industrial Bank) in the BVI is instructive on that point. The BVI Court not only approaches to facilitating cross- recognised and enforced judgments from the border insolvency proceedings Courts of the PRC but also appointed receivers Since both jurisdictions are used as part of the by way of equitable execution to take control of VIE structure, it is useful for investors to know a PRC judgment debtor’s assets being shares what available assistance there is for cross- in a BVI incorporated vehicle, to maximise border recognition at the mid-tier level, should enforcement for a judgment creditor. such occasion arise. This case bodes well for comity between Hong Kong is not a signatory to the the BVI and the PRC and may very well pave UNCITRAL Model Law and so reliance is the way for mutual recognition and assistance placed on principles of common law to assist between the two jurisdictions, which, given with foreign insolvency proceedings, such the prevalence of BVI companies in offshore assistance being determined on a case-by- VIE structures and the issues in pursuing any case basis. The recent case of CEFC Shanghai personal recovery against individual natural International Group Limited [2020] HKCFI persons in China, will be a useful tool for 1674 is the first case where the Hong Kong recovery. Once appointed, the receivers may Court recognised PRC insolvency proceedings use their powers, to realise the value from the and made an order for assistance. The Court shares by appointing themselves directors of summarised common law recognition and the company and thereafter taking corporate assistance as follows: steps to liquidate the assets of the company or a) The foreign insolvency proceedings must put the company into voluntary liquidation to be collective insolvency proceedings, satisfy the judgment debt. commenced in the debtor’s country In permitting the appointment of receivers, of incorporation and the country of the Court was especially persuaded by the incorporation must be a jurisdiction with a fact that a direct sale where the value of the similar insolvency regime to Hong Kong. underlying assets was unknown could result b) There is no requirement that the foreign in a discounted recovery, therefore prejudicing jurisdiction must also recognise insolvency both the judgment creditor and debtor. officeholders appointed by the Hong Kong Therefore, the appointment of a receiver was courts, the country of incorporation must the only available realistic prospect for the be one that aims to promote a unitary 25

CAP9222 II&RR p22-27 Harneys Fangda.indd 25 24/06/2020 10:15 approach in transnational insolvencies and and not just of the debtor company; (b) dealings the degree to which the foreign jurisdiction with third parties (customers, creditors, vendors, recognises officeholders appointed by the suppliers) insofar as where these parties would Hong Kong courts may be relevant to this have considered the debtor in question to determination. have its base; and (c) the location of creditors. c) The Hong Kong Court will offer assistance The Singapore court also made clear that the to the foreign officeholders by applying location from which a foreign representative Hong Kong insolvency law, subject to was operating from is not a relevant factor in certain parameters, on recognition. determining the COMI of a debtor. d) The assistance sought should not enable the foreign officeholders to do something Adoption of the Model Law which they could not do under the law by more generally which they were appointed and the power Across Asia, adoption of the UNCITRAL Model of assistance is only available to the extent Law has not been widespread. For example, that it is necessary for the performance Malaysia is not a signatory to, nor has it adopted their functions. the UNCITRAL Model Law in its domestic e) An order granting assistance must be legislation. Since updating its companies law in consistent with the substantive law and 2016, which greatly enhanced tools for domestic public policy of the assisting court. insolvency matters, there is no codification of In contrast Singapore has adopted the any cross-border arrangements or measures UNCITRAL Model Law to enhance Singapore’s status as an international centre for debt by which foreign courts could cooperate on restructuring. Following its adoption, insolvency matters. Singapore courts must recognise a foreign The Courts are largely left to interpret the proceeding if certain stipulated conditions current legislation and to allow cross border are met, unless recognition would be judicial cooperation on the basis of comity. In the contrary to Singapore’s public policy. Foreign event of a winding-up in Malaysia of a company representatives can apply for recognition of incorporated in another jurisdiction, Malaysian foreign insolvency which will be recognised as law requires that assets of the foreign company a foreign main proceeding if it is taking place which are located in Malaysia to first be ring in the state where the debtor has its centre fenced and applied towards domestic liabilities, of main interests (COMI). This is presumed to before the assets can be turned over to a foreign be location of the registered office or habitual insolvency office holder. residence of the debtor. Commentary from practitioners who have In Re Zetta Jet Pte Ltd and others (Asia been consulted are hopeful that the well known Aviation Holdings Pte Ltd, intervener) [2019] case of Singularis opens a gateway for more SGHC 53 (heralded by practitioners as information sharing and for foreign liquidators Singapore’s landmark judgment on recognition to obtain wider orders for examination of of foreign insolvency proceedings under the persons in connection with the affairs of a UNCITRAL Model Law), the court held that company, by evolution of the common-law in the statutory presumption should not be the future. considered a rebuttable presumption that must Another case in point is Thailand, which be disproved on the balance of probabilities, adopts a civil law system based historically but rather be used as a starting location of the on the French Civil Code. The Thai insolvency COMI, capable of displacement by furnishing and restructuring regime does not recognise evidence to the contrary. Re Zetta Jet held that cross-border insolvency issues. Indeed, the the relevant date for such determination was key legislation in the area, the Thai Bankruptcy the date of filing of the recognition application. Act, [the TBA] expressly provides (section 177 Particular weight is likely to be placed on of the TBA) that “the or bankruptcy factors such as (a) the location of control of the under the law of any other country has no effect company, the analysis of which could include on the debtor’s property located in [Thailand]” the activities of the entire group of companies and practitioners consider that it is fairly clear 26

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that Thai Courts are unlikely to cooperate with Authors: foreign courts in insolvency proceedings. Vicky Lord, Shanghai Managing Partner While some commentators are pushing Tel: +86 21 2030 7818 for Thai adoption of the UNCITRAL Model Law, Email: [email protected] and the Thai government, through the Legal Execution Department, the Ministry of Justice Jolin Lin, Associate has studied the effect of implementing some Tel: +852 5365 3259 of those laws, this has not yet been adopted. Email: [email protected] Thailand is not presently a signatory to any international treaties or arrangements relating Harneys to insolvency and restructuring processes. Unit 2, 9/F, Tower 3, Lujiazui Finance Plaza Ultimately if a foreign creditor wishes to, 826 Century Avenue, Pudong New Area he or she will have to prove in the bankruptcy Shanghai 200120 proceedings in Thailand, declaring any China distributions that have been made to the creditor Website: www.harneys.com in respect of a Thai debtor’s estate outside of Thailand and agree for that to form part of the Lingqi Wang, Partner Thai debtor’s total estate to debtors in Thailand. Tel: +86 21 2208 1179 Email: [email protected] Notes: This article is not intended as legal advice nor a Jessica Li, Counsel substitute thereof and no reliance may be placed Tel: +86 21 2208 1080 on its contents. Email: [email protected] 1 In this article, any reference to the PRC or China excludes Hong Kong, Macau Fangda Partners and Taiwan. 24/F, HKRI Centre Two, HKRI Taikoo Hui 2 Or, less, frequently Singapore. 288 Shi Men Yi Road 3 (2014) Min Si Zhong Zi No 20 Civil Ruling. Shanghai 200041 4 Following Re Supreme Tycoon Limited China (08/02/2018, HCMP833/2017). Website: www.fangdalaw.com

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CAP9222 II&RR p22-27 Harneys Fangda.indd 27 24/06/2020 10:15 The role of the Insolvency Section of the International Bar Association

by Karen O’Flynn and Marcel Willems, Co-Chairs of the Insolvency Section of the International Bar Association

The International Bar Association, established in 1947, is the world’s leading organisation of international lawyers, bar associations and law societies. Membership includes over 80,000 lawyers and 190 bar associations. Within the International Bar Association, there are various groups focused on specific practice areas. One such group is the Insolvency Section. The Insolvency Section, then known as Committee J, originated sometime in the 1970s as a small assembly of business insolvency lawyers mostly from North America, the United Kingdom and Western Europe. Today the Insolvency Section is a truly global group of insolvency professionals with about 1,000 members.

In the 1990s, the World Bank promoted the occasionally has held colloquiums on special idea that it was important for economies, subjects. In 2007, the Section began to publish especially those in early stages of a semi-annual journal called the Insolvency development, to establish predictable and Restructuring International. Since then, and transparent insolvency regimes to the Journal has featured numerous scholarly attract financing. At about the same time, articles contributed by hundreds of authors. UNCITRAL recognised the need for increased The Section has also produced a number of coordination and cooperation across borders valuable treatises, including one on Cash in large multi-national insolvencies. In the Pooling and Insolvency, one on Title Retention, 1990s Insolvency Section’s representatives and another on Financing Company Group played a critical role in crafting UNCITRAL’s Restructurings. Model Law on Cross-Border Insolvency and The Section has four major subcommittees in the early 2000s its Legislative Guide to – Creditor’s Rights, Legislation and Policy, Insolvency Law. In addition, in the mid-1990s, Reorganisations and Workouts, and the Insolvency Section drafted and published Financial Institutions and Insolvency. Each the first Cross-Border Insolvency Concordat, subcommittee plans and puts on topical which has since provided the basis for programmes at the annual and mid-year protocols for administering many of the meetings. There are also officers of the world’s largest cross-border insolvencies. Section focused on, amongst others, projects As cross-border businesses and and publications; membership; conference insolvencies grew in number, so did the planning; and coordination with organisations Insolvency Section, focusing no longer just such as UNCITRAL, the World Bank and other on insolvency, but also on out-of-court professional associations. restructuring as well as transactional and More recently, in recognition of the fact that litigation aspects, including alternative insolvency practice often requires specialised dispute resolution mechanisms. knowledge, the Section has initiated task Over time, the Section developed a practice forces focused on oil and gas, transportation of meeting twice per year – once at the and infrastructure, shipping, real estate, International Bar annual meeting in autumn automotive, and finance and insurance, in conjunction with all other IBA practice , insolvency administration, and groups and once all by itself at a focused employment. mid-year meeting of Section members in As of 2020, the Section has 71 officers from May, with traditionally between 140 and 31 countries in six continents, and there are 200 participants. In addition, the Section still leadership positions that remain open. 28

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The following are the Insolvency Section’s The Insolvency Section endeavours to spread main goals: its mid-year conferences globally, aligned with 1. to meet at least twice a year to provide: the IBA’s annual conferences. In 2020 and 2021 a) stimulating programming on important the annual conferences will be held in Miami insolvency topics with leading thinkers; and Paris; the mid-year conferences will be in and Edinburgh and Montreal. b) networking opportunities to enable members to develop enduring business and social relationships; 2. to provide opportunities for members Authors: to disseminate new ideas, experiences Karen O’Flynn, Partner and insights in insolvency through active Clayton Utz participation in dialogues at meetings and Level 15, 1 Bligh Street publication of materials in the IS Journal and Sydney NSW 2000 IS books, as well as by enhanced use of the Australia Section’s website and social media; Tel: +612 9353 4146 3. to achieve cultural, gender and geographical Email: [email protected] balance among speakers at conferences and Website: www.claytonutz.com in leadership positions; 4. to participate in the important work of Marcel Willems, Partner UNCITRAL, the World Bank and similar Fieldfisher organisations in their efforts to promote more Amsteldijk 220 effective insolvency laws and cross-border 1079 LK Amsterdam cooperation and coordination; and The Netherlands 5. to increase membership of in-house Tel: +31 20 225 2215 legal counsel and non-lawyer insolvency Email: [email protected] practitioners. Website: www.fieldfisher.com

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CAP9222 II&RR p28-29 IBA.indd 29 24/06/2020 10:16 The changing face of the CVA and schemes of arrangement: A security agent’s perspective

by Juliette Challenger, Global Loan Agency Services Limited (“GLAS”)

The use of company voluntary arrangements and court sanctioned schemes of arrangement as tools to restructure the debts of a company in financial difficulties has continued to increase in popularity in recent times, particularly in the retail sector, as an alternative to formal insolvency procedures, with the aim of generating better financial outcomes for the company in question and its creditors.

However, there have been some interesting developments in recent case law that have clarified the parameters around such arrangements, specifically the recent judgments in theDebenhams and Instant Cash cases in the UK, which may have a significant impact on the future content and structure of such restructuring mechanisms.

As an experienced independent debt A key benefit of a CVA is that, once in effect, administration services provider, GLAS a creditor cannot take any step against the has been involved in various capacities in company to recover any debts, or enforce any numerous restructuring transactions and rights against the company that arise from processes, including CVAs and Schemes, failure to pay those debts in full, which are as an active participant in the restructuring covered by the terms of the CVA. of the company’s financial arrangements, There has been a recent increase in the use resulting, in some cases, in litigation, including of CVAs, particularly in the retail sector, as the in the Debenhams case. The recent legal CVA can offer a mechanism for the company to developments raise key considerations for restructure its rent obligations with landlords security agents collaborating with transaction as a whole class of creditor, without the need parties to analyse and assist with achieving to negotiate with each landlord individually, the goals of the transaction parties aiming to and has the potential to swiftly and significantly enable companies to continue as a viable going reduce rental outgoings of a company. concern outside of a formal insolvency process. Additionally, a CVA typically allows greater flexibility than a formal insolvency process, What is a CVA? and is often more cost effective to implement, A company voluntary arrangement (“CVA”) is a therefore offering a more commercially tool permitted under Part 1 of the Insolvency attractive outcome. Act 1986 and is essentially a contract between a company in financial difficulty and certain The Debenhams case of its creditors, which enables a company Discovery (Northampton) Ltd v Debenhams to restructure and compromise its debts Retail Limited [2019] EWHC 2441 (the and liabilities, with the aim of generating a “Debenhams case”) was a recent significant better financial return and better prospects case relating to CVAs, in which GLAS had for the business than if the company entered direct involvement due to its role on the wider into a formal insolvency procedure, such as transaction. liquidation. Unlike other insolvency procedures available, the directors of the company remain The Security Agent’s transactional role in control of the business, which continues to Given its expertise in complex restructuring operate under the supervision of an insolvency matters, GLAS was mandated as successor practitioner, and under the terms of the Facility Agent and successor Security Agent arrangements agreed between certain of the in March 2019 in respect of the existing loans company’s creditors. and notes of Debenhams Retail Limited (the 30

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“Company”) and other Debenhams group that future rents may be reduced as part companies (the “Group Companies”), in addition of the CVA would not be unfairly prejudicial to a subsequent new money facility and transfer or against the requirements of common of debt obligations of some Group Companies justice, as it was noted that the purpose of a to a new funding vehicle (the “Restructured CVA would be to modify existing obligations, Facilities”). This appointment involved rather than create new ones. representing financial creditors whose total 3. The Applicants are treated less favourably exposure to Group Companies was in excess of under the terms of the CVA than other £700,000,000, providing administrative services unsecured creditors without any proper in respect of the Restructured Facilities and justification. The court held that this taking a pragmatic approach to facilitating argument failed as the differential treatment communications amongst lenders in respect of of landlords to other creditors was not the proposed CVA arrangements. inherently unfair and that market pressures Summary of the CVA proposals and the need for business continuity may Following consideration of its financial position necessitate such differential treatment and existing debt arrangements, the Company’s amongst creditors in certain circumstances. directors had proposed a CVA in May 2019 mainly 4. The CVA proposals did not comply with to compromise unsustainable retail rental and certain requirements of the Insolvency business rate liabilities. The proposals principally (England and Wales) Rules 2016 (the affected the Company’s landlords and local “Insolvency Rules”). The court determined authorities, and the proposals were approved by this argument failed on the basis that the over 90% of the Company’s creditors. proposals put to creditors had sufficiently detailed the Company’s efforts to source The CVA proposal challenge alternative financing. Despite this overwhelming approval, a minority 5. The right of forfeiture is a proprietary right group of landlords (the “Applicants”) initiated that cannot be altered by a CVA. On this point, a challenge to the CVA proposals on several the court found in favour of the Applicants, grounds, including specifically relating to the noting that Applicants’ proprietary rights proposals that would impact landlords and the cannot be abrogated and therefore landlords treatment of rental payments due under existing could not be prevented from forfeiting their lease arrangements. leases under the terms of the CVA. At a hearing in September 2019 (the Therefore, this last point highlights the one “September Hearing”), the main claims asserted important ground on which the Applicants by the Applicants (in blue type), and the court’s were successful in relation to the forfeiture of findings (in italics), were as follows: leases – i.e. a landlord’s right to terminate a 1. Claims capable of compromise under the lease before its stated termination date due to a terms of a CVA do not include future rents breach of the lease terms by the tenant, allowing and should not be included in the CVA the landlord to re-enter the property. as these are not correctly characterised Norris J therefore determined that the CVA as “debt” but as “unearned future rent was still valid and remained enforceable, but payments; therefore the Applicants are not would be subject to certain amendments/ “creditors” for future rent within section deletions to sever the proposed forfeiture 1 of the . The court did provisions from the remaining proposals in not agree with this argument and ruled that the CVA. future rental payments can be caught within the terms of a CVA. The further Debenhams proceedings 2. The Applicants should be paid rent under the In February 2020, a further hearing was held CVA at the full agreed contractual rate, as it before Norris J to deal with matters reserved would be unfairly prejudicial not to do so, or at the September Hearing, and to deal with there is no jurisdiction to reduce rents for any an application by the Applicants to challenge future period when the Company occupies and vary the order made by the court at the the property. The court found that the fact September Hearing. 31

CAP9222 II&RR p30-33 GLAS.indd 31 24/06/2020 10:17 Norris J confirmed the findings in the Debenhams case was handed down by Zacaroli J September Hearing regarding the severance of in October 2019 in In the matter of Instant the forfeiture provisions, upholding the decision Cash Loans Ltd [2019] EWHC 2795 (the “Instant that the CVA was valid and could proceed, albeit Cash” case). that the proposed forfeiture arrangements The Instant Cash case related to a scheme of would need to be deleted from the CVA, as it arrangement under Part 26 of the Companies is not possible to interfere with the forfeiture Act 2006, being a court sanctioned arrangement rights of landlords. between a company (the “Scheme Company”) The judge also dismissed an application by and its creditors to achieve a compromise of the certain of the landlord Applicants pursuant Scheme Company’s existing debts (a “Scheme”). to the Insolvency Rules in connection with a The court in this case had to determine request for the court to review the order made at whether the proposed Scheme, which amongst the September Hearing in light of arguments on other things, purported to effect a surrender of certain points of law that were not advanced by leases between the Scheme Company and its the relevant parties at the September Hearing, creditors with the effect of replacing the liability and made determinations as to costs. to pay rent with a claim for damages by the However, leave to appeal the judge’s decision relevant landlord, was valid. of all matters raised at this hearing was granted, The court determined that the provisions potentially leaving the door open for further purporting to unilaterally and automatically future challenges by the parties on these points. terminate the lease arrangements between the Scheme Company and its landlords by surrender The Security Agent’s role in litigation by the tenant was void, as this interfered with In acting as Security Agent, it was necessary for the proprietary rights of the landlord, and did not GLAS to be joined to the litigation proceedings in relate to a contractual right between the Scheme the Debenhams case as a Respondent, in order Company creditor and a debtor. The court made for it to be bound by any court order delivered the distinction, as in the Debenhams case, that for the benefit of the secured parties and the Scheme can only deal with rights between a relevant financial creditors. As an active party to debtor and a creditor, not with proprietary rights, the proceedings, the Security Agent was involved such as those arising from lease arrangements at the forefront of the litigation process, which between a company and its landlord. enables the Security Agent to add value by: The court also found that a lease cannot 1. formulating and understanding all of the key be terminated by the will of the tenant alone, legal and commercial issues, in collaboration and that the surrender of the lease in this with the instructing creditor group, and where case was considered to be an unnecessary necessary, the company; additional consideration, as it was ancillary to 2. taking proactive steps to appoint independent the compromise of a pecuniary liability, and not counsel to work with GLAS’ internal necessary to ensure the effectiveness of the legal team to advise on matters relating compromise of debt effected by the Scheme. As specifically to the Security Agent’s role, such, the court found the surrender provisions preparing submissions in court of arguments in the proposed Scheme were out of the scope in support of the relevant creditors’ position and jurisdiction of the court under a scheme of and attending court hearings; and arrangement pursuant to the relevant provisions 3. seamlessly working alongside creditors and of the Companies Act 2006. the company and their respective counsel in Therefore, the court determined that it could order to adopt and support the arguments in sanction the proposed Scheme, provided that the creditors’/Company’s position papers and the lease surrender provisions were removed. skeleton arguments for trial in opposition to The approach of the courts in this case shares the CVA Challenge. significant similarities with the decision in the Debenhams case, that whilst it is possible to vary The Instant Cash decision contractual provisions as between a debtor and Shortly after the September Hearing, an creditor, it is not possible to unilaterally interfere analogous decision to that of Norris J’s in the with the proprietary rights of a landlord. 32

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A new way forward for CVAs and to anticipate future challenges or issues arising schemes of arrangement? where CVAs or Schemes are contemplated. The Debenhams and Instant Cash litigation Postscript: On April 9, 2020, the directors produced two judgments in quick succession of Debenhams appointed FRP Advisory as on different restructuring procedures where administrators over Debenhams Retail Limited the court has sought to clarify and confirm and Debenhams Properties Limited with the aim aspects of the law in respect of creditors’ (and of protecting the UK businesses from creditors, specifically landlords’) rights. These decisions and potential liquidation, due to the current may well have far reaching consequences COVID-19 pandemic. for the scope and content of future CVAs and Schemes, given the potential implications on the ability of creditors to dictate or determine Author: arrangements in respect of forfeiture or Juliette Challenger surrender of leases, which is often a key Deputy General Counsel consideration for the creditor group in the Global Loan Agency Services Limited (GLAS) decision to implement a debt restructuring 45 Ludgate Hill using these methods. London EC4M 7JU Given the role played by the Security Agent UK on behalf of the secured parties in these Tel: +44 (0) 20 3597 2940 transactions, it will be essential to continue to Email: [email protected] follow these developments in order to be ready Website: www.glas.agency

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CAP9222 II&RR p30-33 GLAS.indd 33 24/06/2020 10:17 Managing uncertainty: Australia’s response to COVID-19 for distressed businesses

by Peter Bowden and Anna Ryan, Gilbert + Tobin

In the wake of the global pandemic and in response to the unprecedented economic threats posed by the developing COVID-19 pandemic, on March 23, 2020, the Australian Federal Government announced dramatic temporary reforms to Australia’s corporate insolvent laws culminating in the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Economic Response Bill). The overarching objective of the Economic Response Bill is to implement measures (and amendments to existing legal frameworks (albeit temporary)) to minimise the economic impact of COVID-19 and promote business continuity in uncertain times.

Background to the new With effect from March 25, 2020, the legislation amendments seek to relieve financially distressed business for a temporary period Over the last four years, a series of reforms of six-months. It is intended that the specific have been introduced to Australia’s insolvency changes related to Australia’s insolvency law laws. The background to the laws has been will operate in parallel with recent reforms a push to modernise the previous legal aimed at protecting directors, being the safe framework which was often criticised for failing harbour regime.1 to adequately focus or facilitate corporate restructures. The Economic Response Bill demonstrates Australia’s existing safe harbour the quick economic response of the Australian Following the introduction of the Treasury Federal Government in the wake of the global Laws Amendment (2017 Enterprise Incentives COVID-19 pandemic. In an incredibly condensed No. 2) Act 2017 (Cth), a “safe harbour” defence time period, the Federal Treasurer announced for directors, in the context of insolvent the proposed amendments to the trading, became part of Australian law. The Act 2001 (Cth) (Corporations Act) on March 22, relevant provisions took effect on September 2020, the Economic Response Bill passed in 19, 2017 and are set out at section 588GA of both Houses of Parliament on March 23, 2020, the Corporations Act. The effect of section received Royal Assent on March 24, 2020 and 588GA(1) is that it provides a defence to the then came into effect the very next day (from insolvent trading provisions (section 588G(2)) March 25, 2020). It should be noted that these if, ‘at a particular time after the director starts provisions do not apply retrospectively. to suspect the company may become or be The Economic Response Bill seeks to insolvent, the director starts developing one implement immediate economic and other or more courses of action that are reasonably relief measures to ensure continuity for likely to lead to a better outcome for the Australian businesses and jobs during these company’ than the ‘immediate appointment of incredibly uncertain economic times. Included an administrator or to the company’. in the relief measures are very specific and A director who seeks to rely upon section considered amendments to parts of the 588GA(1) of the Corporations Act bears the Corporations Act, which operate in parallel evidential burden in relation to that matter. to the various other legislative reforms over That is, providing evidence that suggests a the last four years to Australia’s insolvency reasonable possibility that the matter exists or landscape. Arguably, these new measures does not. demonstrate a continued development of The safe harbour protection does not apply Australia’s insolvency laws to promote in certain circumstances, including where, at corporate rescue and restructuring. the time the debt is incurred, the company has 34

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failed to pay employee entitlements or comply a. Relief for directors and holding companies with certain reporting or taxation requirements. from any liability for new debt incurred during In order to assist directors in seeking to the period a company whilst insolvent ensure they obtain the benefit of the safe provided the debt is incurred in the ordinary harbour protection, the Act lists course of the company’s business. some indicia for a director to regard when b. An increase in the threshold at which determining whether a course of action is creditors can issue a statutory demand (from reasonably likely to lead to a better outcome A$2,000 to A$20,000) and the time companies for the company. have to respond to a statutory demand (from These include whether the relevant 21 days to six months). director is: c. The ability for the Treasurer to provide a. properly informing himself or herself of the targeted relief for classes of persons company’s financial position; from provisions of the Act (by legislative b. taking appropriate steps to: instrument), in order to enable companies to (i) prevent any misconduct by officers or deal with unforeseen events and Government employees of the company that could actions resulting from the Coronavirus. adversely affect the company’s ability to Insolvent trading pay all its debts; or Directors of Australian companies have (ii) ensure that the company is keeping a statutory duty to prevent insolvent trading appropriate financial records consistent as prescribed in section 588G of the with the size and nature of the company; Corporations Act. A director is taken to have c. obtaining advice from an appropriately breached this duty if, during the period when qualified entity who was given sufficient they were a director: information to give appropriate advice; or a. the company incurs a debt; d. developing or implementing a plan for b. the company is insolvent at the time, or restructuring the company to improve its becomes insolvent by incurring the debt, or financial position. by incurring at that time debts including that To date, there has been no case law debt; and providing judicial interpretation of section c. the director suspected at the time when the 588GA as a defence to insolvent trading, company incurred the debt that the company including guidance as to how some of the was insolvent or would become insolvent as a important concepts and terminology associated result of incurring that debt or other debts. with the safe harbour provisions should The Australian solvency test is governed be applied. by section 95A of the Corporations Act, which provides: COVID-19 provisions – “A person is solvent if, and only if, the The new laws person is able to pay all the person’s debts, The changes to Australia’s insolvency law are as and when they become due and payable. contained in Schedule 12 to the Economic A person who is not solvent is insolvent” Response Bill and relate to the key challenges Australian courts have not applied section facing directors, businesses and individuals, 95A as a rigid rule but rather as a factual being insolvent trading, statutory demands question to be determined as a matter of and bankruptcy.2 commercial reality and in light of all the As at the time of writing this article, it is surrounding circumstances. expected that the changes will remain in place The position in Australia is that the key test for a six-month period, alongside the existing of solvency is the “cash flow” test, rather than safe harbour regime. This period could be the “” test. That is, a company further extended by regulation. must have sufficient cash flow available to it The temporary provisions which seek to in order to meet its debts as and when they provide a safety net for businesses in financial fall due. difficulty can be summarised as follows: Section 588H of the Corporations Act 35

CAP9222 II&RR p34-37 Gilbert Tobin.indd 35 24/06/2020 10:18 provides that a director is not liable for a loss that the company or the creditor suffers by breach of section 588G of the Corporations reason of the debt being incurred. Act if it is proved that at the time the relevant Where it can be proved that the director’s debt was incurred the director had reasonable failure to prevent the company from incurring grounds to expect, and did expect, that the a debt was dishonest, ASIC may commence company was solvent at that time and would criminal proceedings against a director. If remain solvent even if it incurred that debt found guilty, the director may be liable for a as well as any other debts which it incurred penalty of up to 2,000 penalty units, or five at the same time. Further, a director is not years imprisonment, or both. liable if it is proved that he or she took all Under the amendments in the Economic reasonable steps to prevent the relevant Response Bill, directors and holding companies debt being incurred. will be relieved from liability with respect to There are statutory defences available. debts that are incurred: Together with relatively new safe harbour a. during the six-month period from defence (see above) the statutory defences March 25, 2020; available to a director for a breach of the b. in the ordinary course of the company’s duty to prevent insolvent trading as set out business; and in section 588H of Corporations Act include c. before any appointment of an administrator the following: or liquidator over the company. a. A director is not liable for a breach of duty if The Explanatory Memorandum of the it is proved that at the time the relevant debt Economic Response Bill provides guidance was incurred the director had reasonable as to what is meant by a debt to be incurred grounds to expect and did expect that the “in the ordinary course of business”. A debt company was solvent at that time and would necessarily incurred in order to facilitate the remain solvent even if it incurred that debt as continuation of a business during the six-month well as any other debts which it incurred at period (such as the taking out of a loan in order the same time. to move some of the businesses’ operations b. Further, a director is not liable if it is proved online, or to continue to pay employees), would that he or she took all reasonable steps to be regarded as a debt incurred “in the ordinary prevent the relevant debt being incurred. course of business”.4 In this context, the Corporations Act states specifically that matters to which regard is to Statutory demands be made in considering this defence include A creditor may issue a formal demand for any action the director took with a view to payment of a debt (in excess of A$2,000) on a appointing an administrator when such action debtor company pursuant to a statutory scheme was taken and the results of that action. set out in the Corporations Act. The failure to A holding company has the same duty that a comply with a statutory demand is a presumption director has to prevent insolvent trading and is of insolvency under the Corporations Act that can exposed to the same prospective liabilities for be relied upon by the creditor in an application to compensation.3 wind up the debtor company. A breach of the duty to prevent insolvent The amendments set out in the Economic trading by a director will expose that director to Response Bill will (as above), which increase prospective liability for: the threshold amount for which creditors can a. a civil penalty order, which could result in a issue a statutory demand (from A$2,000 to fine of up to A$200,000; A$20,000) and the time for compliance of a b. an order for payment of compensation to the statutory demand (from 21 days to six months) company; and/or only apply to statutory demands served on or c. an order for payment of compensation to after March 25, 2020. The increased dollar the creditor. threshold and increased time frame will only be The amount of compensation awarded in place for a six-month period (that is, unless against a director who breaches such a duty extended, these changes will be repealed six will be calculated by reference to the actual months after March 25, 2020).5 36

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By both increasing the minimum debt debts, and other potential personal liability required and increasing the time in which of directors that remain in place to avoid a creditor has to comply with a statutory alternative claims for breaches of director demand, the Government is seeking to provide duties. “breathing space” for companies to deal with The amendments to the Corporations their creditors. Act only apply temporarily and have been Creditors will still have the right to enforce implemented to resolve a unique scenario. debts against companies or individuals through Importantly, the relief measures operate the courts; however, they will not be able to alongside existing provisions in the rely upon a failure to pay to initiate winding Corporations Act. up proceedings until the end of the six-month It remains to be seen whether any of these period. temporary measures will be extended by the Federal Government beyond their current six- Flexibility in the Corporations Act and month lifespan. Treasurers instruments-making powers While the amendments are welcomed, it cannot Notes: be ignored that these relief changes may 1 For a discussion on the recent reforms to have the potential to disrupt the operations of Australia’s insolvency laws, see: Bowden, businesses or create unforeseen issues that will P. & Ryan, A., Revitalising Australian need to be dealt with quickly by company officers restructurings: Developments in Australian during a period in which business-continuity insolvency law, CMI International insolvency is important. & Restructuring Report 2018/19; and Accordingly, in recognising the likelihood of Bowden, P. & Ryan, A., Developments in significant business disruption in the current Australian insolvency law: Combatting illegal circumstances (particularly where businesses phoenixing, CMI International insolvency & may have limited ability to plan or mitigate Restructuring Report 2019/20. against issues that might arise), the Treasurer 2 This article does not consider in any detail has been granted a temporary power to, by the Federal Government’s response (and legislative instrument, relieve specified classes consequential amendments via the Economic of persons from obligations owed under the Act Response Bill) to bankruptcy laws relating to and/or the Regulations, by either exempting personal insolvencies. them from specified obligations or modifying 3 See section 588V, Corporations Act. their obligations (generally or by specified 4 Explanatory Memorandum to the Bill, 12.18. conditions). 5 See Explanatory Memorandum to the Bill, At this stage, any relief granted by the 12.12. Treasurer under this power will only have effect for a maximum period of six-months from the date on which the instrument is made. Directors should be aware that these Authors: temporary safe harbour measures do not Peter Bowden, Partner alter the director’s duties that are owed to the Anna Ryan, Senior Lawyer company itself when it is nearing insolvency. Gilbert + Tobin L35, Tower Two Concluding remarks International Towers Sydney While these legislative changes mark a 200 Barangaroo Avenue positive and swift approach by the Australian Barangaroo government to relieve the issues presented NSW 2000 by COVID-19, they should be approached Australia with caution. Tel: +61 2 9263 4000 Directors must continue to consider the Email: [email protected] financial circumstances of the company, Email: [email protected] the impact on creditors continuing to incur Website: www.gtlaw.com.au 37

CAP9222 II&RR p34-37 Gilbert Tobin.indd 37 24/06/2020 10:18 The insolvency scenario in Brazil: Certain relevant issues

by Thomas Felsberg, FELSBERG Advogados

Being one of the larger economies of the world, Brazil has suffered the impact of international as well as national crises. For the insolvency sector, many issues of importance have been discussed at different levels of government and litigated in court. This article will discuss some of these issues.

The probability of the Uncitral in insolvency processes; provisions addressing Model Law being approved in requests to Brazilian judges for recognition of foreign processes; the cooperation between Brazil in 2020 foreign and Brazilian courts; and specific Proposals are under way in the National regulations for processes running concurrently Congress for a reform of the Insolvency Law in Brazil and overseas. (LFRE). Bill of Law nr. 10.220/2018 (now The bill also has other provisions, many of PL 6229/2005), tabled in May 2018 by the which are positive, such as: an improvement in Administration, adopts, among other provisions, the tax treatment of distressed companies; a the model law on cross-border insolvencies of possible replacement of the judicial monitoring the United Nations Commission on International of insolvent companies by private monitoring; Trade Law (UNCITRAL). healthy reforms of the liquidation in bankruptcy After almost 15 years in effect, expectations system; a possible fresh start for insolvent in relation to reforms in the LFRE are high, companies and related individuals; a new considering that several provisions no longer treatment for debtor-in-possession (DIP) meet the current needs of the business world. financing; the presentation of an alternative The absence of specific legislation in the plan by creditors if the plan presented by the international area has led Brazilian courts to insolvent company is rejected; possible option apply current Brazilian law to cross-border to replace in-person creditor meetings by conflicts, considering the rise in the number virtual meetings; and new rules for substantive of cases of insolvency that traverse national consolidation. borders. Legal certainty and recognition of Despite the positive changes proposed, foreign insolvency decisions, however, have several legal experts have expressed their been subject to vagaries inconsistent with concern in relation to certain alterations the requirements of modern inter-dependent addressed in other chapters of the Bill, especially economies. the increase of the prerogatives conferred on With the intention of overcoming this the tax authorities in insolvency proceedings. In legislative gap, the Bill contains a chapter addition, the Bill addresses matters which are dedicated to international insolvency and efficiently addressed by current legislation and proposes the adoption of the UNCITRAL case law and do not require change. rules, created in 1997, with the purpose of The Bill has already been analysed by the providing greater strength to nations in their Permanent Commissions and currently is under ability to resolve cases involving insolvency of examination of the House of Representatives transnational nature. since November. In case of approval by the In addition to the general provisions commissions, it will be appreciated by the relating to international insolvency, the Bill Senate and, once approved by both chambers, also presents specific rules concerning it will be subject to President’s sanction or veto, access to Brazilian jurisdictions by foreign something that will hardly occur in 2020 because representatives; the equal standing of the of the pandemic and the legislative proceedings rights held by foreign and Brazilian creditors possible delays. 38

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The representation of The of bondholders in the General which are not subject to a Meetings of Creditors and court reorganisation the individualisation of Creditors that hold title to assets or rights their credits which were granted by an insolvent company The raising of financial resources through as security are, in principle, not affected by an the issuance of trade currency on the insolvency filing and are therefore authorised to international markets has become common enforce their rights. practice in Brazil since the 1990s. According to Courts have however been resistant to available data, hundreds of billions of US dollars applying this rule, in its strictest sense, have been raised by companies or government whenever the enforcement of such rights entities over the past few years through the during the stay period could jeopardise the issuance of securities, including reorganisation of the insolvent company. Several bonds, medium term notes and securitisation theories have emerged to justify this position, transactions.1 amongst which are the “essentiality” of the This situation affects the Brazilian asset, the lack of “individualisation” of the credit, insolvency legal system, which the number the recognition that the acceleration clause of of companies that have issued bonds and are such a debt is subject to the filing, or even the on judicial recovery has risen, an example partial enforcement of the rule. being the Odebrecht Group, with US$3bn in In those terms, in 2019, the Court of Appeal of bonds issued. São Paulo (AgInt nr. 2236949-78.2018.8.26.0000) Brazilian case law permits bondholders to recognised that a creditor may not remove its be represented by their indenture trustees or security if it is essential to the debtor’s activities. to individualise their right to vote on the credits Nonetheless, this decision does not represent involved in an insolvency proceeding. the consolidated understanding of the Superior As an example, in the restructuring of Court of Justice. the OGX Group,2 the 4th Commercial Court The Superior Court, thus far, is contrary of Rio de Janeiro approved the adoption of a to the release of bank locks and the non- procedure proposed by the trustee, by means submission of credits assigned in of which the bondholders could opt to guarantee to the effects of judicial recovery, individualise their proofs of claim to vote on under the terms of the Bankruptcy and Judicial the judicial reorganisation plan during the Reorganization Law (art. 49, § 3). general meeting of creditors. The same These matters are still being discussed at all happened in the Oi,3 Rede4 and Aralco5 cases, levels in the state courts and a final definition amongst others. has yet to be structured. In 2015, the ‘II Jornada de Direito Comercial’ approved Statement nr. 76, which established Government credits against that “in the cases of issuance of debt securities by a company under reorganisation, in which companies under judicial there exists a fiduciary agent or similar figure reorganisation representing a collective group of creditors, Law 11.101/05 establishes that the processing it is the responsibility of the fiduciary agent of judicial reorganisation shall not suspend the to exercise the vote at the general meeting of course of tax enforcements6 filed against the creditors, under the terms and by means of debtor (art. 6, §7) and, in parallel, the National the authorisations provided in the issuance Tax Code (art. 187, lead paragraph) excludes tax deed, subject to the power of any final investor credits from any insolvency proceeding. to file with the judicial reorganisation court a Thus, in relation to tax credits there can be request for the break-up of the right to a voice no doubt: these are not subject to the judicial and a vote at a general meeting to exercise reorganisation proceedings and the foreclosure such individually, solely by means of judicial may proceed in the specialised courts in which authorisation.” they have been filed. Only the enforceable acts 39

CAP9222 II&RR p38-41 Felsberg.indd 39 24/06/2020 10:19 designed to constrict or expropriate the assets purposes of voting at the general assembly, the of a company under judicial reorganisation credit in foreign currency should be converted must be previously submitted to the proper into local currency using the exchange rate on restructuring court.7 the eve of the date upon which the meeting takes However, government non-tax credits, place. However, the law does not define the rate have received different treatments by the that should be applied to this conversion. courts, because statutory law is not clear in There exist different interpretations on this respect. this matter in legal doctrine. For some, In the Celpa and Oi8 (0057446- considering that the currency has a sale price 63.2017.8.19.0000) cases, penalties imposed by and a purchase price, the conversion should their respective regulators have been classified be performed in accordance with the currency as unsecured credits in insolvency proceedings. sale price. The best understanding, however, Yet in the Viracopos case, according to the Court seems to be that defended by other scholars, of Appeal of São Paulo, these same credits were who suggest the equitable criteria applicable treated as tax credits, overturning a contrary in Brazilian law to overcome the legal gaps, decision made by the lower court. defending that an average market rate should It is important to stress, however, that the be applied, such which corresponds to the Higher Courts have still not made their position average falling between the purchase rate and clear with respect to this issue, and there is a the sale rate. recent precedent from São Paulo recognising In relation to the payment conditions, the that a public credit arising from contractual current Insolvency Law is favourable to a debt non-compliance should be subject to the judicial expressed in foreign currency: the legislation reorganisation of the Libra Group. establishes that the exchange rate variation shall be the parameter of indexation of the Credits in foreign currency within debt, unless the amounts owed should come to be otherwise determined by the creditor the judicial reorganisation (art. 50, §2). The Brazilian Insolvency Law establishes that, in In other words, unless the foreign currency the general meetings of creditors, for decisions creditor expressly agrees to the provision of on any matters that are incidental to the judicial the judicial reorganisation plan that alters the reorganisation proceeding, the creditor’s vote parameters of the calculation of their credit shall be proportional to the sum of their credit when payment is effectively made, the rate of (art. 38, lead paragraph). In relation to the conversion should necessarily be observed as a decisions for approval or rejection of the judicial parameter for the establishment of their credit. reorganisation plan, this regulation also applies The abovementioned issues are but a few of for the purposes of calculating the quorum for those which are being discussed by the legal all the classes of credits, except for the credits and business communities, as well as in our from classes I (labour) and IV (micro-companies courts and universities. They reflect the vibrant and small companies), the quorums of which are atmosphere in which insolvency matters are calculated by a simple majority of the creditors being dealt with in this country. present, regardless of the value of their credits (art. 45, §2º). Notes: But if the creditors belonging to other classes 1 http://portal.anbima.com.br/informacoes- that are not I or IV (that is, the holders of in-rem tecnicas/boletins/mercado-de-capitais/ guarantees [class II] and unsecured creditors Documents/BoletimMK_201508.pdf [class III]) vote, in all cases, the issue arises 2 In re OGX, Case nr. 037762056.2013.8.19.0001, as to how foreign-denominated credits should 4th Lower Commercial Court of Rio de Janeiro. be treated, given the natural fluctuation in 3 In re Oi S.A., Case nr. 0203711- exchange rates. 65.2016.8.19.0001, 7th Lower Commercial The sole paragraph of article 38 regulates Court of Rio de Janeiro. the matter, establishing that, in judicial 4 In re Rede Energia, Case nr. 0067341- reorganisation procedures, for the exclusive 20.2012.8.26.0100, 2th Lower Commercial 40

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Court of São Paulo. 8 Court of Appeals of Rio de Janeiro, 5 In re Aralco, Case nr. 1001985-03.2014.8.26.0032, Interlocutory Appeal n. 0057446- 2th Lower Civil Court of Araçatuba. 63.2017.8.19.0000 (2017). 6 Judicial process of foreclosure for satisfaction of a tax or non-tax debt. Author: 7 On the other hand, the debtor should Thomas Felsberg, Founding Partner present a certificate of good tax standing FELSBERG Advogados when requesting ratification of its judicial Av. Cidade Jardim, 803 - 5º andar reorganisation plan, precisely so that its São Paulo - SP restructuring, although having an impact 01453-000 – Brazil on the charging of the tax credits, does not Tel: +55 11 3141-9101 end up providing defense for those under Email: [email protected] restructuring against their tax creditors. Website: www.felsberg.com.br

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CAP9222 II&RR p38-41 Felsberg.indd 41 24/06/2020 10:19 Overview of China’s bankruptcy regime

by Audry (Hong) Li, Zhong Lun Law Firm

China’s bankruptcy system mainly consists of laws and relevant judicial interpretations and normative documents formulated by the courts.

Legal framework of China’s Court’s Work Meeting on Bankruptcy Trials in bankruptcy regime March 2018 and Minutes of the Conference on Civil and Commercial Trials Heard by Courts The Bankruptcy Law in China in September 2019. Some local High The Enterprise Bankruptcy Law of the People’s People’s Courts and Intermediate People’s Republic of China (“Bankruptcy Law”), issued Courts have formulated guidelines applicable to by the Standing Committee of the National their respective jurisdictions, such as Guidelines People’s Congress of China and effective as of for Trials of Bankruptcy Cases (Trial) formulated June 1, 2007, is the main legislation that governs by Shanghai High People’s Court on August 31, mainland China’s insolvency and reorganisation 2018 and Guidelines for Trials of Reorganization regime. The Bankruptcy Law applies to the legal Cases (Trial) formulated by Shenzhen entities in China, including state-owned, private Intermediate People’s Court on March 25, 2019. and foreign invested companies in the form of Such normative documents are not limited liability companies or joint stock limited judicial interpretations and shall not conflict companies. The Bankruptcy Law does not apply with laws and judicial interpretations of the to individuals. Supreme People’s Court. However, the rules Judicial interpretations and normative and principles included in such normative documents of the Courts documents can be applied by courts in The judicial interpretations formulated by judicial trial of bankruptcy cases in practice, the Supreme People’s Court is an important which harmonise the judicial standards and basis with legal effect and governs the judicial adjudications in practice. activities of courts in China. The judicial interpretations in relation to the Bankruptcy Law Statutory bankruptcy regimes mainly include the Provisions of the Supreme There are three types of proceedings under People’s Court on Appointing Administrators the Bankruptcy Law including liquidation, for Hearing Enterprise Bankruptcy Cases reorganisation and settlement. Liquidation is a (effective as of June 1, 2007) and Provisions of straightforward process of disposal of debtor’s the Supreme People’s Court on Determining property in a short space of time following the Administrators’ Compensation for Hearing order stipulated by law and the debtor shall Enterprise Bankruptcy Cases (effective as of be deregistered after the procedure has been June 1, 2007) as well as Provisions (I), (II) and concluded. Reorganisation and settlement may (III) of the Supreme People’s Court on Several regenerate a company, but they have different Issues Concerning the Application of the emphasis and apply under different situations. Bankruptcy Law issued and came into force Reorganisation is a more complicated and respectively in 2011, 2013 and 2019. comprehensive procedure with an emphasis In addition to the judicial interpretations, the on maintaining the debtor’s going-concern Supreme People’s Court and local courts have value. A debtor in reorganisation proceedings is also formulated some normative documents allowed to obtain new financing according to the which play an important role in guiding China’s Bankruptcy Law. bankruptcy practice. For instance, the Supreme Settlement is a simpler and faster procedure People’s Court issued Minutes of the National focusing on negotiation between the debtor and 42

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unsecured creditors. Settlement is not applied the debtor, managing and disposing of the to secured creditors. During the settlement debtor’s property, deciding on matters of procedure, a may still request internal management of the debtor and its daily the administrator to dispose of the collateral and expenses and other necessary expenditures, repay debts owed in priority to other subordinate participating in litigation, arbitration or any other creditors with the proceeds obtained from the legal procedure on behalf of the debtor, etc. proposal. During the bankruptcy proceedings, creditors may exercise their rights via the creditors’ Commencement of bankruptcy proceedings meeting or the creditor committee, whose The statutory circumstances triggering establishment is contingent on the decision bankruptcy proceedings under the Bankruptcy made at the first meeting of creditors. Law are (1) the debtor is unable to pay off the debts due and the assets owned by it are not Special regimes for financial institutions sufficient to pay off all the debts; or (2) there The bankruptcy of commercial banks, securities is a clear lack of ability to pay off debts by the companies, insurance companies and other debtor; or (3) there is a possibility of losing its financial institutions has special features ability to pay off debts. according to the Bankruptcy Law. Where either Under the first or second circumstance, of the statutory circumstances for bankruptcy the debtor shall have the right to apply to the proceedings occurs to a financial institution, competent court to initiate a proceeding of the financial supervision and administration either liquidation, reorganisation or settlement. authority of the State Council of China, may But under the third circumstance, the debtor choose to apply the takeover and custody may only apply for a reorganisation proceeding. procedures by itself, or apply to the competent Where a debtor is unable to repay the due court for reorganisation or liquidation according debts to a creditor, the creditor may also to the Bankruptcy Law. apply for reorganisation or liquidation of the In addition, as financial institutions are debtor. Therefore, subject to who initiates the different from general companies, and have high proceedings, reorganisation and liquidation may requirements in having corresponding supporting be voluntary or involuntary for the debtor. facilities to resolve potential social risks caused In a special circumstance whereby a company by their bankruptcy, while applying the general is found not to have sufficient assets to pay off rules of bankruptcy system, the Bankruptcy Law all its debts during the liquidation process for a has also authorised the State Council of China voluntary , or it has been dissolved to formulate implementation measures for the before completion of liquidation, the liquidation bankruptcy of financial institutions. committee shall apply to the competent court After the effectiveness of the Bankruptcy with jurisdiction for bankruptcy liquidation. Law in 2007, with the government’s focus on comprehensive management of financial Control of bankruptcy proceedings companies of high-risk, some securities Bankruptcy proceedings in China are judicial companies withdrew from the market through proceedings subject to the direction and liquidation proceedings and several trust supervision of the court. In a liquidation or companies regenerated through reorganisation settlement procedure, the administrator takes procures according to the Bankruptcy Law. over the debtor, while in a reorganisation So far there have not been any bankruptcies procedure, upon application of the debtor and of commercial banks according to the approval of the court, the debtor may manage Bankruptcy Law. its own assets and operate its business under supervision of the administrator. Trends and development of The administrator is appointed by and report to the court and performs its duties in bankruptcy practice in China accordance with law under supervision of the Growing number of bankruptcy cases creditors’ meeting and the creditor committee, The bankruptcy practice in China has a process which include taking over the property, seals, of development. In the first several years after account books, documents and other data of the Bankruptcy Law came into force in 2007, the 43

CAP9222 II&RR p42-45 Zhong Lun.indd 43 24/06/2020 10:21 Figure 1: Number of bankruptcy cases concluded by China’s courts

18,000 16,000 16,000

14,000 12,000 12,000

10,000

8,000

6,000 4,200 3,749 3,573 3,567 3,373 4,000 2,531 2,100 1,998 2,059 2,000

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: The number of bankruptcy cases in 2015 is not available in the public database Source: Administrative Office of the United States Courts

number of bankruptcy cases had not increased and regions have already given recognition and and even showed a retrogression. However assistance to the enforcement of judgements since 2015, the number of cases accepted and of bankruptcy cases made by China’s courts. concluded by the courts has risen rapidly, which However, so far there are few cases where might be linked to the cleaning up of “zombie Chinese courts have recognised and enforced enterprises” and the policy of “promoting the judgments or rulings of bankruptcy cases structural reforms to build a modern economic made by foreign courts. According to the public system” by the Chinese government. data search, we have only found one case since A series of influential cases have emerged, the Bankruptcy Law came into force in 2007, of which the reorganisation case of Bohai Steel where the Wuhan Intermediate People’s Court Group, involving a debt in total of RMB280bn recognised the ruling on a bankruptcy case (approximately US$40bn at an exchange rate made by Montabaur Court in Germany in 2012. of 7:1), has been the largest bankruptcy case in Given the increasing presence of Chinese China up till now. investment globally, it has become imperative for China to recognise and enforce foreign Development of cross-border bankruptcy rulings on bankruptcy cases. Against this Another development of China’s bankruptcy background, the Supreme People’s Court practice is the increasing number of cross- issued the Minutes of the National Court’s border bankruptcy cases. Currently, the Work Meeting on Bankruptcy Trials on March Bankruptcy Law has only set forth the principle 3, 2018, which requires the courts to actively of cross-border bankruptcy by providing that participate in and promote the negotiation and (1) the bankruptcy proceeding initiated under signing of international treaties on cross-border the Bankruptcy Law shall be binding on the bankruptcy and explore new ways of applying debtor’s property outside China; and (2) for the the principle of reciprocity, so as to promote bankruptcy proceedings conducted in foreign the health and orderly development of courts involving debtor’s property located within international investment. the territory of China, the Chinese court shall review the valid judgement or ruling made by Exploration of mechanism of bankruptcy the foreign court and decide whether or not to for individuals recognise and enforce it in accordance with It has always been a hot topic discussed in international treaties concluded or acceded China’s bankruptcy practice to establish a to by China, or on the basis of the principle of mechanism of bankruptcy for individuals. reciprocity. In China’s judicial practice, there are a In practice, courts in some foreign countries considerable number of cases where the person 44

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involved subjected to enforcement is in a status proceedings. In 2016, the Supreme People’s of no property available for enforcement. For Court set up a National Enterprise Bankruptcy legal entities involved, they can be withdrawn Information Disclosure Platform (“the through bankruptcy liquidation, while a large Platform”), where the trial process information number of enforcements cases involving on bankruptcy cases including announcements, individuals currently have no effective legal documents, debtor information, etc., were withdrawal mechanism, which has caused the published in a unified manner. The Platform accumulation of cases and the consumption of can also be used to convene creditors’ meetings judicial resources. and online auction of property. When hearing On June 22, 2019, the Supreme People’s the bankruptcy case of Jadeite Airlines, the Court, and 12 other China ministries and Shenzhen Intermediate People’s Court auctioned commissions, jointly issued the Plan to two aero-engines through the online auction Accelerate the Improvement of Reform of Exit platform, which was participated by foreign Mechanism of Market Entities, according to companies from the United States and Israel. which the departments involved are requested to promote establishment of a bankruptcy Conclusion system for individuals step by step. With the needs of the Chinese government to Later in 2019, there were cases of individual build and develop a modern economic system, debt liquidation in Zhejiang Province, and local bankruptcy regime has been regarded as a Wenzhou Intermediate People’s Court issued powerful tool in achieving this goal due to its the Implementation Opinions on Centralized crucial role in improving and accelerating Liquidation of Personal Debt (Trial) on August marketing-exit efficiency. It can be expected 13, 2019 to regulate such debt liquidation that the number of bankruptcy cases of individuals. will continue to rise in the future and a The bankruptcy system for individuals is comprehensive bankruptcy regime, which being explored now in practice and it can be includes a domestic and cross-border system expected that the bankruptcy regimes in to cover both corporate entity and individual, China would be expanded to individuals in will be gradually set up. the near future. The current Bankruptcy Law, effective in 2007, has been implemented for more than Improvement of supporting system for 12 years and has lagged behind the growing bankruptcy practice bankruptcy practice in China. On September 7, In order to adapt to the development of China’s 2018, the Standing Committee of the National bankruptcy practice, the supporting system has People’s Congress of China has added the been developed and improved constantly. revision of the Bankruptcy Law into its legislative Guided by the Supreme People’s Court of plan. Currently the revision work is in progress China, some intermediate or high courts in and has not been completed. China have successively set up bankruptcy within the courts to handle bankruptcy cases since 2016. The number of bankruptcy tribunals nationwide has increased from five in Author: early 2016 to 97 by the end of 2017. In January Audry (Hong) Li; Senior Partner 2019, Shenzhen Intermediate People’s Court Zhong Lun Law Firm took the lead in setting up the first special 6/10-11/16-17/F, Two IFC bankruptcy court in China and after that, more 8 Century Avenue bankruptcy courts have been established in Pudong New Area Beijing, Shanghai, Tianjin, Guangzhou, Wenzhou, Shanghai 200120 Chongqing and Hangzhou. P. R. China In addition, the Supreme People’s Court Tel: +86 21 6061 3666 of China is also committed to construction Email: [email protected] of network informatisation for bankruptcy Website: www.zhonglun.com

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CAP9222 II&RR p42-45 Zhong Lun.indd 45 24/06/2020 10:21 India: Liability of directors for ‘wrongful trading’ under the Insolvency & Bankruptcy Code

by Bahram N Vakil, Suharsh Sinha and Ashrita Gulati, AZB & Partners

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was notified by the Indian government in November 2016. The IBC was a major financial sector reform and has been instrumental in resolving a large proportion of non-performing assets, given a fillip to the secondary loan market and led to successful turnaround of several ailing companies. Another benefit has been the improvement in the standards of due to imposition of post facto liabilities on erstwhile directors of the company. In this note we examine the issues surrounding directors’ liability particularly for ‘wrongful trading’ under the IBC.

To provide a brief overview, under IBC, Wrongful trading under creditors or the company itself, may file an Section 66(2) of IBC insolvency application before the National The general duties of directors of solvent Company Law Tribunals (“NCLT”). Once the companies are contained in Section 166 of application is admitted, a restructuring period the Companies Act, 2013, which provides that – the Corporate Insolvency Resolution Process directors must act in good faith in order to (“CIRP”) –commences which is intended to promote the objects of the company for the lead to a resolution within a benefit of its members as a whole, and in the maximum of 330 days. best interests of the company, its employees, The NCLT passes an order for liquidation of the shareholders, the community and for the the company in the event the company is not protection of environment. Though the ambit of resolved within this timeline. On admission of stakeholders to whom directors owe a fiduciary an application for insolvency, the powers of duty under Section 166 of the Companies Act, the are suspended, and an 2013 is cast broadly, it is widely understood insolvency professional assumes control over that the primary duty of directors is towards the affairs of the business. Under the IBC, the shareholders. insolvency professional has a positive obligation The new provision of ‘wrongful trading’ under to examine certain specified transactions under the IBC modifies this position such that the duty IBC, including transactions that give rise to the of directors shifts away liability of directors under IBC. from shareholders and towards creditors of the company once it enters the twilight Directors’ liability under IBC may be zone of insolvency. As per the report of the classified into two broad categories: Bankruptcy Law Reform Committee (which disgorgement-based liability and punitive was instrumental in drafting the IBC), the liability. The punitive liability to a large extent objective behind introducing the provision of codifies the regime against directors for certain wrongful trading under IBC was to accord actions, including defrauding creditors, asset protection to creditors who may suffer from stripping and falsification of books of accounts of information asymmetry while dealing with a the company. These actions require an element distressed company. of mens rea (or intent) to be proved so as to Wrongful trading has been defined under be applicable and liability may be more easily Section 66(2) of IBC. Under this provision, on an determined by a certain set of objective facts. application made by an insolvency professional However, it is the interpretation of the a director is liable to make contributions to disgorgement-based liability which relates to the assets of the company and the NCLT may the ‘wrongful trading’ which remains ambiguous disgorge such amounts from the director’s under Indian law. personal assets if: 46

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a) the director knew or ought to have known that of the company, whereas Section 66(2) of IBC there was no reasonable prospect of avoiding applies when there was no reasonable prospect the commencement of a CIRP against the of avoiding the commencement of a CIRP company; and against the company. It is worth noting that b) the director did not exercise due diligence in under IBC, a CIRP may be commenced on a minimising the potential loss to the creditors mere payment default of INR10m (approximately of the company. US$132,000) – which is a comparatively low Note, that a director is said to have exercised threshold especially for large companies. sufficient due diligence if such diligence was There may be sound logic for diluting the reasonably expected of a person carrying out high trigger point of an insolvent liquidation the same functions as the director. (i.e. the UK standard) to a lower level of a The wrongful trading provision has been payment default (i.e. the IBC standard) so borrowed from the UK Insolvency Act, 1986 as to incentivise directors to take corrective (“1986 UK Act”). Criminal liability for directors action at the first onset of any financial for defrauding creditors existed in the UK even distress rather than waiting till a time where prior to the 1986 UK Act. However, the 1986 saving the company as a going concern is no UK Act introduced a new standard to accord longer commercially viable. At the same time, compensation-based remedy to those creditors advancing the threshold at which directors need who suffered a loss due to the mismanagement to take corrective action increases the prospect of the company in the zone of insolvency – even of personal liability. if such mismanagement by the directors of the Given this onerous standard, the question company fell short of the level of criminality. is what steps directors can take to mitigate The wrongful trading provision enabled potential losses to creditors. Section 66(2) contribution orders against a culpable director creates a safe harbour for directors’ actions to be made without proof of actual dishonesty taken to mitigate losses with sufficient due and without a criminal standard of proof. For diligence. The bankruptcy court is entrusted instance, a company would be trading wrongfully with the task of deciding if the mitigating actions if it incurred liabilities with no reasonable taken by the directors meet the standard prospect of meeting them or when a company expected of a hypothetical person carrying continued trading even when the value of its out the same functions as are carried out by equity was heavily eroded. such director. Therefore, a directors’ liability will depend Scope for liability for directors on the subjective assessment of the NCLT as to The bankruptcy courts have wide discretion in whether their actions meet the “due diligence” imposing personal liability on directors found standard. As a result, directors may not know to be guilty of wrongful trading. It is worth a priori if their actions will meet the scrutiny of mentioning that Section 66(2) of IBC does not the judiciary. distinguish between executive, independent or UK case law considers several actions on the shadow directors and applies uniformly to all part of the directors as being reasonable and types of directors of a company. Therefore, this prudent so as to meet the due diligence test provision would be of greater concern to non- under the safe harbour. The takeaway seems to executive or nominee directors who typically be that on one end of the spectrum, voluntarily play a more passive role in the affairs and filing for an administration procedure under operations of the company. the 1986 UK Act is certainly a safe and legally The most vexed issue under Section 66(2) tenable course of action. Drawing an analogy, of the IBC is the threshold at which courts in the absence of judicial precedents or any will determine the ‘zone of insolvency’ to have further guidance from IBC, the safest option for commenced, thereby triggering the shift in directors facing an imminent payment default directors’ duties. The wrongful trading section of by a company also seems to be to voluntarily file the 1986 UK Act applies only when the directors for CIRP. should have known that there was no reasonable However, a voluntary CIRP filing raises two prospect of avoiding an insolvent liquidation issues. The first issue is a procedural one. By 47

CAP9222 II&RR p46-49 AZB Partners.indd 47 24/06/2020 10:22 way of an amendment to Section 10 of IBC, in Means of mitigating liability effect from June 6, 2018, voluntary filing for of directors CIRP of a company must be supported by a Directors need to maintain a fine balance special resolution passed by the shareholders. in preserving value in a sound business In companies where the directors also happen while avoiding personal liability for wrongful to be the majority shareholders, obtaining trading. It is not an easy choice, especially a special resolution may not be difficult. for companies that are clearly solvent but However, where this is not the case, the could potentially be dragged into a CIRP directors must satisfy the shareholders that a owing to temporary liquidity issues. In the voluntary bankruptcy filing is beneficial to the absence of any clarity on how the concept shareholders as well. of wrongful trading will play out in Indian In practice, this may be difficult to achieve bankruptcy courts, boards must proactively since during the CIRP of a company, there is devise strategies to reduce the scope no legal requirement to make any payments for liability. to equity shareholders unless they are in the Some of the steps that directors may money. Moreover, during the liquidation of consider are: a company, equity shareholders are at the a) negotiate all debt contracts and material bottom of the liquidation waterfall mechanism supply contracts such that any payment in the order of priority. Therefore, a situation default entitles the counterparty to initiate may arise where a director, in satisfaction of an insolvency resolution process only after her fiduciary duties towards the creditors of affording the company an adequately long a company in the zone of insolvency, is notice period to consider all viable options, convinced of the benefits of voluntarily filing to help directors buy time to consider their for insolvency under Section 10 of IBC but options carefully; fails to convince the equity shareholders of b) put in place processes in consultation the company. with the company’s auditors to ensure The second issue is more commercial in availability of adequate and timely financial nature. Even if the directors can overcome information about the company; the threshold requirement of the special c) regularly discuss and review the cash flows resolution by shareholders of the company, of the company and closely monitor all Section 66(2) will nonetheless put directors actual and contingent claims against the in the position of making a difficult choice company; between filing for CIRP against the company at d) review the director and officer insurance the first signs of distress and thereby avoiding policies to ensure that they cover any personal liability; and making a genuine and liability arising as a result of wrongful good faith attempt to remedy the default and trading; continue trading. Directors fearing wrongful e) engage independent and reputed merchant trading liability may act in a risk-averse bankers to formally opine on the business manner and may be tempted to file for a CIRP prospects and solvency of a company in hastily instead of endeavouring to weather the near future at the earliest onset of the temporary financial difficulty and preserve distress; and long-term value. This raises a possibility of f) obtain a legal opinion from a reputed law premature CIRPs against fundamentally sound firm to ensure that the mitigating steps businesses, causing disruption to consumers, taken at the onset of a potential CIRP meet suppliers and employees. the test of “due diligence” under Section Further, if any action by the directors with 66(2) of IBC. a view towards protecting creditors’ interests turns out to be precipitous or without adequate Conclusion basis, shareholders could hold the directors IBC has radically altered the insolvency law liable under Section 166 of the Companies landscape in India and has drastically reduced Act, 2013. the scope for by directors and 48

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promoters. However, mandating directors Authors: to take creditor-focused action at the early Bahram N Vakil, Founding Partner stages of a financial difficulty could create Email: [email protected] pitfalls for professional managers and directors who may not have any fraudulent Suharsh Sinha, Partner or criminal intent. Additionally, the added Email: [email protected] requirement of shareholders’ special resolution prior to voluntarily filing for Ashrita Gulati, Associate insolvency could create barriers to those Email: [email protected] directors that genuinely believe such voluntary filing is the best way forward for AZB & Partners the company. AZB House Till such time as the dust settles on the Peninsula Corporate Park law around wrongful trading, directors Ganpatrao Kadam Marg will be well advised to take all possible Lower Parel steps to eliminate personal liability without Mumbai - 400 013, India compromising their fiduciary duties towards Tel: +91 22 4072 9999 shareholders of the company. Website: www.azbpartners.com/

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CAP9222 II&RR p46-49 AZB Partners.indd 49 24/06/2020 10:22 Old and new issues in cross-border insolvency proceedings in Japan

by Koji Takeuchi,* Sakura Kyodo Law Offices

The subject matter of this report concerns a group of cases before Tokyo District Court (“United Ocean Case”), involving various entities either as debtor or non-debtor in Singapore, Panama and the British Virgin Islands, in ship owning and maritime transport business, together with their 100% controlling individual shareholder.1 The individual debtor involved in this cross-border insolvency is a national of the Republic of India, who has places of living in Singapore and in Japan (“Individual Debtor”).

The individual debtor embarked upon his ship separately and exclusively made a loan to owning business in or around August 1998, each of the Vessel Owner Companies. The and over some 17 years of endeavours in the delivery of the loan proceeds and repayment business had come to own a group of companies were made through a bank account held with owning vessels for chartering in maritime the Lender Banks. transport (“Individual Debtor”). The Vessel Owner Companies each entered These group companies are organised as into time charter agreements solely with follows: one leading Japanese logistics enterprise 1. one Japanese company engaged in transacting worldwide on various forms of transaction facility services by providing marine transport (“Time Charterer”). The offices and secretarial services for loan terms of these time chartering agreements, transactions, loan repayments, ship building though, were never fully negotiated or agreed, contracts, and chartering agreement (“Japan or executed, before the closing date on the Company”); loans from the Lender Banks. The execution 2. one Singapore company engaged in operating of time chartering agreements usually took all vessels including navigating and manning place post-closing. Lender Banks respectively services and providing all provisions for sea secured their loan repayment rights by a transport business for the group vessels mortgage in the vessel, a charge in the Vessel (“Vessel Operating Company”); Owner Company, and a in the 3. one British Virgin Islands financing company time charter agreement. engaged in cash holding (“BVI Financing Additionally, the lead bank (“Lead Bank”) Company”); alone among the Lender Banks, obtained a 4. one Indian company supplying workers to the personal guarantee of the Individual Debtor on Vessel Operating Company; and all its bank debts. This personal guarantee was 5. 40 vessel owner companies established in secured by a security interest, i.e. a pledge, in Singapore and Panama ( “Vessel Owner all of the shares held by the Individual Debtor in Companies), such Vessel Owner Companies respective debtor Vessel Owner Companies. Any are each organised as single asset entities shares in the Non-Debtor Companies, such as owning one vessel registered in their Vessel Operating Company, and BVI Financing incorporation territory, and owing money Company, were free of pledge. There were given liabilities to one lending bank and owing no cross-guarantees among the Vessel Owner fees and expenses to the Vessel Operating Companies to the Bank Lenders. Company.2 The relevant key terms in the uniform loan These Vessel Owner Companies were agreements are those provisions setting forth: financed in their ship building contracts with 1. conditions precedent that the borrower Japanese builders by Japanese mega banks furnish a drawdown notice before closing, (“Lender Banks”). Each of the Lender Banks and a time charter agreement on closing; 50

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Figure 1: Parties and transactions among or with bankruptcy debtor group entities

Territory Japan British Virgin Switzerland SingaporePanama India Islands

International (41 separate involuntary (recognition sought, (no recognition (no recogntion (no recogntion (no recognition bankruptcy bankrutpcy proceedings are and given); sought), sought) sought) sought), (avoidance cases opened; against Sharma and (appealed to High (Lenders' legal action by Individual 40 Debtor companies. No Court); (Appeal action and bankruptcy trustee consolidation) dismissed) enforcement to against local satisfaction "beneficiary"), (local against Swiss creditor action against entities) the trustee)

Group owner Debtor: Vipan K. Sharma (individual 100% shareholder) of Indian Nationality

Group (immigration (non-resident) (tax permant (non-resident) (of Indian companies status: resident) nationality) permanent Swiss bank resident) account in his name 100% share holding 100% share holding 100% share holding 100% share holding 100% share holding

Loan Guarantee Non-debtor Swiss bank Non-debtor under Japan law Financing Company accounts Operation Managing (secured by shares Company in ship owners) (Sharma is replaced Operation Managing by Individual trustee Agreement Panama: 12 Debtor Relations taking directorship on record) Debtor Vessel Facilitating Company SG: 28 Debtor Vessel Owner Non-Debtor Owner Companies Companies Personnel Company

40 separate Loans (Sharma is replaced (no change in (ship building finance) by trustee of Debtor directorship) under Japan law companies taking directorship on (secured by ship record) mortgage, and time charter payment) (set-off against time charter payment receiving account) (payable over 5 to 20 years) (no default in repayment has occurred) (acceleration for breach of covenants)

Lenders Japanese Mega Bank Lenders (Mitsubishi, Mizuho, Resona) each as non-joint lender.

(petitioners) (where accounts for receiving all hire and other charter payments are held and used in repayments of loans)

Ship builder Ship building Japanese Ship agreements under Builders Japan law

Charterer Japanese Time Charter Agreements Charterer (NYK) under Japan law

2. covenants that the borrower keep unchanged borrower did not provide in any case a copy of during the life of the loan the specific charter the executed time charter agreement on the terms as provided in the loan agreement; and closing, namely the Lender Banks all waived 3. acceleration of repayments, either the condition precedent and supplied the automatically or upon advance notice, loan funds on the closing date; with the key depending upon the nature of the breach term (2), the time charter agreements were in question. executed subsequent to the closing date, but In reality, with regard to the key term (1), some deviated from the loan agreements, the borrowers did not in most cases provide more favourable or less favourable, but the the drawdown notice as required, and the borrowers delivered a copy counterfeit bearing 51

CAP9222 II&RR p50-55 Sakura.indd 51 24/06/2020 10:23 the untrue and should-be terms, after repeated by the court ordering commencement of the requests by the Lender Banks. However, it was proceeding is required.8 But, at the same time, fiercely disputed whether the Lender Banks an involuntary petition does not secure the were aware or should have been aware of such debtor rights of his continuing control of assets deviation, or even the counterfeit nature of the or business. Before a formal adjudication submitted copy charter agreements, around the of commencement, the court in which the presumption affecting knowledge arising from involuntary petition is pending may issue several the fact that the borrowers’ account with the provisional orders. Lender Banks showed each monthly In case of straight bankruptcy, the court may in-coming hires. order provisional orders staying, specifically or With regard to key term (3) (acceleration), generally, creditor actions, including execution in reality, (a) the borrowers have been meeting on judgement, or attachments, their repayment obligations fully and timely on-going litigation, and generally tax on principal or interest, and hence no default; enforcement, and prohibiting the debtor from and (b) no bankruptcy event has occurred; but disposing of his assets.9 In case of corporate (c) the Lender Banks, based upon their theory reorganisation, stay orders may expand further of breach of covenant of the charter term, and to order against pending straight bankruptcy the act of counterfeiting, rather elected to take proceedings, enforcement of security interest, immediate acceleration by notice on November and specific tax enforcement, all in addition 10, 2015 (“Acceleration Notice”), rather than to the broad stay orders against non-secured seeking rectification, of which the validity came creditor actions.10 to be fiercely disputed. Further, in a harsh and drastic action, the The bird’s eye description of the foregoing court may order preservative management factual statement concerning the United Ocean order replacing the existing management Case is reproduced in Figure 1. with a court appointed preservative trustee.11 The preservative order replacing the existing Involuntary petitions management is critical and can cause Involuntary petition is provided equally in devastating effects that are irreparable, if made. Japan’s three independent bankruptcy laws, This devastation completes nominally when the Bankruptcy Law,3 Corporate Reorganization court issues commencement order. Law4 and Civil Rehabilitation Law.5 Under the Bankruptcy Law, an involuntary Remedies lender banks petition (for straight bankruptcy) to a division petitioned for and responsive of the court is permissible by only one creditor, even fully secured (but with a split in opinions), orders of the court when his claim is proven, and where the debtor The Lender Banks simultaneously but is insolvent, or has ceased payment, or in case separately filed an involuntary reorganisation of a corporate debtor, if it has more debts than bankruptcy petition against each of the 40 Vessel assets (“Grounds for Bankruptcy Petition”).6 Owner Companies and the Japanese Company Under the Corporate Reorganization with the Tokyo District Court, Civil Division Law, an involuntary petition (for corporate No.8, on November 10, 2015. The following day, reorganisation) to another division of the court November 11, 2015, the Lead Bank filed an is permissible by only one creditor, having a involuntary liquidation bankruptcy petition for claim in the amount of one-tenth or more of straight bankruptcy against the Individual Debtor the debtor’s paid-in capital, even fully secured with the Tokyo District Court, Civil Division No. (but with a split in opinions), when his claim is 20. The theory employed is simple: because of proven, and where the existence of the Grounds the acceleration, all debtors, whether principal for Bankruptcy Petition as to the debtor is or secondary are insolvent. proven or suspected to exist.7 However, the filing On November 11, 2015, the day after the of an involuntary petition does not commence filing date, without any notice to the Vessel a bankruptcy or corporate reorganisation Owner Companies, the Japanese Company, proceeding. A separate formal adjudication or the Individual Debtor, both Divisions issued 52

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bankruptcy preservative orders against the Supreme Court by the Vessel Owner Companies debtors, containing those provisions aforesaid. and the Individual Debtor. These orders combined to expel the Individual Debtor on November 11, 2015 from his group Post commencement issues enterprise, namely, the management of the First, the court in its commencement orders did Vessel Owner Companies and the Japanese not take time to differentiate their proceedings Company, and of his own property, including, between main or non-main even though their most importantly, his shares in his group cases involved abundant international elements. companies. Since the Japanese Law on Recognition and The enforcement process involved other Assistance to Foreign International Insolvency,12 elements as follows: the preservative trustee enacted following the principles of UNCITRAL in reorganisation on November 11, 2015, came Model Law, does differentiate main from non- to be appointed as director of the Vessel Owner main proceedings, the court should have been Companies replacing the Individual Debtor by better advised to identify whether it acted in enforcement of the Lead Bank’s security interest main or non-main proceedings. Such intended in the shares; it is known and undisputed that differentiation would have been helpful to the nominee shareholder entity for the Lead foreign countries. Bank entered into a contract in writing with the Second, the salient point of interest is preservative trustee for reimbursement of costs that the reorganisation trustee for the Vessel in acting as the nominee shareholder; and the Owner Companies never filed an application for preservative trustee appeared surprisingly in recognition in any foreign jurisdiction, including person in Singapore to demonstrate his control Singapore and Panama, and yet he acquiesced as director of the Vessel Owner Companies on in becoming director of the Vessel Owner the very same date of November 11, 2015, and Companies. Likewise, the straight bankruptcy as such ordained there to indirectly control trustee did not file an application for recognition the affairs of the non-debtor Vessel Operating in Singapore and Panama. And yet, the straight Company. bankruptcy trustee, by exercising the voting The power change in the management of rights in the shares in the non-debtor Vessel the Vessel Operating Company took on an Operating Company (incorporated in Singapore) additional layer when the bankruptcy trustee for and in the non-debtor BVI Finance Company the Individual Debtor exercised trustee’s power (incorporated in BVI), was appointed as director to vote on shares and appointed himself as its and managed and controlled these entities. director. He had not filed an application for recognition Similar power change was effected as to the in India, nor in Switzerland where the Individual BVI Financing Company when the bankruptcy Debtor kept a bank account in his name with the trustee became director on April 1, 2016 to expel Lead Bank’s affiliate, and where the bank’s main the Individual Debtor. This action of expulsion office was located with whose Singapore branch in BVI took place before the bankruptcy of the the BVI Finance Company had an account. The Individual Debtor was recognised in BVI on only exception is the straight bankruptcy trustee’s May 26, 2016, subject to appeal and stay for subsequent filing for recognition in BVI (and in lack of due notice, though this appeal was later Hong Kong where no known assets are located).13 dismissed. Third, the Lender Banks initiated, after Also, as can be easily speculated, one will the commencement of straight bankruptcy of understand that each involuntary petition the Individual Debtor, several in this case was preceded by an informal procedures in Switzerland against all the bank customary counselling off record with the accounts aforesaid, going after not only the court. In any event, the commencement order Individual Debtor’s named personal account, but in the involuntary reorganisation was issued also the BVI Finance Company’s account, claiming on December 31, 2015, and in the involuntary the latter account is just part of the Individual straight bankruptcy on January 4, 2016. All these Debtor’s property because the BVI Finance preservative orders and commencement orders Company is owned 100% by him, not necessarily survived the appeals to the High Court and the arguing the application of the alter-ego theory.14 53

CAP9222 II&RR p50-55 Sakura.indd 53 24/06/2020 10:23 The Individual Debtor disputed these Bankruptcy Law. Avoidance action in an procedures by asserting automatic stay international bankruptcy context has been and of such post-bankruptcy creditor actions is still a big item to be researched and studied. against the Individual Debtor because of the Here, it seems that without prior recognition, worldwide effect of the Japanese bankruptcy,15 such a claim may not stand per se. emphatically more so where the acting creditors in Switzerland are Japanese creditors. Accounting and tax issues The bankruptcy trustee, while aware of these The Individual Debtor’s estate has been procedures, took no action to carry into effect threatened by the Japanese tax authorities with the automatic stay there, and even consented to suspected tax evasion of Japanese Income Tax the Lender Banks’ actions by agreeing to some for undistributed company income of the group sharing of the proceeds of such actions. The companies withheld, which if proven would Individual Debtor, after some objection, decided exceed ¥50bn. Most of such income was related for insufficient funds to give up this Swiss battle. to these companies’ accounting practice in In lieu of the Swiss battle, he filed an action US dollars of their corporate affairs including in Japan to seek an injunctive judgement their Japanese yen loans in particular from the against the Lender Banks prohibiting them from Lender Banks, and emerged as the deemed pursuing the creditor action in Switzerland.16 exchange income for exchange rate Naturally, the Swiss collection proceedings fluctuation. kept going in the absence of the Individual This threat was critical because such tax Debtor’s opposition there, and the Lender Banks claims enjoy super priority as administrative successfully obtained a money judgement and claims or priority as preferred claims. Not much enforced on it to their satisfaction. objection was raised except residency issue The Japanese court dismissed the Individual for the Individual Debtor. But, new arguments Debtor’s injunction complaint, simply saying the were presented that (1) if these companies’ bankruptcy debtor has no right to seek such an location of the centre of main interests for injunction. The Individual Debtor filed a plenary purposes of international insolvency are in action post-bankruptcy for damages against Japan, then the formal accounting currency the Lead Bank, alleging the filing of both the would be Japanese yen, producing no exchange involuntary petitions were tortious, in breach of income or loss; (2) the company reorganisation good faith, and fraudulent, arguing in essence trustee prepared all financial papers required that the alleged acceleration was unlawful.17 under the Reorganization Law in Japanese yen The court here did not agree with the defendant currency, which formed the basis of the plan; as to res judicata, but dismissed the claim and (3) these companies engaged in crucial reasoning the acceleration was justifiable under positive activities in Japan such as ship building, all circumstances. financing, and time chartering contracts, which Fourth, it is theoretically of particular would recognise their permanent establishment attention that all Lender Banks and courts here, and their possible income Japan sourced, concerned here take an approach that where thus subjecting these companies directly to a debtor in bankruptcy owns 100% shares in Japan foreign company taxation rules under a corporation, then the debtor’s bankruptcy the Corporate Tax Law, without resorting to trustee may merely thereby exercise direct 18 control and dominance of each asset of the Japanese BEPS measures. issuer corporation, i.e. reverse corporate veil These new voices persuaded the tax piercing, without a separate intervention of a authorities to release the bankruptcy estate of new bankruptcy for the issuer or its liquidation, huge tax liabilities. Similar accounting and tax and perhaps disregarding the elements of the issues may arise in other jurisdictions, and the alter ego. United Ocean Case could present some solution. Fifth, the bankruptcy trustee of the Individual Debtor filed several plenary actions of avoidance Wrap Up in India where he has not filed application The United Ocean Case has given rise to old for recognition by resorting to the Japanese issues, such as notice and ex-parte issues, 54

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and new issues, discussed above.19 It is a fair 10 Corporate Reorganization Law sections 24, statement that Japan has not seriously, or at 25, and 28. most insufficiently, tackled these old issues, 11 Bankruptcy Law section 91, Corporate whereupon this agony of new issues has Reorganization Law section 30. befallen. Whether lawyers here by learning 12 Law No.129 of 2000. more can bring themselves to a new norm and 13 Claim No. BVIHC (COM), 62 of 2016, In the practice is to be seen. matter of part XIX of the Insolvency Act of 2003, and In the matter of Sharma Vipan Notes: Kumar (a bankrupt). * The author represented and represents 14 For example, initial action of sequestration the debtors in the involuntary bankruptcy order by the Geneva Debt Enforcement Office proceedings that are made the subject of this in case 15 070 553 N, dated December 4, 2015. report. The author has tried to be objective 15 Bankruptcy Law sections 34 and 42. in making factual statements. The author 16 Vipan Kumar Sharma v. Mitsubishi UFJ et al., has refrained from expressing the author’s Tokyo District Court Case No. (wa) 21431 personal legal opinion without referring to of 2017. different or confronting views or practice, 17 Vipan Kumar Sharma v. Mitsubishi UFJ, Tokyo if any. Failure to comply with these self- District Court Case No. (wa) 10271 of 2016. ordained rules is the author’s responsibility. 18 The new argument was obviously offered by the Individual Debtor. 1 Tokyo District Court, Case No. (hu) 9711 of 19 The pattern emerged in the United Ocean 2015; Tokyo District Court, Cases No. (mi) 3 Case, formulating the lack of notice, the lack through 41 of 2015. of recognition, the taking of direct foreign 2 The following is a short list of several of these directorship, and the reverse corporate veil Vessel Owner Companies totalling 40 or more piercing would be remembered as “United in number: Rams Wood Chip Carrier S.A., Ocean Great Shortcuts.” Rams Shipping S.A., Rams Challenge Shipping Pte. Ltd, Rams (PCTC) Pte. Ltd., United (PCTC) Pte. Ltd., etc.; as non-debtors, United Ocean Author: Ship Management (SG) Pte.,Ltd, and United Koji Takeuchi, Attorney at law Ocean Ship Management (BVI) Limited. Sakura Kyodo Law Offices 3 Law No.75 of 2004. Yotsuya Tower 8th Floor 4 Law No.154 of 2002. 6-1, Yotsuya 4-chome 5 Law No.225 of 1999. Shinjuku-ku 6 Bankruptcy Law sections 15, 16 and 18. Tokyo 7 Corporate Reorganization Law section 17. Japan 8 Bankruptcy Law section 30, Corporate Tel: +81 3 6385 1120 Reorganization Law section 41. Email: [email protected] 9 Bankruptcy Law sections 24, 25, and 28. Website: www.sakuralaw.gr.jp/index.htm

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by Anthony Idigbe, PUNUKA Attorneys & Solicitors

In Nigeria, there is no specific Insolvency Act. There is no definition of who an is, and there is no statutory framework for the proper regulation of the profession. The Companies and Allied Matters Act (CAMA) enacted as a Decree in 1990 provides the general legal framework for corporate asset recovery or realisation. Whilst the provisions of CAMA have been inadequate in addressing issues bothering on cross-border insolvency, netting, co-operation between domestic and foreign courts, coordination of concurrent proceedings or communication of information in insolvency etc, there is currently a new bill for the amendment of CAMA which has been passed by the National Assembly, but President Buhari withheld assent to the same leading to a revision and return to the National Assembly for further consideration. There is also a new Investments & Securities Bill submitted to the National Assembly by the Nigerian SEC which addresses issues in relation to insolvency rules and netting for financial contracts. Further the Bankruptcy and Insolvency Bill passed by the National Assembly a couple of years ago has not received presidential assent to have force of law. With the advent of the COVID-19 global pandemic, general tnsolvency and reorganisation rules need, as a matter of urgency, to be relaxed in order to provide a conducive framework for business rescue and foreign investments which would stimulate the Nigerian economy. The passage and implementation of these new Bills would also provide necessary certainty for the legal framework for insolvency proceedings in Nigeria.

The UK 1948 Companies Act strongly influences There is no specific legislation in Nigeria the legal framework for corporate insolvency for the recognition of foreign insolvency found in a few parts of the Companies and proceedings, orders, or judgments as well as Allied Matters Act (CAMA), a statute drafted by for co-operation between domestic and foreign the Law Reform Commission and enacted as courts, coordination of concurrent proceedings a Decree in 1990. The Decree became an Act or communication of information. Nigeria only under the civilian regime and was consolidated has a limited framework for recognition and in the 2004 Laws of the Federation of Nigeria. enforcement of an international monetary The Act makes provisions for the general legal judgment which must be final and conclusive, framework for asset recovery or realisation. unchallenged on appeal and conditioned on It recognises three broad types of insolvency reciprocity. The legislative framework creates procedures, to wit; Receivership, Liquidation/ a dual regime for Commonwealth countries Winding-up and Arrangement and Compromises and other countries. Foreign insolvency orders (“A & C”). would scarcely fulfil such requirements while The insolvency procedures recognised by foreign judgments are recognised and enforced the Act are, in that sense, either collective or through a process of obtaining leave of court non-collective and undertaken by Insolvency and registration of the decision. Practitioners (“IP”). In terms of personal insolvency law, there is the Bankruptcy Act Evaluating the process of 1979 consolidated in the 2004 Laws of the The Nigerian insolvency system is unduly Federation of Nigeria, but this law has not had creditor friendly, and liquidation focused. There much impact because of its requirement for is no general business rescue law save for judgment and execution levied as a condition the scheme of arrangement provisions under for proof of bankruptcy. Also, the ineffective CAMA, which provides a window for encouraging discharge provisions render bankruptcy an business recovery. However, the jurisprudence unattractive option for debtors. has not taken up the challenge primarily due 56

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to the conflicting requirements on approval extent that it is conceived and functions under majority of 75% under CAMA and 90% under the bilateral court proceedings and a special law, Investment and Securities Act (ISA) for a buyout it is not truly a formal collective procedure. of dissenting minority and the approach of the Also, whilst AMCON was meant to be a Securities and Exchange Commission (SEC) to temporary solution designed to last for only the interpretation of those provisions. seven years for the purchase of eligible bank CAMA precludes the appointment of a asset – toxic assets which the regulator – provisional liquidator before the advertisement Central Bank of Nigeria (CBN) or the bank of a winding-up petition. Also, the catastrophic itself wants out of their books, it has now decision of the Supreme Court of Nigeria in become a draconian albatross that has refused FMBN V NDIC [1999] 2 NWLR pt 591, 333, that to phase out. The NDIC Act, on the other hand, only actions or proceedings pending or instituted was amended to enable the appointment of in the Federal High Court (the court that has a liquidator for a failed or failing bank or jurisdiction in bankruptcy cases) is prohibited financial institution without the need to go by the stay provisions of s.417 of CAMA brought through the filing and advertisement of a uncertainty to the law around the availability winding-up petition. of moratorium. In this regard, the mere withdrawal of the The decision has effectively circumscribed banking institution’s operational licence by the automatic stay regime by the limitation the CBN Governor suffices to enable NDIC on the bankruptcy court’s inherent power to to be appointed liquidator. However, banking bind everyone by a stay order on the threat regulators have since abandoned the use of of contempt. The absence of automatic stay the appointment of the liquidator as a tool for encourages a race to the bottom as both liquidation or restructuring of banks. They now creditors and debtors’ resort to various antics to prefer the creation of bridge banks as it enables either gain priority or moratorium. There is no the bank to continue business the next business effective moratorium even when the company is day after a weekend as a new bank. in liquidation. Creditors have also found a haven In the end, the popular view is that the in filing for winding-up and obtaining a Mareva AMCON Act is not an insolvency regime but injunction (freezing order) when the company legislation aimed at protecting banks from has not been found insolvent, and the petitioner collapse. It cannot, therefore, be a permanent is not a security holder but ends up exercising solution in that it only purports to give respite security rights over assets of the company even to the banks but leaves the debtors entirely at before judgment or winding up order. the mercy of AMCON with its draconian powers. Notwithstanding the above, there is the The need for a general insolvency and business existence of limited rescue framework in rescue law that would render AMCON’s the context of regulated industries such as intervention unnecessary is thus imperative. banking and telecommunications through the Government’s enactment of AMCON Act, NDIC Act and NCC Act, establishing the Asset Government’s response Management Corporation of Nigeria (AMCON), to Covid-19 Nigerian Deposit Insurance Commission (NDIC) After a case of Covid-19 was recorded in Lagos and the Nigerian Communications Commission State, Nigeria (the economic and commercial (NCC) respectively. centre of the Federation) on 27 February In the case of the reform of the AMCON 2020, the Federal Government of Nigeria Act introduced in 2015,1 the legislation allows through the Central Bank of Nigeria (CBN) AMCON to essentially drive an administrative announced key economic and fiscal policies/ receivership of the affairs of a recalcitrant measures calculated at minimising insolvency perennial debtor company where this becomes consequences caused by the pandemic and necessary where the business is one that is government lockdown. These include a one- critically strategic or or to save year moratorium on all principal repayments; employees or other such vital objectives of the interest rate reduction on intervention facilities Federal Government of Nigeria: however, to the from 9% to 5%; grant of a three-month 57

CAP9222 II&RR p56-60 PUNUKA.indd 57 24/06/2020 10:25 repayment moratorium for all government- It is thus arguable that the Nigerian funded loans including government funded- terminology relating to bankruptcy refers to loans issued by the Bank of Industry, Bank of personal or individual insolvency status while Agriculture and the Nigeria Export Import Bank; insolvency refers to corporate insolvency. The and regulatory forbearance to Deposit Money name of the Bill is somewhat misleading as Banks for the restructuring of loans for affected the scope is restricted since virtually all its businesses and households among other provisions deal with individual and not corporate additional incentives to encourage the extension insolvency. It is, therefore, neither general of longer-tenured credit facilities. corporate insolvency nor business recovery law. The House of Representatives also passed It merely introduces a few personal bankruptcy an Emergency Economic Stimulus Bill 2020 law provisions. There is no indication that it has (the Bill) on March 24, 2020 to provide a broader received presidential assent till date. framework for the management of Covid-19- induced financial distress. The Bill which has The CAC initiative neither been passed by the Senate nor assented About 30 years down the line, CAMA has to by the President, seeks to introduce a new recently been the subject of an arguably detailed 180-day moratorium on mortgage obligations review at the instance of the Corporate Affairs of Nigerians under the National Housing Fund Commission (CAC) set up to administer the amongst other provisions. The passage of the Act. The CAC proposed a Bill for amendment Bill as well as the measures mentioned above of CAMA, with new provisions incorporating are urgently welcome when considered in the some aspects of insolvency such as Company light of existing legislative insolvency framework, Voluntary Arrangements, Administration and the continued lockdown of the federal high court registration of insolvency practitioners including (being the insolvency court) and the increased the recognition of the Business Recovery & clamour for urgent legislative reform into a more Insolvency Practitioners Association of Nigeria reorganisation friendly framework. (BRIPAN) as a certifying professional body, amongst others. Legislative reform efforts Apparently, the above rides on some aspects The past decade has seen the Business of the original recommendations made by Recovery and Insolvency Practitioners BRIPAN in 2011, however, they fail to take on Association of Nigeria (BRIPAN) champion board some other recommendations made the growth of insolvency and business rescue by PEBEC in 2017-18 based on more recent practice in Nigeria through training, advocacy work geared towards achieving ease of doing and law reform. This commitment resulted business in Nigeria. This includes for instance in the drafting of a new, business rescue and the conspicuous omission of a framework of cross-border insolvency friendly Insolvency Bill rules for cross-border insolvency. for resolution of both personal and corporate The Bill has had a bit of back and forth history insolvency following stakeholders’ consultation from the Executive such that by November sponsored by UK Department for International 2019, the President refused to give assent and Development (DFID). returned the same to the Nigerian Parliament Under the current political dispensation, to address concerns it raised particularly the 9th session of the National Assembly saw surrounding certain approval powers of the a private member’s Bill to reform only the Supervising Minister of Trade and Industry in Bankruptcy Act, 1979, but the Bankruptcy and relation to companies matters. Insolvency Bill (“BIB”) is yet to pass into law. The The Bill was resent in April 2020 to the BIB was proposed to repeal the Bankruptcy Act Senate and awaits a vote on the revisions of 1979 (“BA”). It seeks to make provision for made before it returns for Presidential assent. individual insolvency, some aspects of corporate However, it is uncertain how quickly this would insolvency, rehabilitation of the insolvent debtor, be done owing to the disruptive effect of the creation of the office of supervisor of insolvency, pandemic on the effective discharge of the cross-border insolvency recognition and functions of the Nigerian Legislature. Pressure enforcement as well as other connected matters. is, however, being mounted by industry players, 58

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based on a recent assessment of the Nigerian either out of court – where it makes a proposal Government’s economic and legislative to its creditors which would be implemented response to the effect of the pandemic on by a Nominee but without the advantage of a distressed businesses.2 moratorium protection – or in the context of The Bill has arguably earned the partial an Administration, or Winding Up proceedings, support of the Presidential Ease of Business where it can for all intent and purpose propose Committee (PEBEC) as a bridge measure in the or agree on a scheme of arrangement with its area of insolvency and business restructuring as creditors or the Insolvency Office Holder. PEBEC is still considering an agenda of reform In the current CAMA Bill, whilst there is a through commercial omnibus laws because requirement of 28 days within which a Nominee, of the difficulty of passing or revising several Administrator or liquidator would submit business related laws through the National a report as to whether a creditors meeting Assembly. Consequently, the new Bill was should be summoned to approve a voluntary updated by CAC with some assistance from the arrangement, an Administrator, on the other World Bank on some of the identified business hand, has 30 days to make a proposal to indicators for ease of doing business agreed. creditors but 60 days to submit a comprehensive Thus, in addition to existing provisions statement of the schedule of assets of the on Receivership (Chapter 19), Schemes of company to the person who appointed him. Arrangements and Winding Up (Chapters 20 to Also, under the new CAMA Bill, the effect of 25, and 27), some efforts are made to nuance administration is the dismissal of any winding- the insolvency framework by adopting a chapter up petition and vacation of any receiver-manager 17 (Company Voluntary Arrangement), 18 appointed by secured creditors or holders of (Administration), 26 (Regulation of Insolvency . There is also an automatic Professionals) and 28 (Basic provisions on moratorium on enforcement of any security or Netting). However, all the reforms remained repossession of goods and premises. local and territorial in the absence of adoption of The netting provisions of the new CAMA any cross-border insolvency framework. Bill also seek to create a framework which Though there is no standalone insolvency would allow an Insolvency Holder to deal with or business rescue law under consideration claims arising from financial claims on a net at this time at the National Assembly, the CAC basis after commencement of a winding up. sponsored Bill, to some extent, addresses some Incidentally, the Investments and Securities of the current shortcomings of the insolvency Bill being championed by the Nigerian SEC is framework by transitioning the same from a also making robust provisions to give super creditor and involuntary liquidation led approach priority to regulated financial contracts in the to a voluntary, more debtor and business rescue event of insolvency of the counterparty and to friendly regime. modify general insolvency rules that would be However, it seems that the strong bias for an enacted under the CAMA. The ISB specifically involuntary and creditor friendly regime remains envisages that the netting provisions and entrenched as the opportunity to essentially special insolvency rules to be created under abolish receivership as was done in the UK the securities statute would take precedence with the advent of the UK Insolvency Act has over ordinary insolvency rules based on a not been taken. It remains to be seen whether need for special protection of the Nigerian Chapter 19 on Receivership would not result in capital market. turf litigation between Receivers and Insolvency Overall, this law, when it becomes effective, Office Holders. This is because, on the one hand, will bring some sanity to the current practice of the Receiver appointed by the holder of fixed appointment of multiple receiver-managers and charge security has the right to challenge the provisional liquidators. It will be apparent that hearing of an application for administration to the administrator would have priority and failing be commenced by the court, and the court may administration the procedure will be converted dismiss such application for administration. to liquidation with the administrator as the By the provisions of the Bill, a company can liquidator or a separate liquidator is appointed voluntarily enter into a voluntary arrangement to take over from the administrator. The CAMA 59

CAP9222 II&RR p56-60 PUNUKA.indd 59 24/06/2020 10:25 Bill therefore definitely provides a slightly with existing legal impediments to various more comprehensive framework for business business indicators, including sound business recovery and a framework for the regulation of recovery and insolvency framework. It means the insolvency profession by requiring licensing that the CAMA Bill is a stop-gap measure. of practitioners by CAC and recognising Further, following constant engagement BRIPAN and other professional bodies whose through training and attendance at INSOL/World certification is a condition for licensing. Bank African Roundtable, practitioners and Judges are now more commercially minded. Leading the process currently The judges are more willing to use their through creativity and best authority under their enabling Act and rules to direct litigants to settle disputes amicably, practices encourage business rescue through negotiations Overall, managing insolvency and business and settlement, thereby creating the restructuring in Nigeria in the face of the environment for multi-creditors workouts. The inadequate legal framework requires creativity expectation is that given the realities exposed and innovation. A combination of understanding by the Covid-19 pandemic and with the support of the legal process and the application of the of the practitioners, Judges and the National principles of informal workout can be of great Assembly, a holistic solution that addresses assistance in achieving restructuring in a the management and resolution insolvency and creditor-friendly and liquidation-focused system. restructuring issues in Nigeria is achievable in The creditors usually respond positively, if the the not-to-distant future. debtor voluntarily appoints a reputable firm to do an independent business review (IBR). Notes: Creditor perception of commitment to reform and 1 The AMCON Act was amended in 2019 to openness by the debtor through IBR can kickstart strengthen some other provisions in the Act. and sustain the informal workout process. 2 Source: PUNUKA’s contribution to INSOL/WB Also, following the amendment of the AMCON Global Guide: Measures adopted to support Act, the use of the receiver managers by AMCON distressed businesses through COVID-19 has improved the environment for insolvency – Nigerian Chapter at https://d.docs.live. practice and development of some culture of net/864f5b56169edf7c/Documents/Geek%20 business rescue. Squad%20Data%20Backup/HDD1/My%20 document/INSOL%201/COVID19/INSOL%20 Current reform agenda World%20Bank%20Covid%20Interactive%20 As mentioned earlier, agitation by BRIPAN and Map%20Nigeria%20Chapter.pdf other stakeholders (such as PEBEC working with the Nigerian Bar Association Section on Business Law) have had an impact on the Author: reform of some aspects of Nigeria personal Chief Anthony Idigbe, SAN and corporate insolvency laws. The National PUNUKA Attorneys & Solicitors Assembly and existing institutions like the CAC Plot 45 Oyibo Adjarho Lekki Phase 1 have been sensitised and seem to be working on Lagos some relevance in the reform process. Nigeria PEBEC is considering the possibility of an Tel: +234 1 270 4789/4791 omnibus Insolvency Bill to facilitate the ease of Email: [email protected] doing business and tackle challenges associated Website: www.punuka.com

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New reconstruction legislation in Norway: Market perspective on the retail and airline industries

by Stine D. Snertingdalen, Thomas Piro, Ingrid Tronshaug and Erik Torjusen, Kvale Advokatfirma DA

Norwegian companies facing financial difficulties have up until now had two options of judicial proceedings; either debt negotiation proceedings (voluntary or compulsory) or winding-up proceedings. However, the debt negotiation legislation has been considered inadequate, and judicial debt negotiation proceedings have often failed. On May 11, 2020, a new Interim Act on Reconstruction of Businesses in Financial Distress to Remedy Economic Problems as a Consequence of COVID-19 came into force; in short: “The Reconstruction Act”. The Act provides rules to facilitate for a more flexible and effective in-court reconstruction.

The Covid-19 pandemic The changes in the interim law are hence a long kickstarts new reconstruction time coming, and will hopefully help to save enterprises over the almost two-year period legislation the legislation will be in force. The new interim The previous debt negotiation rules have legislation will be in effect only until January commonly been perceived by practitioners 1, 2022. However, the aim of the legislative in the field to be impractical and non- authorities is to replace it with permanent, functioning, and in need of reform. We have improved legislation, which will also take into therefore seen very few judicial debt negotiation account the 2019 EU restructuring directive. proceedings in Norway, and such matters Although the new legislation has been drawn have either been handled out-of-court, or even up hastily and does not include all the elements through judicial proceedings in other countries, that were highlighted and suggested in the 2016 if applicable, such as under Chapter 11 of the report, it is thought to be a much better option US Bankruptcy Code. than the old-established legislation on judicial The new reconstruction legislation is based debt negotiation proceedings. New key elements on a report which was subject to public inquiry in are super-priority financing, a full automatic 2016, and which suggested several amendments stay against bankruptcy petitions, enforcement to the existing legislation on judicial debt proceedings and attachments lasting throughout negotiation proceedings. Attorney Stine D. the reconstruction proceedings, the possibility Snertingdalen in Kvale Advokatfirma was part of to include debt-to-equity swap and to reduce or the advising committee during this work. After extend payment of priority tax and VAT claims, close to four years of being idle, the proposition as well as no minimum dividend requirement, to was urgently handled by the Ministry of Justice mention a few. and Public Security and presented to the A reconstruction composition under the Norwegian Parliament due to the extraordinary new law can be voluntary with full flexibility in situation caused by the Covid-19 pandemic. composing the reconstruction proposal, and Even though financial relief measures have where all creditors must be in agreement. been offered by the government to businesses Alternatively, the composition can be suffering financial losses because of the compulsory, where a majority of unsecured pandemic and the various restrictions in force, creditors bind the minority. these are not enough to save all companies in Creditors with security for their full claim, distress. It is expected that we will see a large claims with priority which will have to be paid number of bankruptcies in the wake of the in full (mainly employees’ claims for wages) pandemic, many of which could potentially be and creditors with close relation to the debtor, avoided with a better restructuring toolset. have no voting rights. Elements in a compulsory 61

CAP9222 II&RR p61-64 Kvale.indd 61 24/06/2020 10:26 composition can only include one or more of both with the ability to offer lower sales prices. the following items: a payment moratorium, The benefits which could come from offering debt reduction, deb-to-equity swap and/ customers personal, face-to-face service and or transferring whole or part of the debtor’s access to products, cannot justify the expenses operations to a new owner and subsequently of operating live stores with rental costs, either continuing or winding up the company. employees, transportation, etc. With already When a plan is presented, the court- low margins, shop owners are left with very appointed administrator and the reconstruction challenging conditions for upholding a healthy committee (consisting of the administrator and business with positive operating results. representative(s) for the creditors), shall show Several larger retail chains1 have ended the presumed financial situation of the debtor in bankruptcy over the last few years, and company in case of bankruptcy/winding-up Kvale Advokatfirma has administered a fair proceedings, and the preparatory works for the part of these. In some cases, the bankruptcy new legislation emphasise that one important estates have sold the business operations to assessment for the court will be to apply a new owners who have managed to save parts “better than bankruptcy”-test before confirming of the operations with a reduced number of a plan. physical stores. In other cases, shops have been The new legislation is given retroactive effect, acquired by what used to be competitors, and and all judicial debt negotiation proceedings rebranded. Such turnarounds are possible due opened after March 1, 2020 may be subject to to Norwegian bankruptcy rules, allowing for the the new rules. bankruptcy estate to sell the debtor’s assets There are several weaknesses in the and whole or parts of the business operations as proposal that should or could be addressed in on-going, free from any debt and encumbrances the continued work towards a permanent new and only taking on the desired number of reconstruction legislation, such as: employees. • rules/options to enable the company a swifter A bankruptcy estate is more or less free downsizing of employees; to enter into or discard the debtor’s business • rules/options to reduce the company’s contracts, such as rental agreements and burden of having to pay wages in full; employment and supplier contracts, giving it • specific regulation for company groups; wide authority to cherry-pick those contracts • a system of classes, in order to present most beneficial to the continuing operations. different proposals to different creditor Further, and especially important in retail groups; bankruptcies, any agreements and/or assertions • rules on pre-pack reconstruction processes of a vendors’ fixed charge in goods intended to for medium sized and large businesses. be (re-)sold in the debtor’s business operations2 (e.g. typical retail goods) are not valid under A business perspective: Norwegian law. Hence, any suppliers who have the Norwegian retail and sold the debtor goods on credit, cannot (with a few exceptions) rightfully reclaim the unpaid airline industries goods to cover their loss, but have to accept that The retail industry the bankruptcy estate seizes and sells the goods Two of the sectors which are likely to be highly while the suppliers are left with a dividend claim represented amongst companies filing for in the estate. reconstruction proceedings, are retail and The already exposed retail industry, as well travel/tourism. Similar to market developments as many others, met a new and unforeseen in other countries, the Norwegian retail industry challenge in 2020 in the Covid-19 virus. has suffered severely over the past few years. Schools, universities, kindergartens and many One factor playing a part is online market businesses were ordered by the government to participants, e.g. larger chains which import shut down their operations, and the population goods in bulk or stand-alone businesses that was either quarantined, isolated or urged to only sell merchandise over the internet with stay at home and practice “social distancing”. considerably less expenses than store owners, Many stores decided to close completely for a 62

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period of time, and others did not receive goods Norway is a small country, but nevertheless due to factory shutdowns both domestically and has a relatively active air traffic industry. abroad. Although the government has issued Oslo airport Gardermoen is Norway’s major relief measures towards many businesses, international hub, and approximately 26.6 a wave of bankruptcies in the wake of the million passengers travelled through the airport pandemic and the implemented measures is in 2019. Scandinavian Airline Systems (SAS) likely. Presumably, some of the first to go are and Norwegian Air Shuttle (Norwegian Air) those businesses which were already in bad are the most sizeable airlines operating out of shape before the virus measures were initiated, Norway. The Norwegian airline Widerøe has a e.g. retailers. more domestic focus, with flights to 41 different With the new reconstruction legislation in domestic destinations as well as a few short- force, it is more likely that several businesses haul international flights. will survive through reconstruction proceedings, Due to the rapid decline in revenues in rather than ending up in winding-up proceedings connection to the Covid-19 outbreak, the and seize to exist. Companies having been airline industry is facing severe illiquidity and forced to postpone payment of mature debt, and bankruptcy risk. State loan guarantees have possibly also having applied for and received been offered to the airlines SAS, Norwegian emergency financing due to the Covid-19 Air, Widerøe and other airlines that have a crisis, can seek debt reduction under the new Norwegian Air Operators Certificate (“AOC”). reconstruction legislation. The aid packages might be sufficient to avoid The reconstruction proceedings will however near term bankruptcies, however a full recovery not solve operating issues such as high running seems unlikely. For example, in April 2020, four costs and low margins, and if such factors are of Norwegian Air’s foreign subsidiaries filed making the business not viable, the company for bankruptcy, leaving 4,705 pilots and cabin should rather file for winding-up proceedings. crew members unemployed. Norwegian Air just managed to avoid bankruptcy in early May 2020 The airline industry after intense negotiations with their creditors, Another pressed industry, and especially now in and further, SAS announced plans to lay off the light of Covid-19, is the travel and tourism 5,000 employees in Scandinavia. industry. Due to the pandemic, the government As mentioned above, judicial debt negotiation requested that people stay at home and do proceedings have been avoided as ineffective not travel outside of their municipality unless in Norway. This will hopefully improve with necessary, and the Norwegian borders have the proposed new reconstruction law. However, been under strict control. Foreigners have if winding-up proceedings turn out to be generally not been allowed to enter the country, unavoidable for one or more airline operators, and anyone allowed to enter has been instructed we expect that pre-packed sales of core assets to stay in quarantine for 14 days. The main would be a preferred solution. Such a sale airport in Oslo, Gardermoen, reported that their could take place prior to or shortly after traffic decreased by approximately 95% the winding-up proceedings are opened. In first month after Covid-19 measurements either case, the transaction would be assessed were implemented. by the bankruptcy trustee, who in order to Many hotels, cabins, visitors centres, safeguard the interests of the creditors will campgrounds, etc. closed completely in order have to look into whether the sale was made to save costs, and have envisioned that it will on fair terms. take time before people get back into their Should an aircraft operator file for winding- previous travel routines and that the usually up proceedings without having a pre-packed busy Summer season will be very different solution in place, the administrator and the this year. Governmental aid will probably secured lenders would have to determine help a large part of the industry to stay on whether the debtor’s (secured) assets could be their feet through these difficult times but, sold in a going concern transaction, and whether undoubtedly, a number of businesses will the operations of the debtor should and could be end up in bankruptcy. continued until such a sale can take place, with 63

CAP9222 II&RR p61-64 Kvale.indd 63 24/06/2020 10:26 financial guarantees and indemnifications from only be in effect temporarily, we understand that the secured creditors. permanent legislation to be effectuated when Norway is a party to the Convention on the interim legislation ceases, is being prepared. International Interests in Mobile Equipment (the Cape Town Convention), which is meant Notes: to standardise the handling of aviation assets 1 Such as Enklere Liv, Notabene, Vita, Loco, without a fixed location, including transfer Toys’R’Us, SuperDry. agreements, establishing mortgages/ and 2 Cf. the Mortgage Act § 3-15. enforcement. Aircraft mortgages registered in either the International Registry of Mobile Assets or the Norwegian aircraft registry (NLR) Authors: are valid and enforceable. In case of an airline Stine D. Snertingdalen, Partner reconstruction or bankruptcy, the Cape Town Email: [email protected] Convention requires that possession of any seized aircrafts is given to the mortgage Thomas Piro, Partner creditor within 60 days from when proceedings Email: [email protected] were opened. Reconstruction proceedings under the new Ingrid Tronshaug, Senior Lawyer legislation might be preferable in order not to Email: [email protected] interfere with the debtor’s necessary permits from relevant authorities, and make it easier for Erik Torjusen, Senior Associate the debtor to save their business operations – Email: [email protected] either to be carried on by the debtor or sold to new owners. Kvale Advokatfirma DA Haakon VIIs gate 10 Going forward Pb. 1752 Vika The new reconstruction legislation will 0122 Oslo give Norwegian companies new and better Norway possibilities of surviving the Covid-19 crisis, Tel: +47 22 47 97 00 especially with respect to reducing unsecured Email: [email protected] debt and tax/VAT claims. Although the law will Website: www.kvale.no

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The emergence of a debt restructuring regime for corporate groups in Singapore

by Smitha Menon and Clayton Chong, WongPartnership LLP

Debt restructurings involving corporate groups pose unique challenges. There is often a need for debt restructuring solutions that address the financial problems across an entire corporate group. The law in Singapore has developed in an incremental and principled way that, while not immediately apparent, lays strong groundwork for effective restructuring of corporate groups. In this article, we illustrate the potential of the Singapore regime in this context by examining the 2019 decision of the Court of Appeal in Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd [2019] 2 SLR 77 and related legislative developments in the area, and conclude with thoughts on how the law may develop further.

Debt restructurings involving corporate groups Singapore’s restructuring regime in the context pose unique challenges. Entities in a corporate of corporate group restructurings. group are often functionally and financially In this article, we will examine the Empire interdependent. When one entity in the group Capital decision and related legislative becomes insolvent, it threatens the solvency developments in this area, and conclude with of related entities which are operationally thoughts on how the law may develop further. or financially connected to it. It is also not uncommon that the insolvency of an entity Empire Capital triggers cross-defaults under the financing Empire Capital involved the restructuring of contracts of related entities within the group, the Berau Group, one of the world’s largest further jeopardising the financial stability of coal producers based in Indonesia.1 The these related entities. restructuring involved two sets of notes issued These difficulties necessitate debt by the Berau Group – these were referred to restructuring solutions that address the in the judgment as the “2015 Notes” and “2017 financial problems across an entire corporate Notes” (collectively, the “Notes”). The 2015 group. Solutions that are neat in theory, such Notes were issued by Berau Capital Resources as excising the financially troubled parts of the Pte Ltd (“BCR”), a Singapore-incorporated group, may be difficult to apply in practice given special purpose entity established for raising the intricate connections between the various debt-financing.2 The 2017 Notes were issued entities in the group. Furthermore, as the entities by PT Berau Coal Energy Tbk (“BCE”), the in a group have separate legal personalities Indonesia-incorporated holding company and insolvency estates notwithstanding some helming the Berau Group.3 overlapping creditors, the starting premise The Berau Group sought to restructure the is that their debts must be restructured on 2015 Notes and 2017 Notes through schemes an entity-by-entity basis – this exponentially of arrangement in Singapore. A scheme of compounds the complexity of achieving any arrangement (a “scheme” in abbreviated form) comprehensive debt restructuring arrangement. is a compromise or arrangement between a The law in Singapore has developed in an debtor company and its creditors to modify their incremental and principled way that, while not respective rights. Debtors and creditors have immediately apparent, lays strong groundwork flexibility in formulating the terms of a scheme. for effective restructuring of corporate groups. For example, a scheme can incorporate features The turning point was the 2019 decision of such as payment deferrals, principal haircuts, the Singapore Court of Appeal in Pathfinder and debt to equity conversions. A scheme is a Strategic Credit LP v Empire Capital Resources potent debt restructuring mechanism as it binds Pte Ltd [2019] 2 SLR 77 (“Empire Capital”) all creditors (including dissenting creditors), which throws into sharp relief the potential of provided that the scheme receives the approval 65

CAP9222 II&RR p65-68 Wong Partnership.indd 65 24/06/2020 10:27 of a majority in number of creditors representing For this approach to work, Empire Capital 75% in value of the debt and is approved by had to cross two fundamental hurdles. First, the court.4 it had to satisfy the court that it was within Initially, the Berau Group proposed the court’s jurisdiction to allow a scheme to two separate schemes of arrangement to be proposed which sought to give the third restructure the Notes – one by BCR for the party release of BCR, BCE and the other 2015 Notes and one by BCE for the 2017 Notes. co-guarantors’ liabilities. Second, it had to However, two creditors collectively holding more persuade the court that the holders of the 2015 than 25% in value of the 2015 Notes opposed Notes and 2017 Notes should vote together as BCR’s scheme (the “opposing creditors”).5 Since a single class of creditors. If the Noteholders a scheme requires the approval of at least 75% were split into two classes (one for each set in value of the creditors, the opposing creditors of Notes), the scheme approval threshold of a were able to veto BCR’s scheme. majority in number representing 75% in value This posed a significant problem as both of the creditors would have to have been met schemes had to succeed in order for the Berau within each class, meaning that the opposing Group to emerge from insolvency. Various creditors would retain its veto within the class of entities in the group provided guarantees and 2015 Noteholders and thereby block the scheme security in favour of the Notes. The security from passing. providers and guarantors for both sets of Notes The Court of Appeal ruled in favour of Empire largely overlapped,6 meaning that the Group Capital on both issues, although ultimately, could not simply excise the limbs that were at Empire Capital’s application failed for its failure risk of enforcement if either the 2015 Notes or to disclose adequate financial information. 2017 Notes were not successfully restructured. On the issue of the third party releases, the The Berau Group ended up withdrawing the court held that such releases are permissible proposed schemes as a result of the opposition under a scheme if there is sufficient nexus or from the opposing creditors. connection between the release of the third Several months later, the Berau Group party liability and the relationship between the initiated a new scheme proposal. This time, a company and the scheme creditors.8 The court single scheme of arrangement was proposed for found that the third party releases of the debts both Notes. The scheme was proposed not by owed by BCR, BCE and the co-guarantors were BCR or BCE, but by Empire Capital Resources evidently closely related to the creditor-debtor Pte Ltd (“Empire Capital”), a Singapore- relationship between Empire Capital and the incorporated subsidiary of the Berau Group Noteholders, as the debts all arose out of the which had guaranteed both the 2015 Notes same note issuances.9 and the 2017 Notes. The scheme sought to In some ways, the court’s decision on this compromise Empire Capital’s liabilities as issue was not surprising as third party releases guarantor of the Notes, and ancillary to that, have historically been endorsed by the Court the scheme sought the compromise of BCR, of Appeal.10 However, what was unique in this BCE and the other co-guarantors’ liabilities in case was that, unlike the typical scenario relation to the Notes (we will refer to this as the where it is the primary debtor proposing a “third party releases”). scheme and seeking third party releases Strategically, this was a deft move, as of its guarantors’ liabilities, here it was the restructuring the Notes liabilities at a guarantor reverse. The court nevertheless considered the level (with corresponding releases at the distinction irrelevant.11 This opens the door to borrower levels) opened the possibility of having exploring creative ways for a corporate group the holders of both sets of Notes vote together in to restructure in a single scheme without much a single scheme of arrangement. The opposing disruption to operations or existing financial creditors who initially blocked BCR’s scheme for obligations – an entity within the group can the 2015 Notes would no longer have a blocking undertake, as an additional obligor, to guarantee vote if the value of the 2015 Notes and 2017 the various buckets of debt to be restructured Notes were taken together, as they only held across the entire group. about 14% of the aggregate value of the Notes.7 In Empire Capital, the court emphasised 66

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that the jurisdictional test had to be applied in related companies of a company seeking to a commercially sensible manner, particularly implement a scheme. Prior to the introduction where a group restructuring is concerned. of the related company moratorium, only the The court recognised that, even if it was the scheme company could seek moratorium guarantor (and not the primary obligor) who was protection. There was a disconnect in the regime the scheme applicant, a release of the primary providing moratorium protection to the scheme obligor’s debt would still be necessary, since company and the commercial reality that other the group would remain exposed to liability and entities within the group, though not needing enforcement risks and the overall restructuring to propose a scheme, required protection from objective would not be met.12 enforcement by the intended scheme creditors. On the second issue of classification, the court This was starkly prevalent in the shipping reaffirmed the test established in prior cases.13 companies with their typical group structure of If the scheme favours or prejudices a group of many single vessel owning subsidiaries. Now, a creditors (against other creditors) differently related company, such as a subsidiary or parent from how they would be favoured or prejudiced company, can apply for a moratorium preventing in the most likely scenario if the scheme is not legal proceedings and enforcement action approved (usually liquidation), then that group of from being commenced or continued against creditors should be classed separately. it, if it plays a necessary and integral role in The court reached a provisional view14 that the proposed scheme and if the scheme will be the two sets of Noteholders could be grouped frustrated without such protections.16 as a single class as the 2015 Noteholders and Another important addition to the toolkit 2017 Noteholders’ relative positions in a scheme for corporate group restructurings was the compared to a liquidation were not materially introduction of a “cross-class ” different. Under a scheme, both sets of mechanism. This enables the court to approve a Noteholders would receive the same treatment, scheme even where there are dissenting classes while in a liquidation their respective rates of of creditors, provided that in aggregate at least a recovery only differed by around 3% which was majority in number and 75% in value of creditors not considered to be a material difference.15 approve the scheme and other safeguards are Considering the case in its totality, the met.17 Using Empire Capital as an example, if implications of the court’s ruling are quite the Noteholders had been split into two classes, remarkable. Through the application of tried the “cross-class cram down” provision could and tested principles, a Singapore-incorporated have enabled the scheme to be approved by the subsidiary with only a nominal share capital court even if one set of Noteholders opposed and no apparent commercial significance to the the scheme. This in effect prevents holdout Berau Group was in principle able to propose creditors from frustrating a scheme that a comprehensive scheme of arrangement to benefits the group’s creditors as a whole. In a restructure the major financial liabilities of its similar vein, the amendments also empower the entire corporate group. At the conclusion of this court to adjust the “majority in number” voting article, we will consider whether the boundaries threshold for the passing of the scheme.18 of such group restructuring schemes can extend Other new provisions also facilitate even further. restructurings of multi-national groups, including provisions which enable foreign Related legislative developments companies with a “substantial connection” to Prior to Empire Capital, in 2017, the debt Singapore to rely on its scheme of arrangement 19 restructuring regime in Singapore was enhanced regime, and provisions which enable the court in a manner that would promote Singapore as an to impose a moratorium on creditor actions international debt restructuring centre. Some of overseas by persons in Singapore or within the 20 the legislative amendments improved the ability court’s jurisdiction. for corporate groups to restructure their debts in a coherent and orderly manner. Concluding remarks Chief among these amendments was the Empire Capital establishes a firm foundation for introduction of moratorium protections for carrying out group restructurings in Singapore. 67

CAP9222 II&RR p65-68 Wong Partnership.indd 67 24/06/2020 10:27 It affirms that a guarantor can propose a Notes: scheme of arrangement to restructure its 1 Empire Capital at [4]. liabilities and the liabilities of the primary debtor 2 Empire Capital at [5] and [10]. and other co-guarantors. The question now 3 Empire Capital at [5] and [11]. becomes how far the boundaries can be pushed 4 Section 210 of the Companies Act (Cap. 50, for this type of scheme. Could a group seeking 2006 Rev ed) (“Companies Act”). to restructure its debts establish a special 5 These two opposing creditors also held about purpose entity to unilaterally guarantee all the 5% of the 2017 Notes, but this is not relevant liabilities of the group, and then use that entity for present purposes. as a platform for implementing a global scheme 6 Empire Capital at [11]. of arrangement for the whole group? 7 Empire Capital at [13]. For the doubting Thomases amongst us, this 8 Empire Capital at [77]. is not as outlandish as it may sound. A similar 9 Empire Capital at [80]. approach was adopted in the restructuring of 10 Daewoo Singapore Pte Ltd v CEL Tractors Pte the Codere Group. The Codere Group acquired Ltd [2001] 2 SLR(R) 791. an English incorporated company and caused it 11 Empire Capital at [80]. to assume a joint and several obligation under 12 Empire Capital at [81]. notes issued by another Codere entity, with 13 Empire Capital at [87], citing The Royal Bank the ultimate objective of having the English of NV v TT International Ltd [2012] 2 company invoking the scheme jurisdiction under SLR 213. English law.21 There, the court recognised the 14 The court only reached a provisional view as strategy as a clear case of forum shopping, but the financial disclosure provided by Empire considered it good forum shopping as it was Capital was considered inadequate (Empire done with the aim of achieving the best possible Capital at [90] to [91]). outcome for the creditors.22 15 Empire Capital at [90]. If such an approach is used to effect a group 16 Section 211C of the Companies Act. restructuring, it might be seen as artificial or 17 Section 211H of the Companies Act. open to abuse. However, it should be kept in 18 Section 210(3AB)(a) of the Companies Act. mind that any scheme ultimately requires the 19 Section 210(11) of the Companies Act, read approval of a supermajority of the creditors and with Sections 351(1)(d) and 351(2A) of the the court, meaning that it will likely not pass Companies Act. muster unless it is a commercially sensible, 20 Sections 211B(5)(b) and 211C(4)(b) of the fair and bona fide scheme. There are legitimate Companies Act. reasons for allowing a group restructuring to 21  be conducted via a single global scheme of Re Codere Finance (UK) Limited [2015] EWHC arrangement. It would swiften and streamline 3778 at [6], [17] and [18]; see also Re Codere the restructuring and enable the restructuring Finance (UK) Limited [2015] EWHC 3206. 22  plan to be formulated in a coordinated and Re Codere Finance (UK) Limited [2015] EWHC coherent manner. It would not only prevent the 3778 at [18]. mushrooming of holdout creditor groups that could result if there were multiple schemes, but Authors: prevent creditors with relatively modest voices Smitha Menon, Partner from having a disproportionate say in the fate of Clayton Chong, Senior Associate the group’s restructuring. WongPartnership LLP The emergence of a group restructuring 12 Marina Boulevard regime in Singapore has occurred slowly but Marina Bay Financial Centre surely. In the years to come, we can expect Tower 3 Level 28 inventive and ambitious developments as Singapore 018982 Singapore’s law makers, specialist insolvency Tel: +65 64168129 / +65 64162472 bench, academics and practitioners work in Email: [email protected] tandem to realise Singapore’s potential as a Email: [email protected] centre for international debt restructuring. Website: wongpartnership.com 68

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Quick and unbureaucratic – The Swiss answer to prevent a wave of bankruptcies because of the Corona Pandemic: COVID-19 Insolvency Law Ordinance

by Dominik Hohler and Christoph Stäubli, Walder Wyss Ltd.

On April 16, 2020, the Swiss Federal Council adopted a new “Ordinance on Insolvency Law Measures to Cope with the Corona Crisis” (the COVID-19 Insolvency Law Ordinance) with targeted measures to prevent Corona related bankruptcies and the associated loss of jobs.1 The COVID-19 Insolvency Law Ordinance provides for (i) a temporary suspension of the obligation of directors to notify over- indebtedness; (ii) amendments to the “ordinary” composition proceedings; and (iii) the option of a temporary, pragmatic COVID-19 moratorium, particularly for small and medium-sized entities (SMEs). The COVID-19 Insolvency Law Ordinance entered into force on April 20, 2020 and currently applies for a period of six months.2

Directors’ duties of a company subordinate their claims to the claims in financial distress of all other creditors in the amount of the over-indebtedness; According to the Swiss Code of Obligation, b) the board of directors can refrain from the board of directors has specific duties if its notifying the bankruptcy or composition court company encounters financial difficulties.3 The for a short period of time if it has sufficient two main tasks are based on a balance-sheet test: reasons to believe that the company can Capital loss successfully be restructured. However, mere If the last annual balance sheet of a company hope or a vague expectation of a restructuring shows that half of the share capital and the does not justify the postponement of the filing legal reserves are no longer covered by the for bankruptcy. company’s net asset value (at going-concern COVID-19 reliefs value), the board of directors shall without delay Given the extraordinary circumstances and the call a general meeting of shareholders and drastic measures limiting economic activities, propose adequate measures for restructuring. the Swiss Federal Council acting on the basis of Concrete options for restructuring need constitutional emergency law decided to order to be considered based on the specific an additional set of exceptions: financial situation of the individual Swiss a) Any loan of up to CHF500,000 guaranteed company concerned. by the Swiss Confederation in accordance Over-indebtedness with the Credit Programme (see below) In case of substantiated concern of over- shall not be considered a liability in the indebtedness an interim balance sheet must company’s balance sheet. Therefore, such be prepared and submitted to the company’s a loan is not taken into account in the over- auditors for examination. If the interim balance indebtedness test (this relief is valid until sheet shows that the claims of the creditors March 31, 2022 only). are neither covered if the assets are appraised b) In case of substantiated concern of over- at ongoing business values nor at liquidation indebtedness an interim balance sheet must values (balance-sheet test), the board of still be prepared. However, the board of directors is obliged to notify the bankruptcy directors is released from the duty to submit or composition court. To maintain going- this interim balance sheet for examination by concern value, a sound cash-flow plan securing the auditors (this relief came into effect on operations for a reasonable period (typically 12 April 20, 2020 and will remain in force for the months) is requested. duration of six months). There are two exceptions to this: c) In case of over-indebtedness the board a) no notification is required if creditors of directors does not have to notify the 69

CAP9222 II&RR p69-72 Walder Wyss.indd 69 24/06/2020 10:29 bankruptcy or composition court, provided rate is currently 0.5%. Companies with a the company was not over-indebted as per turnover of more than CHF500m are not December 31, 2019 and there are sufficient covered by the Credit Programme. reasons to believe that the company will The loans guaranteed by the Swiss overcome over-indebtedness by December Confederation shall be used to meet liquidity 31, 2020 (this relief came into effect on shortages resulting during the pandemic phase; April 20, 2020 and will remain in force for they may not be used to invest in new fixed the duration of six months). The board of assets, to pay dividends to shareholders or directors must justify and document the repurchase a company’s own shares, to repay decision in writing. existing loans, or to grant a private loan or a In addition, the board of directors can loan to a shareholder (including the use of cash file for composition proceedings (instead of pools). The restrictions and covenants shall bankruptcy). The Swiss Federal Council also incentivise borrowers to repay the loans, which simplified some requirements in order to allow are granted for five years, in exceptional cases companies suffering from the financial impact for seven years. The board of directors must of the COVID-19 measures to file for composition ensure that the company strictly complies with proceedings. these restrictions and covenants. Therefore, under the current and modified In the event the loan is used for prohibited regimes, companies in financial distress are not purposes, the members of the board of directors out of options; however, their strategy should be will be held jointly and severally liable for the planned carefully. repayment of the loan guaranteed by the Swiss Confederation. In addition, they could become COVID-19 bridge loans subject to criminal sanctions. On March 25, 2020, the Swiss Federal Council Qualification on the balance sheet adopted an unprecedented, massive liquidity Loans under the Credit Programme must be support programme funded with CHF40bn for booked by the borrower as normal liabilities SMEs (hereinafter the Credit Programme): (debt). They are not subordinated to other claims. COVID-19 affected companies can apply for However, COVID-19 Credits are not considered loans from their respective “house” banks up debt when applying the balance-sheet test (see to a maximum of 10% of their annual turnover above; Article 725 Swiss Code of Obligations). achieved in 2019 and up to a maximum of This rule is intended to prevent companies from CHF20m. Certain minimum criteria must be getting into a capital loss or over-indebtedness met; in particular, the company must declare situation as a result of financing under the Credit that it will suffer a significant loss of sales as a Programme. However, this relief is valid until result of the Corona pandemic. March 31, 2022 only. After that date such loans will be considered debt again when applying the Classes of loans balance-sheet test. In contrast, COVID-19 Credits Loans of up to CHF500,000 (so-called COVID-19 Plus are considered normal debt with respect to Credits) are non-interest bearing and fully Article 725 Swiss Code of Obligations and can, guaranteed by the Swiss Confederation to the therefore, result in a capital loss or even over- granting banks. Due to the use of an existing indebtedness situation for the company. banking relationship they are paid out on the basis of the borrower’s commitments only Credit programme in practice without closer examination and within a short At the beginning of June 2020, roughly 125,000 period of time, usually within less than a day. COVID-19 Credits with a total volume of Bridge loans exceeding the amount of CHF CHF13.5bn had been granted and requests 500,000 (so-called COVID-19 Credits Plus) for 582 Covid-19 Credits Plus for a total of will be guaranteed to the granting bank in the CHF1.6bn had been filed. The Credit Programme amount of 85% by the Swiss Confederation. Such put in place in short time was much acclaimed loans can amount up to CHF20m per company by the local and international financial and therefore require a more comprehensive community for its quick and unbureaucratic bank examination. For these loans, the interest handling. Interestingly enough, while such 70

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loan applications had been submitted and decision only) are under moratorium and granted, the actual drawdown of these loans is creditors may not enforce these claims (with much smaller. According to Swiss newspaper some exceptions such as claims of employees). reports, by mid-May 2020, the vast majority of Moreover, the company must not settle the enterprises had not yet used their approved debts that are under moratorium but is only Covid-19 Credits.4,5 This means that a vast allowed to pay the debts that arose after the majority of entrepreneurs have arranged for a court granted the COVID-19 Moratorium. This fall-back credit under the Credit Programme allows companies to focus on the running but keep this option for liquidity in reserve. business. In addition, creditors may not request a court to issue freezing orders. COVID-19 Moratorium The COVID-19 Insolvency Law Ordinance Amendments to composition introduces a new moratorium for small and proceedings medium-sized enterprises that run into liquidity The Swiss Federal Council ordered specific problems due to the Corona crisis (COVID-19 amendments to provisions regarding “ordinary” Moratorium). With this measure, SMEs can be composition proceedings. These amendments granted a temporary moratorium of up to three came into effect on April 20, 2020 and remain in months by the composition court in a fast and force for the duration of six months: pragmatic manner without the need to submit a) During the crisis, the prerequisites for filing a restructuring plan. The moratorium can be for composition proceedings are lower extended for an additional three months. and the company does not have to file a Prerequisites draft restructuring plan with its request for The conditions to have a COVID-19 Moratorium composition proceedings. Moreover, the approved by the court are deliberately low in court will not declare the company bankrupt order to grant access to this moratorium for if the company fails to establish that there are as many affected companies as possible. Any sufficient reasons to believe that the company company may file for a COVID-19 Moratorium, may be restructured (as would be the case provided that the company was not over- under normal circumstances). indebted as per December 31, 2019 or had b) The temporary composition moratorium (the subordinated its debt according to Article phase that allows the company to consider 725(2) Swiss Code of Obligations in the amount whether it is able to take measures such as covering the over-indebtedness. Excluded restructuring or whether there is a chance from the scope of the COVID-19 Moratorium that the creditors agree on the principle of a are larger undertakings, that is, (i) public composition agreement) may last up to six listed companies; (ii) and companies that months (as opposed to four months under exceeded two of the following thresholds in normal circumstances). 2019: (a) a balance-sheet total of CHF20m; (b) sales revenue of CHF40m; or (c) 250 full-time Notes: positions on annual average. 1 SR 281.242; Accessible at: https://www.admin. ch/opc/de/classified-compilation/20201083/ Application to composition court index.html. The board of directors of the company must 2 Parallel to the COVID-19 Insolvency Law submit a written request to the composition Ordinance, the Swiss Federal Council court at the place of its registered office expanded the pre-existing state sponsored accompanied by evidence of its financial system of short-time work compensation situation as per December 31, 2019. and adopted numerous formal facilitations to Effects further mitigate the economic consequences During a period of three months starting from of the COVID-19 pandemic. The Swiss Federal the decision of the composition court, the debts Council currently expects costs of around covered by the COVID-19 Moratorium (i.e. the CHF20bn for short-time work compensation. debts existing prior to the COVID-19 Moratorium For details see: https://www.walderwyss.com/ 71

CAP9222 II&RR p69-72 Walder Wyss.indd 71 24/06/2020 10:29 user_assets/downloads/FAQ-Employment.pdf. Authors: 3 The terms “directors” and “company” Dominik Hohler, Partner refer to the legal form of a corporation Tel: +41 58 658 56 25 (Aktiengesellschaft) whereby the same duties Email: [email protected] and conditions apply mutatis mutandis to the limited liability company (Gesellschaft mit Christoph Stäubli, Senior Counsel beschränkter Haftung). Tel: +41 58 658 55 30 4 https://www.derbund.ch/die-meisten- Email: [email protected] unternehmen-fassen-ihre-covid-19-kredite- nicht-an-338282581639. Walder Wyss Ltd. 5 https://www.luzernerzeitung.ch/news- Seefeldstrasse 123 service/wirtschaft/trotz-coronakrise-viele- 8008 Zürich unternehmen-tasten-kredite-gar-nicht-an- Switzerland ld.1220517. Website: www.walderwyss.com

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Why the tornado-like headwinds confronting the energy industry will likely produce a surge of bankruptcy transactions in the US

by Michael J. Roeschenthaler, Marc Abrams and Daniel R. Schimizzi, Whiteford, Taylor & Preston LLP

Faced with unparalleled challenges the likes of which modern society has never seen before, economies around the world are combating the fallout from the global COVID-19 pandemic, market volatility, and civil unrest. And while certain industries may rebound in a manner consistent with economic revitalisation and growth, others – like the global oil and gas industry – are likely to end up in uncharted territories resulting from industry realignment and consolidation through restructuring and insolvency proceedings.

Introduction and reduced demand. Earlier in 2020, global 2020 will be a worldwide socioeconomic case oil output levels far exceeded demand due in study for generations to come. Businesses large part to disputes by and among OPEC nations and small are experiencing unprecedented and Russia regarding compliance with financial distress. The sweeping impact of output curtailment agreements. However, COVID-19, coupled with the management (or an underlying factor associated with perhaps mismanagement) of the pandemic Russia’s non-compliance is its concern has been, at a minimum, extraordinary. Recent involving the US shale industry and the civil unrest across the globe has further purported belief that OPEC-driven production compounded the volatility of already fragile curbs effectively hand over market share to economies. Legislatures have enacted funding US shale producers. • The COVID-19 pandemic has exacerbated the and economic relief packages at record pace in crisis. Countries across the globe adopted an effort to stabilise and stimulate their financial and enforced various restrictions that sectors and broaden economies. forced temporary closures of non-essential However, for some industries, these efforts businesses, prohibited and/or restricted may prove “too little, too late,” and the economic domestic and international travel, and challenges will likely lead to the reshaping of implemented “social distancing” mandates the business landscape and a realignment of that curtailed consumer demand. the industry participants. The energy sector • A glut of supply and a lack of sufficient (particularly, the Oil & Gas Industry (“OGI”)) is a storage capacity has further impaired pricing prime example of the extraordinary structural as storage costs consume margin. impairment to a vital sector of the global • Publicly-traded US producers and the economy. In the US, insolvency and restructuring lenders in the energy sector have recently proceedings will likely be the catalyst in experienced large swings in stock prices as repositioning this industry, relying upon effective both prepare for economies to reopen despite legislation, experienced practitioners, and the looming risk of a COVID-19 resurgence. judicial expertise to optimise the success of • Exploration and production (“E&P”) restructurings in the following years. companies endured financial struggles before the pandemic, but the precipitous drop in oil The ever-changing “current” prices and the almost non-existent demand state of affairs for oil and gas due to COVID-19 restrictions The current state of affairs, though volatile, can have left them with few options. Their be summarised as follows: efforts to survive are particularly strained • The energy markets have suffered from considering capital markets remain reluctant plummeting oil prices due to excess supply to underwrite those producers. 73

CAP9222 II&RR p73-76 Whiteford Taylor Preston.indd 73 24/06/2020 11:10 • Producers with stronger financials Restructurings and the resur- have greater optionality with respect to gence of the oil and gas industry managing production while bearing asset The macro and micro issues permeating the preservation expenses. Senior debtholders OGI presage a surge of bankruptcy filings for end up in the precarious position of E&P companies and smaller oilfield servicers. determining how much pressure to apply to Unlike debtors in other energy sectors – i.e. maximise returns without triggering possible thermal coal – these cases show promise and regulatory or lender liability. It has been opportunity if the producers engage experienced reported that major industry lenders practitioners, with expertise both in the OGI and are forming holding companies and may with complex restructuring transactions, to play partner with industry experts or specialty a critical role in the survival of their companies. firms to own and operate assets upon So, what should one expect from the OGI seizing control. resurgence via chapter 11 emergence? Industry • Producers with diminishing financials participants should focus on the following “tells”: struggle to afford ongoing maintenance costs associated with production, even when Publicly active senior lenders largely non-operational. These operators While often a leverage tactic, financial must explore strategies that preserve institutions exploring ownership options assets, minimise costs and avoid defaults. (especially involving physical commodities) Similarly, their lenders focus on minimising is a notable and relatively novel development. carrying and maintenance costs while Junior lenders typically serve as the fulcrum for developing paths towards value-maximising a debt for equity swap that produces a change transactions. in control. While more traditional lenders have • Industry players are reevaluating potential reluctantly taken control of an entity through value opportunities that exist or may arise legal recourse as a prophylactic measure in the because supply curtailment may have been past, there may be more opportunistic conduct more significant than expected and cost- going forward. This is particularly notable in cutting measures associated with value light of the recent invitation by various governing preservation may have been deeper US agencies for public comment to a proposal than reported. that would amend the regulations implementing • 2020 is a general election year in the section 13 of the Bank Holding Company Act US, where victories in states such as (“BHC Act”), commonly referred to as the Pennsylvania (20 electoral votes), Volcker Rule, as added by Section 619 of the Ohio (18 electoral votes), New York (29 Dodd-Frank Wall Street Reform and Consumer electoral votes), West Virginia (5 electoral Protection Act. Section 13 contains certain votes), and Texas (38 electoral votes) restrictions on the ability of a banking entity or often pave the road to the White House. nonbank financial company supervised by the The challenged oil market has impacted Board to engage in proprietary trading and have each of these states and may lead to certain interests in, or relationships with, a favourable legislation to help reestablish or private equity fund. the industry. While perhaps coincidental, amendments • Liquidity is king and access to working to the Volcker Rule could smooth the path for and other capital will play a critical role banks to directly or indirectly acquire equity in the determination of which companies interests in oil and gas producers. Nevertheless, will survive during this unprecedented the formation of holding companies, reports period of financial distress. Stakeholders of potential joint-venturing, and news about often expect over-leveraged companies to more aggressive enforcement of default rights pursue restructuring processes and, with and remedies by lenders strongly suggests any light at the end of the tunnel, will forthcoming voluntary insolvency proceedings likely be subject to acquisition and/ and corresponding deleveraging, leaving a or consolidation at steeply discounted “leaner and meaner” operator (albeit under new valuations. management or ownership via change in control). 74

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Significantly discounted bond trading anti-trust considerations), it is foreseeable While banks may be recalibrating their appetite that the assets of the market losers will for risk in distressed oil and gas settings, become available for acquisition by their bondholders have often eaten this meal and, competitors via bankruptcy sales. In short, with a shift of headwinds towards the tail, market consolidation is coming, which will stakeholders should carefully monitor bond unquestionably impact business relationships trading activity. Discounted trading, together with and contract rights. a distressed company’s retention of “advisors,” Communications with large trade creditors “investment bankers,” or “restructuring” or statutory lienholders professionals (such as law firms experienced in In most complex chapter 11 cases, the chapter 11), is an indicator of a potential filing debtors file first day motions in order to pay that contemplates deleveraging and ownership certain statutory lienholders and “critical” change through a debt for equity swap. vendors. These discussions, especially with Also, amendments to inter-creditor the largest general unsecured creditors, agreements, negotiations about “restructuring often occur prior to the filing in order to support agreements,” and financial minimise operational disruptions and gather accommodations that yield short-term liquidity support of key constituencies. While creditors all suggest chapter 11 planning where creditors of this type (with the exception of perhaps junior to bondholders (and in some instances creditors providing oil storage) often accept non-participating bondholders) may be left out considerable discounts on their claims of the money. notwithstanding protections otherwise Political action/intervention available to them under applicable law, these While the phrase “never let a good crisis go concessions ensure a continuation of cost- to waste” has surfaced from time to troubled efficient services to a distressed oil and gas time, its usage is more than apropos now. With company during the restructuring. an election year upon the United States, one is Statutory lienholders, such as the holders compelled to conclude that the White House of various maritime liens should pay particular will attempt to advance policies or take actions attention to proposed treatment of their claims to capture the 100 plus electoral votes of the oil at the outset of the case, as the first day relief and gas rich states mentioned above. may not only irreparably impair their rights and Modifications to energy-specific regulations claims, but also impact their relationship with or policies that preserve jobs in these states, the debtor and a potential asset purchaser. regardless of the costs on the state and federal Reports/discussions of debtor-in-possession levels, should further whet the appetite of financing energy funds with the stomach for transactions Anyone involved in a complex restructuring in this industry. These policies may actually case knows the process itself is almost cost provide tailwinds to the sails of a restructuring prohibitive. But for large companies with asset- company. Stakeholders must understand rich balance sheets and stockpiles of cash, recent developments in law and policy when almost every oil and gas company pursuing a analysing rights and remedies associated with a restructuring transaction will require some forthcoming insolvency proceeding. form of debtor-in-possession (“DIP”) financing. Separation of the winners from the losers DIP financing is a loan that facilitates the While certain energy companies are rebounding restructuring of an over-leveraged company. despite marginal improvement to market The lenders providing post-petition DIP conditions, others are floundering. The markets financing are often pre-petition lenders are thinning the herd and the attractive assets advancing additional funds to protect their of those companies that lenders conclude preexisting loans and maximise their recovery. will create greater value through liquidation DIP financing is typically subject to will become the targets of those that remain. strict restrictions – i.e., compliance with an Subject to the expectations of those at the senior approved budget, attaining case milestones, level of the (and perhaps some etc. – and often provides DIP lenders with 75

CAP9222 II&RR p73-76 Whiteford Taylor Preston.indd 75 24/06/2020 11:10 enhanced protections and influence compared the current economic and financial climates; to existing debt, such as priming liens on (ii) identifying the indicators of a forthcoming existing collateral, superpriority claims for restructuring transaction; (iii) identifying diminution in value, and termination rights mispriced assets relative to future valuation upon an event of default. DIP financing is also increases as the industry consolidates; and (iv) a tool often used to drive a case to a particular engaging practitioners with expertise in these conclusion, as milestones and other DIP areas to guide clients through the process. financing conditions will establish the theme and direct the outcome of a chapter 11 bankruptcy Authors: case (most commonly a sale or similar Michael J. Roeschenthaler transaction). Any reference to DIP financing is Business Reorganisations possibly the clearest indicator that an insolvency and Bankruptcy Partner proceeding is on the horizon and junior/non- Tel: +1 412 618 5601 participating creditors should be cognisant that Email: [email protected] this heavily-negotiated document may advance interests inconsistent with their own. Marc Abrams Business Reorganisations Conclusion and Bankruptcy Senior Counsel The inevitable consolidation of industry Tel: +1 302 357 3279 participants and partial deleveraging of balance Email: [email protected] sheets should right size the US OGI. While it is unfortunate that some companies will likely Daniel R. Schimizzi disappear as a result of the financial crisis the Business Reorganisations industry faced earlier in 2020, those entities and Bankruptcy Associate that survive and/or emerge will be healthier Tel: +1 412 275 2401 and stronger. Stakeholders should find that Email: [email protected] they have a more reliable trade partner that is not only more financially stable but is Whiteford, Taylor & Preston LLP hopefully more astute, being armed with the 200 First Avenue education that comes from going through a Pittsburgh, PA 15222, US formal restructuring proceeding. Moreover, this restructuring cycle should arm the survivors 405 North King Street with the tools to withstand potential pitfalls that Wilmington, DE 19801, US may arise and are beyond their control, yielding a more resilient and efficient marketplace. 7 Saint Paul Street But the keys to surviving these Baltimore, MD 21212, US unprecedented times are: (i) understanding Website: www.wtplaw.com

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Contributors

AZB & Partners Felsberg Advogados AZB House Avenida Cidade Jardim, 803 - 5º andar Peninsula Corporate Park Itaim Bibi Ganpatrao Kadam Marg São Paulo - SP Lower Parel Brazil Mumbai 400013 Tel: +55 11 3141 9100 India Email: [email protected] Tel: +91 22 4072 9999 Website: www.felsberg.com.br Email: [email protected] Partner: Thomas Felsberg Website: www.azbpartners.com Partner: Suharsh Sinha Fieldfisher Amsteldijk 220 Clayton Utz 1079 LK Amsterdam Level 15, 1 Bligh Street The Netherlands Sydney NSW 2000 Tel: +31 20 225 2215 Australia Email: [email protected] Tel: +612 9353 4146 Website: www.fieldfisher.com Email: [email protected] Partner: Marcel Willems Website: www.claytonutz.com Partner: Karen O'Flynn Gilbert + Tobin L35, Tower Two Ernst & Young LLP International Towers Sydney 6 More London Place 200 Barangaroo Avenue London SE1 2DA Barangaroo UK NSW 2000 Tel: +44 20 7951 2000 Australia Email: [email protected] Tel: +61 2 9263 4000 Website: www.ey.com/restructuring Email: [email protected] EY EMEIA Head of Restructuring: Website: www.gtlaw.com.au Dr. Rainer Bizenberger Partner: Peter Bowden

Fangda Partners GLAS 24/F, HKRI Centre Two, HKRI Taikoo Hui 45 Ludgate Hill 288 Shi Men Yi Road London EC4M 7JU Shanghai 200041 UK China Tel: +44 (0)20 3597 2940 Tel: +86 21 2208 1179 Email: [email protected] Email: [email protected] Website: www.glas.agency Website: www.fangdalaw.com Marketing: Samantha Dinnan Partner: Lingqi Wang

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CAP9222 II&RR p77-79 Contributors.indd 77 24/06/2020 10:30 Harneys Kvale Advokatfirma DA Unit 2, 9th Floor, Tower 3 PO Box 1752 Vika Lujiazui Finance Plaza Haakon VIIs gate 10 826 Century Avenue 0122 Oslo Pudong New Area Norway Shanghai 200120 Tel: +47 22 47 97 00 China Email: [email protected] Tel: +86 21 2030 7818 Website: www.kvale.no Email: [email protected] Partner: Stine D. Snertingdalen Website: www.harneys.com Partner: Thomas Piro Managing Partner: Vicky Lord PUNUKA Attorneys & Solicitors INSOL International Plot 45 Oyibo Adjarho 6-7 Queen Street Off Ayinde Akinmade street London EC4N 1SP Off Admiralty Way UK Lekki Phase 1 Tel: +44 (0)20 7248 3333 Lagos Email: [email protected] Nigeria Website: www.insol.org Tel: +234 1 270 4789/4791 Chief Executive Officer: Jason Baxter Email: [email protected] Website: www.punuka.com International Insolvency Institute Marketing and Communication Officer: P.O. Box 249 Ayodele Akinsiku Stanardsville, VA 22973 US Sakura Kyodo Law Offices Tel: +1 434 939 6003 Yotsuya Tower 8th Floor Email: [email protected] 6-1, Yotsuya 1-chome Website: www.iiiglobal.org Shinjuku-ku Administrative Director: Shari Bedker Tokyo Japan Kargman Associates Tel: +81 3 6385 1120 500 East 77th Street Email: [email protected] Suite 1714 Website: www.sakuralaw.gr.jp New York, NY 10162 Senior Partner: Koji Takeuchi US Tel: +1 212 286 1500 United Nations, Office of Legal Affairs, Email: [email protected] International Trade Law Division Website: www.kargmanassociates.com (The Secretariat of the United Nations President: Steven T. Kargman Commission on International Trade Law - UNCITRAL) Vienna International Centre Vienna Austria Tel: +43 1 26060 4060 Email: [email protected] Website: uncitral.un.org Legal Officer: Samira Musayeva

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Walder Wyss Ltd. WongPartnership LLP Seefeldstrasse 123 12 Marina Boulevard 8008 Zürich Marina Bay Financial Centre Switzerland Tower 3 Level 28 Tel: +41 58 658 56 25 Singapore 018982 Email: [email protected] Tel: +65 64168129 Website: www.walderwyss.com Email: [email protected] Partner: Dominik Hohler Website: wongpartnership.com Partner: Smitha Menon Whiteford, Taylor & Preston, LLP 200 First Avenue Zhong Lun Law Firm Pittsburgh, PA 15222 6/10-11/16-17/F, Two IFC US 8 Century Avenue Tel: +1 412 618 5601 Pudong New Area Email: [email protected] Shanghai 200120 Website: www.wtplaw.com P. R. China Partner: Michael J. Roeschenthaler Tel: +86 21 6061 3666 Email: [email protected] Website: www.zhonglun.com Senior Partner: Audry (Hong) Li

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