ins19 e-edition layout 1conference held in sydney in 2017. the paper itself was the culmination of...

ICLGThe International Comparative Legal Guide to:

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

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

13th Edition

Corporate Recovery & Insolvency 2019

Ali Budiardjo, Nugroho, Reksodiputro Allen & Gledhill LLP AZB & Partners Barun Law LLC Benoit Chambers Cleary Gottlieb Steen & Hamilton LLP De Pardieu Brocas Maffei Aarpi Dirican | Gozutok ENGARDE Attorneys at law Gall Gilbert + Tobin Hannes Snellman Attorneys INSOL International International Insolvency Institute (III) Kennedys Law Office Waly & Koskinen Ltd. Lenz & Staehelin Loyens & Loeff Luxembourg

Macfarlanes LLP McCann FitzGerald Miyetti Law Mori Hamada & Matsumoto Noerr LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Pirola Pennuto Zei & Associati SCA LEGAL, SLP Schindler Rechtsanwälte GmbH SOLCARGO Stibbe Synum ADV Thornton Grout Finnigan LLP Zepos & Yannopoulos

WWW.ICLG.COM

The International Comparative Legal Guide to: Corporate Recovery & Insolvency 2019

Editorial Chapters:

Country Question and Answer Chapters:

1 INSOL’s Role Shaping the Future of Insolvency – Adam Harris, INSOL International 1

2 International Insolvency Institute – An Overview – Alan Bloom, International Insolvency Institute (III) 4

5 Australia Gilbert + Tobin: Dominic Emmett & Alexandra Whitby 18

6 Austria Schindler Rechtsanwälte GmbH: Martin Abram & Florian Cvak 26

7 Belgium Stibbe: Pieter Wouters & Paul Van der Putten 32

8 Bermuda Kennedys: Alex Potts QC & Mark Chudleigh 38

9 Canada Thornton Grout Finnigan LLP: Leanne M. Williams & Alexander Soutter 48

10 England Macfarlanes LLP: Paul Keddie & Timothy White 55

11 Finland Law Office Waly & Koskinen Ltd.: Tuomas Koskinen & Sami Waly 62

12 France De Pardieu Brocas Maffei Aarpi: Joanna Gumpelson & Philippe Dubois 68

13 Germany Noerr LLP: Dr. Thomas Hoffmann & Isabel Giancristofano 75

14 Greece Zepos & Yannopoulos: Emmanuel Mastromanolis & Giorgos Vavatsioulas 81

15 Hong Kong Gall: Nick Gall & Ashima Sood 90

16 India AZB & Partners: Bahram N. Vakil & Gausia Shaikh 96

17 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Theodoor Bakker & Herry N. Kurniawan 101

18 Ireland McCann FitzGerald: Michael Murphy & Grace Armstrong 106

19 Italy Pirola Pennuto Zei & Associati: Massimo Di Terlizzi 112

20 Japan Mori Hamada & Matsumoto: Daisuke Asai & Dai Katagiri 120

21 Korea Barun Law LLC: Thomas Pinansky & Joo Hyoung Jang 125

22 Luxembourg Loyens & Loeff Luxembourg: Anne-Marie Nicolas & Véronique Hoffeld 132

23 Mauritius Benoit Chambers: Anjeev Hurry 137

24 Mexico SOLCARGO: Fernando Pérez Correa Camarena &

Abimael Hernández Hernández 141

25 Netherlands Stibbe: Job van Hooff & Daisy Nijkamp 147

26 Nigeria Miyetti Law: Dr. Jennifer Douglas-Abubakar & Jude Odi 153

27 Russia Synum ADV: Alexander Zadorozhny & Artem Kazantsev 159

28 Singapore Allen & Gledhill LLP: Kenneth Lim & Edward Tiong 166

29 Spain SCA LEGAL, SLP: Pedro Moreira & Isabel Álvarez 172

30 Sweden Hannes Snellman Attorneys: Carolina Wahlby & Fredrik Olsson 179

31 Switzerland Lenz & Staehelin: Tanja Luginbühl & Dr. Roland Fischer 185

32 Turkey Dirican | Gozutok: Gökben Erdem Dirican & Ali Gozutok 194

33 Ukraine ENGARDE Attorneys at law: Dmytro Donenko & Artem Parnenko 201

34 USA Paul, Weiss, Rifkind, Wharton & Garrison LLP: Alan W. Kornberg &

Elizabeth R. McColm 208

Contributing Editor

Jat Bains, Macfarlanes LLP

Publisher

Rory Smith

Sales Director

Florjan Osmani

Account Director

Oliver Smith

Senior Editors

Caroline Collingwood Rachel Williams

Sub Editor

Jane Simmons Group Consulting Editor

Alan Falach

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Disclaimer

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

General Chapters: 3 Directors and Insolvency: Dangers and Duties – Jat Bains & Paul Keddie, Macfarlanes LLP 7

4 “Cross”-Border Wall? Not for U.S. Recognition of Foreign Insolvency Proceedings –

Cleary Gottlieb Steen & Hamilton LLP 12

1

chapter 1

insol international adam Harris

insol’s role shaping the Future of insolvency

As I near the end of my tenure as President of INSOL International (a

role that has brought immense satisfaction over the last two years), it

is a privilege to once again be asked to contribute to this publication.

It has been another busy year for INSOL International as we

continue to implement the recommendations of our Task Force 2021

strategic review, hold conferences and seminars, develop new

offerings for our members, and publish regular papers.

INSOL’s Task Force 2021, to which I referred in the previous

contributions to this publication, was launched at our Quadrennial

Conference held in Sydney in 2017. The paper itself was the

culmination of over two years’ development. The finished

product showed where INSOL wished to be and how it sought to

position itself in 2021; as a result, a number of working groups

were established to deliver on these key areas.

I am proud to say that two years into the process many of the key

achievements which we identified have actually been delivered or are in

the process of being finalised, and I am excited at the prospect of what will

be achieved over the next couple of years as we make our way to 2021.

I would like to take this opportunity to run through some of the key

developments over the last year.

Communications

When I wrote for this publication last year, there was a great deal of

excitement and anticipation not only for the annual conference due to

be held in New York but also for the launch of the new INSOL website,

the launch of which would coincide with the conference.

Communication via the internet is now such an important part of

business that it was vital that INSOL got this right and with the new

website a platform now exists that provides an enhanced user

experience for members. Not only that, but it is seamlessly integrated

with INSOL’s CRM system which provides members the opportunity

to update their details and list preferences and in so doing provides a

far more bespoke user experience. With this platform in place,

opportunities for further development are unlimited with one such

project being the INSOL app. Linked to both the website and CRM it

provides INSOL with further means of communicating with its

members, thereby enhancing their membership experience. Whether

used during a conference, seminar or other INSOL event, this product

allows INSOL to provide information and help establish contact

between members. In time its functionality will be enhanced and will

provide ever more ways to communicate and disseminate information.

I am also very pleased that over the last 12 months INSOL has

established itself in the world of social media. Whether through

Twitter, LinkedIn or other platforms, our members are “active” and

embracing this medium of communication has become a priority.

Whether used to promote publications and events, or to stimulate

debate, INSOL has embraced this form of communication and work

continues as we look for new ways to utilise it and add to our ever-

growing number of followers.

Legislative Colloquium

INSOL has over many years established excellent relationships with

the Judiciary in many parts of the world. Our Judicial Colloquium has

proven a great success. Similarly, we have touchpoints with many

regulators and legislators and, resulting from our strategic review, a

Legislative Colloquium has been formed. The first gathering took

place at our conference in New York last year and a larger meeting

will be held next month at our forthcoming conference in Singapore.

Initiatives such as this understandably gain momentum over time but

the support for this at this early stage as been immense and I am proud

of what has been achieved in such a short time.

Judicial Training College

INSOL is fortunate that its members are so generous with their time.

It would be almost impossible to deliver our technical products and

services without them. One group that is particularly generous with

their time is the Judiciary, who have been firm supporters of the

organisation and the work that we do. Another significant

achievement that has been contemplated in the taskforce

deliberations has been the launch of INSOL’s Judicial Training

College. This initiative has seen Judges assist in the training of the

Judiciary in other jurisdictions. With training taking place in

Vietnam and Zambia in 2018 and more scheduled for 2019, this is

an initiative that we are already extremely pleased with and

confident that this is a sustainable long-term project for INSOL.

Foundation Certificate in International Insolvency Law

INSOL’s Global Insolvency Practice Course (also known as the

Fellowship) is now in its 10th year and has proven to be a great success.

Fellows have been instrumental in the forward strategy of INSOL, and

while this course is aimed at more experienced practitioners it has long

been thought that a more “entry level” course was required. The

Foundation Certificate in International Insolvency Law is intended to

provide a first-class but affordable and accessible educational offering

to those who do not have access to similar offerings in their own

iclg to: corporate recovery & insolvency 2019 www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London

jurisdictions. The course focuses on providing a sound theoretical

understanding of the basic principles of international insolvency law

for persons who have had limited exposure to this field (or no exposure

at all). The course has also been designed to provide candidates with a

basic understanding of practical issues in international insolvency.

A fundamental distinguishing factor of the course is that it is

presented entirely online and can be completed over a period of one

or two years. While appropriate support and guidance will be

provided to registered candidates, this is mainly a self-study course

to be completed at a pace suitable to each individual. While the

course is mainly aimed at candidates from the emerging market and

developing economies, less experienced candidates from developed

countries will also benefit from the course.

In terms of content, emphasis is placed on corporate insolvency law

and introduces candidates not only to the insolvency laws of various

jurisdictions, but also to the various available mechanisms for

dealing with transnational insolvencies in those jurisdictions.

To provide a little more detail, the course focuses on: i) an

understanding of the various principles and theories that apply in

international insolvency law; ii) an overview of the UNCITRAL

Model Law on Cross-Border Insolvency or the European Insolvency

Regulation; iii) an overview of the insolvency system that applies in

the United Kingdom or that which applies in the United States (as

two leading global insolvency systems), including the approach to

cross-border insolvency in these two jurisdictions; and iv) an

overview of the insolvency systems (and approach to international

insolvency) in various jurisdictions across the globe (candidates can

select from 25 jurisdictions in five regions across the globe).

The course begins on 1 September 2019 but registrations have already

commenced and I am happy to say that the level of interest has been

overwhelming with some candidates registering within hours of this

opening. We are confident that this product will prove very successful

and sit comfortably alongside the INSOL Fellowship.

INSOL International Technical Publications

One of the most valuable benefits INSOL International provides to its

members, is its technical library containing a vast array of technical

publications. With over 10,000 members worldwide, INSOL is able

to tap into the incredible depth of experience and knowledge of its

members in producing regular technical publications dealing with

cutting-edge issues in the world of restructuring and insolvency.

These publications come in the form of books, Special Reports, a

Technical Paper Series and a Small Practice Technical Paper Series.

Recent publications include topics as diverse as Insolvency and

Trusts, and Employee Entitlements (books), UNCITRAL’s Model Law on Recognition and Enforcement of Insolvency-Related Judgments – a universalist approach to cross-border insolvency (Special Report)

and Liability of controlling persons in corporate insolvency: Evolving trends in Russian law and practice (Technical Paper Series).

The Global Insolvency Practice Course (GIPC or Fellowship)

I have already briefly mentioned the GIPC when referring to the

Foundation Certificate above, but I would like to take this

opportunity to congratulate the class of 2018, whilst also wishing

this year’s class (busy preparing for Module B as I write) the best of

luck. I am sure they will excel on this course and I do hope they are

enjoying the experience. The Fellowship really has been a jewel in

the INSOL crown and the impact that the Fellows make across so

many aspects of INSOL’s work and initiatives, is hugely significant.

Events

Throughout my tenure as President and long before I even joined the

Board, INSOL has been running tremendously successful seminars

and events that seem to get bigger and more successful each year. Last

year our New York conference was more successful than I could ever

have imagined. Just under 900 delegates attended and the feedback we

received was overwhelmingly positive. It is always difficult to

continue to improve on numbers – particularly when the bar is set so

high – but our 2019 conference, which will take place in Singapore in

April, has already attracted numbers that exceed 900. The topics and

speakers selected under the theme “looking to the future”, really seem

to have caught the imagination. Personally, I am really looking

forward to hearing the thoughts and insights of our Keynote Speaker,

Professor Richard Susskind. That will set the scene for the forward-

looking theme of the conference. Significant parts of the 2019

Singapore conference are devoted to areas such as artificial

intelligence and cryptocurrency, all very much in keeping with the

underlying theme of the future and the issues, challenges and

opportunities it may bring. In addition, various ancillary meetings and

events have been planned around the main plenary session, including

the Offshore Meeting, Small Practice Meeting, Judicial Colloquium,

Academics’ Colloquium, Legislative Colloquium and the Ian Fletcher

International Insolvency Law Moot presented in conjunction with the

International Insolvency Institute (III).

While the INSOL conference is the largest and most high-profile

INSOL event, our one-day seminars over the last 12 months have also

been very successful and have taken place all over the globe. INSOL

returned to Buenos Aries for our established Latin American seminar

in March 2018 and then returned to Europe in June to host its first one-

day seminar in the Nordic region. This seminar took place in Helsinki,

Finland and was jointly hosted by INSOL International and INSOL

Europe, attracting over 100 delegates. Events were also held in the

Channel Islands (Jersey), Dubai, Jakarta and Hong Kong. We also

staged a very successful Africa Round Table (ART) in Maputo,

Mozambique, in partnership with the World Bank Group. As a South

African it has been particularly rewarding and meaningful to me to

have been involved with this initiative, especially to have seen it grow

over the last nine years, and to have delegates from diverse

jurisdictions enthusing about the project having been a real catalyst for

change in a particular insolvency system. I look forward to celebrating

the 10th year of this project, which will be held in Swakopmund,

Namibia, and I am confident that it will be a resounding success.

The Future

And what of the future? Though I am soon stepping down from my

role as President, I am proud to have contributed. I see a very bright

and exciting future for INSOL. I have already made mention of the

many Task Force 2021 initiatives that have been delivered over the

last year, however, there are many more to come in the next two

years, one of which is the establishment of the Asia Hub, a project

that has required some significant research.

insol international insol’s role shaping the Future of insolvency

www.iclg.com2 iclg to: corporate recovery & insolvency 2019 © Published and reproduced with kind permission by Global Legal Group Ltd, London

Adam Harris INSOL International / Bowmans 22 Bree Street Cape Town, 8000 South Africa Tel: +27 21 480 7837

Email: [email protected]

URL: www.bowmanslaw.com

www.insol.org

Adam Harris is a Director of Bowmans, South Africa, and specialises in business restructuring, insolvency and related fields. He is the current President of INSOL International.

Adam represents lenders and creditors, such as a number of major banks, and other institutions such as professional indemnity insurers, as well as business rescue and insolvency practitioners in various aspects relating to the restructuring or winding up of companies and the administration of insolvent estates.

He has represented international practitioners and creditors in various cross-border matters, to obtain recognition, and in relation to asset tracing, the valuation of such assets, and the ultimate disposal thereof and the repatriation of the proceeds.

In the course of representation of creditors and business rescue practitioners, Adam has dealt with various aspects such as the rights of creditors given the moratorium established on commencement of the formal proceedings, post-commencement (DIP) finance, the ranking of claims, and the formulation and implementation of rescue plans.

Adam has attended to some of the leading cases on different aspects of winding-up, insolvency and business restructuring such as the constitutionality of interrogations, impeachable transactions (claw-backs), procedural aspects of winding up applications, the interpretation of the Business Rescue legislation and insolvency practitioners’ remuneration.

He is one of the co-authors of Mars: The Law of Insolvency (9th and 10th Ed.), a leading insolvency text in South Africa.

INSOL International is a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency. There are currently over 40 Member Associations world-wide with over 10,000 professionals participating as Members of INSOL International.

Copyright © No part of this document may be reproduced or transmitted in any form or by any means without prior permission of INSOL International. The author accepts no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any view expressed herein.

©2019 Copyright INSOL INTERNATIONAL. All Rights Reserved. Registered in England and Wales, No. 0307353.

INSOL, INSOL INTERNATIONAL, INSOL Globe are trademarks of INSOL INTERNATIONAL.

insol international insol’s role shaping the Future of insolvency

iclg to: corporate recovery & insolvency 2019 3www.iclg.com© Published and reproduced with kind permission by Global Legal Group Ltd, London

With such a large membership in the Asia-Pacific region and such

scope for growth, INSOL is delighted to announce that it will be

opening a satellite office in this region in 2019. This is obviously a

momentous decision for an organisation such as INSOL, which has

operated from one office in London for over two decades.

These are without question exciting times and I know that the

organisation is in good hands going forward. It has the roadmap,

and knows where it is headed.

Note

Please note that this chapter was written in March 2019.

chapter 2


international insolvency institute (iii) alan Bloom

international insolvency institute – an overview

Most commentators seem to think that we are heading towards some

form of downturn/correction in a number of global markets either

towards the end of 2019 or in the early part of 2020.

With the ever more globalised nature of business and the more

nationalistic politics of the early 21st century, it is incumbent on

organisations like the International Insolvency Institute (“III”) and

others to ensure that in the case of both in-court and out-of-court

restructurings and insolvency, there is maximum cooperation

between those representing enterprises in different jurisdictions and

the judges who preside over estates that are subject to

multijurisdictional proceedings.

The III is dedicated to this and through our activities, our

sponsorship of projects, conferences, academic and judicial

meetings and regional activities, we seek to develop thinking in the

area of cross-border insolvency and to support international

organisations and in some cases individual countries or their

judiciary that are looking to develop and/or implement legislation

which furthers cross-border insolvency.

The III is now 19 years old and has recently undertaken quite a

considerable revamp in terms of its governance, the way in which it

operates and the breadth of its activities.

The organisation has approximately 360 members with a cap on

membership of 500. Membership is currently: 40% North

American; 35% European; 16% Asian; and 9% Latin American and

Caribbean. We have a stated objective to increase representation

from jurisdictions with less mature insolvency regimes and

therefore less well-developed insolvency professions and judiciary.

Our membership is currently 83% male and 17% female with a clear

and stated intention of increasing the percentage of female

members.

Finally, on membership, we have: 16% judges; 16% academics;

61% legal practitioners; and 7% financial advisory practitioners.

We have a keen interest in increasing the number of financial

advisory members across the full range of financial advisory

activities.

As membership is by invitation through full member sponsorship,

we have a network of individuals, as part of our membership

committee, who liaise with the existing membership to establish a

pipeline of candidates who are to be considered for membership.

In terms of governance, the organisation is accountable to its

members, through a Board, an Executive Committee and a series of

operating committees.

The board consists of members with a good cross-section of

geographic, gender and professional backgrounds. It meets

monthly, and all major decisions have to be approved by the board.

The Executive Committee consists of the President, the immediate

past-President and four Vice-Presidents. At the time of writing, the

immediate past-President role is represented by both Don Bernstein

of Davis Polk & Wardwell and former judge James Peck, now of

Morrison and Foerster. The Vice-Presidents are Debra Grassgreen

of Pachulski Stang Ziehl and Jones of San Francisco; John Martin of

Norton Rose Fulbright, Sydney, Australia; Professor Charles

(“Chuck”) Mooney of the University of Pennsylvania Law School;

and Professor Ignacio Tirado of UNIDROIT.

The Executive Committee and other committees are supported by a

small, experienced team of senior administrators.

III’s operational committees consist of three types:

■ Four regional committees representing: North America;

EMEA; Asia; and Latin America/the Caribbean.

■ Four core committees: Partnerships; Programs and Meetings;

Projects; and Law and Practice Reform.

■ Various specialist committees such as: the Academic

committee; the Judicial committee; and the NextGen

committee.

Each of the regional committees has co-chairs and between five to

ten members. The role of the regional committees is principally to:

■ identify suitable new members;

■ identify new candidates for the NextGen programme;

■ organise regional activities including meetings, webinars

etc.; and

■ consider projects for submission to the Projects Committee.

The Partnerships Committee ensures that the III is working closely

with other like-minded organisations in a positive and proactive way

and collaborating on projects and joint-ventures where appropriate.

The Programs and Meetings committee oversees the work of our

annual conference committees, ensures that we present the best

possible conferences and learn from the lessons of previous events

to ensure quality, consistency and continuity. It is also responsible

for looking at future destinations for the annual conference and

ensuring that each of the regional meetings are dovetailed with other

activities within the Institute.

The Projects Committee is responsible, in liaison with the Academic

Committee, for helping to generate ideas for new projects and

approving any proposed projects before they are sanctioned by the

Executive Committee and the Board.

The Law and Practice Reform Committee is looking at

opportunities to use the skill base of the III membership to support

initiatives either cross-border or within countries, to develop

insolvency/bankruptcy regimes and to support the development of a

suitably skilled judiciary.


The Academics forum meets on the day before each annual conference

and part of the meeting is open for any of our members to attend. It

provides a forum for the discussion and debate on key topics and its

work often results in the generation of new project ideas, as well as

input to our regional and annual events.

The judicial forum also meets the day before our annual conference.

Unlike the Academic forum, the Judicial forum is not open to non-

judges and it serves to stimulate debate and influences the subject

matter for projects, wider forums and future conferences, for

example on court-to-court communication.

At the New York annual conference last September, for the first time

we not only had a Judicial forum but in a separate meeting, there

was an opportunity for the academics and judges to get together and

discuss issues of mutual interest.

The NextGen membership consists of approximately 125 current

members and approximately 40 alumni. The NextGen group

organise their own conference, with a completely separate tailor-

made programme which they develop, which takes place the day

before each annual conference. There is an open invitation for full

members to participate. NextGen also organise their own social

programme. Increasingly, NextGen members support and

participate in the work of the full member committees.

Finally, we have subcommittees looking at issues such as intellectual

property rights in insolvency, sovereign debt restructuring and

UNCITRAL liaison.

The creation of these committees and the increased level of

governance has meant that there is far more activity at III than ever

before with many more opportunities for members to participate. A

few highlights from the past year and from the programme for the

next few months represent a major change in the scale of

opportunities for our members to get involved and significantly

greater platforms for the Institute and its members.

Annual Conference

Our next conference is in Barcelona between 16–17 June 2019, and

in 2020 we will have our second conference in Asia, when Hong

Kong will host following the great success of Tokyo 2016. We are

currently assessing venues for our 2021 conference with an

announcement to be made in Barcelona.

Regional Meetings

During the course of the last 12 months, we have held regional

meetings in Vancouver, Paris, Mexico City, Miami and Singapore,

with further meetings planned for San Diego, Amsterdam, China,

São Paulo and Singapore.

These meetings, usually followed by lunch or dinner, tend to involve

no more than 50 to 60 members and sometimes as few as 10 to 20.

They represent an opportunity to deal with significant issues of the

day and, with relatively few involved, there is the opportunity to

dive deeper and engage more fully in the topics presented.

Webinar

Last autumn we ran our first ever webinar on issues arising from

insolvency and restructuring in Africa. The event was a great

success and allowed access to a much wider group of participants

without the cost and time commitment of travelling. I fully expect

that III will do more of these in the future.

Ian Fletcher Moot Competition

In a strong collaboration with INSOL, we have created a branded

moot competition in honour of Professor Ian Fletcher, who sadly

passed away last year.

First run in Sydney in 2017, the second running took place in

Vancouver in February 2018 and the third will take place in

Singapore, coinciding with the Judicial colloquium that forms part

of the Insol regional conference in April 2019.

The quality of submissions and the prominence of the judges make

this a very impressive, now annual, event. III and INSOL are

committed to this for the foreseeable future and we are currently

planning the location for 2020, which will be the announced in the

next few months.

Academic Events/Panels

In February 2018, an event was held in honour of Professor Jay

Westbrook from the University of Austin in Texas. The gathering,

of many of the leading lights from academia and professional

practice, has been recorded in a series of papers produced in

Professor Westbrook’s honour, soon to be published on the III

website.

In September 2018, the University of Michigan hosted another

academic forum primarily concerned with issues around soft law.

The conference was designed to attract members who would be in

New York for the annual conference and it was attended by a

number of leading academics in the field.

III also ran panels at other organisations’ events: at the ABI

International symposiums in Dublin and Milan; at the NCBJ

conferences; and in conjunction with the International Committee of

the ACB.

Support for Law and Practice Reform

III has provided considerable support in terms of members’ time, to

the Asian Business Law Institute’s initiative, looking at the

insolvency regimes in a dozen or so Asian jurisdictions, and ways in

which the various domestic codes can be made more consistent.

iii international insolvency institute – an overview


Alan Bloom Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom

Tel: +44 207 951 9898


URL: www.ey.com

Alan Bloom is a senior restructuring Partner at EY and President of the International Insolvency Institute from 2017–2019.

The International Insolvency Institute Is:

A non-profit, limited membership organisation. ■

An invitation-only membership of the most senior, experienced and respected practitioners, academics, judges and financial industry ■professionals in the world.

Dedicated to improving international cooperation in the insolvency field. ■

Focused on promoting greater international cooperation and coordination through improvements in the law and in legal procedures. ■

Continually studying, analysing and providing solutions to problems in cross-border insolvencies and reorganisations. ■

Awarded special consultative status to United Nations Agencies.■

iii international insolvency institute – an overview

7

chapter 3


macfarlanes llp

Jat Bains

paul Keddie

Directors and insolvency: Dangers and Duties

Nobody envies directors caught up in a restructuring. Tough

decisions need to be made and not everyone will get what they want

or expect, and those decisions will be subject to intense scrutiny

from disaffected stakeholders. Moreover, directors risk the

unpleasant prospect of personal liability for their actions and

pressure upon them is not easing up.

In the aftermath of the financial crisis, a common view was held that

whilst institutions may have been punished, the senior executives

responsible for misbehaviour have largely escaped punishment. A

number of governments have reacted to this sentiment, along with

recent high-profile failures of businesses where at least partial

blame was attributed to the actions of the directors of those

businesses, and have pushed an agenda of personal accountability.

This makes it more incumbent than ever on directors to ensure that

they can satisfy the myriad of legal obligations placed on them, as

they confront the financial difficulties of their companies.

Controls on Directors

There are certainly good reasons for the law to regulate directors’

actions, particularly relating to insolvency. In a balance sheet

insolvency, the economic value of the company breaks in the

creditors’ debt and not the shareholders’ equity. However, in the

absence of regulations the directors may take actions in the interests

of themselves or the shareholders and not the creditors who hold the

remaining economic interest in the company. Such actions include

shifting assets out of the company (and so out of the reach of

creditors) or engaging in highly speculative investments or loss-

making activities. The losses caused by those actions will be borne

by the creditors. The shareholders will usually be protected by

limited liability and will be no worse off as the value of their equity

has already been reduced or completely depleted.

To mitigate the potential harm to creditors, the law may impose

controls on directors including:

■ an obligation on directors to file for insolvency;

■ making directors personally liable for increased liabilities of

the company;

■ shifting directors’ duties from being owed to the shareholders

to being owed to the creditors of the company; or

■ challenges to transactions prior to an insolvency process that

are detrimental to the general body of creditors.

Versions of the fourth type of control are common across most

jurisdictions, whilst there is more variation in which of the other

controls various jurisdictions adopt.

Obligation on Directors to File for Insolvency

English law does not impose a strict obligation on directors to file

for an insolvency process when they become, or should have

become, aware of the company’s insolvency. However, many other

European jurisdictions do. For example, in Germany directors have

21 days to file for insolvency, in France they have 45 days, and in

Spain, they have two months.

Personal Liability for Directors for Increased Liabilities of the Company

In England and Wales, where directors are not explicitly obliged to

file for insolvency, “wrongful trading” is the main impetus for

directors to put an insolvent company into administration or

liquidation.

The criteria for wrongful trading are set out in sections 214 and

246ZB of the Insolvency Act 1986. Directors face being personally

liable for an increase in the net deficiency of a company’s assets

between the time the directors knew, or ought to have concluded,

that there was no reasonable prospect of a company avoiding an

insolvent liquidation or administration and the commencement of

the subsequent insolvent liquidation or administration. Directors

found liable for wrongful trading may also be disqualified from

acting as directors or have restrictions placed upon their capacity to

act as directors in the future.

There is a defence against wrongful trading if the director concerned

took every step that they should have taken with a view to minimising

the potential loss to the company’s creditors. A higher standard will

be required of a more skilled or experienced director, for example, a

professionally qualified director such as an accountant. It is crucial

that the board minutes or other written evidence records what steps

are being taken to protect creditors, as the burden of proof in

establishing the defence will be on the directors. Engaging

professionals to advise on wrongful trading can be helpful to

directors, both for the advice received and in demonstrating that steps

are being taken to minimise losses to creditors.

It is tempting for directors who are worried about personal liability

for wrongful trading to get themselves out of the situation by either

resigning or putting the company immediately into an insolvency

process. Neither of these may be advisable. Resigning as a director

will not absolve the liability for wrongful trading. Indeed, by

resigning, the now former director can be said to have failed to take


every step to minimise creditors’ losses. This is particularly the case

where the director’s resignation has left a skills or knowledge gap in

the company’s board. Immediately putting the company into an

insolvency process which is destructive of value may contravene the

directors’ duty to the company’s creditors.

Duties Owed to Creditors

The Companies Act 2006 partially codified directors’ duties in

England and Wales. Section 172(1) provides that directors have a

duty to promote the success of the company for the benefit of its

members as a whole. However, this is subject to a requirement in

“certain circumstances” to act in the interests of the creditors of the

company. The English Court of Appeal has recently confirmed that

these circumstances include not only insolvency but a period prior

to insolvency if the directors knew, or ought to have known, that

insolvency was probable (BTI 2014 LLC v Sequana SA [2019]

EWCA Civ 112).

This shift in directors’ duties, from being owed to shareholders to

owed to creditors upon or near insolvency is more prevalent in

common law jurisdictions than in civil jurisdictions. Many of the

notable cases originate from Australia and New Zealand. However,

this is not a universal rule and certain jurisdictions retain the

primacy of duties owed to shareholders even where a company is

insolvent. Conversely, the EU’s proposed directive on preventative

restructuring frameworks will require its member states to lay down

rules requiring directors to have due regard for creditors’ and other

stakeholders’ interests where there is a likelihood of insolvency.

Directors of distressed companies should consider carefully, and

take professional advice if necessary, if a duty to act primarily in the

interests of creditors has been triggered. It is advisable for the

directors to record in board minutes how the creditors’ interests have

been duly considered and the reasons why the board’s decisions are

in the interests of creditors. This will mean a different way of

operating from when shareholders’ interests were being primarily

considered. However, this does not necessarily mean that a

company cannot continue its business, as in many cases, it will also

be in the creditors’ interests for the company to carry on trading.

The shift in directors’ duties towards creditors can be problematic in

a group restructuring. Directors of an insolvent subsidiary can be

caught between the competing demands of its creditors and its

parent company. This can be complicated when the same

individuals are directors of different companies within the same

group. English law and many other jurisdictions do not allow

directors to consider their duties on a group-wide basis, as they must

consider the interests of the particular company of which they are a

director. Prudent directors will appoint their own lawyers who are

independent to those advising the company or the wider group to

help them navigate these issues and avoid any potential conflict.

Challenges to Pre-Insolvency Transactions

England and Wales, like most jurisdictions, allows for certain

transactions which had a detrimental effect on a company’s creditors

to be challenged during an insolvency process. The main types of

challenge are transactions at an undervalue, transactions defrauding

creditors, preferences and avoiding a floating charge. The risks of

these transactions being subsequently challenged should be

considered by directors, as where it is not feasible to reverse the

transaction, directors may be required to compensate the company

for the loss suffered.

Transactions at an Undervalue and Defrauding Creditors

Transactions at an undervalue involve a company transferring an

asset to another party for no consideration or for significantly less

than its market value. A transaction at an undervalue can be

challenged by a liquidator or administrator if:

■ the company was insolvent or became insolvent as a result of

the transaction (insolvency is presumed if the transaction is

with a connected person such as a director);

■ the transaction occurred within the two-year period prior to

the onset of insolvency; and

■ the transaction was not made in good faith, for the purpose of

carrying on the business and there are no reasonable grounds

for believing that the transaction was for the benefit of the

company.

A transaction at an undervalue can also be challenged under section

423 of the Insolvency Act 1986 if its purpose was to put assets

beyond the reach of a creditor. These are so-called “transactions

defrauding creditors”. Despite the name, there is no need to show

fraud or any dishonesty on the part of the company or its directors,

just that the transaction was carried out with a purpose of removing

assets from creditors. There is also no requirement that the

company was insolvent or became insolvent due to the transaction.

Unlike the other types of challenges which are brought by an

administrator or liquidator, a claim for a transaction defrauding

creditors can be brought directly by creditors or any other party

prejudiced by the transaction.

Preferences

Preferences are transactions that the company carries out or permits

to happen which, upon a company going into administration or

liquidation, puts a creditor in a better position than it would

otherwise have been. This can include a company paying off a

director’s loan account ahead of paying other creditors, or the

granting of security to an unsecured creditor. For a transaction to be

successfully challenged as a preference:

■ the company must have been insolvent at the time of the

preference or become insolvent as a result of the preference;

■ the transaction must have occurred no more than six months

prior to the onset of insolvency (if to an unconnected person)

or no more than two years prior (if to a connected person);

and

■ the granting of the preference must have been motivated by

the desire to prefer the particular creditor (i.e. to put it in a

better position than it would have otherwise been). This is

presumed when the recipient of the preference is connected to

the company.

Avoiding Floating Charges

Floating charges are a form of security that allows the security

provider to freely deal with the class of assets charged until the

floating charge is crystallised, e.g. upon an event of default in a loan

agreement or insolvency. If granted within one year (to an

unconnected person) or two years (to a connected person) prior to

the onset of insolvency, a floating charge may be avoided to the

extent it secures “old money”. These are funds already advanced to

the company prior to the floating charge being granted.

macfarlanes llp Directors and insolvency: Dangers and Duties


Public Companies

Directors of public and listed companies have to bear an even

heavier burden. A particular concern of regulators will be the flow

of information and need to make sure investors are not misled by

directors.

The directors will need to comply with disclosure rules such as

those in the Market Abuse Regulations or the AIM Rules. There is

a limited ability to delay disclosure where immediate disclosure

may prejudice the company’s legitimate interest, the market is not

likely to be misled and the company is able to ensure the

confidentiality of the information. For example, if there are

negotiations in progress.

A further risk in withholding information from the public is that a

director can commit a crime if they mislead the market. A director

does so if they knowingly or recklessly make a statement that is

false or misleading in a material respect or they dishonestly conceal

any material fact. Directors may also be held personally liable if

they made a false or misleading statement in any prospectus issued

as part of a public fundraising.

Until “cleansed” by publication the facts of a company’s financial

difficulties or planned restructuring may constitute inside

information. Directors should avoid any dealing in shares, options

and other securities of the company, or they run the risk of civil and

criminal liabilities for insider dealing or market abuse.

Cross-border Difficulties

Directors of companies operating across jurisdictions should take

steps to clarify what obligations apply or may apply to them upon an

insolvency. A striking example of what can go wrong is the case of

Kornhaas v Thomas Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd (C-594/14), where the

European Court of Justice (“ECJ”) found that the director of an

English incorporated company was personally liable under German

law for payments the company had made after becoming insolvent.

Despite being registered in England, the company’s “centre of main

interest” was in Germany. On this basis, the company’s insolvency

was subject to German law as per the EC Insolvency Regulation

2000 (since recast). The ECJ held that the personal liability for

payments by the company was linked to the failure to file for

insolvency within 21 days (which, as referenced above, is a

requirement of German, but not English law). Accordingly, this

requirement to file applied to the director even if as a director of an

English company she was otherwise subject to English law

directors’ duties.

The interaction of obligations of directors in different jurisdictions

also needs to be considered when planning a restructuring. For

example, the plan for a group-wide out-of-court restructuring may

be derailed if the directors of one group company are required by

law to file for insolvency before the restructuring can be

implemented.

Protection for Directors

Given the risks that directors assume, companies often have to

provide some level of protection to directors. Otherwise it can be

difficult to persuade individuals to serve as directors and to continue

serving during difficult times. The two most common protections

offered are indemnification by the company and directors’ and

officers’ (“D&O”) insurance.

An indemnity from the company cannot be all encompassing.

England and Wales section 232 of the Companies Act 2006 restricts

a company’s ability to indemnify a director in respect of negligence

or a breach of trust or duty in relation to the company. Section 234

prevents a company from indemnifying a director for criminal fines,

regulatory penalties and defence costs for criminal or regulatory

proceedings where the director was found guilty.

A more critical limitation of indemnities is that, if called upon, an

indemnity would only make a director an unsecured creditor of the

company. Therefore, an insolvency scenario, the time when the

indemnity is most likely to be needed is also when the indemnity is

least likely to have any value. Accordingly, directors may seek

indemnification from elsewhere in the group, or from a controlling

fund or sponsor, which is more likely to meet any indemnity claim.

The advantage of D&O insurance over an indemnity from the

company is that the payer would be a (hopefully) solvent insurer rather

than a financially distressed company. However, care and specialist

advice will need to be taken to ensure the cover is as expected.

It is common for insurance policies to not pay out in respect of a risk

that is against public policy. Directors may find they are not

covered for criminal liabilities and, in some jurisdictions, civil fines.

Therefore, criminal liabilities are one area where directors are

unlikely to benefit from either an indemnity or a D&O policy. At

one level, this is sensible as generally insulating individuals from

the legal consequences of criminal behaviour can lead to perverse

consequences. However, there may be technical criminal offences

which do not require any dishonesty or malevolent intent on the

directors’ part. With more and more obligations imposed on

directors, the uncovered risks they run are increasing.

Even where cover is not prohibited by the law, the drafting of the

policy may still leave directors exposed. For example, a D&O

policy will typically provide cover for a damages claim which is

made against a director. However, some jurisdictions do not

consider a claim against directors under insolvency laws to be a

damages claim and, consequently, that claim may not be covered by

the D&O policy. Directors, therefore, would be wise to seek both

insurance and local law advice if there are concerns about the extent

of a policy’s coverage.

A common area of concern in relation to coverage is the extent of

the “insured versus insured” exclusion. Insurers will typically

exclude claims made by one insured party against another. A D&O

policy will usually insure both the company and its directors, so an

insured versus insured exclusion may apply when a company brings

a claim against its own director, as would be the case in England for

a breach of directors’ duties. Some comfort for directors can be

found if, in an insolvency process, actions brought in the name of

the company by insolvency practitioners controlling the company

are carved out of the insured versus insured exclusion.

There is a risk that a D&O policy may encourage claims against a

director if claimants believe the deep pockets of an insurer will meet

their claim. However, in general a good D&O policy is likely to be of

benefit to directors and almost certainly of more benefit than an

indemnity from an insolvent company. Indeed, it is often worth shadow

directors, who may run many of the same risks as directors, being

formally appointed as directors so that they can benefit from the policy.

Directors and former directors should also bear in mind that usually

the D&O insurance policy will be taken out by the company, but in

an insolvency process the directors cede control of the company to

an insolvency practitioner. Therefore, as a practical matter,

directors should ensure they keep their own copy of the D&O policy

documents.



Future of Directors’ Liability in the UK

In the UK, attitudes towards directors of insolvent companies have

hardened after a string of high-profile failures including BHS and

Carillion. In the former case, the previous owner of BHS, Sir Philip

Green, was heavily criticised in the press and in Parliament for

selling to a consortium of inexperienced investors, headed by a

twice bankrupted businessman. Shortly after the sale, BHS went

into administration with its pension fund among its most heavily

affected creditors. After enormous political pressure, Sir Philip

agreed to contribute £363m to the BHS pension fund.

The BHS case has inspired a raft of new proposals by the UK

Government. A pension-specific measure is a proposed new

criminal offence of wilful or reckless behaviour in relation to a

defined benefit scheme. Another proposal with wider application is

to make directors of a holding company liable in relation to the

disposal of an insolvent subsidiary. According to the proposal,

liability would attach to a holding company’s directors if:

■ the subsidiary was insolvent at the time it was sold;

■ within 12 months of completion of the sale the disposed of

subsidiary enters administration or liquidation;

■ the interests of creditors are adversely affected during the

period between the sale and administration or liquidation; and

■ the holding company’s directors could not have reasonably

believed that the sale would lead to a better outcome for creditors

than the administration or liquidation of the subsidiary.

The UK Government has rowed back on an earlier proposal to make

any holding company directors found guilty of this offence to pay

compensation to the sold subsidiary’s administrators or liquidators.

However, guilty directors would still risk being disqualified to act as

a company director and the associated financial penalties.

Detailed draft legislation is still awaited, but the UK Government is

keen to implement the new liabilities for directors. This is despite

strong scepticism from the professional restructuring community.

In part, this relates to concerns about how directors of holding

companies (and potentially entities further up the group structure)

will manage the conflicts with their duties to their own company and

shareholders. There are also concerns that holding company

directors, fearing for their own personal liability, may place a

subsidiary into an immediate value-destructive insolvency process

rather than risk a distressed sale (which may ultimately produce a

better outcome for creditors despite the risks).

It will be interesting to see whether any changes in the UK inspire

other jurisdictions to follow suit.

Brexit means the EU proposed directive of preventative restructuring

frameworks is unlikely to be directly relevant to UK directors. From

an English law perspective, this would have broadened the category

of parties’ whose interests’ directors would need to have due regard

for when there is a likelihood of insolvency to “other stakeholders”.

The directive will have a larger impact on the remaining EU

members where, for the first time in many jurisdictions, directors

will owe duties to creditors when the company is in the vicinity of

insolvency.

Conclusion

Undoubtedly, the law should take a firm stance where there has been

clear and genuine wrongdoing by directors. However, financial

distress and insolvency will be an unfamiliar and bewildering

situation to most directors. Governments should as a result be wary

of imposing too onerous a burden on directors, and too high a risk of

personal liability. Companies need individuals to be willing to

accept directorships and to remain in office when the company is in

distress. Nonetheless, the trend continues to be to expect more of

directors not less. The particular course of action directors will need

to adopt will vary with the situation, but good practice would be to:

■ hold regular board meetings focused on the company’s

financial difficulties. These may have to be held more

frequently than the practice during better times. Minutes

should be carefully kept to record decisions made, the

reasons for them and that due consideration was given to the

directors’ duties including, where relevant, those owed to

creditors of the company;

■ take professional advice, ideally from insolvency and

corporate recovery specialists. Directors should also

consider whether it would be appropriate to appoint their own

legal advisors independent of the company’s or the group’s

advisors;

■ ensure they have up-to-date and accurate information on the

company’s affairs, assets and liabilities. This should include

a list of all known current and prospective creditors and other

crucial stakeholders. The liquidity of cash is crucial and

directors should have a cash flow projection for the

immediate future;

■ avoid committing the company to large new liabilities or new

creditors. If this is necessary to continue trading directors

should consider how new creditors can be protected and how

the liabilities to the new creditors will be met; and

■ review (with the assistance of professional advisors if

necessary) the company’s D&O insurance coverage.



Jat Bains Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2234


URL: www.macfarlanes.com

Paul Keddie Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2894



Jat specialises in a range of debt finance transactions, acting for a diverse range of stakeholders including credit and special situations funds, corporate clients, sponsors, bondholders and senior and mezzanine lenders in relation to, amongst other things, workouts and restructurings.

He has been involved in restructurings in a wide range of sectors including retail, healthcare, hotels, consumer lending, technology and media, construction, manufacturing, professional services and infrastructure.

Jat is a member of the Institute for Turnaround.

Paul advises on a broad range of corporate restructuring and recovery issues.

His clients include companies in financial difficulties, their directors and shareholders, insolvency practitioners appointed over such companies, lenders to and other major creditors of troubled entities, investors interested in a “loan-to-own” strategy and buyers of businesses where there is an insolvency aspect.

Paul is a qualified insolvency practitioner, having passed the Joint Insolvency Examination Board examinations and is the co-author of the “Insolvency and Restructuring Manual, 3rd Edition”, which was published by Bloomsbury in 2018.


From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high-net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters.

Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals.

Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation.

We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.

chapter 4


cleary gottlieb steen & Hamilton llp

“cross”-Border wall? not for U.s. recognition of Foreign insolvency proceedings

Introduction

Though political headlines in the U.S. and other major developed

economies may be focused on trends of nationalism and insularity, a

study of the recent U.S. decisions on recognition and enforcement of

foreign insolvency proceedings suggests a decidedly contrary trend.

Rather than any hint of “America First”, or insistence on United

States-centric views of creditor rights, U.S. courts are trending

towards openness to recognition and enforcement of foreign

insolvency proceedings. Courts in the U.S. have moved away from

technical or formalistic requirements that could arguably present

barriers to cross-border restructurings, and now prioritise

effectuating the mandate of the UNCITRAL Model Law on Cross-

Border Insolvency (“UNCITRAL Model Law”).

Approximately 15 years ago, the United States enacted legislation to

implement the UNCITRAL Model Law, styled as Chapter 15 of the

United States Bankruptcy Code. The stated purpose of Chapter 15

is to “provide effective mechanisms for dealing with cases of cross-

border insolvency” and to facilitate cooperation between U.S. and

foreign courts. See 11 U.S.C. § 1501. Since that time, foreign

debtors have enjoyed this comprehensive legislative framework that

provides straightforward and consistent rules for treatment and

recognition of foreign insolvency proceedings. A representative of

a foreign debtor may commence a proceeding under Chapter 15 for

recognition of a foreign judicial or administrative insolvency

proceeding, which provides foreign debtors access to U.S. courts to

efficiently administer assets, resolve claims, and take certain other

actions (e.g., file discovery requests) within the United States.

A number of earlier bankruptcy court decisions, such as the Second

Circuit’s decision in In re Barnet, 737 F.3d 238 (2d Cir. 2013)

(imposing Section 109 debtor eligibility requirements for

possessing property in the United States to Chapter 15 foreign

debtors), were viewed to limit the scope of Chapter 15. In contrast,

recent cases have taken a more permissive approach, with increased

emphasis on ensuring that the legislative objective of Chapter 15 to

facilitate efficient cross-border corporate reorganisations is achieved.

This chapter discusses several major decisions in the last two years

consistent with this trend and provides guidance on some of the key

legal issues and tools available to foreign debtors seeking U.S.

recognition of foreign proceedings. Consistent with these decisions,

foreign debtors and creditors should expect Chapter 15 proceedings

to continue to emphasise prioritising a single foreign main

proceeding, granting comity to foreign insolvency courts, and

providing broad relief without procedural delays to ensure proper

enforcement.

No Gaming the System: Determining a Debtor’s Centre of Main Interests

The decisions on the touchstone for recognition – where a debtor’s

“centre of main interests” (“COMI”) lie – perhaps best highlight

where the developments on foreign insolvency recognition point.

To begin, consistent with the UNCITRAL Model Law, Chapter 15

authorises different relief depending on whether the recognised

foreign proceeding is a “main proceeding” – a case pending in the

country where the debtor’s COMI is located – or a “nonmain

proceeding” – a case pending in the country where the debtor has

only an “establishment”. See 11 U.S.C. § 1502. This is a key

determination because recognition of a foreign main proceeding

entitles the foreign debtor to broader automatic relief, including an

imposition of the automatic stay in the United States, than is

available upon recognition of a foreign non-main proceeding.

Although COMI is not defined in the statute, Section 1516(c)

provides a statutory presumption that the debtor’s registered office

is its COMI. Nevertheless, creditors in a proposed Chapter 15 case

may challenge the location of a debtor’s COMI (and thus whether

the proceeding is a main proceeding) in an effort to disrupt or

otherwise limit the reach of the Chapter 15 case. The stakes are

especially high because courts have interpreted Chapter 15 to be the

exclusive avenue for providing ancillary assistance to foreign

proceedings. See, e.g., In re Millennium Global Emerging Credit Master Fund Ltd., 458 B.R 63, n. 42 (Bankr. S.D.N.Y. 2011).

Foreign debtors and representatives, as well as their creditors who are

keenly aware of the stakes, have provided fodder and guidance for

how the COMI determination can be leveraged. Specifically, in 2017,

two opinions from the U.S. Bankruptcy Court for the Southern

District of New York (“SDNY Bankruptcy Court”) (one of the most

sophisticated and active jurisdictions for both Chapter 11 and Chapter

15 cases) demonstrate how the fundamental principles of fairness and

efficiency under Chapter 15 can drive outcomes (at least in part).

Determining COMI with competing foreign proceedings: Don’t play games

In In re Oi S.A., 578 B.R. 169 (Bankr. S.D.N.Y. 2017), Judge Lane

addressed COMI issues in the context of two competing foreign

restructuring proceedings of a Dutch subsidiary of a Brazilian

conglomerate, one in Brazil (the “Brazilian Proceeding”) and one

subsequently commenced in the Netherlands (the “Dutch

Proceeding”). Judge Lane maintained his finding that the debtor’s

COMI was in Brazil, in part because of an objecting creditor’s role


in initiating the Dutch Proceeding. The decision emphasises that

Chapter 15 will be interpreted with a focus on promoting fair and

efficient administration of foreign insolvencies.

Oi Brasil Holdings Coöperatief U.A. (“Coop”) was the Dutch

subsidiary of a Brazilian telecommunications conglomerate, Oi S.A.

(“Oi”). In July 2016, Judge Lane recognised Oi’s Brazilian

Proceeding as a “foreign main proceeding” in part because Coop

operated as a tax-advantaged financial vehicle for Oi, a Brazilian

corporation. Around the same time as Judge Lane’s decision,

Coop’s creditors commenced legal proceedings against Coop in the

Netherlands, which culminated in the competing Dutch Proceeding.

The Dutch insolvency trustee then asked Judge Lane to modify or

terminate the prior recognition order and instead recognise the

Dutch Proceeding as Coop’s foreign main proceeding.

In a lengthy opinion, Judge Lane denied the petition, finding no

basis for the relief sought under Section 1517(d) because the Court

had been fully aware of Coop’s connections to the Netherlands at

the time of recognition of the Brazilian Proceeding and that the

intervening commencement of the Dutch Proceeding did not

provide a basis for recognising it as the main proceeding. Of

particular note, Judge Lane expressly considered an objecting

creditor’s role in commencing the Dutch Proceeding as part of its

strategy to block recognition of any Brazilian restructuring plan in

order to increase its leverage. Judge Lane found that the objecting

creditor’s actions were “at odds with many of the goals of Chapter

15”, including fair and efficient administration of international

insolvencies, and admonished the objecting creditor for

“weaponiz[ing] Chapter 15 to collaterally attack” the Brazilian

Proceeding. Id. at 242.

While Judge Lane did not impute the objecting creditor’s conduct to

the Dutch insolvency trustee, the opinion paves new ground in

making clear that bankruptcy courts will consider a broad range of

facts and circumstances in resolving Chapter 15 disputes (including

determination of a foreign debtor’s COMI) in an effort to protect

against the use of Chapter 15 in contravention of its fundamental

purposes. Interested readers should keep an eye on further opinions

in this case – although the Second Circuit recently denied the

objecting creditor’s petition for appeal as moot, the objecting

creditor continues its efforts to challenge Judge Lane’s decision.

See Aurelius Capital Mgmt., LP v. Oi Brasil Holdings Coöperatief, U.A., No. 18-1450 (2d Cir. Jan. 24, 2019); Aurelius Capital

Management, LP’s Response to Motion to Dismiss Appeals and

Cross-Request for Vacatur, In re Oi Brasil Holdings Coöperatief U.A., No. 18-cv-03147 (S.D.N.Y. Feb. 15, 2019).

Pre-Filing COMI shifting: Move it to file it

Another important decision issued by the SDNY Bankruptcy Court

came out of the In re Ocean Rig UDW Inc. case, 570 B.R. 687

(Bankr. S.D.N.Y. 2017). The Second Circuit had previously held

that the relevant time for assessing COMI is the date on which the

Chapter 15 proceeding is commenced, but that a court “may look at

the period between the commencement of the foreign proceeding

and the filing of the Chapter 15 petition to ensure that a debtor has

not manipulated its COMI in bad faith”. See In re Fairfield Sentry,

714 F.3d 127, 138 (2d Cir. 2013). In Ocean Rig, Judge Glenn

considered whether the pre-filing actions of a foreign debtor to shift

its COMI to a country with more favourable insolvency laws

constituted legitimate “COMI migration” or bad faith “COMI

manipulation”. Focusing on the intent of the debtors in trying to

shift their COMI prior to their Chapter 15 filing, Judge Glenn found

that the UDW debtors had legitimately migrated, rather than

artificially manipulated, their COMI.

Ocean Rig UDW (“Ocean Rig”) was the corporate parent of three

holding companies owning deep-water oil drilling rigs. Each of the

Ocean Rig subsidiaries were nonresident corporations in the

Republic of Marshall Islands. Although the Marshall Islands were

the debtors’ statutory presumptive COMI, it lacked an established

restructuring regime. As a result, the debtors moved a substantial

portion of their business operations to the Caymans less than a year

before commencing insolvency proceedings.

Judge Glenn held that the debtors had legitimately moved their

COMI. Specifically, the debtors had taken concrete steps for the

“proper purpose” of facilitating a “value maximizing restructuring”.

570 B.R. at 703. The Court found no evidence of “insider

exploitation, untoward manipulation, [or] overt thwarting of third

party expectations” indicating bad faith. Id. at 707.

Lessons learned: Don’t weaponise Chapter 15

Both the Oi and Ocean Rig opinions show bankruptcy courts’

increasing attention to whether conduct of a foreign debtor (or, in

some instances, its creditors) comport with the underlying policies

of Chapter 15, a pragmatic approach that emphasises substance over

form. That approach is most clearly seen in Judge Lane’s findings

in the Oi decision that the recognition process must be “sufficiently

flexible to achieve the goals of Chapter 15”. 578 B.R. at 204.

Ultimately, Judge Lane appeared unwilling to create unnecessary

complexities by recognising a separate foreign main proceeding for

a Dutch finance subsidiary, since doing so would likely delay (and

even potentially threaten) the restructuring and jeopardise

uniformity across jurisdictions. Practitioners can likely expect to

see bankruptcy courts facing COMI disputes to take a similar

approach.

Tune Out the Noise: Enforcement in the Shadow of Pending Proceedings

Cross-border insolvencies often require navigating competing

foreign proceedings. Later opinions in Oi and Ocean Rig, as well as

the Argokor decision, suggest that U.S. courts are increasingly

willing to facilitate consummation of a foreign restructuring plan

notwithstanding pending foreign and domestic appeals or foreign

proceedings, in order to maximise the likelihood of a successful

restructuring. If nothing else, this puts increasing pressure on

creditors to avail themselves of remedies in the foreign

restructuring, rather than rely on potential hold-up-value in the

subsequent U.S. recognition and enforcement proceeding.

Enforcement in the U.S. pending appeal abroad: Don’t hold it up

The Oi restructuring saga did not stop at Judge Lane’s decision not

to recognise the Dutch insolvency proceeding. In re Oi S.A., 587

B.R. 253 (Bankr. S.D.N.Y. 2018). After the restructuring plan was

overwhelmingly confirmed by the Brazilian court, a group of Oi

shareholders appealed the plan confirmation in Brazil without

successfully obtaining a stay pending appeal. Instead, the appeal

was still pending when Judge Lane was asked to enforce and give

effect to the Brazilian confirmation order in the U.S.

In deciding whether to enforce the Brazilian plan despite the

pending appeal, Judge Lane focused on the court’s broad

discretionary authority, including the authority to grant relief

consistent with principles of comity, one of the most fundamental

principles of Chapter 15. The bankruptcy court concluded that

cleary gottlieb steen & Hamilton llp “cross”-Border wall?


unstayed foreign appeals should not prevent enforcement of a

confirmed restructuring plan. Judge Lane noted that the objecting

parties “provide[d] no timeline for how long this Court should wait”

and that waiting to enforce the restructuring plan in the U.S. would

“provide the very same stay pending appeal that...[was] denied by

the Brazilian courts”. Id. at 270. Judge Lane’s decision is consistent

with the general practice of the U.S. courts in recent cases of

providing the Chapter 15 debtor with the opportunity to

consummate a restructuring that has been approved by the foreign

court overseeing its primary insolvency proceeding.

Applying equitable mootness to appeals in the U.S.: The ship has sailed

After Judge Glenn recognised and enforced the terms of the Cayman

restructuring in Ocean Rig, certain shareholders appealed to the

SDNY District Court. See In re Ocean Rig UDW Inc., 585 B.R. 31

(S.D.N.Y. 2018). Judge Koeltl held that the appeal was equitably

moot, relying on Chapter 11 case law holding that there is a

presumption in favour of equitable mootness where a plan had been

substantially consummated. Further, where an appellant fails to

seek or obtain a stay pending appeal, overcoming the presumption

in favour of equitable mootness is particularly daunting. Judge

Koeltl further emphasised principles of “finality and fairness” in

dismissing appeals of substantially consummated reorganisations.

This appears to be the first published decision applying equitable

mootness in the Chapter 15 context.

Enforcement in the U.S. pending foreign recognition: Not my jurisdiction, not my problem

One decision further suggests that issues that could arise for

recognition in other jurisdictions outside of where the foreign main

proceeding is pending will not thwart U.S. recognition, even if the

governing law of the debt instruments would point there. In In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2019), Judge Glenn

ruled on a request to enforce the restructuring agreement approved

by a Croatian insolvency court under Chapter 15 despite a pending

dispute in the U.K. with respect to the enforcement of the agreement

as to English law-governed debt. Like Judge Lane in Oi, Judge

Glenn found that the purposes of Chapter 15 required prioritising

the debtor’s ability to effectuate its restructuring plan in a fair and

efficient way over other secondary considerations. It bears

particular note that this fulsome opinion was issued by Judge Glenn

in an apparent effort to clarify the law, even in the absence of formal

opposition by any creditors to the recognition of the restructuring

agreement.

The lead foreign debtor in this case, Agrokor d.d. (“Agrokor”), was

the holding company of a number of food-related companies, with

approximately half of its subsidiaries operating in Croatia. Because

Agrokor accounts for almost 15 per cent of Croatia’s GDP, the

Croatian government passed a special law (the “Extraordinary

Administration Law”), which it applied to Argokor’s restructuring.

In July 2018, the Agrokor entities in the Croatian Proceeding

entered into a settlement agreement with creditors holding

approximately 78 per cent of claims (the “Settlement Agreement”),

which was approved by the Croatian court. Shortly thereafter,

Agrokor and eight of its affiliates filed Chapter 15 cases in SDNY.

Enforcement in the U.S. of the Settlement Agreement was

straightforward on its face, but had one issue. Although the English

court had recognised the Croatian Proceeding, creditors there had

argued that the English court should decline to enforce the

Settlement Agreement under an English common law rule (known

as the “Gibbs Rule”), which provides that rights under English-law

governed indentures can only be determined by English laws and

cannot be discharged in a foreign proceeding. The concern is not

theoretical, given that the English High Court had applied the Gibbs

Rule when determining recognition of an Azerbaijan proceeding in

2018.

Judge Glenn dismissed the concern and held that a “broader analysis

of comity with respect to every nation involved” is not required

“because the Court’s decision to recognize and enforce the

Settlement Agreement is effective within the territorial jurisdiction

of the United States”. 591 B.R. at 186-87. Further, a creditor with

an English-law governed claim could always challenge enforcement

of the claim in English courts, which had also adopted the

UNCITRAL Model Law. Judge Glenn further offered a critique of

the Gibbs Rule and its territorialism as incongruent with the

UNCITRAL Model Law’s goal for bankruptcy proceedings that are

“unitary and universal, recognized internationally and effective in

respect of all the bankrupt’s assets”. Id. at 192.

Lessons learned: Get on board, the train is coming through

The Oi, Ocean Rig, and Agrokor decisions demonstrate that U.S.

bankruptcy courts will focus an enforcement inquiry on whether the

Chapter 15 debtors’ restructuring plan has been approved by the

foreign insolvency court, and will not permit proceedings before

foreign courts or appeals to U.S. courts to derail the restructuring

effort. Practitioners should be aware that U.S. bankruptcy courts

may be generally hesitant to delay enforcement of a plan already

approved in the foreign main proceeding, especially if delayed

enforcement may affect creditors’ rights and the success of the

restructuring. This places additional pressure on creditors to focus

their efforts to obtain all available remedies within the foreign

proceeding, as the U.S. courts are unlikely to impose procedural

protections denied abroad.

No “Pax Americana”: Comity Over Consistency with Chapter 11

Chapter 15 makes available certain relief that a domestic U.S.

debtor could not obtain under Chapter 11. After recognition of a

foreign proceeding, a U.S. bankruptcy court has discretion to grant

“appropriate relief ” under Section 1521 or provide “additional

assistance” pursuant to Section 1507. In Avanti and Energy Coal, two bankruptcy courts granted relief on principles of comity to

foreign courts even though such relief may not have been authorised

in a Chapter 11 proceeding.

Enforcement of third-party releases approved by foreign courts: Let me go!

Although U.S. bankruptcy courts are often hesitant to grant non-

consensual third-party releases, one recent opinion cements the

trend that such releases are more freely granted in Chapter 15. In In re Avanti Communications Group PLC, 582 B.R. 603 (Bankr.

S.D.N.Y. 2018), Judge Glenn approved a U.K. scheme of

arrangement that included non-consensual third-party releases, on

the grounds that a Chapter 15 proceeding should be driven by

principles of comity.

Avanti Communications Group (“Avanti”) was engaged in a U.K.

scheme of arrangement that restructured its debt. The U.K. scheme

was overwhelmingly approved by 98% of the impaired creditors.

The scheme contained releases of guarantees by affiliates who were



not parties to the scheme. Avanti petitioned for recognition and

enforcement of the scheme under Chapter 15.

While recognising that third-party releases can be “problematic” in

Chapter 11 cases, Judge Glenn largely disregarded those issues and

held that the proper analysis is “whether to recognize and enforce

the foreign court order based on comity”. Id. at 606. Citing In re Metcalfe & Mansfield Alt. Inv., 421 B.R. 685, 696 (Bankr. S.D.N.Y.

2010), Judge Glenn noted that principles of comity counsels

approval of third-party releases granted in a foreign proceeding

“even if those provisions could not be entered in a plenary Chapter

11 case”. Id. at 607. Still, Judge Glenn evaluated whether the U.K.

scheme provided sufficient process and notice and received enough

support from creditors to justify binding non-voting creditors, and

whether the releases were required for a successful reorganisation,

factors often considered by bankruptcy courts Chapter 11 cases.

Judge Glenn further distinguished Avanti from the Fifth Circuit’s

decision in In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1042 (5th Cir.

2012). In Vitro, the Fifth Circuit declined to grant comity and

refused to enforce a Mexican court order granting releases of

guarantees of U.S.-based non-debtor affiliates. While Judge Glenn

focused on factual differences, such as the fact that Avanti had near

unanimous creditor support and did not count insider votes, the

Avanti opinion also generally took a more permissive view of the

relief available by granting comity. It also bears noting that the

Second Circuit (in which the SDNY Bankruptcy Court sits) has

more permissive standards governing Chapter 11 third-party

releases than the Fifth Circuit. Avanti is likely to further solidify

SDNY as foreign debtors’ preferred forum, given that debtors have

already started to avoid jurisdictions like the Fifth Circuit that are

hostile to granting third-party releases in Chapter 15.

Limited enforcement of choice of law clause: When in Rome, do as the Romans do

Even when a choice of law or forum selection clause points to the

United States, a bankruptcy court may compel a creditor to resolve

claims through the foreign proceeding. In In re Energy Coal S.P.A.,

582 B.R. 619 (Bankr. D. Del. 2018), the Bankruptcy Court for the

District of Delaware considered whether a dispute with respect to the

priority and distribution of claims must be resolved through the foreign

insolvency proceeding. Judge Silverstein held that creditors must

contest priority and distribution issues in the foreign proceeding.

Energy Coal S.P.A (“Energy Coal”) was an Italian-based company that

markets fuels, coal, and petroleum products for steel manufacturing.

Energy Coal entered into a contract with certain U.S. contractors (the

“Contractors”), which contained a Florida choice of law provision for

any dispute. In April 2015, Energy Coal commenced a restructuring in

Italy (the “Italian Proceeding”), which was later recognised in the

United States as a foreign main proceeding.

The Contractors objected to enforcement of the Italian-court

approved plan in the U.S., arguing that the plan improperly resolved

the priority status of their claims because their contracts required

adjudication of all disputes by a Florida court. The foreign

representative acknowledged that the validity and amount of the

claims could be determined by a Florida court, but insisted that any

dispute over priority and distribution must be resolved in Italy.

The U.S. bankruptcy court agreed with the foreign representative.

Judge Silverstein explained that enforcement of the restructuring is

guided by considerations of comity and the Contractors had

provided no basis for the choice of law provisions to “override the

comity afforded foreign main proceedings”. Id. at 628–29.

Lessons learned: If good enough abroad, good enough here

Both the Avanti and Energy Coal opinions reinforced the importance

given by U.S. bankruptcy courts to comity to foreign courts in

enforcing restructuring plans despite inconsistencies with Chapter 11

practices. Avanti continued a trend in the Southern District of New

York of approving non-consensual third-party releases in a Chapter

15 proceeding despite increasing scrutiny given to such releases in

Chapter 11. See In re Mood Media Corporation, 569 B.R. 556

(Bankr. S.D.N.Y. 2017) and In re Boart Longyear Limited, No. 17-

11156 (Bankr. S.D.N.Y. Aug. 30, 2017). Both the Avanti and Energy Coal decisions are consistent with the modern, uniform view of

cross-border insolvencies, ceding power of U.S. courts to foreign

courts to ensure uniform treatment across jurisdictions.

Do You Belong?: Practical Solutions for Section 109 Eligibility Requirements

Not all foreign debtors can access the protections of Chapter 15, and

U.S. courts may be making it easier by reducing or at least

mitigating the demands of eligibility requirements. As discussed

earlier, the Second Circuit’s Barnet opinion in 2013 required a

foreign representative under Chapter 15 to satisfy the eligibility

requirements for having a domicile, place of business, or property in

the United States pursuant to Section 109(a). Recent cases, such as

the SDNY Bankruptcy Court’s opinion in In re B.C.I. Finances Pty. Ltd., 583 B.R. 288 (Bankr. S.D.N.Y. 2018), suggest a practical

approach to satisfying Barnet’s requirements, furthering the

growing consensus that the bar for satisfying Section 109(a) is low.

B.C.I. Finances Pty. Limited (“B.C.I.”) and its affiliates were placed

into Australian liquidation proceedings (the “Australian Proceeding”)

in August 2014. As a part of the liquidation, the Australian

liquidators sued B.C.I.’s directors, alleging a breach of their

fiduciary duties. Two of the directors who were sued moved to New

York. The Australian liquidators then sought Chapter 15

recognition so that they can conduct discovery against the former

directors. One of the directors opposed the recognition, arguing that

B.C.I. did not have sufficient U.S. property under Section 109(a).

Judge Lane held that a $1,250 retainer placed in the trust account of

the liquidator’s U.S. counsel satisfied the Section 109(a) eligibility

requirement, by relying on prior Chapter 11 decisions holding that

the “property” requirement is satisfied by “even a minimal amount

of property located in the United States”. Id. at 293–94. Judge Lane

dismissed the objection that the retainer was deposited to

“manufacture eligibility”, explaining that prior Chapter 15 cases

have held that it is not improper to create eligibility by establishing

a bank account to pay bankruptcy counsel.

Separately, Judge Lane also held that the breach of fiduciary duty

claims against former directors that now reside in the United States

independently satisfied Section 109(a). Following a multi-step

conflict of laws analysis, the U.S. court determined that the claims

are situated where they are properly recoverable. This suggests that

even those with no concrete property in the United States can seek

the protection of Chapter 15, paving the way for debtors whose

primary assets are litigation claims to access U.S. courts.

Lessons learned: Don’t worry, a little is enough

The B.C.I. decision affirms the broad availability of Chapter 15 by

allowing foreign debtors to satisfy the “property” requirement of



Section 109 with an immaterial amount of property deposited just

prior to filing or U.S. litigation claims. Notably, the decision was

echoed by the U.S. District Court for the Northern District of

California in In re Forge Group Power Pty., Ltd., 17-30008-DM,

2018 WL 827913 (N. D. Cal. 2018), which overturned the

bankruptcy court’s decision that an attorney retainer was not

property for purposes of Section 109. Forge is also notable as the

first case outside the Second Circuit to apply Barnet. In light of

these decisions, it is clear that foreign debtors do not face a

significant hurdle to satisfying the eligibility requirements of

Section 109. As a result, even if Barnet gains traction outside the

Second Circuit (and now courts within the Ninth Circuit), the

requirements under Section 109(a) can be easily satisfied and

should not be a material bar to seeking Chapter 15 protection.

Show Me the Money: Securities Law Exemptions in Chapter 15

While U.S. securities registration requirements are demanding and

expensive, foreign debtors are increasingly able to access

exemptions. Section 1145(a) of the Bankruptcy Code provides an

exemption from U.S. securities registration requirements for

securities issued by a debtor on account of pre-petition claims. Prior

to 2016, no court had explicitly authorised the use of Section 1145

in a Chapter 15 case. In a series of recent decisions, the SDNY

Bankruptcy Court has expressly applied Section 1145 in the Chapter

15 context, allowing foreign debtors to take advantage of

exemptions from the cumbersome securities registration process.

■ First, on December 21, 2017, in connection with the

enforcement of CGG S.A.’s French-confirmed plan, Judge

Glenn explicitly approved the use of Section 1145 in a Chapter

15 proceeding. Judge Glenn presented the use of Section 1145

as uncontroversial and resolved any policy-based concerns by

finding that securities disclosures provided in the French

insolvency proceeding were sufficient to protect investors. See In re CGG SA, 579 B.R. 716 (Bankr. S.D.N.Y. 2017).

■ Next, on June 15, 2018, in connection with the Chapter 15

proceedings for Oi S.A., the bankruptcy court approved the use

of Section 1145 for securities issued pursuant to the Brazilian

Reorganization Plan. See Order (I) Granting Full Force and

Effect in the United States to the Brazilian Reorganization Plan,

and (II) Granting Related Relief, In re Oi SA, et al., Case No.

16-11791 (Bankr. S.D.N.Y. June 15, 2018), ECF No. 277.

■ Finally, on October 5, 2018, Judge Bernstein issued an order

enforcing the Brazilian reorganization plan in OAS, S.A.,

which applied Section 1145 and exempted from securities

registration requirements the offer and sale of certain OAS

“conversion stock” issued under the Brazilian plan. See Order Granting Relief, In re OAS S.A. et al., Case No. 15-

10937 (Bankr. S.D.N.Y. Oct. 5, 2018), ECF No. 170 at 13.

Judge Bernstein previously noted in a hearing that Section

1145 should be available to a foreign debtor as a part of the

“additional assistance” provided under Section 1507.

These cases establish a trend in approving the use of Section 1145

for securities issued pursuant to a foreign reorganisation and is

consistent with the larger trend favouring the grant of broad relief in

Chapter 15. Foreign debtors who seek relief previously reserved for

domestic bankruptcy cases should consider arguing for the

extension of broad relief under Sections 1507 and 1521.

Conclusion

Despite early decisions limiting access to and the scope of Chapter

15 proceedings for foreign debtors, recent decisions (especially from

the Southern District of New York) suggest the opposite trend,

prioritising the underlying policies of Chapter 15 to facilitate

efficient and uniform treatment of cross-border insolvencies. These

recent opinions have interpreted Chapter 15 as a flexible tool to

resolve potential conflicts between competing jurisdictions by

prioritising the foreign main proceeding, granting deference to

decisions by foreign insolvency courts in an effort to maximise the

likelihood of restructuring success, and providing access to broad

relief previously reserved for domestic bankruptcy cases. As a result

of these developments, Chapter 15 will become an increasingly

attractive option to foreign debtors seeking protection for their U.S.

assets and resolution of potential claims in the United States.



Cleary Gottlieb is a pioneer in globalising the legal profession. Since 1946 our lawyers and staff have worked across practices, industries, jurisdictions and continents to provide clients with simple, actionable approaches to their most complex legal and business challenges, whether domestic or international. We support every client relationship with intellectual agility, commercial acumen and a human touch.

We have a proven track record for serving with innovation. We are fluent in the many languages of local and global business. And we have achieved consistent success in multiple jurisdictions. Global corporations, financial institutions, sovereign governments, local businesses, and individuals come to us for consistently practical and forward-looking advice.

Our bankruptcy and restructuring practice advises clients worldwide on matters that cross legal and geographical borders. The deep ties that we form in all of the regions comprising our practice allow our lawyers to understand both the legal and cultural landscapes of highly complex, multijurisdictional restructurings. Clients appreciate the rigor of our approach, with our lawyers employing tough, analytical and outside-the-box thinking to structure creative solutions.

Luke A. Barefoot

Luke A. Barefoot’s practice focuses on bankruptcy litigation,

insolvency, corporate restructuring and related litigation matters, with a

particular focus on cross-border and international bankruptcy disputes.

Among others, Luke’s notable representations include representing the

Steering Committee of bondholders in the Oi Brasil Holdings

Coöperatief (Coop) Chapter 15 cases, including successful trial victory

maintaining recognition of Brazilian proceeding by the U.S. Bankruptcy

Court, and entry of order by Chapter 15 court enforcing terms of

Brazilian plan; Goldman Sachs Mortgage Company in exit financing

facilities in the John Hammonds Trust Chapter 11 proceedings; and

Overseas Shipholding Group Inc., in its Chapter 11 bankruptcy

proceedings and successful restructuring, including successful defense

and resolution of challenges to its plan of reorganisation.

Luke has been recognised as a leading lawyer by The Legal 500 for

his corporate restructuring work. He was named a “Rising Star”, by

Law360 and an “Outstanding Young Restructuring Lawyer”, by

Turnarounds & Workouts.

Lisa M. Schweitzer

Lisa M. Schweitzer’s practice focuses on financial restructuring,

bankruptcy, insolvency and commercial litigation. She has extensive

experience advising corporate debtors, individual creditors and

strategic investors in both U.S. Chapter 11 proceedings and

restructurings in other jurisdictions in North America, Europe and Asia.

Lisa has represented many companies and creditors in major U.S.

bankruptcy proceedings, including Nortel Networks Inc., Grupo

Inbursa, Inversiones Alsacia and Express de Santiago Uno, and has

advised various financial institutions in resolution planning.

Lisa has advised clients in some of the most high-profile bankruptcy

matters in North America, and her work repeatedly has been

recognised by the business and legal press, including being

honoured as a “Dealmaker of the Year” and as a “Dealmaker in the

Spotlight” by The American Lawyer.

Sean A. O’Neal

Sean A. O’Neal’s practice focuses on corporate restructuring,

insolvency, bankruptcy, and related litigation matters.

He regularly assists corporate debtors, creditors, investors, financial

counterparties, and other interested parties in bankruptcy-related

transactions, out-of-court workouts, and liability management

transactions. Sean also works with investors in purchasing assets from,

or making investments in, distressed companies. He frequently advises

clients on creditors’ rights, debt instruments, prepackaged bankruptcies,

loan-to-own strategies, debtor-in-possession financing, exit financing,

Chapter 11 rights offerings, forbearance arrangements, and other matters.

Sean recently represented ESL Investments Inc., as largest creditor

and shareholder of Sears Holdings Corp. with over $2.6 billion in

claims, in its Chapter 11 proceedings, as well as advising on

prepetition transactions and related matters.

Sean has been recognised as an “Outstanding Restructuring

Lawyer” by Turnarounds and Workouts. Additionally, he has been

recognised by Chambers USA, The Legal 500 U.S. and IFLR 1000

for his restructuring work.

Jane VanLare

Jane VanLare’s practice focuses on restructuring, insolvency and

bankruptcy litigation.

Jane has advised on significant transactions in the bankruptcy and

restructuring space, including acting as counsel to ModSpace, the largest

U.S. provider of temporary and modular office space, in the restructuring

of nearly $1 billion in secured debt through a pre-packaged Chapter 11

plan; Overseas Shipholding Group’s successful restructuring and exit

from Chapter 11 bankruptcy protection, which IFLR named as

“Restructuring Deal of the Year”; Goldman Sachs in the Lehman

Brothers Chapter 11 proceedings, which IFLR named as a “Restructuring

Deal of the Year”; and to Truvo Group in its Chapter 11 proceedings,

which IFLR named as an “EMEA Restructuring Deal of the Year”.

Jane has been recognised by the American Bankruptcy Institute as a

“40 Under 40” honouree and by Benchmark Litigation on the

“Under 40 Hot List”.

Benjamin S. Beller

Benjamin S. Beller’s practice focuses on bankruptcy, restructuring

and litigation.

Benjamin’s notable representations include Nortel Networks Inc., The

Puerto Rico Electric Power Authority (PREPA), and Tempur Sealy

International Inc. as debtor-in-possession lender and purchaser in the

Chapter 11 cases of Innovative Mattress Solutions LLC.

Benjamin has served clerkships with the Honorable Robert E.

Gerber of the U.S. Bankruptcy Court, Southern District of New York

and the Honourable Shelley C. Chapman of the U.S. Bankruptcy Court, Southern District of New York. He joined the firm in 2013.


chapter 5


gilbert + tobin

Dominic emmett

alexandra whitby

australia

1 Overview

1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?

Australia is widely considered to emphasise the rights of creditors

over debtors and as such is recognised as a creditor-friendly

jurisdiction. Whilst there are some limitations on the options that

might otherwise be available to distressed companies and some

inflexibility in certain tools available to insolvency practitioners,

Australia’s insolvency regime is, for the most part, primarily

focused towards protecting the rights and interests of creditors over

the interests of debtors. For example, Australia’s voluntary

administration regime is controlled by creditors to the exclusion of

management and members and its purpose is designed to maximise

creditor returns. Further, unlike the United Kingdom for instance,

receivership is alive and well in Australia.

Creditors are active participants in all insolvency processes in

Australia. They can enforce their rights in each process and, whilst

there are some timing limitations placed on their enforcement rights

in a voluntary administration scenario, enforcement rights over

secured assets are otherwise unfettered.

Secured creditors and employees enjoy a statutory priority in a

distribution of assets and, in some circumstances, unsecured

creditors can also place themselves in a position of protection.

Unlike secured creditors, unsecured creditors are given no legal

right to priority, yet due to a particular relationship that may exist

with a debtor (for example, as a supplier of essential materials), they

can exercise that power to obtain payment and ensure future

payments as a practical necessity to maximise value and keep the

debtor business running.

1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?

Informal work-outs and reorganisations can be pursued in Australia

provided adequate attention is paid to the prohibitions on insolvent

trading. The Corporations Act 2001 (Cth) (the Act) bestows a

positive duty on directors to prevent a company from incurring a

debt whilst it is insolvent (or where they suspect it is likely to

become insolvent). A breach of this duty exposes the director(s) to

penalties such as personal liability for future debts incurred,

including during any informal workout period.

Following the recent introduction of a “safe harbour” protection into

Australia’s legislative regime (see question 9.1 below), Australia

may see an increase in the use of informal work-outs. The

protection is designed to provide financially distressed companies

time to develop an informal turnaround where a formal insolvency

might have otherwise been necessary. Given the real exposure

directors have to personal liability, which risk is only mitigated and

not eliminated by the safe harbour provisions, it is unclear at this

stage whether the reforms go far enough to significantly increase the

use of informal work-outs.

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

2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?

Directors owe a number of general and specific law duties to the

company, its shareholders and creditors. These include:

■ duties of good faith and due care and diligence;

■ to not improperly use the position, or information obtained by

virtue of the position, to gain personal advantage or cause

detriment to the company;

■ to keep adequate financial records;

■ to take into account the interests of creditors; and

■ to prevent insolvent trading.

Compliance with these duties means that directors should place a

company into external administration at such time that the company

is cash flow insolvent or there exists a less than reasonable prospect

that the company will remain cash flow solvent.

Australia’s new safe harbour provisions could, in certain

circumstances, enable a company to delay a formal insolvency

appointment where it seeks to pursue a turnaround plan with a

“better outcome” for the company (see question 9.1 below). If such

a plan is being developed, the company must ensure it meets the

criteria to enliven the protection, because as a matter of practice, if

the turnaround plan is unsuccessful and a formal insolvency

follows, the safe harbour protection will only be a defence to an

insolvent trading claim rather than a positive exception to liability.

aus

tral

ia


2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?

Stakeholders who have the power to influence a company’s

situation include:

■ Secured creditors, who may seek to enforce their security and

appoint a receiver to realise the assets of the company.

■ Unsecured creditors, where they may have a particular

relationship with a debtor (e.g. as a supplier of essential

materials), may exercise that power to obtain future payment

of its debts as a practical necessity to keep the debtor business

running.

■ Shareholders.

An automatic moratorium applies in respect of each of the formal

procedures, other than receivership, to prevent unsecured creditors

(including shareholders and landlords) from enforcing their rights.

Whilst no such moratorium exists in receivership, to the extent an

unsecured creditor takes action to enforce their rights, they have no

recourse to the assets which are secured and in the control of the

receivers.

The Personal Properties and Securities Act (Cth) in 2009 (PPSA)

provides a regime for certain unsecured creditors and the protection

of a supplier’s title to goods relevantly supplied. A uniform concept

of “security interest” exists under the PPSA to cover all existing

forms of security interests under which an interest in personal

property is granted pursuant to a consensual transaction that, in

substance, secures the payment or performance of an obligation. It

also applies to certain deemed security interests such as certain

types of lease arrangements for certain terms, retention of title

arrangements and transfers of debt, regardless of whether the

relevant arrangement secures payment or performance of an

obligation. Personal property is defined broadly and essentially

includes all property other than land, fixtures and buildings attached

to land, water rights and certain statutory licences.

To perfect title under the PPSA, suppliers are required to register the

retention of title arrangements on the Personal Property and

Securities Register (PPSR). If a security interest is not perfected it

will, on liquidation of the grantor, vest in the grantor, despite the

agreement between the supplier and recipient that the supplier

retains title to those goods until payment is received.

2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?

Transactions are only vulnerable to challenge where a company is in

liquidation. Liquidators have the power to bring an application to

the court to declare the following types of transactions void:

■ insolvent transactions (which includes both unfair preferences

and uncommercial transactions) if entered into, in the case of

unfair preferences, during the six-month period ending on the

relation-back day (the relation-back day is generally the date

of the appointment of administrators prior to/the application

to wind-up the company) or in the case of uncommercial

transactions, during the two-year period ending on the

relation-back day;

■ unfair loans, which are voidable if entered into any time

before the winding up began;

■ unreasonable director-related transactions, which are

voidable if entered into during the four years ending on the

relation-back day; and

■ transactions entered into for the purpose of defeating,

delaying or interfering with creditors’ rights on a company’s

winding up, which are voidable if entered into during the 10

years ending on the relation-back day.

Uncommercial transactions and unfair preferences are voidable if

the company was insolvent at the time of the transaction or at a time

when an act was done to give effect to the transaction. Australian

Courts have held a transaction is “uncommercial” if a reasonable

person in the company’s circumstances would not have entered into

it. An unfair preference is one where a creditor receives more for an

unsecured debt than would have been received if the creditor had to

prove it in the winding up. The other party to the transaction or

preference may prevent it being held void if they can show they

became a party in good faith, they lacked reasonable grounds for

suspecting that the company was insolvent and they provided

valuable consideration or changed position in reliance on the

transaction.

Loans to a company have been held to be “unfair” and thus voidable

if the interest or charges in relation to the loan were, or are, not

commercially reasonable. This is distinct from the loan simply

being a bad bargain. Any “unreasonable” payments made to a

director or a close associate of a director are also voidable,

regardless of whether the payment occurred when the company was

insolvent.

3 Restructuring Options

3.1 Is it possible to implement an informal work-out in your jurisdiction?

See question 1.2 above.

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?

There are two processes available to effect a restructure of a

company’s debts:

■ deed of company arrangement (DOCA); or

■ scheme of arrangement (Scheme).

DOCA

A DOCA takes place in the context of a voluntary administration

(i.e. a formal appointment).

Once a company is in voluntary administration, a DOCA can be

proposed by anyone with an interest in the company. A DOCA is

effectively a contract or compromise between the company and its

creditors. Whilst it is a feature of voluntary administration, it should

in fact be viewed as a distinct regime, where the rights and

obligations of the creditors and company differ to those under a

voluntary administration.

gilbert + tobin australia

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Approval of a DOCA requires a simple majority (50% of creditors

voting in number and value). Where a DOCA is approved, it will

bind unsecured creditors, the company, directors and shareholders

and those secured creditors who vote in favour of it. Secured

creditors who do not vote to approve the DOCA retain their rights to

enforce their security at any time, including by appointing a

receiver. As such, secured creditors are the only form of stakeholder

who cannot be crammed down under a DOCA.

Shareholders have no entitlement to vote on a DOCA, but will be

bound by it.

A DOCA is a flexible restructuring tool in terms of outcomes that it

can deliver. These include debt-for-equity swaps, a transfer of

equity pursuant to section 444GA of the Act, moratorium of debt

repayments, a reduction in outstanding debt and the forgiveness of

all, or a portion of, outstanding debt.

Scheme of arrangement

A Scheme is a restructuring tool that sits outside of formal

insolvency. It is a court approved agreement which binds company’s

creditors and/or members to some form of rearrangement or

compromise of their pre-existing rights and obligations.

Schemes typically involve the deleveraging of a business or the

reduction of outstanding debt in exchange for the issuance of equity.

Schemes have also been used to facilitate a subsequent proposed (and

not mandatory) debt restructuring, rather than to actually implement it.

The approval threshold for Schemes is 50% by number and 75% by

value of the debt held by those creditors voting in each class such

that it is possible for dissenting creditors to be crammed down.

However, given the approval threshold must be met in each class,

dissenting creditors will have a power of veto if they can establish

they belong in a separate class. Classes are determined by reference

to commonality of legal rights and only those creditors whose rights

will be affected need be included.

The key element to the success of both restructuring procedures is

the willingness of (any) secured creditors to work with management

of the distressed company as well as other stakeholders. The

starting point for the negotiation will often involve an agreement or

undertaking on a standstill or forbearance period during which the

company will look to refinance its current debt structure (often

through the injection of new capital and/or equity).

Pre-packaged sales

The “pre-pack sale” in the traditional English and US tradition has

had limited application in the Australian restructuring environment

due to the stringent obligations placed on insolvency practitioners

and the protections afforded to creditors under both statute and

common law. However, the use of pre-packs may increase given the

recent introduction of the safe harbour protection.

Attempts to effect a “pre-pack” are also restricted by the specific

obligations on receivers vis-à-vis the disposal of assets. Section

420A of the Act requires a receiver to, upon the sale of an asset,

either achieve a price not less than market value (if a market exists

for the asset), or alternatively the best price reasonably obtainable.

Australian Courts have identified certain steps that a receiver should

take in order to comply with the second limb of the obligation,

which include a market or auction sale process and marketing

campaign, which has made “pre-pack” sales difficult for receivers to

achieve.

Due to the impediments described above, pre-packs tend only to be

used in circumstances where:

(a) there are limited alternative sale options available to the

insolvency practitioner appointed and there is evidence to

support the assumption that any delay in sale may be fatal to

the underlying business; or

(b) a market testing sale process has already been undertaken

prior to the appointment of the receiver or administrator.

Notwithstanding the above, the market may well evolve so that we

see more pre-packs if it can be demonstrated clearly that junior

creditors and shareholders are out of the money.

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

DOCA

Where a DOCA has been proposed by an interested party, it will be

accepted at the second creditor meeting if the majority of creditors

(50% in number and value) vote in favour of it.


A Scheme will be approved where at least 50% in number and 75%

in value of creditors in each class of creditor vote in favour of it.

Final court approval is required.

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

DOCA

The management of the company under the DOCA will depend

entirely on its terms. A Deed Administrator may be appointed to

control the company and/or management may be reinstated.

Court supervision is not mandatory for a DOCA; however, should a

section 444GA share transfer be contemplated, it is likely leave of

the court will be required for implementation.

Dissatisfied creditors also have recourse to the court to have a

DOCA set aside.


The pre-existing management of the company generally continue in

that capacity during the Scheme process and approval phases (and,

depending on the terms of the Scheme itself, after implementation).

The Scheme process is heavily supervised by the court (as well as

regulatory bodies) and is subject to two hearings. The first court

hearing is to approve the convening of the meeting for the relevant

class(es) of creditors. At the second court hearing, the court must

approve the Scheme prior to implementation.

3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?

There is no formal insolvency procedure that results in the

automatic termination of contracts between the debtor and third

parties.

Following appointment, administrators, receivers and liquidators

can choose not to continue to perform a contract. Any damages

flowing to the counterparty from the non-performance of a contract

will rank unsecured against the company. However, any contract

that an insolvency practitioner continues with may result in the

practitioner being held personally liable under the Act.

Contractual and mandatory set-off will apply in formal insolvency

processes, with certain exceptions. Section 553C of the Act

provides for a statutory set-off in a liquidation where there have

been mutual dealings between the distressed company and the


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relevant creditor. In such circumstances, an automatic account is

taken of the sum due from one party to the other in respect of those

mutual dealings, and the sum due from one is set-off against any

sum due from the other.

Until 1 July 2018, it was not uncommon for contracts to contain ipso facto clauses allowing a counterparty to terminate or renegotiate a

contract on the occurrence of any insolvency event (which can be

defined to include any form of restructure).

Following the introduction of Insolvency Law Reform Act 2016

(Cth) (ILRA) and its associated instruments, the ipso facto clause

regime underwent significant change, which came into effect from 1

July 2018. The effect of the regime amendments is to impose an

automatic stay on the enforcement of ipso facto termination rights in

certain contracts that are triggered simply because a company enters

into a formal or informal insolvency or restructuring process. The

stay operates during a “stay period”, the length of which is

determined by reference to the length of the relevant restructuring

process. There are also circumstances in which the stay period will

be indefinite. A court will also have the power to lift the automatic

stay where it considers it is in the interests of justice to do so.

Where the stay operates to prevent a counterparty from exercising

termination rights, a corresponding stay will also operate to prevent

a company from requiring a “new advance of money or credit” from

the relevant counterparty. This corresponding stay is designed to

protect counterparties from advancing further “money or credit” to

a company that has entered an insolvency process. However, the

concept of a “new advance of money or credit” is not defined such

that its scope is ambiguous and its application (for example, to

lenders within the terms of a facility or to suppliers of goods and

services under credit) is unclear.

The full effect of the new regime will take some time to be properly

understood as it does not operate retrospectively and only applies to

contracts entered into after 1 July 2018. All existing contracts as of

1 July 2018 that contain ipso facto termination clauses will confer

rights on the counterparty to enforce those rights in accordance with

the terms of the contact.

3.6 How is each restructuring process funded? Is any protection given to rescue financing?

The costs of a DOCA will be the company’s costs in the

administration. Equally, Scheme costs will usually be the costs of

the company, unless otherwise negotiated.

A debtor can obtain financing and otherwise use its assets as

security in a scheme of arrangement and informal voluntary

reorganisations. This is solely a matter for agreement between the

company and its creditors. There are no special priorities given to

new debt as of right and such priorities have to be negotiated and

agreed with any existing creditors who already hold some form of

priority.

4 Insolvency Procedures

4.1 What is/are the key insolvency procedure(s) available to wind up a company?

A company may be wound up:

■ if solvent, voluntarily by its members; or

■ if insolvent, by its creditors or compulsorily by order of the

court.

4.2 On what grounds can a company be placed into each winding up procedure?

Members’ voluntary winding up

A members’ voluntary liquidation is a solvent winding up. It

requires the directors of the company to make a declaration of

solvency under section 494 of the Act that, in their opinion, after an

inquiry into the affairs of the company, the company will be able to

discharge its debts in full within 12 months of the commencement of

winding up. This is coupled with a special resolution of the

members to wind up the company (at least 75% of votes cast by

members entitled to vote).

Creditors’ voluntary winding up

A creditors’ winding up arises when the company is insolvent. It

can occur in a number of circumstances, including:

■ if the members of the company resolve that the company be

wound up and the directors cannot provide a solvency

declaration;

■ where a liquidator is appointed by members, the liquidator

forms the opinion that the company is in fact insolvent, they

will convert the process from a members’ voluntary winding

up into a creditors’ voluntary winding up; and

■ a company may also enter into a creditors’ voluntary winding

up at the end of an administration if the creditors resolve to do

so at the second creditors’ meeting.

Compulsory liquidation

A creditor can apply to the court for an entity to be wound up. The

most common ground for the application is insolvency, usually

indicated by a failure to comply with a statutory demand or

judgment debt. Other grounds not related to insolvency are also

available, including that it is “just and equitable” to do so or because

of a deadlock at a shareholder or director level affecting the ability

to manage the company.

Provisional liquidation

Upon application to the court to wind up a company, the court can

order the appointment of a provisional liquidator.

4.3 Who manages each winding up process? Is there any court involvement?

Liquidation

Following appointment, a liquidator will control the affairs of the

company and has the power to realise and distribute assets to the

exclusion of the directors and shareholders.

Court involvement is required in a compulsory winding up, where it

will appoint the liquidator.

Courts will also consider applications by the liquidator, pursuant to

section 480 of the Act, for an order that the liquidator be released

and that the company be deregistered after the liquidator has

realised all of the property out of the company or so much of that

property as can be realised (in his or her opinion) without needlessly

protracting the winding up, has distributed a final dividend (if any)

to the creditors, has adjusted the rights of the contributories among

themselves and made a final return (if any). The court must be

satisfied that no creditor will be adversely affected by the order.


The provisional liquidator controls the affairs of the company

during the provisional liquidation to the exclusion of the directors

and shareholders.


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4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?

Generally, unsecured claims rank pari passu (with some exceptions),

with secured creditors afforded a level of priority by virtue of the

security arrangements in place. However, the court has the power (in

limited circumstances) to change the rank of a creditor’s claim.

Section 564 of the Act provides an incentive to creditors to give

financial assistance or indemnities to the liquidator to pursue asset

recovery proceedings or to protect or preserve property. If creditors

provide such assistance, the liquidator may apply to the court for an

order that the contributing creditors receive a higher dividend from

the company’s assets than they would otherwise be entitled to.

After the commencement of a winding up of a company, or after the

appointment of a provisional liquidator, leave of the court is

required to commence or continue legal proceedings against a

company. Secured creditors are generally exempted from this

process, assuming the validity of their security, as they remain

entitled to realise their security despite the liquidation.

4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?

See question 3.5.

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

Generally, the statutory waterfall set out in the Act has secured

creditors paid in priority to unsecured creditors. Secured creditors

may contract priority arrangements between themselves if there are

different levels of secured debt within a company.

There is an exception to this for employee entitlement claims.

During a winding up, the entitlements of employees have priority

over all other unsecured debts and claims, as well as those assets

subject to a circulating security interest (formerly floating charges).

The numeration, costs and expenses of liquidators are afforded

priority over all creditors’ claims, including employees.

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

A company cannot be revived in the future following a winding up.

Once the company’s assets have been sold, the company is deregistered

with the corporate regulator and ceases as a corporate identity.

5 Tax

5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?

Tax liabilities (including PAYG and capital gains tax) can continue

to be incurred during trade-ons in each of the insolvency and

restructuring processes. Whilst the tax office is not afforded

priority, certain tax liabilities are met regularly in distressed

situations as directors can be rendered personally liable of those

certain tax liabilities which are not paid.

6 Employees

6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?

Receivership

A receiver becomes personally liable for the services rendered by an

employee to the company. A receiver may choose to terminate

employment contracts, and is not personally liable for accrued

entitlements prior to appointment. The claims of the terminated

employees (in relation to unpaid entitlements) are given priority to

all other unsecured claims.

Voluntary administration

The position of an employee under any voluntary administration

will be at the discretion of the administrator.

DOCA

Employees are afforded a level of protection under a DOCA. The

statutory priority afforded to employees in liquidation must be the

equivalent in a DOCA (unless the employees vote otherwise).


Provisional liquidation does not automatically terminate employees.

Liquidation

Employees are afforded a statutory priority ahead of other

unsecured creditors, and in some cases, secured creditors, for claims

in relation to unpaid employee entitlements. The position of

directors and management is different, and the priority afforded to

them is capped significantly. A liquidator that chooses to run the

business for a short period of time as part of the process will become

personally liable for services provided by individuals retained or

employed during that period.


A Scheme of itself generally does not affect employment.

7 Cross-Border Issues

7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?

Companies registered as foreign corporations in Australia could

have receivers, administrators or liquidators appointed to them, but

it is rare for this to occur. We are not aware of any foreign

corporations having initiated a scheme of arrangement in Australia.

7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?

Australian courts act cooperatively with foreign courts and

insolvency practitioners and will recognise the jurisdiction if the

relevant court where the “centre of main interest” is located. This

approach follows the UNCITRAL “Model Laws” on insolvency

which was codified into Australian law through the Cross-Border Insolvency Act 2008 (Cth).

There is also scope under different legislation (such as the Act) for

Australian Courts to recognise foreign judgments in Australia. Such

recognitions require compliance with the relevant court practice and

procedure rules.


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

It is becoming increasingly common for Australian companies

subject to a formal insolvency process to seek recognition of that

process in other jurisdictions (for example, Chapter 15 recognition

in the United States of America) but it is rare for Australian

companies to look to initiate a formal insolvency process or

restructure exclusively in a foreign jurisdiction.

8 Groups

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

In insolvency proceedings involving corporate groups, a consolidated

group is not considered as a single legal entity. Where companies

operate as a consolidated group, the starting legal position is the

“separate personality” principle which prevents creditors of an

insolvent company from gaining access to the funds of other

companies for payment of their debts. Having said that, groups of

companies often enter into deeds of cross guarantee to afford

themselves the benefit of consolidated financial reporting. In a

liquidation scenario, that deed commits the companies a party to it

to pay the liabilities of all the other companies that are a party to it.

The Act, however, provides for a holding company to be liable for the

debts of their insolvent subsidiaries in certain circumstances. These

provisions enable the subsidiaries’ liquidator to recover amounts

equal to the loss or damage suffered by creditors from the parent

company if the parent failed to prevent the subsidiary from incurring

debts while the subsidiary was trading whilst cash flow insolvent.

Pooling of group funds may occur in limited circumstances, as

prescribed by Division 8 and Part 5.6 of the Act being sections 5.71

to 5.79L. Generally, those circumstances are where there is a

substantial joint business operation between members of the same

corporate group and external parties, such members of the group are

jointly liable to creditors. The liquidator of the corporate group

makes what is called a pooling determination, after which separate

meetings of the unsecured creditors of each company must be called

to approve or reject the determination. The court may vary or

terminate any approved pooling determination.

9 Reform

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

Australia’s corporate insolvency law has been the subject of recent

reform. Significant changes have been introduced via the ILRA,

with many of the reforms either in their infancy or still in the process

of being rolled out. To give full effect to the ILRA, a number of

additional instruments have been introduced, including the:

■ Insolvency Practice Rules (Corporations) 2016, which

provides a range of rules regarding the external

administration of companies and the registration and

discipline of external administrators;

■ Corporates and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016, which amends the

Corporations Regulations 2001 (Cth) and other relevant

regulations consequential on the Insolvency Practice Rules;

and

■ instruments to provide for the partial delay of certain ILRA

amendments.

Whilst the reforms do not make wholesale changes to Australia’s

current insolvency regime, they will affect the day-to-day operation

of both formal and informal restructuring processes and will bolster

creditor information rights.

Two of the biggest changes contemplated by the reforms include:

■ the introduction of a “safe harbour” concept to the insolvent

trading laws (see questions 1.2 and 2.1); and

■ the operation of the automatic stay on ipso facto termination

clauses (see question 3.5).

The safe harbour protection has been incorporated by introducing a

new section 588GA into the Act which provides that section

588G(2), being the provision which makes directors personally

liable for insolvent trading, will not apply if, after starting to suspect

the company is, or may become, insolvent, the director takes steps to

develop one or more courses of action that is “reasonably likely to

lead to a better outcome for the company” than the immediate

appointment of an insolvency practitioner. There are a number of

criteria that will be used to assess whether the test has been satisfied

so as to enliven the protection, including the engagement of

appropriately qualified advisors to provide advice on the restructuring

plan. The Explanatory Memorandum accompanying the legislation

states that “reasonably likely” requires that there is a chance of

achieving a better outcome that is not “fanciful or remote”, but is

“fair”, “sufficient” or “worth noting”.

The safe harbour rule does not provide protection in respect of all

debts and only covers debts that are incurred:

■ in connection with the relevant course of action being

pursued; and

■ during the period commencing at the time the course of

action is being developed ending at the earliest of a

“reasonable period” following the course of action not being

pursued, when the director ceases to take such course of

action, when the course of action ceases to be “reasonably

likely” to lead to a better outcome or the appointment of an

insolvency practitioner.

Care should be taken when relying on the safe harbour principle as

it will not operate to automatically exempt a director from exposure

to personal liability; rather it will be relevant to a director seeking to

defend an insolvent trading claim.

Additional reforms being proposed in Australia include:

■ Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth), pursuant to which:

■ civil and criminal penalties will apply to persons

(including directors and related entities) that enter into

transactions which are “reasonably likely” to prevent or

significantly reduce the recovery of employee entitlements;

and


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■ the Court will be able to make an “employee entitlements

contribution order” against a (solvent) parent company or

another entity which has benefited from the services of

the employees of a company in liquidation where it is

“just and equitable” for the order to be made (for example,

where the assets of group entities have been intermingled

and a subsidiary company has been intentionally left with

insufficient assets to discharge its liabilities).

■ Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth), pursuant to which:

■ it is proposed to introduce a new clawback provision into

the Corporations Act to enable a liquidator to recover a

“creditor-defeating disposition”, being a disposition of

company property:

■ where the consideration paid is less than the lesser of

the market value of the property and the best price

reasonably obtainable; and

■ which has the effect (irrespective of intention) of

preventing, hindering or significantly delaying the

property becoming available for creditors in the event

of a winding up,

only if the disposition was entered into (or an was act done

for the purpose of giving effect to the disposition):

■ when the company was insolvent or otherwise caused the

company to become insolvent; and:

■ during the 12 months before appointment of an

external administrator; or

■ less than 12 months after the disposition was entered

into or an was act done for the purpose of giving effect

to the disposition, the company enters into external

administration as a direct result of the disposition or

the act in respect of the disposition; and

■ was not entered into or done under a scheme of arrangement

or DOCA or by an administrator, liquidator or provisional

liquidator; and

■ a director will be exposed to personal liability where he or she

fails to prevent a company from entering into a creditor-defeating

disposition within the relevant time periods and the director:

■ is reckless as to the result of the disposition, in which case

the director will commit an offence and will also be liable

for a civil penalty and/or to pay compensation; or

■ knows or ought to know the disposition is a creditor-

defeating disposition, in which case a civil penalty and/or

compensation order may be imposed.


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Dominic Emmett Gilbert + Tobin Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue Barangaroo, NSW 2000 Australia Tel: +61 2 9263 4328


URL: www.gtlaw.com.au

Alexandra Whitby Gilbert + Tobin Level 35, Tower Two International Towers Sydney 200 Barangaroo Avenue Barangaroo, NSW 2000 Australia Tel: +61 2 9263 4114


URL: www.gtlaw.com.au

Dominic specialises in non-contentious restructuring and insolvency work for banks and financial institutions, as well as special situation groups and distressed debt funds. His expertise includes: preparing and negotiating standstill and forbearance arrangements; debt restructuring and schemes of arrangement; structured administration and receivership sales; and advice to directors, receivers, administrators and liquidators.

Recent and current roles in the resources sector include Bis Industries, Arrium, Emeco, Boart Longyear, Paladin and WICET.

Additionally, Dominic is involved in a significant if not lead role in Atlas Iron, Mirabela Nickel, Straits Resources, BrisConnections, RiverCity, Nine Entertainment, Westpoint, Ansett, Billabong, Alinta Energy, I-Med, Centro, Freight Link, Cross City Tunnel, Timbercorp, Walter Construction, MF Global, Top Ryde, Allco Finance, Raptis and FAI.

Gilbert + Tobin is Australia’s leading independent law firm. Established in 1988, the firm employs more than 500 lawyers and professionals nationally.

From our Sydney, Melbourne and Perth offices, we work on transactions and cases that define and direct the market. Our clients include major corporations and government clients, throughout Australia and the Asia-Pacific region, and around the world.

We are a diverse mix of talented, energetic and creative thinkers who bring different perspectives to find original solutions to unprecedented problems. With insight and rigour, we cut through complexity to get to the point.

Our core competency practice areas are: Restructuring + Insolvency; Corporate Advisory/M+A; Banking + Infrastructure; Capital Markets; Competition + Regulation; Intellectual Property; Disputes and Investigations; Technology; Media + Telecommunications; Employment; Energy + Resources; Real Estate; and Environment + Projects.

Alexandra practises in insolvency and restructuring disputes as well as non-contentious restructuring and insolvency transactions:

Anchorage Capital Partners, in its claim against certain former ■directors and officers of the Arrium Group in relation to the Arrium Group’s collapse.

A secured lender, in its objection to a proposed creditors’ scheme ■of arrangement in Re Boart Longyear Limited.

Bis Industries, in relation to a recapitalisation plan to restructure its ■A$1.17 billion debt.

The receivers and managers appointed to the Clem 7 (Airport Link) ■Tunnel in Brisbane, Queensland (BrisConnections).

The receivers and managers appointed to the North-South Bypass ■Tunnel in Brisbane, Queensland (RiverCity).

Nine Entertainment Group, in respect of its A$3.4 billion debt-for-■equity restructuring by way of scheme of arrangement.

The deed administrators of Mirabela Nickel Limited, in respect of a ■recapitalisation plan to restructure its A$500 million debt.

GrainCorp, in representative proceedings in the Supreme Court of ■New South Wales.

The majority group of term lenders in the Atlas Iron creditors’ ■scheme of arrangement.

chapter 6


schindler rechtsanwälte gmbH

martin abram

Florian cvak

austria

1 Overview


Austria is generally considered a creditor-friendly jurisdiction, as it

does not provide for UK or US styles of restructuring proceedings.


Austrian law allows for both informal work-outs as well as (within

the framework of the Austrian Insolvency Code) formal restructuring

and insolvency proceedings, all of which are used in practice. The

Austrian Insolvency Code provides for three types of insolvency

proceedings, namely:

■ restructuring proceedings with self-administration (where the

management of the debtor retains control over the day-to-day

business);

■ restructuring proceedings without self-administration (where

the court-appointed administrator takes control over the day-

to-day business); and

■ bankruptcy proceedings (where the court-appointed

administrator takes control over the debtor with the aim to

realise all assets to pay off the creditors).

The following chapter solely deals with work-outs, restructuring and

insolvency proceedings of corporate entities, and not individuals.



Managing directors are obliged to timely file for insolvency if the

debtor is considered “insolvent” according to the Austrian

Insolvency Act, i.e., if it is illiquid or over-indebted. A debtor is

illiquid if it cannot settle the liabilities due – known but not due

liabilities are not considered – and this is not just a temporary

occurrence. A debtor is over-indebted if its assets – based on their

liquidation value – are not sufficient to satisfy all of the creditors

and a business forecast shows that the debtor is likely to become

illiquid within a reasonably predictable period; usually at least the

current and the following financial year are considered for such a

test. If a debtor is illiquid or insolvent, the managing directors have

to file for the opening of insolvency proceedings without undue

delay; however, no later than within 60 days; failure to meet this

obligation exposes the managing directors to civil and criminal

liability, as follows:

In case of such delays, the managing directors will be liable to all

creditors for the damages caused by such delay. Existing creditors,

i.e. creditors who had a claim against the debtor before the opening

of the insolvency proceedings, are entitled to claim quota damages,

i.e. the difference between the quota they would have received in

case of a timely filing and the lower quota they received because of

the delayed filing. New creditors, i.e. creditors who became

creditors of the company after the point in time when management

would have been obliged to file, will be entitled to be reimbursed for

the negative interest, as they would have most likely not have

contracted with the debtor had its management already filed for

insolvency.

Criminal liability can occur under several circumstances, most

notably in cases of grossly negligent encroachment of creditors’

interests, preferential treatment of creditors, withholding of social

security payments and fraudulent intervention with creditors’ claims.


Shareholders or members of the supervisory board of the debtor (if

any) are not entitled to file for the opening of insolvency

proceedings. If they exert their influence to induce management not

to file for the opening of proceedings, this may expose a stakeholder

to claims for damages for contributing to a delay of the filing.

Creditors are entitled to (and frequently do) file for the opening of

insolvency proceedings; however, they can only apply for the

opening of bankruptcy proceedings, and not for the opening of in-

court restructuring proceedings. Creditors which have ongoing

contractual relationships with the debtor may be barred from

terminating such contracts in in-court restructuring proceedings, if

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such contracts are vital for the restructuring of the debtor (see

question 3.5). Otherwise, there are no special types of rules or

regimes applying to particular types of unsecured creditors.

Moratoria and stays on enforcement are only available for in-court

reorganisation proceedings (see question 3.5).


Court-appointed insolvency administrators can (and frequently do)

challenge before the insolvency court transactions undertaken by the

debtor prior to the opening of the proceedings during certain “suspect

periods” (not applicable for restructuring proceedings under self-

administration). For example, transactions in which the debtor

intentionally puts certain creditors at a disadvantage relative to one or

several other creditors who knew of such an intention can be

challenged when made within a suspect period of 10 years before the

opening of the proceedings. In other cases, suspect periods range

between six months and two years. Cases include the transfer of

assets without due consideration (two years), provision of security or

settlement of an obligation not due at the time (one year), and business

transactions with the insolvent debtor when the counterparty knew or

should have known of its insolvency (six months).



Out-of-court restructurings can only be implemented pre-insolvency

or within the 60-day grace period (that is, management has an

obligation to file for the opening of insolvency proceedings without

undue delay but in any event within 60 days of insolvency; during

the 60-day grace period, management may make reasonable efforts

to restructure the debtor or prepare an application for restructuring

proceedings). The obvious advantage of an out-of-court

restructuring is that the proceedings are not registered in the

insolvency database (as would be the case with in-court

restructuring proceedings), and thus it is less likely to become

public. The other advantage is that out-of-court restructurings tend

to offer more flexibility and can be implemented quicker as long as

all relevant parties contribute. The downside is that out-of-court

restructurings only capture the contracting parties (and not all

insolvency creditors) and in certain situations there may be a risk of

voidance where an agreement is entered into at a time where the

debtor is already insolvent and the effect thereof is to potentially

reduce the value of the estate.

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram down dissenting classes of stakeholder?

As mentioned under question 1.2 above, the Austrian Insolvency

Code provides for three types of formal insolvency proceedings.

The two types of restructuring proceedings (with or without self-

administration by the debtor) are aimed at ensuring the continuing

survival of the debtor by providing a restructuring of (some of his)

financial obligations. On the other hand, bankruptcy proceedings

(see question 1.2 above) are aimed at realising the assets of the

estate and distributing the proceeds to the debtor’s creditors. In case

restructuring proceedings are not successful, they are transformed

into bankruptcy proceedings.

Additionally, the Austrian Reorganisation Act also provides – at

least in theory – provisions for the restructuring of a company in

financial difficulty. However, these provisions have little practical

relevance, as the completion of such procedure requires the consent

of all creditors.

Austrian law does not contain any special rules on pre-packaged

sales or debt-for-equity swaps.

For in-court restructuring proceedings, creditors can influence the

process through threatening to withhold their consent to the

restructuring plan. The restructuring plan must be approved by

simple majority (by headcount) of the insolvency creditors present

at the restructuring plan hearing (Sanierungsplantagsatzung), who

must represent at least 50 per cent of the outstanding unsecured debt

represented at the hearing and be confirmed by a decision of the

court. Insolvency creditors who have acquired their claims after the

opening of the proceedings have no voting right (unless they

acquired the claim based on an agreement entered into prior to the

opening of the proceedings). In principle, the restructuring plan

must treat all insolvency creditors equally (Paritätsprinzip) unless

(where a group of insolvency creditors is concerned) unequal

treatment is approved by a simple majority (by headcount) of the

affected insolvency creditors present at the restructuring plan

hearing, who must represent at least 75 per cent of the affected

insolvency claims represented at the hearing or (where an individual

creditor is concerned) the individual creditor has granted his explicit

consent. The court decision confirming the restructuring plan

releases the debtor from his obligation to pay insolvency creditors in

excess of the agreed quota. If the debtor defaults and fails to come

current during the requisite cure period, the released claims are

reinstated and become immediately due.

Shareholders also have some (albeit less formalised) influence on

the process; typically, the debtor will require additional shareholder

funding to (a) satisfy the estate claims during the proceedings, and

(b) fulfil the payment obligations pursuant to the restructuring plan.

As opposed to creditors, the Austrian Insolvency Code does not

provide for a (creditor-initiated) cramdown of shareholders as a

whole or classes of shareholders.


An in-court restructuring process can only be opened by the

competent insolvency court based on an application by the debtor;

in case a creditor files for the opening of bankruptcy proceedings,

the debtor has the option to request that such proceedings are

opened as restructuring proceedings.

The debtor’s application for in-court restructuring proceedings must

include a restructuring plan (Sanierungsplan), which must provide

(i) that the rights of secured creditors (that is, rights of creditors

holding a property interest in an asset in the estate to request return

of the asset (Aussonderungsgläuber) and the rights of creditors

(Absonderungsgläubiger) holding a security interest in an asset to

the proceeds of enforcement into that asset) will not be affected, (ii)

full payment of all estate claims (Masseforderungen) (these are,

ranked in order of practical importance, claims for labour, services

and goods furnished to the estate post-filing, the costs of the

proceedings (including the remuneration and reimbursement

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awarded to the creditor’s committee and the Special Creditors’

Rights Protection Associations), any monies advanced by a third

party to cover the initial costs of the proceedings (to avoid a

dismissal of the filing in limine), and the fees of the administrator),

as well as (iii) an offer to pay at least 20 per cent (or 30 per cent if

self-administration is requested) of the claims filed by insolvency

creditors, i.e. other (unsecured) creditors that were not contested by

the administrator, within two years of the approval of the

restructuring plan. Furthermore, the debtor must provide evidence

in the application that he is able to fund the estate claims for a period

of 90 days following the application.


Out-of-court restructurings are managed by the company itself

without any court involvement.

In restructuring proceedings with self-administration, the debtor

retains control over the estate. The administrator’s approval is

required only for matters outside the ordinary course of business.

However, the administrator may also veto matters which fall within

the ordinary course of business. In restructuring proceedings

without self-administration, control over the estate is transferred to

the administrator.

Following the receipt of an application for restructuring proceedings,

the court will issue a formal edict opening the proceedings. In such

edict, the court will determine the type of proceedings, appoint the

administrator and set dates/deadlines for (i) the report hearing (where

the administrator has to present his or her report of the status of the

debtor), (ii) the first creditors’ convention, (iii) the filing of

insolvency claims, (iv) the examination hearing (where the filed

insolvency claims are examined), and (v) the restructuring plan

hearing (where the creditors will take a vote on the proposed

restructuring plan). The report hearing and the first creditors’

convention typically take place within 14 days of the publication of

the edict and the examination hearing within 60 to 90 days.

Following the acceptance of the restructuring plan, the debtor will

(again) be vested with all rights in and to the estate. However, the

restructuring plan may also provide that a trustee is appointed to (i)

supervise the fulfilment of the restructuring plan by the debtor (in

which case supervision is similar to that during self-administration

proceedings), (ii) take over the estate (übernehmen) with the

mandate to fulfil the restructuring plan (Sanierungstreuhand), or

(iii) liquidate the estate (Liquidationstreuhand).


Out-of-court restructuring proceedings do not have any impact on

existing contracts. Thus, as the debtor will at this point most likely

be in default due to certain financing arrangements that it has, it is

customary for banks to agree on a standstill for the duration of such

out-of-court restructuring. It has to be borne in mind that the 60-day

filing obligation of the debtor’s management still applies in this case.

For in-court restructuring proceedings, the Insolvency Act provides

for a six-month moratorium for vital contracts, which limit a

contracting party’s ability to terminate for good cause. Default on

payments and deterioration of the financial or economic state of the

debtor is not considered good cause. The most notable exception to

that rule is funding commitments under credit facilities.

If contractual partners have to continue performing their contractual

obligations following the opening of in-court restructuring

proceedings, any claims for services provided after the opening of the

proceedings will be (preferred) estate claims (Masseforderungen).

Subject to this restriction, termination and set-off provisions will

still be upheld; however, set-off in an insolvency setting is modified

compared to the general rules of the Austrian Civil Code, as claims

of creditors are converted to monetary claims upon the opening of

the insolvency proceedings, and thus can be set off at an earlier

point. However, claims arising post-petition cannot be set off

against claims of the debtor.


As mentioned above, the debtor needs to provide proof of funds to

cover its post-petition payment obligations for a period of 90 days

following the application. There are no restrictions on the sources

of funding, so funds can be provided by shareholders, through

operating cash flows, through existing unused financing lines or

through new debt financing.



There are two types of proceedings to wind up a company, namely

(i) a voluntary liquidation, and (ii) bankruptcy proceedings pursuant

to the Austrian Insolvency Code.


A voluntary liquidation can only be initiated by a resolution of the

shareholders of a company. In such resolution, a special suffix is

added to the company name to denote that the company is in wind-

down. Both the resolution and the change of the company name

have to be notified to the Companies Register.

For the preconditions of opening bankruptcy proceedings, see

question 2.1 above. As with in-court restructuring proceedings, the

proceedings are opened by an edict of the competent insolvency court.

Please note that the debtor has the option to apply for a conversion of

bankruptcy proceedings into restructuring proceedings, provided that

he can show that the preconditions are met.


A voluntary liquidation is managed either by (all or some of) the

managing directors of the company or by newly appointed

liquidators, as decided by the company’s shareholders. Court

involvement for a voluntary liquidation is limited; the liquidators

have to make certain filings with the Companies Register, which are

only subject to a limited review by the court. The liquidators will

have to terminate all existing contractual relationships of the

company, settle all outstanding claims and repay company debt

before the company can be finally wound down.


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For bankruptcy proceedings, the process is similar to the process for

in-court restructuring proceedings; the court will appoint an

administrator who will take care of the liquidation of the assets of

the debtors and the payment of the quota to the insolvency creditors.


In a voluntary liquidation, the liquidators need to pay-off all existing

creditors of the company, so the creditors are in a strong position to

demand full repayment of their claims. Shareholders still retain

their influence (to the extent allowed by law), even after they

decided to put the company in liquidation.

In bankruptcy proceedings, the shareholders do not have any

noticeable degree of influence on the proceedings. They are,

however, entitled to bid for assets of the debtors in the same way as

other creditors. The influence of unsecured creditors is also limited

in bankruptcy proceedings; certain decisions by the administrator

require the prior consent of the creditors’ committee, where the

various creditors have voting rights depending on the amount of

their (accepted) claims against the debtor.


In a voluntary liquidation, the shareholder decision to put the company

into liquidation does not by itself impact on the existing contracts of

the company. Typically, counterparties of the company will have a

contractual right to terminate their contract for cause if the company is

put into liquidation. Absent the company and its counterparty

exercising such termination right or reaching a different agreement, the

outstanding obligations under such contracts have to be fulfilled. Set-

off provisions (whether by contract or by statute) will typically not be

affected by a decision to put a company into voluntary liquidation.

In bankruptcy proceedings, the insolvency administrator may elect to

assume or withdraw from contracts which neither party has fully

performed at the time of the opening of the insolvency proceedings. If

the contract is assumed, further claims of the contracting party are

(preferred) estate claims (Masseforderungen), whereas in case of a

withdrawal, any resulting (damage) claims of the contracting party are

ordinary insolvency claims. Where the estate is the tenant, the

insolvency administrator (not the landlord) can terminate the lease, in

which case he must only observe the statutory notice period or a shorter

contractual notice period (but is not bound by a longer contractual

notice period). The six-month moratorium referred to under question

3.5 above may also apply in case of bankruptcy proceedings if the

administrator has sufficient funds to pay the estate claims and can show

that keeping such contracts in place will likely enhance the chances of

successfully selling the business enterprise of the debtor during the

bankruptcy proceedings for higher sales proceeds. Where the estate is

the landlord, no special termination rights exist. As regards set-off

provisions, please see question 3.5 above.


All Austrian in-court restructuring and insolvency proceedings

differentiate between certain types of claims, which are ranked in

the following order:

■ Secured claims: claims of creditors holding a property

interest in an asset in the estate to request return of the asset

(Aussonderungsgläuber) and creditors holding a security

interest in an asset to the proceeds of enforcement into that

asset (Absonderungsgläubiger).

■ Estate claims: estate claims (Masseforderungen), which consist

of (i) costs of the proceedings, (ii) costs for the administration of

the estate, (iii) costs for post-petition salaries, (iv) costs for

terminating certain types of employment agreements, (v) claims

for the fulfilment of agreements not terminated by the

administrator, (vi) claims based on acts of the administrator,

(vii) unjust enrichment claims against the estate, and (viii)

compensation claims by the creditor protection organisations.

■ Insolvency claims: insolvency claims are claims by unsecured

creditors of the debtor relating to the pre-petition period. Such

claims need to be filed with the court (within a period of time set

forth in the opening edict of the proceedings) and can be

contested by the administrator.

■ Subordinated claims: claims of shareholders or claims based

on equity replacing services to the debtor can only be

satisfied if all other of the aforementioned claims have been

satisfied in full.


Following the completion of the bankruptcy proceedings, the

(Austrian) debtor is deleted from the Companies Register. To the

extent additional assets of the debtor are discovered at a later point

in time, the company could be revived for as long as it takes to

distribute such additional assets to the creditors.

5 Tax


The opening of a restructuring or insolvency procedure itself does

not give rise to tax risks or liabilities. In an out-of-court

restructuring, any formal subordination or waiver of existing

shareholder debt may lead to the debtor recognising a taxable gain,

which – in most circumstances – can be offset against current losses

or loss carry-forwards.

For a voluntary liquidation to be finalised, the company will need to

obtain a tax clearance certificate before it can be deleted from the

companies register.

6 Employees


The opening of in-court restructuring or insolvency proceedings by

itself does not affect the employees of the debtor.

The insolvency administrator has special rights to terminate

employment upon a partial or total shut down, only requiring the

administrator to comply with the (mandatory) notice periods under

statute and the applicable collective bargaining agreement (but not

longer contractual notice periods). A similar provision is available

to a debtor in a restructuring with self-administration if he decides to

close part of the business or unit, and continuing the employment of


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an employee engaged in that part of the business or unit would put

the restructuring or the business at risk. Such a measure, however,

requires the consent of the insolvency administrator.

Please note that mass lay-offs in connection with restructuring or

insolvency proceedings require a 30-day pre-notification of the

competent branch of the Austrian Labour Market Service. During

the aforementioned 30-day notice period, no termination can be

effectively announced – which means that the notice period is de facto prolonged by that period.

Post-petition salaries of employees as well as the costs for terminating

certain types of employment agreements are estate claims (see

question 4.6). Claims by employees for periods before the opening of

the proceedings (i.e., back pay, unpaid severance payments, etc.) are

normal insolvency claims. However, Austria maintains an Insolvency

Contingency Fund, where employees will receive compensation for

back pay and other claims from the employment relationship that arose

no earlier than six months before the opening of in-court insolvency

proceedings (up to a specified maximum amount), in exchange for

passing on their claims to the Insolvency Contingency Fund; as a result

of this scheme, the Insolvency Contingency Fund is typically one of

the bigger creditors in in-court restructuring proceedings.



Under the Austrian Insolvency Code, companies registered outside

of Austria (but in another EU Member State) can enter into

insolvency proceedings in Austria if their centre of main interest

(COMI) is in Austria and no insolvency proceedings have been

opened in respect of such debtor in another EU Member State as a

main proceeding according to Council Regulation (EC) No

848/2015. Companies registered outside the EU can in principle

also enter into insolvency proceedings in Austria, provided that their

COMI is in Austria; in this case, the Austrian Insolvency Code

provides for a rebuttable assumption that the COMI of a non-

Austrian debtor is located in its country of registration.


Insolvency proceedings that were opened as main proceedings in

another EU Member State have to be recognised in Austria pursuant

to Council Regulation (EC) No 848/2015.

For foreign insolvency proceedings opened outside of EU Member

States, the Austrian Insolvency Code provides for a recognition of

such proceedings provided that the COMI of the debtor is located in

the country where the insolvency proceedings were opened and the

foreign insolvency proceeding is comparable to an Austrian

insolvency proceeding. Please note that the Insolvency Code does

not provide for a formal recognition procedure, such as a Chapter 15

filing in the United States; thus, the question of the effects for such

foreign insolvency proceedings will be decided by Austrian courts

on a case-by-case basis, primarily when creditors try to initiate

enforcement actions against the debtor in Austria.


Generally, Austrian companies tend to restructure or enter into

insolvency proceedings in Austria. As opposed to Germany, where

several debtors have tried to open insolvency proceedings in the UK

in the recent past, we have not observed such attempts in Austria.

8 Groups


Since the 2017 amendment, the Austrian Insolvency Code

incorporates the provisions of Council Regulation (EC) No

848/2015 regarding insolvency proceedings for groups of

companies. These provisions basically provide for increased

coordination of the insolvency proceedings for the various group

entities.

9 Reform


There are currently no proposals for reform.


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Martin Abram Schindler Rechtsanwälte GmbH Kohlmarkt 8-10 A-1010 Vienna Austria Tel: +43 1 512 2613 300


URL: www.schindlerattorneys.com

Florian Cvak Schindler Rechtsanwälte GmbH Kohlmarkt 8-10 A-1010 Vienna Austria Tel: +43 1 512 2613 500


URL: www.schindlerattorneys.com

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

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

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


chapter 7


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pieter wouters

paul van der putten

Belgium

1 Overview


Belgian restructuring law can be considered to be debtor-friendly

for viable business, as well as at the same time being creditor-

friendly as it provides tools for creditors to counter any abuse of this

branch of law by debtors.


Belgian insolvency law allows for informal work-outs (i.e. reaching

an amicable settlement with two or more creditors), formal

restructuring (i.e., judicial reorganisation procedure under court

supervision), and insolvency proceedings (i.e., for bankruptcy and

liquidation). Formal restructuring and insolvency proceedings are

often used in practice. Informal work-outs are never publicly

disclosed. In our experience, informal work-outs have proven to be

useful for several matters.



Directors can be held liable on various grounds when they are

managing a company in financial difficulties. In summary, directors

should consider these specific issues when doing so:

■ Any current and former director and all other persons who

had de facto authority to manage and run the company’s

business can be held liable for all or part of the company’s

liabilities up to the amount of the shortfall if either is proven:

(i) that a manifest, serious mistake committed by one of them

contributed to the bankruptcy; or (ii) the directors knew or

should have known that there was obviously no reasonable

prospect in continuing the activities and in avoiding

bankruptcy and that they failed to act as a reasonable and

prudent director who is placed in the same circumstances.

■ Directors can, under certain circumstances, incur liability for

unpaid social security contributions, corporate tax, or VAT.

■ Directors will have to fulfil certain duties with regard to

informing the employees.

■ Directors must timely convene an extraordinary general meeting

of shareholders when the net asset value of the company

becomes less than the half of the share capital of the company.

■ Finally, directors have a statutory duty to file for bankruptcy

within one month after the company is in the state of

bankruptcy, i.e., when it has ceased to pay its debts and its

creditworthiness is undermined. A director who did not

timely file for bankruptcy can be held liable towards the

company and third parties for any losses incurred as a result

of his or her failure to file for bankruptcy. Directors can also

be punished under criminal law for certain acts and omissions

(e.g., not filing for bankruptcy on time or at all) if such acts

and omissions are found to have been committed intentionally

to delay the bankruptcy.


Shareholders can decide to put the company in liquidation when the

company’s net asset value becomes less than half of its share capital.

The public prosecutor or any party with standing can have the

company summoned before court and can seek its liquidation if the

company’s net asset value becomes less than the minimum share

capital required by law. However, the court can grant the company

time to correct its situation.

The public prosecutor, one or more creditors, the temporary

administrator who is appointed to oversee the debtor, or the

bankruptcy receiver in the main proceedings can petition for the

debtor’s bankruptcy.

If certain conditions are met, the public prosecutor, a creditor or any

party that is interested in acquiring the debtor’s business can seek

the opening of a judicial reorganisation procedure against the debtor

in order to have the debtor’s assets and business activities

transferred under court supervision.

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A debtor is protected from a petition for bankruptcy or liquidation

once it has filed an application for the opening of a judicial

reorganisation procedure. This filing also automatically suspends

any enforcement. However, any seizure of goods that is already in

an advanced stage cannot be stayed automatically because of the

filing, so the debtor, in such situation, will have to request the court

to order suspension of such seizure.

If the court affirms the opening of a judicial reorganisation

procedure, the court will grant the debtor a moratorium. During the

moratorium:

■ no bankruptcy or liquidation proceedings may be opened in

respect of or pursued against the debtor;

■ no means of enforcement (in relation to both moveable and

immoveable assets) against the debtor may be used or

pursued for claims predating the opening of the judicial

reorganisation procedure; and

■ no assets of the debtor may be seized for claims predating the

opening of the judicial reorganisation procedure unless the

seizure is in an advanced stage and the court did not suspend it.

The prohibition of enforcement during the moratorium prevents the

enforcement of recovering actual security interests (e.g., a pledge or

mortgage) or enforcement sought by creditors benefiting from a

statutory lien. However, it is allowed to enforce: (i) any specific

pledge over claims; and (ii) financial collateral created under the Act

of 15 December 2004 on financial collateral (on the condition that

the debtor is in default).


In case of bankruptcy, certain transactions may be declared

ineffective against third parties if concluded or performed by the

debtor during the so-called “hardening period” (a period of a

maximum of six months before the date of the bankruptcy order,

except in the case where the bankruptcy order relates to a company

that was dissolved more than six months before the date of the

bankruptcy order in circumstances suggesting an intent to defraud

its creditors).

The transactions entered into or performed during the hardening

period which may be declared ineffective against third parties

include, among others, (i) gratuitous transactions entered into at an

undervalue or on extremely beneficial terms for the counterparty,

(ii) payments for debts which are not due, (iii) payments other than

in cash for debts due, and (iv) security provided for pre-existing

debts.

In addition, the court may, at the request of the trustee and in its

discretion, declare ineffective against third parties other transactions

entered into or performed during the hardening period provided that

the counterparty was aware of the debtor’s cessation of payments

and the court determines that this declaration would benefit the

bankruptcy estate.

The above provisions have been made inapplicable to a large extent

with regard to financial collateral and with regard to certain

transactions that have taken place within the framework of a judicial

reorganisation procedure.

So-called “fraudulent transactions”, i.e., abnormal transactions

entered into with the knowledge that the transaction would

prejudice the creditors of a company, are also ineffective in the

subsequent bankruptcy of that company. This is so even if the

transaction dates back from before the hardening period.



Belgian restructuring law gives the debtor the possibility to conclude

an amicable settlement with two or more of its creditors.

The reason for creditors to want to conclude such settlement with their

debtor lies in the fact that such type of agreement enjoys protection

from certain claw-back rules mentioned under question 2.3.


A debtor can opt for a reorganisation procedure under court

supervision. The purpose of undergoing such judicial reorganisation

procedure is to preserve the continuity of all or part of the company or

of its viable business activities. A pre-packaged sale is not allowed.

A judicial reorganisation procedure can be initiated with an aim to:

(i) Conclude an amicable settlement with two or more creditors

(this is similar to the amicable settlement mentioned under

question 3.1, but it is concluded under court supervision).

The amicable settlement cannot affect third parties’ rights.

(ii) Implement a debt restructuring plan. The reorganisation plan

can contain the conversion of debt into equity. The

restructuring plan will be submitted for voting at a meeting

attended by the creditors and will only be adopted if (i) the

majority of the creditors attending the meeting, and (ii) the

majority share of the total value of the debt claims (the

principal sum) vote in favour of such plan. The creditors are

not divided into classes, but the plan can provide for a

differential treatment of creditors.

If the creditors meeting vote in favour of such plan, the court

will ratify it, and the plan will then bind all the debtor’s

creditors.

(iii) Selling all or part of its assets and activities to a third party.

Upon completion of the sale, the creditors are entitled to

exercise their rights on the sale proceeds. Any remaining part

of the company can then be submitted to either bankruptcy or

a voluntary liquidation.

Any party with standing can demand early termination of a judicial

reorganisation procedure if the debtor can no longer ensure the

continuity of its activities in accordance with the aim of the procedure.


An out-of-court amicable settlement can be concluded as soon as

this is necessary for reorganising the debtor’s business.

A debtor can request the opening of a judicial reorganisation

procedure if the debtor’s continuity is threatened in the short- or

long-term.

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An out-of-court amicable settlement is managed by the directors

and without court involvement.

A judicial reorganisation procedure with a view to concluding an

amicable settlement or implementing a debt restructuring plan is

managed by the directors under court supervision.

A judicial reorganisation procedure with a view to selling all or part

of the debtor’s assets is managed by a judicial administrator acting

under court supervision. However, the directors remain on board to

manage the company.

Under certain circumstances, the court can appoint a judicial

administrator to assist or to replace the directors.


A judicial reorganisation procedure does not terminate any contract,

and contractual provisions that allow for early termination or

acceleration of the contract to be triggered by the initiation or

opening of a reorganisation procedure are null. A creditor may not

terminate a contract on the basis of a debtor’s default that occurred

prior to the reorganisation procedure if the debtor remedies such

default within 15 days from the date of the default notice. Subject

to certain conditions, close out netting provisions can be upheld.

As an exception to the general rule of continuity of contracts, the

debtor may cease performance of a contract during the reorganisation

proceedings if the debtor notifies the creditor about it and the

decision to cease performance is necessary for the reorganisation of

the business. The debtor’s exercise of this right to cease

performance does not preclude the creditor from suspending, on its

turn, the performance of its own obligations under that contract.

Claims arising during the judicial reorganisation procedure will be

treated preferentially over all other creditors’ claims in the event of

a subsequent bankruptcy or liquidation. Moreover, claims arising

after the opening of the judicial reorganisation procedure are not

subject to the moratorium and can thus be enforced. They can also

be set-off.


Belgian law explicitly allows the debtor to provide new security

interest for both existing and new debts (e.g., bank credits,

factoring, etc.) during the moratorium as long as doing so will

sustain the continuity of the business. Any new collateral granted

during the moratorium cannot be challenged in a subsequent

bankruptcy.

Claims arising after or relating to services rendered after the

opening of the restructuring proceedings are regarded as an estate’s

debts in the event of subsequent liquidation proceedings. Estates’

debts have the highest priority over all claims, and rank higher than

any other type of debt claim.



There are two types of liquidation procedures under Belgian law:

bankruptcy; and voluntary or judicial liquidation.


A company that has ceased to pay its debts persistently as they

become due and that is no longer in a position to obtain credit can be

declared bankrupt.

Voluntary liquidation of a company results from a decision made by

the general shareholders’ meeting.

A company can be placed in judicial liquidation on various grounds.

The most common ones are:

■ failure to file its annual accounts with the National Bank of

Belgium;

■ removal of the company from the Crossroads Bank for

Enterprises;

■ failure to appear when summoned before the chamber for

companies in difficulty; and

■ impairment of the company’s net equity capital as a

consequence of accumulated losses.


The bankruptcy procedure is managed by one or more court-

appointed bankruptcy receivers. The court also appoints a

bankruptcy judge who supervises the procedure.

Liquidation is managed by a liquidator who is appointed by the

shareholders (but such appointment must be approved by the court)

in case of a voluntary liquidation, and appointed by the court in case

of a judicial liquidation. The court will have to approve the payment

distribution plan that describes the distribution of funds.


As a general rule, the enforcement rights of individual creditors are

suspended once the court declares the opening of bankruptcy

proceedings. And only after this declaration is the bankruptcy

receiver allowed to take any actions against the debtor and liquidate

its assets. However, such suspension does not apply to any pledge

of financial instruments or cash held on account, which falls under

the scope of the Act of 15 December 2004 on financial collateral.

For creditors whose debt claims are secured by certain movable

assets, such suspension would normally be limited to the period

required for the first verification of the debt claims.

For creditors whose debt claims are secured by immovable assets, the

intervention of the bankruptcy receiver is necessary to pursue the sale of

the assets. A first ranking mortgagee will generally be entitled to pursue

the enforcement of its mortgage after the first verification of the debt

claims if the enforcement procedure was already in an advanced stage.

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In case of liquidation, unsecured creditors and creditors with a

general privilege on all assets lose their enforcement rights, save to

the extent that the enforcement would not prejudice other creditors

or the proper course of the liquidation. Creditors whose debt claims

are secured by certain movable assets or immovable assets do not

lose their enforcement rights.


The declaration of bankruptcy or opening of a liquidation does not

in itself cause the termination of existing contracts. However, two

exceptions apply:

■ the parties to a contract may contractually agree that the

occurrence of a bankruptcy/liquidation constitutes an early

termination or acceleration event; and

■ intuitu personae contracts (i.e., contracts whereby the

identity of the other party constitutes an essential element of

the contract conclusion) are automatically terminated.

In case of a bankruptcy, the bankruptcy receiver may elect not to

perform the obligations of the bankrupt party that are still outstanding

after the bankruptcy if such decision is necessary for the management

and the liquidation of the bankrupt estate. The counterparty may not

seek injunctive relief or specific performance of the contract.

Subject to certain conditions, close out netting provisions can be upheld.


In case of bankruptcy (or deficit liquidation) the debts will generally

be priority-ranked according to a complex set of rules. Here is a

general overview of these rules:

Estate’s debt: All costs and debt incurred by the bankruptcy

receiver/liquidator during the bankruptcy/liquidation proceedings

are known as “estate’s debts”, and these have ultimate priority. In

addition, if the bankruptcy receiver/liquidator has contributed

financially towards the selling and enforcement of secured assets,

such contribution will be refunded to the receiver as priority, which

will be paid out from the proceeds from the assets sold before the

rest of the proceeds are distributed to the secured creditors.

Security interests: Creditors that hold a security interest have a

priority right over the secured asset (whether by means of

appropriation of the asset or from the proceeds generated from the

asset’s sale).

Privileges: Creditors may have a particular privilege right on

certain or all assets (e.g., tax claims, claims for social security

premiums, etc.). Privilege rights on specific assets rank higher than

privilege rights on all of the assets of the debtor.

Pari passu: Once all of the estate’s debts are settled and once the

creditors holding security interests and privilege rights are satisfied,

the sale proceeds from the remaining assets will be distributed

among the unsecured creditors who are ranked pari passu (unless a

creditor agrees to be subordinated).


No, it is not possible to revive a company once the bankruptcy

procedure/liquidation has been closed.

There is a possibility, however, to appoint a bankruptcy receiver ad hoc if assets are discovered after the closing of the bankruptcy.

As from the closing of the liquidation, creditors have five years to

still initiate proceedings against the liquidated company. If the

liquidation was closed while fraudulently disregarding the interests

of a creditor, such creditor can seek to have the closing of the

liquidation declared null. If such claim is granted by the court, the

liquidation will be reopened.

5 Tax


A creditor who has filed a debt claim in the bankruptcy is entitled to

record that claim immediately as loss and to request the refund of

VAT, insofar as it is applicable.

The opening of a judicial reorganisation procedure does not affect

the debtor’s tax obligations.

Debt reductions or waivers granted by creditors in the framework of

a collective restructuring plan approved by the court is not regarded

as a taxable gain for the debtor.

6 Employees


An employment contract is considered an ongoing contract and does

not end when bankruptcy proceedings pertaining to the employer

are opened. The bankruptcy receiver is the one who must terminate

the employment contracts. However, the law sets out a simplified

procedure for the bankruptcy receiver to dismiss employees.

No specific rules apply to employee dismissals in the event of the

employer’s liquidation, so the liquidator needs to comply with

labour law provisions on the dismissal of employees.

Unpaid salaries and severance pay benefit from a privilege right on

all movable assets of the debtor-employer. It is important to note

that in certain circumstances, Belgian law gives dismissed

employees the right to a (capped) financial contribution from the

Indemnity Fund for the closing-down of firms.

In case of judicial reorganisation procedure, employment contracts

are not affected and remain in full force. Belgian law, just as the law

in most EU countries, allow the employer the possibility to dismiss

employees for economical or other specific reasons as part of a

social plan. In case of a judicial reorganisation procedure with a

view to selling all or part of the debtor’s assets and activities, the

parties involved will have to abide by a specific Collective

Bargaining Agreement (i.e., CBA no. 102) which, in short, entitles

the buyer to decide on how many employees should be transferred

and even to renegotiate to some extent the individual terms of

employment with the employees concerned. Please note that

Belgian courts have asked the CJEU the preliminary question of

whether the right to choose the number of employees is consistent

with Council Directive 2001/23/EC. Meanwhile, the Advocate

General has already issued his opinion in which he concludes that

Belgian law violates the Directive.

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In situations to which Regulation (EU) 2015/848 of the European

Parliament and of the Council of 20 May 2015 on insolvency

proceedings (“European Insolvency Regulation”) does not apply,

Belgian private international law states that companies incorporated

elsewhere can use restructuring procedures or enter into insolvency

proceedings if its principal establishment is located in Belgium. In

most cases, the concept of “principal establishment” will be aligned

with the concept of “centre of main interests”, which is used in the

European Insolvency Regulation.

If the establishment is not the principal establishment, secondary

insolvency proceedings can be opened that will affect the Belgian

establishment only.


In situations to which the European Insolvency Regulation does not

apply, Belgian private international law states that foreign

judgments with regard to restructuring or insolvency proceedings

can be recognised in Belgium if all conditions for recognition are

met (e.g., the judgment (i) does not contravene certain provisions

regarding applicable law, public order, the right of defence, (ii) does

not contravene another judgment, and (iii) does not attempt to

escape or deviate from mandatory law, etc.).


Yes, this has been so for some Belgian companies because they are

members of an international group. But it is not common practice.

8 Groups


Belgian insolvency law does not contain regulatory provisions

regarding groups of companies. It is possible, however, for a group

of companies to have the same insolvency practitioner appointed.

In an international context, Belgian insolvency law contains

provisions that give effect to the group insolvency provisions under

the European Insolvency Regulation. It also contains provisions on

co-operation in case of an international insolvency that fall outside

the scope of the European Insolvency Regulation.

9 Reform


The new Belgian company code will enter into force on 1 May 2019

and will slightly amend the rules regarding the liquidation of a

company. The liquidation procedure will be simplified for solvent

liquidations, and it will be possible to liquidate a company in one

day if the creditors consent with such simplified dissolution.

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Pieter Wouters Stibbe Central Plaza – Loksumstraat 25 Brussels, 1000 Belgium Tel: +32 2 533 53 36


URL: www.stibbe.com

Paul Van der Putten Stibbe Central Plaza – Loksumstraat 25 Brussels, 1000 Belgium Tel: +32 2 533 52 95


URL: www.stibbe.com

Pieter Wouters mainly handles litigation cases in the area of contract law, sureties, banking law and the usual contracts. He focuses particularly on all aspects of insolvency law.

Pieter Wouters was a part-time assistant of Professor S. Stijns at the Instituut voor Verbintenissenrecht of the Katholieke Universiteit Leuven law faculty (from 2007 to 2010).

Stibbe is a Benelux law firm with main offices in Amsterdam, Brussels, and Luxembourg and branch offices in Dubai, London and New York. Stibbe offers a full legal service, both advisory work and litigation, in all areas of law, such as administrative law, banking & finance, corporate/M&A, employment & pensions, energy, EU, competition & regulated markets, insolvency & restructuring, intellectual property, litigation & arbitration, planning & environment, real estate & construction, tax, and TMT.

Stibbe consists of more than 390 lawyers. Stibbe’s Brussels office comprises close to 150 lawyers, of whom 30 are partners. As a full-service firm, our lawyers work in multidisciplinary teams with the aim to deliver pragmatic advice. We build close business relationships with our clients that range from local and multinational corporations to state organisations and public authorities. We realise that understanding their commercial objectives, their position in the market and their sector or industry, allows us to render suitable and effective advice.

Paul Van der Putten primarily handles litigation files in the field of contract law and obligations, banking law, security interest and enforcement. He also specialises in insolvency and restructuring (bankruptcy, composition and liquidation). Moreover, he acts as a liquidator of wound-up companies.

Paul Van der Putten is a regular guest speaker at seminars and conferences.

Paul Van der Putten has published various articles in professional reviews covering his areas of specialisation. He was a co-author of The European Restructuring and Insolvency Guide 2002–2003.

stibbe Belgium

chapter 8


Kennedys

alex potts Qc

mark chudleigh

Bermuda

1 Overview


Bermuda is a self-governing British Overseas Territory. The

systems of law administered in Bermuda are local Bermudian

legislation, Bermudian common law (as developed from English

common law), and UK legislation expressly made applicable to

Bermuda.

Bermuda has its own Court system, including a designated

Commercial Court which is part of the Supreme Court of Bermuda,

with rights of appeal to the Court of Appeal for Bermuda, and then

the Privy Council in London.

The formal procedures available for companies in financial difficulties

are principally contained in the Companies Act 1981 (the winding

up provisions of which are substantially modelled on the UK’s

Companies Act 1948). Some provisions of the Bankruptcy Act

1989 are also applied to companies, by virtue of section 235 of the

Companies Act 1981, and there is some scope for debate as to the

applicability of certain provisions of the Bankruptcy Act 1989 to

corporate partnerships. There are also specific provisions relating to

insurance companies in the Insurance Act 1978 and relating to

segregated accounts companies and their general and segregated

accounts in the Segregated Accounts Companies Act 2000. There

are also specific provisions relating to banks in the Banking (Special

Resolution Regime) Act 2016, although only sections 1 and 10 of

that Act are currently in force.

The rules relating to compulsory winding up of companies are

contained in the Companies (Winding up) Rules 1982 and also, to a

lesser extent, in the Rules of the Supreme Court 1985.

As in other jurisdictions that follow English common law, there are

various ways by which a creditor can take security over assets in

Bermuda, by agreement between the creditor and the debtor,

including by way of: legal mortgage; equitable mortgage; fixed

charge; floating charge; pledge; contractual lien; and assignment.

The nature of the security interest, in any particular case, will be

determined by:

(a) the terms of the parties’ agreement, ordinarily set out in the

relevant security documents;

(b) the nature of the property being secured; and

(c) the nature of the debtor’s interest in the property being

secured.

There are various statutory provisions relevant to the taking of

security in Bermuda, including, for example, section 19(d) of the

Supreme Court Act 1905, section 1 of the Bonds and Promissory

Notes Act 1874, and section 2 of the Charge and Security (Special

Provisions) Act 1990.

With this legislative background in mind, Bermuda can be

described, for the most part, as a very creditor-friendly jurisdiction.

Secured creditors can generally enforce their security outside of the

insolvency process, and the insolvency legislation is highly pro-

creditor. It provides, in particular, for the right of an unsecured

creditor with an unpaid debt to apply for an order that the corporate

debtor be compulsorily wound up and its assets applied in

satisfaction of its debts, and there is no statutory corporate rescue

regime beyond the ‘Scheme of Arrangement’, discussed below.

Nevertheless, the Supreme Court has developed an insolvency

practice, through the appointment of ‘soft-touch’ provisional

liquidators, which is designed to support formal and informal

restructuring plans that have credible prospects of success, and the

support of the majority of creditors. In appropriate circumstances,

therefore, the Court does have the power to approach corporate

insolvencies in a ‘debtor-friendly’ manner, with a view to achieving

a corporate restructuring.


There is no provision in Bermuda’s legislation for informal work-

outs. However, informal work-outs are common in Bermuda, and

the Supreme Court has developed certain practices to support and

assist them as discussed in our answer to question 3.1.

The only formal restructuring process in Bermuda is the Scheme of

Arrangement, discussed in our answer to question 3.2. The Scheme

of Arrangement is a highly versatile statutory procedure enabling

the restructuring of debt (and capital) by majority approval and

Court sanction. It is frequently used to restructure debt where the

consent of all creditors is unlikely to be forthcoming.

The only formal insolvency proceeding is compulsory winding up

by the Supreme Court. As we discuss in what follows, the Court’s

compulsory winding up jurisdiction can serve as a protective device

within which to restructure a company’s debt with a view to its

continued trading. Compulsory liquidations are common in Bermuda.

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Directors’ and officers’ duties are principally owed to the company

itself. To the extent that the company is solvent, such duties are

ordinarily owed to the company for the benefit of its present and

future shareholders.

When the company enters the zone of insolvency, directors must act

in the best interests of the company’s creditors. Directors that allow

a company to continue to trade while it is in financial difficulties

face a range of potential liabilities, depending on the precise

circumstances and the relevant director’s conduct and state of mind

(as discussed below).

Fraudulent trading: Section 246 of the Companies Act 1981

provides that any director that has knowingly caused or allowed a

company to carry on business with intent to defraud creditors of the

company or for any fraudulent purpose may be found personally

liable for all, or any, of the debts or other liability as the Court may

direct. This would include carrying on the business of the company

when it is known to be insolvent.

Personal liability for fraudulent conveyances/fraudulent

preferences: It is possible that directors might be held to be

personally liable, in certain circumstances, for fraudulent

conveyances or fraudulent preferences, as discussed in our

answer to question 2.3 below.

Breach of fiduciary duty and failure to exercise reasonable skill

and care: Directors owe duties to the company both pursuant to

section 97 of the Companies Act 1981, and as a matter of common

law, to act honestly and in good faith with a view to the best interests

of the company (which can include the interests of the company’s

creditors when the company is in the zone of insolvency), and to

exercise the care, diligence and skill that a reasonably prudent

person would exercise in comparable circumstances. Failure to

comply with these obligations may result in personal liability on the

part of directors. Although not confirmed in statute, the power of

the directors of a Bermuda company to petition for the compulsory

winding up of an insolvent company has been recognised in Re First Virginia Reinsurance Ltd. [2003] Bda LR 47.

Misfeasance and breach of trust: Section 247 of the Companies

Act 1981 provides that a director may be personally liable if he has

misapplied, or retained, or become liable, or accountable for any

money or property of the company, or been guilty of any

misfeasance or breach of trust in relation to the company. The scope

and effect of section 247 was recently considered by the Supreme

Court of Bermuda in Peiris v Daniels [2015] SC (Bda) 13 Civ.

Unlawful return of capital: As a matter of common law and

pursuant to certain sections of the Companies Act 1981 dealing with

dividends, reduction of capital, share repurchases and share

redemptions, a Bermuda company that is not in liquidation cannot

lawfully return capital to its shareholders except by way of an

approved reduction of capital, or by way of authorised dividend,

redemption, or repurchase. Section 54 of the Companies Act 1981

provides that a company shall not declare or pay a dividend, or make

a distribution out of contributed surplus, if there are reasonable

grounds for believing that the company is, or would after the

payment be, unable to pay its liabilities as they become due or the

realisable value of the company’s assets would thereby be less than

its liabilities.

Miscellaneous offences and liabilities: Sections 243 to 248 of the

Companies Act 1981 set out a range of criminal offences that may

be committed by directors of companies, including, for example, by

fraudulently altering documents relating to company property or

affairs, falsifying books or accounts with the intention of defrauding

any person, or fraudulently inducing a person to give credit to the

company. There are also various legislative provisions that impose

personal liability on directors for any failure to pay certain taxes and

remit pension contributions.

Segregated accounts companies representatives: Section 10 of

the Segregated Accounts Companies Act 2000 requires a segregated

account representative to make a written report to the Registrar of

Companies within 30 days of reaching the view that there is a

reasonable likelihood of a segregated account or the general account

of a segregated accounts company for which he acts becoming

insolvent, and section 30 makes it a criminal offence to fail to do so.


Creditors with security over an insolvent company’s core assets

have the greatest influence over the company’s situation.

Unsecured creditors also exercise considerable influence as a result

of the rights which they enjoy, pursuant to Bermuda’s winding up

jurisdiction. The greater the value of an unsecured creditor’s debt

(and the greater the support that it can command from other

unsecured creditors), the greater the influence. Minority unsecured

creditors have relatively limited influence, above and beyond their

statutory and contractual rights.

In addition to the Supreme Court (and any foreign Courts with

jurisdiction over the company), certain regulatory authorities in

Bermuda may also influence the company’s situation, depending on

the circumstances. For example, the Registrar of Companies, the

Bermuda Monetary Authority and the Regulatory Authority of

Bermuda might, in appropriate circumstances, investigate the affairs

of an insolvent company and exercise such regulatory powers as

may be appropriate.

Section 165 of the Companies Act 1981 provides that, at any time

after the presentation of a winding up petition and before a winding

up order has been made, the company or any creditor or contributory

may apply to the Court for a stay of any proceedings pending against

the Company.

Section 167(4) of the Companies Act 1981 provides that, when a

winding up order has been made or a provisional liquidator has been

appointed, no action or proceeding shall be proceeded with or

commenced against the company except by leave of the Court and

subject to such terms as the Court may impose.

The Bermuda Court also has the separate power to order that

Bermuda Court proceedings be stayed in the exercise of its inherent

jurisdiction and as a matter of its case management powers under

the Rules of the Supreme Court; the Bermuda Court also has the

power, in appropriate cases, to issue an anti-suit injunction or an

anti-enforcement injunction with respect to claims being pursued in

foreign Court proceedings.

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Payments, transfers of assets, and security transactions can be

vulnerable to attack in the event of the company’s insolvency or

liquidation. Reviewable transactions include fraudulent conveyances,

fraudulent preferences, floating charges, onerous transactions, and

post-petition dispositions.

Fraudulent conveyances: Sections 36A to 36G of the Conveyancing

Act 1983 provide that a creditor of a company may be entitled to

apply to the Court to have a transaction set aside to the extent required

to satisfy its claim, provided that the dominant intention of the

transaction was to put the property beyond the reach of other creditors

and the transaction was entered into for no value or significantly less

than the value of the property transferred. For these purposes, a

creditor is one to whom an obligation is owed at the date of the

transfer, or to whom it is reasonably foreseeable an obligation will be

owed within two years of the date of the transfer, or to whom an

obligation is owed pursuant to a cause of action which accrued before,

or within, two years after the date of the transfer.

Fraudulent preferences: Section 237 of the Companies Act 1981

provides that any conveyance, mortgage, delivery of goods,

payment, execution or other act relating to property made or done by

or against a company within six months before the commencement

of its winding up shall be deemed a fraudulent preference of its

creditors and be invalid accordingly. Section 238 provides for the

liability and rights of fraudulently preferred persons. In order to fall

foul of the provision, the transfer or disposition must have been

made within the six months prior to the commencement of the

winding up. In the case of a compulsory winding up, this would be

the date of the presentation of the petition to the Supreme Court of

Bermuda. The transfer will be invalid if it was carried out with the

dominant intention of preferring one creditor over others at a time

when the company was unable to pay all of its creditors in full.

Floating charges: Section 239 of the Companies Act 1981 provides

that a floating charge on the undertaking or property of a company

created within 12 months of the commencement of the winding up

shall be invalid, unless it is proved that the company immediately

after the creation of the charge was solvent, except to the amount of

any cash paid to the company at the time of, or subsequently to, the

creation of the charge, together with interest at the statutory rate.

Onerous transactions: Section 240 of the Companies Act 1981

provides that the liquidator of a company can, with the Court’s

permission, disclaim any property belonging to the company or any

rights under any contracts which he considers to be onerous for the

company to hold, or is unprofitable or unsaleable.

Post-petition dispositions: Section 166 of the Companies Act 1981

provides that, in a compulsory winding up, any disposition of the

property of a company, including things in action, and any transfer of

shares or alteration in the status of the members of the company,

made after the commencement of the winding up (being the time of

presentation of the petition) shall be void, unless the Court otherwise

orders by way of a validation order. In the case of an insolvent

company, the Court should only make an order validating a post-

petition disposition where it can be shown that the disposition will

benefit (in a prospective case), or that it has benefitted (in a

retrospective case), the general body of unsecured creditors so as to

justify the disapplication of the pari passu principle. The focus of the

test is mainly directed to an objective assessment of the benefit to be

obtained by the general body of unsecured creditors, rather than the

necessity or expedience of the disposition from the company’s or

directors’ perspective. In the case of a solvent company, in contrast,

there are four elements which must be established before a validation

order may be made: first, the proposed disposition must appear to be

within the powers of the company’s directors; second, the evidence

must show that the directors believe the disposition is necessary or

expedient in the interests of the company; third, it must appear that

the directors in reaching that decision have acted in good faith; and

fourth, the reasons for the disposition must be shown to be ones

which an intelligent and honest director could reasonably hold.

Bulk sales in fraud of creditors: Under section 5 of the Bulk Sales

Act 1934, certain sales and purchases of stock in bulk are deemed to

be fraudulent, and absolutely void as against the vendor’s creditors,

unless the proceeds of sale are sufficient to pay the vendor’s

creditors in full, and are in fact so applied.



Yes, where the consent of all relevant creditors is forthcoming. It is

not possible to ‘cram down’ creditors in the absence of a formal

restructuring process.

Where there is a risk that negotiations towards an informal work-out

may be jeopardised by creditors instituting or continuing

proceedings against the company seeking enforcement of their

debts, the negotiations may be protected by a ‘soft touch’

provisional liquidation, a procedure developed as part of the

insolvency practice of the Supreme Court and now commonly used

to support work-outs. The procedure is described below.

Following presentation of a petition for the winding up of the

company (usually presented by the company itself, if the company

contemplates a restructuring), a provisional liquidator may be

appointed, who may then apply for a statutory stay of all proceedings

against the company while the work-out process continues, whether

informally or through the medium of a Scheme of Arrangement. The

board of directors retains control over the company, and endeavours

to effect a work-out under the supervision of the ‘soft-touch’

provisional liquidator and the Court. If the work-out negotiations are

successful, the winding up petition can be dismissed; if they are

unsuccessful, the winding up petition can be restored for final

hearing and the company can be wound up and placed into full

liquidation. While the work-out plan is negotiated, the hearing of the

winding up hearing petition is adjourned (although the company

enjoys the protection of the statutory moratorium).


Liquidation procedures can generally be divided into compulsory

liquidations and voluntary liquidations. Voluntary liquidations can,

in turn, be divided into solvent liquidations (members’ voluntary

liquidations) or insolvent liquidations (creditors’ voluntary

liquidations).

As above, the general purpose of liquidation is to gather in, and

realise assets, to pay off creditors in accordance with their rights and

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priorities, and to distribute any remaining assets to the company’s

shareholders. The only formal rescue procedure is the Scheme of

Arrangement (although see further below in this section for an

exception to this rule). A Scheme of Arrangement (‘scheme’) is a

formal procedure which may be used to reorganise the business of

the debtor with a view to its continued trading.

A scheme may result in the adjustment or compromise of all or a

class of the debt of the company. It may include the transfer of

rights, property and liabilities of the company to another company.

Schemes of Arrangement may also reorganise the company’s

capital, and accordingly may be used (and have on several occasions

been used) to implement a debt-for-equity swap.

The Court has jurisdiction to make specific provision for this in the

order sanctioning the scheme.

A scheme is not an intrinsically insolvency-related procedure.

However, it may be employed after the appointment of a liquidator

or provisional liquidator, and there can be advantages in employing

a scheme in this way. Where illiquidity issues confront the

company, for example, its freedom to promulgate or pursue a

Scheme of Arrangement may be susceptible to litigation or

compulsory winding up petitions presented by dissentient creditors.

Where this is a concern, the powers of the Court pertaining to the

winding up of companies and appointment of liquidators may be

employed in the protection of a proposed scheme. This may include

the use of a ‘soft touch’ provisional liquidation, along the lines

described in our answer to question 3.1.

In the case of an insolvent insurance company, there is another

restructuring tool potentially available under section 37(5) and

section 39 of the Insurance Act 1978. These provisions enable the

Court, if it thinks fit, to reduce the amount of the insurance contracts

of the insurer, on such terms and subject to such conditions as the

Court thinks fit. Although the procedure and case law in this area is

not fully developed in Bermuda, it is likely that the Court would

require that a meeting of policyholders be convened, and their views

canvassed, and one relevant consideration for the Court would be

the effect of any reduction order on the company’s ability to make

recoveries against its reinsurers. Depending on the circumstances, a

formal Scheme of Arrangement may be required in any event.

A pre-packaged sale involves the pre-agreement of terms of a sale of

the business of the company to another party or a new company,

which sale is then effected directly after the appointment of an

office-holder. The sale and its terms are frequently negotiated by, or

with the approval of, major secured creditors of the company. The

prevailing regime in Bermuda does not lend itself to the use of pre-

packaged sales. Winding up proceedings anticipate the death of the

company and distribution of its assets. Conversely, the Scheme of

Arrangement process is too dependent upon the views of the general

creditor body. Neither allows the discretion necessary to pre-agree

and dictate a disposal of the business of the company, in the manner

required for a pre-packaged sale. Conceivably, a receiver and

manager appointed by a secured creditor pursuant to a charge over

substantially all the assets of a company may achieve something

akin to a pre-packaged sale. It is also conceivable that a Bermudian

exempt company whose centre of main interests is in the United

Kingdom, or whose assets and liabilities are situated in the United

Kingdom, might seek the assistance of both the Courts of Bermuda

and the Courts of England and Wales for the purposes of having a

pre-packaged sale effected under the supervision of a court-

appointed administrator. The procedure, however, is not as common

in Bermuda as it is in certain other jurisdictions, such as Jersey, and

there is some uncertainty in the case law as to the scope of the power

of Bermudian Courts and English Courts in this respect.

As is noted in our answer to question 3.3, a binding Scheme of

Arrangement requires the approval of a majority within each class

of creditors present and voting (including by proxy) at the meeting

of that class, representing 75 per cent by value of that class, votes in

favour of the scheme. Accordingly, the Scheme of Arrangement

must be on such terms as may be approved by the majority of

creditors in each class, and a Scheme of Arrangement is often the

result of promotion and direction by majority creditors.

Those voting at scheme meetings may in some circumstances

include persons beneficially interested in the company’s debt. In a

recent Scheme of Arrangement of debts of a company evidenced by

a global note held by a trustee, beneficial owners of the note, who

were each entitled to require issuance of an individual note

enforceable directly against the company, were allowed to vote in

the Scheme as contingent creditors of the company.

As may be seen from the above, a minority of dissenting creditors in

each class may be crammed down by a Scheme of Arrangement. In

the event that there is an enforceable debt subordination agreement

in place creating different classes of unsecured creditor (or in the

event that there are deferred creditors, for example, or shareholders

claiming payment of debts arising in their capacity as shareholders),

it may be possible to structure and secure the Court’s approval for a

Scheme of Arrangement in such a way as to cram-down a dissenting

(subordinate or deferred) class of stake-holder.


The Scheme of Arrangement procedure may be initiated by

application of a creditor, a member, the company itself, or (where

one has been appointed) the liquidator.

The applicant requests the Court to convene a meeting of the

creditors, or the relevant class of creditors, of the company. If the

Court so directs (which will almost always be the case, absent

exceptional circumstances), creditors must be summoned by notice.

Notification commonly includes advertisement of the meeting.

Where, because of differences in their respective rights, two or more

creditors are unable to consult together with a view to their common

interest, it will be necessary to separate creditors into classes for the

purposes of voting on the scheme proposal.

If a majority within each class of creditors present and voting

(including by proxy) at the meeting, representing 75 per cent by

value of that class, votes in favour of the scheme, and the Court

approves it, then the scheme will be binding on all creditors. Court

approval is a discretionary matter. The Court must be satisfied that

the statutory requirements have been met, including the holding of

requisite class meetings and approval of necessary majorities, and

that each class was fairly represented at each meeting. In addition,

the Court must be satisfied that the scheme is fair to creditors

generally – in other words, that the majority has not taken unfair

advantage of its position.

The scheme is not effective until a copy of the sanction order is

delivered to the Registrar of Companies. The scheme order must be

annexed to any copies of the company’s memorandum of

association issued subsequently to the order.


If the Scheme of Arrangement is conducted outside a liquidation,

the company’s board of directors and any managers control the

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process, although a Scheme Administrator is normally appointed to

administer the scheme once it is implemented.

If the scheme is conducted within a liquidation, the liquidator

controls the process.

However, there is a hybrid option, under which the scheme is

conducted within a ‘soft touch’ provisional liquidation, used to

implement a restructuring within the protective environment of a

provisional liquidation but without the necessity of winding up the

company. The ‘soft touch’ provisional liquidation procedure has

been described in our answer to question 3.1. The board of directors

normally manages the scheme process under the supervision of the

provisional liquidator.


The commencement of a Scheme of Arrangement has no automatic

effect on contracts, save in the case where the relevant contract

contains contractual terms to that effect. If a Scheme of

Arrangement with creditors is approved, the scheme will govern any

issues relating to the termination of contracts with those creditors.

The protections available to parties that may be compelled to

perform outstanding obligations will depend on whether the

company is seeking to effect a solvent Scheme of Arrangement

(outside of a liquidation process) or an insolvent Scheme of

Arrangement (within a liquidation process). If the company

commences a liquidation process with a view to promoting an

insolvent Scheme of Arrangement, parties that are required to

continue performing outstanding obligations may be in a position to

require security or priority for payment, whether from the

company’s liquidators or the company’s other stakeholders.


The company generally uses its own assets to finance the procedures

of voluntary liquidation, compulsory liquidation, and any Scheme of

Arrangement. However, if the company does not have sufficient

assets or liquidity, it is possible for the company, or its liquidators, to

enter into funding arrangements with those interested in the outcome

of the procedures, typically creditors, if doing so is necessary for the

beneficial winding up of the company. In such a case, funding

liabilities would be expected to be re-paid by the company or by the

liquidator prior to the repayment of unsecured creditors, although

subject to the specific terms of any funding agreement and the Court’s

approval. In this context, it is possible as a matter of Bermuda law to

secure protection (or priority treatment) for rescue financing on an ad hoc basis, and by agreement in appropriate circumstances. In certain

cases, the liquidator appointed by the Court is the Official Receiver,

being a government official with a limited government budget.



As set out above, the formal procedures available for companies in

financial difficulties are principally contained in the Companies Act

1981 (the winding up provisions of which are substantially modelled on

the UK’s Companies Act 1948). Some provisions of the Bankruptcy

Act 1989 are also applied to companies, by virtue of section 235 of the

Companies Act 1981, and there is some scope for debate as to the

applicability of certain provisions of the Bankruptcy Act 1989 to

corporate partnerships. There are also specific provisions relating to

insurance companies in the Insurance Act 1978 and relating to

segregated accounts companies and their general and segregated

accounts in the Segregated Accounts Companies Act 2000. There are

also specific provisions relating to banks in the Banking (Special

Resolution Regime) Act 2016, although this legislation has not yet been

brought into force. The rules relating to compulsory winding up of

companies are contained in the Companies (Winding up) Rules 1982

and also, to a lesser extent, in the Rules of the Supreme Court 1985.

Insolvent liquidation procedures can generally be divided into

compulsory liquidations and insolvent voluntary liquidations

(creditors’ voluntary liquidations).

The general purpose of the liquidation process is to gather in and

realise assets, to pay off creditors in accordance with their rights and

priorities, and then to distribute any remaining assets to the

company’s shareholders. However, liquidators in a winding up of a

company have the power to promote compromises and

arrangements whether by consensual means or using a Scheme of

Arrangement. Furthermore, where the company is not already in

liquidation, the winding up jurisdiction of the court and statutory

machinery may be invoked in order to protect the implementation of

a restructuring (as discussed above in connection with ‘soft-touch’

provisional liquidation).

Liquidators are generally given a degree of discretion as to the time

period within which to effect and complete the liquidation, which may

depend to some extent on the nature, location, and liquidity of the

company’s assets. After the liquidation process is complete, the

company can then be dissolved and it will cease to exist as a legal entity.

Voluntary liquidation

An insolvent voluntary liquidation is initiated by the company’s

shareholders through a resolution, based on the recommendation of

the board of directors. Although creditors participate in the

creditors’ voluntary liquidation procedure, they can only secure the

active supervision of the Court by petitioning for the compulsory

liquidation of the company.

Compulsory liquidation

The compulsory liquidation process is initiated by one of the

following making a petition to the Supreme Court of Bermuda: a

creditor, including any contingent or prospective creditor; a

contributory (that is, any person liable to contribute to the assets of

the company in the event of its liquidation, i.e. a shareholder or

member); the company itself (by a shareholders’ resolution if it is

solvent and/or by a directors’ resolution if it is insolvent); and, in

certain circumstances, the Registrar of Companies or the Supervisor

of Insurance (being the Bermuda Monetary Authority).

It is also possible, in exceptional circumstances, for receivers of

segregated accounts within a segregated accounts company to

petition for the winding up of the whole company, and also for the

Court to wind up a company of its own motion.

Section 170(2) of the Companies Act 1981 also allows the Court to

appoint a provisional liquidator between the presentation of a

winding up petition and its final hearing.


A company may be compulsorily wound up by the Court in any of

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the following circumstances, under section 161 of the Companies

Act 1981:

(a) if the company has, by resolution, resolved that the company

be wound up by the Court;

(b) if there is default in holding the company’s statutory meeting;

(c) if the company does not commence its business within a year

of its incorporation or suspends its business for a whole year;

(d) if the company carries on any restricted business activity;

(e) if the company engages in a prohibited business activity;

(f) if the company is unable to pay its debts;

(g) if the company’s ministerial consents were obtained as a

result of a material misstatement in the application for

consent; or

(h) if the Court is of the opinion that it is just and equitable that

the company should be wound up.

The Supervisor of Insurance (being the Bermuda Monetary

Authority) can present a petition for the winding up of an insurance

company if it is in breach of the regulatory provisions of the

Insurance Act 1978, or if it is in the public interest that the insurance

company should be wound up on just and equitable grounds.

Section 34 of the Insurance Act 1978 also provides that the Court

may order the winding up of an insurance company subject to the

modification that the insurance company may be ordered to be

wound up on the petition of 10 or more policyholders owning

policies of an aggregate value of not less than $50,000, provided

that such a petition shall not be presented except by leave of the

Court, and leave shall not be granted until a prima facie case has

been established to the satisfaction of the Court and until security

for costs for such amount as the Court may think reasonable has

been given.

The Registrar of Companies can petition for the winding up of a

company if directed to do so by the Minister of Finance following

receipt of a report of an Inspector to investigate the company under

section 110 or section 132 of the Companies Act 1981.

A provisional liquidator can be appointed prior to the final hearing

of a compulsory winding up petition if there is a good prima facie

case that a winding up order will be made, and if the Court considers

that a provisional liquidator should be appointed in all the

circumstances of the case.


Compulsory liquidation: The liquidator or provisional liquidator

appointed by the Court controls the procedure of liquidation, and

displaces the company’s board of directors upon his appointment.

The exercise by the liquidator of his powers is subject to the

sanction, supervision and control of the Court, and, to a lesser

extent, the Committee of Inspection, if one is appointed. In the

same way as the board of directors is displaced, so too are the

powers of the shareholders displaced.

‘Soft touch’ provisional liquidation: Subject to the circumstances

of the case, the Court can order that a provisional liquidator be

appointed with limited powers (i.e. a ‘soft touch’), and that the

directors continue to retain all of their powers or certain limited

powers, subject only to the supervisory role to be played by the

provisional liquidator (subject, in turn, to the Court’s supervisory

role). This can be an important tool for the purposes of effecting a

restructuring, especially in the context of international insolvencies

which require parallel restructuring procedures both in Bermuda

and in other jurisdictions.

Voluntary liquidation: The liquidator appointed or approved by

the company’s creditors controls the procedure of voluntary

liquidation. The board of directors is displaced upon the

appointment of the liquidator, and their powers are terminated.


Subject to any orders dispensing with the need for approval, a

number of the powers of a liquidator appointed in an insolvent

winding up of a company may only be exercised with the approval

of a ‘Committee of Inspection’ comprising representative creditors

of the company. It is also possible for creditors to apply to the Court

with respect to the exercise or proposed exercise of the liquidator’s

powers, under sections 175 and 176 of the Companies Act 1981.

The making of a winding up order brings about a statutory moratorium

on proceedings against the company. This will not prevent secured

creditors enforcing their security where they can do so without

instituting proceedings before the court. Furthermore, even where

judicial assistance is needed, leave will usually be given to enforce

valid security interests notwithstanding the statutory moratorium. A

judgment creditor will not be permitted to continue with the execution

of its judgment against the company where notice of an order winding

up the company is received by the Provost Marshall prior to sale of

goods of the company taken in execution or prior to completion of

execution by receipt or recovery of the full amount of the levy.


Other than the statutory provisions governing contracts of employment

discussed in our answer to question 6.1, as a matter of law, there is no

automatic termination of contracts with the company upon the

commencement of a compulsory liquidation or a creditors’ voluntary

liquidation (save in the case of the liquidator disclaiming an onerous

contract or transaction, and save in the case where the relevant contract

contains contractual terms to that effect). However, a contracting

counterparty can only claim in the liquidation for debts which exist at

the date of commencement of the liquidation, and interest also ceases

to run from that date. In the circumstances, there is, as a matter of fact,

a termination or cancellation of contracts in the event of liquidation,

unless the liquidator elects to affirm the relevant contract. Contracting

counterparties can also seek to assert claims against the company for

damages sustained as a result of any breach of contract caused by the

commencement of the liquidation, subject to proof in the liquidation.


In a compulsory liquidation or a creditors’ voluntary liquidation,

creditors’ claims are ranked in the following order:

(1) secured creditors enforce their security outside the

liquidation, but essentially in priority to all other creditors;

(2) the costs and expenses of the liquidation, including all costs,

charges and expenses properly incurred in the company’s

winding up, including the liquidator’s remuneration if

sanctioned by the Court (pursuant to sections 194, 232, and

236(6) of the Companies Act 1981 and Rule 140 of the

Companies (Winding up) Rules 1982);

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(3) debts due to employees located in Bermuda under section 33(3)

of the Employment Act 2000;

(4) preferential debts owed to preferential creditors pursuant to

section 236(1) of the Companies Act 1981, including unpaid

taxes under the Taxes Management Act 1976, unpaid social

insurance/Government pension contributions under the

Contributory Pensions Act 1970, liability for compensation

under the Workmen’s Compensation Act 1965, and payments

of up to $2,500 due to employees of Bermudian companies but

resident outside of Bermuda;

(5) debts secured by a floating charge (although higher priority

debts must be paid out of any property secured by a floating

charge if the assets of the company are not otherwise sufficient

to meet them pursuant to section 236(5) of the Companies Act

1981);

(6) unsecured creditors’ debts, including the unsecured balance of

secured creditors’ claims (pursuant to sections 158(g), 225 and

235 of the Companies Act 1981);

(7) post-liquidation interest on unsecured creditors’ debt claims;

(8) debts due to shareholders in their capacity as such (pursuant to

section 158(g) of the Companies Act 1981); and

(9) shareholders’ equity in the event of a surplus balance, according

to their rights and interests under the company’s bye-laws.

Each category of debts must be paid in full before payment of

creditors in the subsequent category. Creditors in the same category

rank equally (or pari passu) among themselves.

However, in the case of the winding up of segregated accounts

companies, section 25 of the Segregated Accounts Companies Act

2000 provides that the liquidator shall deal with the assets and

liabilities which are linked to each segregated account only in

accordance with the segregation principles of the legislation and the

relevant governing instruments or contracts for each transaction.

Section 36 of the Insurance Act 1978 also provides that, in the case

of an insurer carrying on long-term business, the assets in the

insurer’s long-term business fund will only be available for meeting

the liabilities of the insurer attributable to its long-term business, and

its other assets shall only be available for meeting its other liabilities.

There is some scope for argument as to the order of priority for

payment of claims asserted by former shareholders in mutual fund

companies, whose shares have been redeemed but who are owed

payment of the redemption proceeds at the commencement of

liquidation. The general view is that these are debts due to

shareholders that rank behind outside trade creditors’ debts, but

ahead of shareholders’ equity, but the legislative provisions,

including section 158(g) of the Companies Act 1981, are not

entirely clear in this respect, notwithstanding a recent judgment of

the Supreme Court of Bermuda that has touched upon the issue.

There is also scope for argument as to the order of priority of

outstanding occupational pension payment liabilities under the

National Pension Scheme (Occupational Pensions) Act 1998 and

Regulation 56 of the National Pension Scheme (General) Regulations

1999, since the legislative provisions are not entirely clear.


In the course of the liquidation, the liquidator will adjudicate the

claims of unsecured creditors and collect the assets of the company.

Assets will be distributed (to the extent available) according to the

statutory priorities in the form of dividends.

At the end of this process, the liquidator is generally released, and

the company is dissolved.

Under section 260 of the Companies Act 1981, the Court has the

power to declare a dissolution of a company void in certain

circumstances, up to a period of either two years (most liquidation

cases) or 10 years (members’ voluntary liquidation) after the date of

dissolution, and under section 261 of the Companies Act 1981 the

Court has power to restore a company that has been struck off the

Register for up to 20 years after strike-off.

Following Court approval of a Scheme of Arrangement (see below), the

scheme is implemented under the auspices of the company’s directors

and the Scheme Administrator (or the liquidator, if one has been

appointed). The company may continue in all respects (subject to the

scheme) as before. Alternatively, where the scheme was promoted in

the context of winding up proceedings, the liquidation of the company

may proceed on the basis of the balance of its assets and liabilities.

A Scheme of Arrangement of the debts of a company extinguishes

the debts and has no effect on the existence, powers or capacity of

the company. Accordingly, the company may go on to trade

unburdened by the debts that have been discharged as a result of the

Scheme of Arrangement.

5 Tax


No particular tax liabilities are incurred in each procedure, as a

matter of local Bermuda law. Stamp duty is payable in the ordinary

way, save that section 253 of the Companies Act 1981 provides

various exemptions from stamp duty where a company is in

compulsory liquidation or creditors’ voluntary liquidation.

6 Employees


Section 33(1) and 33(2) of the Employment Act 2000 provide that

the winding up or insolvency of an employer’s business shall cause

the contract of employment of an employee to terminate one month

from the date of winding up or the appointment of a receiver, unless,

notwithstanding the winding up or insolvency, the business continues

to operate.

Upon termination of an employment contract under the Employment

Act 2000, employees working in Bermuda may be entitled to

recover accrued entitlements (such as salary and payment in lieu of

paid vacation entitlements), as well as severance pay.

As set out in our answer to question 4.6 above, the following claims

rank within the list of preferential claims that are to be settled before

payment of certain other unsecured debts: (a) debts due to employees

located in Bermuda under section 33(3) of the Employment Act 2000;

and (b) preferential debts owed to preferential creditors pursuant to

section 236(1) of the Companies Act 1981, including unpaid taxes

under the Taxes Management Act 1976, unpaid social

insurance/Government pension contributions under the Contributory

Pensions Act 1970, liability for compensation under the Workmen’s

Compensation Act 1965, and payments of up to $2,500 due to

employees of Bermudian companies but resident outside of Bermuda.

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Following the decision of the Privy Council in PricewaterhouseCoopers v Saad Investments Company Limited [2014] UKPC 35 (discussed in

more detail in our answer to question 7.2), it is clear that the Supreme

Court of Bermuda currently has no jurisdiction to wind up ‘overseas

companies’ that have not been granted a permit by the Minister of

Finance to carry on business in Bermuda. A previously used ‘loophole’

under the External Companies (Jurisdiction in Actions) Act 1885 was

closed by the Privy Council’s decision.

The Supreme Court currently lacks jurisdiction to order the

convening of meetings of creditors in relation to a proposed

compromise or arrangement of the debt of an overseas company,

unless that company has been registered by the Minister of Finance

as a Non-Resident Insurance Undertaking under the Non-Resident

Insurance Undertakings Act 1967.


Bermuda has no statutory equivalent of Chapter 15 of the US’s

Bankruptcy Code, section 426 of the UK’s Insolvency Act 1986, or the

UK’s Cross-Border Insolvency Regulations 2006, by which the UK

implemented the United Nations Commission on International Trade

Law’s Model Law on Cross-Border Insolvency. The Supreme Court of

Bermuda has nonetheless confirmed, following the Privy Council

decision in Cambridge Gas Transportation Corp v Navigator Holdings plc [2007] 1 AC 508 that, as a matter of common law, the Supreme

Court of Bermuda may (and usually does) recognise liquidators

appointed by the Court of the company’s domicile and the effects of a

winding up order made by that Court, and has a discretion pursuant to

such recognition to assist the primary liquidation Court by doing

whatever it could have done in the case of a domestic insolvency.

However, the precise scope of Bermudian Courts’ common law power

to assist foreign liquidations, and, in particular, to ‘provide assistance

by doing whatever it could have done in the case of a domestic

insolvency’ has been the subject of considerable debate in a number of

recent judgments, including in two recent judgments by the Privy

Council, on appeals from the Court of Appeal for Bermuda, in

Singularis Holdings Limited v PricewaterhouseCoopers [2014]

UKPC 36 and PricewaterhouseCoopers v Saad Investments Company Limited (referred to in our answer to question 7.1).

In summary, subject to the facts of any particular case, the Bermuda

Court is likely to recognise the winding up orders of foreign Courts,

and to assist foreign liquidators to the fullest extent possible, in

circumstances where:

(1) there is a ‘sufficient connection’ between the foreign Court’s

jurisdiction and the foreign company making it the most

appropriate, or the ‘most convenient’ jurisdiction to have

made an order for the winding up of the company and

appointment of foreign liquidators;

(2) there are documents, assets, or liabilities of the foreign

company within the jurisdiction of Bermuda; the foreign

company has conducted business or operations within, or

from, the jurisdiction of Bermuda, whether directly or by

agents or by branches; the foreign company has former

directors, officers, managers, agents or service providers

within the jurisdiction of Bermuda; and/or the foreign

company properly needs to be involved in litigation or

arbitration within the jurisdiction of Bermuda; and

(3) there is no public policy reason under Bermudian law to the

contrary (if, for example, there would be unfairness or

prejudice to local Bermudian creditors).

However, the Privy Council has stressed that the question of how far

it is appropriate to develop the common law so as to assist foreign

liquidations depends on the facts of each case, and the nature of the

power that the Bermuda court is being asked to exercise. In the

context of an application for an order for production of documents

by an entity within the jurisdiction of the Bermuda court, the Privy

Council has noted that such a power is available only where

necessary to assist the officers of a foreign court of insolvency

jurisdiction or equivalent public officers, but is not available to

assist a voluntary winding up, which is essentially a private

arrangement. It is not a power to assist foreign liquidators to do

something which they could not do under the law by which they

were appointed, and its exercise must be consistent with the

substantive law and public policy of the assisting court in Bermuda.

There is some uncertainty as to whether a foreign Scheme of

Arrangement or related procedure (such as an insurance business

transfer scheme under legislation implementing European single

market insurance directives) can be recognised and enforced in

Bermuda as a matter of common law. Although the Supreme Court

of Bermuda has shown some willingness to recognise foreign Court

orders approving foreign schemes (in the absence of opposition), it

is unclear what position it might take in a contentious situation.


Exempted companies incorporated in Bermuda carry on business

predominantly or exclusively in foreign jurisdictions, and

frequently have their shares and other securities listed on foreign

public exchanges. They are accordingly subject to the insolvency

regimes of the jurisdictions in which they do business, where these

extend to companies incorporated overseas. Proceedings in other

jurisdictions, for example: the United States; the United Kingdom;

the British Virgin Islands; the Cayman Islands; Hong Kong; and

Singapore, affecting insolvent Bermuda exempted companies are

common. Where necessary, these are commonly supported by

ancillary liquidation proceedings in Bermuda or by judicial

recognition and assistance (of the type discussed in our answer to

question 7.2) from the Supreme Court with the foreign proceedings,

in the absence of winding up proceedings in Bermuda.

8 Groups


There are no statutory provisions for the treatment of insolvent group

companies. The Supreme Court has, however, occasionally appointed

the same office-holders as liquidators to multiple companies in the

same group of companies, subject to suitable arrangements being

made with respect to any conflicts that might arise (including by way

of appointment of a ‘conflicts’ liquidator). In appropriate cases, the

Supreme Court has also supported and approved co-operation

agreements that have been entered into between separate office-

holders of companies within a group of companies.

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9 Reform


One of the more significant recent legislative developments in

Bermuda is the Banking (Special Resolution Regime) Act 2016,

which has been enacted but not yet brought into force, save with

respect to sections 1 and 10 (as at the time of writing). This is a very

substantial piece of legislation which provides a new statutory

toolset for dealing with the failure or insolvency of a bank in

Bermuda.

The Companies and Limited Liability Company Amendment Act

2017 also introduced certain legislative changes regarding retention

of the books and papers of a company and its liquidators.

The Bermuda Monetary Authority has been actively engaged in a

consultation exercise regarding potential reform of the order in

which insurance policyholder creditors rank for payment in an

insolvent liquidation of an insurer. It is anticipated that this

consultation exercise will lead to certain legislative changes to the

1978 Insurance Act later in 2019.

The Chief Justice has recently published various consultation papers,

proposing certain procedural reforms to the Companies (Winding Up)

Rules 1982 and certain Rules of the Supreme Court of Bermuda 1985

which are of relevance to corporate litigation. Some of these rule

changes were implemented in July 2018, and it is anticipated that

certain other rule changes will be implemented later in 2019.

The Government of Bermuda is actively engaged in a consultation

exercise with respect to potential relaxation of the 60/40 Bermudian

ownership and control requirements for local Bermuda companies.

The Restructuring and Insolvency Specialists Association

(Bermuda) is also actively considering a variety of industry

proposals for potential law reform in the area of personal

bankruptcy, insolvency and corporate rescue, and this is also an area

of interest to the Government of Bermuda, the Official Receiver, the

Registrar of Companies, as well as the Chief Justice.

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Alex Potts QC Kennedys 20 Brunswick Street Hamilton HM10 Bermuda Tel: +1 441 296 9276


URL: www.kennedyslaw.com/bermuda

Mark Chudleigh Kennedys 20 Brunswick Street Hamilton HM10 Bermuda Tel: +1 441 296 9276


URL: www.kennedyslaw.com/bermuda

Alex Potts QC has a wide-ranging commercial litigation and arbitration practice, with a focus on disputes in the fields of contentious insolvency, banking, financial services, investment funds, insurance, reinsurance, professional negligence, aircraft finance, company law, and trusts.

Mr. Potts has conducted cases and appeared as counsel before a variety of courts and tribunals, in England and Wales, Bermuda and the Cayman Islands, representing creditors, directors, managers, liquidators, and debtors.

Mr. Potts has appeared in a number of reported insolvency cases in Bermuda, and he regularly advises, speaks and writes on issues of insolvency law in Bermuda. He is a committee member of The Restructuring and Insolvency Specialists Association (Bermuda) and a member of INSOL.

Alex Potts’ full professional profile is available at: http:// www.kennedyslaw.com/apotts/.

Kennedys provides expert counsel in relation to commercial and corporate matters in Bermuda.

The firm handles insolvency and restructuring matters, commercial litigation and arbitration, corporate and trust disputes, contract drafting, and general corporate advisory/regulatory work across all business sectors and with a particular focus on insurance.

The firm excels at prosecuting and defending complex matters involving significant exposure, sensitive public relations issues and industry-wide policies. Kennedys offers its clients not only local Bermuda expertise but also multinational legal expertise through its association with the international law firm Kennedys Law LLP.

In its insolvency and restructuring practice, Kennedys advises and represents clients in Bermuda and in other jurisdictions with connections to Bermuda. Recent matters handled by the team include: representing the liquidators of two British Virgin Islands-funded companies in compulsory winding up proceedings in Bermuda; advising on Schemes of Arrangement; representing the compulsory liquidators and segregated accounts receivers of two Bermuda mutual fund companies structured as segregated accounts companies; representing management, creditors and shareholders of various Bermuda companies, funds and private equity structures in a number of contested compulsory winding up petitions; representing the interests of unsecured creditors in various receiverships; and representing a Bermuda mutual fund company structured as a segregated accounts company in responding to various claims and applications for its various segregated accounts to be put into receivership.

The Kennedys insolvency and restructuring team in Bermuda includes Alex Potts QC, Mark Chudleigh, Nick Miles, Lewis Preston, and Nicolas Champ.

* * *

Kennedys and Kennedys Bermuda are the trading names in Bermuda of Kennedys Chudleigh Ltd., an independent Bermuda law firm. Kennedys Chudleigh Ltd. is a limited liability company incorporated in Bermuda under the Companies Act 1981, which is regulated under the provisions of the Bermuda Bar Act 1974, and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009.

Mark Chudleigh is the managing partner of Kennedys. Having practised in London for 20 years, he maintains an international practice for clients in Bermuda, London, the United States, Asia and elsewhere. His practice focuses on dispute resolution and commercial litigation involving the insurance and financial services sectors. Mr. Chudleigh’s practice includes commercial/corporate litigation, insurance and reinsurance claims and disputes, insolvency and restructuring and trust matters.

Mr. Chudleigh acts as an expert witness on Bermuda law and accepts appointments as an arbitrator. In addition to being admitted in England & Wales and Bermuda, he is admitted as an attorney in the State of California and he is frequently involved in matters with a US component.

Mr. Chudleigh is recognised as a leading lawyer in Bermuda by several directories, including Chambers Global and The Legal 500. He is a member of the Restructuring and Insolvency Specialists Association (Bermuda) and a member of INSOL.

Mark Chudleigh’s full professional profile is available at: https:// www.kennedyslaw.com/our-people/profiles/bermuda/mark-chudleigh.

Kennedys Bermuda

chapter 9


thornton grout Finnigan llp

leanne m. williams

alexander soutter

canada

1 Overview


Canada is a relatively creditor-friendly jurisdiction. Canada’s

restructuring legislation is drafted to provide creditors with

sufficient remedies and latitude while balancing those remedies

with protections in favour of the debtor to ensure fairness.


Many restructurings never become public and are not formalised. In

order to avoid the costs of a formal restructuring process, parties

often attempt an informal restructuring prior to commencing a

public insolvency filing.



Under Canadian law, the directors of a company have a fiduciary

duty to the company and not to its creditors, shareholders or other

stakeholders. This is so even when the company is facing

insolvency. However, directors may consider the interests of

various stakeholders, including shareholders, creditors, employees

and suppliers, in fulfilling their fiduciary duty. The fiduciary duty is

a duty of loyalty – it requires directors to act honestly and in good

faith with a view to the best interests of the company. This means

that a director must prefer the interests of the company over, for

example, the interests of a shareholder who nominated the director

to the board or the director’s own interests in a business opportunity

that properly belongs to the company.

Directors also have a duty of care that requires them to exercise the

care, diligence and skill that a reasonably prudent person would

exercise in comparable circumstances. In other words, directors

must take steps to ensure that they are making informed decisions,

including by considering all relevant information, identifying

reasonable alternatives and seeking input from appropriate advisors.

Directors face many potential liabilities as regards a financially

troubled company. A variety of stakeholders have standing to seek

an oppression remedy against a director where the director’s

conduct was oppressive, unfairly prejudicial or unfairly disregarded

the interests of a shareholder, creditor, director or officer of the

company. In such circumstances, the court can make any order it

deems fit, including holding the director personally liable for any

damages. In addition, various statutes impose personal liability on

directors for the company’s failure to meet its obligations.

Examples include a company’s failure to pay wages or vacation pay

to its employees and to remit source deductions for employee

income taxes and Employment Insurance and Canada Pension Plan

contributions.

While there is no statutory requirement to enter a restructuring or

insolvency process at a particular time, a company must be

“insolvent” in order to qualify for insolvency protection. For

proceedings under the Companies’ Creditors Arrangement Act (CCAA) (Canada’s primary restructuring statute for large

companies, which is discussed in greater detail below), courts have

interpreted the term “insolvent” broadly, finding that a company is

insolvent if it is reasonably expected to run out of liquidity within a

reasonable proximity of time as compared with the time reasonably

required to implement a restructuring.


A variety of stakeholders may influence the company’s situation in the

pre-filing context. Various statutory regimes may govern certain aspects

of the relationship between the company and certain stakeholders.

Additionally, stakeholders may have certain rights against the company

under common law. For example, secured creditors may have the ability

to compel the company to file for insolvency protection or may have a

contractual right to appoint a receiver to take over the company’s

business and/or realise on its assets.

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The government is also a key player in the pre-filing context, as it is

able to impose financial sanctions on the company for a variety of

reasons, including environmental, pension and other wrongdoings.

Landlords may exercise various remedies as against a tenant-

company upon non-payment of rent including, in addition to their

express contractual rights, the right to distrain on the tenant’s goods

or to terminate the lease. A company’s employees may also affect a

company’s decision about whether to file for insolvency protection

and there are very limited circumstances under which a collective

agreement can be altered in both a bankruptcy and restructuring

situation.

In the post-filing context, there are restrictions on the actions certain

stakeholders can take against the company. If a company files for

protection under the CCAA, typically all creditors (secured and

unsecured) are stayed from exercising their rights against the

company. By contrast, if the company files an assignment in

bankruptcy under the Bankruptcy and Insolvency Act (BIA), only

unsecured creditors are restricted from pursuing their rights against

the company. Where a debtor company makes a proposal, or gives

notice that it intends to make a proposal, under the BIA, all creditors

are stayed except for secured creditors who have issued the

appropriate enforcement notice and such notice periods as are

prescribed have expired.

The stay of proceedings does not apply to obligations incurred after

a proceeding is commenced under the BIA or CCAA.


There are generally two types of transactions entered into by a

financially troubled company that are at risk of challenge. The first

occurs where the company makes a transfer to (e.g., a gift,

conveyance, assignment, payment of dividends, premiums, etc.) or

for a creditor at the expense of other creditors. The second occurs

where the company makes a transfer and the consideration received

by the company (if any) is far less than the value of the

consideration given by the company.

It is possible to challenge such transactions under various provincial

and federal statutes. Where the company has filed for insolvency

protection under either the BIA or the CCAA, typically the party

challenging the transaction is the court officer overseeing the

insolvency proceedings, although it is possible for a creditor to do so

where the court officer refuses or neglects to act. A creditor can also

challenge the transaction under various provincial statutes,

regardless of whether the company has filed for insolvency

protection.

The requirements to prove that such a transaction has occurred vary

depending on the statute pursuant to which the transaction is

challenged. For example, in certain instances, it is necessary to

prove that the company intended to defraud, defeat or delay a

creditor, while in other cases it is not necessary to prove intent.

Where a creditor successfully challenges a transaction under a

provincial statute, the transaction is void against any person injured

by the transaction. Where the company has filed for insolvency

protection under either the BIA or the CCAA and the transaction is

successfully challenged by the court officer overseeing the

proceedings, typically the transaction is void as against the court

officer. In certain cases, it is also possible for the court officer to

order that a party or any other person who is privy to the transaction

make a payment to the company’s estate to make it whole.



Often an informal restructuring of a company’s balance sheet or sale

of assets is approved through an abridged court process. In

appropriate circumstances, the court will approve a consensual

restructuring that is in the best interests of the debtor company and

its creditors without a full-blown insolvency proceeding.


Formal restructuring proceedings are provided for under the BIA

and the CCAA to either liquidate or restructure a company’s

indebtedness. A formal restructuring may also be implemented by a

corporation’s governing statute. This chapter will focus on the

mechanisms by which a debtor may restructure its liabilities; as a

result, certain other liquidation and sale mechanisms will not be

fully explored.

A restructuring under the BIA typically takes the form of a

restructuring proposal to the company’s creditors. If a proposal

process is commenced, a licensed trustee in bankruptcy (trustee) is

appointed as proposal trustee who will work with the debtor

company to prepare a proposal to put to its creditors. The proposal

trustee is required to monitor the business of the debtor but

management of the corporation remains under the debtor’s control.

A debtor company is not restricted in what its proposal may include.

Typically, a proposal under the BIA will offer to pay a percentage of

the debt owing to compromised creditors or establish a pool of

money which is to be divided up among creditors and/or provide an

extension of the time required to pay the amounts afforded under the

proposal. The restructuring proposal must be put to a vote by the

creditors being compromised at a meeting established for that

purpose. During the creditors’ meeting, at least 51 per cent of

creditors holding at least 66⅔ per cent of the voting claims must

approve the proposal for it to be passed and approved. Even if

approved by the required majorities, the proposal must also be

approved by the court. In the event that the proposal is not approved

by the required majorities or the court, the proposal will fail and the

company will automatically be deemed bankrupt.

Debtor companies with liabilities of at least $5 million may

commence restructuring proceedings under the CCAA. The CCAA

is designed to be a flexible and discretionary statute by which larger

companies are able to restructure their indebtedness. A CCAA plan

of arrangement must be approved by at least 51 per cent of creditors

holding at least 66⅔ per cent of the voting claims and the court.

Unlike a vote under a BIA proposal, there is no deemed bankruptcy

if a CCAA plan is not approved by the creditors or the court.

However, in the event that the creditors of a debtor under the CCAA

fail to approve the debtor company’s plan of arrangement, it is likely

that the creditors will move to pursue a liquidation of the debtor’s

assets for the benefit of its creditors.

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A debtor company may also successfully restructure its obligations

under the provisions of its governing statute, whether such company

is provincially or federally incorporated. Certain restructurings do

not require the extensive relief afforded by the BIA or CCAA and, as

such, its governing statute may provide the flexibility to restructure

certain discrete aspects of a corporation’s capital structure. In

Canada, such restructurings are not common but have become more

prevalent in recent years.

The creditors must ultimately vote in favour of any restructuring

proposal or plan of arrangement. If the vote successfully achieves

the requisite majorities in number and amount, those creditors not in

favour will be subjected to the will of the majority and have the

proposal or plan of arrangement.


A bankruptcy proposal may be filed by an “insolvent person”. An

insolvent person is defined by the BIA as one whose liabilities

amount to $1,000 and (i) who is unable to meet his obligations as

they generally become due, (ii) who has ceased paying his current

obligations in the ordinary course of business as they generally

become due, or (iii) the aggregate of whose property is not, at a fair

valuation, sufficient to pay its obligations. A bankruptcy proposal is

commenced by either filing (i) a notice of intention to make a

proposal (NOI) together with a statement of creditors having claims

in excess of $250, or (ii) the filing of the actual proposal together

with a statement of the financial affairs of the debtor, with a

government office known as the official receiver. The NOI must

also appoint a trustee to act as proposal trustee.

In order to qualify to restructure under the CCAA, a debtor company

or affiliated debtor companies must have total obligations in excess

of $5 million. A CCAA restructuring is commenced by way of

application to the court in the province within which the head office

or chief place of business resides. In the event that the company has

no place of business in Canada, a company may file in any province

where the company’s assets are situated.

A restructuring under a corporation’s governing statute is dependent

on the particular framework of that statute. This type of

restructuring is typically reserved for a solvent corporation that is

attempting to make a fundamental change; however, the courts have

used a flexible approach to this interpretation.


The proposal trustee manages the process of a BIA proposal. The

debtor company remains in possession and control and any proposal

approved by the debtor’s creditors must be approved by the court.

A CCAA restructuring is also a debtor-in-possession process. A

monitor is appointed by the court (Monitor) to oversee the process

on its behalf. The CCAA is a purely court-driven process. Any plan

of arrangement approved by the creditors of the debtor must be

approved by the court.

A restructuring under a corporation’s governing statute is managed

by the corporation. The court typically plays a central role in the

arrangement process. The court establishes the process by which

the arrangement will be presented to the company’s stakeholders

which must then be approved by the court prior to implementation.


Once the BIA proposal process has commenced, a debtor may

disclaim or resiliate any agreement to which the debtor is a party by

giving notice in a prescribed manner to the other parties to the

agreement and to the proposal trustee. A stay of proceedings is

granted which prohibits parties from terminating or failing to

honour their obligations under the proposal process unless such

agreement is disclaimed. Creditors are not permitted to set off for

goods and services delivered by them after the date of filing.

During a CCAA process, the court order will grant a stay of

proceedings prohibiting a party from exercising any rights or

remedies against the debtor, including the termination of contracts.

Parties are expressly prohibited from terminating a contract for

reason of the commencement of the proceedings. The purpose of

the CCAA is to preserve the status quo in order to allow the debtor

to restructure its affairs. The CCAA explicitly states that the law of

set-off applies in CCAA proceedings.

Creditors are not, however, prohibited from requiring immediate

payment, or pre-payment, for goods, services, use of leased or

licensed property or other consideration provided. If such payment

terms are not met, the creditor can refuse further supply/service and

can require immediate payment through court order.

The terms and structure of a restructuring under a corporation’s

governing statute is completely discretionary. Typically, the stay of

proceedings is very limited.


In the event that sufficient funding is not available to sustain the

business through the process, Debtor-in-Possession (DIP) financing

may be obtained in either a BIA proposal process or a CCAA process.

Under both the BIA and the CCAA, the court may grant a super-

priority charge in favour of the DIP lender which ranks ahead of all

other creditors of the debtor. The ranking of charges is discussed in

more detail in question 4.7.



Depending on the nature of the company, it may be wound up

through bankruptcy or receivership proceedings under the BIA or

the Winding up and Restructuring Act (WURA). The WURA

governs the liquidation and restructuring of certain types of

financial institutions including incorporated banks or savings banks,

authorised foreign banks, trust companies, insurance companies,

loan companies having borrowing powers and building societies

having a capital stock. The WURA also applies, but is rarely used to

liquidate federally regulated corporations, including not-for-profit

corporations. The WURA has been used sparingly in recent years

and will not be discussed in detail in this chapter.


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While the CCAA is primarily a restructuring statute, it is possible to

liquidate or wind up a debtor company under the CCAA if attempts

to restructure the debtor company under the CCAA fail.


Bankruptcy proceedings in Canada can be commenced on a

voluntary or involuntary basis. A voluntary bankruptcy proceeding

may be commenced by a company that meets the statutory

definition of “insolvent person” under the BIA. An insolvent person

is defined as a person who is not bankrupt and who resides, carries

on business or has property in Canada, whose liabilities to creditors

provable as claims under this Act amount to $1,000, and:

(a) who is for any reason unable to meet his obligations as they

generally become due;

(b) who has ceased paying his current obligations in the ordinary

course of business as they generally become due; or

(c) the aggregate of whose property is not, at a fair valuation,

sufficient, or, if disposed of at a fairly conducted sale under

legal process, would not be sufficient to enable payment of all

his obligations, due and accruing due.

By contrast, an involuntary application may be initiated by one or

more unsecured creditors where: (i) their debt owing to the applicant

creditor(s) is at least $1,000; and (ii) the debtor company has

committed a prescribed act of bankruptcy within six months

preceding the filing of the application. A secured creditor may also

commence an involuntary bankruptcy application provided that it

can establish that the debtor company has unsecured debts of at least

$1,000 owing and that an act of bankruptcy has occurred with six

months preceding the filing of the application.

With respect to receiverships, a creditor’s contractual right to

appoint a receiver is often triggered by a default under the terms of

the security document governing the credit relationship. A receiver

may be privately appointed by a creditor if the right to do so is

contained in the security documentation governing the credit

relationship.

Alternatively, a creditor may seek a court-appointed receiver where

such appointment is “just or convenient”. In determining whether

an appointment would be “just and convenient”, a court may look to

the following factors:

■ whether the company’s default justifies the appointment of a

receiver;

■ whether a right to appoint a private receiver exists;

■ whether it is in the interests of all parties to have a receiver

appointed by the court;

■ whether appointment by the court is necessary to enable the

receiver to carry out its work and duties;

■ whether the assets of the company are in jeopardy;

■ whether the appointment would cause prejudice to innocent

third parties; and

■ whether the appointment would maximise recoveries for all

creditors.

If a company qualifies for liquidation under the WURA, it may be

liquidated if it is: insolvent; in liquidation or in the process of being

wound up and asked to be brought under the WURA by petition of

any stakeholders, assignees or liquidators; or a financial institution

and it is (or its assets are) under the control of the Superintendent of

Financial Institutions and is subject to an application for a winding

up order.


Bankruptcy proceedings under the BIA are managed by a trustee. At

the time of the trustee’s appointment, all property of the debtor

company passes to the trustee, including property located outside

Canada and property of the company in the possession of third parties.

After taking possession of the debtor company’s property, the trustee

will sell the company’s property and distribute the proceeds to

creditors, subject to the rights and actions of secured creditors.

The trustee will compile certain statutory documents in accordance

with the BIA, notify creditors of the debtor company’s bankruptcy,

investigate the affairs of the debtor company and arrange for the first

meeting of creditors to provide creditors with information on the

bankruptcy. Following the distribution to creditors, the trustee is

discharged and the company is usually discharged from its debts.

As part of the bankruptcy process, the trustee will provide the court

with periodic reports and must seek court approval when taking

certain steps, such as selling the debtor company’s property and

finalising its discharge.

With respect to receiverships, the winding up process is managed by a

receiver. A receiver may take control of the debtor company’s business

(at which point the receiver becomes a receiver-manager) and dispose

of the company’s property. As noted above, a receiver may be privately

appointed or appointed pursuant to court order. Privately appointed

receivers will generally only act on behalf of the secured creditor that

appointed them and will realise on the property specifically covered by

the relevant security or loan agreement under which they were

appointed. Privately appointed receivers are not overseen by the court.

Court-appointed receivers are officers of the court and act on behalf of

all creditors of the debtor company. The powers and rights of court-

appointed receivers are included in the court order that appointed them.

Similar to trustees, court-appointed receivers will provide the court with

periodic reports and must seek court approval when taking certain steps.


Under liquidation proceedings under the BIA, a secured creditor

may proceed to enforce its security without obtaining the consent of

the trustee or leave of the court. The stay of proceedings that comes

into effect on the bankruptcy of a company does not apply to a

secured creditor in realising or otherwise dealing with its security

unless the court orders otherwise, which occurs infrequently.

Under CCAA proceedings, all creditors, including secured

creditors, are stayed from taking enforcement action against the

debtor company.

Shareholders typically have very little or no influence over the wind

up of a debtor company under each of Canada’s insolvency and

restructuring regimes.


The rules applicable to contracts in insolvency differ depending on

whether the company is being wound-up under the BIA or CCAA.


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In certain cases, existing contracts may be disclaimed by the debtor

company (i.e., rejected) or they may be assigned to purchasers

notwithstanding that the agreement contains a restriction on

assignment. However, post-filing contracts, eligible financial

contracts and collective agreements are not assignable.

Counterparties to a contract with the debtor company may also be

stayed from exercising what are commonly known as ipso facto

clauses, which purport to terminate, amend or accelerate payment in

the event that the counterparty to the contract becomes insolvent.

Termination or acceleration rights triggered by insolvency or

bankruptcy are stayed in CCAA proceedings but may not be stayed

in bankruptcy proceedings under the BIA where the company is

being wound-up.

The disclaimer of contracts by a company is statutorily authorised

under the CCAA with the consent of the Monitor, subject to the right

of any party to the contract to move before the court for an order that

the company should not be permitted to disclaim the contract. If the

Monitor does not consent to the contract rejection, the company

may move before the court on notice to all parties to the contract for

an order permitting the rejection of the contract. It is important to

note that certain types of categories of contracts may not be

disclaimed: an eligible financial contract; a collective agreement; a

financing agreement if the company is the borrower; and a lease of

real property if the company is the lessor.

While a trustee does not have the statutory right to disclaim a

contract made by the company, the common law has held that the

trustee has a right to do so. With respect to intellectual property,

while a licensor may reject a licence, the licensee continues to be

entitled to use the intellectual property during the term of the licence

agreement provided the licensee continues to perform its obligations

under the licence agreement. As noted above, the CCAA explicitly

states that the law of set-off applies in CCAA proceedings. While

the law of set-off in the bankruptcy context is different from that

under the CCAA, it continues to apply in BIA proceedings.


The BIA contains a statutory scheme that governs the ranking of

claims. The rights of secured creditors will rank ahead of

substantially all claims against the debtor company, except for

certain “super-priority” claims. These super-priority claims

include: (i) claims for unpaid payroll tax deductions (known as

source deductions); (ii) claims made by suppliers for the return of

goods supplied to the debtor company in the 30-day period prior to

bankruptcy; and (iii) claims for up to $2,000 for unpaid salary,

wages, commissions and benefits. Once super-priority claims and

secured claims are satisfied, preferred claims are paid. Preferred

claims include fees of the trustee and its legal counsel and claims for

up to three months of arrears of rent and three months of future rent

by landlords. Once preferred claims are paid, the claims of general

unsecured creditors are paid pari passu. If the debtor company has

funds remaining after all unsecured creditors are paid, equity

holders and other subordinated claims may receive a distribution.

The CCAA does not contain a statutory scheme for distribution.

However, the BIA scheme of liquidation and distribution supplies

the backdrop for distribution if a CCAA reorganisation is ultimately

unsuccessful and a company is liquidated under the CCAA. Under

the CCAA, the court typically grants super-priority charges which

rank ahead of secured creditors for certain claims. These super-

priority charges often include: (i) fees for professionals such as the

Monitor and its counsel, fees for counsel to the company and fees

for other restructuring professionals such as a chief restructuring

officer (administrative charge); (ii) DIP financing (DIP financing

charge); and (iii) amounts to pay post-filing suppliers to the

company that are deemed critical suppliers (critical supplier

charge).


A dissolved company that is insolvent or bankrupt may be revived.

A revival, however, does not change the company’s status under the

BIA. When the company is revived, the rights, liabilities and

obligations arising before and after the dissolution are restored to

the revived company. The company is put in the same position as

though it was never dissolved. The company benefits from, is

bound to and is liable for, all acts taken while the corporation was

dissolved. Also, any changes to the internal affairs of the company

are deemed valid. Any legal actions dealing with the internal affairs

of a revived corporation taken between the time of its dissolution

and its revival are valid.

5 Tax


Certain steps in a restructuring or insolvency procedure may give

rise to certain tax risks. The primary tax consideration in a

restructuring or insolvency proceeding is the potential application of

the debt forgiveness rules contained in the Income Tax Act. In

general terms, the debt forgiveness rules apply where debt of a

company is forgiven or settled for payment of an amount that is less

than the principal amount owing. The forgiveness causes a

reduction in various tax accounts or tax attributes or, ultimately, an

income inclusion. In addition, the sale of a company’s assets may

give rise to tax liabilities if the debtor company does not have

sufficient tax losses to offset the gains made on the sale of the assets.

6 Employees


None of the three procedures discussed in this chapter have an

automatic effect on the status of the employment of the debtor’s

employees. However, in the event that a BIA proposal is

unsuccessful and a debtor is deemed bankrupt, the act of

bankruptcy automatically terminates the employees of the debtor.

The BIA and CCAA both prohibit the termination of collective

bargaining agreements during a restructuring.

Notwithstanding that the employment relationship remains

unaltered, in each process, certain amounts owing to employees

may be compromised.

A proposal or CCAA plan of arrangement will not be approved if it

does not provide for at least the minimum amount that would be

provided to employees in a bankruptcy. Claims payable to

employees include claims for unpaid wages or other compensation

for the period commencing six months before the date the NOI was

filed in a BIA proposal, or the date of the proposal if no NOI was

filed, or the date that CCAA proceedings were commenced, to the

date that the proposal was accepted.


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In a bankruptcy, the employee can claim for unpaid wages or other

compensation for the period commencing six months before the

date of the initial bankruptcy event to the date of the bankruptcy

rank behind secured creditors and super-priority claimants, but

ahead of unsecured claims and most other preferred claims.



Companies incorporated in a foreign jurisdiction can restructure or

enter into insolvency proceedings in Canada. In order to restructure

or enter into insolvency proceedings under the CCAA, a debtor

company must be incorporated in Canada or have assets or conduct

business in Canada. Companies not incorporated in Canada, but

seeking to restructure in Canada, will often have to establish that

their centre of main interest (COMI) is situated within Canada.

Three factors generally determine where a debtor company’s COMI

is situated: (i) the location of the company’s headquarters or head

office; (ii) the location of the company’s management; and (iii) the

location which a significant number of creditors’ recognise as the

company’s COMI. Other secondary factors, which a Canadian

court may review in determining COMI, include:

■ the location where corporate decisions are made;

■ the location of human resource functions;

■ the existence of shared management within entities and in an

organisation;

■ the location where cash management and accounting

functions are administered;

■ the location of the debtor company’s marketing and

communication functions;

■ whether the debtor company is managed on a consolidated

basis;

■ the extent of integration of the debtor company’s

international operations;

■ the centre of the debtor company’s corporate, banking,

strategic and management functions;

■ the location where pricing decisions and new business

development initiatives are made; and

■ the location of the debtor company’s treasury management

functions, including management of accounts receivable and

accounts payable.


Foreign restructuring or insolvency proceedings may be recognised

by courts under the BIA (in the case of a bankruptcy) or the CCAA

(in the case of a restructuring). To commence the process, a foreign

representative must apply to the court for recognition of a foreign

insolvency proceeding. If the applicant is successful in convincing

the court that he or she is a “foreign representative” and that the

application relates to a “foreign proceeding” as those terms are

defined under the CCAA and the BIA, the court must make an order

recognising the foreign proceeding.

If the court is satisfied that the applicant is a foreign representative

and that the application relates to a foreign proceeding, the court

must determine whether the foreign proceeding is a “foreign main

proceeding” or a “foreign non-main proceeding”. If the proceeding

is characterised as a foreign main proceeding, the court will issue an

order staying all proceedings against the debtor, restraining further

proceedings in any action. By contrast, if the proceeding is

classified as a non-main proceeding, a stay is not automatic. Rather,

the court has the discretion to make any order necessary for the

protection of the debtor’s property or the interests of creditors.


Companies incorporated in Canada can enter into insolvency

proceedings in other jurisdictions. However, this is rare given that

Canada’s insolvency regimes are advanced and Canadian insolvency

practitioners and courts are recognised around the world.

8 Groups


There are a number of different approaches for seeking insolvency

protection for a corporate group in Canada. A company or group of

companies may file in a foreign jurisdiction and seek recognition of that

foreign proceeding in Canada. Alternatively, a company or group of

companies may file in the jurisdiction that is the group’s COMI, with

each debtor company filing in only one jurisdiction and then

coordinating each separate filing either through recognition proceedings

or some other mechanism. Finally, each member in a corporate group

may make separate full filings in Canada and the foreign jurisdiction(s).

Coordinated filings are often implemented in circumstances in

which there is a corporate group consisting of entities that are

related but not centrally managed or highly integrated.

Concurrent main filings involve full insolvency proceedings under

the CCAA or BIA as well as a full filing in the foreign jurisdiction(s)

by the same entity. This approach is administratively complex and

has rarely been used since the UNCITRAL Model Law on Cross-

Border Insolvency was adopted by Canada in 2009.

Courts and office holders (professionals administering the debtor

company’s insolvency) involved in multi-jurisdictional insolvency

proceedings typically enter into communication or cooperation

protocols to ensure that cross-border insolvency proceedings are

managed in a harmonious and efficient manner.

9 Reform


There are not currently any fundamental proposals of reform that

have been tabled in respect of the restructuring regime in Canada.


can

ada


Leanne M. Williams Thornton Grout Finnigan LLP Suite 3200, 100 Wellington Street West Toronto Dominion Centre Toronto, ON, M5K 1K7 Canada Tel: +1 416 304 1616


URL: www.tgf.ca

Alexander Soutter Thornton Grout Finnigan LLP Suite 3200, 100 Wellington Street West Toronto Dominion Centre Toronto, ON, M5K 1K7 Canada Tel: +1 416 304 0595


URL: www.tgf.ca

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

Leanne M. Williams is a Partner at Thornton Grout Finnigan LLP practising exclusively in the area of restructuring and insolvency, including reorganisations, workouts, refinancings and secured transactions. Leanne has extensive experience in Canadian and cross-border restructurings on behalf of both debtors and creditors across a broad spectrum of industries. She also regularly acts for accounting firms during the insolvency process. Leanne represents all types of stakeholders in the restructuring process with the goal of achieving a successful workout both within and outside of formal court proceedings.

Alexander Soutter is an Associate at Thornton Grout Finnigan LLP and practices in the firm’s restructuring and insolvency group as well as its commercial litigation group. Alexander has significant experience representing creditors, both before and after a debtor’s insolvency.


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chapter 10

iclg to: corporate recovery & insolvency 2019 www.iclg.com

macfarlanes llp

paul Keddie

timothy white

england

1 Overview


The UK is typically considered to be a creditor-friendly jurisdiction

and, in particular, friendly towards secured creditors. Enforcement

of security in the UK is regularly carried out without the need for

any court involvement other than the filing of certain prescribed

forms. Notarisation or similar requirements that can sometimes

delay enforcements in other jurisdictions are also not required.

Consequently, English law is often chosen as the governing law of

contracts and disputes are litigated in the English courts by both

local and overseas parties. A number of high-profile cross-border

restructurings have also been conducted using English law-

governed documents and the English courts have been flexible in

facilitating the use of English law to govern proceedings concerning

overseas companies. In the context of restructurings, this is perhaps

best demonstrated by the sanctioning of a number of schemes of

arrangement proposed by foreign companies in the English courts,

even where those companies have a limited connection to the UK

(such as English law-governed finance documents which are being

amended via the scheme).


Informal work-outs without any court involvement or the use of

formal insolvency proceedings are common in the English market.

Such work-outs can take a variety of forms and range from (for

example) amendments to credit agreements to relax covenant

testing levels or extend maturity dates to debt-for-equity swaps.

There are also a number of formal insolvency processes available

under English law. The most commonly used insolvency process is

administration, pursuant to which a licensed professional is appointed

to manage a company’s affairs in place of its directors. The

administrator has extensive powers to trade the company and may

also dispose of the company’s assets, either after a period of trading or

immediately upon his appointment (known as a “pre-pack” sale).

The alternative to administration is liquidation, which is primarily used

in respect of companies which have insufficient remaining assets to be

traded or sold and whose affairs are therefore being wound down.

English law also provides for two types of court-approved

restructuring processes: company voluntary arrangements

(“CVAs”); and schemes of arrangement (“Schemes”). Whilst there

are a number of differences between the two processes, each

essentially allow a company to (provided that a specific amount of

its creditors vote in favour) compromise creditor claims and take

other steps to restructure its affairs, which binds all creditors

(regardless of whether they voted in favour or not).



English law does not prescribe a set point in time at which a

company’s directors must file for insolvency. It is the duty of the

directors to decide the appropriate time to file (although secured

creditors may, in practice, take the decision to enforce and put the

company into an insolvency process prior to the directors taking

action).

The main impetus for directors in this respect is that directors of

companies who knew, or should have known, that the company of

which they are a director had no reasonable prospect of avoiding

entering an insolvency process, but caused creditors to incur losses

after that point, can be personally liable to compensate creditors for

those losses. This is known as “wrongful trading”. Consequently,

directors are often eager to file for insolvency without too much

delay, although a premature filing which causes losses to creditors

also presents a risk to directors.

Further, from the point at which a company becomes insolvent

under English law (either on a “balance sheet basis” – the

company’s liabilities exceed the value of its assets – or on a “cash

flow basis” – the company owes a liability or liabilities that it is

unable to pay when due), the directors of the company must have

their primary regard to the interests of the company’s creditors.

Prior to that point, it is the company’s shareholders to whom the

directors should have their primary regard. Breaching this duty and

causing the company’s creditors to incur losses by doing so risks the

director being personally liable for the offence of “misfeasance” if

the company subsequently enters liquidation.

© Published and reproduced with kind permission by Global Legal Group Ltd, London

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The “pari-passu” principle provides that a company’s ordinary,

unsecured creditors should be treated the same and without

preference between them within an English insolvency process.

However, certain types of unsecured creditors are granted certain

additional rights and given a different status notwithstanding the

application of that principle:

■ employees rank ahead of other unsecured creditors to the

extent of their “preferential claims” against the company –

these are claims for certain liabilities such as wages and

unpaid holiday pay owed to the employee up to certain

prescribed limits. Claims in excess of those limits rank

alongside all other unsecured claims against the company;

■ landlords of commercial property are granted certain rights to

seize a company’s assets, sell them and apply the proceeds

towards unpaid rent due by the company) and to forfeit (i.e.

terminate) a lease if it is breached. These rights do not

automatically terminate upon a company entering insolvency;

however, the moratorium against creditor action which

applies in administrations prevents a landlord from taking

any such action without the benefit of a court order or the

consent of the administrator; and

■ suppliers of goods to a company may include retention of title

clauses in the terms of their supply which provide that the

supplier retains title to the relevant goods until those goods

are, either by themselves or along with all other goods

supplied by that supplier, sold by the company. Such clauses

survive the company entering an insolvency process and

therefore mean that the administrator or liquidator either has

to set aside the proceeds of a sale of the relevant goods and

pay them to the supplier (rather than distribute them to all

creditors equally), or allow the relevant supplier to collect the

goods from the company’s premises if they are not necessary

to the conduct of the proceedings.

A moratorium on creditor action comes into effect upon a company

entering administration with a two-week interim, and a moratorium

is also available when a preceding notice of intention to enter

administration is filed at court. A moratorium prior to a CVA is

currently only available to companies with turnover, assets and

employees below certain (relatively low) thresholds, and is rarely

used. The courts have been willing to use their general case

management powers to stay creditor action where preparations for a

Scheme are at an advanced stage (although there is no statutory

moratorium available).

The government has proposed a new general restructuring

moratorium, but we await new legislation to bring this into effect.


Certain types of transactions entered into by a company prior to its

entry into administration or liquidation can be challenged by the

administrator or liquidator. If that challenge is successful, the

transaction can be unwound or, if that is not possible (for example,

because the counterparty to the transaction was dealing with the

company in good faith and it would therefore be unfairly

detrimental to that counterparty if the transaction was clawed back),

the directors can be ordered to make a compensatory payment to the

company’s creditors for the losses caused.

The main types of challenge are:

■ transactions at an undervalue where the company gifts or

disposes of assets for significantly less than their market

value. The transaction must have occurred within two years

of the commencement of the administration or liquidation

and the company must have been insolvent at the time of the

transaction or become insolvent as a result;

■ preferences where a company does something or causes

something to be done which has the effect of putting a

creditor in a better position upon the company entering

administration or liquidation than it would have otherwise

been. In order to be challenged the preference must have

occurred within two years (if to a person connected with the

company) or six months (if to an unconnected person) prior

to the commencement of the liquidation or administration.

The company must also have been motivated by the “desire”

to prefer the recipient of a preference for the challenge to be

successful; and

■ invalidation of floating charges (which are a type of security

which “floats” over a company’s non-fixed, movable assets,

such as stock) that are entered into by a company within two

years (for floating charges granted to connected persons) or

one year (for floating charges granted to unconnected

persons) prior to it entering administration or liquidation.

The invalidity is only to the extent that they secure “old”

consideration. This would apply if, for example, no new

money was advanced by the recipient of the floating charge

when it was granted by the company.



Yes. There are a number of tools available to companies and

creditors which wish to restructure the Company’s obligations under

English law financing contracts. The Loan Market Association’s

(“LMA”) recommended forms of loan facility documentation

contain extensive amendment and waiver provisions which govern,

amongst other things, the percentage by face value of a company’s

lenders (usually a “majority” of lenders holding in aggregate more

than two thirds of the participations under the relevant loan, or for

certain exceptional changes, all of those lenders) required to vote in

favour of steps such as waivers of debt, conversions of debt into

equity, re-setting of financial covenants and disposals of assets.

Schemes are often used to push through restructurings where

finance documents require the approval of 100% of the company’s

lenders to amendments and waivers required in connection with the

restructuring. If the company cannot secure the consent of all of its

lenders, but has the approval of the requisite number of creditors to

approve a Scheme (see below), the company can use a Scheme to

effect the relevant amendments and waivers which, if approved,

binds all of the company’s creditors.

macfarlanes llp england

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Schemes and CVAs are commonly used for companies looking to

restructure their liabilities. Each process causes creditors who vote

against it (or, in the case of a Scheme, creditors who have no

economic interest in the Scheme and are not being affected by it) to

be crammed-down provided that a requisite number of creditors

vote in favour. In the case of a CVA, at the meeting convened to

vote on the CVA, 75% by value of the companies’ unsecured

creditors present or voting by proxy (provided that no more than

50% by value of any creditors who vote against the proposal are

creditors who are unconnected with the company) must vote in

favour of the CVA. If approved, the CVA binds all of the

companies’ unsecured creditors, although it cannot affect the rights

of a secured creditor without its consent.

A Scheme requires that creditors (both secured and unsecured) are

divided into classes, based on commonality of their rights against

the company, to vote on the Scheme. Each class must then vote on

the Scheme at a meeting held for that purpose and provided that

75% by value and a majority in number of each class of creditors

present (in person or by proxy) at such meetings vote in favour, and

provided the Scheme is sanctioned by the Court, the Scheme binds

all creditors of the company. If a company can demonstrate that a

particular class of creditors is not affected by the Scheme (usually

“out of the money” creditors who have no economic interest in the

company), such class will not be required to vote on the Scheme.

Creditors are able to challenge Schemes and CVAs on the basis of

being treated unfairly in comparison to other creditors, or that the

outcome of the CVA or Scheme realises a poorer result than an

alternative process. Furthermore, other than in the case of relatively

small companies proposing a CVA, there is no moratorium or stay

on creditors threatening enforcement prior to the Scheme or CVA

being approved, which can potentially disrupt the process (although

the courts are becoming increasingly willing to stay enforcement

action by creditors which would disrupt a Scheme which has

reached an advanced stage and would produce a more favourable

outcome for creditors than if that enforcement action was allowed to

proceed).

Pre-packaged sales are also frequently used as a means to

restructure a company’s liabilities by transferring the company’s

assets to a newly incorporated subsidiary free of any liabilities

which the company is unable to pay in full, or to effect a sale of a

company to a third party. A pre-pack involves the documentation

and terms of the sale being negotiated and agreed in advance and

then completed by the administrator immediately upon, or shortly

after, their appointment. This is often preferable to the sale being

executed by the company’s directors because it is the administrator,

rather than those directors, who bears the responsibility of ensuring

that the assets are sold for the best possible value. Furthermore, a

pre-pack sale is often executed quickly and can be publicised to

creditors and third parties as a way of rationalising a company’s

liabilities so it can trade on successfully, which reduces the “stigma

of insolvency” for the company.

Currently, it is not possible to cram-down a dissenting class with a

Scheme or a CVA (such that a Scheme will fail if a class votes against

it). However, the government has proposed a new restructuring plan

procedure which would be similar to a Scheme, but would allow

dissenting classes of creditors to be crammed-down in certain

circumstances.


A company must be insolvent (on either a balance-sheet or cash-

flow basis) in order to be placed into administration by its directors.

In order for a secured creditor to appoint an administrator to a

company the creditor’s security must be enforceable in accordance

with its terms.

Schemes and CVAs can be initiated by the directors of a company at

any time but, as mentioned above, require a certain threshold of

creditors to vote in their favour together with, in the case of a CVA,

the consent of any affected secured creditors.


Administration and liquidation

A qualified insolvency practitioner must be appointed as an

administrator or liquidator of a company and, for all intents and

purposes, manage the company in place of its directors (including to

effect a pre-pack).

Schemes and CVAs

In a CVA, a qualified insolvency practitioner will act as

“supervisor” of the CVA and carry out the steps and actions

provided for in the CVA proposal (which sets out the terms of the

CVA). The directors remain in control of the company, although

they will co-operate with the CVA supervisor in order for it to be

properly implemented. There is no requirement for a qualified

insolvency practitioner to supervise a Scheme, it is simply carried

out by the company’s directors in accordance with the terms of the

Scheme.

A CVA proposal must be filed at court and creditors who feel they

have been unfairly prejudiced by a CVA or there has been a material

irregularity in the CVA process may challenge a CVA via a court

application within 28 days of its approval. There is more court

involvement in a Scheme as the court must, at a first hearing,

approve the company’s classification of its creditors to vote on the

Scheme in meetings convened for that purpose. Then, if the

requisite number of creditors vote in favour of the Scheme at those

meetings and assuming that the court is satisfied that the Scheme is

fair to the company’s creditors, they will “sanction” and approve the

Scheme at a second hearing.


A company entering into an insolvency process does not

automatically cause contracts to which the company is party to

terminate, although those contracts may contain terms which allow

the counterparty to terminate the contracts upon the process

commencing. Certain essential utilities and IT suppliers may not

terminate their contracts as a result of their customer entering

administration or a CVA. The relevant suppliers are protected by

virtue of payment for post administration supplies having the higher


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priority of an expense of the administration and, in addition, the

suppliers may apply to court to terminate the contract if continuing

to supply the company is causing them hardship.

An administrator or liquidator may simply refuse to perform the

company’s obligations under contracts if doing so is in the best

interests of the company’s creditors. Creditors are prevented from

court action to enforce breaches of contract without the

administrator/liquidator’s approval or an order of the court and even

if action is successfully taken, the counterparty has an unsecured

claim against the company which ranks alongside all other

unsecured creditors (so effectively is not worth pursuing).

A liquidator has additional powers to “disclaim” unprofitable

contracts (including leases) to which the company is party (which

has the effect of determining the counterparty’s rights under the

contract upon the disclaimer becoming effective and entitles the

counterparty to an unsecured claim against the company).


If an administrator or liquidator trades a business, the costs and

expenses of the process (including their fees) will usually be

discharged from the receipts of the trading. An administrator or

liquidator may also seek additional funding which is then repaid as

an “expense of the administration or liquidation” (ranking above

ordinary unsecured claims). However, outside of that possibility,

within a formal insolvency process there is no statutory mechanism

for rescue/debtor in possession financing under English law.



Companies looking to wind down their affairs, and creditors who

wish for a company to be wound up, can initiate a liquidation,

whereby a liquidator realises the company’s assets, distributes the

proceeds to creditors and then winds the company down.

There are two types of liquidation: voluntary liquidation; and

compulsory liquidation. Voluntary liquidations can either be made on

a “solvent” basis (known as a members’ voluntary liquidation)

(“MVL”) where the company’s directors are willing to swear a

statement to the effect that the company has sufficient assets to meet

its liabilities over the next 12 months, or on an “insolvent” basis

(known as a creditors’ voluntary liquidation) (“CVL”) where the

directors are unwilling or unable to give that statement. Both types of

voluntary liquidation are initiated by a company’s shareholders;

however, in a MVL the shareholders nominate the liquidator, whereas

in a CVL the creditors have the final say in the choice of liquidator.

Compulsory liquidation is made by filing a petition at court,

followed by a court hearing. A hearing of the petition is then held at

court and if it can be demonstrated to the court that one or more

prescribed circumstances applies to the company (usually that the

company is insolvent) the company is placed into liquidation.


Voluntary liquidations require a resolution of the company’s

shareholders (the exact proportion of those shareholders which are

required to pass the resolution will be determined by the company’s

constitutional documents – usually 75%) to initiate the process and,

in a MVL, that the directors swear the declaration of solvency

referred to above.

Compulsory liquidation requires that one or more prescribed

circumstances apply to the company. Usually, this is so that it can

be proved to the court that the company is “unable to pay its debts”

(i.e. is insolvent on either a balance sheet or cash-flow basis) which

is often demonstrated by serving demand on the company to pay

amounts owed to the petitioning creditor which, if not paid, can then

be used as evidence that the company is cash-flow insolvent.


There is court involvement in respect of a compulsory liquidation,

which requires a court hearing to order that the company enters

liquidation. Voluntary liquidations do not usually require any

involvement of the court. Once the company has entered liquidation,

the liquidation process is managed by the liquidator (with the

sanction of shareholders or creditors – see below).


Liquidation, unlike administration, does not impose a moratorium

on the rights of secured creditors to enforce their security, so a

liquidator will either obtain the consent of the relevant secured

creditor before dealing with any secured assets or allow that creditor

to take its own action in respect of those assets. Liquidation does,

however, impose a stay on court proceedings, which can only be

lifted with the consent of the liquidator or approval of the court.

Liquidators (also unlike administrators) can only take certain

actions if sanctioned to do so. In a MVL, this sanction comes from

shareholders. In a CVL, sanction must be obtained from creditors.

It is also common, at least in larger liquidations, for a committee of

three to five creditors to be formed as a representative body and to,

amongst other things, scrutinise the steps taken by the liquidator and

approve certain actions taken by them.


Termination is covered above. Set-off provisions in contracts are,

however, superseded by mandatory set-off rules which apply in

liquidations and which provide that amounts owed by a creditor to

the company are set-off against amounts that the company owes to

the creditor (with only the net balance, if any, being claimable by

that creditor).


Creditors holding “fixed” charges over a company’s assets

(essentially a charge over assets which the company is not able to

freely deal with, such as property) rank first, followed by the

expenses and costs of the liquidation/administration. Creditors with

“preferential” claims (usually only employees for unpaid wages,

holiday and pension contributions up to certain prescribed limits)


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rank next, followed by creditors with “floating” charges over the

company’s assets (assets which the company can freely deal with,

such as stock). A fund of up to £600,000 is also set aside for

unsecured creditors from realisations of floating charge assets

known as the “prescribed part”. If there are sufficient funds

available after the prior-ranking amounts have been paid in full, a

distribution can then be made to unsecured creditors. In the

somewhat unlikely scenario that unsecured creditors are paid in full,

they are then entitled to claim interest for the period of

administration/liquidation on their claims and, in the even more

unlikely scenario that all such claims to interest are paid in full, any

surplus is distributed to the shareholders.


Yes, in theory, a company that is wound down and dissolved (which

is the outcome at the culmination of a liquidation) can be restored

for up to six years after it is dissolved by court order, although this

is extremely rare.

5 Tax


CVAs and Schemes

A company is taxed in the usual way whilst going through a CVA or

Scheme. However, releases of debt usually incur a tax charge by the

company although this can be avoided if made pursuant to a CVA or

Scheme (which is an added benefit of the CVA or Scheme).

Administration and liquidation

Unpaid tax at the commencement of the administration or liquidation

is simply an unsecured debt of the company. Corporation tax on

gains which arise from the disposal of assets during the period of the

administration or liquidation is paid as an expense of the

administration or liquidation.

6 Employees


CVAs and Schemes

CVAs and Schemes have no direct impact on a company’s employees.

Administration

Contracts of employment do not automatically terminate upon the

appointment of an administrator. There is a 14-day period which

commences upon a company entering into administration during

which the administrator can dismiss any employees who are not

required for the conduct of the administration. Wages, holiday and

sickness pay and pensions contributions due to employees retained

after this period are paid as expenses of the administration. If the

administrator sells the company as a going concern (either after a

period of trading or as a pre-pack) employees, as well as liabilities

owed to those employees, automatically transfer to the buyer.

Determining the number of such employees and the sums owed to

them is therefore a key area of diligence in sales by administrators.

Liquidation

A company entering compulsory liquidation automatically causes

its employees’ contracts of employment to terminate. The liquidator

then has to re-employ any employees needed for the conduct of the

liquidation. Voluntary liquidation does not automatically terminate

employment contracts, although the liquidator can simply refuse to

perform employment contracts (with the result that the affected

employee(s) can then claim as a creditor of the company for

amounts owed to them).



Yes. At the time of writing, the EC Regulation on Insolvency

Proceedings (the “EC Reg”) provides that companies incorporated

in the EU but which have their “centre of main interests” (“COMI”)

(being their primary place of business activity) in England or Wales

can commence administrations, liquidations and CVAs (each of

which are governed by the EC Reg) in England or Wales as “main

proceedings”. EU companies which do not have their COMI in

England or Wales but which have a non-transitory “establishment”

here may open “secondary” proceedings which are restricted to

assets situated in England or Wales.

In the event of a “no deal Brexit” the EC Reg will no longer apply to

the UK and without any replacement legislation each Member States’

private laws will dictate whether UK proceedings are recognised by

its courts. It is expected that a company having its COMI in England

and Wales will continue to be the main consideration in the English

courts’ decision to accept jurisdiction over the company’s

insolvency. However, without the EC Reg the English courts will not

be prevented from accepting jurisdiction over the insolvency of a

company which has its COMI in a remaining EU Member State.

There is no requirement for a company to have its COMI or an

establishment in England or Wales in order to propose a Scheme.

Instead, overseas companies have been able to use Schemes where

those companies have demonstrated a “sufficient connection” to

England and Wales. The existence of such a connection has been

interpreted widely by the courts over recent years so that companies

have been able to (amongst other things) amend the governing law

of finance documents to English law in order to establish such a

connection.


Yes. At the time of writing, no deal has been agreed between the UK

and the EU so it is envisaged that from 29 March 2019 the UK will no

longer automatically recognise remaining EU Member States’

insolvency proceedings under the EC Reg (and vice versa). Despite

this, recognition of proceedings in jurisdictions outside the EU (and

possibly within the EU from 29 March 2019) is provided for in the

UNCITRAL Model Law on Cross-Border Insolvency, which has been

enacted into English law. English law does not require reciprocal

adoption of the UNCITRAL Model Law by the foreign jurisdiction in

order for the relevant proceedings to be recognised in the UK.

However, the English courts will not allow an English law debt to be

compromised by a foreign restructuring or insolvency process where

the creditors have not submitted to that foreign jurisdiction.


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Not commonly – because the English system is generally perceived to

be creditor-friendly, companies incorporated in England and Wales

(and their creditors) will usually want to use English insolvency and

restructuring proceedings. The only real exception to this is, whilst

also uncommon, companies establishing a link to the USA (which can

simply just involve opening a bank account or having a retainer with

a law firm) in order to use Chapter 11 bankruptcy and benefit from the

extensive automatic stay on proceedings it affords, will generally be

recognised by the English courts.

8 Groups


Each company within a group is, for the purposes of English law,

treated as distinct so there is no concept of group-wide proceedings.

Each company in a group will, therefore, need to go into an

insolvency process on an individual basis although it is common for

the same administrator or liquidator to be appointed to multiple

companies within a group.

This is in contrast to the position in respect of cross-border

insolvencies involving companies within the EU (including, as of

the time of writing, the UK). A “group coordinator” can be

appointed in such proceedings, to coordinate proceedings in a

number of jurisdictions and generally preside over them (albeit that

the proceedings themselves will still be conducted by the office-

holders appointed to the various insolvent companies).

9 Reform


The UK government has proposed a raft of measures to boost

corporate rescues. These include:

■ a general moratorium on creditor enforcement which would

initially be for 28 days but could be extended;

■ a ban on clauses that allow suppliers to terminate supply

contracts due to a company’s insolvency; and

■ a new restructuring plan that would be similar to a Scheme

but allow for the cram-down of a dissenting class of creditors

where at least one class which will suffer an impairment on

its debt (subject to no impaired class being paid in priority to

any senior ranking classes via the plan) approves the plan and

a court considers it “fair” (particularly by comparison to the

likely alternative of administration or liquidation).

The government also plans to introduce potential liability for

directors of a holding company that disposes of an insolvent

subsidiary which shortly afterwards goes into administration or

liquidation. Directors would be liable if creditors were adversely

affected during the period between the disposal and the

administration or liquidation where the directors could not have

reasonably believed that the disposal would lead to a better outcome

for creditors than an immediate administration or liquidation. We

still await detailed draft legislation for these proposed reforms.

There will also be changes to recognition of cross-border

insolvencies within the EU as a result of Brexit (see questions 7.1

and 7.2).


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Paul Keddie Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2894



Timothy White Macfarlanes LLP 20 Cursitor Street London EC4A 1LT United Kingdom Tel: +44 20 7849 2796



From its base in London, Macfarlanes advises many of the world’s leading businesses and business leaders, from multinational companies to high-net-worth individuals. We are recognised for the quality of our work, dealing with the full range of corporate and commercial matters.

Our restructuring and insolvency team offers comprehensive and expert advice in a constantly evolving legal market. The strength and resources of our highly-rated restructuring specialist lawyers enable us to advise on the most complex deals.

Our specialist expertise includes restructurings, distressed M&A, insolvency proceedings, distressed and special situations investments, distressed debt and claims trading and portfolio acquisitions, and restructuring and insolvency litigation.

We work seamlessly with our banking, M&A, tax, real estate, commercial, antitrust, pensions, employment, regulatory and funds teams, to advise in relation to any challenges which may arise on a restructuring.

Paul advises on a broad range of corporate restructuring and recovery issues.

His clients include companies in financial difficulties, their directors and shareholders, insolvency practitioners appointed over such companies, lenders to and other major creditors of troubled entities, investors interested in a “loan-to-own” strategy and buyers of businesses where there is an insolvency aspect.

Paul is a qualified insolvency practitioner, having passed the Joint Insolvency Examination Board examinations and is the co-author of the Insolvency and Restructuring Manual, 3rd Edition, which was published by Bloomsbury in 2018.

Tim advises on a range of financial transactions, with a focus on restructurings, insolvency and debt financings. His experience includes consensual debt restructurings, administrations, liquidations and other formal insolvency processes.

His clients include banks, alternative finance providers, corporate borrowers, creditors, insolvency practitioners and the shareholders and directors of distressed companies.


chapter 11


law office waly & Koskinen ltd.

tuomas Koskinen

sami waly

Finland

1 Overview


Finland is more of a creditor-friendly than debtor-friendly

jurisdiction. Both the legal framework and the praxis support the

enforcement of debt obligations through bankruptcy and execution.

The position of a secured creditor is strong in the event of

proceedings. Overall, the bankruptcy process is creditor-driven.

Simultaneously, the statutory restructuring procedure available to

debtors is a debtor-friendly process. Entering into restructuring

gives the debtor an extensive protection from the enforcement of

pre-existing debts. In court practice, debtors are often allowed to

enter into restructuring. However, a successful restructuring

process requires co-operation between the debtor and the various

stakeholders.


The Finnish legal system has one formal restructuring and one formal

insolvency process, restructuring (governed by the Restructuring of

Enterprises Act 47/1993) and bankruptcy (governed by the Bankruptcy

Act 120/2004), respectively. According to annual statistics published

by Statistics Finland, 2,534 bankruptcy proceedings and 408

restructuring proceedings were initiated during 2018. As such, both

proceedings are used in practice.

The Finnish legal framework has no statutory bars on informal

work-outs, but it also does not have any support for them. In

practice, a successful informal work-out requires either a limited

pool of creditors or existence of LMA-style documentation and an

intercreditor agreement. Such loan documentation and intercreditor

agreements are increasingly common among sophisticated creditors.

Such informal work-outs are much rarer than the formal

proceedings, but on average, they also typically concern much

larger companies with sophisticated creditors.



Under the Finnish Companies Act (624/2006), the directors of a

company have a general duty to act in the best interests of the

company and to prudently ensure the protection of the interests of

the company. Finnish company legislation does not recognise any

special interests owed to parent companies or other group

companies, and as such, all decisions must be done with the

corporate benefit of each individual company in mind.

The duties of the directors and managers do not differ greatly when

managing a company in financial difficulties. However, a key

consideration is that directors and managers may incur criminal or civil

liability if they continue to enter into further commitments even while

being aware that the company will not be able to meet them. A safe

course of action for directors in such a situation is to file for bankruptcy

or restructuring, if emergency financing is not available. Additionally,

payment of dividends from a company in financial distress is limited.


The legislative framework grants no formal power to stakeholders

over a company in financial difficulties which has not entered any

insolvency procedure. From a purely legal point of view, the debtor

company operates as it would during ordinary course of business.

Any stakeholder influence over the debtor is the result of contractual

arrangements in place or for purely business reasons.

The primary statutory method of influence granted to stakeholders

is the possibility to file for the debtor company’s bankruptcy or

restructuring. A creditor has the right to file for the debtor’s

bankruptcy almost at will, given that statutory requirements for a

bankruptcy filing are met. Creditors may also apply for the debtor’s

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restructuring, but such applications are uncommon and have limited

chance to succeed without the debtor’s co-operation. Influence of

stakeholders that are not creditors are somewhat more limited.

The Finnish enforcement regime contains the possibility to stay an

enforcement, but this generally requires the debtor or a third party to

provide a security. For this reason, the most practical legal

instrument for achieving the effects of a moratoria is applying for

either bankruptcy or the statutory restructuring described later. The

effect of applying for a restricting in practice acts as a moratorium.


The legislative framework for challenging, and potentially recovering,

transactions entered into by a company in financial distress is the Act on

the Recovery of Assets to a Bankruptcy Estate (758/1991). The same

Act is also applied to a restructuring process and execution proceedings.

Any transaction favouring a creditor or other party at the expense of

other creditors by either reducing the debtor’s assets or increasing the

debtor’s liabilities is potentially recoverable by the bankruptcy estate or

the administrator of a restructuring procedure. Primary considerations

for recovery are whether the debtor is legally insolvent and whether the

creditor was aware of the debtor’s insolvency.

The most significant ground for a challenge is if a debt was paid during

a three-month window prior to commencement of bankruptcy or a

restructuring process. Such a payment may be recoverable given three

alternative conditions: first, if the method of payment was unusual

(usually, anything else than money); second, if the payment was made

in advance to becoming due and payable; or, third, in excess of an

amount considered significant in relation to the estate’s assets. Court

practice has established that any payment in excess of 10% of the

assets of an estate at the time of bankruptcy is considered significant in

this respect. A counterargument for such recovery is if the payment is

considered to have been made in the ordinary course of business.



Yes. The legislative framework has no bars for implementing an

informal work-out. However, there is no support for such a work-

out either. A method used in practice over purely informal work-

outs is one where the largest creditors reach a joint agreement in

advance with the debtor and any opposing minor creditors are dealt

with using the formal restructuring process.


Finnish legislation provides one formal restructuring process, the

restructuring of a company under the Restructuring of Enterprises

Act. The purpose of such a restructuring process is adopting a

restructuring plan acceptable by the creditors. The restructuring

plan allows for changes in the debt obligations, such as repayment

schedule, interest, or the principal itself. In practice, the amount of

principal owed is reduced almost as a rule. Secured obligations are

protected from this, since the principal of a secured debt cannot be

reduced below the secured amount.

Debt-for-equity swaps and pre-packaged sales are possible; however,

the statutory framework provides no tools for forcing such actions.

Pre-packaged sales in the form used in, e.g., the United States or the

UK, are not used in Finland.

Creditors may object to the initiation of restructuring by lodging their

formal opinion to the court. Typically, an application with required

support is accepted even if some creditors object. The commencement

of restructuring provides for a relief period from stakeholder pressure.

A security cannot be enforced during the preparation phase of a

restructuring plan, an exception being if the creditor shows that the

secured asset is unnecessary for the debtor’s business.

A restructuring plan is put to creditor vote and it does not need to be

adopted unanimously. Adopting the plan requires reaching a majority

in the different creditor groups, most typically secured and unsecured

creditors. Any dissenting stakeholders are automatically crammed-

down if they form a minority. However, a majority must be reached in

each class of stakeholders and an entire class cannot be crammed down.

However, the way that restructuring is set up means that a restructuring

has no realistic chances of succeeding if a majority cannot be reached.


The Restructuring of Enterprises Act stipulates that a company may

enter into restructuring proceedings if it lodges its own application

or a joint application with its creditors. Creditors have a legal right

to apply for restructuring without the debtor, but in practice this

almost never happens. The criteria, one of which must be met, for

entry into restructuring are 1) a joint application with, or the consent

of, two unaffiliated creditors which represent at least 20% of all the

debts of the debtor company, 2) an existing threat of the debtor

company becoming insolvent, or 3) the debtor company being

insolvent without any of the obstacles of restructuring being present.

Various statutory obstacles for entering into a restructuring procedure

exist, with the court having broad power of interpretation over some.

Such obstacles include, e.g. that the criteria for initiating restructuring

have not been met or that the debtor is trying to avoid debt collection

via restructuring. In legal practice, courts apply caution in ruling that

such obstacles exist, since typically courts lack enough evidence for

their existence in all but the most extreme cases.


A court-appointed administrator manages the restructuring process.

Courts have an overseeing role in the process, by initiating it and

affirming the restructuring plan once approved by the creditors.

Courts also rule on objections made to individual creditor’s debts.


The Restructuring of Enterprises Act has the force of mandatory

legislation, superseding all conflicting contractual terms agreed by

law office waly & Koskinen ltd. Finland

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the debtor. According to the Act, only terms allowed in the Act itself

form an exception, and any other contractual terms conditional on

entering into restructuring are unenforceable, such as termination

and set-off provisions. In addition, the entry into restructuring is not

enough grounds for the debtor’s contractual parties to demand

additional security for the continuation of their services or the

provision of their goods. The Act therefore obligates contracting

parties to perform outstanding obligations irrespective of the

initiated restructuring process.

However, the debtor company entering into restructuring, but not

creditors, may terminate leases and leasing contracts, and any

termination clauses included therein notwithstanding. Such

termination may lead to additional liabilities owed by the company

entering restructuring in the form of compensation for premature

termination. Such compensation is subject to the restructuring

proceedings and, e.g., haircuts. The debtor company may also

terminate any agreements deemed unusual.

Any liabilities incurred by the debtor company after the initiation of

restructuring proceedings must be paid in due course and they are

not subject to haircuts. The same holds true for any obligations

agreed prior to restructuring but fulfilled only after the initiation of

restructuring. Failure to satisfy new debts accrued after starting the

restructuring is sufficient grounds for cessation of the provision of

further services or supply of further goods.


The costs of restructuring are borne by the company being

restructured itself. This includes the administrator’s fee. If the

restructuring fails and the company is declared bankrupt, any debt

obligations that have been entered into after the initiation of the

restructuring process have precedence over past debts when the

proceeds of the bankruptcy are divided between creditors.



Finnish law provides for two procedures to wind up a company:

bankruptcy under the Bankruptcy Act; and liquidation of a company

under the Companies Act. Liquidation proceedings are only

possible if the company is not insolvent, meaning that the company

has more assets than liabilities. Liquidation is initiated by the

shareholders of a company and does not involve court involvement.

Liquidation is not an insolvency procedure in itself, since it is

typically used only for companies that cease their business for other

reasons besides insolvency. For this reason, liquidation is not

considered any further in this article.


The statutory grounds for the bankruptcy procedure to be initiated is

the insolvency of the debtor, meaning the inability to pay debts as

they fall due other than temporarily. Bankruptcy may be applied by

the debtor itself or any of its creditors. In a debtor application,

insolvency is presumed and usually not questioned. A creditor

requires either a court ruling (or a debt which is enforceable without

one) or a debt obligation which is otherwise indisputable enough.

The creditor must also provide proof for the debtor’s insolvency.

This is typically accomplished by sending out a payment demand

with the threat of filing for bankruptcy. If such a payment demand

is not paid within a week, the debtor is presumed insolvent.


The bankruptcy process is overseen by the courts in various stages.

Firstly, the bankruptcy process is managed by a court-appointed

administrator of the bankruptcy estate. The court appoints the

administrator based on the views of the largest creditors. Courts are

also involved in ending the bankruptcy proceedings and approving

the distribution list, as well as resolving various disputes, such as the

existence of a creditor’s debt or the enforceability of a security given

to a creditor.


The Finnish bankruptcy process is a creditor-driven process. All

major decisions are made by the creditors in a creditors’ meeting.

Each creditor has one vote for one euro of debt owed to them. Only

decisions of lesser implication are done by the administrator of the

bankruptcy estate alone. The administrator has also the duty to

safeguard the interests of all creditors on equal standing.

A security may be enforcement as normal during a bankruptcy

procedure. Upon a decision of the administrator, the bankruptcy

estate may temporarily prevent the enforcement of a security for two

months if the interests of the bankruptcy estate require such.

Typically, secured creditors may ask the administrator to enforce

and realise securities as part of the bankruptcy proceedings.

In a typical bankruptcy proceeding, shareholders have almost no

influence. Low-ranking creditors, i.e. creditors entitled to pay only

after all other creditors, such as shareholders or creditors of capital

loans (as statutorily defined), are typically barred from voting, if

their debts are not expected to receive payment. Influence of

shareholders in bankruptcy proceedings usually stems from the fact

that they have a double-role as creditors.


The Bankruptcy Act is mandatory legislation and supersedes all

conflicting contractual terms of the debtor’s agreements. Upon the

commencement of bankruptcy proceedings, the bankruptcy estate

assumes all the rights and liabilities of the bankrupt company. In legal

praxis, this has been interpreted to mean that the initiation of

bankruptcy proceedings itself does not change the rights and

liabilities of the bankrupt company. In Finland, almost all contractual

terms conditional on bankruptcy, such as those entitling the creditor to

terminate the contract or set-off liabilities, are unenforceable.

Parties to a contract are obliged to perform outstanding obligations.

The administrator of a bankruptcy estate has the right to terminate any

agreements unilaterally regardless of any commitments made by the

company prior to bankruptcy. If the bankruptcy estate upholds any

agreements, debts incurred after the initialisation of bankruptcy

proceedings are paid with the highest priority before any debts incurred

prior to bankruptcy, second only to the administrator’s own fee.


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The highest-ranking claims are those incurred by the bankruptcy

estate during the bankruptcy proceedings itself, among which the

administrator’s fee takes the top priority. Any such debts must be

paid in full before any bankruptcy debts can be paid. All other debts

get a pro rata share of the liquidated assets of a bankruptcy estate.

Exceptions to this primary rule are secured creditors, creditors

holding enterprise mortgages (floating charges), and creditors with

debts owed that were incurred during a restructuring procedure that

preceded the bankruptcy. Lower ranking debts consist of statutory

capital loans, various statutory sanctions and junior bonds.


The Finnish legal framework provides for no method through which

a bankrupt company may be revived once the bankruptcy

proceedings start. Bankruptcy proceedings may be cancelled for

eight days if legal grounds for this are presented to the court.

In practice, especially in the case of a smaller company, it is not

atypical that a bankruptcy estate sells all or most of its assets,

including the business name to a new entity. Legally, this constitutes

the establishment of a new legal entity with a common name to the

bankrupt company.

5 Tax


The processes themselves do not typically give rise to tax liabilities.

In some cases, it is possible that certain actions, such as divestments,

may give rise to tax liabilities as a part of an insolvency procedure.

The tax creditor is on equal footing with other creditors. For

example, taxes accrued prior to the initiation of a bankruptcy

procedure are subject to the bankruptcy proceedings and the

bankruptcy estate is not liable for such taxes. The bankruptcy estate

is only taxed if it continues to conduct business during the

bankruptcy process. Realisation of assets is not typically taxed.

6 Employees


An initiated restructuring procedure allows for a shorter notice of

termination. If the accepted restructuring plan includes actions that

result in the termination of employment, this allows for the

termination of employment contracts with two months’ notice.

Additionally, if the restructuring leads to ceasing or decreasing of

work, the same two-month notice period applies. The employee has

the right to terminate their employment with 14 days’ notice during

a restructuring process.

When a bankruptcy process is initiated, all employment contracts

may be terminated on 14 days’ notice without the requirement of

any further grounds besides the bankruptcy itself. If there are no

sufficient funds in a bankruptcy estate to pay out salary debts, the

state-run pay security scheme pays out debts to employees given

certain conditions and becomes a creditor in the insolvency

proceedings instead of the employees themselves. Employee claims

are on equal footing with other unsecured creditors.



The primary legislative framework for international insolvency in

Finland is the recast regulation (EU) 2015/848 of the European

Parliament and of the Council of May 2015 on insolvency proceedings

(the “Recast Insolvency Regulation”), applied both to bankruptcy and

restructuring. The Recast Insolvency Regulation grants jurisdiction to

the courts of the Member State in which the centre of a debtor’s main

interests is situated. The centre of main interests is the primary place

in which the administration of the debtor is conducted, which, unless

proven otherwise, is assumed to be the place of registered office. This

being considered, the jurisdiction of incorporation is not relevant if the

centre of a debtor’s main interests is situated within Finland, which

grants jurisdiction to Finnish courts over such a debtor.

If a debtor having its centre of main interests in another EU Member

State has an establishment in Finland, secondary bankruptcy

proceedings (but not restructuring) may be initiated in Finland.

Such a secondary bankruptcy proceeding is limited to the debtor’s

assets located in Finland. Additionally, the Member State in which

a real property involved in insolvency proceedings has exclusive

jurisdiction over such real property.

In addition, a treaty between the countries results in Finnish courts

having no jurisdiction over debtors that have entered into

bankruptcy proceedings in Iceland, Norway or Denmark, provided

that the debtor was domiciled therein.

If the Recast Insolvency Regulation does not apply, and there is no

relevant treaty in force, the legal starting point is that any company with

a place of business in Finland may enter into bankruptcy proceedings

before the Finnish courts. This holds true regardless of whether the

company conducted business in Finland through a registered

establishment or as an unregistered presence. Such bankruptcy

proceedings are limited to assets situated within Finland. These

proceedings are also rare and may require case-by-case evaluation.

The legal situation concerning restructuring of companies

incorporated in other non-Member State jurisdictions is unrefined.

A principle of international law is the equal treatment of bankruptcy

and insolvency proceedings (and similar). As such, it could be

entirely possible for a company incorporated out of the EU to enter

into restructuring in Finland. However, the foreign company must

have a business presence in Finland for the restructuring to have any

desired results. To the authors’ knowledge, such restructuring

proceedings of non-EU companies are almost unheard of.


If an insolvency process has been commenced in another EU

Member State, the Recast Insolvency Regulation applies. This leads

to the automatic recognition of insolvency processes started in other

EU Member States. Under the Recast Insolvency Regulation, such

insolvency processes are construed according to the laws of the EU

Member State in which such a process was initiated in.


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In addition, Finland is a party to several conventions on the recognition

of foreign judgments, including the Brussels and Lugano conventions.

These have been largely replaced by applicable EU legislation

between Member States. If no convention applies, the recognition

of a restructuring or insolvency process initiated out of the EU

requires an exequatur from a Finnish court.


The primary situation in which this happens is when another Member

State has jurisdiction over a Finnish company based on the Recast

Insolvency Regulation. Enforcement of insolvency proceedings

initiated outside of the EU and concerning companies incorporated in

Finland may be difficult. To the authors’ knowledge, such practices

are not commonplace.

8 Groups


Finnish company law and insolvency legislation treats each

company as a fully independent legal entity, regardless of whether it

has group interests. Thus, the insolvency process of each group

entity proceeds separately. Legally, a group company does not

differ in a material way from other stakeholders.

It should be noted that, from a recovery standpoint, transactions

between related parties are evaluated more stringently and the

critical period, during which challenges to transactions are possible,

is longer. Care should therefore be taken to make sure that any

significant transactions with related parties are done on an arm’s-

length basis, which may also be required for other reasons (e.g. tax

or corporate law).

9 Reform


The Bankruptcy Act was last reformed in 2004 and the

Restructuring of Enterprises Act entered into force in 1993 with the

latest major changes entering into force in 2007. There have been

various discussions on amendments to these statutes, but the authors

are not aware of any major changes. Perhaps the largest proposed

change being discussed is the possibility for natural persons to

effectively declare bankruptcy, but no proposed acts have yet been

published.


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Tuomas Koskinen Law Office Waly & Koskinen Ltd. Rikhardinkatu 1, FI-00130 Helsinki Finland Tel: +358 09 4257 8780


URL: www.wklaki.fi/en

Sami Waly Law Office Waly & Koskinen Ltd. Rikhardinkatu 1, FI-00130 Helsinki Finland Tel: +358 09 4257 8780


URL: www.wklaki.fi/en

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

Law Office Waly & Koskinen Ltd. is a Finnish boutique law firm with an office in the Helsinki capital focusing mostly on dispute resolution, white-collar crimes and insolvency, as well as general corporate advice to medium- and small-sized companies. The practitioners have a shared experience together involving more than 100 bankruptcy estates.

Our core value offered to our clients is that we provide excellent value service with predictable pricing. With the cost structure of a boutique firm, we can provide our services at a discount without compromising the quality of service provided.

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


chapter 12


De pardieu Brocas maffei aarpi

Joanna gumpelson

philippe Dubois

France

1 Overview


Historically, French bankruptcy law was generally considered to be

rather debtor-friendly. However, the French Bankruptcy Code has

been regularly amended since 2005 with a view to reinforcing

creditors’ rights both in the context of out-of-court workouts and

also insolvency proceedings. In particular, an ordinance dated 12

March 2014 reformed bankruptcy laws with a view to favouring

reorganisation at a preventive stage, strengthening the efficiency of

out-of-court proceedings and increasing the rights of creditors. In

addition, a bill dated 6 August 2015 introduced the possibility, under

certain limited conditions, to squeeze-out dissenting shareholders of

a bankrupt company in rehabilitation proceedings, notably to favour

debt-for-equity swap restructurings.


French bankruptcy law provides for two main types of restructuring

proceedings:

■ Out-of-court proceedings: ad hoc proceedings and

conciliation proceedings are flexible, voluntary and

confidential proceedings that aim at facilitating work-outs

between a distressed company and its major creditors under

the supervision of a court-agent. Those are frequently used

especially for large groups of companies in the context of

financial restructurings.

■ Court-monitored formal proceedings: safeguard (as well as

pre-packaged safeguard); rehabilitation; and liquidation

proceedings. Safeguard and rehabilitation are formal

proceedings that aim, depending on the situation of the

company, to restructure the company’s liabilities whether

through a restructuring plan or a total or partial sale of its

business and/or assets. The liquidation aims to sell the

company’s assets (as a whole where possible or on an asset-

by-asset basis) where the rescue of the company appears as

obviously impossible.



The company’s legal representative must file for rehabilitation or

liquidation (if rehabilitation appears impossible), no later than 45

days from the date on which the company becomes insolvent (see question 3.3), unless conciliation proceedings (which are also

available to insolvent companies) are pending.

For certain specific breaches such as using the company’s assets or

credit for their own benefit or carrying out business activities at a

loss to further their own interests, directors can be forced to assign

their equity interest in the company and prohibited from managing

any business for up to 15 years.

Liability can also arise where, as a result of management errors

(other than mere negligence), a company’s assets do not cover its

debts: an action for mismanagement can lead to an insolvent

company’s directors being liable for all or part of its debts.

These liabilities can extend to formally appointed directors/managers

with representation powers, and to any individual or entity that,

although they are not officially a director/manager, repeatedly

influenced the company’s management or strategic decisions (de facto

directors/managers).


When a company faces difficulties, the French Commercial Code

provides for different types of warning proceedings (procédures d’alerte) to draw the directors’ attention to any matter likely to

jeopardise the continued operation of the company. They can be

triggered by the company’s external auditors, the employees’

representatives or shareholders provided that they own at least 5%

of the share capital.

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ce


With respect to creditors, the opening of out-of-court proceedings

does not trigger an automatic stay. However, the debtor can apply

for a moratorium (for a maximum of two years) if any creditor

attempts to enforce its right while ad hoc proceedings or

conciliation proceedings are pending. In conciliation, the debtor’s

petition is submitted to the judge who had jurisdiction to open such

proceedings during both the negotiation phase and the

implementation phase (that is, after the workout agreement has been

approved by the court).

The opening of court-monitored proceedings triggers a stay on

enforcement (subject to few exceptions, see question 3.2).


In rehabilitation or liquidation (but not in safeguard as those

proceedings are available to solvent companies only), any

transaction entered into during the hardening period (période suspecte) can be subject to clawback provisions. The hardening

period runs from the date when the company is deemed insolvent

and can be backdated by the court by up to 18 months before the

judgment opening rehabilitation or liquidation proceedings. If a

court-approved conciliation agreement has been entered into prior

to the opening of insolvency proceedings, the insolvency date

cannot be backdated to a date before the court order approving the

conciliation work-out agreement.

A limited number of transactions are automatically voided if

performed during the hardening period, for instance:

■ any deed entered into without consideration transferring a

title to moveable or immoveable property;

■ any bilateral contract in which the debtor’s obligations

significantly exceed those of the other party;

■ any payment by whatever means, made for debts that have

not fallen due on the date when payment is made;

■ any payment for outstanding debts, if not made by cash

settlement or wire transfers, remittance of negotiable

instruments, or Dailly-type assignment of receivables or any

other means commonly used in business transactions; or

■ any mortgage or pledge (both contractually agreed or court-

ordered) granted to secure a pre-existing debt (being noted

that, in view of the pending reform currently under

discussion, other types of security could be subject to

voidance in the future, see question 9.1).

In addition, any transaction or payment entered into during the

hardening period is subject to optional voidance if proper evidence

is brought that the contracting party or the beneficiary of the

payment knew the company’s insolvency (this knowledge being

presumed for companies belonging to the same corporate group).



Ad hoc proceedings and conciliation proceedings are confidential

and consensual out-of-court proceedings that aim to facilitate the

negotiation of a work-out agreement between a distressed company

and its major creditors under the supervision of a court-appointed

agent. Trade creditors and major shareholders can also be invited to

take part in the negotiations. Social and tax authorities can be asked

to consent to a debt-rescheduling plan or a cancellation of debt.

A work-out agreement accepted by some creditors cannot be

imposed onto other dissenting creditors, as the process is consensual

and no cram-down can be imposed (subject to the subsequent

opening of pre-packed safeguard proceedings, see question 3.2). In

practice, majority rules provided for in the existing credit

documentation apply.

In conciliation specifically, the company has two options to

implement the work-out agreement:

■ It can obtain the president of the court’s approval, which does

not involve publicity.

■ It can request formal court approval, which encourages

creditors to extend credit to the company to benefit from a

super-senior repayment status (see “new money” privilege in question 3.6). Except where fraud has taken place, a court-

approved work-out agreement is also protected from the risk

of being voided in the future (see question 2.3). However, this

approval must be recorded in a full judgment accessible to the

public and therefore subject to challenge by a third party or

appeal. Employees’ representatives must be informed of the

agreement and invited to attend the court hearing.

Since 2014, the court-appointed agent may be entrusted with the

mission to arrange a pre-packaged sale of a business in conciliation,

which could ultimately be implemented in rehabilitation or

liquidation proceedings.


Safeguard proceedings

Safeguard proceedings allow solvent debtors to be restructured at a

preventive stage under the court’s supervision. They begin with an

observation period of up to six months (which can be extended) to

assess the company’s financial position. Once opened, there is an

automatic stay of all creditor payment and enforcement actions –

subject to few exceptions (and notably claims secured by a security

interest conferring a retention right, claims secured by a trust

(fiducie) and set-off of related claims) – against the main debtor and

individuals acting as guarantors and joint debtors.

The general outcome of safeguard proceedings is the approval by

the court of a safeguard plan that can involve a debt restructuring,

re-capitalisation of the company, debt-for-equity swap, sale of assets

or a partial sale of the business. However, it cannot include a

proposal to sell the business as a whole.

For companies of a certain size, three classes of creditors must be

arranged, comprising financial institutions, major trade creditors

and bondholders, which are invited to vote on the draft safeguard

plan at a two-thirds majority in value for each class. Subordination

agreements, if any, shall be taken into account by the administrator

in the computing of the votes.

If those classes are not set up, or if one of them has rejected the draft

plan, the plan must be negotiated on a one-to-one basis with each

creditor. The court can impose a 10-year maximum term-out to

dissenting creditors, but cannot impose any debt write-off.

If the plan provides for any operation requiring shareholder approval

(e.g. debt-for-equity swap), shareholders must also be consulted and

vote at a two-thirds majority. However, the court can reduce the

majority applicable to shareholder meetings on first notice.

De pardieu Brocas maffei aarpi France

Fran

ce


Once approved by the court, the safeguard plan is enforceable

against all members of the creditors’ classes, including the

dissenting minority within each class. French law, however, does

not allow inter-class cram-down, as the court cannot impose a plan

to a dissenting class of creditors when such class rejected the draft

plan. Yet, such inter-class cram-down mechanism is very likely to

be soon introduced by the upcoming reform of French bankruptcy

laws, under certain conditions which are still yet to be determined

(see question 9.1).

Pre-packaged safeguard proceedings

Two types of pre-packaged safeguard proceedings are available:

accelerated financial safeguard; and accelerated safeguard. Their

global purpose is to enable debtors, for which conciliation proved

unsuccessful to reach all participating creditors’ consent, to be

restructured in a very short timeframe with the consent of a two-

thirds majority within creditor classes.

Rehabilitation proceedings

As a whole, rules applicable to the observation period, the automatic

stay and classes of creditors are the same as in safeguard.

Unlike in safeguard, however, there are two main possible outcomes

for rehabilitation proceedings:

■ a rehabilitation plan, where the same principles apply as in

safeguard proceedings; and

■ a sale plan, where the court can authorise the administrator to

auction the business as a whole or in part. Creditors (except

for limited exceptions, e.g., creditors benefiting from a

retention right) have no say on the choice of the purchaser

made by the court when approving the sale plan.

As in a safeguard, if shareholder approval is required, the court can

reduce majority rules applicable on first notice. Moreover, in

rehabilitation proceedings only, if the insolvent company’s net

equity is not restored and shareholders have refused to increase the

company’s equity to at least half of its share value (which is a legal

requirement in France), the administrator can petition the court to

appoint an agent in charge of convening the shareholder meeting

and to vote, on behalf of the dissenting shareholders, on the

recapitalisation of the company for the amount suggested by the

administrator, when the draft plan provides for a change in the share

capital in favour of one or several committed investors.

In addition, under certain narrowly defined circumstances, the Court

can order the squeeze-out of shareholders through a forced sale of

all or part of their shares should those shareholders have refused to

implement the required change in the equity structure and hold

directly or indirectly a majority stake or a blocking minority stake in

the capital of the company, or through an imposed dilution of their

equity stake.


The French insolvency test is a pure cash-flow test: a company is

deemed insolvent (en état de cessation des paiements) when it is

unable to meet its due and payable liabilities out of its available

assets (those in the form of cash or those that can be quickly turned

into cash), taking into account undrawn committed facilities and

other credit reserves and moratoriums/standstills accepted by

creditors.

Ad hoc proceedings: the company must be solvent, although there

have been some recent precedents where ad hoc proceedings were

opened for insolvent companies (but for a very short period of time

only).

Conciliation proceedings: the company must face legal or financial

difficulties (whether actual or foreseeable) and can be insolvent but

for less than 45 days before the petition is filed.

Safeguard proceedings: the company must be solvent and facing

difficulties that cannot be overcome, with no restrictions applied to

the concept of “difficulty”.

Rehabilitation proceedings: the company must be insolvent, but

rescue does not appear to be impossible.


In out-of-court proceedings, the court agent does not have any

management responsibilities. There are no restrictions on business

activities.

In formal court-monitored proceedings, the judgment opening

safeguard or rehabilitation proceedings appoints:

■ An insolvency judge (juge commissaire) who oversees the

whole procedure. He/she must approve all management

decisions that go beyond ordinary actions and any decision to

settle pending disputes.

■ An administrator (administrateur) who supervises or assists

the management to prepare the restructuring plan, but cannot

take over any management responsibility in safeguard

proceedings. In rehabilitation proceedings, he/she can be in

charge of assisting the management or also, in limited

situations, taking control of the company’s management.

■ A creditors’ representative (mandataire judiciaire) who

represents the creditors’ interests and assesses proofs of

claim, and who can be assisted by supervising creditors

(créanciers contrôleurs) appointed by the court.


Out-of-court proceedings

Since the 2014 reform of the French Bankruptcy Code, ipso facto

provisions are deemed null and void. More generally, any

contractual provision increasing the debtor’s obligations (or

reducing its rights) by that sole reason of the opening of out-of-court

proceedings (or of any filing for that purpose) is also null and void.

Safeguard and rehabilitation proceedings

Notwithstanding any contractual provisions, ongoing contracts

cannot be terminated by the sole reason of the opening of such

proceedings. The administrator can require the debtor’s contracting

party to perform ongoing contracts in exchange for the performance

of the debtor’s post-petition obligations. However, all contracts can

be terminated by court order at the request of the administrator,

should this termination be necessary to the company’s safeguard

and not excessively detrimental to the contracting party’s interests.

The contracting party can require the administrator to express

his/her position on the assumption of an ongoing contract, which

will be automatically terminated once a formal notice is sent to the

administrator and has remained unanswered within a month.

The debtor’s contracting party must perform its obligations despite

non-performance by the debtor of its own pre-petition obligations,

which will only allow the contracting party the right to file proof of

claim.


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For obligations resulting from certain kinds of financial instruments

only, early termination and set-off provisions remain enforceable

irrespective of the opening of insolvency proceedings.

In terms of protection, when an ongoing contract is assumed by the

administrator, the debtor must perform its post-petition obligations.

In rehabilitation proceedings, when the assumed ongoing contract

involves the payment of a sum of money, the contracting party can

require that the payment be made in cash on delivery.

In addition, in both safeguard and rehabilitation proceedings, the

contracting party benefits from the statutory privilege granted to

certain post-petition claims representing consideration in connection

with a business transaction directly connected to the company’s

activities continued during the observation period (see question 4.6).


New money, injected in the context of a court-approved work-out

agreement, entered into in conciliation benefits from a statutory super-

senior status if the debtor subsequently files for insolvency. In this

case, the new money providers do not have to suffer any rescheduling

in a term-out scenario and cannot have any write-off, debt-for-equity

swap or rescheduling imposed through the vote of creditor classes.

In safeguard and rehabilitation proceedings, post-petition claims

arising for the purpose of funding the observation period benefit

from a certain statutory privilege (see question 4.6).

In addition, the pending reform of French bankruptcy laws could

introduce new incentives, still to be defined, for cash contributions

granted notably in the context of safeguard and rehabilitation

proceedings (see question 9.1).



Liquidation proceedings aim at liquidating a company by selling its

business, as a whole or per branch of activity, or by selling its assets

one by one. Creditors are repaid according to their rank and

privilege with the sale proceeds.

There is a simplified form of liquidation proceedings available for

small businesses, which lasts for a maximum of one year.


The debtor must be insolvent and its rehabilitation must appear as

obviously impossible. Liquidation is the only possible outcome

when rehabilitation proceedings are attempted without success.


The judgment opening liquidation proceedings appoints:

■ An insolvency judge to oversee proceedings.

■ A liquidator, who is responsible for:

■ collecting in all of the company’s assets and paying the

creditors to the extent that funds are available; and

■ assessing proofs of claim and representing the creditors’

interests.

The liquidator has sole authority to bind the company and assumes

all management responsibilities.


Liquidation proceedings trigger an automatic stay of enforcement

against the company, subject to few exceptions. Yet, in liquidation

only (unlike in safeguard or rehabilitation), secured creditors

benefiting from a pledge can enforce their security interest through

a court-monitored allocation process (attribution judiciaire), that is,

request the court to be transferred ownership of the pledged asset(s).


The same rules applicable in safeguard and rehabilitation apply to

liquidation proceedings, where the liquidator is recognised the same

prerogatives as the administrator.

However, in liquidation proceedings, ongoing contracts where the

debtor’s performance consists of the payment of a sum of money are

automatically terminated when the contracting party is informed of

the liquidator’s decision not to assume the contract.

In addition, in case a sale plan is approved by the court, some supply

contracts deemed necessary to continue the transferred activity are

judicially assigned to the transferee by the sole effect of the court’s

decision.


Where creditors rank on insolvency is complex, and any attempt to

provide a simple list can be misleading. However, a simplified

ranking of claims could be summed-up as follows:

■ Arrears of wages (see question 6.1): a portion of employees’

pre-petition claims benefit from a senior preferential status,

which protects the last 60 days’ wages in arrears before the

judgment opening insolvency. If the bankruptcy estate

cannot pay these claims from its available cash, they are paid

as advances by a national wage insurance body, which then

replaces the employees’ ranking as a creditor.

■ Post-petition court costs, which arose for the purpose of the

proceedings.

■ “New money” facilities granted in the framework of a court-

approved work-out in conciliation proceedings (if any) also

benefit from a senior legal privilege.

■ Post-petition claims: in safeguard and rehabilitation

proceedings, they benefit from a statutory privilege provided

that they either arise for the purpose of funding the

observation period, or represent consideration in a business

transaction directly connected to the company’s activities

continued during the observation period. They must be paid

when they fall due. If not, they rank ahead of both secured

and unsecured pre-petition claims.

■ Secured pre-petition claims.

■ Unsecured pre-petition claims.

■ Shareholders do not receive any repayment of their capital

investment, unless a surplus remains after all the creditors

have been paid in full (which is extremely rare).


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In liquidation proceedings, the creditors’ ranking is the same, except

that pre-petition mortgage claims rank ahead of post-petition claims

benefiting from the statutory privilege.


The court closes the liquidation in two hypotheticals: hardly ever,

when all the creditors are repaid; or when no more proceeds can be

expected from the sale of the company’s business/assets. In the

second case, the company shall terminate and cannot be revived.

Once closed, liquidation may be re-opened if some of the debtor’s

assets have not been sold off, or if a legal action in the interests of

the creditors shall be initiated.

5 Tax


A taxpayer remains liable for all taxes while undergoing

restructuring or insolvency proceedings and the French tax

authorities typically benefit from a preferential ranking as creditors.

In addition, if the taxpayer benefits from debt waivers granted by

creditors as part of these proceedings, the amount of these debt

waivers will typically be included in its taxable income, thereby

potentially generating additional tax liabilities. If a debt waiver is

granted as part of safeguard, rehabilitation or liquidation

proceedings or pursuant to a court-approved conciliation agreement,

the debtor can, however, fully offset its available carry-forward

losses against the amount waived. This possibility is expressly

provided for in the French tax code as an exception to the general

rule whereby carry-forward losses can only be used up to an

amount, in any given year, of €1 million plus 50% of the taxable

profits realised in that year. On the creditor side, whether the debt

waiver will be treated as a tax-deductible loss will mainly depend on

whether it can qualify as a “commercial debt waiver”, in which case,

it will typically be treated as deductible, or as a “financial debt

waiver”. A financial debt waiver may be tax deductible at the level

of the creditor if granted as part of safeguard, rehabilitation or

liquidation proceedings or pursuant to a court-approved conciliation

agreement, subject to limitations where the creditor is a shareholder

of the debtor.

Instead of granting debt waivers, creditors may subscribe to a share

capital increase of the debtor by way of offset against their

receivables, thereby implementing a debt-for-equity swap. This

would generally not trigger the recognition of taxable income at the

level of the debtor, which would then retain its existing carry-

forward losses intact. This, however, needs to be reviewed on a

case-by-case basis, having in mind also the resulting consequences

for the relevant creditors. A French corporate creditor having

recorded a depreciation on its receivable and treated this

depreciation as a deductible expense would need to reverse that

depreciation upon conversion of the receivable into shares, which

would create taxable income at its level. The recording of a

depreciation on the shares received in exchange would not be tax-

deductible if these shares constitute a participating interest and a

later sale of these shares for a price lower than the initial book value

of the receivable would also not generate a tax deductible loss. A

successful restructuring will thus also involve reconciling the

interest of both the creditors and the debtor from a tax standpoint.

6 Employees


Employment contracts remain in force during the restructuring

procedure.

Subject to certain conditions, lay-offs for economic reasons may be

implemented in this context. However, rules pertaining to the process

of making staff redundant are complex, and depend on the type of

proceedings and on the timing when lay-offs are implemented.

For instance, the redundancy process during the observation period

differ between safeguard and rehabilitation proceedings: while in

safeguard, there is no specific feature as to the redundancy for

economic reasons, in the context of rehabilitation proceedings, the

court-appointed administrator can be authorised by the insolvency

judge to implement a redundancy process for economic reasons if it

is deemed urgent, unavoidable and necessary.

In the context of liquidation proceedings or following a total or partial

sale plan of the business activities in rehabilitation proceedings, lay-offs

are implemented by the court-appointed administrator or the liquidator,

as the case may be, following a court’s judgment that provides for the

dismissal of the employees that were not transferred to the bidder.

With respect to employees’ claims, where they rank on insolvency is

complex, and any attempt to provide a simple list can be misleading.

However, in a nutshell, the following principles apply:

■ Regarding their pre-petition claims, and unlike other

creditors, employees are exempted from filing proof of claim,

and have the status of preferred creditors:

■ A portion of employees’ pre-petition claims benefits from a so-

called “super” senior status and ranks ahead all other claims.

This includes all forms of pre-petition remuneration left unpaid

for the last 60 days of effective work prior to bankruptcy, and

other limited compensations and indemnities (e.g. paid holiday,

payment in lieu of notice in case of termination of the

employment contract…), subject to certain caps.

■ Certain other employees’ pre-petition claims benefit from a

“general” senior status less favourable than the super-senior

status, such as pre-petition remuneration for the last six

months prior to bankruptcy, compensations and indemnities

protected by the super-senior status and other compensation

such as severance indemnities (subject to certain caps).

■ Employees’ post-petition claims benefit from the priority

rights offered to post-petition claims: they must be paid when

they fall due and if they’re not, they rank ahead of both

secured and unsecured pre-petition claims.

In addition, employees’ claims are guaranteed, under certain

circumstances, by a national wage insurance system (“AGS”),

which pays these claims as advances (subject to certain caps). For

all sums paid to employees, the AGS is subrogated in the

employees’ rights vis-à-vis the bankrupt estate.



Under Regulation (EU) 2015/848 of the European Parliament of the

Council of 20 May 2015 on insolvency proceedings, reforming the


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Regulation (EC) 1346/2000 on insolvency proceedings and

applicable to insolvency proceedings commenced after 26 June

2017 (the Insolvency Regulation), the EU Member State where a

company’s centre of main interests (COMI) is located shall have

exclusive jurisdiction to commence insolvency proceedings

regarding this company.

A company’s COMI is presumed to be the place of its registered

office unless it is proven that both:

■ Its COMI, as defined in the Eurofood decision of the

European Court of Justice, is in a country other than its place

of incorporation.

■ The company’s trade and financial partners are fully aware

that the COMI of such company is not its place of

incorporation.

Under this framework, a company incorporated in another EU

Member State can commence insolvency proceedings in France if

its COMI is located in France. If it only has an establishment based

in France, secondary proceedings can be subsequently commenced

in France which shall apply to its assets located in France.

With respect to a company incorporated outside of the EU, where no

international treaty applies, French courts have jurisdiction to

commence proceedings if such courts find that the company’s

COMI is located in France.


If insolvency judgments are made in a jurisdiction that is party to a

treaty with France, they are recognised and enforceable in France.

In addition, the Insolvency Regulation allows insolvency

procedures in different EU Member States to be automatically

recognised.

In other cases, foreign judgments can only be recognised and

enforced if they have been subject to an inter partes recognition

procedure known as exequatur, which is intended to verify that the

foreign court had proper jurisdiction, international public policy has

been complied with and no fraud has taken place.


Some companies incorporated in France have entered into

insolvency proceedings in other jurisdictions, especially in schemes

of arrangement in the UK (e.g. Zodiac). Yet, it is not common

practice.

Contrariwise, it is far more common for foreign companies to seek

protection under French Bankruptcy Law and to commence

insolvency proceedings in front of French Courts, based on the

location of their COMI in France (e.g. Coeur Défense, Mansford,

Orco Property Group or NextiraOne).

8 Groups


Under French law, a corporation is deemed to be an autonomous entity,

and the company’s assets should not be affected by insolvency

proceedings commenced against other companies within the same group.

However, the court can, under certain circumstances, find that there

is a ground for a consolidation of estates (confusion des patrimoines),

so that debt of several companies can be paid from a larger

consolidated pool of assets.

In addition, when insolvency proceedings are commenced against a

company, the same court has jurisdiction to hear any proceedings

relating to a company it controls or is controlled by, and a common

administrator and a common creditors’ representative may be

appointed for all the proceedings.

Furthermore, at least two administrators and creditors’ representatives

must be appointed by the court, if the net revenues of the debtor or

of one of the companies mentioned below reach at least a threshold

of €20 million and the debtor either:

■ Owns at least three secondary establishments located in the

jurisdiction of another Commercial Court than the one the

debtor is registered in.

■ Owns or controls at least two companies against which court-

monitored proceedings have commenced.

■ Is owned or controlled by a company against which court-

monitored proceedings have commenced and that owns or

controls another company against which court-monitored

proceedings have commenced.

9 Reform


Initiated by the currently discussed proposal for a directive dated 22

November 2016 and published by the European Commission, the

prospective reform of French bankruptcy laws is expected to soon be

implemented by way of ordinance. Mainly relating to the voting process

by classes of creditors on the draft safeguard or rehabilitation plan (see question 3.2), this pending reform may provide for the set-up of more

homogeneous classes of creditors, and the possibility, under certain

conditions which are still to be determined, to impose on dissenting

classes a plan that was accepted by one class of creditors only.

French law relating to security interests is also expected to be

amended in the coming years. Still under discussion, this reform is

expected to simplify and clarify rules pertaining to security interests

in the context of restructuring and insolvency proceedings.


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Joanna Gumpelson De Pardieu Brocas Maffei Aarpi 57 avenue d’Iéna 75016 Paris France Tel: +33 01 53 57 71 71


URL: www.de-pardieu.com

Philippe Dubois De Pardieu Brocas Maffei Aarpi 57 avenue d’Iéna 75016 Paris France Tel: +33 01 53 57 71 71


URL: www.de-pardieu.com

De Pardieu Brocas Maffei is one of France’s leading independent business law firms and currently has 33 partners. Founded in 1993, the Firm has become a key player in French business law and also has a highly regarded international practice. The Firm’s lawyers regularly advise on both domestic and international matters, and clients primarily include large French and overseas corporations.

The Restructuring and Insolvency team offers a full range of advisory and litigation services in relation to companies facing financial difficulties. The team regularly advises lending institutions, investment funds, credit insurers, factors and leasing companies, in connection with the drafting and negotiating of all types of agreements, including renegotiating existing loan documentation.

The team also represents listed and non-listed companies faced with financial difficulties and/or their shareholders, with respect to their reorganisation or the renegotiation of their debts, with solutions ranging from mandat ad hoc/conciliation to safeguard procedures and continuation plans.

Joanna Gumpelson specialises in insolvency proceedings and debt-restructuring. She represents French and foreign investment funds, banks, as well as lease-finance and factoring institutions, bondholders or suppliers, etc. She also regularly represents French or foreign issuers, in particular in the context of failing LBOs. She also handles commercial, banking and finance litigation cases.

Admitted to the Paris Bar in 2002, she graduated from HEC Paris (2000) and holds an advanced degree (DESS) in Tax and Business law from the University of Paris I Panthéon-Sorbonne (2000). She joined De Pardieu Brocas Maffei’s Restructuring & Insolvency team in 2002. She was appointed Counsel in 2009, before being co-opted as Partner in 2014.

Joanna Gumpelson was elected as “Lawyer of the Year 2017” by Best Lawyers in Restructuring and Reorganisation Law, and she is also recognised by the 2016 Who’s Who Legal – Restructuring & Insolvency publication.

Vice Chair of the Financial Institutions Subcommittee IBA (2017–2018).

Philippe Dubois has considerable experience in restructuring & insolvency. He advises banking and financial institutions as well as large French and foreign industrial groups in a wide range of economic sectors. His practice focuses on restructuring, litigation and arbitration in diverse areas such as shareholder disputes, indemnification agreements and liabilities.

He manages the firm’s Restructuring & Insolvency and Arbitration teams.

Admitted to the Paris Bar in 1994, Philippe Dubois is a doctor-at-law and teaches business law at the University of Paris X Nanterre. He joined the firm in 2008 as a Partner, after working at Jeantet (1984–2005) and Sonier Poulain (2005–2007).

He was named “Best Lawyer of the year” in Restructuring by Option Droit & Affaires magazine (2015).


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chapter 13


noerr llp

Dr. thomas Hoffmann

isabel giancristofano

germany

1 Overview


The German Insolvency Act (“Insolvenzordnung, InsO ”) states that

the main goal of a formal insolvency proceeding is the equal

satisfaction of the creditors’ claims by liquidating the debtor’s assets

or otherwise by an insolvency plan, particularly to allow the

business of the debtor to continue. The German Insolvency Act

contains creditor-friendly tools, such as avoidance rights, director’s

criminal and civil liability for late insolvency filing, and cram-down

of shareholders or minority creditors in insolvency plan

proceedings. It also enables a debtor efficient restructuring by

providing for different kinds of measures, such as protective shield

proceedings, debtor in possession and insolvency plan proceedings.

Overall, the insolvency regime is slightly creditor-friendly.


Despite the ongoing EU discussion to implement a pre-insolvency

proceeding (“Vorinsolvenzliches Sanierungsverfahren”), there is so

far no legal framework for an out-of-court restructuring. There is

one exception: German law bonds can be restructured outside

formal insolvency proceedings via a majority vote under the

German Bond Act.

Informal work-outs are possible with the consent of all parties

involved. Due to recent court rulings, those out-of-court work-outs

bear certain risks for the management, creditors and advisors.

Formal insolvency proceedings require the involvement of a court

and an insolvency administrator or custodian. However, they grant

a wide variety of restructuring options, such as a sale of the debtor’s

business, an operational restructuring based on an insolvency plan

where the debtor’s business is continued, as well as financial

restructurings.



There are strict rules under German statutory insolvency law:

managing directors are obliged to file for insolvency within three

weeks of the occurrence of an insolvency reason (illiquidity or

balance sheet over-indebtedness with no going-concern prognosis).

Directors are subject to criminal and civil law liability due to late

insolvency filing. This may include the payment of significant

amounts of damages to third parties as well as to the debtor. In

addition, directors are personally liable for any unpaid employee

social security contributions and wage and value-added taxes.

The directors of a company are obliged to continuously monitor its

financial status, irrespective of whether a crisis is occurring or not.


Apart from the debtor company itself, creditors are the most

important stakeholders in the financial crisis of a company. In

particular, only the debtor itself (through its directors) or creditors

may file for insolvency. Without an insolvency filing, insolvency

proceedings cannot be initiated against a company.

The debtor may file for insolvency if the company is balance sheet

over indebted without a going-concern prognosis, illiquid or

threatening to become illiquid. For a creditor filing there are

additional requirements. The creditor must have a legal interest in

the insolvency filing and must prove its claim against the debtor and

the reason for insolvency. This may be difficult to do as the creditor

will not have the required internal company information.

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There are no specific rules for certain types of creditors outside of

formal insolvency proceedings. In principle, a creditor will have to

litigate its claim and show the enforcement was unsuccessful before

filing for insolvency. However, even if a creditor successfully

enforces against a company in financial distress, payments made to

him may be clawed back by the insolvency administrator under

certain circumstances.

As soon as insolvency has been filed, enforcement measures by a

single creditor are usually no longer admissible or can be clawed

back, unless the creditor had no knowledge of the filing.

Secured creditors may under certain circumstances directly enforce

into their assets (e.g. creditors with a retention of title claim or

where assets have been assigned as a security to a creditor).

Shareholders of the debtor will have few rights and influence in the

insolvency proceedings. They are not entitled to file for insolvency

(unless all managing directors have resigned – in that case the duty

to file for insolvency in time shifts to the shareholder with all legal

consequences). With few exceptions, shareholder loans are

subordinated in a German insolvency.

Outside of formal insolvency proceedings, no moratoria or stays are

available.


In opened insolvency proceedings, the insolvency administrator has

a number of possibilities to claw-back certain acts (e.g. a payment,

granting of securities, delivery of goods) and reverse transactions.

The intention of the law is to distribute the debtor’s assets equally

amongst the creditors and avoid preferential transactions. For

creditors, this bears the risk that acts close to the insolvency –

specifically the three months preceding the filing – are clawed back.

Creditors must act carefully if they have knowledge of financial

distress of a business partner.

The consequence of a claw-back is that the insolvency administrator

can claim back payments, goods delivered or other advantages from

the recipient. If the recipient made a consideration, he may claim

such consideration back from the insolvency estate – however, only

as an unsecured insolvency claim.

The insolvency administrator may claw-back an act detrimental to

the creditors if it was undertaken:

■ within one month before the insolvency filing, if the

recipient was not entitled to receive the obtained, e.g. in cases

of early payment or granting of additional securities;

■ in the second or third month before filing, if the recipient

was not entitled to receive the obtained and the debtor was

either illiquid or the recipient had knowledge that the act was

detrimental to the creditors;

■ within a period of three months before filing, if the debtor

was illiquid or had filed for insolvency and the recipient was

aware of the illiquidity, circumstances that indicate

illiquidity, or the insolvency filing;

■ within one year before filing, payments on shareholder loans

or similar claims, but note that securities granted for

shareholder loans can be clawed back for 10 years;

■ within four years before filing, acts granted without

consideration (e.g. a donation or a payment or delivery of

goods without a fair consideration in return); or

■ within 10 years before filing, if the debtor acted wilfully to

disadvantage the creditors and the recipient was aware of

such an intention. The intention to disadvantage the creditors

is generally assumed by courts if the debtor acted in the

knowledge that it was (imminently) illiquid and the recipient

was aware of the financial distress. To limit claw-back

options for insolvency administrators and thereby grant

security for business transactions, a number of exceptions to

this provision were included in a reform of the claw-back

provisions in April 2017. However, a general claw-back risk

for up to 10 years continues to exist. This especially applies

in the event that the debtor is and has been in financial

difficulties for an extended period of time.



There is no legal framework for informal restructuring work-outs

under German law. Therefore, they need the consent and

participation of all affected parties. In practice, informal work-outs

are the preferred option especially in financial restructurings. It is

important to note that an out-of-court restructuring requires a third-

party restructuring opinion (“Sanierungsgutachten”) to avoid

liability for all stakeholders involved, should the out-of-court

restructuring fail.

Should the parties not come to an agreement, the German

Insolvency Act provides for alternative restructuring options under

court and administrator or custodian supervision.


Insolvency proceedings under German law provide extensive tools

for the rescue of businesses. Both debt-for-equity swaps and pre-

packaged sales are possible in the framework of formal insolvency

proceedings. Secured creditors have rights to prevent detrimental

outcomes. However, dissenting stakeholders can be crammed down

in an insolvency plan.

Regular insolvency proceedings (as opposed to self-administration

(“Eigenverwaltung”)) are opened upon application of the debtor or

a creditor. An insolvency administrator is appointed, and in larger

insolvencies, a creditor committee, also creditor meetings are

scheduled. The administrator has to be an individual (not a firm).

He or she will assess the debtor’s assets and their value, evaluate

whether the assets will cover the costs of the insolvency proceedings

and ask creditors to file their claims. The administrator will also

keep an insolvency table and assess whether it is feasible to continue

the debtor’s business and if financing is necessary and available.

Once the insolvency proceedings are opened, only the insolvency

administrator may dispose over the debtor’s assets. The shareholders

or the debtor’s managers lose control over the business.

Regularly, the insolvency court does not open insolvency proceedings

immediately after the filing. There is a preliminary insolvency period

of regularly around three months during which the wages of the

German-based employees will be borne by the German state.

The administrator (with the consent of the creditor committee or

assembly) can arrange a pre-pack sale in the period before the

opening of the proceedings instead of preparing a liquidation of all

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assets. During this time, the administrator will set up a bidding

process with the aim of selling the business as a whole on the

opening date. Such sales are usually asset deals as the debtor entity

remains intact with the insolvency debt. The business can then be

continued in a purchaser entity. The administrator will distribute the

sale proceeds to the creditors after deducting the costs of the

insolvency proceedings (“Übertragende Sanierung”).

Alternatively, the debtor’s business can be restructured. This would

usually take place in the framework of an insolvency plan. The debtor

entity would remain the owner of the business and not be liquidated.

Insolvency plan proceedings provide a flexible restructuring of a

business supervised by the court. Either the debtor or the insolvency

administrator/custodian (for self-administration, see below) may

prepare and file an insolvency plan. The plan will contain measures

to restructure the business, such as waivers, haircuts and payment

deferrals, change of the legal form of the debtor entity, sale of

shares, reduction and increase of the share capital (also combined)

and debt-for-equity swaps. The creditors are divided into groups

which separately vote on the plan. If the majority of the groups

approve the plan, the plan is deemed accepted, thereby cramming

down the dissenting voting creditor groups.

As an alternative to an insolvency administrator managing the

insolvency procedure, the debtor can apply for self-administration.

Courts have to allow these proceedings unless there are

circumstances indicating that this would be disadvantageous for the

creditors. In self-administration, the debtor remains entitled to

dispose of its assets and continues to manage the business

supervised by a court-appointed custodian.

In order to gain further flexibility for business restructuring, in 2010

protective shield proceedings were introduced. The debtor can

apply for protective shield proceedings if it is balance sheet over-

indebted and imminently illiquid, but not yet illiquid, and a

restructuring is not evidently unfeasible. The application needs to

contain a confirmation by an experienced practitioner that these

requirements are met. The court can then grant a period of up to

three months in which the debtor is protected from enforcement in

order to present an insolvency plan. The court will usually appoint

a preliminary creditor committee and custodian to supervise the

debtor during this period. In practice, the application for a

protective shield proceeding will require thorough preparation and

consensus with the key stakeholders.

Shareholder and creditor rights:

■ Shareholders generally lose control over the debtor when

insolvency proceedings are opened. They cannot participate

in the insolvency proceedings other than as regular creditors

if they have recognised claims against the debtor other than

shareholder loans (in practice, most shareholder claims will

be classified as loans, even if they concern other agreements).

■ Creditors are entitled to vote on material decisions in the

insolvency proceeding through an appointed creditor

committee. If no committee is appointed, the creditors

decide in the creditor assembly (see below under question 4.4

for creditor rights).

■ Secured creditors. Retention of title is unaffected in

insolvency proceedings. If a creditor has full title to an asset,

it must be returned to the creditor and the creditor does not

take part in the insolvency proceedings. Most securities only

grant a right to receive the proceeds of their sale which the

administrator takes care of and receives a fee for. Therefore,

secured creditors have to file their claims with the insolvency

administrator and participate in the proceedings.


Any formal insolvency proceeding requires an insolvency filing.

Special proceedings must be applied for within the filing, such as

self-administration, insolvency plan proceedings or protective

shield proceedings.

An insolvency filing will only lead to opened insolvency

proceedings, if:

■ an insolvency reason exists (illiquidity, imminent illiquidity

or balance sheet over-indebtedness with no going-concern

prognosis); and

■ the assets of the debtor are sufficient to cover the costs of the

insolvency proceeding.


In preliminary insolvency proceedings (the period between

insolvency filing and opening of the proceedings), the debtor

regularly continues to manage its business, albeit with the consent

of the preliminary insolvency administrator only.

In opened insolvency proceedings, the insolvency administrator

manages the proceedings and ensures the satisfaction of the creditors

by implementing the tools explained under question 3.2 above.

Only in self administration proceedings can the debtor itself,

through its executive directors, manage the proceedings. In this

case, the debtor is monitored by a court-appointed custodian who is

also responsible for actions usually reserved for an administrator

(such as claw-back of transactions).

The court is always involved in insolvency proceedings; it

supervises the participants and decides on specific issues (i.e.

insolvency plan, change from self-administration to regular

insolvency proceedings).


In principle, insolvency proceedings do not affect contracts. They

continue to be valid and effective, but special provisions apply to

some contracts:

■ Certain legal relations are terminated automatically, such as

instructions and powers of attorney, profit and loss

agreements.

■ Any contracts which are not fully implemented can either be

fulfilled by the insolvency administrator or rejected. If the

administrator rejects fulfilment, any claims of the other party

are unsecured insolvency claims.

■ In principle, long-term agreements such as property leases

remain in force and cannot be terminated by the other party

on grounds of the insolvency only. Claims arising before the

insolvency opening can only be filed as unsecured claims.

Any claims arising after the opening of the proceedings can

be claimed from the insolvency mass as a privileged claim.

However, the insolvency administrator may terminate such

agreements early in order to free the insolvency estate from

disadvantageous liabilities.

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■ The possibility of a set-off for a creditor may be affected by

the opening of insolvency proceedings, depending on when

the claims subject to the set-off become due and how they

were acquired.


Granting a loan to a company in financial distress bears risk as the

lender may be liable towards other creditors for delaying its

insolvency filing if it had no chances of a successful restructuring.

Out-of-court rescue funding is therefore only privileged in an

insolvency proceeding if it is based on a third-party restructuring

opinion (“Sanierungsgutachten”) confirming that the business can

be restructured successfully before granting loans.

In a formal insolvency proceeding, the insolvency administrator

may take up a loan if he deems such loan can be paid back from the

insolvency mass. Such loan repayment claims are qualified as

privileged claims. The administrator may take up loans and incur

privileged insolvency claims during preliminary insolvency

proceedings with prior authorisation of the court.

The German Employment Agency pays all employee salaries for a

period of up to three months between insolvency filing and the

opening of insolvency proceedings. The debtor’s business can be

continued without the personnel costs and the costs saved can be used

to restructure the business. As soon as insolvency proceedings are

opened, the employee’s claims become privileged claims and have to

be borne by the debtor. The insolvency administrator can therefore

only continue to employ staff if the insolvency mass is sufficient to

pay the salaries, social security contributions, loan taxes, etc.



Solvent liquidation can be resolved by the shareholders. The debtor

company is then wound down, i.e. its assets are liquidated and debt

paid. Solvent liquidation is only possible if all liabilities can be met.

If the debtor does not have sufficient funds for a solvent liquidation,

it must file for insolvency as soon as an insolvency reason exists

(see section 3 above). The liquidation of a company is regularly

implemented in a regular insolvency liquidation proceeding by an

insolvency administrator.


See section 2 above. The managing directors of a company are

obliged to file for insolvency if an insolvency reason exists.

Creditors are also entitled to file for insolvency, but under stricter

requirements.


In a solvent liquidation, a liquidator is appointed by the

shareholders. This liquidator can be the former managing director

of the company. The liquidator manages the winding up of the

company until no liabilities remain and it can be deleted from the

commercial register when it ceases to exist.

In insolvency proceedings, an insolvency administrator or, in self-

administration, a custodian manages the liquidation of the debtor’s

assets and the distribution to the creditors. The creditor committee

and creditor meeting approve the important decisions, and the

insolvency court monitors the proceedings (see question 3.6 above).


Shareholders are in full control of the company during a solvent

liquidation and creditors have no special rights as all claims will be

fully satisfied.

In an insolvency proceeding, shareholders generally lose control

over the debtor company. The insolvency administrator or custodian

takes over the management and disposal of assets completely,

including the realisation of security. The creditor assembly resolves

via majority votes on major issues, i.e. it approves acts of the

administrator with special importance, such as the sale of the

business. It can also dismiss the insolvency administrator and

appoint or dismiss the creditor committee. The creditor committee

has additional tasks and rights and may request detailed information

from the administrator or custodian and actively participate in the

decision making regarding the management of the debtor. The

creditors therefore have a clear influence on the proceedings and can

instruct to, or prevent the administrator from, taking actions that the

creditors do not agree with.




Secured creditors I: Creditors with full title to an asset can claim for

the asset to be separated from the insolvency mass and handed over to

them. They do not have to participate in the insolvency proceedings.

This is, for example, the case for creditors with retention of title claims.

Secured creditors II: Creditors with other security rights (e.g. with

a mortgage, security transfer or assignment) participate in the

insolvency proceedings as creditors. The insolvency administrator

will liquidate such assets, separate the proceeds and pay them out to

the secured creditor.

Privileged creditors: Creditors which have made agreements with

the insolvency administrator, e.g. all liabilities the administrator

incurs while continuing the business, such as wages, new orders for

goods and services made after the opening of the insolvency

proceedings. The insolvency administrator is personally liable for

these claims. The costs of the insolvency proceedings, including the

administrator’s or custodian’s fees, also fall in this rank.

Unsecured creditors: These include all unsecured claims that

originated before the opening of the insolvency proceedings. These

claims are satisfied from the proceeds of the liquidation of the debtor’s

assets or the continuation of the business. In practice, unsecured

creditors only receive a small quota on their insolvency claims.

Subordinated creditors: These are usually shareholder loans or

similar claims as well as claims for interest, etc.

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In the framework of liquidation procedures, the debtor company is

usually liquidated and deleted from the commercial register. After

deletion, it ceases to exist.

However, in insolvency plan proceedings, when the insolvency plan

is fully implemented and no new insolvency reasons exist, the

company continues to operate and exist.

If the insolvency reason is removed for other reasons (e.g. a

shareholder payment), the company can also continue to operate and

the insolvency proceedings are terminated.

5 Tax


In principle, tax laws do not provide special provisions for

insolvency. Particularly, there are no exceptions regarding the

payment of VAT, wage, income, corporation and capital gains taxes.

Especially in insolvency plans, the tax effects have to be considered

carefully to avoid extraordinary restructuring gain

(“Sanierungsgewinne”) taxes. Usually, in complex proceedings, a tax

opinion from the competent tax authority is requested to mitigate tax

risks, especially those arising in connection with the debt restructuring.

6 Employees


Employment agreements remain valid, irrespective of an insolvency

filing or the opening of insolvency proceedings. The insolvency

administrator or custodian may terminate employment agreements

with a notice period of three months (unless the employment

agreement provides for a shorter term). Employee claims are

standard unsecured insolvency claims, no special rules apply for

them.

If the business is continued, the standard rules apply for termination

of employment agreements. The German Dismissal Protection Act

is applicable and employees can only be terminated if the required

criteria apply (“social selection”). Also, works councils have to be

involved. When mass terminations are necessary, the insolvency

administrator must negotiate and agree on a social plan for the

employees which will usually provide for compensation payments

to the employees (privileged claims).

In a business transfer, all employees of a business automatically

transfer to the acquirer. Only the employee, not the acquirer, can

object to such a transfer. This provision is also applicable in a

company’s insolvency. Social plans can provide for employees to

be transferred to a special transfer vehicle where employees are

trained and transferred to new employers. However, such vehicles

are costly, and the acquirer will likely have to bear a large part of the

costs.



Insolvency proceedings can only be initiated in Germany, if an

entity has its COMI – centre of main interest – in Germany. Courts

will review the question of COMI carefully. It is not uncommon for

German courts to pull insolvency proceedings of foreign entities to

Germany if the entity’s COMI is deemed to be located in Germany

by the court, especially in group insolvencies.


Foreign insolvency procedures can be recognised under EU

regulations as well as the German Insolvency Act as foreign main or

secondary proceedings. Acts of foreign administrators and receivers

can be recognised under such proceedings, including claw-back,

set-off and the subordination of claims. These rules are especially

relevant in cross-border group insolvencies where intra-group or

cash pooling claims exist.


In large insolvencies and where sufficient connection to another

state exists, it is not uncommon to implement restructuring measures

admissible in other jurisdictions. Specifically, restructuring measures

under English law have been used by larger German companies in

the past to achieve a financial restructuring (scheme of arrangement).

Due to the time and cost effort of such foreign proceedings, as well

as increasingly strict court decisions on the requirements for and

validity of the restructuring measures, in practice foreign insolvency

proceedings are used only in a very small number of cases.

8 Groups


On 20 April 2018, new provisions in the German Insolvency Act

regarding group insolvencies were implemented.

Under the new provisions, a group debtor can apply for joint

jurisdiction of all concerned group entities at the same insolvency

court. If one of the group debtors files for insolvency and the court

declares itself competent, other insolvency proceedings for entities

of the same group will be opened at the same court and judge.

The new group insolvency rules contain further provisions on the

interaction of the parties to the group insolvency proceedings.

Insolvency administrators of the same group (if one administrator

not is appointed for several entities) are obliged to co-operate and

keep each other informed. The same applies to creditor committees.

A group creditor committee can be appointed.

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Dr. Thomas Hoffmann Noerr LLP Börsenstraße 1 60313 Frankfurt am Main Germany Tel: +49 69 9714 77161


URL: www.noerr.com

Isabel Giancristofano Noerr LLP Tower 42, 25 Old Broad Street London EC2N 1HQ United Kingdom Tel: +44 20 7562 4338


URL: www.noerr.com

Thomas Hoffmann has been advising companies in distressed situations and during insolvency proceedings for over 20 years. He co-heads Noerr’s Restructuring and Insolvency practice group.

His typical instructions include bridge and restructuring financing on the basis of restructuring plans that meet the requirements of the German Federal Court of Justice as well as the restructuring of syndicated loans or listed bonds. The preparation and, if necessary, implementation of insolvency (plan) restructurings in self-administration proceedings on the debtor’s side is just as much a part of his advisory activities as the representation and analysis of restructurings in the interests of shareholders or creditors.

Thomas is a managing director of Team Treuhand GmbH, a Noerr company which offers services in distressed situations, e.g. as a restructuring shareholder in a dual-benefit trust, a security trustee or a joint representative of bond creditors under the German Bonds Act.

Noerr stands for excellence and an entrepreneurial approach. With highly experienced teams of strong characters, Noerr devises and implements solutions for the most complex and sophisticated legal challenges. United by a set of shared values, the firm’s 500+ professionals are driven by one goal: our client’s success.

Listed groups and multinational companies, large and medium-sized family businesses as well as financial institutions and international investors all call on the firm.

As one of the leading European law firms, Noerr is also internationally renowned with offices in 11 countries and a global network of top-ranked “best friends” law firms. In addition, Noerr is the exclusive member firm in Germany for Lex Mundi, the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide.

Offices: Alicante; Berlin; Bratislava; Brussels; Bucharest; Budapest; Dresden; Düsseldorf; Frankfurt; Hamburg; London; Moscow; Munich; New York; Prague; and Warsaw.

Isabel Giancristofano is a member of Noerr’s Corporate Department and the firm’s Restructuring & Insolvency Group. She specialises in complex cross-border transactions, particularly with German-UK aspects. Isabel regularly advises on international insolvency and restructuring cases as well as issues relating to the launch of new businesses in Germany and the co-ordination of multi-jurisdiction matters. Isabel has good knowledge of the German, UK and Iberian markets.

Special group co-ordination proceedings can be opened upon

application of a debtor, a (preliminary) insolvency administrator or

a (preliminary) creditor committee. The court will then appoint a

group co-ordinator independent from the other parties to the

proceedings who shall ensure the aligned administration of the

insolvencies. The co-ordinator can also present a coordination plan

to the group insolvency court, which is not binding for the

insolvency proceedings of each entity.

For groups with foreign entities, the rules explained under section 7

above apply.

9 Reform


The introduction of an out-of-court restructuring procedure is

discussed both on an EU level and in the German literature and

practice. On an EU level, a directive on preventive restructuring

measures and measures to increase the efficiency of insolvency and

restructuring procedures is set to be voted on for 26 March 2019 in the

European Parliament. On a national level, an expert commission,

which was established to evaluate the effects of the German insolvency

law reform in 2012, found that the self-administration proceedings are

largely successful and have proved to be attractive in practice. As a

result, the government plans to reinforce this procedure.

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chapter 14


Zepos & yannopoulos

emmanuel mastromanolis

giorgos vavatsioulas

greece

1 Overview


As a general principle, winding up proceedings (bankruptcy) are

less creditor-friendly than pre-bankruptcy rehabilitation and

reorganisation proceedings, which give leeway to creditors to apply

for their initiation or to contribute to negotiations with the debtor,

while being subject to stricter completion deadlines as opposed to

winding up. Also, pre-bankruptcy rehabilitation and reorganisation

proceedings, special administration, and recently, out-of-court

workout contribute to the maximisation of going concern value of

the business of debtors and are subject to the “no worse off

principle”, in application of which creditors may not be found in a

worse financial position in comparison with the level of their

satisfaction in the context of bankruptcy.


In principle, the legislative framework in Greece does not allow for

informal work-outs; however, there are two specific insolvency-

related processes available to debtors, which, although not informal,

can inherently boast certain scintilla of informality.

The new extrajudicial debt settlement mechanism called “Out

of the Court Workout” (“OCW”) introduced by virtue of law

4469/2017. OCW allows for the extrajudicial settlement of amounts

due by a debtor to any creditor by submitting an online application

before the Special Secretariat of Private Debt Management until

31.12.2018 via a special electronic platform held on the latter’s

official website. The proceeding may be also initiated by the

creditors (Greek state, Social Security Funds, Public Law Legal

Entities or financial institutions) by inviting in writing the debtor to

be submitted to the OCW. Law 4469/2017 provides for the

possibility (and not the obligation) of the Settlement Agreement’s

judicial ratification (by means of a Court ruling). The judicial

ratification is required in order for the Settlement Agreement to

legally bind the non-contracting creditors. The Court decision

ratifying the Settlement Agreement constitutes an ex lege

enforcement title.

The pre-bankruptcy Rehabilitation process provided for by art.

99-106f GBC. The core of this process is the – private –

rehabilitation agreement which is contracted by and between the

debtor and a qualifying majority of its creditors, i.e. a majority of

60% of total claims, including at least 40% of the claims secured by

securities in rem or a pre-notation of mortgage or holding a special

lien, providing for the restructuring of the debtor’s debts with the

aim that the debtor remains operational after the ratification.

However, this process cannot be deemed informal since it involves

the ratification by the competent Court of the relevant rehabilitation

agreement.



Directors managing a company in financial distress may be held

liable: a) in case they do not meet their obligation to file a timely

application for bankruptcy; or b) in case they have intentionally

caused the cessation of payments of the company, i.e. the

insolvency. The cessation of payments is the objective requirement

in order to be declared insolvent; the cessation of payments shall

constitute a general and permanent inability of the company to meet

its outstanding monetary obligations in a serious and consistent

manner and such inability should demonstrate lack of

creditworthiness. Such liability applies also to the persons who

influenced the directors (i.e. shareholders, non-executive members,

etc.). In addition, the GBC provides for the directors’ criminal

liability for certain practices, which took place during a particular

period. Nevertheless, directors will be held liable towards social

security organisations and tax authorities for certain company debts,

while they may also be held liable for any tortious acts or omissions

that took place during their management or representation of the

company. In particular:

a) Undue delay of bankruptcy (GBC art. 98 par. 1): According

to the GBC, the management (directors, administrators) of

the debtor company is obliged to file a bankruptcy

application within 30 days from the point of time when it

ceased its payments. Unreasonable (wilful) delayed filing of

a bankruptcy application may cause further damage to the

company, the creditors and the market as a whole, as it allows

the continuation of a business which is not capable to pay its

creditors while its debts are increasing. In that case, the

directors of that company will be found jointly and severally

liable towards the company’s creditors for not filing the


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bankruptcy application within the aforementioned timeframe

either because they knew or they wilfully ignored the cessation

of payments. Such liability applies even if the delay is caused

due to efforts to place the company under a restructuring

programme (unless the restructuring efforts flourish and there

is no damage). However, any management’s efforts made in

good faith aiming to avoid the insolvency (i.e. due to the fact

that the management subjectively considered the restructuring

of the company possible) will be taken into consideration for

liability mitigation purposes. It should be noted that due to the

difficulty in proving the actual facts, in practice, it has been

really difficult to substantiate the directors’ liability on above

grounds.

b) Causing the cessation of payments (art. 98 par. 2 GBC): In

case the cessation of payments is attributed to the

management’s wilful misconduct or gross negligence, the

directors will be held liable jointly and severally towards the

company’s creditors for the damage caused. In substance, the

directors will be liable for mismanagement, false business

decision-making, frivolous risk undertaking, competitive

actions to the detriment of the company, and in general any

action or omission harming the company’s creditors. To be

noted, when examining the extent of the directors’ wilfulness,

the “business judgment rule” (art. 102 of Greek law

4548/2018) shall not apply. The liability for causing the

cessation of payments shall be distinguished from the case in

which the company was already in financial difficulties and

the management just aggravated the situation. In the latter

case, the general rules of the Greek corporate law regarding

the administrative liability will apply.

c) Criminal liability (art. 171 GBC): In case the directors cause

the cessation of payments, even though the company

objectively would not have reached, without their acts and/or

omissions, a general, permanent, and not transitory, inability

to pay its commercial debts when they fall due, then the

directors of the company might be found criminally liable

and be sentenced to the payment of criminal fines or

imprisonment of a minimum duration of two years (art. 171

GBC). The GBC provides for certain illegal practices which

may be used by the directors and lead to a false cessation of

payments such as the following: (a) concealing or

compounding assets belonging to the bankruptcy estate of the

company contrary to the rules of wise financial

administration; (b) conclusion of risky, detrimental or

speculatory agreements contrary to the rules of wise financial

administration or spending extremely high amounts on

betting; (c) sale of goods at extremely low prices contrary to

the rules of wise financial administration; (d) false

presentation of the company as a debtor of third parties or

false recognition of inexistent third-party rights; (e)

compounding, hiding or destroying of the fiscal books and

documents of the company in order to prevent the

examination of the financial status of the company; (f) failing

to draft the annual financial statements of the company; or (g)

decreasing the company’s estate by any means. Such

practices are also illegal as such, i.e. irrespectively of the fact

whether they lead or not to a cessation of payments status,

when they are adopted during the suspect period or within six

months prior to the declaration of bankruptcy.

Directors may also be held personally criminally liable (facing up to

two years of imprisonment) for favourable treatment of creditors

while the company face a situation of cessation of payments or of a

threatened inability to regularly meet outstanding monetary

obligations, satisfy creditors’ claims, provide security or knowingly

favour a creditor against other creditors and in case of receiving in

advance payments exceeding those provided for in the company’s

articles of association.


The shareholders of a company are not deemed creditors; therefore,

they are not able to influence a company’s situation, nor can they

proceed with a relevant action against the company. In general, any

action taken against the company is associated with the enforcement

measures and therefore there is a distinction among secured and

unsecured creditors. Creditors secured in rem are able to initiate

enforcement proceedings against the debtor, whereas, all

enforcement proceedings against the debtor are suspended for

unsecured creditors as of the time of such declaration. However, the

law grants a general ranking privilege to employees (art. 154 par. 1

(b)), while there is a particular regime regarding: a) the right of third

parties to retrieve their objects that are in the debtor’s possession

(known as “Separation Right”); b) the right of third parties to seek

their goods which were delivered to the debtor in order to be resold

(known as “Bankruptcy Claim”); and c) the preservation of the

bilateral and employment agreements, retention of title agreements

and set-off arrangements (art. 28 GBC et seq.) (please refer to

question 4.5 below).

With respect to available stays on enforcement, in the bankruptcy

regime, besides the ipso jure suspension of enforcement measures as

of the time of the declaration of bankruptcy, the Court (provided that

an application for bankruptcy has been filed) following a petition by

anyone bearing legitimate interest, may order any appropriate

injunction measure(s) for safeguarding the debtor’s property from

any alterations thereto as per art. 10 GBC. Said injunction

measure(s) may indicatively prohibit the disposition of any assets of

the debtor, the suspension of any enforcement measures against the

creditors or the appointment of an escrow agent; said measure(s)

shall remain in force until the issuance of the decision declaring the

debtor bankrupt or dismissing said application.

In the context of the rehabilitation procedure, besides the ipso jure

suspension of enforcement measures as per art. 106 GBC for the

period between the filing of the application for the ratification of the

rehabilitation agreement by the Court and the issuance of the

decision by the Court ratifying the agreement or dismissing such

petition, the Court may order pursuant to art. 106a GBC any

proactive injunction measure(s) in accordance with art. 10 GBC

following a petition by anyone with legitimate interest. Such

measures apply to claims, which were born before the filing of the

application for the ratification of the rehabilitation agreement and

shall remain in force until the issuance of the decision by the Court

on the ratification or non-ratification of the rehabilitation agreement.

To be noted that said injunction measures may also be granted prior

to the filing of the application for the ratification of the

rehabilitation agreement by the Court following a respective

application of the debtor or (a/the/any) creditor(s) provided,

however, that: (a) creditors representing at least 20% of the total

claims provide their written consent therefor; and (b) there is

imminent danger to the debtor, said measures remain in force until

the filing of the abovementioned application and in any case for no

longer than four months.

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Art. 41 GBC provides that certain transactions which were made

within the timeframe of the cessation of payments of the debtor and

the declaration of insolvency and can be detrimental for the

creditors’ group must be revoked. The law also provides for certain

transactions which may be revoked.

According to the provisions of art. 42 GBC, the following

transactions entered into by a company may be considered to be

detrimental to the creditors of the company and must be mandatorily

revoked by the receiver:

■ repayment of debts which are not yet due;

■ repayment of due debts by means other than cash or the

agreed performance; and

■ the provision of a security in rem, including registration of a

pre-notation of mortgage or provision of other securities of

contractual nature for pre-existing obligations, for which the

debtor has not undertaken a relevant obligation or in order to

secure new obligations undertaken by the debtor in

replacement of formerly existing obligations.

Under the provisions of art. 43 GBC, every payment by the debtor

with respect to outstanding debts that was made after the cessation

of payments and before the declaration of liquidation bankruptcy by

the competent Court (i.e. liquidation) may be revoked, if the counter

party was aware at that time that the debtor was in a cessation of

payments status and such act was detrimental for the other creditors.

Furthermore, art. 44 GBC provides that any transaction of the debtor

that has been effected intentionally (by the debtor) to the detriment

of its creditors during the last five years prior to the declaration of

insolvency (i.e. liquidation/receivership) by the competent Court,

must be recalled and reversed, to the extent that such third parties

were aware of the fraudulent intent of the debtor.



Considering that an “informal work-out” has the notion of a process

not taking place before the Court, reference should be made to the two

specific insolvency-related processes described above under question

1.2. However, in both cases, in order for the agreement entered into

(as the case may be) to be legally binding erga omnes and to have any

enforcement power, this should be ratified by a Court decision.

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram down dissenting classes of stakeholder?

In general, the Greek bankruptcy legal framework provides for a

number of rescue proceedings aiming at the satisfaction of the

business’s creditors and the restructuring of the liabilities of

distressed companies. Below is a brief summary of the pre-

bankruptcy rescue procedures available under Greek law.

A. The Rehabilitation Proceeding (art. 99 GBC et seq.): The

core rescue (pre-bankruptcy) procedure provided by the GBC

is the rehabilitation proceeding (in Greek: “προ-πτωχευτική διαδικασία εξυγίανσης”) (the “Rehabilitation Proceeding”)

the main purposes of which are: a) for a company debtor to

secure the viability of its operations while avoiding the

implications and constraints of statutory bankruptcy

(including but not limited to the alienation of the company

debtor from the management of its property and the latter’s

submission to the powers of the bankruptcy administrator);

and b) for creditors to avoid the absolute freezing of their

claims (subject to the ipso facto suspension effects of

rehabilitation and the potential order of provisional measures

by the bankruptcy Court, while achieving an “à la carte”

satisfaction of those claims, other than according to the

ranking and the timeframe provided by the GBC for statutory

bankruptcy. In the context of the rehabilitation proceeding,

the company debtor concludes an “early” agreement with its

creditors (the “Rehabilitation Agreement”) in order to

rescue and restructure its operations at the pre-bankruptcy

(insolvency) stage; the pattern, timing and conditions of

satisfaction of creditors are regulated by the – freely

negotiated – “pre-packaged” Rehabilitation Agreement that

becomes valid and enforceable upon its ratification by the

bankruptcy Court.

The Rehabilitation Agreement is, in principle, a settlement

agreement, with no mandatory minimum content, whereas

the parties may freely negotiate and agree on its terms and is

concluded between the debtor and its creditors representing

specific percentages of the debtor’s obligations (creditors

holding 60% of the total debts of the company debtor

including 40% of any in rem secured debts). Although the

agreement may provide any arrangement of the debtor’s

assets and liabilities towards the viability and the

restructuring of the business, the law provides for indicative

content which may be freely negotiated and agreed upon

between the debtor and the creditors. By way of indication,

the agreement may provide for:

■ the adjustment or alteration of the conditions and timing

of payment of the company debtor’s financial obligations

(e.g. the change of the interest rate, etc.);

■ the capitalisation of such obligations, the arrangement of

the relationships among different creditors, especially

following the capitalisation of the company debtor’s

obligations;

■ the “haircut” of the creditors’ claims;

■ the suspension of the creditors’ individual actions for the

satisfaction of their claims following the ratification of the

agreement;

■ the assignment of the business of the company debtor to a

third party; and

■ the divestiture of the company’s assets of the company’s

business en bloc or of parts thereof, etc.

The Rehabilitation Agreement may also include inter-

creditors agreements regulating the sequence and priority of

satisfaction of the claims of each of the creditors or of each

creditor’s class, while the transfer to the debtor’s business in

whole or in part as a restructuring tool can also be agreed

upon in the Rehabilitation Agreement (art. 106d GBC). In

particular, such transfer of business can be effected in two

ways: a) either by means of the Rehabilitation Agreement in

which the acquiring party shall by a signatory as well; or b)

by a separate (subsequent) agreement, concluded in

execution of the Rehabilitation Agreement. In addition, the

GBC provides that, while the assets of the company debtor

can be transferred as a whole (unless otherwise agreed), the

liabilities are not transferred, unless otherwise agreed. Non-

transferred debt is repaid by the purchase price of the

business transfer or is written off or capitalised (art. 106d par.


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1 GBC). The debtor’s business can be transferred to: a) any

third party; or b) by way of a contribution in rem to a Greek

Société Anonyme especially established by the creditors or to

any other (existent or newly established) company.

B. The Special Administration Process (Greek law 4307/2014):

An attempt-to-rescue pre-bankruptcy procedure provided by

Greek law 4307/2014 is the special administration process

(the “Special Administration Process”), which is more of a

liquidation nature than of a restructuring one. In particular,

no restructuring amendments are provided therein, nor are

any debt arrangements relevant. Instead, it aims at

maintaining and divestiture of the business, if possible, as a

whole. It is a fast track procedure pursuant to which shall

either succeed within a timeframe of one year (a success is

considered to be the divestiture of 90% of the assets) or fail in

which case the business is driven to bankruptcy.

C. The Out-of-Court Work Out Mechanism (“OCW”) (Greek

law 4469/2017): OCW allows the extrajudicial settlement of

amounts due by a debtor to any creditor by submitting an

online application before the Special Secretariat of Private

Debt Management initially until 31.12.2018 and currently

extended until 31.12.2019 (as art. 4 par. 1 of Greek law

4469/2017 was amended, by virtue of art. 45 par. 3 of Greek

law 4587/2018) via a special electronic platform held on the

latter’s official website. OCW aims at the conclusion of a

debt settlement agreement through the involvement of a

coordinator who is in charge of notifying all creditors of the

debtor referred to in the application. Creditors representing

50% of all claims should participate in order for the settlement

to proceed.

The debt settlement agreement is concluded between the

debtor and specific majorities of the participating creditors

(i.e. � of all claims and � of secured claims). The parties

may decide freely on the terms of the debt restructuring

agreement subject to certain restrictions, the most important

of which are:

(a) the creditors must be no worse off under the out-of-court

settlement that what they would have been if the debtor’s

assets were liquidated through the enforcement procedure

of the Code of Civil Procedure; and

(b) restrictions regarding the write-off and/or settlement of

the claims of the Greek State and the social security funds;

for the calculation of such amounts and considerations,

the following are deducted from the creditors’ claims: (i)

the aggregate amounts of interest due for late payment;

(ii) 95% of the claims of the Greek State stemming from

fines imposed by the tax administration; and (iii) 85% of

the claims of the Greek State and the social security funds

stemming from increases and interests for late payments.

The relevant legislative framework provides for the option

(and not the obligation) of the debt restructuring agreement’s

judicial ratification by means of a Court ruling. The judicial

ratification is required in order for the settlement agreement

to legally bind the non-contracting creditors. The Court

decision ratifying the Settlement Agreement constitutes an ex lege enforcement title.

In view of the above and the brief outline of the available

distress rescue tools, the current legislative framework

provides for a wide range of restructuring measures mostly

freely negotiable among the involved parties.

From Hold-out to Cram-down

Due to the fact that a company’s restructuring measure usually

requires a shareholders’ consent or approval, in the context of the

Rehabilitation Proceeding, there is a measure explicitly provided in

the GBC in case shareholders fail to cooperate by providing their

required consent to the restructuring measure or obstruct the

relevant measure (the “Hold-Out”). In case one or more debtor’s

shareholders declare that they will not participate in the General

Shareholders’ Meeting or that they will countervote the relevant

item of the agenda, and they actually do so, the Court, if it deems

such approach abusive, may appoint a special representative

empowered to exercise the standing and voting rights of the debtor’s

shareholders who do not cooperate in making the required decisions

for the implementation of the Rehabilitation Agreement, subject to a

prior application by the debtor or a creditor.

Nevertheless, once a Rehabilitation Agreement or an OCW debt

settlement agreement has been ratified by the Court, it binds all

creditors, even those who have dissented in the proceeding or did not

participate in (the “Cram-down effect” or the “Mandatory

Settlement”); however, their claims are regulated therein, which

means also that provisional (suspension) measures provided under the

rehabilitation agreement are binding on non-consenting creditors, but

only for a three-month period as of the ratification. To the extent that

different classes of creditors/stakeholders exist, the above provisions

apply even in case of dissenting classes of stakeholder, which means

that, as long as the majority criteria (mentioned under paragraph A.

above, the dissenting or non-participating creditors/stakeholders are

bound by the Rehabilitation Agreement.

It should be noted that, although rare in practice, dissenting

stakeholders may claim indemnification against the company and the

creditors in case in the context of a Court assessment, it could be

evidenced that after liquidation, relevant proceeds could have arisen.


All procedures analysed above under question 3.2 can be initiated

by any eligible person under the GBC (merchants and association of

persons with legal personality that pursue an economic purpose)

while independent professionals who are not eligible under the GBC

may exceptionally and under certain circumstance (not yet fully

regulated thereof ) initiate the OCW procedure. In particular:

A. The Rehabilitation Proceeding: A debtor company is eligible

to file a ratification application, if it can establish a current or

future (threatened) inability to meet its non-contingent and

outstanding monetary debts. Such inability must be of a

general nature and relate to all or the vast majority of the

company’s outstanding debt. The inability should

nevertheless not be necessarily durable (i.e. non-reversible),

because, should this be the case, it would amount to a

“cessation of payments” justifying the opening of a

bankruptcy proceeding (rather than a pre-bankruptcy

rehabilitation proceeding). Alternatively, the rehabilitation

proceeding can also be initiated when actual inability of the

debtor to meet its obligations, as they fall due, is not yet

present but there is a likelihood of insolvency of the debtor

and the bankruptcy Court considers that its insolvency could

be avoided through the recovery proceeding. Nevertheless,

any contracting creditor may file as well the ratification

application with the Court, in case there is an agreement

between the company debtor and the creditors. Otherwise, in

case of an agreement only among creditors, the ratification

application may only be filed by one of the creditors. To be

filed by creditors, the Rehabilitation Agreement must relate

to a debtor company that is already in cessation of payments

(i.e. neither in a status of threatened inability or of likelihood

of insolvency, as above).

B. The Special Administration Process: The going concern

businesses to which such mechanism refers to must be

domiciled in Greece, pursue a commercial scope and must be

unable to fulfil their overdue financial obligations in a

general and permanent manner. Corporations (and capital

companies in general) can also be placed under special

administration, if the conditions for their placement under


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liquidation or under corporate law are met for two consecutive

fiscal years (i.e. when either the corporation does not have the

minimum capital provided for by the law, or the shareholders’

equity is less than � of the nominal share capital and the

general meeting of shareholders does not take any measures to

cure the shortfall). The special administration process is

initiated by an application filed by lender(s) representing at

least 40% of the debtor’s aggregate obligations, among which

at least one is a financial institution, a financial leasing

company or a factoring company.

C. The OCW Mechanism: Individuals who may be declared

bankrupt according to the Greek Bankruptcy Code, i.e.

merchants – natural or legal persons – and associations of

persons with legal personality, which pursue economic purpose;

and legal entities which earn income from business activity

pursuant to the Greek Tax Income Code and have a tax

residence in Greece, are considered eligible debtors and can

submit an application until 31.12.2019 (as per the recently

amended provisions) in order to be placed under the beneficial

provisions of the relevant law, provided that any of the

following main conditions are met: (a) as of 31.12.2017: (i) the

debtor had outstanding debts towards financial institutions

arising from loans or credits in arrears for at least 90 days; (ii)

the debtor had debts settled after 01.07.2016; (iii) the debtor had

outstanding debts towards tax authorities or social security

funds or other public law entities; (iv) the debtor had issued

checks that have bounced; or (v) payment orders or Court

judgments for outstanding debts had been issued against the

debtor; (b) the total debts to be settled exceed €20,000; and (c)

for debtors keeping double-entry accounting books, the debtor

must have positive EBITDA or positive equity at least in one of

the three financial years preceding the submission of the

application and for debtors keeping single-entry accounting

books, the debtor must have positive net EBITDA in at least one

of the three years preceding the submission of the application.

Pursuant to the recent amendments of Greek law 4469/2017, by virtue

of art. 45 par. 3 of Greek law 4587/2018, the use of the OCW platform

is extended to certain categories of – until now – ineligible debtors

regarding the bilateral settlement of their debt towards the State/social

security funds and the amount of debt now amounts to €125.

The general partners of General Partnerships and Limited

Partnerships are able to settle their eligible personal debts, in case

their personal activity is terminated but the Partnership remains

active, whereas in case of dissolution of the Partnership but

maintenance of their personal business activity, the general partners

are able to apply for the OCW, including the debts arising from the

partnership.


In general, the Greek Court is involved in all restructuring procedures.

While in the context of the Rehabilitation Proceeding and the OCW

debt settlement agreement, the Court’s involvement, inter alia, lies in

the ratification of the relevant agreements rendering them binding erga omnes, and in the special administration process the Court intervenes in

two stages in order: a) to accept the respective application and appoint

the special administrator; and b) to approve the special administrator’s

report on the highest bidder for the sale of the debtor’s assets.

Nevertheless, each restructuring procedure has or may have a

competent individual managing the respective process. In

particular, in the context of the OCW, the coordinator (the

“Coordinator”) is appointed by the competent authority by a

coordinators’ registry held therein and is in charge of supervising the

overall proceeding. Similarly, in the Special Administration

Process, an administrator is appointed by the Court with a mandate

to liquidate the debtor’s asset by conducting a public auction for at

least 90% of the book value of the debtor’s business and assets (the

“Special Administrator”). Whereas the Rehabilitation Proceeding

does not provide for a particular person supervising the pre-

ratification process, the Court pursuant to the ratification ruling of

the agreement and following a debtor’s or creditor’s application,

may appoint a special proxy in order to safeguard the debtor’s

assets, to proceed with certain administrative actions and the overall

supervision of the agreement’s perfection (the “Special Proxy”).


The rationale of the Rehabilitation Procedure aims at the

preservation, exploitation, restructuring and recovery of the debtor

business, without the impairment of the creditors’ collective

satisfaction. To this effect, the debtor is expected to continue its

business and, subject to the terms of the Rehabilitation Agreement,

to maintain its contractual relationships. In practice, Rehabilitation

Agreements may provide for the continuation of certain contractual

relationships considered beneficial for the debtor’s business and the

termination of others. As regards the counterparties who are forced

to perform their outstanding obligations in principle there is not a

statutory remedy available, since the rationale of the Rehabilitation

Procedure is to preserve the sustainability of the debtor’s business.

However, one could argue that to the extent that such a pertinent

contract provides that the entrance into a rehabilitation agreement

may constitute a material ground for an immediate termination of

the agreement and to the extent that they have not been committed

pursuant to the ratified Rehabilitation Agreement, they may be

entitled to terminate the contract.

With regard to the Special Administration Process and the OCW

Mechanism, the respective legal frameworks explicitly provide that

the fact that a debtor enters into such a procedure does not constitute

grounds for the termination of existing contracts. Also, in case a

transfer of business is agreed in the context of the above procedures,

contracts may be transferred as well, regardless of any transfer

restriction, to the extent such transfer is favourable to the creditors

and the debtor’s counterparty agrees.


In general, entering into a restructuring process is not subject to the

available debtor’s assets to cover the relevant costs. However,

insufficient funds will render each process unfruitful. In any case,

the satisfaction of creditors (depending on their ranking) comes after

the repayment of any restructuring costs which will be covered from

the proceeds of any agreed restructuring measures (in the case of the

Rehabilitation Agreement and the OCW debt settlement agreement)

and the divestiture of the debtor’s assets (plus any applicable financing

available) transfer (in the case of the Special Administration Process).

Regarding the safeguards available in order to secure financing in

order to enter into one of the restructuring processes described above,

this is mostly agreed among the parties pursuant to the agreements.

However, only in the context of the Special Administration Process

is there an explicit reference to the financing necessary to be sought

by the Special Administrator for the purposes of the business

continuation. In particular, the law states that in order for the


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Special Administrator to be able to operate the business and to cover

the relevant costs (including his fees), he may receive financing.

What is of importance is the general privilege granted to the creditor

providing such financing in accordance with art. 154 par. 1(a) GBC.



The key insolvency procedure available in the Greek jurisdiction to

wind up a company is “bankruptcy” (the term “bankruptcy” can

relate both to the legal status and to the procedure – the latter being

the case for this analysis), which is regulated by art. 1-98 GBC.

Insolvency is commenced by virtue of a Court decision, whereas the

satisfaction of certain both subjective and objective conditions is a

prerequisite for the issuance of the decision declaring bankruptcy.

Persons entitled to file for a bankruptcy application (art. 5 GBC) are

(i) the debtor’s creditors bearing lawful interest, i.e. having an

existing and legally enforceable monetary or pecuniary claim, (ii) the

eligible debtor itself, (iii) the Attorney General on public interest

grounds, or even (iv) other third persons (e.g. the foreign bankruptcy

administrator of the main bankruptcy proceedings who may opt for

the opening up of secondary insolvency proceedings in Greece, if the

debtor is domiciled in another EU country, has been declared

bankrupt in that other country and has an establishment in Greece).

Upon the declaration of bankruptcy, a bankruptcy administrator

(syndikos) is appointed by the Court and is responsible for the

administration of the debtor’s assets for the purposes of liquidating

and distributing the proceeds of such liquidation to the creditors, in

accordance with their respective rights of priority. In line with the pro rata satisfaction of creditors, their claims may only be partly satisfied.

One of the most important consequences of the declaration of

bankruptcy is the suspension of enforcement proceedings against

the debtor for unsecured creditors as of the time of such declaration;

no suspension is provided in the case of secured creditors.

However, if the secured assets are closely connected with the

debtor’s business, enforcement measures on them by the secured

creditors are temporarily suspended, too. If the business is sold as a

whole by the bankruptcy liquidator, the above suspension applies

until completion of the sale of the business.


The decision declaring a company bankrupt will be issued if the

following subjective and objective conditions – besides the typical

prerequisite of the lawful filing of the respective application – are met:

i. Subjective condition: According to art. 2 GBC, the debtor

shall have a commercial status as per art. 1 of the Commercial

Code or constitute “an association of persons bearing legal

personality and having an economic objective”. A person –

natural or legal or association of persons with legal

personality – has a commercial status if it professionally

carries out commercial activities or objectives or when it can

be attributed such status automatically by virtue of the law

(ex. a limited company, a limited liability company, a private

capital company, a shipping company, a partnership, etc.).

Single member and foreign EU companies may also be

declared bankrupt.

ii. Objective conditions: (1) According to art. 3 GBC, (a) a

debtor who is unable to fulfil his pecuniary obligations as

they become due in a general and permanent manner

(cessation of payments) is declared bankrupt, (b) a threatened

inability of a debtor to fulfil its pecuniary obligations, as they

come, constitutes grounds for bankruptcy, provided that the

debtor itself files the bankruptcy application, and (c) the

likelihood of insolvency constitutes grounds for bankruptcy

provided that the debtor itself files the bankruptcy application

along with a proposed restructuring plan as per art. 107 GBC

et seq. (2) The Court presumes – based on the provided

financial data – that the debtor’s assets suffice for covering

the expenses of the bankruptcy procedure.


A bankruptcy administrator (syndikos) is appointed by the

bankruptcy Court and is responsible for the administration of the

debtor’s assets for the purposes of liquidating and distributing the

proceeds of liquidation to the creditors, in accordance with their

respective rights of priority.

The declaration of bankruptcy is an in-Court procedure since it takes

place by virtue of a decision issued by the competent multimember

Court of the place of the centre of the debtor’s main business

interests. The Court in its bankruptcy declaring decision also (i)

appoints the rapporteur judge and the bankruptcy administrator, (ii)

orders the sealing of the debtor’s property, (iii) incorporates

provisions on the convocation of the assembly of creditors, and (iv)

defines the exact time when the cessation of payments presumably

commenced. This decision is valid erga omnes.


The shareholders of the company are not creditors; therefore, they

are not able to influence the bankruptcy process. The only influence

it can be deemed they have on the bankruptcy proceedings is

associated with their participation in that general meeting, which

will resolve on the filing of the bankruptcy application with the

Court (provided that the company, under its capacity as the debtor,

files the application itself ).

To assess the restrictions imposed on the creditors of the company,

such restrictions being first and foremost associated with the suspension

of enforcement proceedings, a primary distinction among secured and

unsecured ones shall be made. The secured in rem creditors are able to

initiate enforcement proceedings against the debtors, whereas, all

enforcement proceedings against the debtor are suspended for unsecured

creditors as of the time of such declaration. However, if the secured

assets are closely connected with the debtor’s business, enforcement

measures on them by the secured creditors are temporarily suspended,

too. If the business is sold as a whole by the bankruptcy liquidator, the

above suspension applies until completion of the sale of the business.


The general rule is that existing contracts remain in force despite the

declaration of a debtor’s bankruptcy (art. 28 GBC). However, a

distinction between instant and continuous contracts shall be made.

Upon bankruptcy, instant contracts become inactive, i.e. they are not

terminated (subject to provisions in the contract or the law to the

contrary), but their performance is put on hold. The bankruptcy


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administrator has an option to decide on their performance or non-

performance on business criteria (art. 29 GBC). Should the contract

be deemed beneficial to the creditors or the administrator wishes to

transfer the whole contractual relationship, then the latter, following

permission by the rapporteur judge, may service a performance

statement (for the whole and not part of the contract); otherwise, the

administrator may reject such contract in whole either explicitly or

implicitly by not responding within the deadline the counterparty

may have set.

Continuous contracts (or contracts with consecutive repeated

considerations) maintain their force, unless otherwise specified (art.

31 par. 1 GBC). The administrator does not have to declare their

performance and no permission by the rapporteur judge is needed.

However, continuous contracts may be terminated pursuant to the

respective provisions in the Greek Civil Code.

However, there are certain exceptions to the above, which can be

grouped as follows: (i) certain exceptions provided by the law (for

example, art. 40 of PD 34/1995 on the commercial lease agreements

provides that bankruptcy constitutes an ex lege cause for

termination); (ii) personal contracts, which are ex lege terminated

upon the declaration of a counterparty as bankrupt; and (iii)

contractual clauses that may provide for termination of the contract

in case of bankruptcy of one of the contracting parties. Lastly, it

should be mentioned that certain provisions (art. 34 GBC) apply in

case of employment contracts and that financial contracts

contemplating the provision of banking, security and investment

services are excluded and therefore can be automatically terminated.


The ranking of claims is depicted in the respective table composed

by the bankruptcy administrator as per the provision of both the

GBC and the Greek Civil Procedure Code (“GCPC”); the table

contains debts that have been announced and confirmed during

bankruptcy and is declared enforceable by the rapporteur judge.

The ranking is as follows:

■ Group debts and expenditures (art. 154 GBC). The GBC

does not specifically define these debts, which indicatively

can refer to Court expenses, expenses for the administration

of the bankruptcy property, etc. In case the auction is

enforced by a creditor secured in rem, group debts will

cumber only the group and not those creditors secured in rem;

however, they will be paid on priority, unless they are

privileged as per GCPC (ex. employment claims created after

the declaration of bankruptcy).

■ Claims bearing general privileges (art. 154 and 21 point

b. GBC). These claims are ranked in a specific order as per

art. 975 GCPC. This category includes indicatively claims

stemming from the funding of the debtor’s business for

securing continuation of business and payments, its rescue,

the maintenance or increment of assets strictly as per the

rehabilitation or restructuring plan. It should be noted that

this privilege is valid regardless of the non-ratification of the

rehabilitation plan and that it does not concern contribution

by the shareholder in case of a share capital increase.

■ Creditors secured in rem with claims bearing special

privileges and collateral securities (art. 155 and 21 point

c. GBC). These claims are ranked in a specific order as per

art. 976 GCPC. These are claims associated with

expenditures for the preservation of the assets or the

collection of their proceeds deriving during the six-month period

prior to bankruptcy and the capital and its interest accrued during

the last two years corresponding to claims with pledge, mortgage

or pre-notation of mortgage (in case of real estate).

It should be noted that art. 156 GBC as well as new art. 156A

GBC recently introduced by law 4512/2018 deal with the –

usually encountered – case of concurrence of the privileges

set forth in arts 154 and 155 GBC and/or non-privileged

claims and set out their respective ranking of satisfaction.

■ Ordinary/unsecured and book creditors (art. 21 point a.

GBC). Claims that are not in rem secured or do not bear a

privilege fall under this category. These claims are ranked

pari passu within said category.

■ Remaining or bottom-tier creditors (art. 21 point d.

GBC). These claims are satisfied provided that all other

claims (as set forth above) have been satisfied and there has

been a remainder of the liquidation proceeds.

The costs of the procedure vary; therefore a rough estimate could be

misleading.


The former version of the GBC contained provisions on the

restoration of the debtor that had been declared bankrupt or was

about to be declared so. The effects of the repealed institution of

restoration have been transferred as regards natural persons to the

mechanism of declaring such person excusable (art. 167 par. 4

GBC) and as regards legal persons to the final ratification of the

restructuring plan (art. 164 par. 2 GBC). Should the restructuring

plan be finally ratified by the Court, then, provided that all

bankruptcy creditors have been paid off, the company can be

revived according to the legal provisions set forth in company law.

5 Tax


The GBC provides for certain tax exemptions. In the regime of

insolvency (bankruptcy), art. 133 GBC provides that all contracts

and deeds that are entered into pursuant to the GBC provisions (art.

135–145) on the sale of the debtor’s business as a whole, as well as

any transfers, transcriptions with the land registries, etc. by virtue of

said contracts and deeds are exempted from the imposition of any

taxes, stamp duties or any rights of the State or third parties,

excluding VAT. This exemption applies ipso iure.

On the contrary, the above exemption does not apply in the context

of restructuring.

6 Employees


According to art. 31 par. 1 GBC, contracts of “durable performance”

(e.g. employment agreements, lease agreements) remain valid as from

the declaration of bankruptcy. However, any contract can provide for

a termination right in the event of declaration of insolvency of one of

the parties to the contract. Automatic termination is nevertheless not

possible, even if it is provided in a contractual clause.

Art. 34 GBC stipulates that the employment agreements are not

terminated due to the declaration of insolvency. The receiver

(syndic) may terminate an employment agreement of indefinite time


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if the employer is the debtor. In case there are chances for the

viability of the company, the syndic and the debtor may ask for the

maintenance of the necessary employment contracts until the

approval of the rejection of the reorganisation plan.

Claims of the employees against their employer (debtor) that were

born before the declaration of insolvency are considered as claims

within the insolvency procedure for which the employees can be

satisfied according to the privileged claims provided in art. 154 GBC.

Art. 154 (d) GBC provides that claims that arose within the last two

years before the declaration of insolvency, for the provision of

salaried work and compensation claims due to the termination of the

employment agreement, are placed in the fourth place of the priority

claims of the classification list drafted by the syndic, right after

claims of creditors of any kind of the company, claims for funeral or

hospital treatment of creditors and claims regarding provision of

first aid needs such as food supplies necessary for the creditor, if

such claims arose during the last six months as from the declaration

of the insolvency.

On the other hand, claims of the employees that are born after the

declaration of insolvency due to the continuation of the employment

agreements are considered as collective claims of the creditors.

The recently adopted law 4512/2018 provides for an addition in

respect to the privileged classification of employees’ claims that

arose before the declaration of insolvency; more specifically, it

provides that claims arising before the declaration of insolvency and

pertaining to unpaid salaries under dependent labour spanning up to

six months and up to the equivalent of the product of the monthly

salary payable per employee entitled to the statutory minimum

salary provided by law for employees over 25 years of age

multiplied by 275%, are given priority over any other claim

(enhanced preference right), after deduction of any Court expenses,

insolvency estate management expenses, including any provisional

and final retainer fees of the insolvency administrator and any

collective creditors’ claims arising under the liquidation procedure,

as the case may be.



The initiation of insolvency proceedings in Greece follows the rule

of art. 4 of the GBC, according to which Greek Courts are

competent to hear an insolvency case only as long the COMI (centre

of main interests) of the debtor is located in Greece. COMI is

designated by the location of which the debtor administers its

interests, in a manner recognisable by third parties. For companies,

there is a presumption that COMI coincides with their statutory seat.

In light of the above, only debtors established in Greece are subject

to insolvency proceedings under the GBC, save for companies that

have their statutory seat in other third countries, but still their COMI

is located in Greece.


In the case of debtors having their COMI in an EU Member State

(other than Denmark), Regulation EU 848/2015 comes into play,

and insolvency proceedings initiated in the Member State where the

COMI of the debtor is located are automatically recognised in

Greece, without any further formalities or requirements. Greek

Court jurisprudence on the issue is scarce, although the principle of

automatic recognition has been occasionally confirmed by both a

lower Court (decision 166/2012 of the Court of First Instance of

Rethymno) and the Supreme Court (decision 838/2015). Likewise,

the initiation of secondary insolvency proceedings in Greece

(pursuant to art. 34 of Regulation 848/2015) has been ordered by

Greek Courts (see, e.g., Athens First Instance Court decision

32/2014). By contrast, if the Regulation does not apply, recognition

of non-Greek insolvency proceedings is only possible if the COMI

of the debtor is located in a country signatory of the UNCITRAL

Model Law on cross-border insolvencies (in which case, however,

recognition is not automatic but is subject to an approving Greek

Court decision, pursuant to art. 15 of law 3858/2010, having

implemented the UNCITRAL Model Law in Greece).


Foreign insolvency of debtors established in Greece should depend

on the applicable laws of the country where the initiation of each

proceeding is sought.

8 Groups


Under Greek law, a separate insolvency proceeding applies for each

company of a group. However, when the centre of main interests of

each of the companies of the same group are located in different EU

Member States, arts 56–77 of Regulation 848/2015 apply; therefore,

local administrators for each company are under the duty to co-operate

with each other, as also different bankruptcy Courts in each Member

State, where individual insolvency proceedings have been initiated for

companies of the group.

9 Reform


Other than the most recent reforms introduced by virtue of law

4512/2018, on “Arrangements for the implementation of the Structural Reforms of the Economic Adjustment Programme and other provisions” which came into force on 17.01.2018, there are no

specific upcoming proposals for the reform of the corporate rescue

and insolvency regime.

Acknowledgment

The authors would like to thank Messrs. Antonis Giannakodimos

(Senior Associate, LL.M.) and Danai Eirini Falconaki (Associate,

LL.M.) of Zepos & Yannopoulos for their contributions to the chapter.


gre

ece


Emmanuel Mastromanolis Zepos & Yannopoulos 280 Kifissias Av. Halandri, 15232 Athens Greece Tel: +30 210 696 7000


URL: www.zeya.com

Giorgos Vavatsioulas Zepos & Yannopoulos 280 Kifissias Av. Halandri, 15232 Athens Greece Tel: +30 210 696 7000


URL: www.zeya.com

International Orientation

Zepos & Yannopoulos is an independent Greek law firm with a unique international orientation. The vast majority of the clients of the firm are foreign-based. Zepos & Yannopoulos is the Greek member of numerous non-exclusive associations of leading law firms. For example, Zepos & Yannopoulos is the exclusive member in Greece for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide. Zepos & Yannopoulos is the Greek member firm for Taxand.

Client Focus

Our legal advice is customer friendly and tailored to the needs of each client. Given our international orientation we have developed particular expertise in alerting our international clients to the specificities of the Greek business and legal environment.

Comprehensiveness

Our firm is particularly well known for providing quality and comprehensive legal and tax advice in areas of law of interest to our clients. Our tax practice, widely acknowledged as the leading in the country, works hand-in-hand with all different practice groups to provide seamless and comprehensive services to our clients.

Professional Integrity and Business Ethics

Our firm is fully committed to professional integrity and practices that promote business ethics. Zepos & Yannopoulos is the corresponding firm in Greece for Trace (Transparent Agents and Contracting Agencies), a non-profit association providing anti-bribery support.

Emmanuel Mastromanolis is a Partner of the corporate commercial practice and head of the competition/anti-trust practice and insolvency practice. He was admitted to the Athens Bar in 1991 and joined our firm in 1998.

Emmanuel focuses on corporate, commercial, antitrust, trademarks, distribution and bankruptcy law, as well as in mergers and acquisitions (“M&A”).

Emmanuel gives advice regarding a wide area of issues arising following the enactment of the new bankruptcy laws, especially those involving Greek or foreign credit institutions and novel financial products, covered or not with collateral. Concurrently with his professional practice, he also represents clients before bankruptcy courts. Emmanuel is Assistant Professor of Commercial Law at the Faculty of Law of the University of Athens, teaching a wide array of subjects, including Competition Law, Bankruptcy Law and Corporate Law. His scholarly publications relate to Commercial Law.

Giorgos Vavatsioulas is a member of Zepos & Yannopoulos’ corporate commercial practice. He was admitted to the Athens Bar in 2015 and joined the firm in 2017.

Giorgos focuses on corporate, commercial, M&A, anti-trust and bankruptcy law. He is engaged in carrying out legal due diligences, advising clients on company establishment and structuring, ongoing corporate governance, their entry into commercial agreements and contracts, as well as in drafting share purchase and ancillary agreements. He also deals with cases pertaining to competition law, including cartels, abuse of dominance and merger control, and advises clients on bankruptcy law-related issues.

Giorgos is admitted before the Court of First Instance and works in Greek and English.


chapter 15


gall

nick gall

ashima sood

Hong Kong

1 Overview


Hong Kong’s insolvency regime, like its commonwealth

counterparts, has always been very creditor-friendly. In the right

circumstances, courts even have the power to exercise their

discretion to wind up foreign companies. Although the statutory

rescue procedure under the Companies Ordinance of Hong Kong by

way of a scheme of arrangement is designed to provide a debtor

company with more control than the traditional insolvency

proceedings, the scheme is still required to be approved by the

company’s creditors and the court.


The Companies Ordinance of Hong Kong provides for the

following formal restructuring and insolvency procedures for

companies in financial difficulties:

(1) a members’ voluntary liquidation;

(2) a creditors’ voluntary liquidation;

(3) a compulsory liquidation;

(4) appointment of a receiver; and

(5) a scheme of arrangement.

In practice, most restructurings take place by way of informal work-

outs, compositions and arrangements essentially made by agreement

of the parties concerned.



General/Common Law Duties

As a general rule, the director of a company has certain fiduciary

duties towards the company and its members. However, as a

company approaches insolvency, a director has a duty to take into

account the interests of the company’s creditors. If he/she breaches

those duties, he/she may be ordered to compensate the company for

any loss or damage that has been suffered as a result of those

breaches or repay, restore or account for the money or property

appropriated or acquired.

Misfeasance

Where a director has breached his duties to the company by

misapplying or retaining any money or property, the court can

compel repayment of money or restoration of property or

contribution by way of compensation by that director.

Fraudulent Trading

A director may be personally liable if he/she was knowingly

involved in carrying on any business of the company with the intent

to defraud its creditors. The court may make an order that the

director be personally liable for all or any of the debts and liabilities

of the company. He is also exposed to criminal liability and

potentially liable to a fine and imprisonment.

Disqualification

A director may be disqualified for a period of up to 15 years if

he/she: engages in fraudulent trading; is unfit to be concerned in the

management of a company; is convicted of an indictable offence in

connection with the promotion, formation, management, or

liquidation of any company such as falsifying the company’s books;

or is found guilty of any other misconduct in relation to the

company.

Whether or not a company must enter a restructuring or insolvency

process will depend on various factors, including whether it is

solvent or not. A solvent company will be able to restructure using

schemes of arrangement at any time.


Insolvency

In a creditors’ voluntary liquidation and a compulsory liquidation,

generally the creditors have the most significant influence on the

company’s situation. In a compulsory liquidation, the creditors

initiate the process and are also responsible for nominating and

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voting for the appointment of a liquidator, and a committee of

inspection to supervise the liquidator in the conduct of the liquidation.

In a creditors’ voluntary liquidation, the liquidator nominated by the

creditors will normally prevail in the event of a conflict with the

liquidators appointed by the shareholders and creditors.

Secured creditors stand outside the liquidation as they are generally

entitled to be paid out of the proceeds of their security ahead of all

other claims.

Unsecured creditors have limited rights in any liquidation as they

are ranked the lowest amongst all creditors. An unsecured creditor

would not rank higher than other creditors even if leave was granted

in his favour to proceed with or commence an action against the

company in compulsory liquidation and that action was ultimately

successful.

A landlord would not be allowed to distrain for rent due before the

commencement of winding up of the company in respect of which

he is a creditor, but will need to prove his debt.

Employees would be considered unsecured creditors of the

company, except in respect of any statutory claims arising under the

Companies Ordinance, which would constitute preferential debts.

Creditors with lien would have the right to hold the assets of the

debtor, although this right would not generally extend to the power

of sale (which should be sought from the Court).

Generally, an unpaid vendor with a retention of title arrangement

would be entitled to retain possession of goods which he has sold

but not delivered to an insolvent purchaser.

Restructuring

In a restructuring (whether formal or not), it is again the creditors

who have the most significant influence on the company’s situation.

There are no provisions available for moratorium or stays on

enforcement. The fact that a company is in the process of

restructuring does not prevent an individual creditor from suing the

company, seizing the company’s property or presenting a winding

up petition.


Transactions at an Undervalue and Unfair Preferences

A transaction at an undervalue takes place when the company makes

a gift or enters into a transaction with a person without receiving any

consideration, or enters into a transaction for a consideration, the

value of which is significantly less than the value of the

consideration provided by the company. The liquidator may

challenge the validity of any such transactions which took place five

years prior to the commencement of the winding up.

An unfair preference occurs where a payment has been made by the

company to a creditor when it is insolvent, but before the

commencement of its winding up, with the effect of putting the

creditor in a better position than it would otherwise have been in the

liquidation of the company. The liquidator may challenge the

validity of any such transactions which took place two years prior to

the commencement of the winding up if the creditors are

‘associates’ (e.g. director or employee) or six months for any other

creditor. If the challenge is successful, the court may restore the

position to what it would have been if the company had not entered

into the relevant transaction.

Extortionate Credit Transaction

The court may set aside any extortionate credit transactions entered

into three years before the commencement of a voluntary winding

up, the date on which a special resolution was passed to wind up the

company or on the date of the winding up order made by the court.

A transaction will be considered extortionate if, having regard to the

risk accepted by the person providing the credit, the terms require

grossly exorbitant payments in respect of the provision of credit or

grossly contravene ordinary principles of fair dealing.



Yes. Most restructurings in Hong Kong take place by way of

informal work-outs, compositions and arrangements essentially

made by agreement of the parties concerned.


There are no formal procedures available to achieve a restructuring

of the company’s debts in Hong Kong. The only exception is a

scheme of arrangement. The Companies Ordinance of Hong Kong

provides for procedures for court-sanctioned schemes of

arrangements which may be entered into by a company with its

creditors or members, or both, and for companies’ amalgamation (as

among group companies).

A debt-for-equity swap arrangement may form part of a

restructuring of a company. This will generally involve the dilution

or elimination of existing shareholders’ equity in the company.

Unlike many jurisdictions, there are no statutory provisions on pre-

packaged insolvencies in Hong Kong, or any arrangement whereby

the business of the company is carried on under a new and separate

special corporate vehicle. That said, it is nevertheless not uncommon

for companies to be restructured under a pre-packaged arrangement.

The fact that a company is in the process of negotiating a work-out

or putting in place a scheme of arrangement does not prevent an

individual creditor from suing the company, seizing the company’s

property or presenting a winding up petition. Some (often smaller)

creditors will deliberately take such actions once they know:

(a) they are not getting a better deal from the proposed scheme of

arrangement or even paid off in full; and

(b) that major creditors are in favour of the scheme of

arrangement.

The only way of cramming down dissenting stakeholders is in a

sanctioned scheme of arrangement. If a scheme of arrangement is

sanctioned by the court, it becomes binding on all creditors and, as

a result, the rights of creditors may change. Until that point,

however, unsecured creditors may take any enforcement actions

available to them against the company.

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There are no specific criteria to be met by a company before

negotiating a work-out or a scheme of arrangement. That being

said, restructuring arrangements have to be agreed by, and made

binding on, all creditors, otherwise a dissenting creditor may

frustrate the rescue plan and petition for a winding up.


A work-out is managed by the creditor(s) and the management of

the company.

On the contrary, a scheme of arrangement is substantially

supervised by the court, although the management of the company

remains in place throughout the restructuring process. Once a

proposal has been devised and presented to the shareholders and

creditors, an application is made to the court to convene meetings of

the respective classes of shareholders and creditors.

After the court makes an order that the meetings of the respective

classes of creditors and shareholders can be convened, notice of the

date and time of these meetings is advertised. At these meetings: (a)

a majority of 75 per cent in value; and (b) 50 per cent in number is

required to approve the proposed scheme.

After approval, a petition for sanction must be issued and, at the

hearing of such petition, the court will consider whether or not to

sanction the scheme. If the scheme is sanctioned by the court, a

copy of the relevant court order must be filed with the Companies

Registry in Hong Kong.


The impact of a restructuring procedure on existing contracts

depends on the terms of the scheme and the terms of the contract.

For example, a contract may contain restrictions on restructuring or

allow counterparties to terminate the contracts in the event of a

restructuring. There is no statutory protection for those who

continue to perform their outstanding obligations when the

restructuring process is underway. Termination and set-off

provisions in the contract would be upheld subject to the terms of

the scheme.


A consensual restructuring on an informal basis can be achieved

through a debt-for-equity swap, which involves the creditors

exchanging some or part of their debt for shares in the company, the

issuance of convertible notes at a low rate of interest with an option

of converting into shares, and/or through ‘white knight’ investors.

Currently, there is no legislation granting any protection to rescue

financing.



The key insolvency procedures available to wind up a company are

as follows:

(1) a members’ voluntary liquidation (it should be noted that this

is a solvent liquidation);

(2) a creditors’ voluntary liquidation; and

(3) a compulsory liquidation.


A members’ voluntary liquidation is only available where the

company is solvent. Having made a full inquiry into the company’s

affairs, the directors must have also formed an opinion that the

company will be able to pay all its debts within 12 months of the

commencement of the winding up and sign a certificate of solvency

to that effect. The shareholders must also pass a special resolution

to wind up in a General Meeting.

A creditors’ voluntary liquidation will occur where the company

decides to place itself into voluntary liquidation but the directors are

unable to certify the solvency of the company (i.e. the company is

insolvent), or the liquidator is at any time of the opinion that the

company will not be able to pay its debts in full within the specified

period.

A compulsory winding up order may be made by the court where:

(1) the company has passed a special resolution for winding up by

the court;

(2) the company has failed to commence its business within one

year from its incorporation, or suspends its business for a whole

year;

(3) the company has no members;

(4) the company is unable to pay its debts as and when they fall due;

(5) the event, if any, occurs if the memorandum and articles provide

that the company is to be dissolved; or

(6) the court is of the opinion that it is just and equitable that the

company be wound up.


A voluntary liquidation is managed by the directors of the company

until the appointment of the liquidator.

A compulsory winding up is commenced by issuing a petition

against the company. The court will hear the petition and make an

order for compulsory winding up if it is satisfied that grounds for

winding up have been established. It is managed by a provisional

liquidator, Official Receiver or the liquidator, as the case may be.


On the appointment of a liquidator in a members’ voluntary

liquidation, all the powers of the directors cease, although a

liquidator or the shareholders in a General Meeting can sanction

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their continuance. Similarly, in a creditors’ voluntary liquidation,

the powers of the directors will also cease. However, the committee

of inspection or, if there is no committee, the creditors, can sanction

their continuance. In contrast, appointments of directors, agents and

employees are automatically terminated when the court makes a

winding up order under a compulsory winding up.

The rights of the shareholders will also lapse, although it is worth

noting that the shareholders may still vote in a General Meeting for

the continuance of the directors’ powers in a members’ voluntary

liquidation.

Unsecured creditors have limited rights in any liquidation as they are

ranked the lowest amongst all creditors. When a winding up order

has been made or a provisional liquidator has been appointed,

creditors must seek leave from the court to continue with, or

commence proceedings against, the company. An unsecured creditor

would not be ranked higher than other creditors even if leave was

granted in his favour to proceed or commence an action against the

company in compulsory liquidation and the action is successful.

On the other hand, secured creditors stand outside the liquidation as

they are entitled to be paid out of the proceeds of their security ahead

of all other claims. That said, if the security created is a floating

charge, the preferential debts (e.g. sums owing to employees and the

government) must be paid before the floating charge holder.


See the answer to question 2.3 above in respect of avoidance of

disposition of property after a presentation of petition and avoidance of

transfers after commencement of a voluntary winding up. As explained

in question 2.3 above, the liquidator also has the power to avoid or set

aside certain transactions to ‘clawback’ assets of the company in order

to increase the funds available to distribute to creditors.

Set-off applies in liquidation where there have been mutual credits

or mutual debts or other mutual dealings between the company and

the creditor before a winding up order is made.


The order of payment in a liquidation is generally as follows:

(1) expenses of the winding up, including the liquidator’s

remuneration. The order of priority of the costs in a winding

up is set out in rule 179 of the Companies (Winding up) Rules

(Cap. 32H);

(2) preferential debts;

(3) any preferential charge on distrained goods;

(4) the company’s general creditors; and

(5) shareholders.


In a voluntary liquidation, the company will be permanently

dissolved three months after the liquidator files the final account and

return with the Companies Registry in Hong Kong following the

final meeting of creditors.

In a compulsory winding up, the liquidator can apply to the court for

an order to permanently dissolve the company once the affairs of the

company have been completely wound up. Dissolution brings the

company to an end.

5 Tax


If the company continues to trade or sells its assets, it would be

subject to tax on its profits.

6 Employees


Restructuring

A work-out or a scheme of arrangement has no effect on employees.

Insolvency

On a compulsory winding up, all employment contracts will be

automatically terminated, unless the court orders otherwise. On the

other hand, the commencement of a voluntary liquidation does not

automatically terminate the service contracts of employees. In the

event an employee’s contract is terminated, that employee becomes

a preferential creditor of the company in respect of any statutory

claims such as unpaid wages, severance payments, etc. They could

expect to receive ex gratia payments out of the Hong Kong

Protection of Wages on Insolvency Fund if the employer is put into

liquidation. The Fund covers wages owed in respect of services

rendered to an employer during the four months prior to the last day

of service (capped at HK$36,000), pay for untaken annual leave and

untaken statutory holidays (capped at HK$10,500), wages in lieu of

notice (capped at HK$22,500) and severance payment (capped at

HK$50,000 plus 50% of any excess entitlement) payable to an

employee under the Employment Ordinance.



Whilst the United Nations Commission on International Trade Law

(UNCITRAL) has adopted the Model Law on Cross-Border

Insolvency, there are no statutory provisions in Hong Kong to

implement the UNCITRAL Model Law. Notwithstanding this, a

foreign liquidator may initiate a new liquidation in Hong Kong

against the foreign company. However, the court will only exercise

its discretion to make a winding up order against a foreign company

if, amongst other requirements, there is sufficient connection within

the jurisdiction of Hong Kong.


A foreign liquidator may be able to protect assets of a foreign debtor

in Hong Kong where the foreign winding up order is extraterritorial

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(i.e. extends to assets situated in Hong Kong) and is fair (i.e. does

not depart from the pari passu rule for treating all creditors equally).

In order to achieve this, the foreign liquidator may commence

proceedings in Hong Kong seeking a declaration regarding the

effect of the foreign insolvency proceedings and to recover debts.


Although it is common for Hong Kong companies to have assets

and operations elsewhere, there are obvious difficulties in dealing

with insolvencies of such companies in jurisdictions other than

Hong Kong, especially while safeguarding and realising the assets.

8 Groups


Hong Kong does not have the group liquidation concept. Generally,

in a winding up of a group company/companies, each company of

the group is treated as a separate legal entity and the interest of a

single company is not sacrificed for the larger interest of the group.

To secure co-operation and also for practical reasons, the court may

permit the same liquidator to take control of insolvent companies

within a group, subject to any conflict of interest.

9 Reform


The key proposals for reform in the current insolvency regime

include, inter alia, the introduction of:

(1) provisional supervision rescue provisions for companies with

minimum court involvement;

(2) a moratorium on creditors’ claims;

(3) provisions relating to payment of outstanding wages and

benefits to employees; and

(4) stringent provisions for insolvent trading in order to

encourage directors to initiate provisional supervision at an

early stage.

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Nick Gall Gall 3/F, Dina House, Ruttonjee Centre 11 Duddell Street, Central Hong Kong Tel: +852 3405 7688


URL: www.gallhk.com

Ashima Sood Gall 3/F, Dina House, Ruttonjee Centre 11 Duddell Street, Central Hong Kong Tel: +852 3405 7688


URL: www.gallhk.com

Gall is a leading dispute resolution law firm in Hong Kong. We specialise in handling highly complex disputes, many of which involve multi-jurisdictional litigation. Our lawyers have a wealth of experience in a wide variety of litigation, mediation and arbitration.

Our core practice areas include commercial litigation, fraud and asset tracing, employment disputes, restructuring and insolvency, obtaining emergency injunctive relief remedies, regulatory and criminal matters, family matters and China-related matters.

Gall has a highly respected insolvency practice noted particularly for its expertise in high-profile, cross-border contentious insolvency matters. We deal with all areas of contentious insolvency including: advising appointment takers such as liquidators; provisional liquidators and receivers; applications for the appointment of provisional liquidators; the identification, protection and realisation of assets in insolvent estates; investigations and examinations; security enforcement; corporate and personal debt recovery; and cross-border insolvency issues.

Our clients also include appointment takers, creditors, bondholders, financial institutions, investment funds, distressed companies and company directors and practitioners in Hong Kong.

Nick Gall is Senior Partner and head of the insolvency practice at Gall. His practice areas cover commercial litigation, insolvency, fraud and asset tracing, regulatory/criminal and employment matters.

Nick has extensive experience in a range of contentious insolvency and bankruptcy proceedings where he has acted for liquidators, receivers, creditors and directors. He advises on the appointment of provisional liquidators, the identification, protection and realisation of assets in insolvent estates, investigations and examinations, security enforcement, corporate and personal debt recovery and cross-border insolvency issues.

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

gall Hong Kong

chapter 16


aZB & partners

Bahram n. vakil

gausia shaikh

india

1 Overview


One of the main principles driving the design of the Insolvency and

Bankruptcy Code, 2016 (Code) was to ensure a balance between

creditor rights across classes of creditors on one hand and between

creditors and the debtor on the other. The Code is largely creditor-

friendly with collective resolution proceedings empowering a

committee of creditors to make commercial decisions for the

resolution of the corporate debtor. However, sufficient checks and

balances have developed through jurisprudence, to ensure that the

debtor, represented by its directors, is kept informed of the decisions

of the creditors. Recent judgments have also called for sharing of

the restructuring plan with the erstwhile board of directors of the

corporate debtor.


The legislative framework in India currently provides for formal

restructuring and insolvency proceedings. However, an informal

work-out in the form of a settlement is permitted under the Code by

way of withdrawal of an ongoing insolvency application. Such

withdrawal post-initiation of the corporate insolvency resolution

process is only permitted when 90% of the committee of creditors

has assented to such withdrawal. Further, to the extent admission of

the insolvency application and initiation of the corporate insolvency

resolution process has not occurred, parties may enter into out-of-

court settlements outside the process stipulated under the Code.

However, informal work-outs have been formulated through

private, out-of-court negotiations and the directions of financial

sector regulators such as the Reserve Bank of India (RBI). For

instance, the RBI issued a circular dated February 12, 2018 on the

revised framework for the resolution of stressed assets, under which

banks were directed to classify such large stressed accounts as

Special Mention Accounts (SMA) and to formulate restructuring

plans to resolve such situations within 180 days from such

classification, failing which such accounts would be required to be

referred for insolvency under the Code.

In addition to the above, an initiative called “Project Sashakt”

(“Sashakt” is a Hindi word which means empowered) has also been

recommended by an expert committee, for the resolution of stressed

assets. Under this initiative, a bank-led resolution approach has

been recommended outside of any regulatory processes, which

includes the following:

(a) for loans up to USD 7.3 million, a steering committee has

been recommended to be formed within the bank for

resolution of such debt;

(b) for loans of value between USD 7.3 million to USD 73

million, the banks would be required to work together for

resolution of such debts based on an inter-creditor agreement

entered into by several banks voluntarily; and

(c) for loans above USD 73 million, the committee had

recommended the formation of an asset management

company with investment from private players for the

acquisition and turnaround of such assets.



The Code introduces the concept of wrongful trading, which does

impose liability on directors and managers. It requires directors and

managers to assess whether there is a reasonable prospect of

avoiding insolvency proceedings of a company in financial distress.

If such prospects are not determined, then the company should file

for insolvency proceedings under the Code. The directors/managers

are also required to take such steps prior to the insolvency

proceedings, as to mitigate losses likely to be suffered by the

creditors of the company. The standard for taking such steps is:

reasonable due diligence. The point at which insolvency

proceedings ought to be initiated by the company has not been

provided in the Code but the trigger is a default of USD 1,451. The

liability imposed on directors held to have committed wrongful

trading is that they may be required to make such contributions to

the assets of the corporate debtor as the National Company Law

Tribunal (NCLT) may deem fit.

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The Code makes a differentiation between financial and operational

creditors. Financial creditors are creditors whose debt is based on the

time-value of money. Such creditors typically include banks and bond

holders, both domestic and international. Operational creditors on the

other hand, are vendors and service providers to the corporate debtor.

Both financial and operational creditors can initiate insolvency

proceedings against the corporate debtor upon a default of USD 1,451.

With respect to special rights being granted to unsecured creditors,

special rights have been accorded to purchasers of commercial and

residential real estate. If such purchasers have dues outstanding

against the corporate debtor then such purchasers qualify as

financial creditors. Upon admission of insolvency proceedings

against a corporate debtor, a moratorium is imposed which prevents

security enforcement, sale or transfer of assets and initiation of legal

proceedings against the corporate debtor. Special dispensations

from the moratorium have been granted in respect of the following:

(a) providers of essential supplies to the corporate debtor are

required to continue to provide such supplies;

(b) lessors of immovable property cannot repossess property in

possession of the corporate debtor; and

(c) the Central Government may, by notification, notify financial

securities transactions which are exempt from the

moratorium. This provision is intended to cover financial

collateral arrangements, but no such notification has been

released by the Central Government so far.


The Code does permit the resolution professional/liquidator to

examine certain transactions for initiating avoidance actions against

such transactions. The Code permits the avoidance of the following

transactions:

(a) preferential transactions or transactions in which preference is

given to one party as against all other persons;

(b) undervalued transactions or transactions involving a gift or

transfer of assets at less than the market value of such assets;

(c) transactions where creditors have been defrauded with the

objective of moving the assets of the corporate debtor beyond

their reach or to prejudice their rights;

(d) extortionate credit transactions or transactions where the

corporate debtor has taken a debt at exorbitant rates; and

(e) fraudulent/wrongful trading or the conduct of business with the

intent to defraud creditors or for any other fraudulent purposes.

The look-back period for such actions is two years for transactions with

related counterparties and one year for transactions with unrelated parties.

An application to the NCLT made by the resolution

professional/liquidator may lead to one or all of the following

consequences:

(i) reversal of the transactions;

(ii) release or discharge of any security interest granted by the

corporate debtor;

(iii) any person, who is/was a party to the transaction, may be

required to repay any amount received by her; or

(iv) payment of such consideration for the transaction as may be

determined by an independent expert.



Please refer to our response to question 1.2 above.


As mentioned above, formal rescue procedures available in India

are processes under the Code and the RBI circular dated February

12, 2018. Both the Code and the RBI Circular are not prescriptive

on the modes of restructuring and it is permissible for lenders to

swap debt for equity. At the same time, it is customary for many

financial contracts to contain rights of lenders to convert debt into

equity upon default by the company. This is a contractual right and

can be exercised outside the regulatory or judicial process.

Pre-packaged sales are not possible under the current regime. This

is because the resolution professional who takes control over the

corporate debtor is required, by law, to invite resolution proposals

from all eligible applicants and the committee of creditors is

expected to choose the most profitable proposal.

As mentioned above, upon commencement of the corporate insolvency

resolution process under the Code, a moratorium is enforced which

prevents, among other things, the enforcement of security interest. This

prevents creditors and/or other stakeholders from blocking such

procedures or threatening action against the corporate debtor.

Approval of a resolution plan under the corporate insolvency resolution

process requires 66% consent from the committee of creditors. An

approval pursuant to such consent is then binding on all stakeholders,

including dissenting stakeholders. However, the Code does provide a

right to anyone affected by the resolution plan to be heard by the NCLT.

In addition to the above, the Companies Act, 2013 permits a

corporate debtor to enter into a compromise or arrangement with its

creditors or a class of its creditors. However, there is no moratorium

in such scheme and the creditors are free to enforce their security

interest and block the restructuring of debts process.


For initiating insolvency proceedings against a corporate debtor

under the Code, there must be a default of payment of more than or

equal to USD 1,451 by such corporate debtor. Once such a default

takes place, a financial creditor, operational creditor or the corporate

debtor itself may initiate insolvency proceedings against such

corporate debtor.

aZB & partners india

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Once the corporate insolvency resolution process commences, a

resolution professional is appointed. Such appointment is

confirmed by the committee of creditors. The tenure of the

resolution professional continues till the corporate insolvency

resolution process. During such period, the powers of the board of

directors of the corporate debtor stand suspended and such powers

vest exclusively with the resolution professional. The resolution

professional has to run the corporate debtor as a going concern

during the corporate insolvency resolution process. For this

purpose, the resolution professional is also responsible for

operational decisions for running the affairs of the corporate debtor.

However, all significant decisions (such as the sale of assets outside

the ordinary course of business, equity issuances and creation of

security), the resolution professional is required to obtain approval

from the committee of creditors. While the NCLT does not oversee

the day-to-day functions of the committee of creditors and the

resolution professional, it can be approached in case of any

deviation from the rules of conduct.

The committee of creditors is primarily responsible for approving

resolution plans or deciding to liquidate the corporate debtor. However,

the final approval for such decisions is to be made by the NCLT.

If the committee of creditors and NCLT approve the liquidation of the

corporate debtor, the committee of creditors is disbanded and a

liquidator is appointed. Such liquidator is then answerable to the NCLT.


Please refer to our response to question 2.2 in relation to essential

supplies, lessors and financial securities transactions notified by the

Central Government. Subject to the treatment of such

contracts/transaction, contractual counterparties are not restricted

from terminating contracts.

No, all parties are not obliged to perform outstanding obligations,

only parties providing essential supplies and lessors are obliged to

do so. To the extent that such parties are forced to perform their

outstanding obligations, dues accruing to such parties are treated as

insolvency resolution process costs. Such costs need to be paid out

in full before recovery is made by any other stakeholder.

On termination and set-off provisions, while termination is permitted

in cases as mentioned above, set off is not permitted for the purpose

of the corporate insolvency resolution process. However, the

liquidation process does provide for set-off provisions to be upheld.


The transaction cost of running the enterprise, fees of the resolution

professional, legal fees and other operating expenses and costs are

met out of the cash flow of the corporate debtor. Such cost is treated

as the corporate insolvency resolution process cost and if unpaid has

top priority in the distribution of the proceeds proposed in a

resolution plan or recovered upon liquidation.

The Code does provide for fresh debt to be infused into the

corporate debtor for working capital requirements or for funding the

restructuring process. Such interim finance is also treated as part of

the corporate insolvency resolution process cost and has top priority

in the distribution of the proceeds proposed in a resolution plan or

recovered upon liquidation.



Winding up (understood to be a liquidation under the Indian law)

can be sought under the Companies Act, 2013 on certain grounds

such as, when the company has acted against the interests of the

sovereignty and integrity of India, friendly relations with foreign

states, public order, decency or morality. However, in the event of a

payment default, stakeholders cannot seek direct liquidation. They

will first have to achieve resolution under the corporate insolvency

resolution process, which may last up to a maximum period of 270

days. If resolution is not viable, then liquidation proceedings may

be initiated against the corporate debtor. The Code also provides for

voluntary liquidation provided the company does not have any debts

or if it can discharge its debts from the proceeds of liquidation.


Please refer to our response to question 4.1 above.


Under the Companies Act and the Code, the liquidator manages the

conduct of the liquidation process. However, unlike the liquidation

process in the Code, the winding up process under the Companies

Act, 2013 is under close supervision and monitoring by the court.


Once a liquidation order has been passed by the NCLT under the

Code, a moratorium is imposed on the filing of suits and other legal

proceedings against the corporate debtor. However, a specific

power is granted to secured creditors to choose to realise their

security interest outside the Code.

Additionally, under the Companies Act, 2013 once a winding up

order has been passed, no suit or other legal proceeding can be

commenced or continued against the corporate debtor, except with

the permission of the tribunal.


In liquidation, the restrictions placed on lessors and providers of

essential supplies are lifted. Further, the liquidator also has the

power to disclaim onerous contracts. As mentioned above, set-off

provisions may be upheld in liquidation.


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The Code ranks claims of creditors and costs of the process in the

following manner, for the distribution of the liquidation estate:

(a) insolvency resolution process costs and the liquidation costs

(which include interim finance, fees paid to the insolvency

professional, etc.);

(b) in equal priority: (i) workmen’s dues for the period of 24

months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured

creditor has relinquished security;

(c) wages and any unpaid dues owed to employees other than

workmen for the period of 12 months preceding the

liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) in equal priority: (i) any amount due to the Central

Government and the State Government including the amount

to be received on account of the Consolidated Fund of India

and the Consolidated Fund of a State, if any, in respect of the

whole or any part of the period of two years preceding the

liquidation commencement date; and (ii) debts owed to a

secured creditor for any amount unpaid following the

enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.


The corporate insolvency resolution process under the Code is

intended for the revival of the corporate debtor. If liquidation is

ordered, then the Code provides for the distribution of all assets of the

corporate debtor, its dissolution and the striking out of its name from

the records and registers of the relevant authority (being the Registrar

of Companies). However, recent judicial precedents indicate that

liquidation of a corporate debtor may be conducted as a going concern

but it is not clear how this will play out in practice.

5 Tax


Dues accruing to tax authorities constitute operational debt.

Therefore, during the corporate insolvency resolution process, such

authorities are required to submit a proof of claim as operational

creditors. The Code mandates that all operational creditors must be

provided at least the liquidation value of their debts in resolution

plans. The same applies to tax authorities as operational creditors.

In liquidation, however, such authorities rank fifth in the waterfall as

described in our response to question 4.6.

The Code also provides an exemption from applicability of tax laws

in accordance with Schedule III of the Code. Further, in respect of

computation of the Minimum Alternate Tax, the book profits of the

corporate debtor undergoing the corporate insolvency resolution

process can be reduced by the amount of total loss brought forward

and the unabsorbed depreciation.

6 Employees


The Code differentiates between two categories of persons

employed by the corporate debtor: workmen; and employees.

For the corporate insolvency resolution process, both employees

and workmen qualify as operational creditors. Therefore, they must

be provided at least the liquidation value of their dues.

In liquidation, dues of workmen owed for the two years preceding

the liquidation commencement date are treated at par with the dues

of secured creditors and are second only to the insolvency resolution

process and liquidation process costs, in ranking. For employees on

the other hand, dues preceding one year prior to the liquidation

proceeding date rank third in the waterfall of distribution.



The Code is not currently applicable to companies (i.e. corporate

debtors) incorporated outside India. However, foreign creditors

may file an application under the Code to initiate CIRP against

companies incorporated in India.


The Code provides recognition to restructuring or insolvency

processes commenced in foreign jurisdictions, provided reciprocal

arrangements are in existence with such jurisdiction. The Code also

empowers the Central Government to enter into agreements with

foreign jurisdictions for enforcing the provisions of the Code. The

Central Government may also, by notification, direct that the Code

be applied in relation to assets or property of the corporate debtor

located in a jurisdiction with which reciprocal arrangements have

been made.


Under several foreign laws, companies not incorporated in a

jurisdiction can also initiate insolvency proceedings under the laws

of such jurisdiction (including Chapter 11 of the US Bankruptcy

Code). The Code does not prohibit Indian companies from going

through, say, Chapter 11. However, Indian creditors are likely to

oppose such proceedings especially when proceedings under the

Code have been imitated. In such case, the Courts and tribunals in

India are unlikely to recognise such foreign proceedings.


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8 Groups


Currently, there is no provision for substantial consolidation in

insolvency proceedings of group companies. However, attempts

have been made towards procedural coordination where a common

resolution professional is appointed and all proceedings with group

members are transferred to a single bench of the NCLT. The

Insolvency and Bankruptcy Board of India has recently constituted

a Working Group to recommend the complete regulatory framework

for group insolvencies.

9 Reform


The following reforms are being contemplated in India:

(a) introducing a regulatory structure for group insolvencies;

(b) introduction of provisions for cross-border insolvency; and

(c) notification and implementation of the personal insolvency,

including that of personal guarantors to corporate debtors.


Bahram N. Vakil AZB & Partners AZB House, Peninsula Corporate Park Ganapatrao Kadam Marg, Lower Parel Lower Parel West Mumbai, Maharashtra – 400013 India Tel: +91 22 6639 6880


URL: www.azbpartners.com

Gausia Shaikh AZB & Partners AZB House, Peninsula Corporate Park Ganapatrao Kadam Marg, Lower Parel Lower Parel West Mumbai, Maharashtra – 400013 India Tel: +91 22 6639 6880


URL: www.azbpartners.com

AZB & Partners is a leading law firm with expertise in all practice areas including restructuring and insolvency matters in India. Bahram N. Vakil, one of the firm’s founding partners, was a member of the Bankruptcy Law Reforms Committee (BLRC) constituted by the Ministry of Finance, Government of India. The BLRC was entrusted with the task of drafting the policy and legislative framework for the Insolvency and Bankruptcy Code, 2016 (IBC) and for drafting several of the key IBC rules and regulations – which form the backbone of the operation of the IBC.

Bahram is also a member of the Insolvency Law Committee constituted by the Government of India to examine the functioning and implementation of the IBC and make recommendations for legal reform.

AZB is at the forefront of advising all stakeholders involved in restructuring such as insolvency professionals, committees of creditors, acquirers, distressed asset funds and the Reserve Bank of India.

Bahram N. Vakil is a founding partner of AZB & Partners. He was a member of the Bankruptcy Law Reform Committee (which provided and led to the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC)) and is currently serving on a Committee that has proposed amendments to the IBC. Bahram is recognised by Chambers and Partners, The Legal 500 and other publications as a leading lawyer for restructuring, banking & project finance in India. Bahram has also served as a member on various high-level government committees on financial reform, foreign direct investment and securities market reform.

Gausia Shaikh is an associate at AZB & Partners, Mumbai. She is the co-creator of the FRG Insolvency Cases Dataset, a first of its kind dataset of orders passed under the Insolvency and Bankruptcy Code, 2016. She has presented her work on the Indian insolvency reforms at various events such as the Institute for Global Law and Policy’s 2018 Conference at Harvard Law School, the INSOL India Annual Conference, 2018 and the IBBI-IGIDR insolvency and bankruptcy reforms conference. Her work has also been published in publications such as Business Standard, Moneycontrol, BloombergQuint and The Leap Blog. She has also taught Bankruptcy Laws to the LL.M. batch of NMIMS Kirit P. Mehta School of Law, Mumbai.

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theodoor Bakker

Herry n. Kurniawan

indonesia

1 Overview


Restructuring and insolvency proceedings in Indonesia are

regulated under Law No. 37 of 2004 concerning Bankruptcy and

Suspension of Payments (“Bankruptcy Law”); the term used is

bankruptcy and suspension of payments.

We would consider the Bankruptcy Law to be creditor-friendly,

subject to proper implementation of the law; in both bankruptcy and

suspension of payments proceedings, the creditors play key roles to

determine/decide on key issues, which substantially affect the result

of such proceedings. Whether or not bankruptcy or suspension of

payments proceedings could be successfully concluded will be

subject to the agreement and participation of the creditors, including

but not limited to the following:

1. the creditors have the right to file a petition for bankruptcy or

a petition for suspension of payments against the debtor;

2. if the company proposes a composition plan, the creditors

have voting rights to approve or reject the composition plan.

In the event of rejection, the company will be declared

bankrupt (in suspension of payment procedures) and declared

insolvent (in bankruptcy procedures); and

3. if deemed necessary, the creditors may request the

supervisory judge to establish a creditors’ committee to work

with the administrator or the receiver.


Indonesian law allows for informal work-outs to restructure a

company’s debt through mutual agreement between the company

and the creditor(s).

As for formal restructuring and insolvency proceedings, the

Bankruptcy Law provides two procedures for companies having

financial difficulties, namely:

a. bankruptcy procedures; and

b. suspension of payments procedures.

Formal restructuring and insolvency proceedings are particularly

used when the company and the creditor(s) could not mutually agree

on the informal work-outs.



In bankruptcy procedures, upon the declaration of the company’s

bankruptcy, the directors lose the power to manage the company. The

power is transferred to the court-appointed receiver, who then manages

the bankruptcy estate and the settlement of the company’s debts.

In suspension of payments procedures, the company is still entitled

to carry on its business activities. The directors of the company,

jointly with the court-appointed administrator and supervised by the

supervisory judge, run the management of the company.

Directors are personally liable for the losses suffered by the

company if both:

a. the company is declared bankrupt and the bankruptcy is the

result of the directors’ fault or negligence; and

b. the company’s assets are not sufficient to cover the

company’s obligations.

There is no specific point at which a company must enter a

restructuring or insolvency procedure.


There is no other stakeholder who may influence the company

situation during the suspension of payments or bankruptcy

procedures. During the bankruptcy and suspension of payments

procedures, there should be no action that the creditors take against

the company.

There are no special rules or regimes applicable to particular types

of an unsecured creditor. The Bankruptcy Law does not

differentiate specific unsecured creditors.

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For 90 days after the bankruptcy decision or a decision of

suspension of payments, secured creditors are stayed from

undertaking any enforcement action against the assets.


Certain transactions favouring one creditor over other creditors,

entered into before the bankruptcy declaration, can be set aside

under the fraudulent conveyance (actio pauliana) principles set out

in the Bankruptcy Law. For a pre-bankruptcy transaction to be set

aside, all of the following requirements must be met:

■ The transaction was voluntary. This means that the

transaction did not arise from a contractual obligation.

Examples of voluntary transactions include:

■ the granting of security to one particular creditor;

■ the payment of a debt that is not yet due and payable; and

■ the sale of an asset against non-cash payment or with set-

off of the purchase price against a debt.

■ The transaction harmed creditors’ interests. This includes

most situations where the condition of the bankrupt estate

would have been better if the transaction had not been entered

into, for example:

■ a sale of goods below their fair market value; or

■ transactions resulting in the increase of the company’s

liabilities (for example, the granting of a guarantee or

other form of security by a subsidiary for the debt of its

parent company).

■ The company and the contracting party had knowledge of

the harm caused to other creditors. Knowledge of harm to

other creditors is presumed in a number of circumstances.

Generally, there is a rebuttable presumption of knowledge

where the following categories of transaction are performed

less than one year before the bankruptcy:

■ transaction for which the value received by the company

is substantially less than the value of the asset sold;

■ payment of a debt that is not yet due and payable, or

granting security for such debt;

■ transaction between the company and related parties (that

is, relatives or companies controlled by relatives, insiders

and legal entities belonging to the same group); and

■ donations.

The payment of a debt that was due and payable can also be set aside

if it is shown that either:

■ the recipient of the payment knew that, at the time of receipt,

a bankruptcy petition had been submitted; or

■ payment was the result of a consultation between the

company and the creditor with the intention of preferring that

creditor over other creditors. It is generally believed that this

requirement is only fulfilled if some measure of collusion

between the parties is established.



Yes. It is possible to implement an informal work-out in Indonesia.


The suspension of payments procedure is the formal procedure to

achieve a restructuring of debts. The suspension of payments

procedure is provided for a company that faces temporary liquidity

problems and is unable to pay its debts but may be able to pay them

some time in the future. It gives the company temporary relief in

order for it to reorganise and continue its business, and ultimately to

satisfy the creditors’ claims.

A debt-for-equity swap is possible to be offered by the company in

a composition plan to be agreed by the creditors in the suspension of

payment procedure. The debt-for-equity swap requires the approval

of the existing shareholders, and thus the approval is required to be

obtained before the debt-for-equity swap proposal is offered to the

creditors. The proposal itself must be approved by the creditors in

the creditors meeting.

Pre-packaged sale is also a possible scheme. An approval from the

supervisory judge (who supervises the suspension of payments

procedure) is required for the sale of the company’s assets.

Creditors’ Influence

The creditors play substantial roles in a suspension of payment

procedure, as follows:

a. the creditors can file a suspension of payments petition

against the company with the Commercial Court; and

b. the creditors have voting rights to agree or not with the

proposal/composition plan offered by the company; the

rejection of the composition plan by the creditors will result

in a bankruptcy declaration by the company.

The secured creditors could not enforce its security right during the

stay period in bankruptcy procedure.

Unsecured creditors who vote against the composition plan are

crammed down if the composition plan is approved by the secured

and unsecured creditors and ratified by the Commercial Court.

Shareholders’ Influence

The Bankruptcy Law does not specifically discuss the powers of the

shareholders during the suspension of payment procedure, but it is

understood that the shareholders are still entitled to pass resolutions

with respect to the company’s matters except for those which pertain

to assets and management. Moreover, shareholders’ approval is

required for voluntary filing on the petition for suspension of

payment and for the debt-for-equity swap.

Cram-down

If a composition plan is approved by the requisite majority, the

dissenting secured creditors are effectively crammed down, but they

must be compensated by the lower of the value of the collateral they

hold or the actual value of their claim.


The company or the creditors can apply for a suspension of

payments if the debtor either cannot pay its debts or foresees that it

will not be able to pay its debts.

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Yes, there is court involvement in suspension of payments

procedure. The directors of the company, jointly with the court-

appointed administrator and supervised by the supervisory judge,

will manage the process and run the management of the company.


The granting of a suspension of payment does not change the

validity of a contract which has been validly entered into by the

company; it only stays the obligations of both parties for a

maximum period of 270 days. Therefore, except during the stay

period, the company is still obligated to continue performing its

obligations under the contract.

Notwithstanding the foregoing, if the contract expressly stipulates

that the contract will be expired or terminated in the event the

company is granted a suspension of payments, then such provision

will prevail.

In a suspension of payments procedure, the creditors can set off

sums owed by them to the company against amounts owed by the

company to them. However, the said set-off right can only be

exercised if: (i) the claim and the debt already existed prior to the

suspension of payments proceedings; or (ii) the claim and the debt

exist as a result of transactions/actions carried out by the company

before the suspension of payments proceedings.

A person who has taken over the debt or receivables from a third

party prior to the pronouncement of suspension of payment cannot

exercise a set-off if: (i) the taking over of the debt and receivables

was not based on good faith; and/or (ii) the taking over of the debt

or receivables was done after the initiation of the suspension of

payment process.

If at the time the decision declaring bankruptcy is rendered, the

parties to a contract have not fulfilled their obligations or have

fulfilled them only partially, the non-bankrupt party may request the

receiver to confirm the continuation of the performance of the

contract. The receiver must decide on whether the contract is to be

resumed within a certain period agreed to by the receiver and the

non-bankrupt party. If no agreement on the period is reached, the

supervisory judge will determine the said period.


The costs incurred in a suspension of payments procedure, including

but not limited to the administrator’s fees, must be paid by the

company. With prior approval from the administrator, the company

in suspension of a payments process may obtain loan or credit from

any third party for the sole purpose of increasing the value of the

company’s estate. However, if the company intends to obtain a

secured loan, it should be previously approved by the supervisory

judge. Also, security rights can only be encumbered over the

company’s asset which has not been encumbered with any security

rights. The creditor providing the above-described loan shall be

treated the same as the other creditors involved in the suspension of

the payment process.



The insolvency procedure available to wind up a company facing

financial difficulties is the bankruptcy procedure.

The bankruptcy shall be pronounced by the Commercial Court if it

fulfils the following requirements: (i) the company has at least two

creditors (plurality of creditors); and (ii) at least one of the two debts

could not be paid by the company when it becomes due and payable.

If, following its bankruptcy declaration, (i) no composition plan is

submitted by the company to the creditors, (ii) a composition plan is

submitted but subsequently rejected by the creditors, or (iii) a

composition plan is submitted and subsequently approved by the

creditors but is not ratified by the Commercial Court, then the

company shall be declared insolvent. Where the company becomes

insolvent, the bankruptcy procedure shall be concluded with the

liquidation and dissolution of the company.


A company can be placed in bankruptcy or suspension of payments

if it passes all tests or conditions as described in question 4.1 above.


The receiver manages the bankruptcy process after declaration of

bankruptcy by the Commercial Court. The administrator, together

with the directors of the company, manages the suspension of the

payments process after the granting of suspension of payments by

the Commercial Court.


Creditors’ Influence

In a bankruptcy procedure, the creditors are entitled to submit a

petition for bankruptcy against the company with the Commercial

Court.

If, after the declaration of bankruptcy, the company proposes a

composition plan, then the unsecured creditors are entitled to

approve or reject the composition plan. Secured creditors are not

entitled to take the vote regarding the composition plan and are not

affected by the result of the vote. If the majority of the unsecured

creditors reject the composition plan, then the company becomes

insolvent and the bankruptcy procedure shall be concluded with the

liquidation and dissolution of the company.

Shareholders’ Influence

The Bankruptcy Law does not specifically discuss the powers of the

shareholders during the bankruptcy procedure, but the shareholders

are still entitled to pass resolutions with respect to the company’s

matters, except for those which pertain to assets and management.

The shareholders’ approval is required for the voluntary filing of a

petition for bankruptcy by the company and for a debt-for-equity

swap.


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The bankruptcy of a company, in principle, does not change the validity

or the terms of a contract which has been validly entered into by the

company. The rights and obligations of the parties to such contracts

remain unchanged. However, the receiver does not have the obligation

to perform the contract. If the receiver confirms performance, he must

guarantee performance; if he confirms cancellation, the other party will

have to submit a damages claim as an unsecured creditor.

The Bankruptcy Law stipulates that in a bankruptcy procedure, the

creditors can set off sums owed by them to the company against

amounts owed by the company to them. However, the said set-off

right can only be exercised if: (i) the claim and the debt already

existed prior to the declaration of bankruptcy; or (ii) the claim and

the debt exist as a result of transactions carried out before the

declaration of bankruptcy.

These rules make a creditor’s set-off right in an event of bankruptcy

more favourable than its set-off right outside of a bankruptcy

procedure, since there is no requirement for the debts to be currently

due and payable. However, there is uncertainty as to whether the

receiver must approve an intended set-off.


In bankruptcy and suspension of payment procedures, the ranking of

creditors’ claims is as follows:

■ Preferred creditors (kreditur preferen). Preferred creditors

are entitled to receive payment in full from the bankruptcy

estate. Preferred claims are tax claims and post-

bankruptcy/suspension of payments claims, such as:

■ fees of the receiver/administrator;

■ fees of experts appointed by the supervisory judge;

■ costs of liquidation of the bankruptcy estate or costs

incurred during the suspension of payments process;

■ post-bankruptcy/suspension of payments financing;

■ lease of the bankrupt’s house or offices; and

■ employees’ wages.

■ Secured creditors (kreditur separatis). These are the creditors

holding security rights over some or all of the assets of the

company.

■ Unsecured creditors (kreditur konkuren). Unsecured creditors

rank as follows:

■ specific statutorily preferred creditors whose preference

relates only to specific assets;

■ general statutory priority creditors; and

■ non-preferred unsecured creditors.

■ Shareholders. Generally, the shareholders of the company

rank behind all other creditors in the distribution of the proceeds

of the bankruptcy estate. Any distribution they receive is

proportional to the shares that they hold in the company, if there

are remaining assets after distribution to other creditors.


Yes, it is possible. The bankrupt company can be revived if the

composition plan proposed by the company is agreed by the

creditors and ratified by the Commercial Court, or if the claims of

the creditors have been fully satisfied by the bankruptcy estate.

5 Tax


Tax risks will depend on the approach and actions taken during the

procedure. Tax liabilities are ordinarily incurred during each of the

procedures if the business is continued during each procedure. The

written-off amounts in haircuts and debt write-offs are subject to

income tax on the part of the company.

6 Employees


Claims of employees fall into the classification of estate creditors,

and as such they are entitled to payments in full of their claim on the

basis of the employment contract.

If the employer is declared bankrupt, termination of employment

may be conducted by the employer, which triggers payment of the

severance package for the employees.



Yes, companies which conduct their profession or business in the

territory of the Republic of Indonesia, even if incorporated

elsewhere, can use the bankruptcy/suspension of payments

procedure in Indonesia.


No, the Bankruptcy Law adopts the principle of territoriality and

does not recognise cross-border bankruptcy or suspension of

payment cases. Moreover, foreign court judgments cannot be

enforced in Indonesia. Therefore, any court judgments, orders, or

reliefs made during foreign bankruptcy or suspension of payment

proceedings cannot be enforced in Indonesia and shall not affect the

status of assets situated in Indonesia.


No, the Commercial Court does not recognise bankruptcy/insolvency

and suspension of payments/rescue procedures in other jurisdictions;

insolvency proceedings outside Indonesia cannot affect the status of

assets located in Indonesia.


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Theodoor Bakker Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia Tel: +62 21 250 5125


URL: www.abnrlaw.com

Herry N. Kurniawan Ali Budiardjo, Nugroho, Reksodiputro Graha CIMB Niaga, 24th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia Tel: +62 21 250 5125


URL: www.abnrlaw.com

Mr. Theodoor Bakker graduated from Leiden University in the Netherlands, is admitted to the Amsterdam Bar and is a registered Foreign Lawyer under the Indonesian Advocates Law. He has worked in Southeast Asia since 1984, over time building up extensive experience in: direct foreign investment; project finance work, including private power and petrochemical projects; aircraft finance; infrastructure development; and general manufacturing investment. During the Asian financial crisis, he was involved in many aspects of restructuring and insolvency, and has advised on foreign law issues of bankruptcy reform in Indonesia. His practice now also encompasses capital market transactions, structured finance, and mergers and acquisitions. He has published various articles on insolvency and cross-border investment issues and teaches at the Faculty of Law of the University of Indonesia and at the Ministry of Law and Human Rights.

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

Mr. Herry N. Kurniawan joined ABNR as an associate in 1999 and became a partner on 1 January 2012. His specified areas of practice are mergers and acquisitions, foreign investment, project and corporate finance, restructuring and bankruptcy, in which fields he has both intensive and extensive regulatory knowledge. He was involved in the project for the monitoring of the implementation of the Indonesian Bankruptcy Law in 1999, which gave him further in-depth regulatory knowledge in bankruptcy and suspension of payments matters. He co-writes various articles and publications on bankruptcy, mergers and acquisitions, and speaks in seminars and workshops on bankruptcy and suspension of payments, as well as on investment, and mergers and acquisitions. He has also acted as counsel in numerous bankruptcy/suspension of payments and commercial litigation/arbitration.

8 Groups


The Bankruptcy Law does not recognise the bankruptcy or

suspension of payment proceedings of a corporate group. Petition

for bankruptcy or suspension of payment may only be submitted

against an individual or legal person, and the bankruptcy of a

company does not affect the status of other companies within the

group. There is no scope for co-operation between officeholders.

9 Reform


There are currently no governmental proposals for the reform of the

corporate rescue and insolvency regime in Indonesia.

Acknowledgment

The authors would like to thank their colleague, Ridzky Firmansyah

Amin, for his invaluable assistance in the preparation and

finalisation of this chapter.


chapter 18


mccann Fitzgerald

michael murphy

grace armstrong

ireland

1 Overview


Corporate insolvency and restructuring law in Ireland has developed

to respond to the needs of both creditors and debtors by balancing

the protection of both parties’ rights. Our framework provides a

broad range of flexible legislative remedies, with perhaps a

marginal emphasis on the stability engendered by the protection of

the rights of secured creditors. Where previously such secured

creditors overwhelmingly comprised regulated financial

institutions, with the recent advent of loan sales in the market,

private institutions have become the holders of security and have

frequently been involved in restructuring and enforcement actions.

Where such proceedings come before the courts, the courts are

mindful to ensure careful adherence to contractual and statutory

rights, to ensure that debtors are protected notwithstanding that their

obligations have been assigned to third parties.

Unsecured creditors do not enjoy priority in a winding up.

However, retention of title clauses are valid as a matter of Irish law

and may permit the unsecured creditor to recover goods supplied.


There are a comprehensive range of procedures available to an insolvent

Irish company. These include liquidation, either following a court order

or a shareholders’ resolution, receivership (the appointment of a receiver

by a secured creditor pursuant to contractual rights in a security

document) and examinership, a court-managed restructuring procedure.

Examinership is a corporate rescue and restructuring procedure

whereby an insolvent company is provided with court protection for

a limited period to enable it to negotiate with creditors, seek new

investment and write down its liabilities.

Irish company law also provides a mechanism for a company to

reach a compromise with its creditors on a less structured basis than

examinership and the recently revised company legislation reduced

the number of court appearances required for such compromises.

These scheme of arrangement provisions are very similar to the

English scheme provisions. Until recently, such arrangements have

not been widely availed of. However, there has been a noticeable

focus on our scheme provisions.

Troubled companies will typically seek to resolve their financial

difficulties through consensual discussion and agreement with

creditors, whether documented by way of a formal standstill or

settlement agreement. Failing such resolution, examinership,

receivership and liquidation are commonly availed of under Irish

law.



When a company is insolvent, or close to insolvent, its directors owe

fiduciary duties to the creditors of the company and not to its

shareholders. Recent amendments to company law have codified

directors’ duties in a non-exhaustive list of formerly pre-existing

common law (fiduciary), equitable and statutory duties. These

include but are not limited to the duty to act honestly and

responsibly and in good faith in the interests of the company, to act

in accordance with the company’s constitution and the law, not to

use the company’s property for his/her benefit, to avoid conflicts of

interest and to exercise due skill, care and diligence.

The thrust of Irish company law sanctions against directors (which

includes shadow and de facto directors) of an insolvent company is

to penalise individuals who are recklessly incurring credit or who

deplete the company’s assets where the directors cannot, on any

reasonable or objective basis, believe that the company will be able

to operate as a going concern, or who were knowingly party to

fraudulent trading. Personal liability may be imposed for all or part

of the liabilities of the company. In addition, criminal sanctions

may apply.

Directors of companies in insolvent liquidation are at risk of being

subjected to restriction orders where they cannot show that they

acted honestly and responsibly in relation to the affairs of the

company. If restricted, a director is prevented from continuing to

act as a director unless the company meets certain minimum paid up

share capital requirements.

No specific mandatory triggers exist under Irish law for entry into

restructuring or insolvency procedures. There are two tests for

insolvency: the balance sheet test; and the cash flow test. If a

company is considered to be insolvent under either of the above

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tests, its directors will need to keep their decision to continue to trade

under constant review. The difficulty with applying the balance sheet

test revolves around the valuation of the company’s assets. This test

can easily be triggered, particularly if the company has significant

bank borrowings. It is therefore more important for directors to focus

on the cash flow test in the short term while at the same time planning

how to reduce the balance sheet deficit in the longer term.


Secured creditors, unsecured creditors and shareholders can directly

influence the company’s situation. An examinership is the only

means by which a company in financial difficulty can obtain a

moratorium from action by its creditors. An application for the

appointment of an examiner can be made by the company itself, its

directors, a creditor or member.

In an examinership, once a company has been placed under court

protection, the creditors of the company (which term includes

retention of title creditors and landlords) are prevented from taking

any action to enforce their security or to take enforcement action of

any kind against the company.

Secured creditors who apprehend a risk of examinership and wish to

prevent the appointment of an examiner will typically move quickly

to appoint a receiver. The appointment of a receiver is the main

method by which a secured creditor will enforce its security. A court

will refuse to hear a petition for examinership in relation to a

company in respect of which a receiver has been appointed for a

period of three continuous days prior to the date of presentation of

the petition and a receiver will be removed if a petition for the

appointment of an examiner is presented within three days of his

appointment.

A winding up petition may be presented by the company itself, its

creditors, any of its creditors or contributories, the Director of

Corporate Enforcement and any person entitled to bring shareholder

oppression proceedings. In every liquidation, a committee of

inspection is typically appointed by creditors. The main duty of a

committee is to oversee the activities of the liquidator and approve

the liquidator’s fees and expenses.

Shareholders who can show the affairs of the company are being

conducted in a manner which is oppressive to their interests may

apply to the court for relief.


Certain transactions to which an insolvent company is party may be

attacked by, among others, a liquidator appointed to the company

and where such challenge is successful, the transactions may be set

aside.

Where property is disposed of and it is possible to show that the

effect of such disposal was to perpetrate a fraud on the company, its

creditors or members, the court may direct the return of such

property. There is no prescribed period within which an application

must be brought.

Irish company law prohibits certain transactions where a company

provides financial assistance in connection with the acquisition of

shares in that company. Such transactions are voidable at the option

of the company against a third party with notice and a breach of the

legislation is a criminal offence. Directors are also restricted from

entering transactions with the company except within certain

specified conditions. In the event of a breach, such a transaction is

voidable and a director may risk personal liability.

Transactions in favour of a creditor taking place within six months

of the commencement of a winding up (or within two years if in

favour of a connected person) made with a view to giving such

creditor a preference are liable to be set aside.

Where a company is being wound up, a floating charge created

within 12 months of the commencement of the winding up can in

certain circumstances be declared invalid.



Informal work-outs as between debtors and creditors frequently

occur. While creditors may be willing to provide standstill

agreements during a period of negotiation, a company in financial

difficulty will not be able to avail of immunity from suit during this

period and will be vulnerable to actions by non-secured creditors,

including the Revenue Commissioners. Accordingly, where a

company perceives a significant threat of liquidation or receivership,

but where it believes it has a reasonable prospect of survival,

examinership may be a more viable option.


Examinership is the main rescue procedure for an insolvent

company (or group of companies) which comprises three main

components: new investment into the company; a forced write down

of the company’s current liabilities; and a “legal stay” or protection

period which prevents any enforcement action being taken against

the company for a period of up to a maximum of 100 days. During

the period of examinership, no enforcement action can be taken by

creditors, including secured creditors or against guarantors of the

company’s liabilities. Unless an existing shareholder is the investor,

examinership will result in a change of ownership of the company.

Existing shares will be cancelled and new shares will be issued to

the proposed investor.

If an objecting party establishes that a company in examinership does

not have a reasonable prospect of survival as a going concern or that

the examiner’s proposals for a scheme of arrangement are unfairly

prejudicial, a court will not confirm the proposals. However,

liquidation is the inevitable consequence of a failed examinership.

Debt-for-equity swaps and pre-packaged sales do occur, and while

in practice the appointment of a receiver or examiner may take place

on the basis that a pre-ordained outcome is to be implemented, there

is no current legislative basis for a pre-packaged sale.

mccann Fitzgerald ireland

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The criteria for entry into examinership are threefold: the company

is insolvent or likely to become insolvent; no resolution has been

passed (nor has any order been made) to wind up the company; and

there is a reasonable prospect of survival of the whole or part of the

business as a going concern. An application for the appointment of

an examiner must (save in exceptional circumstances) be

accompanied by an independent expert’s report, which verifies that

the company has a reasonable prospect of survival as a going

concern.


An examinership is commenced by way of a petition to the High

Court (or in certain circumstances, the Circuit Court) and the

process is closely monitored by the court. The directors of the

company remain in place and the company continues to trade, while

the examiner analyses the company’s finances, establishes which

parts of the business can be rescued and negotiates with investors,

creditors and shareholders to prepare proposals for a scheme of

arrangement which, if implemented, will facilitate the company’s

survival. Once he has formulated his proposals, the examiner must

convene meetings of each class of creditors who may vote in favour

of or against the proposals. The examiner will then prepare a report

which is filed in court. In order for a scheme to become binding on

the members and creditors of a company, the court must make an

order confirming the proposals. It may only do so if at least one

class of impaired creditors has voted in favour of the proposals and

the court will not approve a scheme if its purpose is to avoid tax or

if it is unfairly prejudicial to any class of creditors.


Examinership does not itself terminate contracts, albeit most contracts

provide that examinership activates a right of termination. However,

where a company is under the protection of the court, its creditors

are prevented from exercising rights against the company, such as

any claim for damages which may arise.

The company in examinership may, with the approval of the court,

repudiate any contract under which some element of performance

other than payment remains to be rendered by both parties. Any

person who suffers loss as a result of the repudiation becomes an

unsecured creditor in the examinership and the court may assess the

value of his loss. This provision is frequently availed of by tenant

companies to repudiate expensive leaseholds. The landlord becomes

an unsecured creditor, the liability on him being discharged under the

scheme.

The examiner may obtain court approval to dispose of property

subject to a fixed or a floating charge on the basis that this would

facilitate the survival of the company. The market value of the

property sold must be accounted to the holder of the charge. The

liabilities of a secured creditor can in certain circumstances be

crammed down.

During an examinership, no proceedings may be commenced

against guarantors or other third parties liable in respect of debts of

the company. Particular rules govern the enforcement of guarantees

in an examinership and certain steps must be taken by secured

creditors to preserve their rights under the guarantees, thereby

protecting the creditor’s right to pursue the guarantor, even if the

underlying debt is crammed down in the examinership.

During the examinership, the company must be able to fund itself

and discharge all new liabilities incurred as they fall due. Further,

the examiner’s proposals should result in a more favourable

outcome for the creditors than would be the case in a liquidation or

receivership.

Set-off provisions will be upheld and can be applied, notwithstanding

that a company is in examinership.


The costs of an examinership can be significant and will be met out

of the assets of the company. An examiner has the power to certify

a liability at the time it is incurred if he forms the view that it is

necessary for the survival of the company that the debt should be

incurred. Such certification affords priority to any such liability

over other creditor claims in the event of the subsequent liquidation

of the company. No specific protection exists under Irish law for

any new finance provided to a company by way of rescue funding.



An insolvent company may be wound up by the Irish courts where,

amongst other things, its members by special resolution have

resolved that the company be wound up by the court or where the

company is unable to pay its debts. The petition for a compulsory

liquidation can be made by the company itself, any creditor(s)

and/or, subject to some restrictions, any members. In limited

circumstances, the Director of Corporate Enforcement (who has a

supervisory role in respect of liquidations and insolvent companies),

the Central Bank of Ireland and the Registrar of Companies may

also petition for a compulsory liquidation of the company.

A company may also be placed in a creditors’ voluntary liquidation

where, amongst other things, the members by ordinary resolution

resolve that the company cannot by reason of its liabilities continue

its business and that it be wound up voluntarily.

The appointment of a receiver by a secured creditor pursuant to

contractual rights contained in a security document is the main

method by which a secured creditor enforces its security. However,

receivership is not a process for the dissolution of a company.


A company can be placed in compulsory liquidation by the court if

the company is insolvent, or on just and equitable or public interest

grounds. A creditors’ voluntary liquidation may be initiated by the

company in a general meeting, resolving that it cannot by reason of

its liabilities continue its business, and that it be wound up as a

creditors’ voluntary liquidation. A company may be placed in a


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solvent liquidation if its directors are in a position to confirm that it

will be in a position to meet its liabilities in full within a period of 12

months.


A liquidator is appointed to manage the realisation of the company’s

assets and distribution of claims. While compulsory liquidations

were previously actively managed by the High Court, recent

legislative change altered this position. A committee of inspection

(comprising creditors of the company) may now be formed and the

liquidator is obliged to report to the committee throughout the

liquidation. The committee can authorise the exercise of certain

powers and sanction payment of the liquidator’s fees, costs and

expenses.

The Director of Corporate Enforcement is tasked with ensuring

compliance with company law and a liquidator is obliged to report

to the Director in relation to the conduct of the directors of a

company in liquidation.

Voluntary liquidations take place without court involvement. A

solvent voluntary liquidation can be controlled by the company’s

shareholders, in contrast to an insolvent voluntary liquidation,

which is managed by a liquidator but may be overseen by a

committee of inspection, if such a committee is formed by the

company’s creditors. As in the case of a court liquidation, the

committee can authorise the exercise of certain powers by the

liquidator and sanction payment of the liquidator’s fees, costs and

expenses.


Typically, the liquidator is nominated by the petitioning creditor or

the company, if it is initiating the winding up process. Following the

appointment of a liquidator or a provisional liquidator, the leave of

the court is required in order to commence or continue proceedings

against the company.

The rights of secured creditors are unaffected by a liquidation,

assuming such rights do not fall foul of any avoidance provisions

and the secured creditor may elect to appoint a receiver or to allow

the liquidator to realise its security and account to it for the

proceeds. However, the claims of preferential claims will rank

ahead of floating charge realisations.


Contractual provisions which allow for termination of the contract

on the entry by the company into an insolvency or restructuring

process are common and are enforceable against a liquidator.

The liquidator may, with court approval, within 12 months after the

commencement of the liquidation, disclaim any property of the

company being wound up which consists of, amongst other things,

(a) unprofitable contracts, or (b) any property which is unsaleable or

not readily saleable by reason of its binding the possessor to the

performance of any onerous act or to the payment of money. The

liquidator’s hand may be forced – any person interested in the

property may require him to decide whether or not he will disclaim

and if the liquidator wishes to disclaim in such circumstances, he

must give notice within 28 days that he intends to apply to court to

disclaim.

Under statutory insolvency set-off rules, set off of “mutual credits

and debts” is permitted, but not mandatory. In addition, contractual

set-off will survive insolvency and is enforceable against a

liquidator.


The key principle of distribution of property of a company under

Irish law is that claims, subject to certain exceptions, shall rank pari passu. Where a liquidator realises assets on behalf of a fixed charge

holder, his costs and expenses in respect of such realisation will by

agreement be retained out of such realisation. Once assets have

been distributed to the holders of a fixed charge, super preferential

creditors (comprising unpaid employee withholding tax), trust

monies returned and following the application of set-off rights

which may apply, the order of priorities in a liquidation are as

follows:

(1) the costs and expenses of the liquidation;

(2) preferential creditors (comprising employee entitlements and

unpaid taxes);

(3) floating charge holders;

(4) unsecured creditors; and

(5) members and contributories.

In the event of a liquidation following an examinership, the

examiner’s costs and expenses have priority over all over claims,

including those of secured creditors. Any expenses certified by an

examiner will rank in priority to a floating charge creditor.

The order of priority of claims in a receivership will be set out in the

security document pursuant to which the receiver has been

appointed.


Where a company has been dissolved, the court may within a two-

year period on an application being made by the liquidator or

another interested party, make an order declaring the dissolution to

have been void. It is also possible to apply for the annulment of a

winding up order or resolution. In practice, both such applications

are rare.

5 Tax


The commencement of insolvency proceedings does not per se give

rise to a tax liability; however, tax liabilities will continue to be

incurred in the ordinary way in an insolvency or restructuring

procedure, including, for example, corporation tax, VAT, employee

withholding taxes, capital gains tax and stamp duty.

A liquidator or receiver will register for tax on their appointment

and any pre-existing tax liabilities will be dealt with in the

liquidation or receivership and are likely to have preferential status.


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In an examinership, liabilities to the Revenue Commissioners can be

crammed down; however, the court will not confirm a scheme

which is unfairly prejudicial to any creditor, including the Revenue.

However, the write down of debt may trigger a capital gains tax

liability or a VAT liability where VAT deductions have been claimed

for the full value of invoices subsequently written down by the

examiner’s proposals. A liquidator appointed pursuant to a solvent

voluntary liquidation will be obliged to obtain tax clearance before

finalising the liquidation.

A key question is whether trade has ceased in a liquidation or a

receivership. If a liquidator or receiver is simply realising trading

assets, trade is likely to have ceased, in which case the income

received is currently taxed as a post-cessation receipt at a corporation

tax rate of 25%, as opposed to the standard rate of 12.5%.

6 Employees


In a receivership, the appointment of a receiver will not terminate

employment contracts. However, a receiver may choose to

terminate employment contracts and any claims by employees (for

example, in respect of unpaid wages) which accrued prior to his

appointment will have preferential status in the receivership.

Similarly, in an examinership, the appointment of the examiner will

not terminate employment contracts as the business of the company

will continue to be traded. Pre-existing claims by employees,

including prospective or contingent claims, can be crammed down

in the examiner’s proposals.

In a liquidation, contracts of employment are generally terminated

by the liquidator. Employee claims will typically rank as a

preferential claim, ahead of floating charge creditors. Certain

claims by employees (in respect of, for example, unpaid wages,

holiday pay and redundancy payments up to certain thresholds)

which cannot be met by the insolvent company will be paid out of a

government-funded insolvency fund (the “Fund”). The Fund is

then entitled to claim in the liquidation for all amounts paid to

employees and will rank as a preferential creditor in the liquidation.

Where a transfer is effected or proposed to be effected of the

business of the company in liquidation, the employees and the

employers’ liabilities to its employees may under specific

legislation automatically transfer to the purchaser. The legislation

provides certain exemptions for insolvency proceedings which may

be applicable depending on the circumstances.



By virtue of the Insolvency Regulation, subject to certain

exclusions, where a foreign insolvent company (whether or not the

insolvent company is Irish incorporated) has its “centre of main

interests” (“COMI”) in Ireland, “main proceedings” can only be

instituted before an Irish court. Under the Insolvency Regulation,

“main proceedings” have, subject as otherwise provided in the

Regulation, universal scope and as such encompass all of the

debtors’ assets and creditors located in the EU (with the exception of

Denmark). In the case of Ireland, main proceedings for the purposes

of the Insolvency Regulation include compulsory winding up by the

Irish court, examinership and creditors’ voluntary winding up (with

confirmation by the Irish court). Further, a foreign company

incorporated in a country which is not subject to the provisions of

the Insolvency Regulation may, in certain circumstances, be wound

up by the Irish Court.


Ireland has not adopted the UNCITRAL Model Law on cross-

border insolvency and domestic legislation does not contain a

mechanism for the recognition of restructuring or insolvency

processes commenced elsewhere. Where the proceedings are those

to which the Insolvency Regulation applies, such proceedings will

automatically be recognised in Ireland. Where the proceedings fall

outside the scope of the Insolvency Regulation, the insolvency

officeholder may apply to the High Court for recognition of the

process under common law principles.


The range of remedies and procedures available under Irish law

means that in practice this is rare.

8 Groups


Each Irish company will be dealt with as a separate legal entity and

accordingly the assets and liabilities of a company in liquidation

will not automatically be taken on by another group company.

However, where two or more related companies are being wound

up, and if a court is satisfied that it is just and equitable to do so, both

companies may be wound up together as if they were one company.

This is known as a pooling order.

In deciding whether it is just and equitable to make a pooling order,

a court will have regard to (among other things): the extent to which

any of the companies took part in the management of any of the

other companies; the conduct of any of the companies towards the

creditors of any of the other companies; the extent to which the

circumstances that gave rise to the winding up of any of the

companies are attributable to the actions or omissions of any of the

other companies; and the extent to which the businesses of the

companies have been intermingled.

An order will not be made simply because one company is related to

another, or because the creditors of the company being wound up

have relied on the fact that another company is or has been related to

the first company.

Where an examiner is appointed to a company, either at the same

time or later, an application may be made to appoint him to one or

more related companies. The court must have regard to whether the


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Michael Murphy McCann FitzGerald Riverside One, Sir John Rogerson’s Quay Dublin 2 Ireland Tel: +353 1829 0000

Email: michael.murphy@

mccannfitzgerald.com

URL: www.mccannfitzgerald.com

Grace Armstrong McCann FitzGerald Riverside One, Sir John Rogerson’s Quay Dublin 2 Ireland Tel: +353 1829 0000

Email: grace.armstrong@

mccannfitzgerald.com

URL: www.mccannfitzgerald.com

Michael is Head of the Insolvency and Restructuring team. He has wide experience of advising in a number of significant restructurings, examinerships, receiverships and liquidations on behalf of all stakeholders including companies, directors, office holders, banks and other creditors. As well as advising when financial difficulties are identified, Michael advises on solvent reorganisations and on mitigating insolvency risk in transactions in the making.

Michael is a member of the Irish Society of Insolvency Practitioners and INSOL Europe. He has written and lectured extensively in the area of corporate recovery and insolvency.

McCann FitzGerald is one of Ireland’s premier law firms, with 77 partners and almost 350 lawyers and professional staff.

The firm is consistently recognised as being the market leader in many practice areas and its pre-eminence is endorsed by clients and market commentators alike. Our principal office is located in Dublin and we have overseas offices in London, Brussels and New York. We provide a full range of legal services, primarily to commercial, industrial and financial services companies. Our clients include international corporations, major domestic businesses and emerging Irish companies. We also have many clients in the State and semi-State sectors.

Grace is a Senior Associate on the Insolvency and Restructuring team at McCann FitzGerald. As such, Grace has experience acting on behalf of a range of parties in restructuring matters, insolvency proceedings including liquidation, receivership and examinership and bankruptcy and debt collection proceedings.

appointment would facilitate the survival of the company or the

related company or both and must be satisfied that there is a

reasonable prospect of survival of the related company. The

protection period of the related company is limited to the period

available for the first company.

The recast EU regulation on Insolvency Proceedings contains a

chapter on group insolvency proceedings, including provisions on

cross-border cooperation of insolvency courts and insolvency

practitioners from various insolvent group companies and a

coordination procedure to afford a greater chance of rescuing the

group as a whole, where possible. Insolvency practitioners can

coordinate a joint restructuring plan and seek a stay of asset

realisation measures.

9 Reform


Irish company law was modernised in 2015, resulting in the

consolidation of 12 acts into one, including all provisions which

deal with corporate rescue and insolvency. Accordingly, substantive

legislative reform is not anticipated. Irish insolvency law was also

amended to incorporate so-called “Alternative A” contained in

Article XI of the Aircraft Protocol to the Cape Town Convention.

The most significant change arising from this is in examinership. In

the event of an examinership of an airline or a company which owns

or leases or has mortgaged aircraft under interests that fall within the

scope of the Cape Town Convention, the examiner will have, at

most, 60 days to cure all defaults and to agree to perform the

company’s obligations in full. If he does not do that then he must

deliver possession of the aircraft to the creditor at the end of the

examinership or 60-day period, whichever is the earlier.

Ireland is party to the recast EU regulation on Insolvency

Proceedings.


chapter 19


pirola pennuto Zei & associati massimo Di terlizzi

italy

1 Overview


With the first Italian bankruptcy law (R.D. 267/1942 “the

Bankruptcy Law”), bankruptcy in Italy was considered an indelible

social stain and the returning in bonis was considered difficult to

implement and socially unacceptable. As a result, the legal system

was primarily aimed at the liquidation of the debtor and not at the

recovery of the debtor.

It is only with the reforms starting from 2003 that the focus of the

legislator turned to the recovery of the debtor by emulating the

mechanism of the so-called “second chance”, born in the US.

The subsequent reforms, until 2012, had as their primary aim the

recovery of the debtor’s productive capacity through compositions

with creditors, also in “blank”, which facilitated the continuation of

the business activity, with the further possibility, through these

compositions, to split the debtor into classes.

In addition, the legislator implemented the so-called “certified”

restructuring plan and debt restructuring agreement, which are

independent of jurisdictional control during the formation phase.

The reforms from 2013 to 2015 introduced instruments aimed at the

interests of the creditors in the context of the compositions with

creditors, such as minimum payment thresholds, “concurrent bids”

and specific informational obligations, in particular in the “blank”

compositions.

Furthermore, by the Delegation Law of 2017, the legislator reached

a point of balance between the protection of the interests of creditors

and interests of the debtor, the continuation of the business activity

being their main objective.

Indeed, with the new Legislative Decree n. 14/2019, which will

come into force definitively on 15 August 2020, the creditors and the

debtor will both obtain new protections. On the one hand, the

creditor will be able to constantly monitor the health conditions of

the company through some monitoring tools and, on the other hand,

the debtor will be aware of his crisis before the “judicial liquidation”

(the “new name” for the bankruptcy procedure given to avoid the

stigmatisation of the debtor) and he will be able to access various

alternative instruments in order to ensure the continuity of the

business of the company. In other words, the Italian Legislator has

anticipated the moment in which the company itself as well as the

creditors will become aware of the crisis of the company in order to

allow the latter to restructure the company and maintain the value of

the business.

Within this new frame, the liquidation of the company is considered

the last option for the company, to be activated only when other

procedures are not feasible.


According to the actual Italian legal system, it is possible to

distinguish between:

1) pre-bankruptcy procedures: a certified restructuring plan

(“piano di risanamento” – art. 67 of the Bankruptcy Law) and

a debt restructuring agreement (“accordo di ristrutturazione del debito” – art. 182bis of the Bankruptcy Law);

2) procedures that are not yet bankruptcy: composition with

creditors (“concordato preventivo” – art. 160 et seq. of the

Bankruptcy Law) that can aim to rescue the company or to

wind up the company; and

3) bankruptcy (“fallimento” – art. 5 et seq. of the Bankruptcy

Law), bankruptcy agreements (“concordato fallimentare” –

art. 124 et seq. of the Bankruptcy Law) and compulsory

administrative liquidation (“liquidazione coatta amministrativa” – art. 124 et seq. of the Bankruptcy Law).

There are also special procedures provided by Legislative Decree

270/1999 (so-called “Prodi-bis”), as amended by the “Marzano Decree”, that involve large companies.

In light of the last Reform contained in Legislative Decree n. 14/2019,

the Italian legal system will provide for a single procedure in order to

access the abovementioned procedures under points 1, 2 and 3 which

will all be regulated in the “Crisis and Insolvency Code”.

Only the so-called Extraordinary Administration of Large

Companies procedures will remain regulated by special laws

(“Prodi-bis” – Legislative Decree n. 270/1999 and “Marzano Decree” – Decree n. 347/2003).

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There are different possible liability scenarios that directors can

encounter:

i. not having promptly detected the symptoms of the crisis or

not having reacted promptly;

ii. having caused or aggravated the company’s crisis;

iii. having badly used the necessary or useful tools in order to

deal with the crisis or limit its effects; and/or

iv. not having guaranteed the “par condicio creditorum”.

A company crisis depends not necessarily on the behaviour of the

directors, but it may happen where the directors, due to the improper

capacity to manage the company, can make decisions that, even though

they were chosen to dispel a crisis, can in fact aggravate the situation.

In principle, the decisions taken by the directors remain

unquestionable by the court (“business judgment rule”), unless the

decisions taken by them are manifestly non-economic, imprudent or

risky for the company.

Directors must prepare organisational tools that allow them to know

as soon as possible of any financial crisis that can lead to insolvency.

In other words, they must be able to ascertain whether a company

can continue its business or not, due to the financial situation of the

company and its capacity to make profit.

There are also potential criminal liabilities for directors as a result of

actions or omissions that have led to the insolvency of the company.

There is no specific moment in which it can be identified when a

company enters into financial crisis. However, it is important to pay

attention to the symptoms of the financial crisis of a company, such

as delay or non-payment of withholdings, taxes, social contributions

or repayment of mortgage or the receipt of injunctions notified by

the creditors.

The Reform of Legislative Decree n. 14/2019 also extends the

duties of the company’s directors with regards to the maintenance of

the company’s assets. Specifically, the reform amends, with

immediate effect, art. 2476 of the Italian Civil Code concerning the

liability of the company’s directors, introducing their liability

towards the creditors (and not only towards the shareholders as it

was prior to the Reform) for the non-observance of the obligations

inherent to the preservation of the integrity of the company’s assets.

According to the new framework, the lawsuit can be proposed by

creditors when the assets are insufficient to satisfy their credits.


The other stakeholders may influence the company’s situation

through the filing of legal actions or executive actions against the

company in order to obtain the repayment of their credits. There are

no special rules applicable to unsecured creditors; in the case where

a company is not able to face the legal actions of the creditors, the

latter can also claim the court for the declaration of judicial

liquidation of the company. The Italian legal system, as amended by

the 2019 Reform, will consider the judicial liquidation (the old

“bankruptcy”) as the last remedy for the company in crisis. This

could change the way in which creditors can interfere with the credit

recovery.

Furthermore, in some proceedings involving the restructuring of the

companies (such as in case of a certified restructuring plan or debt

restructuring agreement), the main creditors (often the banks) may

ask for a change in the governance, especially regarding the

management, selecting the new director to whom they assign the

process of business turnaround.

The 2019 Reform has also amended the moratoria agreement and

stays on enforcement in the Italian legal system.

First of all, the duration of the moratoria agreement, regulated by

art. 182-septies, paragraph 5 (Bankruptcy Law), having the purpose

of stabilising relations with the company’s financial creditors for a

set period of time established, has been extended.

The moratoria agreements are not necessarily linked to other crisis

instruments regulated by the bankruptcy law and can be efficiently

used to the aim of the undersigning:

1) of a certified recovery plan, according to art. 67, third

paragraph, lett. d), Bankruptcy Law;

2) of a debt restructuring agreement, according to art. 182bis of

the Bankruptcy Law;

3) of a restructuring agreement with financial intermediaries,

according to art. 182-septies Bankruptcy Law;

4) of a direct or indirect arrangement with creditors, according

to art. 161 Bankruptcy Law; and

5) of a settlement agreement with creditors.

Through the 2019 Reform, the moratoria agreement negotiated

between the debtor company and one or more participating banks or

financial intermediaries, representing 75% of financial credits, also

produce effects with respect to non-adherent banks and financial

intermediaries if they have been informed of the start of negotiations

and have been able to participate.

According to the 2019 Reform, the agreement will also be extended

to creditors who are not qualified as banks/financial creditors under

the condition that they are identified in categories that are

homogeneous.

Furthermore, there is also the “automatic stay”, to be used in case of

access to a procedure in case a company’s crisis changes with the

mentioned Reform. The new system will no longer provide

automatic inhibition of individual executive actions, rather the debtor

will have to ask the judge to declare the “automatic stay” within his

claim for the admission to the procedures.


In case of transactions entered into by a company in financial

difficulties during the so-called “suspect period” (i.e. the period

preceding the declaration of insolvency), the Italian legal system

provides for the possibility of “claw-back” actions underlying such

payments with the following terms and conditions:

i. the payments made by the debtor are within the suspicious

period of two years, in order to settle debts that would have

expired in the period following the declaration of bankruptcy

may be clawed-back;

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ii. the “abnormal” transactions listed in the Bankruptcy Law

that took place within the suspicious period of one year or six

months – depending on the type of transaction – may be

clawed back if the other party does not prove that they were

unaware of the debtor’s insolvency status;

iii. the “normal” transactions listed in the Bankruptcy Law that

took place within the suspicious period of six months prior to

the declaration of insolvency can be clawed back if the

bankruptcy trustee proves that the other party knew of the

insolvency of the debtor;

iv. the Bankruptcy Law also provides cases in which claw-back

actions cannot be exercised (e.g. payments for goods and

services that can be included: in the normal course of

business with standard terms; payments due to employees;

acts and payments made or securities granted on a debtor’s

assets on the basis of a certified restructuring plan, a debt

restructuring agreement or a composition with creditors; sale

or preliminary contracts of sale of real estate at a fair price;

and payments on a bank account when they do not

permanently reduce the debtor’s exposure); and

v. in addition, transactions entered into between companies of

the same group may be clawed back under the rules

governing extraordinary administration proceedings (the

suspect period is extended to three/five years).

Transactions entered into by a company in financial difficulties may

also be clawed back under the rules governing the ordinary claw-

back actions.

In order to avoid claw-back actions and the related responsibility of

the company, the counterpart and any other third parties involved in

such transactions, transactions are made according to pre-

bankrupcty procedures provided by the law, which are suitable and

considerable in nature and amount.



There is the possibility to enter into informal work-out agreements

between the debtor and its creditors, so long as it is understood that

these agreements i) are freely negotiable between the parties, and ii)

are binding only for the parties who have entered into them.

Nevertheless, what often occurs is that such agreements are

finalised to hide – and so postpone – a financial crisis.

These work-out agreements, in case of the subsequent default of the

company, may have consequences in terms of claw-back actions and

criminal liabilities, too; therefore, it is preferable to enter into the

restructuring agreements provided by the law.


In order to restructure the liabilities of distressed companies, the

Italian system provides the following options:

■ CERTIFIED RESTRUCTURING PLAN (“piano di risanamento” – art. 67 of the Bankruptcy Law)

The Certified Restructuring Plan is a private agreement

between the debtor and its creditors, and it is named

“certified restructuring plan” since it has to be “certified” by

an independent expert, who guarantees the feasibility and

truthfulness of the plan. In this process the court is not

involved.

Only the payments and, in general, the transactions made in

accordance with the certified plan, are not subject to claw-

back actions.

The most relevant effects connected with the adoption of a

certified restructuring plan are provided by arts 166 and 324

of the Code, which contemplate, respectively, i) the

exemption from the claw-back action of the deeds and

payments made in the execution of the plan, and ii) the

exemption from penal responsibilities relating to the crimes

of preferential bankruptcy and simple bankruptcy possibly

resulting from the fulfilment of such acts and payments.

The 2019 Reform amended the systematic structure of the

rules concerning the “certified restructuring plan” by

introducing a specific article (art. 56 of the new “Crisis and

Insolvency Code”) regulating such tool, while in the prior

system they were regulated by claw-back actions. In the new

framework, the claw-back actions are regulated separately.

■ DEBT RESTRUCTURING AGREEMENTS (“accordo di ristrutturazione del debito” – art. 182bis of the Bankruptcy Law)

Debt restructuring agreements agreements are aimed at

allowing a debtor in financial difficulties to restructure its

debts and obtain protection against creditors, through the

validation by the court of an agreement made with at least

60% of its creditors.

This is a private negotiation between the debtor and its

creditors; the court is involved only at the end of the

negotiation process to obtain the validation of the

restructuring agreement.

The application for the validation must include a fairness

opinion by an independent expert regarding, among others,

the reasonableness of the restructuring agreement to ensure

full payment of any creditor who is not party to the agreement.

These creditors have to be paid within i) 120 days from the

validation of the agreement in case of expired credits, or ii)

120 days from the expiring of the credits in case these credits

are not expired at the date of the validation of the agreement.

For the companies that have, for the most part, their debts to

banks and other financial operators, there is the possibility to

enter into an agreement with a part of such creditors in order

to delay the payment of their credits; such agreements are

also binding for the creditors that have not entered into them

(so-called “stand still agreements”).

Before the restructuring agreement is signed, it is always

possible for the company to block any individual action by

the creditors, by filing an application with the court including

i) the proposal of the restructuring agreement, ii) an affidavit

certifying the ongoing negotiations with creditors, and iii) a

fairness opinion by an independent expert confirming the

suitability of the proposed agreement.

After the validation of the agreement, every dissenting

stakeholder that has not entered into the agreement may file

an opposition against the agreement.

Art. 57 of the new “Crisis and Insolvency Code” substantially

reproduces the content of the current art. 182bis Bankruptcy

Law not modifying the features of the ordinary discipline of

the restructuring agreements, while the new art. 61 of the

Code, as mentioned above under question 2.2, extends the

effectiveness of a restructuring agreement not only to

financial creditors, but also to non-financial creditors.


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■ COMPOSITION WITH CREDITORS (“concordato preventivo” – art. 160 et seq. of the Bankruptcy Law)

This procedure involves an agreement between the debtor

and its creditors, subject to the supervision of the court, with

the aim of: i) avoiding the bankruptcy by means of

liquidation of the company (“concordato liquidatorio”); or ii)

reaching an agreement with its creditors in order to

restructure its debts and continue the business (“concordato con continuità”).

The procedure initiates the filing with the Bankruptcy Court

of: i) a petition; ii) a plan (that has to provide for the payment

of, at least, 20% of the unsecured creditors and may also

provide for the division of the creditors in classes); and iii) an

expert’s opinion confirming the feasibility of the plan and the

truthfulness of the accounting data.

The court is involved in verifying the existence of the legal

requirements (for instance, the minimum payment ration of

unsecured creditors of 20%) to enter into the procedure, but

the approval is made by the creditors. The composition is

approved by the favourable vote of the unsecured creditors

(who will be subject to the partial repayment of their credits)

representing the majority of the claims admitted to vote.

Creditors whose rights accrued prior to the date of filing of

the compositions cannot take legal action against the debtor

to enforce their claims until the court’s approval becomes

definitive; creditors whose rights accrued after the filing of

the composition have the right to be paid before the other

admitted creditors (“creditori prededucibili”).

The decision to file a composition with creditors is taken by

i) the directors in case of limited companies, and ii) by the

shareholders in case of partnership.

The new regulation of the composition with creditors is

provided by the “Crisis and Insolvency Code” in art. 44 and

following, with reference to the general rules for the access to

any procedure, and in art. 84 and following, with reference to

the specific rules applicable only to composition with

creditors. The new legislation about composition with

creditors reduces the terms for the deposit of the plan and the

protective measures, which will be subject to a specific

request of the debtor and in any case limited to 12 months.

■ EXTRAORDINARY ADMINISTRATION

Extraordinary Administration is a special insolvency

procedure that is: i) supervised by the Ministry for Productive

Activities; ii) applicable to large entities with significant

indebtedness; and iii) specifically aimed at the restructuring

of the company.

It may be implemented through i) the sale of the business run

by the company, on the basis of a programme to be completed

in one year, or ii) the restructuring of a company’s debt on the

basis of a business plan aimed to restore the company in two

years.

Once the competent authority admits the debtor to Prodi or

Marzano’s extraordinary administration proceedings, the

creditors, whose rights accrued prior to the date of the

admission, cannot take legal action against the debtor in order

to enforce their claims.

Debt-for-equity swaps

This form of satisfaction of creditors (accepting to receive

shares, bond and similar in exchange of their credits),

initially has been introduced as an alternative form of

extraordinary administration and then extended to other

bankruptcy procedures, but it is not often used.

Pre-packaged sales

In case of crisis of the company, it is possible to perform pre-

packaged plans (i.e. providing for the sale or lease of the

debtor’s assets to a third party). These plans can be

performed: i) in accordance with a restructuring procedure

(for example, certified restructuring plans, debt restructuring

agreements and compositions with creditors) and in this case

it is not subject to claw-back actions; or ii) out of a

restructuring procedure but, in this case, the operation can be

subject to claw-back actions.


The criteria for entry into the below restructuring procedures are as

follows:

■ DEBT RESTRUCTURING AGREEMENT AND

COMPOSITION WITH CREDITORS

All companies that perform commercial activities may enter

into a debt restructuring agreement or file a petition for a

composition with creditors unless the debtors are expressly

excluded by the Bankruptcy Law (art. 1).

In the light of the new Reform, non-commercial entrepreneurs

will have access to the procedures described above, with

percentages of agreement depending on the type of debtor

requesting and the objective that the plan sets.


For Prodi’s proceedings, it is necessary that the company has

more than 200 employees and a total indebtedness of no less

than two-thirds of the aggregate of the total assets and the

revenues of the preceding financial year.

For Marzano’s proceedings, it is necessary that the company

has more than 500 employees (also considered in a group)

and a total indebtedness of no less than 300 million euros.


■ THE CERTIFIED RESTRUCTURING PLAN (art. 67 of

Bankruptcy Law)

This is a mechanism completely unrelated to the involvement

of the court and it is managed by the directors of the

company.

■ THE DEBT RESTRUCTURING AGREEMENTS (art.

182bis of Bankruptcy Law)

The court is involved in the final phase for the approval of the

agreement while the execution of the agreement is managed

by the directors of the company. The court has no duty of

supervision on the execution of the agreement.

■ COMPOSITIONS WITH CREDITORS

In compositions with creditors, the court is involved in the

process of the approval of the agreement; the execution of the

agreement is assigned to a judicial liquidator who is

supervised by a judicial commissioner, both appointed by the

court who then is involved in case of extraordinary

transactions not planned in the agreement.


In Prodi and Marzano’s extraordinary administration

proceedings, two phases can be identified: in the first one the

judicial commissioner, appointed by the court, supervises the

management of the company and expresses its opinion on the

existence of the conditions for the approval of such procedure;

and in the second one, the Ministry of Economic Development

is involved in the appointment of the extraordinary

commissioner who manages the company.

These rules will still apply according to the new “Crisis and

Insolvency Code”.


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Among the innovations introduced by the 2019 Reform 2019

regarding the pending contracts in case of access to an insolvency

procedure, there is:

i. an express provision granting the trustee the right of

termination of the preliminary real estate sale contract;

ii. an express provision stating the automatic termination of

contracts of a personal nature; and

iii. a specific provision regarding the employment contracts in

force at the time of the opening of judicial liquidation

granting the trustee the right to decide the termination or

maintenance of the contracts and stating that in case the latter

does not communicate his decision within four months from

the opening of judicial liquidation, the contract is considered

terminated by law.

■ THE CERTIFIED RESTRUCTURING PLAN AND DEBT

RESTRUCTURING AGREEMENT

The existing contracts are not affected and they normally

perform as ordinary management of the company; the chance

to terminate the contract is subject to the decision of the

parties.

■ COMPOSITIONS WITH CREDITORS

Regarding the compositions with creditors aimed to

restructure the company (“concordato con continuità”), the

existing contracts normally continue, but it provides the

possibility for the debtor to apply for the suspension or

termination of pending contracts (with an indemnity provided

for the counterparty according to the provisions of the

contract). The Bankruptcy Law also provides the

inapplicability of the above rules to employment contracts,

rental of real estate, preliminary agreement of a real estate,

leasing and financing for a specific deal.


The extraordinary commissioner can terminate pending

contracts not completely performed by both parties.

In any case, the counterparty (“contraente in bonis”) could

terminate unperformed contracts according to the Italian

Civil Code rules about the breach of contracts.

Set-off operations are possible, according to Italian

Bankruptcy Law, if both credits arose before the filing for

declaration to the court, even if the creditor’s title has not yet

expired. Compensation is excluded in the following cases:

i. the creditor’s unexpired credit was purchased by the inter vivos act after the declaration of bankruptcy or in the

previous year (this rule also applies to overdue credits); and

ii. the credit is subject to certain conditions and this has not

yet occurred.

These rules will still apply according to the new “Crisis and

Insolvency Code”.


In general, the restructuring procedures are aimed at the

reimbursement of the credits of the company but it may happen that,

in order to perform the targets provided in the plan, the debtors need

new financing.

This new financing has to be included in the plan and the

independent expert must give an opinion about the possibility to

reimburse this new financing.

In the event of subsequent judicial liquidation of the company, the

credit arising further to this new financing is satisfied with

preference to the other creditors (“prededucibile” according to

Bankruptcy Law).

The 2019 Reform amended this matter, significantly restricting the

effectiveness of the said funding.

Firstly, it has completely eradicated the possibility for the debtor

obtaining the financing to be satisfied with a preference to the other

creditors (“prededucibile”) which had been disbursed prior to the

filing of the claim to access to the procedure, even if provided by the

following plan of the said procedure. It is therefore no longer

reproduced in the provision of the second paragraph of art. 182-

quater Bankruptcy Law.

Secondly, the possibility to apply for the so-called “prededucibile”

financing is limited to cases in which it is provided for the

continuation of the activity, even if only for a limited period of time.



According to Italian law, there are i) procedures only aimed at the

winding up of the company: bankruptcy; bankruptcy agreements;

and compulsory administrative liquidation, and ii) procedures that

can also be aimed at the winding up of the company: certified

restructuring plan, debt restructuring plan; compositions with

creditors; and extraordinary administration (Prodi’s procedures).


In the case where the company is in a status of crisis or if the

corporate purpose has been reached or has become impossible to

reach, the company can enter into a voluntary winding up process

firstly finalising the payment of its creditors.

In the case of the liquidation of the assets of a company which is

able to fully repay its debts, it is not necessary to apply for an

insolvency procedure as, in order to avoid responsibility of the

directors and to guarantee in the correct way the rights of all

creditors, it is necessary that the process of liquidation is run

according to one of the tools provided by the law.

As abovementioned, once it is verified that the company is not able

to satisfy all the creditors, it becomes mandatory to wind up the

company according to one of the following insolvency procedures:

■ BANKRUPTCY AND ADMINISTRATIVE LIQUIDATION

The commencement of these procedures is mandatory and

the liquidation of the company begins immediately after the

declaration by the court (the administrative liquidation only

applies to banks and insurance companies). Regarding the

case of bankruptcy, the liquidation process can also be

performed and closed through a bankruptcy agreement

(“concordato fallimentare”) in which a creditor or a third

party can propose a plan aimed at full or partial

reimbursement of the creditors.


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■ COMPOSITIONS WITH CREDITORS, DEBT

RESTRUCTURING AGREEMENTS AND CERTIFIED

RESTRUCTURING PLANS

The commencement of these procedures is an opportunity for

the company and the liquidation is activated with the filing of

the proposal or the subscription of the agreements. These

types of procedure allow the avoidance of bankruptcy.

The 2019 Reform has amended art. 2486 of the Italian Civil

Code regarding the liabilities of the directors upon the

occurrence of a cause for dissolution of the company.


■ BANKRUPTCY

This is managed by the bankruptcy trustee with the

supervision of the court and the creditors’ committee.

■ BANKRUPTCY AGREEMENTS

Once the agreement is approved by the court, the execution

of the agreements is performed by the directors and

supervised by the appointed judge, bankruptcy trustee and

creditors’ committee.

■ ADMINISTRATIVE LIQUIDATION

The Public Authority manages the procedure and authorises

the extraordinary acts proposed by the extraordinary

commissioner, who is appointed by the Ministry and who is

entrusted with the management of the company.

■ COMPOSITIONS WITH CREDITORS AND DEBT

RESTRUCTURING AGREEMENTS

See the answer to question 3.4.


Regarding the insolvency procedures, the creditors cannot influence

the winding up process; they simply have to file a petition to the

court through the bankruptcy trustee, in order to request to be

included in the list of the creditors.

Starting from the admission of the debtor to any of the winding up

procedures, the creditors cannot take executive legal actions

individually. The creditors assisted by general or special privilege

(also by pledge or mortgage) have no right to perform individual

executions; they simply have the right to be satisfied, with

preference respecting the other unsecured creditors, with the sum

obtained by the sale of the secured assets. In the case that the sum

obtained is lower than the value of the credits, for the remaining

debts, such creditors will be treated as the unsecured creditors.


■ BANKRUPTCY AND COMPULSORY ADMINISTRATIVE

LIQUIDATION

There is a general rule that the declaration of bankruptcy of a

company determines the suspension of the execution of the

contract until the bankruptcy trustee, upon the approval of the

creditors’ committee, decides whether to perform or terminate it.

The Bankruptcy Law also provides some exceptions for

contracts that automatically perform (such as: rental contracts;

and insurance contracts) or terminate automatically (such as:

banking contracts; or proxy contracts).

Finally, contracts are provided which perform automatically

but the bankruptcy trustee can make the decision regarding

their termination (such as a rental contract with the

insolvency of the renter) or contracts which terminate

automatically but the bankruptcy trustee can decide on their

performance (such as tender).

The same rules apply for compulsory administrative

liquidation.

■ COMPOSITIONS WITH CREDITORS AND DEBT

RESTRUCTURING AGREEMENTS

See the answer to question 3.5.

The counterparty (“contraente in bonis”) could terminate

unperformed contracts according to the Italian Civil Code rules on

the breach of contracts.

Furthermore, in bankruptcy and in compulsory administrative

liquidation, set-off operations are possible, according to the Italian

Bankruptcy Law. Please see the answer to question 3.5.


The ranking of claims is the following:

i. costs of the procedure (“crediti prededucibili” according to

the Bankruptcy Law);

ii. privileged creditors in order of priority provided by law (e.g.

employees, artisans, professionals, taxes, contributions, etc.);

iii. creditors secured by guarantees (in the case where the value

of the secured property is lower than the credit, the remaining

part of the credit is admitted as unsecured); and

iv. unsecured creditors.


Despite there being no specific provision in Italian law, it is possible

that a company will revive in the future in the case that its business

is sold for prospective business continuity, so that the company may

continue its activity as a different entity.

5 Tax


In the context of restructuring and insolvency procedures, the tax

liabilities are included in the debts of the company with privileged

nature.

Regarding tax risks (i.e. arising from future and eventual tax

assessment), the art. 14 paragraph 5bis of Legislative Decree

472/1997 (Italian law related to tax penalties and fines) provides that

in the case of a sale of business of a company, performed according to

a restructuring procedure (art. 67 and art. 182bis of Bankruptcy Law)

or insolvency procedure, the buyer is not responsible for the tax

liabilities of the seller (except in the case of fraud).


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6 Employees


In case of “certified” restructuring plans, debt restructuring

agreements and compositions with creditors aimed at restructuring

the company (“concordato in continuità”), there are no specific

effects on employment contracts.

The procedures of bankruptcy, compulsory administrative

liquidation or extraordinary administration are not causes for

dismissal but, from the commencement of these procedures, the

performance by the employees is suspended until the bankruptcy

trustee or the commissioner decide on their performance or

termination. In this period, the employees are entitled to receive a

social contribution aimed at integrating their salary (so-called

“cassa integrazione guadagni”). In case of bankruptcy, the credits

of employees towards the company are satisfied by the National

Social Welfare Institution.

With reference to the changes introduced by the Reform regarding

employment contracts, please see question 3.5 above.



EC Regulation 1346/2000 and EU Regulation 848/2015 introduced

the concept of COMI (Centre Of a debtor’s Main Interest) according

to which the declaration of the principal insolvency procedure (that

involves all the assets of the debtor) must be filed before the court of

the state in which the company has the centre of its interests (for the

companies it is presumed that the COMI has to be identified with the

place in which there is the registered office).

It is also possible to open secondary procedures in other EU States

in which the debtor has a form of dependence, limited to the assets

located in those other states.

The concept of COMI is especially useful in resolving bankruptcy

proceedings of groups of companies with offices in different

Member States.

Pursuant to EU Regulation 848/2015, the Italian Legislator has

introduced in the new “Crisis and Insolvency Code” a provision on

jurisdiction according to which the court, when it opens a cross-border

insolvency procedure in accordance with EU Regulation 848/2015,

shall declare whether the procedure is main, secondary or territorial.


EC Regulation 1346/2000 and, from June 2017, EU Regulation

848/2015, provide that the judgment is automatically recognised in

all other Member States from the moment in which it produces its

effects in the State in which the procedure was opened, without

needing judicial intervention. This effect is produced even if the

debtor, according to the national law of another Member State,

cannot be subject to insolvency proceedings.

The effects that the recognition of the procedure involves in every

other Member State are those “provided for by the law of the State of opening”, unless a secondary procedure is opened in other States.

Such second procedure (that anyway is not compulsory), if opened,

produces its effects only in the State in which is opened.

In case of procedures opened in States outside the EU, the relevant

effects are regulated by Italian law n. 218/1995.


Companies incorporated in the Italian jurisdiction can restructure or

enter into insolvency proceedings according to EU Regulations for

other Member State’s jurisdictions, while in the case of States

outside Europe, it depends on the specific treaties or legal rules

provided by the foreign jurisdictions. Although this possibility is

provided by law, such rules did not have an effective execution in

the past, since these types of rules are mostly suitable in the case of

insolvency of a large company.

8 Groups


The 2019 Reform has provided an organic regulation for group

company crises. In particular it provided, for the first time in the

Italian legal system, a group definition, which is the following: “all

the companies, businesses and entities, excluding the State, which,

pursuant to arts 2497 and 2545-septies of the civil code, are subject

to the direction and coordination of a company, of an entity or of a

natural person, on the basis of a participatory constraint or a

contract, for this purpose it is presumed, unless proved otherwise,

that: 1) the management and coordination of companies is exercised

by the company or body required to consolidate their financial

statements; 2) the companies directly or indirectly controlled or

subject to joint control are subjected to the management and

coordination of a company or entity with respect to the company or

body that exercises management and coordination activity.”

Following the intervention of the Reform 2019, a coordinated

procedure for the management of insolvency proceedings regarding

groups is now available within the Italian legal system.

Specifically, the request to access the new coordinated procedure

shall not necessarily be presented by the holding company, since

such company may not be in a crisis and, as a consequence, may not

be interested in the procedure.

However, this does not exclude that the same or other companies of

the group not in crisis may, according to the plan, participate in the

management of the crisis.

1) Management and coordination

In order to access the mentioned procedure, the group shall

be subject to management and coordination activity.

If a company that exercises management and coordination

activities is not in crisis, the competent court will be

identified having regards to the company that has the highest

debt exposure according to the last approved financial

statements. The new rule aims to avoid that the competent

court is that of the seat of the holding company without any

connection with the court that is competent regarding the

other companies actually in crisis.


ital

y


Massimo Di Terlizzi Pirola Pennuto Zei & Associati Via Vittor Pisani no. 20 Milan 20124 Italy Tel: +39 02 66 99 52 03


URL: www.pirolapennutozei.it

Pirola Pennuto Zei & Associati was established as an association of professionals in the early 1980s by its founders who, from the 1970s, have been engaged in providing tax and statutory consulting services to companies and multinational groups. It is currently one of the leading independent Firms in Italy.

Pirola Pennuto Zei & Associati, through the experience and high professionalism of over 500 professionals who integrate technical and specialist skills, provide a wide range of tax, corporate and statutory consulting services, both nationally and internationally, using advanced methodologies and an extensive network of correspondents.

Pirola Pennuto Zei & Associati is an authoritative partner in business, academic and professional circles, with offices in Milan, Rome, Turin, Bologna, Padua, Verona, Naples, Brescia, Florence, Parma, London, Shanghai and Beijing.

Admitted to the roll of Lawyers of the Italian Court and to the roll of Solicitors of the Senior Courts of England and Wales.

Registered with the Italian Register of Certified Tax Advisors and the Italian Register of Certified Public Statutory Auditors.

Equity Partner, Member of the Executive Committee and of the Board at Pirola Pennuto Zei & Associati (Milan).

Equity Partner and Managing Partner at Pirola Pennuto Zei & Associati UK LLP (London).

Chairman at Pirola Consulting China Co. Ltd (Beijing and Shanghai).

Chairman at Pirola Corporate Finance SpA (Milan). Knowledge of and experience with corporate, commercial and tax law, M&A, private equity and restructuring.

Member of Boards of Directors and Statutory Auditor of Italian companies and Italian subsidiaries of foreign multinational groups.

2) The unique proposal

The proposal, with its unitary plan or its connected plans,

shall show that the group procedure concerning the

individual companies in crisis is suitable to allow the

recovery of the debt exposure of each single company in

crisis, ensuring at the same time the convenience of a group

procedure for the creditors.

3) Single procedure

The companies of a group may access a procedure before the

court (either a procedure of composition with creditors or a

judicial liquidation) by filing a single appeal, asking to access

the single procedure. In these cases, a form of coordination

of the procedures shall be highlighted with respect to the

procedure the companies are willing to access and would not

have existed in case of individual procedures.

4) Single court

In order to proceed with a single procedure there will be the

appointment of a sole court (“giudice delegato”) and a sole

trustee of the procedure to simplify the management of the

single procedure.

5) Claw-back action

The trustee of the procedure in the context of a unique

procedure or of a plurality of procedures, may take actions

aimed to obtain the declaration of ineffectiveness of the acts

performed in the five years prior to judicial liquidation.

The trustee of the procedure may also claw back deeds and

payments carried out by other group companies before the

starting of the judicial liquidation and in the two years before

the same.


9 Reform


The new Legislative Decree n. 14/2019, the “Crisis and Insolvency

Code”, will be introduced into the Italian legal system, which will

substitute the previous Bankruptcy Law (R.D. 267/1942). The

decree will completely enter into force on 15 August 2020, but the

articles concerning the changes of the Italian Civil Code related to

directors’ liabilities is already in force.

chapter 20


mori Hamada & matsumoto

Daisuke asai

Dai Katagiri

Japan

1 Overview


In restructuring proceedings, the creditor cannot take the initiative,

nor do they have the right to control the proceedings both

institutionally and factually in Japan. For instance, in general, the

debtor in civil rehabilitation proceedings or the trustee in corporate

rehabilitation proceedings has the right to control almost the entire

restructuring proceedings. In addition, the trustee in bankruptcy

proceedings or the debtor in special liquidation proceedings also has

the right to control almost the entire liquidation proceedings. As a

result, we believe that Japan is a debtor-friendly jurisdiction.


Informal financial restructurings of distressed companies are

allowed and being increasingly used, especially for small or mid-

sized companies. Such restructurings are encouraged through the

alternative dispute resolution mechanism available for business

revitalisation under the Alternative Dispute Resolution Act (2007),

and soft law such as the Guidelines for Individual Debtor Out-of-

Court Workouts (2013).



There are no specific provisions of law that place enhanced duties

on the directors of distressed debtors. However, they owe

obligations under general provisions of the Companies Act, such as

the duties of diligence and loyalty. Thus, for example, directors

could be held liable for damages to the company or creditors if they

breach their duty of diligence. In addition, certain acts (such as

gratuitous ones) by an insolvent company are vulnerable to being

challenged as being legally null and void. Furthermore, any director

or officer who engages in fraudulent conduct before the filing of the

company’s bankruptcy proceedings may be held liable for such

conduct under criminal or tort law, or both.

In general, directors of distressed debtors are not obliged to file

restructuring or insolvency proceedings. However, any liquidator of

a company under voluntary liquidation is obliged to (i) file for

special liquidation if the company’s debts are suspected to exceed its

assets, and (ii) file for bankruptcy if the liquidator finds that the

company’s debts exceed its assets. Failure to comply with these

obligations may result in fines and the liquidator being held liable

for damages to the creditors.


Upon the commencement of insolvency/restructuring proceedings, in

general, civil actions and civil execution proceedings with respect to

unsecured claims are suspended, and unsecured creditors are prohibited

from commencing new civil actions or civil execution proceedings.

However, exercising security interests is not prohibited, and secured

creditors may collect their claims regardless of the commencement of

such proceedings, except corporate reorganisation proceedings which

prohibit secured creditors from exercising their security interests.


In civil rehabilitation, corporate reorganisation and bankruptcy

proceedings, the debtor’s pre-insolvency transactions may be

challenged. The company or trustee (as applicable) must exercise

this right through court proceedings within two years after the

commencement of each of these proceedings.

There are two elements to the grounds for such challenges. The first

pertains to the timing of the transactions, which must be conducted

after the debtor falls into financial crisis. The second pertains to the

harmfulness of the transactions to the debtor.

If such challenges are successful, the subject transactions basically

become null and void. Bona fide third parties, however, may be

protected from such challenges.

Japa

n


In special liquidation proceedings, such challenges are not

available, but creditors may challenge transactions that are harmful

to creditors based on the Civil Code. This challenge is not special to

insolvency proceedings, and may apply to transactions in general.



It is possible to implement an informal work-out in addition to

restructuring court proceedings. Restructuring plans in an informal

work-out must be approved by all creditors.


There are two types of restructuring procedures in Japan: civil

rehabilitation proceedings (minji-saisei); and corporate reorganisation

proceedings (kaisha-kosei).

In civil rehabilitation proceedings, the debtor must propose and

submit to the court a rehabilitation plan within the period specified

by the court. Registered creditors also have the right to propose and

submit a rehabilitation plan that must be approved at a creditors’

meeting by a majority number of creditors present and voting at the

meeting and a majority by value of all creditors who hold voting

rights. If approved, the court authorises the rehabilitation plan,

which will bind the company and the creditors.

In corporate reorganisation proceedings, the trustee must propose

and submit to the court a reorganisation plan within the period

specified by the court. The debtor company, registered creditors or

stockholders may also propose and submit a reorganisation plan.

The reorganisation plan must be submitted to and approved at a

stakeholders’ meeting. If approved, the court authorises the

reorganisation plan, which will bind the stakeholders. Different

classes of stakeholders (e.g. unsecured creditors, secured creditors

and shareholders) vote separately, and approval must be obtained

from each class. The Corporate Reorganisation Act sets forth

different thresholds for different classes (for example, the requisite

majority for unsecured creditors is a majority by value).

Debt-for-equity swaps are possible in both proceedings. In

corporate reorganisation proceedings, the process set forth under the

Companies Act for the issuance of shares (such as a special

resolution of the shareholders’ meeting or a resolution of the board

of directors) will not apply if the debt-for-equity swap scheme is

provided for by the approved reorganisation plan. In civil

rehabilitation proceedings, however, the issuance of shares is

subject to certain requirements under the Companies Act.

Pre-packaged sales are commonly used in Japan, especially in civil

rehabilitation proceedings. In cases where a pre-packaged sale

process is used, the proceedings are generally shorter than the

standard period. While there are no specific provisions in the Civil

Rehabilitation Act for proceedings involving pre-packaged sales,

these sales are subject to the same requirements as under normal

proceedings (for example, pre-packaged sales must be stipulated in

the rehabilitation plan and approved at a creditors’ meeting).

Creditors and/or shareholders may file an immediate appeal against

the court’s decision to commence civil rehabilitation proceedings or

corporate reorganisation proceedings. Commencement of civil

rehabilitation proceedings does not automatically affect any secured

creditor’s right to enforce its security interests; provided, however,

that in exceptional circumstances, the court may impose certain

restrictions on the secured creditors’ right to enforcement. On the

other hand, once corporate reorganisation procedures commence

with respect to the debtor corporation, enforcement of security

interests will be subject to certain limitations as contemplated in the

Corporate Reorganisation Act.

Cram-down is permitted under corporate reorganisation proceedings.

When one or more classes of stakeholders approve the reorganisation

plan, the court may authorise the reorganisation plan by providing a

clause to protect the interests of dissenting creditors.


The entry requirement is for (i) there to be a risk that the debtor will

not be able to pay its debts as they become due or that its debts

exceed its assets, or (ii) the debtor to be unable to pay its debts

already due without causing significant hindrance to the

continuation of its business.


In civil rehabilitation proceedings, the board of the debtor company

remains in control and has the power to manage the company’s

business. However, the court may require the debtor to obtain

permission of the court in order to conduct certain types of

activities, including (but not limited to): (i) disposing of property;

(ii) accepting the transfer of property; (iii) borrowing money; (iv)

filing an action; (v) settling a dispute or entering into an arbitration

agreement; and (vi) waiving a legal right. In practice, the court

appoints a supervisor in most cases and grants him or her the

authority to give such permission to the debtor on its behalf in

respect of the debtor’s activities. In addition, under exceptional

circumstances, a court-appointed trustee may take over control of

the company’s business.

In corporate reorganisation proceedings, a trustee must be appointed

for the corporate debtor. The trustee, who is appointed by the court

and is usually an attorney with expertise in insolvency cases, has

control and possession of the debtor’s business and its assets.

However, the trustee may also be a business person who is deemed

fit to operate the debtor’s business. Even under corporate

reorganisation proceedings, there are increasing numbers of cases in

which the court appoints trustees from the current management.

Such proceedings are called ‘debtor-in-possession-type’ (‘DIP-

type’) reorganisation proceedings, as opposed to traditional

‘administration-type’ proceedings. In those cases, the court usually

also appoints a supervisor who monitors the management’s

activities. Thus, the proceedings look similar to civil rehabilitation

proceedings.

mori Hamada & matsumoto Japan

Japa

n



If the company and its contract counterparty have not yet

completely performed their obligations under a bilateral contract by

the time of commencement of civil rehabilitation proceedings or

corporate reorganisation proceedings, the company or trustee (as

applicable) may either cancel the contract or cause the company to

perform its obligations and request the counterparty to perform.

When the counterparty is required to perform its obligations, the

counterparty’s claims are categorised as a common benefit claim

that can be paid at any time without going through the proceedings.

Even though existing contracts with the debtor often contain a

termination clause providing that the filing of restructuring proceedings

is a cause for termination, such clauses are often regarded as void.

If a creditor owes a debt to the debtor at the time of commencement

of restructuring proceedings, the creditor may set-off its claim

against the debtor’s claim under certain circumstances.


The costs or expenses of restructuring proceedings are borne by the

debtor. In both civil rehabilitation and corporate reorganisation

proceedings, the debtor’s or the trustee’s right to borrow new money

is subject to the court’s permission. The court will grant permission

if the debtor proves that new funding is necessary to continue

trading and maximise the value of the company’s business. The

lender can collect its claim outside these proceedings as a common

benefit claim. This places the new lender in a better position than

prior unsecured creditors, but the new funding will not have priority

over secured creditors in respect of their secured assets.



There are two options for court liquidation for insolvent companies:

bankruptcy proceedings (hasan); and special liquidation

proceedings (tokubetsu-seisan), the latter being more flexible than

the former. Special liquidation proceedings allow a director or an

officer of the company to be the liquidator to execute the

liquidation, while bankruptcy proceedings require a court-appointed

trustee to execute the liquidation.


For bankruptcy proceedings, a company can be placed into them if:

■ the company is characterised as being ‘unable to pay its

debts’ – that is, where the company is generally and

continuously unable to pay its debts as they become due; or

■ the company is characterised as ‘insolvent’ – that is, where

the company’s debts exceed its assets.

For special liquidation proceedings, a company can be placed into

them if:

■ there are circumstances prejudicial to implementation of the

voluntary liquidation; or

■ there is suspicion that the company is ‘insolvent’.


Upon commencement of bankruptcy proceedings, a trustee is

appointed by the court and takes over control and possession of the

company’s property. The trustee is usually an attorney, and is

supervised by the court. On the other hand, in special liquidation

proceedings, the liquidator who has been appointed by the company

continues to hold control and possession of the company’s property.

The liquidator’s activities are subject to the court’s supervision.


In bankruptcy proceedings, creditors are prohibited from receiving

payment in respect of any claim arising from any cause occurring

before the commencement of the proceedings (‘Bankruptcy Claim’)

or otherwise acting in any manner that has the effect of satisfying

their claim outside the proceedings. Civil actions and civil

execution proceedings with respect to Bankruptcy Claims are

suspended, and the Bankruptcy Claims are prohibited from

commencing new civil actions or civil execution proceedings. On

the contrary, exercising security interests is not prohibited, and

secured creditors may collect their claims regardless of the filing or

commencement of bankruptcy proceedings. The shareholders’

rights are not formally affected by the commencement of

bankruptcy proceedings. Nevertheless, shareholders will have little

stake in the proceedings because the company’s shares are

effectively valueless, and because both the company and its shares

will be extinguished upon closing of the proceedings.

In special liquidation proceedings, the company must give public

notice in the Official Gazette to request that its creditors register

their claims during a certain specified period of time. The company

cannot pay or otherwise satisfy creditors’ claims during this period.

Claims without security or priority are called ‘agreement claims’,

and must be paid on a pro rata basis. Exercising security interests is

not prohibited, and secured creditors may collect their claims

regardless of the filing or commencement of special liquidation

proceedings. However, the court may order suspension of the

exercise of security interests for the general benefit of creditors.

Shareholders of the company under special liquidation will have

little stake in the proceedings because the company’s shares are

effectively valueless, and because both the company and its shares

will be extinguished upon closing of the proceedings.


In bankruptcy proceedings, bilateral contracts are not automatically

terminated. However, when the company and its contract

counterparty have not yet completely performed their obligations


Japa

n


under a bilateral contract by the time of commencement of the

bankruptcy proceedings, the trustee may either:

■ cancel the contract; or

■ perform its obligations and request the counterparty to

perform theirs.

However, creditors are not prohibited from offsetting their claims

against their obligations to the company except in limited

circumstances.

In special liquidation proceedings, the proceedings themselves do

not automatically affect the legal status of the existing contracts.

Creditors are not prohibited from offsetting their claims against their

obligations to the company except in limited circumstances.


In bankruptcy proceedings, creditors’ claims are ranked in the

following order:

i. estate claims (e.g. fees for trustees, administrative expenses,

tax claims that became due within one year before the

commencement of bankruptcy proceedings, employee

compensation for their work within three months before the

commencement of bankruptcy proceedings);

ii. superior bankruptcy claims (e.g. tax claims and employee

compensation that are not estate claims);

iii. ordinary bankruptcy claims; and

iv. subordinated bankruptcy claims (e.g. interests after the

commencement of bankruptcy proceedings).

In special liquidation proceedings, creditors’ claims are ranked in

two categories. Claims in the first category basically correspond to

estate claims and superior claims in bankruptcy proceedings. Claims

in the second category basically correspond to ordinary bankruptcy

claims and subordinated bankruptcy claims in bankruptcy

proceedings. The first category is superior to the second category.

The priority of shareholders is the lowest rank both in bankruptcy

and special liquidation proceedings. Japanese law does not have

any rule of equitable subordination.


In principle, the company will be extinguished and not be revived if

bankruptcy or special liquidation proceedings end. However, if

assets are found after the proceedings have already ended, the

company will be deemed to survive its corporate capacity and a

liquidator will be appointed by the court.

5 Tax


In general, tax claims before the commencement of restructuring

proceedings are treated as claims with general priority, whereas tax

claims after the commencement are treated as common benefit

claims that can be paid at any time outside the proceedings. In

restructuring cases, it is very important for the debtor company to

avoid taxation on income from discharge of indebtedness by

applying deductible expenses to such income.

Tax claims before the commencement of bankruptcy proceedings

are treated as estate claims if they became due within one year

before the commencement of bankruptcy proceedings; otherwise,

they are treated as superior bankruptcy claims. Tax claims after the

commencement of bankruptcy proceedings are treated as estate

claims if they are categorised as administrative expenses; otherwise,

they are treated as subordinate bankruptcy claims.

In special liquidation proceedings, tax claims are treated as superior

claims that can be paid at any time outside the proceedings.

6 Employees


In restructuring proceedings, in general, the company or trustee (as

applicable) tries to maintain employment contracts with its

employees. If the company or trustee (as applicable) terminates

employment, it must do so in a manner consistent with Japanese

employment law (which is employee-friendly). Claims for unpaid

wages before the commencement of restructuring proceedings are

treated as claims with general priority, whereas claims for wages

after the commencement are treated as common benefit claims that

can be paid at any time outside the proceedings.

In insolvency proceedings, in many cases, the debtor company

dismisses all or part of its employees before filing for commencement

of the proceedings. If the company or trustee (as applicable)

terminates employment after the commencement of the

proceedings, it must do so in a manner consistent with Japanese

employment law, which requires 30 days’ notice before such

termination (or equivalent compensation). The company or trustee

may continue to employ some of the employees so that they can

assist with its administration. In such cases, wages are treated as

estate claims, which can be paid at any time outside the proceedings.

Claims for unpaid wages before the commencement of the

proceedings are also granted certain priorities.



As long as the company has an office or assets in Japan, a debtor

incorporated outside Japan can enter into restructuring or insolvency

proceedings in Japan.


Local courts in Japan may recognise foreign restructuring or

insolvency proceedings. The process is initiated by a debtor’s filing

with the Tokyo District Court, which has exclusive jurisdiction on

such recognition proceedings. The test for recognition is based

mainly on the necessity of such recognition. For example, if foreign

restructuring or insolvency proceedings are obviously ineffective

over assets in Japan, such recognition would be denied.


Japa

n



It is not common practice, but companies incorporated in Japan can

enter into restructuring or insolvency proceedings in other

jurisdictions. For instance, Azabu Buildings Co. Ltd. entered into

Chapter 11 bankruptcy proceedings in the U.S. in 2006.

8 Groups


In general, there are no specific legal provisions on how to treat

group companies in restructuring or insolvency proceedings.

However, in practice, group companies will usually file these

proceedings at the same time because they must resolve guarantee

claims with respect to bank loans, typically in situations where the

parent company has guaranteed its subsidiary’s bank loans.

There are no specific legal provisions on cooperation between

officeholders. However, in general, the court will usually appoint

the same trustee if group companies have a parent-subsidiary

relationship. If the relationship is other than that of a parent-

subsidiary, and a subsidiary is extremely large or there are potential

conflict issues among the group companies, the court sometimes

will appoint different trustees. Nevertheless, the same court will

have jurisdiction over the group companies in most cases, which

makes it easy to proceed with several restructuring or insolvency

proceedings at the same time and to construct a cooperative

relationship between the trustees.

9 Reform


No proposals are pending.


Daisuke Asai Mori Hamada & Matsumoto 16th Floor, Marunouchi Park Building 2-6-1 Marunouchi, Chiyoda-ku Tokyo 100-8222 Japan Tel: +81 3 6266 8752


URL: www.mhmjapan.com/en

Dai Katagiri Mori Hamada & Matsumoto 16th Floor, Marunouchi Park Building 2-6-1 Marunouchi, Chiyoda-ku Tokyo 100-8222 Japan Tel: +81 3 6266 8774


URL: www.mhmjapan.com/en

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

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

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

125

chapter 21


Barun law llc

thomas pinansky

Joo Hyoung Jang

Korea

1 Overview


Korea is more debtor-friendly in the sense that, except for certain

restrictions on creditors’ rights to exercise their claims and on

debtors’ rights to manage the business and dispose of its assets, there

are not many restrictions and each proceeding has several measures

that aim to achieve the above goals.


The legislative framework in Korea allows informal work-outs, as

well as formal restructuring and insolvency proceedings.

Informal work-outs include (a) Voluntary Agreements, and (b)

Work-outs under the Corporate Restructuring Promotion Act

(“CRPA”). Formal proceedings available under the Debtor

Rehabilitation and Bankruptcy Act (“DRBA”), which are

supervised by the courts, include (a) rehabilitation proceedings, and

(b) bankruptcy proceedings.

Since each procedure has different levels of court intervention and

creditor autonomy, appropriate procedures are used depending on

the circumstances of a debtor company and creditor’s judgment.

A. Informal work-outs

a) Voluntary Agreement

Based on the creditor-financial institutions’ review of the

debtor’s potential for rehabilitation, a voluntary agreement

may be entered into among them. The creditor-financial

institutions can relieve the debtor’s financial stress by, for

example, extending the term of the loan.

b) Work-out procedure under the CRPA

A work-out procedure governed by the CRPA may be

commenced by a resolution of a committee composed of

creditors who own financial credits (upon the consent of

at least 75% of the total financial credits). This is a more

formal process in which the Korean Financial Services

Commission (the “FSC”) may impose corrective

measures or administrative fines for failure to abide by the

CRPA. The previous CRPA expired on June 30, 2018.

However, as the demand for the work-out procedure has

not been diminished, it was re-enacted as of October 16,

2018, and shall be effective until 2023.

Informal work-outs are flexible and have relatively minimal

impact on the debtor’s credit rating.

B. Formal proceedings under the DRBA

a) Rehabilitation proceeding

A company may restructure its debts through a court-

supervised rehabilitation proceeding, in which the

interested parties (e.g., creditors) and the court approve a

rehabilitation plan.

When a debtor that is unable to pay its debts when due

without a significant impact on the continuity of its

business or its total debt is larger than its total assets, the

debtor may apply for the rehabilitation proceeding. A

creditor who has credits in the amount of at least 10% of

the debtor’s equity or a shareholder of the debtor who

owns at least 10% of the debtor’s ownership interests may

also apply for this proceeding.

If the court determines that the debtor’s continuing value

is larger than the debtor’s liquidation value, it can order a

receiver to submit a rehabilitation plan. Once the court

and the interested parties approve the rehabilitation plan

submitted by the receiver, the receiver restructures the

debtor’s debts according to the rehabilitation plan.

A receiver owes a fiduciary duty and typically, the courts

appoint the debtor’s representative director as a receiver in

order to ensure that a person who is familiar with the debtor’s

business is involved in the rehabilitation proceeding.

b) Bankruptcy proceeding

A debtor or the debtor’s creditor may petition for a

bankruptcy in case the debtor is unable to pay its debts

when due or its total debt is larger than its total assets.

Also, the court may at its discretion declare a debtor

bankrupt if a debtor’s continuing value is less than its

liquidation value. In the latter case, the debtor’s debts are

examined and the debtor’s assets after being monetised

are distributed to its creditors. A trustee appointed by the

court implements the bankruptcy procedures.



Under the Civil Code, a director owes a fiduciary duty to the

company. The Supreme Court of Korea has recognised a director’s

Kor

ea


duty to monitor the adequacy of other directors’ performance under

the relevant laws, regulations and articles of incorporation and to

take necessary measures to prevent illegitimate activities.

Also, if a company suffers damages or loss due to a cause

attributable to a director’s wilful misconducts or negligence in

performing his/her foregoing duties, the director is responsible for

compensating such damages to the company under the Commercial

Code and the Civil Code and could potentially be subject to criminal

penalties for a breach of fiduciary duty.

Other than such fiduciary duties, there is no law, regulation or

precedent to date that explicitly requires a director to petition for a

rehabilitation or a bankruptcy proceeding when the company is in

financial distress.


The rules/regimes that apply are the following:

■ A debtor may enter into a voluntary agreement with its

creditor-financial institutions or may petition for a

rehabilitation proceeding or a bankruptcy proceeding.

■ Creditor-financial institutions may enter into a voluntary

agreement or may commence a work-out procedure according

to the CRPA.

■ A creditor who has credits in the amount of at least 10% of

the debtor’s equity value may petition for a rehabilitation

proceeding, and any creditors may petition for a bankruptcy

proceeding.

■ A shareholder of a debtor who owns at least 10% of the

debtor’s ownership interest may petition for a rehabilitation

proceeding, and any shareholder may petition for a

bankruptcy proceeding.

■ The exercise of rights of unsecured creditors (such as

landlords, employees or creditors with retention of title

arrangements) is not restricted solely because the financial

situation of the debtor company is difficult, unless informal

work-outs or formal proceedings have been initiated.

■ In case a debtor petitions for a rehabilitation proceeding, the

court may put a halt to all compulsory execution proceedings

already being enforced on the debtor’s assets until it makes a

ruling on the debtor’s petition or issue a “general prohibition

order” on compulsory execution on all rehabilitation creditors

and rehabilitation secured creditors.


A. Creditor’s right to challenge

A creditor may petition to the court for cancellation of a

debtor’s legal action and a restitution of the relevant assets as

a fraudulent conveyance if such action has reduced the

debtor’s assets and the debtor committed such action

knowing that such action would impair the creditor.

B. Receiver’s (rehabilitation proceeding) or trustee’s

(bankruptcy proceeding) right to challenge

Prior to the commencement of a rehabilitation proceeding or

declaration of bankruptcy under the DRBA, a receiver for the

rehabilitation proceeding or a trustee for the bankruptcy

proceeding may petition to the court for the cancellation of

the debtor’s legal actions and restitution of the relevant assets

under one of the following cases:

(1) the debtor’s acts would be detrimental to other creditors at

the time such acts were taken, provided that the

beneficiary was aware that such acts would be detrimental

to other creditors;

(2) the debtor’s acts would be detrimental to other creditors or

repay any debt or provide collateral after a suspension of

payment or the filing of rehabilitation proceedings

(collectively, the insolvency event), provided that the

payee or the secured party was aware that the insolvency

event had occurred or that such acts would be detrimental

to other creditors;

(3) the debtor’s acts that repay debt or provide collateral after

or within 60 days prior to an insolvency event when the

insolvent debtor was not obliged to do so at such time,

provided that the payee or secured party was aware that

the insolvency event had occurred or that such acts will

prejudice the equal treatment of the insolvent party’s

creditors; and

(4) the debtor’s acts that took place after or within six months

of the occurrence of an insolvency event and that

conferred benefits on the beneficiary in exchange for no

or nominal compensation.



Yes. Please refer to question 1.2.


A formal rescue procedure available in Korea to restructure the

liabilities of distressed companies is a rehabilitation proceeding

under the DRBA. Both debt-for-equity swaps and pre-packaged

sales are possible.

The debt/equity swap whereby creditors’ rehabilitation credits are

swapped into the debtor’s equity according to the rehabilitation plan

is commonly used because from the creditor’s perspective, it is more

beneficial to receive stocks (which may later be monetised) than to

reduce its credit amounts. From the debtor’s perspective, such

restructuring method could prevent repaying the debts out of its own

pocket.

Pre-packaged sales were adopted on August 30, 2016 under the

amended DRBA, by which a creditor (who owns at least 50% of the

debtor’s debts) or a debtor (who obtained consent from such

creditor) may submit a plan to the court before the commencement

of a rehabilitation proceeding and the court may expedite the

process based on the plan.

A creditor who has credits in the amount of at least 10% of the

debtor’s equity value may petition for a rehabilitation proceeding

and any creditors may petition for a bankruptcy proceeding. A

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shareholder of a debtor who owns at least 10% of the debtor’s

ownership interest may petition for a rehabilitation proceeding.

Also, creditors and shareholders participate in the rehabilitation plan

approval process. At least ⅔ of the rehabilitation creditors’ consent,

at least ¾ of secured creditors’ consent and at least ½ of the

shareholders’ consent are required to approve a rehabilitation plan.

In case the approval requirement of any of the stakeholders is not

satisfied, the court may nevertheless approve the rehabilitation plan

with safety measures protecting the stakeholder who did not

consent. The person who drafted the rehabilitation plan may also

request the court to approve the plan.



The work-outs under the CRPA may be commenced by a

resolution of a committee composed of creditors who own

financial credits (consent of at least 75% of the total financial

credits).

B. Formal rehabilitation proceeding

A rehabilitation proceeding under the DRBA may be

voluntarily applied to the court by a debtor that is unable to

pay its debts when due without a significant impact on the

continuity of its business or its total debt is larger than its total

assets. This proceeding may also be involuntarily applied by

a creditor who has credits in the amount of at least 10% of the

debtor’s equity or a shareholder of the debtor who owns at

least 10% of the debtor’s ownership interests.



Informal work-outs are supervised and implemented by

creditors without the court’s involvement. However, the FSC

may impose corrective measures or administrative fines for

failure to abide by the CRPA.


A court-appointed receiver has the authority to manage the

debtor’s affairs and to dispose of its assets. Typically, the

court appoints the debtor’s representative director as the

receiver in order to ensure that a person who is familiar with

the debtor’s business is involved in the rehabilitation

proceeding.



There is no impact on the existing contracts entered into by

the debtor. However, the voluntary agreement and/or the

corporate restructuring plan under the CRPA may have an

impact on the rights and obligations of the debtor’s existing

contracts.


a) General rule

In principle, there is no impact on the existing contracts

entered into by the debtors (even in the event of a

rehabilitation proceeding).

b) Exceptions

According to the DRBA, an executory contract that has

not been completely performed by the debtor and the

counterparty at the time of the commencement of the

rehabilitation proceeding may be revoked or terminated

by the receiver, and the receiver may demand the

counterparty to perform its obligations after completing

the debtor’s obligations. The counterparty may demand

the receiver to confirm its position as to whether the

receiver will revoke/terminate the contract or to perform

the contract. The receiver will be deemed to have waived

its revocation/termination right if the receiver fails to

provide his/her position within 30 days after receipt of the

notice.

The claim that arose out of the counterparty’s supply

between the petition for a rehabilitation proceeding and

the commencement of the rehabilitation in a bilateral

contract that imposes obligation of continuous supply, is a

priority claim and therefore will be reimbursed prior to

other claims.



Typically, a debtor funds the restructuring process. However,

it may be otherwise agreed under the voluntary agreement or

the corporate restructuring plan under the CRPA.


The person who petitions for a rehabilitation proceeding must

pay the costs prescribed by the court in advance. On the other

hand, in case a stakeholder other than a debtor petitions for a

rehabilitation proceeding, the petitioner may be reimbursed

for the costs paid by the debtor out-of-pocket in case the court

decides to commence the rehabilitation proceeding.



The key insolvency procedure in Korea is bankruptcy proceedings

under the DRBA, which are led and supervised by the court.


If a debtor company cannot repay its debts when they become due or

has more liabilities than the total amount of its assets, either the

debtor or a creditor may file an application for a bankruptcy

proceeding. Further, the court has the authority to declare

bankruptcy of the debtor during the rehabilitation proceedings

without the relevant application from the debtor or creditor if the

value of the continuation of the debtor’s business is deemed to be

lesser than the value of it when it is liquidated.


The court-appointed bankruptcy trustee plays the pivotal managing

role in the bankruptcy procedure including, but not limited to,

exercising the avoidance power, managing and disposing the

debtor’s properties, and monetising such properties into cash to

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make distribution to creditors. Bankruptcy Trustees are under the

supervision of the court, but the court does not have general

command over the Trustees’ performance of their duties.

A person who is appointed as the bankruptcy trustee cannot be

dismissed without justifiable grounds, he/she must perform her or

his duties with the fiduciary duty, and he/she may receive

remuneration and expenses from the debtor’s property in the amount

determined by the court.


The creditor may apply for a bankruptcy proceeding, and the

relevant bankruptcy proceeding is commenced if the competent

court which received the creditor’s application declares the debtor

bankrupt. However, once the bankruptcy proceeding is commenced,

the creditor cannot influence the bankruptcy proceeding and is only

entitled to the payments pursuant to the respective credit amounts.

Still, a holder of the security interests over the debtor’s properties,

who has a right to enforce outside bankruptcy, may enforce the

security for the fulfilment of its obligations without resorting to the

bankruptcy proceeding.


A. General Rule

In general, the declaration of bankruptcy does not impact the

obligations, terms and effects of the pre-existing contracts

involving the debtor.

B. Exceptions

The general rule may not apply to the following cases:

a) DRBA

According to the DRBA, an executory contract that has

not been completely performed by the debtor and the

counterparty at the time of bankruptcy declaration may be

revoked or terminated by the bankruptcy trustee and the

trustee may demand the counterparty to perform its

obligations after completing the debtor’s obligations. The

counterparty may demand the bankruptcy trustee to

provide a definitive answer as to whether the contract is to

be revoked, terminated or upheld. In such cases, when the

bankruptcy trustee fails to provide a definitive answer

within a reasonable time from the date on which he/she is

so notified, the relevant contract shall be deemed to have

been revoked or terminated by him/her.

b) Civil Code

If a lessee has been declared bankrupt, either the lessor or

the bankruptcy trustee may terminate the relevant lease

agreement. If the lessor has been declared bankrupt, the

bankruptcy trustee may terminate the relevant lease

agreement if the lessee does not meet the requirements to

claim against a third party. In the case of employment

agreements, the employee or the bankruptcy trustee may

terminate the employment agreements of the bankrupted

employer. The contractor or the bankruptcy trustee may

terminate the contract for work when the person who

ordered the contracted work has been declared bankrupt.

c) Commercial Code

The insurance contract shall lose its effect upon the lapse of

three months after the declaration of bankruptcy of the

insurance company and the policyholder may terminate her

or his insurance contract once the relevant declaration is

made. Further, the bankruptcy trustee may terminate the

insurance contract if the insurer has been declared bankrupt.


In Korea, the creditors may be categorised into three different

groups based on the priority of their claim: A. the holder of the right

to enforce outside bankruptcy proceedings (the “Secured Creditor”);

B. the estate creditor; and C. the bankruptcy creditor. The

bankruptcy creditors may be further divided into the following three

categories: bankruptcy creditors with preferred claims; bankruptcy

creditors with general unsecured claims; and bankruptcy creditors

with subordinate bankruptcy claims.

A. Secured Creditors

The Secured Creditor who holds the security right over the

debtor’s properties is generally deemed as the highest priority

creditor in relation to the secured subject property, since the

Secured Creditor may enforce the security for the fulfilment of

its obligation without resorting to the bankruptcy proceeding.

B. Estate Creditors

Estate creditors are creditors with estate claims, such as costs

of judicial proceedings, tax claims, wage and severance

claims, management expenses incurred in connection with

management, liquidation and distribution of the bankruptcy

estate, or other claims arising from the administration of the

bankruptcy estate. These estate claims shall be reimbursed

prior to the bankruptcy claims at any time without resorting

to the bankruptcy proceeding.

C. Bankruptcy Creditors

A bankruptcy claim is a property claim that accrues before the

debtor is declared bankrupt and it shall not be exercised without

resorting to bankruptcy proceedings. During bankruptcy

proceedings, the bankruptcy claims shall be repaid in

proportion to the amount of each claim. While the bankruptcy

claims with preferential rights under the relevant Acts shall take

precedence over other general bankruptcy claims, the claims for

any interest accrued after the declaration of the bankruptcy or

any damages caused by the failure to comply with any

obligation after the declaration of the bankruptcy shall be

deemed subordinate to the general bankruptcy claims.


A. Discontinuation of the bankruptcy proceeding

The debtor may request the discontinuation of the bankruptcy

proceeding if all bankruptcy creditors agree or if the debtor

provides securities to the creditors from whom the debtor

fails to obtain the consents. The court decision to discontinue

the bankruptcy proceeding invalidates the relevant

bankruptcy procedure.

B. Revocation of the declaration of the bankruptcy

The creditors or debtors may contest in relation to the

declaration of the bankruptcy within 14 days from the date of

notification regarding the relevant bankruptcy if the facts

leading to bankruptcy do not or no longer exist. If the court

revokes its declaration of the bankruptcy, the relevant

declaration becomes void.

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C. Commencement of the rehabilitation procedure

If the decision on commencement of rehabilitation proceeding

is made prior to or after the declaration of the bankruptcy, the

relevant bankruptcy proceeding shall be suspended. When

the rehabilitation plan is approved, the suspended bankruptcy

proceeding loses its effect.

5 Tax


The commencement of the restructuring or insolvency procedure

itself does not give rise to special tax liabilities. Still, tax claims in

the rehabilitation proceedings receive different treatment based on

their timing. In other words, if the liabilities for the tax were

incurred before the commencement of the rehabilitation proceeding,

the related tax claims shall be deemed to constitute rehabilitation

claims. In such case, the relevant repayments shall be made

according to the rehabilitation proceeding. Alternatively, the

liabilities for the tax incurred after the commencement of the

rehabilitation proceeding shall constitute priority claims, and shall

be reimbursed without resorting to the rehabilitation proceeding.

On the contrary, the liabilities for the tax incurred prior to the

commencement of the bankruptcy proceeding is different from that

of the rehabilitation proceeding, since they shall constitute estate

claims which shall be repaid in preference to other bankruptcy

claims without resorting to the relevant bankruptcy proceeding.

6 Employees


A. Wages and severance payments

The wages and severance payment of the debtor’s employees

shall constitute either priority claims or estate claims in the

rehabilitation and bankruptcy proceeding, respectively,

which shall be reimbursed in preference to other claims.

Employees can claim wages, severance payment and disaster

compensation. Claim for wage of the last three months of

employment and claim for severance payment for the last

three years of employment take priority over all other claims.

B. Dismissal

The commencement of a rehabilitation or a bankruptcy

proceeding itself may not constitute a justifiable ground to

dismiss the employee of the relevant employer. Instead, the

employer must satisfy the following conditions set out in the

Labor Standard Act in order to properly and legitimately

dismiss its employees: (1) there is an urgent managerial need;

(2) the employer shall make every effort to avoid dismissal;

(3) the employer shall establish and follow reasonable and

fair criteria for choosing employees subject to dismissal; (4)

the employer shall inform and consult with the labour union

or the representative of employees regarding intended

dismissal; and (5) an employer that intends to dismiss more

than 10% of its total employees shall report such intention to

the Minister of Employment and Labor.



Under the CRPA, the companies established under the laws of

foreign nations shall not be subject to the work-out procedures

under the CRPA.

However, under the DRBA, foreigners and the companies

established under the laws of foreign nations shall have the same

status as that of peoples and corporations of Korea. Further, the

district court is deemed to have jurisdiction over the place of

business of the foreign company as well as the location of its

property. Thus, a foreign company which has its property in Korea

may utilise the Korean rehabilitation and bankruptcy proceedings

without having an office in Korea.


Under the DRBA, a foreign bankruptcy proceeding may be

recognised if there is a relevant petition and decision to approve the

foreign bankruptcy proceeding.

A. Application for approving Foreign Bankruptcy Proceedings

The representative of the foreign bankruptcy proceeding may

file an application with the following statements with the

Seoul Bankruptcy Court for approving the foreign bankruptcy

proceeding:

■ a written statement concerning the legal basis and a

summary of the overall foreign bankruptcy proceeding;

■ a written statement attesting to the commencement of the

foreign bankruptcy proceeding;

■ a written statement attesting to the qualification and

authority of the representative of the foreign bankruptcy

proceeding;

■ a written statement concerning the main points of the

foreign bankruptcy proceeding for which an application is

filed for their approval (including statements of creditors,

the debtor and interested parties); and

■ a written statement concerning all other foreign bankruptcy

proceedings over the debtor, which are known to the

representative of the foreign bankruptcy proceeding.

B. Approval decision of the Seoul Bankruptcy Court

The court shall decide whether to recognise and confirm the

foreign bankruptcy proceeding within one month from the

date on which the relevant application is filed, and the court

shall dismiss such application in any of the following cases:

■ where expenses determined by the court are not prepaid;

■ where each written statement provided is not submitted or

the establishment and contents of any such written

statement is not bona fide; or

■ where approving the foreign bankruptcy proceeding is

contrary to the good public morals and social order of

Korea.

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It is not common for companies incorporated in Korea to restructure

or enter into insolvency proceedings in other jurisdictions.

Still, a domestic bankruptcy proceeding and a foreign bankruptcy

proceeding for the same debtor may be jointly and simultaneously

pending in the court of Korea and foreign courts in order to protect

the debtors in foreign countries. In such case, close coordination

between the two proceedings are required. When a domestic

bankruptcy proceeding and a foreign bankruptcy proceeding for the

same debtor are jointly and simultaneously pending in the Korean

court and foreign courts, the DRBA stipulates that the court shall

coordinate the progression of multiple proceedings in order to make

sure that the domestic bankruptcy proceeding plays a central role.

8 Groups


The DRBA does not stipulate a combined rehabilitation or

bankruptcy proceeding for multiple debtors; thus each procedure

must be conducted individually. In other words, each company

must file an application for commencement of rehabilitation

proceeding or, for a bankruptcy proceeding, the court shall make a

decision on commencement of rehabilitation proceeding or

declaration of bankruptcy and appoint a bankruptcy trustee or

conductor for each debtor.

9 Reform


In 2016 and 2017, there were several proposals to reform or modify

the CRPA as well as the DRBA, and multiple amendments were

made in order to reflect and incorporate those proposals.

A. CRPA

The previous CRPA expired on June 30, 2018, but the

demand for the work-out procedure has not been diminished,

especially in the vulnerable sectors. Therefore, the CRPA

was re-enacted as of October 16, 2018, to facilitate constant

corporate restructuring, promote the stabilisation of financial

markets and the development of the national economy. It

maintained most of the existing provisions while reflecting

certain improvements to the regime. It is a temporary statute

and will be effective until October 15, 2023.

B. DRBA

In order to secure a constant stream of new funds to the

debtor in the rehabilitation proceeding, the rights of the

creditors who have provided new funds have been

strengthened to induce new fund support to the debtor. Also

the Korean pre-package system was introduced, and the

Bankruptcy Court was newly established.

There is no scheduled revision on the DRBA regarding

corporations in 2019.

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Barun law llc Korea

Thomas Pinansky Barun Law LLC Barun Law Building, 92 gil 7, Teheran-ro Gangnam-gu, Seoul 06181 Korea Tel: +82 2 3479 7517


URL: www.barunlaw.com

Joo Hyoung Jang Barun Law LLC Barun Law Building, 92 gil 7, Teheran-ro Gangnam-gu, Seoul 06181 Korea Tel: +82 2 3479 7519


URL: www.barunlaw.com

Barun Law LLC (“Barun Law”) is Korea’s fastest growing and most dynamic full-service law firm. Founded in 1998, Barun Law has quickly taken its place among Korea’s top full-service law firms. Conveniently located in Seoul’s Gangnam Business District, next to one of Asia’s largest and most prestigious convention centre complexes, Barun Law is comprised of over 200 attorneys who, together with highly-qualified support staff, provide a full range of legal services.

The firm’s partners include some of the most prominent and well respected members of the Korean Bar, while a sophisticated and highly experienced team of foreign lawyers adds international savvy and recognised expertise, creating a substantial comfort factor for international clients.

Mr. Pinansky is the Senior Foreign Attorney at Barun Law. He plays a leading role in the firm’s international practice and advises an extensive number of international and Korean clients on business and legal issues arising in the context of international operations, including international transactions and cross-border disputes. Mr. Pinansky recently completed a three-year term as a Vice-Chairman of the American Chamber of Commerce in Korea, and he currently serves as a Special Advisor to the AmCham Board. He also serves on the Board of the Canadian Chamber of Commerce in Korea and as Special Advisor to the Kiwi Chamber of Commerce in Korea. He was appointed as the “Honorary Ambassador” of the US State of Maine to Korea. He served as the Chairman of the Asia-Pacific Council of American Chambers of Commerce, an organisation comprised of over 25 American Chambers of Commerce throughout the Asia-Pacific Region. He received his B.A. from Harvard College and J.D. from the University of Pennsylvania Law School.

Mr. Jang is a Partner Attorney at Barun Law LLC. Since joining the firm in 2005, his practice has focused on cross-border transactions, M&As and general corporate matters. He has accumulated a broad range of experience and expertise in the fields of cross-border transactions and M&As, and general corporate matters. He has served as a Member of the Digital Media City of Seoul since 2003; and Vice-Commissioner of the International Committee of the Korean Bar Association and is a member of the In-House Lawyers’ Special Committee of the Korean Bar Association since 2011. Mr. Jang received his B.A. in law from Seoul National University and his LL.M. from Columbia Law School. He is a member of the Bar of the Republic of Korea.

chapter 22


loyens & loeff luxembourg

anne-marie nicolas

véronique Hoffeld

luxembourg

1 Overview


Luxembourg is generally perceived as a secured creditor-friendly

jurisdiction, especially in light of the very wide implementation under

Luxembourg law of the financial collateral arrangements directive.

Luxembourg financial collateral arrangements cover any pledge or

assignment of financial instruments and receivables (including most

types of shares and bonds). Any such security is “bankruptcy proof”

as well as very cost effective, subject to few formalities and easy to

put in place and to enforce.

Luxembourg courts have, for instance, held that a Luxembourg

financial collateral arrangement can be enforced:

■ without the condition of an acceleration under the underlying

financing documentation having to be fulfilled; and

■ regardless of the existence of a criminal attachment.

Finally, courts have also held that they cannot impose provisional

measures that could interfere with the enforcement of financial

collateral arrangements.


Contrary to many other civil law jurisdictions, Luxembourg has not

tried to adopt more efficient recovery proceedings such as the (pre-

pack) administration, the scheme of arrangement or US Chapter 11

type proceedings. Instead, it has three traditional formal recovery

procedures consisting of controlled management (gestion contrôlée), composition with creditors (concordat préventif de faillite) and suspension of payments (sursis de paiement).

None of these procedures are much used in practice due to the lack

of flexibility, cost and/or publicity that they entail.

As regard to insolvency proceedings, bankruptcy proceedings

(faillite) are the most common proceedings in Luxembourg. These

proceedings aim at winding-up a company’s assets in the best

interests of the estate and its creditors.



Under Luxembourg law, the directors of a company may generally

be liable for (i) the non-execution of their mandate, (ii) any

misconduct in the management of the company’s affairs, and (iii)

any damages caused by their fault or negligence (torts).

The directors of an insolvent company must file for bankruptcy

within one month of the date on which it has ceased to pay its debts,

provided that the company has also lost its creditworthiness

(cumulative insolvency criteria). The loss of creditworthiness

criteria is a very important addition to the more standard insolvency

tests of cessation of payments as it allows a company not to be

considered insolvent as long as it is, for instance, in restructuring

talks with its creditors.

Not filing for bankruptcy within the statutory timeframe constitutes

serious misconduct, which can lead the court to recognise the

directors’ civil or criminal liability and order the directors to bear all

or part of the liabilities of the company.


In bankruptcy proceedings, the court assesses at its sole discretion

whether the conditions for bankruptcy are met and, if so, appoints a

bankruptcy receiver to liquidate the assets. In principle, creditors and

shareholders have no say or control over the procedure or decisions

made but the receiver may decide to involve them, at its discretion.

There is no credit-bidding process provided under Luxembourg law.

Employees, tax and social security authorities are super-privileged

creditors in a bankruptcy scenario.

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Also, a reservation of title clause allows an unpaid seller to retain

title to the sold assets (non-fungible movable assets) until the

purchaser has paid the full purchase price. In the same vein, a

retention right provides a creditor with the right to keep goods for as

long as its due and payable claim regarding such goods is

outstanding. A retention right is only effective if the creditor has

actual possession of the goods.


The Luxembourg Commercial Code sets out the conditions

according to which certain transactions made by the debtor can be

declared null and void. The court first determines the occurrence of

the cessation of payments and the duration of the hardening period

or période suspecte. The hardening period must not date back more

than six months as from the date of the declaratory judgment of

bankruptcy.

Some specific transactions may be set aside or declared null and

void, if so requested by the bankruptcy receiver. These include,

among others:

■ the granting of a security interest for antecedent debts;

■ the payment of debts that have not fallen due; and

■ the payment of certain debts that have fallen due entered into

during the hardening period (or the 10 days preceding it).

However, security interests qualifying as financial collateral

arrangements are not affected by the suspect period, as these are

“bankruptcy remote”.

In addition, the bankruptcy receiver can challenge any fraudulent

payments and transactions made before the bankruptcy, without any

time limit.



Luxembourg does not expressly provide for an informal out-of-

court restructuring framework and has, in this respect, not followed

the European trend to implement more effective and flexible

recovery proceedings based on UK schemes of arrangement, (pre-

pack) administrations and/or US Chapter 11 proceedings.


Luxembourg provides with three formal rescue procedures in order

to restructure the liabilities of distressed companies:

■ Suspension of payments (sursis de paiement) which allows

a commercial company who faces temporary liquidity

difficulties to apply for a suspension of payments until its

financial liabilities can be met. This procedure is mainly used

in respect of regulated entities.

■ Controlled management (gestion contrôlée) which entitles

a commercial company to either reorganise and restructure its

debts and business or to realise its assets in the best interest of

creditors. In practice, this procedure is very rarely used.

■ Composition with creditors (concordat préventif de faillite)

allows a debtor facing financial difficulties to negotiate a

settlement or a rescheduling of its debts with its creditors,

which must be approved by the court to avoid bankruptcy

proceedings. In practice, this procedure is very rarely used.

Each of these formal rescue procedures can be challenged by the

creditors. A majority of creditors will be needed in order to make the

rescue procedure a binding procedure and cram-down other creditors.

Debt-for-equity swaps are possible but not provided by statute.

Security interests qualifying as financial collateral arrangements may

be enforced notwithstanding the opening of insolvency proceedings.


Suspension of payments procedures can be initiated upon the

debtor’s request and can be granted if either the debtor’s temporary

financial difficulties are due to extraordinary and unexpected

circumstances and the debtor has sufficient means to pay off all its

creditors; or the debtor is in a situation where the re-establishment

of a proper balance between assets and liabilities appears likely.

The suspension of payments requires the consent of a majority of

creditors representing 75% of the debtor’s liabilities and the

approval of the Superior Court of Justice.

Controlled management (gestion contrôlée) can be initiated by the

debtor who must file an application before the district court sitting

in commercial matters, and can be granted to a commercial

company where the company is acting in good faith and either

suffers from a loss of creditworthiness or faces difficulties in

meeting all of its commitments and its creditors wish to proceed

with enforcement procedures. More than 50% of the creditors (in

number) representing more than 50% in value of the debtor’s debts

must approve the plan, which must in turn be approved by the court.

Composition with creditors (concordat préventif de faillite) can be

initiated on the debtor’s request before the district court sitting in

commercial matters. The debtor must be unable to meet its engagements

or have lost all creditworthiness. In addition, the applicant must be

deemed unfortunate and acting in good faith (débiteur malheureux et de bonne foi), as determined by the court at its discretion. To be successful,

the application requires the consent of a 75% majority of the creditors,

must meet the relevant legal requirements and must not be deemed

contrary to the public interest or the interests of the creditors by the court.


Formal insolvency proceedings (whether bankruptcy or a restructuring

proceeding) are all heavily court-lead in Luxembourg. Debtors and

creditors will in principle only have very limited intervention rights

or influence on the process.


Once placed under controlled management, the debtor cannot,

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without the court appointed commissioners’ prior approval and

under penalty of nullity, dispose of its assets or take any actions,

including granting mortgages, making commitments or payments,

borrowing money or receiving funds. The commissioners can also

compel the company to perform a given action.

As regard to composition with creditors, during the proceedings and

up to the date of the ratification of the composition, the debtor

cannot dispose of its assets, grant mortgages or make any

commitments without the authorisation of the delegate judge. Once

the plan is adopted, the debtor must act within the frame of the latter.

Finally, concerning the reprieve from payments, the debtor cannot,

without the court appointed commissioners’ prior approval, dispose

of its assets or take any actions, including granting mortgages,

making payments, borrowing money or receiving funds.


There is no statutory protection or privilege given to new money.

However, Luxembourg case law recognises contractual subordination,

which is enforceable against the parties having accepted the

subordination of their claims (usually to new money claims).

Equitable subordination is not implemented nor applied in

Luxembourg.



The key insolvency procedure is the bankruptcy proceeding which

is the most common proceeding filed against commercial

companies in Luxembourg. This proceeding aims at winding-up a

company’s assets in the best interests of the estate and its creditors.

Luxembourg law does not cater for insolvent liquidations.

The State prosecutor can file an application for compulsory

liquidation which must then be ordered by the court if a commercial

company has pursued illegal activities or has seriously infringed the

provisions of, among other things, the Commercial Code, the

domiciliation law or the company law.


A commercial entity may be declared bankrupt by the court when

the following two criteria are met:

(i) the company has ceased payments and is unable to meet its

commitments (cessation des paiements) that is, the company

cannot, or does not, fully pay its due, certain and liquid debts

as they fall due; and

(ii) the company has lost its creditworthiness (ébranlement de crédit) that is, the company is unable to obtain credit (i.e.,

new money, waivers, maturity extension, grace periods,

standstills etc.) from any source.


Once a bankruptcy procedure is opened, the directors/managers are

removed from their functions and a bankruptcy receiver is appointed

by the court. The receiver is responsible for realising the debtor’s

assets and distributing the proceeds to the creditors, under the

supervision of a supervisory judge. The receiver, together with the

supervisory judge, decides how to liquidate the assets of the

bankruptcy estate.


Individual legal actions by privileged and unsecured creditors

against the debtor are suspended once the company has been

declared bankrupt for the entire duration of the bankruptcy.

Creditors must file a proof of claim (déclaration de créances) with

the court. “Bankruptcy proof” secured creditors holding financial

collateral security can, however, freely take enforcement actions

regardless of the opening of bankruptcy proceedings.


In bankruptcy proceedings, contracts will automatically continue

(except for intuitu personae contracts and contracts whereby

bankruptcy is a termination event) following the opening of a

bankruptcy proceeding. The receiver cannot, in principle, reject or

disclaim a contract after the judgment opening the insolvency

proceeding and must comply with its terms. However, upon

establishing that it is in the interest of creditors, the receiver may

request that the insolvency judge terminates an agreement to which

the debtor is a party. See also question 2.3 above on actions during

the suspect period.


“Bankruptcy proof” secured creditors (such as creditors benefiting

from security interests under the financial collateral law and

mortgagees) are outside the bankruptcy process (hors masse), meaning

that they are not, in principle, subject to ordinary distribution and

priority rules. These creditors can enforce their security and do not have

to wait for the distribution of the assets by the bankruptcy receiver.

For other creditors, the order of priority payments during a

bankruptcy proceeding (faillite) is as follows:

■ Creditors of the bankruptcy. These are bankruptcy

expenses (the bankruptcy receiver’s fees or procedure costs)

and have a preferential status over all other claims.

■ Preferred creditors of the bankrupt estate. Preferred

creditors include:

■ preferred creditors by law (créanciers privilégiés), such

as employees in respect of certain debts owed to them and

tax authorities; and

■ creditors with a non-bankruptcy proof contractual or judicial

security (créanciers ayant une sûreté conventionnelle ou judiciaire), ranking behind preferred creditors by law.

■ Ordinary unsecured creditors (créanciers chirographaires).

These are paid pro rata out of the remaining assets, if any.

Shareholders are treated as subordinated creditors unless they have

other contractual arrangements in place as creditors (Luxembourg

law does not recognise the concept of equitable subordination) and

may receive a surplus from the liquidation (boni de liquidation), if

any, in proportion to their shareholding.


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Yes, but the revival process is very rarely admitted by the courts since

the insolvency state is assessed by the court on the day of the judgment.

5 Tax


The claim of the tax authorities is super privileged in case of

bankruptcy. They may hold a preferential right over a specific asset

or a general preferential right over all of the debtor’s assets.

Also, in terms of restructurings, having creditors waive part of their

claims against a Luxembourg debtor may create taxable income for

that debtor.

6 Employees


Employment contracts are terminated with immediate effect upon the

declaration of entry into bankruptcy by the company. Save for the

case of the bankruptcy receiver deciding to let the company continue

its activities, employees of a bankrupt company are entitled to:

■ the salary for the month in which the declaration is made and

for the following month; and

■ compensation of 50% of their monthly salary for the notice

period to which they are statutorily entitled to.

The amount owed to employees for the last six months of work and

all compensation due as a result of termination of the employment

contracts, up to an amount equal to six times the minimum salary,

must be paid prior to any payments to secured creditors.



Pursuant to the Recast Insolvency Regulation (as defined below), a

foreign EU Member State debtor whose COMI is located in

Luxembourg, may enter into restructuring or insolvency proceedings

in Luxembourg.

Luxembourg courts generally hold that courts in the jurisdiction (outside

of the EU Member State and thus of the scope of the Recast Insolvency

Regulation) of the principal establishment of a company have

jurisdiction to decide on matters of insolvency regarding that company.


Judgments regarding insolvency procedures introduced in a non-EU

Member State or not covered by the Regulation (EU) 848/2015 on

insolvency proceedings (recast) (Recast Insolvency Regulation) are,

in principle, recognised in Luxembourg (which recognises the

principle of universality of bankruptcy) without the need for a

further order for enforcement of the award, subject to the following

conditions:

■ the judgment must be rendered by a competent court;

■ due process must be complied with;

■ the foreign court must have applied the appropriate

Luxembourg conflict of law rules;

■ the foreign judgment must not contravene Luxembourg

public policy; and

■ the foreign insolvency law which has been applied must have

extra-territorial scope.


It is relatively common practice for Luxembourg holding and

treasury companies to restructure their debt or enter into rescue

proceedings in other jurisdictions. The most frequently seen

proceedings are UK schemes of arrangements and Chapter 11

bankruptcies in the US or similar proceedings elsewhere.

8 Groups


Except in certain cases of shadow directorship, fraud co-mingling of

assets etc., Luxembourg law generally treats each company and

bankruptcy estate separately so that a company may be insolvent

and put into bankruptcy without necessarily affecting its affiliates.

Under the Recast Insolvency Regulation, in case insolvency

proceedings are opened in relation to several companies of a same

group, the courts and the office-holders appointed will have to

cooperate and communicate with each other. Luxembourg law does

not specifically cater for this issue but very often in practice the

Luxembourg receiver will cooperate with the foreign insolvency

professionals appointed for other group entities.

9 Reform


On 1 February 2013, the government filed a draft bill No. 6539 on

the preservation of business and modernisation of bankruptcy law.

This draft bill includes various preventive, repressive, restorative

and social provisions which aimed to reduce the number of

bankruptcies in Luxembourg. It was heavily redrafted in March

2018 and is currently under discussion.

New measures include, in particular, the decriminalisation of

fraudulent bankruptcy, an accelerated administrative dissolution

procedure without liquidation and an easing of the conditions

required for a debt contribution action.


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Anne-Marie Nicolas Loyens & Loeff Luxembourg 18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 314


URL: www.loyensloeff.com

Véronique Hoffeld Loyens & Loeff Luxembourg 18-20, rue Edward Steichen L-2540 Luxembourg Tel: +352 466 230 232


URL: www.loyensloeff.com

Anne-Marie Nicolas, attorney at law, is a partner in the banking, debt restructuring and finance practice of Loyens & Loeff Luxembourg. She specialises in banking and finance law and acts for banks, financial institutions, private equity sponsors, corporates and investors in various types of cross-border finance transactions. She also advises on regulatory, and corporate governance matters.

Anne-Marie holds masters in French and German Law from the University of Paris I-Pantheon-Sorbonne and the Universität zu Köln, and an LL.M. in American law from Boston University.

Anne-Marie is a member of INSOL, the Luxembourg directors association (ILA), the Luxembourg Bankers’ Association (ABBL) and the Luxembourg association of bank lawyers (ALJB) and is an active member of several working groups related to the financial services and restructuring industry. She has published a number of articles on restructuring and corporate governance-related issues.

Anne-Marie is admitted to the Luxembourg Bar and to the New York Bar.

Loyens & Loeff is a leading independent Luxembourg law firm which provides comprehensive and fully integrated legal and tax advice on corporate and commercial law, tax law, banking and finance, investment management, M&A, private equity, real estate and litigation. Our clients include private companies, family offices, financial institutions, investment funds and individuals.

The close cooperation between legal and tax specialists within a single firm places us in a unique position both in our home market, the Benelux and Switzerland, and internationally, and benefits our clients by facilitating an approach to issues from different angles, creating synergies and increasing efficiency.

Loyens & Loeff’s culture is characterised by a strong sense of independence, entrepreneurship, high-quality services and involvement. The principles of quality, transparency and short-line communication form the foundation for an informal and inspiring culture, which stimulates the search for pragmatic but secure solutions to complex legal and tax issues. Loyens & Loeff pays particular attention to education and training, and to creating an exciting and challenging work environment. This enables the firm to attract outstanding young talent and to guarantee the highest standards of service.

Véronique Hoffeld, is a member of the Management Committee of Loyens & Loeff Luxembourg and heads the Luxembourg Litigation & Risk Management Practice Group. She can be considered as a generalist lawyer, and her activities cover matters in the areas of commercial law (negotiation of contracts), litigation, insolvency, arbitration and IP law.

She has experience in advising on a broad range of complex, high-value multi-jurisdictional litigations and arbitrations. She also has extensive experience in proceedings before the civil courts and arbitration tribunals, as well as in mediation proceedings. She focuses in particular on commercial disputes especially financial and corporate litigation. Together with her team, she has worked on various high profile arbitration cases that involve interesting and partly unresolved issues related to recognition and enforcement of ICC arbitral awards.

Véronique has been a member of the Luxembourg Bar since 1996.

Acknowledgment

The authors would like to thank Richard Steichen for his invaluable

assistance in the writing of this chapter. Richard is an associate in

the banking and finance practice of Loyens & Loeff Luxembourg.

He specialises in cross-border banking and finance work and acts

for lenders, borrowers and sponsors in various types of transactions,

including debt restructurings.

Richard was admitted to the New York Bar in 2017 and admitted to

the rolls of solicitors of England and Wales in 2017.

Tel: +352 466 230 492 / Email: [email protected]


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mauritius

1 Overview


Mauritius generally provides good protection to creditors, and in the

context of commercial transactions, especially to secured creditors.

The most commonly used securities are capable of enforcement



The Mauritian legislation expressly provides for out-of-court

workouts (i.e. a deed of company arrangement in the context of a

voluntary administration or a compromise with creditors) and court-

sanctioned work-outs (i.e. scheme of arrangements). Whilst the

same were not commonly used previously, these types of work-outs

have been increasingly used in recent years and it can be said that the

Mauritian practitioners and courts are now well acquainted with their

procedure and intricacies. In addition, it is not uncommon for local

banks to engage non-statutory work-outs (by, for example,

restructuring banking facilities by amending the finance documents).



A director who believes that a company is unable to pay its debts as

they fall due must forthwith call a meeting of the board of directors

to consider whether the board of directors must appoint a liquidator

or an administrator. If a director fails to do so and the company is

subsequently placed in liquidation, that director may be personally

liable for the losses suffered by creditors as a result of the company

continuing to trade.

Similarly, if a board has been convened, but the directors did not

resolve to appoint an administrator or liquidator, without having any

reasonable ground for believing that the company was able to pay its

debt as they fell due, and the company is subsequently placed in

winding up, the directors who voted against the appointment of the

administrator or liquidator may be personally liable for the losses

suffered by creditors as a result of the company continuing to trade.

A director owes his/her duties to the company and not the creditors.

However, when the company is in the vicinity of insolvency, a

director must also take into account the interests of the creditors of

the company (and not just the interest of the company) when

exercising its powers as directors of the company.


All creditors are treated equally, unless they have a preferred claim.

A list of the preferred claims is expressly provided for in the

Mauritian legislation. In practice, secured creditors tend to be more

pro-active with the other stakeholders, with the aim of finding a

solution for the company.

The landlord of property leased to the company has a priority claim

(ranked together with beneficiaries of charges) for rental payments

for the period of up to six months prior to the commencement of

winding up.

There is a stay of enforcement of claims or securities against a

company if the company is in voluntary administration. Also, a

person must seek permission from the court before commencing or

continuing proceedings against a company that is in winding up.


There is a “twilight period” of two years preceding the commencement

of winding up of a company. Certain preferences, transactions at

undervalue, charges or gifts enter into or provided by the company

during the “twilight period” may be set aside. As regards charges

and gifts, the company must have been unable to pay its debt at the

time of providing the same in order for the same to be set aside.

In addition, the alienation of property by the company, within five

years of the commencement of the winding up, with intent to

defraud a creditor may also be set aside.

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The court may, in addition to setting aside the above-mentioned

voidable transactions, make an order for the re-transfer of the asset

or interest therein or the payment to the liquidator of a sum of

money not exceeding the value of the asset.



Yes, it is indeed not uncommon for Mauritian banks to engage in

informal work-outs by restructuring the banking facilities availed to

borrowers.


During voluntary administration of a company, the administrator

may propose a deed of company arrangement to the creditors of the

company at a watershed meeting. The proposed deed of company

arrangement will require the approval of creditors who represent

being at least a majority, representing 75% in value of the creditors

or class of creditors voting at the meeting. If the minimum majority

of creditors approve the deed of company arrangement, the

dissenting creditors are “crammed down” and the deed of company

arrangement is binding on all creditors.

In addition, a company may restructure its liabilities pursuant to a

court-approved scheme of arrangement or out-of-court compromise

with creditors. In both cases, if the requisite majority of creditors

approve the proposal by the company, the dissenting creditors will

be “crammed down”.

Debt-for-equity swaps are not usually done in Mauritius because of

regulatory provisions restricting local banks from holding equity as

investments.

Pre-packaged sales are possible and not uncommon in Mauritius.


The directors of the company or a provisional liquidator or liquidator

of the company may appoint an administrator where the company is

or may become insolvent. In addition, a secured creditor may

appoint an administrator if its security has become enforceable.

A scheme of arrangement or compromise with creditors may be

initiated at any time (whether the company is solvent or insolvent)

and is driven by the directors of the company.


A registered insolvency practitioner will act as administrator and

deed administrator. The process of having an acceptable deed of

company arrangement is undertaken by the administrator, usually in

consultation with the principal creditors.

Compromise with creditors is managed by the board of directors.

A scheme of arrangement is initiated by the company and is

supervised and approved by the court.


Generally, none of the procedures unilaterally amends or terminates

an existing contract, unless where it is specifically provided for in

the contract.

The parties are obliged to continue performing their outstanding

obligations. There is no specific protection afforded to those who

are obliged to perform their outstanding obligations.

Also, Mauritius law will generally uphold termination or set-off

provisions, even if a company has engaged into a restructuring

procedure.


The restructuring process is usually funded by the company’s own

funds. It is very unusual to find rescue financing in Mauritius, even

though financiers who protect or preserve the assets of the company

are afforded a first-ranking priority under Mauritius law and count

as a “cost of liquidator”.



A company may be wound up either under the supervision of the

court (pursuant to a compulsory winding up initiated by the

company, a director, a shareholder or a creditor) or pursuant to a

voluntary process (either a members’ voluntary winding up or a

creditors’ voluntary winding up).


A members’ voluntary winding up can only be commenced by a

special resolution of shareholder(s) of the company and if their

company is solvent.

A creditors’ voluntary winding up can be commenced by the

directors of the company only if the company is insolvent.

A compulsory winding up may be initiated for one or more of the

prescribed conditions, although the most common condition is the

company inability to meet its debt.


In cases of voluntary winding up, the liquidator manages the process


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In cases of compulsory winding up, while it is still the liquidator

who manages the process, the liquidator has a duty to report to the

court on the progress and actions taken during the winding up.


The liquidator is the sole decision-maker and has to exercise its

rights and perform its duties in accordance with the law. In cases of

creditors’ voluntary winding up, a committee of inspection

consisting of no more than five members may be set up. Such

committee does not have the power to give directions or instructions

to the liquidator, though.


Generally, none of the procedures unilaterally amends or terminates

an existing contract, unless where it is specifically provided for in

the contract.

The parties are obliged to continue performing their outstanding

obligations. There is no specific protection afforded to those who

are obliged to perform their outstanding obligations.

However, a liquidator has the power to disclaim an unprofitable

contract or an onerous property.

Save for certain transactions that occurred during the “twilight

period” and at a time when the company was unable to pay its debt

as they became due, a company’s counterparty will continue to

enjoy the right to set-off. Also, Mauritius law will uphold

termination provisions, even if a company has engaged into a

restructuring procedure.


The Mauritian legislation lists the order of priority of creditors in the

winding up of a company. By way of example, winding-up costs are

given first priority.


A company that has been removed from the registers kept by the

Registrar of Companies may be restored to the registers either by the

Registrar of Companies or by the court. Grounds for restoration

include the fact that the company was still carrying on business, was

party to ongoing legal proceedings or was in receivership or

liquidation or both.

5 Tax


As a general rule, amounts received by the company as value added

tax or deducted at source by the company are not considered to form

part of the estate of the company during its winding up or

receivership. These sums are not catered for in distribution

schedules/plans and failure to do so will result in the creditors

receiving dividends below the anticipated amounts.

6 Employees


None of the insolvency procedures automatically alter or terminate

an employment agreement. An administrator becomes personally

liable for the payment of wages unless the administrator has

provided lawful notice of termination of the employment agreement

within 21 days of the appointment of the administrator. Similarly, a

receiver becomes personally liable for the payment of wages unless

the receiver has provided lawful notice of termination of the

employment agreement within 14 days of the appointment of the

receiver.

In the winding up of a company, employees of the company have a

third-ranking (i.e. after costs of the liquidator and amounts owed to

government and its agencies) preferential claim for wages or salary

in respect of services provided during the period of one month before

the commencement of winding up, capped at a sum of Rs 30,000.

Employees are unsecured creditors for any balance owed to them.



The local restructuring procedures (scheme of arrangement,

compromise with creditors or voluntary administration) or

insolvency proceedings (i.e. winding up, or receivership) can

only be availed by companies incorporated or registered in

Mauritius.


Although the Mauritian legislator has enacted the UNCITRAL

Model Law on Cross-Border Insolvency (approved by the General

Assembly of the United Nations on 15 December 1997), the relevant

provisions have been proclaimed and do not have force of law.

Presently, the Mauritian courts will be guided by English common

law principles to recognise foreign restructuring or insolvency

proceedings. We have not come across any such case so far.


It is not common for Mauritian companies to enter into insolvency

proceedings in foreign jurisdictions. However, we have seen

several examples of Mauritian global business companies investing

in Indian companies entering into solvent court-approved

restructurings or schemes of arrangements in India.


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Anjeev Hurry Benoit Chambers Level 9, Orange Tower CyberCity Ebene Mauritius Tel: +230 403 6900


URL: www.benoitchambers.com

Benoit Chambers is consistently a top choice for the largest and most complex cases and transactions involving the Mauritian jurisdiction every year. The Firm is well known for valuing excellence, sharp legal analysis, and a practical commercial approach which has often led to the development of innovative solutions to suit clients’ needs.

The Firm specialises in company law, financial services and commercial litigation. We offer advisory and advocacy services covering the whole spectrum of those areas. We have a sophisticated knowledge of insolvency, taxation and employment law, as well as the emerging areas of intellectual property and competition law.

Our clients include local and foreign conglomerates, financial institutions, global business companies and regulatory bodies, amongst others.

Members of Chambers appear before every jurisdiction in Mauritius as well as the Judicial Committee of the Privy Council in London. We are also active in the arbitration of commercial matters and international investment disputes.

Anjeev read law at the London School of Economics and Political Science, and is a barrister of the Honourable Society of the Middle Temple, England. He has developed a good practice for banking and financing transactions, as well as an acumen for complex industrial, green field and real estate projects. Also, he regularly advises on issues relating to company law and insolvency, financial services, securities law and taxation. Anjeev is a registered insolvency practitioner who has diligently completed the winding up of several companies and has acted as an administrator, receiver and manager of several companies.


8 Groups


If two or more related companies are in liquidation, a liquidator,

creditor or shareholder may apply to the court and ask that the

liquidations in respect of each company must proceed together as if

they were one company. The court may impose such terms as it

thinks fit when granting such application.

9 Reform


Although discussions are on-going at the level of the Company Law

Advisory Committee, the author is not aware of any current or

specific proposal to reform the corporate rescue and insolvency

regime in Mauritius.

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abimael Hernández Hernández

mexico

1 Overview


Mexico is considered to be a neutral jurisdiction with regard to

being debtor and creditor-friendly. One of the objectives of the

Commercial Insolvency Law (CIL) is to procure the conservation

and operation of the debtor, but also to protect the interests of the

creditors.


Yes. However, an informal work-out is not a practice used by

debtors in Mexico. Formal restructuring is only used by complex

companies, serving as an example that since 2000 when the CIL was

enacted, there have been only approximately 750 insolvency

proceedings in Mexico.



The director or board of directors and key personnel can be held

liable for a company’s insolvency only in the following

circumstances:

1. If they voted or decided about a matter concerning the

company’s properties and assets knowing they had a conflict

of interest regarding the matter.

2. If they intentionally favour a shareholder or group of

shareholders injuring or prejudicing the rest of the

shareholders.

3. When, without a legitimate cause and because of their

position or job, they obtain an economical benefit for

themselves or a third party, including a group of shareholders.

4. If they generate, spread, publish, provide or order

information, knowing it is false.

5. If they order or provoke that the Company’s operations do not

get registered, if they modify or order the modification of the

registries to hide the true nature of the operations, affecting

the Company’s statement of account.

6. If they order or accept to register false data in the Company’s

accountancy.

7. If they destroy, modify or order the modification of the

Company’s accountancy.

8. If they modify or order the modification of the active or

passive accounts of the Company or the agreements

subscribed by the Company conditions, as well as register

inexistent expenses of the Company.

These conducts can only be reported by the Company, not by the

creditors or a third party, and the penalty is limited to payment of

damages in favour of the debtor.


Some creditors may affect a company’s situation in a very important

way. For instance: tax creditors may have the capacity to seize the

bank accounts of a Company; and/or Labour creditors (employees)

may initiate a strike against the Company and/or attach the assets of

a Company even if it is under an insolvency proceeding. There are

no special rules for unsecured creditors.

The Court may dictate ex officio or by request of the creditors some

remedies, including:

■ prohibition against payments of obligations due before the

date of admittance of the petition for insolvency;

■ moratorium and stay of enforcement proceedings against the

assets and rights of the Company, with the exception

mentioned before (employee’s credits);

■ prohibition against the Company’s performance of sales,

transfers or encumbrances of the principal assets of its

enterprise;

■ appointment of a judicial administrator;

■ prohibition against performance of transfers of funds or

securities in favour of third parties; and

■ arrest warrants, among others.

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Irrespective of the date on which they have been performed (except

for the general commercial rule that sets the statute of limitations at

10 years), acts in fraud of creditors are those that meet the following

requirements: (i) were performed prior to the declaration of

commercial insolvency; (ii) through them creditors were knowingly

defrauded; and (iii) the third party involved in the act was aware of

the fraud.

The following are acts that are considered to be creditor fraud, so

long as they have been performed within the date of retroaction (270

days prior to the date of the judgment declaring the Company under

insolvency): (i) gratuitous acts; (ii) acts and sales in which the

debtor pays a price with a clearly higher value or receives a price

with a clearly lower value to the considerations offered by its

counterpart; (iii) transactions performed by the debtor in which

conditions or terms are established that are significantly different to

the prevailing conditions of the market in which they have been

performed, on the date of their performance, or from commercial

practices and uses; (iv) debt remittances; and (v) payments of

unmatured obligations; among others.

The CIL deems that the performance of any of these acts inherently

includes the bad faith of the person performing it, both of the

debtors and the other parties involved therein. In all those cases, the

transaction will be declared null and void by petition of any of the

parties (creditor, comptroller, conciliator, liquidator).



Yes. However, companies recur to formal work-outs because the

Company do not need the approval of all the creditors, only 50% of

them. Another benefit is that a reorganisation agreement is

mandatory for all unsecured creditors, even for those who did not

sign the agreement.


Out-of-court restructuring

Out-of-court restructuring will be entered into with all or a portion

of the debtor’s creditors. Non-party creditors are not bound by the

restructuring terms, which do not therefore affect their original debt

terms and conditions. As a result, out-of-court restructuring has no

practical effect or use for dissenting stakeholders.

Pre-packaged restructuring

The CIL provides for two restructuring schemes:

■ formal proceeding (reorganisation), which is similar to the

reorganisation procedure regulated under Chapter 11 of the

US Bankruptcy Code; and

■ pre-packaged restructuring, where the debtor with the

majority of its creditors can file for an insolvency proceeding

with an agreed restructuring plan. If it fulfils all legal

requirements, the Bankruptcy Court will issue a ruling

approving the plan if it does not contain any clause in

violation of the law (public interest) or third parties’ rights.

Reorganisation procedure

Debtors may file a voluntary petition for reorganisation at any time

before bankruptcy adjudication. Admission of the petition requires

the filing of evidence showing in a presumptive manner that the

debtor is in payments cessation at the time of filing.

The debtor enjoys a 185-day period, extendable up to 180 additional

days from the date of the Court’s resolution admitting the debtor’s

petition, during which it must draft a reorganisation plan and obtain

the consent of the required majorities of creditors secured and non-

secured creditors.

The restructuring plan must receive the approval of more than 50% of:

■ all unsecured creditors; and

■ secured creditors that signed the reorganisation agreement.

Once the plan is endorsed and performed, the Court will issue a

resolution declaring the reorganisation to be concluded and

finalising the intervention of the conciliator.

Creditors cannot block any insolvency procedure or threaten action,

but they can seek enforcement of collaterals if they are not

necessary to the operation of the debtor.

Finally, insolvency procedures in Mexico only allow to cram down

dissenting stakeholders if those dissenters form a majority of

creditors (veto).


In Mexico, the eligibility criteria for initiating a restructuring

procedure are based on proving that the Company has failed to fulfil

its payment obligations in a general manner.

The CIL considers that a Company is in a general state of non-

performance if there exists a payment default to two or more

creditors. One of the two following conditions should exist if the

insolvency petition is filed by the Company and both conditions if

the insolvency petition is filed by the creditors:

■ Insolvency – 35% or more of the Company’s payment

obligations are at least 30 days past maturity on the date that

the restructuring proceeding is filed.

■ Lack of liquidity – The Company has insufficient assets to

fulfil at least 80% of its matured payment obligations on the

date that the restructuring proceeding is filed.

In addition, the CIL foresees several events that constitute a

presumption that a Company is in a general default of payment of its

obligations (e.g. the non-existence or insufficiency of assets over

which enforcement may be brought in the case of an attachment).


Yes, the Bankruptcy Court (Federal Court) is the director of the

process, therefore it is involved in all the restructuring proceedings

supervising the conciliator’s performance, and it must resolve all

petitions of the creditors and debtor.

Also, the Court will determine whether a debtor must be declared

insolvent. The court must issue a ruling declaring the ranking and

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priority of all the creditors. The court issues a judgment approving

the reorganisation agreement entered into by the Company and its

creditors.

In general, the court conducts the restructuring proceeding and

resolves all motions filed by the parties and the conciliator.


As a general rule, the validity of the contracts is not affected by the

restructuring procedure. However, the CIL makes a casuistic

classification:

■ the validity of the agreements concerning only personal

goods will not be affected, as well as inalienable goods, those

exempt of attachment and those not subject to a statute of

limitation;

■ preparatory and definitive agreements must be complied with

by the Company, unless the liquidator considers that it will

harm the estate;

■ the seller can oppose delivering goods or property regarding

purchase agreements in which the Company is the buyer,

unless the Company pays the full price agreed by the parties

or guarantees the payment of the goods;

■ deposit agreements, loan agreements and commission and

agency agreements will not be terminated for the liquidation

procedure, unless the liquidator considers it necessary;

■ existing account agreements will be terminated, unless the

Company states its continuation with the consent of the

liquidator;

■ securities repurchase agreements will be terminated;

■ lease agreements will not be cancelled by the liquidation

procedure, unless the Company is the lessee and the

liquidator considers it necessary, in which case the receiver

must pay the penalty agreed in the contract or three months’

rent for the anticipated termination;

■ personal service agreements will not be cancelled;

■ lump-sum construction contracts will be cancelled, unless the

Company agrees to comply with the agreement with the

liquidator’s authorisation; and

■ insurance contracts will not be cancelled if the Company is

the insured party, but if the Company is the insurer, the

insured party can choose to terminate the contract.

Regarding repurchase, securities loans, futures and derivatives

transactions, the declaration of commercial insolvency will lead to

the early termination of those transactions, provided that:

■ the debts and credits resulting from these transactions are

offset;

■ the outstanding balance that may result from the set-off

against the debtor may be claimed by the corresponding

counterpart by means of the acknowledgment of the credits

procedure; and

■ in the case of a balance in favour of the debtor, the

counterpart will be bound to pay the conciliator for the

benefit of the estate within a term not exceeding 30 calendar

days, calculated from the date of the declaration of

commercial insolvency.


During the restructuring process, the Company is able to obtain further

credit or take out additional secured loans during an insolvency

procedure. The debtor can request authorisation from the Court in

order to obtain further credit (DIP Financing) and secure loans during

the insolvency procedure, if the resources required are strictly

necessary to maintain the Company’s operations.

Other costs, such as payment of salaries, taxes and all ordinary

expenses of the Company (rents, utilities, etc.) are funded by the assets

of the Company while it is in operation, but it can be also funded by

third parties, meaning the creditors themselves or any other party.



Out-of-court liquidation: Out-of-court liquidation does not require

the filing of a complaint or evidence to demonstrate that the debtor

is in payments cessation. Shareholders of the Company may agree

on a voluntary dissolution of the Company. Such resolution shall be

approved at a partners’ meeting (dissolution meeting), in which one

or more liquidators are to be appointed.

Winding up proceedings begin immediately after the Company’s

dissolution minutes have been duly registered with the Public

Registry of Commerce.

The sole manager must provide all corporate and accounting

documents, information and books to the liquidator, which must be

registered in an inventory. The liquidator is entitled to act on behalf

of the Company, acting as legal representative of the partnership,

therefore having all the obligations, responsibilities and limitations,

as well as the authority and powers of attorney and of a legal

representative.

Unless the dissolution minutes or law provides otherwise, the

liquidator is obliged to:

■ wind up the outstanding transactions and operations;

■ collect due payments and pay debts;

■ sell the assets;

■ distribute the remaining assets proportionately to their

partnership interest;

■ draft the liquidation balance sheet; and

■ hold the partnership’s documents and corporate and accounting

books in deposit for 10 years following the date of the

partnership’s winding up.

The final liquidation balance sheet must be approved by partners in

a winding up meeting. Liquidators may then proceed to:

■ pay partners’ equity against their corresponding partnership

interests;

■ give notice of the liquidation to the Ministry of Finance and

Public Credit; and

■ request the cancellation of the taxpayers’ registry and

partnership’s registry in the Public Registry of Commerce.

Partners will decide during the winding up meeting on the

distribution of the remaining assets (distribution agreement) once

the liabilities have been paid or their amount has been deposited

whenever payment is not possible. The liquidator will determine the

amount or assets that each partner is entitled to receive as final

payment for its ownership interest.

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Simplified Out-of-court liquidation: A recent Reform of the

General Law of Business Entities (that came into force on July 25th,

2018) has introduced two innovations for the winding up and

liquidation procedure of companies:

■ First, it establishes that a judicial resolution or administrative

decision by a Court is ground for dissolution, in accordance

to the tendency set by the legislator to recognise these

grounds for dissolution in the case of Simplified Stock

Companies.

■ Second, and most importantly, is the addition of Articles

249bis and 249bis 1 to the General Law of Business Entities,

of which enact a simplified winding up procedure, without

the need to notarise the dissolution and winding up of

meetings.

Pursuant to Article 249bis, business entities can conduct the

simplified winding up procedure if, and only if, the entity complies

with the following requirements:

■ if they are comprised exclusively by partners and

shareholders that are individuals;

■ if they do not operate illegally or habitually commit illicit

acts;

■ it must publish in the Secretary of the Economy’s electronic

system its Special Book of Partner or its Stock Registry with

the current share structure as of 15 business days from the

date of the meeting in which the winding up was agreed

upon;

■ it has not undertaken any operations or emitted any electronic

invoices during the last two years;

■ it has complied with all of its tax, labour, and social security

obligations;

■ it has not imposed any monetary obligations on third parties;

■ none of its legal representatives are a part in criminal

investigations for possible financial or property crimes;

■ it is not insolvent; and

■ it is not an entity within the financial system.

Court liquidation: The debtor Company may voluntarily file an

insolvency proceeding requesting the liquidation of all its assets,

properties, goods and rights. The Federal Institute of Commercial

Insolvency (IFECOM) will appoint a receiver (liquidator) to

manage the Company and sell the assets and rights of the Company

in order to pay the debts recognised in favour of the creditors.

The compulsory liquidation will take place when the Company

creditors request that the court liquidate the assets, or if the

Company and creditors do not reach a reorganisation agreement

during the conciliation stage of the insolvency proceeding (365 days

maximum).

The only regulatory difference between voluntary liquidation and

compulsory liquidation is that if the compulsory liquidation is filed

by the creditors, the Company may reject such petition and the

insolvency proceeding will begin from the conciliatory stage.


Out-of-court liquidation: It will suffice that the Company (debtor)

proves that it is facing general economic or financial difficulties.

Court liquidation: The liquidation procedure may be initiated:

■ if the debtor Company applies for an insolvency proceeding

in the liquidation stage; or

■ if two or more creditors request the liquidation stage.

In both cases, it must be demonstrated (even in a presumptive way)

that the debtor has defaulted in the payment of its obligations in a

general manner. In order to prove this condition of general non-

performance, a payment default to two or more creditors should

exist alongside the following conditions:

■ at least 35% of all Company obligations are at least 30 days

past maturity; and

■ the Company has insufficient liquid assets to satisfy at least

80% of its matured obligations on the date of the petition.

Also, a debtor can file for liquidation if it will imminently incur any

of the two scenarios mentioned before, taking into consideration

that the CIL provides that it will occur imminently if the default will

take place within the period of 90 days.


The out-of-court liquidation is managed by the shareholders and

directors of the Company. The court liquidation is managed by the

Bankruptcy Court.


Regarding out-of-court liquidation, shareholders decide if the

Company will enter in a dissolution and winding up process, and

creditors can act reluctantly and seek enforcement of security.

Regarding court liquidation when it is requested by the Company, it

is mandatory for the shareholders to sign a letter accepting that the

Company is going under bankruptcy itself, in the case that the

bylaws of the Company do not request additional requirements.

Also, secured creditors may seek enforcement of their collateral in a

different lawsuit, generally in a State Court.


The effects are the same as in the restructuring procedure. The

general rule is that the contracts entered into by the Company

(debtor) will continue to be valid, except when the liquidator rejects

them in the best interest of the estate.


Claims are divided into two categories:

■ Those filed before the judgment issued by the Court declaring

the company in insolvency; in that case, the claim will be

followed by the Company with the supervision of the conciliator.

■ Those filed during the insolvency proceeding, where the

lawsuits do not have to be accumulated to the insolvency.

The costs of those procedures will be assumed by each party.


Yes. If a Company is declared in liquidation (bankruptcy) that does

not mean that the Company will lose its capacity to continue in

operations in the future when new sources of financing are found, if

all creditors are paid.

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5 Tax


The CIL has foreseen that all tax credits will continue to cause fines

and accessories that correspond to pursuant applicable regulations.

In case of reaching a reorganisation agreement, the fines and

accessories caused during the conciliation stage will be cancelled.

However, the issuance of a judgment of bankruptcy will not be

sufficient cause to interrupt payment of taxes and social security

contributions of the Company, for being considered as indispensable

for the operation of the Company.

From the judgment of insolvency and until the end of the period for

the conciliation stage, all administrative procedures for the execution

of tax credits will be suspended, even though the tax authorities may

continue any process to determinate the tax credits of the Company.

6 Employees


Employees must be paid since an insolvency procedure is not a

justification to interrupt payments of salaries and wages.

Employees will be ranked as creditors against the bankruptcy estate

(first ranking) when the labour claim has a connection with unpaid

salaries for the last two years. But when the credit of an employee

comes from a different concept, the ranking will be equal to tax

creditors without collateral.

During insolvency procedures, any attachment of assets is forbidden

for all creditors, with the exception of when the attachment is

requested by a Labour Court for concept of unpaid salaries for the

last two years.

Creditors (including employees) who have not been paid in full,

individually retain their rights and actions for the unpaid amount

against the merchant.



If a foreign Company does business or has agencies or offices in

Mexico, under Mexican law it is considered a merchant under the

Mexican Commercial Code and the court with jurisdiction in the

place where the foreign Company does business can order the

insolvency proceedings or liquidation of the foreign Company’s

agencies and offices. However, it will be limited to the rights,

goods, assets and properties located in Mexico.


Yes. Mexican Courts recognise the validity of foreign insolvency

proceedings when:

■ a foreign court or representative requests for assistance from

the Mexican courts regarding a foreign insolvency proceeding;

■ when the insolvency proceeding takes place in Mexico and a

foreign country; and

■ when foreign creditors ask for an insolvency proceeding to be

initiated in Mexico.


Yes, it is common for global companies with a branch or subsidiary

in Mexico.

8 Groups


The bankruptcy of a Company that comprises a corporate group will

be accumulated, but it will follow its own course of action.

9 Reform


No, there are not.

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Fernando Pérez Correa Camarena SOLCARGO Avenida Insurgentes Sur 1602 Floor 11, office 1102 Colonia Crédito Constructor, Benito Juárez P.C. 03940, Mexico City Mexico Tel: +52 55 5062 0050


URL: www.solcargo.mx

Abimael Hernández Hernández SOLCARGO Avenida Insurgentes Sur 1602 Floor 11, office 1102 Colonia Crédito Constructor, Benito Juárez P.C. 03940, Mexico City Mexico Tel: +52 55 5062 0050


URL: www.solcargo.mx

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

Fernando Pérez Correa Camarena is a lawyer with more than 20 years of experience in dispute resolution, civil and commercial litigation, arbitration and mediation. He is admitted to practise in the state of New York and in the federal courts of the 2nd Circuit of the United States of America. He is a certified mediator before the Superior Court of Justice of Mexico City, and since 2005 he is registered as conciliator and receiver before the Federal Institute of Specialists in Insolvency Proceedings (IFECOM). Since 1998 he has been the managing partner of the dispute resolution practice area. He has experience as a party lawyer in more than 25 international commercial arbitrations, four investment arbitrations and more than 20 bankruptcy proceedings. He is listed in classifications such as Chambers and Partners, The Legal 500 and Latin Lawyer.

Abimael Hernández Hernández is a lawyer with more than 13 years of experience in civil and commercial litigation (domestic and international) including enforcement and annulment of arbitration awards and foreign judgments. He has participated in different commercial and investment arbitration proceedings. He has also vast experience in claims for damages against private entities, as well as public authorities. In the last six years he has focused and specialised his practice on commercial insolvency, restructuring and bankruptcy proceedings. During 2010 and 2012 he worked for the law firm O’Melveny & Myers, LLP at Newport Beach, California, USA, and in 2013 he achieved a Masters of Law at UCLA. He is listed and recommended in classifications such as Chambers and Partners, The Legal 500, Global Law Experts (commercial litigation), and Corporate Advisory Network.

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chapter 25


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Job van Hooff

Daisy nĳkamp

netherlands

1 Overview


The Dutch jurisdiction is primarily creditor-friendly, the primary

aim of the Dutch Bankruptcy Act (“DBA”) – more specifically the

bankruptcy proceedings – is to ultimately satisfy the creditors, and

not to give the debtor a remedy to reorganise its business and to

grant a (full or partial) discharge of debts.


The DBA provides for two formal corporate insolvency proceedings:

bankruptcy (faillissement; corporate liquidation proceedings); and

suspension of payments (surseance van betaling; corporate

restructuring proceedings).

In both formal insolvency proceedings the debtor can offer a

composition plan (akkoord) to its (ordinary) creditors, but this does not

happen often.

The legislative framework also allows informal work-outs, for

example, by means of a plan of composition. Such an informal

composition – currently – requires the cooperation of all creditors. The

Dutch legislator is working on a proposal allowing for more

possibilities for formal restructurings outside insolvency proceedings.

Suspension of payments are rarely successful and are often followed

by bankruptcy. In practice, bankruptcy is the most used insolvency

proceeding.



The managing directors of the debtor are not under a statutory

obligation to file for the opening of insolvency proceedings.

Although the DBA does not contain such obligation, the managing

directors may become personally liable vis-à-vis the creditors if the

managing directors have allowed the company to incur obligations

towards a third party which they know, or should have known, the

company will not be able to timely meet. In such circumstances, the

managing directors will be required to take appropriate measures,

which could – depending on the circumstances – include the

cessation of trading and the filing for suspension of payments or

bankruptcy.

A managing director can be held liable for losses suffered by the

company due to improper management if the managing director can

be seriously blamed (ernstig verwijt), taking into account all facts

and circumstances, such as the allocation of duties within the

management board, the management board guidelines, information

which the member of the management board is or should have been

aware of, etc. These proceedings can only be initiated by the

company, or by the bankruptcy trustee in case of a bankrupt

company.

Managing directors are liable for the deficit of the estate if it is

plausible that the management board manifestly improperly

managed the company and this was an important cause of the

bankruptcy. Certain legal presumptions apply. This liability

towards the bankruptcy estate also applies to a de facto managing

director.

Although the main rule is that only the company (and not its

managing directors) is liable towards third parties such as creditors

of the company, personal liability towards third parties may

nevertheless arise if a managing director has committed an unlawful

act towards such third party by violating his general duty of care. In

all cases, the standard of liability is that the member of the

management board can be seriously blamed for this.

Members of the management board may further become jointly and

severally liable for the payment of certain taxes. This liability arises

in the case of manifestly improper management. If the company or

any of the managing directors timely filed a notification of non-

payment, the tax authorities have to demonstrate that there was such

manifestly improper management. If the company or any of the

managing directors failed to timely file the notification, it is legally

assumed that the non-payment of taxes was caused by the managing

director, unless he proves otherwise.

In conclusion, certain criminal law provisions apply, e.g. in case of

fraudulent conveyance.

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In the Netherlands it is fairly easy for creditors to obtain leave for

conservatory attachment. Such creditors may also file a petition for

bankruptcy. The filing of such petition can trigger contractual

clauses that make it possible to terminate existing contracts.

Dutch law further provides for a broad retention of title regime.

Suppliers can arrange to reclaim their goods until all invoices have

been paid.

Secured creditors (financiers) also have a strong influence. In

practice, a company in financial difficulties will be placed under the

supervision of the financiers’ special management department

because certain covenants under the financing agreements will be

breached. Formally, the secured creditor has no role within the

company but in practice the company often cooperates with the

bank, in the knowledge that the cooperation of the financiers is

required for any restructuring due to all assets being pledged.

Employees take a special position in the Netherlands. Outside of a

bankruptcy scenario, the possibilities to dismiss employees are

limited. This is one of the reasons why it is difficult to successfully

restructure a company outside insolvency proceedings.

In the Netherlands, suspension of payments (moratorium) is granted

on a preliminary basis if a debtor foresees that it will be unable to

meet its obligations. During suspension of payments proceedings,

the debtor cannot be forced to pay his debts and all actions in

progress to recover those debts are suspended. However, this regime

only affects the ordinary creditors. See question 3.2 and further.

A freeze period can apply in bankruptcy or suspension of payments

(see question 4.4).


The bankruptcy trustee is entitled to invalidate legal acts of the

bankrupt debtor which were carried out before the declaration of

bankruptcy and which were detrimental to the creditors. No

hardening period applies. The burden of proof may be reversed in

respect of voluntary legal acts that took place less than a year before

the debtor was declared bankrupt (e.g. legal acts entered into with

related parties or transactions at undervalue).

Voluntary legal acts by the bankrupt debtor, of which the results are

detrimental to creditors (which is established when the action is

invoked), may be invalidated if both the debtor and its counterparty

knew or should have known (at the time the legal act was voluntarily

entered into) that such legal act would have a detrimental effect on

the creditors. The fact that a transaction was at arm’s length does

not necessarily mean that a transaction cannot be challenged.

Also, compulsory legal acts can be invalidated if (a) the creditor

knew that the request for bankruptcy was pending, or (b) if the

creditor consulted with the debtor with the intention to put him in a

more favourable position than the other creditors. These must be

proven by the bankruptcy trustee. There is no presumption of

knowledge as in the case of voluntary legal acts.

Outside of formal insolvency proceedings, transactions can also be

challenged. As a matter of Dutch law, every creditor may nullify (by

a simple declaration) any legal act entered into by a debtor with a

third party if the requirements for voidable preference outside

bankruptcy are met.

The validity and enforceability of the obligations of a debtor under

e.g. guarantee or security interest may be successfully contested by

a debtor (or its bankruptcy trustee) if the execution of the security

document is not within the scope of the corporate objects of the

debtor (doeloverschrijding) and the counterparty of such debtor

under the security document knew or ought to have known (without

enquiry) of this fact.



As a general rule, the Dutch legislative framework currently only

allows informal work-outs if all creditors cooperate and approve the

informal work-out. In exceptional cases, creditors can be forced to

approve the informal work-out (i.e. in case of abuse of power). A

debt-for-equity swap can be part of an informal work-out.

Legislation on extrajudicial restructuring plans to avert bankruptcy

is in the making (see question 9.1).


Suspension of payments is the main formal rescue procedure

available in the Netherlands. Suspension of payments only affects

the rights of ordinary creditors; the obligations of the debtor to pay

its ordinary creditors are suspended. The rights of the secured and

preferential creditors are not affected.

The debtor can offer a composition plan which provides for a full or

partial payment of the suspended claims of the creditors, in full

satisfaction of their claims. Using the plan of composition during

suspension of payments may lead to a successful reorganisation.

Dissenting ordinary creditors can be forced to accept the

composition if – in summary – the majority of the creditors vote in

favour of the plan and the plan is approved by the court. However,

in practice, it is difficult to achieve a successful restructuring by way

of offering a composition plan.

A pre-packaged sale is also allowed under Dutch law. Although

there is no specific legislation regarding pre-packaged sales yet (see

question 9.1), the majority of Dutch courts allowed for pre-

packaged sales. Since the European Court of Justice has decided

that the transfer of undertaking rules in respect of employment

contracts can be applicable in pre-packaged sales, the pre-packaged

sale has not been very popular. There is a risk that employees of the

debtor automatically transfer to the purchaser in a pre-packaged

asset sale.

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The debtor can file a petition in court for a suspension of payments

if it foresees that it will be unable to continue to timely meet its

obligations. Suspension of payments is immediately granted on a

preliminary basis. In theory, the object of a suspension of payments

is to allow the debtor time either to overcome temporary illiquidity

or to propose a settlement to its creditors. An application for

suspension of payments cannot be made by creditors or other third

parties.


Upon granting a preliminary suspension of payments, the court will

appoint an administrator (bewindvoerder). A supervisory judge is

usually also involved. The administrator, in co-operation with the

management board of the debtor, will administer the affairs of the

debtor and investigate the possibilities of a reorganisation of the

debtor’s company and/or full or partial payment of the creditors

through a plan of composition. By law, the management and the

administrator may only act together; the administrator is de facto in

control during suspension of payments. In practice, the preliminary

suspension of payments is most often shortly followed by a

bankruptcy, because the administrator considers that a successful

reorganisation is unlikely.


In principle, suspension of payments does not affect existing

agreements. However, the debtor’s payment obligations in relation

to ordinary claims are suspended. Moreover, these contracts might

contain provisions on the consequences of the granting of

suspension of payments on any of the parties to the agreement, and

these remain in principle valid. The same applies to set-off

provisions.

Although agreements in principle are not affected by suspension of

payments, the administrator/debtor does not have to perform all

obligations under agreements as this may conflict with his duty to

treat all creditors equally (e.g. not obliged to make payments,

deliver goods). The counterparty can file its (ordinary) claim in the

bankruptcy estate. The administrator/debtor does have the

obligation to passively perform (e.g. honour the lease agreement if

the debtor is the lessor). If such obligations are not honoured, the

counterparty has a direct claim on the estate.

If both the debtor and the counterparty have not or have only

partially performed under an agreement, the counterparty can

request the administrator/debtor to confirm within a reasonable time

whether it is willing to perform under the contract. If the

administrator/debtor does not confirm this, he loses the right to

claim performance of the counterparty’s obligations. If the

administrator/debtor confirms that he will perform, the

administrator/debtor has to provide security.


Reorganisation of the company will generally be funded by the

debtor itself. The debtor can generate money by selling certain

assets in order to pay off debts.

Rescue financing is not protected by any legislation. However, after

the opening of insolvency proceedings it is possible for a financier

to provide a preferential loan that has a higher rank than other debts

of the debtor if the bankruptcy trustee or the administrator agrees.



The key insolvency procedure available to wind up a company is

bankruptcy.


A debtor can be declared bankrupt by a Dutch court if it resides or has

a place of business in the Netherlands and either applies for bankruptcy

itself or an application for bankruptcy is filed by a creditor.

The petition must reveal facts and circumstances which constitute

prima facie evidence that the debtor has ceased to pay its debts.

This is considered to be the case if there are at least two creditors,

one of whom has a claim which is due and payable and which the

company cannot or refuses to pay. The DBA does not require that

other creditors support the petition.

In addition, the administrator in suspension of payments might have

to file for bankruptcy. This would, for example, be the case if there

is no outlook that the debtor will be able to satisfy its creditors or the

debtor acts in bad faith.


When making the bankruptcy order, the court appoints a supervisory

judge (rechter-commissaris) and at least one bankruptcy trustee

(curator). The bankruptcy trustee is entrusted with the

administration of the bankruptcy and is exclusively entitled to

administer and dispose of the assets. The bankruptcy trustee is

usually an attorney of the local bar association and, especially in

case of larger bankruptcies, a specialised insolvency lawyer.

The supervisory judge’s task is to supervise the bankruptcy trustee

and he has a statutory duty to approve certain decisions to be made

by the bankruptcy trustee.


The management board is not authorised to file for bankruptcy

without a resolution to do so from the general meeting of

shareholders. Other than that, shareholders have little influence on

the bankruptcy proceedings.

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The court may, depending on the type and size of the bankruptcy,

decide to form a creditors’ committee which task is to advise the

trustee. If a creditors’ committee is installed, the bankruptcy trustee

is obliged to seek advice from the committee with regard to the

subjects referred to in the DBA. In addition, creditors have the right

to file a request with the supervisory judge objecting to acts of the

bankruptcy trustee or demanding an order from the supervisory

judge.

Ordinary creditors are not entitled to enforce their claims; all

attachments on the debtor’s assets which benefit specific creditors,

are replaced by a general bankruptcy attachment which benefits all

creditors. Pending legal proceedings are suspended. Creditors have

to file any claims on the debtor in the bankruptcy estate.

Creditors that have a right of mortgage or right of pledge have more

influence. Subject to any applicable freeze order, secured creditors

are entitled to foreclose their collateral during bankruptcy. The

bankruptcy trustee is in principle not entitled to the proceeds of the

sale of the secured assets, nor is he entitled to withhold these assets.

The secured creditors cannot be charged with the costs of the

bankruptcy.

However, the bankruptcy trustee may impose on the mortgagee or

pledgee a reasonable deadline for selling the collateral. If secured

creditors do not execute the collateral before the deadline, the

bankruptcy trustee is entitled to liquidate the collateral himself,

notwithstanding the creditor’s right of priority to the proceeds as a

preferential creditor. In that case the secured creditor has to share in

the costs of the bankruptcy, which may mean that they will receive

little or no proceeds.

The supervisory judge may declare a freeze period, during which

recourse can only be sought against (some of the) assets of the estate

or assets in the possession of the bankruptcy trustee, after having

obtained authorisation from the supervisory judge. The freeze

period applies for a maximum period of two months and may be

extended once, for a maximum of two months.


In principle, bankruptcy proceedings do not affect the validity or the

content of an agreement. Set-off provisions and termination

provisions will be upheld. The DBA provides for broad set-off

possibilities.

Although agreements are in principle not affected by the bankruptcy

proceedings, the bankruptcy trustee does not have to perform

obligations under agreements that may conflict with his duty to treat

all creditors equally (e.g. not obliged to make payments, deliver

goods). The counterparty has to file its claim with the bankruptcy

estate. The bankruptcy trustee does have the obligation to passively

perform (e.g. honour the lease agreement if the debtor is the lessor).

Alternatively, the counterparty has a direct claim on the estate.

If both the debtor and the counterparty have not, or have only

partially performed under an agreement, the counterparty can

request the bankruptcy trustee to confirm within a reasonable time

whether he is willing to perform under the contract. If the

bankruptcy trustee does not confirm this, he loses the right to claim

performance of the counterparty’s obligations. If the bankruptcy

trustee confirms that he will perform, he has to provide security.

The DBA does grant the bankruptcy trustee with the right to

terminate lease agreements and employment contracts.


The ranking of claims is as follows:

Estate claims (boedelvorderingen) are direct claims against the estate.

Estate claims have priority over all other claims. An exception applies

to the claims of secured creditors which have timely foreclosed their

security, as they can act as if there is no bankruptcy at all.

Estate claims are claims which arise by virtue of law (e.g. rental

payments during the bankruptcy, and salaries dating from after the

date of the bankruptcy order), from legal acts performed by the

bankruptcy trustee in his capacity and resulting from actions of the

bankruptcy trustee in breach of an obligation or commitment

applicable to him in his capacity as bankruptcy trustee. The salary

and costs of the bankruptcy trustee are estate claims as well.

Claims of secured creditors are claims of creditors which are

secured by a right of mortgage (hypotheek) or a right of pledge

(pandrecht). Subject to any applicable freeze order, secured

creditors are entitled to foreclose their collateral during bankruptcy

(see above under question 4.4). To the extent that not all claims can

be satisfied from the proceeds of the enforcement of the security

rights, the remainder is treated as an ordinary claim.

Preferential claims are claims that have a priority right to the

proceeds of the assets of the estate. There are several categories of

preferential creditors, all of whom have a right of priority to the

proceeds of the assets of the estate. Their preference may relate to

the proceeds of all assets or to the proceeds of specific assets only.

The claims of the tax and social authorities (taxes and social

insurance contributions) as well as certain claims of employees are

the most important categories of preferential claims. Preferential

creditors only receive payment if all estate claims are paid. With

regard to the proceeds of fixtures and fittings tax claims take

preference over secured claims under certain circumstances.

Ordinary claims are claims that already existed on the date of the

bankruptcy order or were already a part of the legal position of the

creditor at the date of the bankruptcy order. Ordinary claims must

be submitted for verification. The ordinary creditors receive a pro rata share of the remainder after the estate claims and preferential

claims are paid.

Post-insolvency claims are claims that arise after the bankruptcy

and do not fall within one of the abovementioned categories. Those

claims cannot be submitted for verification.


In theory, the bankruptcy can end with a plan of composition

offering the creditors a partial payment of their claim. The bankrupt

legal entity then emerges from bankruptcy and can continue to do

business. In practice, the plan of composition is almost never

offered in case of bankruptcy proceedings.

5 Tax


Restructuring and insolvency proceedings can significantly affect

the fiscal position of the company. Certainly in group relationships,

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complex tax regulations can have far-reaching consequences that

affect not only the distressed company itself, but also the group of

companies to which it belongs. Examples of possible tax risks are:

■ Companies in distress are obliged to timely report to the tax

authorities their inability to pay tax debts.

■ Many groups of companies form a fiscal unity (fiscale eenheid). If a company in a fiscal unity goes bankrupt, the

unity automatically terminates in relation to that company.

This can be relevant in relation to corporation tax and VAT.

■ If a creditor remits a claim, this can lead to a taxable profit for

the debtor (kwijtscheldingswinst). Under Dutch law there is

a specific regulation concerning these kinds of profits.

Remission is also possible within the company’s tax unity.

It is therefore important to map out the distressed company’s tax

position adequately and timely.

6 Employees


With authorisation from the supervisory judge, the bankruptcy

trustee is entitled to terminate the employment contracts. The

applicable termination period depends on the terms of the relevant

employment agreement, but at the longest is six weeks.

The salary and pension contributions between the bankruptcy date

and the date of termination of the employment agreement rank as

estate claims. Claims that predate the bankruptcy date and arose

within one year prior to that date are preferential claims. Any

further claims rank as ordinary claims. The same regime applies in

a suspension of payments.

In practice, most of the employee’s claims on the estate will be paid

by the Employee Insurance Agency (“UWV”) under the wage

guarantee scheme. It concerns the amount that ranks as estate claim

(with a maximum of six weeks) and also the salary for the period

until 13 weeks prior to the bankruptcy and certain other amounts

(e.g. holiday pay and holidays for the year preceding the

bankruptcy). The UWV in turn will subrogate in the claims of the

employees towards the estate.

In a suspension of payments, the administrator and debtor acting

jointly can terminate the employment contracts together. They

require a dismissal permit from the UWV. The termination period

can vary depending on the relevant employment contract.

European rules on the transfer of undertaking are not applicable in

case of an asset sale during bankruptcy proceedings. This, however,

might differ in the case of a pre-packaged sale due to the recent

judgment of the European Court of Justice in relation to Smallsteps;

see also question 3.2 above.



Any debtor residing in the Netherlands or with its centre of main

interest located in the Netherlands can enter into insolvency

proceedings in the Netherlands.


There is a difference between proceedings commenced in an EU

Member State and those commenced in a non-EU Member State.

Insolvency proceedings commenced in EU Member States (with the

exception of Denmark) are recognised pursuant to the EU

Insolvency Regulation (recast).

Proceedings commenced in non-EU Member States are formally not

recognised in the Netherlands absent any treaty, but in practice do

have some effect. When determining a claim for recognition of

insolvency proceedings rendered by a court in a non-EU Member

State, Dutch courts will apply the Dutch private international rules

for recognition of foreign judgments. Foreign judgments will be

recognised if the authority of the relevant court is based on

internationally accepted standards and the foreign judgment does

not conflict with the Dutch public order. The recognition of the

foreign insolvency order is, however, limited by the principle of

territoriality. This means that the foreign proceeding, for example,

cannot impair the rights of creditors to take recourse on assets

located in the Netherlands.


Occasionally, companies incorporated in the Netherlands enter into

insolvency proceedings or restructuring proceedings in other

jurisdictions. Dutch incorporated companies have, in the past, for

example, used the English scheme of arrangement in order to restructure

their debt. It is not unusual, but neither is it common practice.

8 Groups


Dutch legislation does not provide for a formal procedure with

regard to the insolvency of a group of companies. The main rule is

that each company has to be separately liquidated.

In exceptional cases, the bankruptcies can be settled jointly by

means of what is known as a consolidated settlement. At the request

of the bankruptcy trustee, the appointed supervisory judge is

authorised to decide whether a consolidated settlement is necessary.

Dutch law does not provide for a statutory obligation for bankruptcy

trustees to cooperate with one another.

9 Reform


The Act on the Modernisation of Bankruptcy Proceedings has

recently (on 1 January 2019) become effective. This legislation

aims to limit the ‘social costs’ resulting from a bankruptcy and to

contribute to increasing the revenues for the creditors.

stibbe netherlands

net

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Job van Hooff Stibbe Beethovenplein 10 1077 WM Amsterdam Netherlands Tel: +31 20 546 06 71


URL: www.stibbe.com

Daisy Nijkamp Stibbe Beethovenplein 10 1077 WM Amsterdam Netherlands Tel: +31 20 546 02 54


URL: www.stibbe.com

Job co-heads Stibbe’s restructuring and insolvency group, specialising in liability, security rights and restructuring. He advises and litigates on complex matters, often relating to situations in an international context or to situations of financial distress. He also acts as a court appointed administrator and bankruptcy trustee. Job is an active member of Insolad, INSOL World and INSOL Europe and he regularly teaches and publishes on subjects of liability, including directors’ liability, security rights and bankruptcy law.

About Stibbe

Stibbe is an international law firm advising on the laws of the Benelux countries and European law, with offices located in Amsterdam, Brussels and Luxembourg as well as in Dubai, London and New York.

Our practice groups include restructuring and insolvency, employment, pensions and incentives, corporate, mergers and acquisitions, real estate, construction, telecom, media and technology, administrative law, environment and planning, private equity, capital markets, finance, tax, litigation and dispute resolution, EU competition, energy and intellectual property.

In addition to our own international offices, we collaborate closely with other top-tier firms for cross-border matters outside our Benelux home jurisdictions. These relations are non-exclusive and enable us to assemble a tailor-made, integrated team of lawyers with the best expertise and contacts for each specific matter. This guarantees efficient coordination on cross-border matters, whatever their complexity and nature.

Restructuring & Insolvency

Stibbe’s Insolvency & Restructuring team is recognised as top tier and its members are considered front runners in their field. Our practice is active in all major areas of international Insolvency & Litigation.

Our team stands out in the Dutch market because it combines (i) restructuring/insolvency advisory work, (ii) appointments by the Court to act as bankruptcy trustee or administrator in suspension of payments procedures, and (iii) litigation. We know how bankruptcy trustees and supervisory judges act and think and we know them very well. We can apply that knowledge towards strategy decisions and litigation tactics.

Our Insolvency & Restructuring team has ample experience in (international) insolvency procedures, litigation and in representing creditors and shareholders in disputes and negotiations with bankruptcy trustees.

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

The following developments in the context of reform of the

corporate rescue and insolvency regime in the Netherlands are

worth mentioning:

■ Legislation regarding pre-packs (Continuity of Enterprises

Act). The purpose of this proposal is to provide a legal basis

for the working method that has arisen in practice, whereby

in certain cases an intended bankruptcy trustee is appointed

prior to an expected bankruptcy, often termed a ‘pre-pack’.

The effect of the Court of Justice ruling mentioned under

question 3.2 is that the number of situations in which the

proposal will be used is more limited than was taken into

account at the start of the legislative process. For the time

being, the legislation process has been suspended.

■ Legislation introducing the possibility to get court

confirmation for an extrajudicial restructuring plan to

avert bankruptcy (Act on Court Confirmation of

Extrajudicial Restructuring Plans to Avert Bankruptcy). The

purpose is to include a regulation in the DBA providing for

court confirmation of a restructuring plan concerning the

restructuring of debts where this is necessary to avert

imminent bankruptcy. The purpose of the proposal is to

introduce formal reorganisation proceedings containing

elements which are comparable to the US Chapter 11 and UK

scheme of arrangements. Although the wording of the

proposal is not yet officially published, it is understood that

the proposal contains mechanisms that allow for changing the

rights of creditors.

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chapter 26


miyetti law

Dr. Jennifer Douglas-abubakar

Jude odi

nigeria

1 Overview


Nigeria is a substantially creditor-friendly jurisdiction, especially

for debts acquired by Nigeria’s public assets management body, i.e.

Assets Management Corporation of Nigeria (AMCON). With

creditors other than AMCON, the extant laws still tilt highly in

favour of creditors, who have an array of options, including winding

up, by which they may realise or recover debts.


Legislative frameworks in Nigeria have made express provisions for

formal restructuring and insolvency proceedings in the form of

mergers or amalgamations, takeovers, acquisitions, bankruptcy or

winding up proceedings. (See Sections 117–152, Investment and

Securities Act, 2007 (ISA) which laid down the procedures for

such.) Insolvency proceedings are more formal as provided for

under the Asset Management Corporation of Nigeria Act

(AMCON Act), 2010 (as amended), for AMCON-acquired debts,

and under the Companies and Allied Matters Act (CAMA), Cap.

C20, LFN 2004 and the Bankruptcy and Insolvency Act (BIA),

2017 for other debts.

On the other hand, informal work-outs are accommodated by extant

laws, albeit without detailed regulations. For instance, under the

Banks and Other Financial Institutions Act (BOFI Act) Cap. B3,

LFN 2004, a bank can enter into an agreement or arrangement that

will result in: the change in control of the bank; sale, disposal or

transfer of the whole or any part of the business of the bank;

amalgamation or merger of the bank with any other person;

reconstruction of the bank; or employment or transfer of the business

of the bank to a management agent. Whatever the restructuring

might be, Section 7 BOFI Act requires prior consent of the Governor

of the Central Bank of Nigeria (CBN). Similarly, the AMCON Act empowers AMCON to accept work-outs or indulge a restructuring.

With respect to other private creditors, work-outs and restructuring

are feasible only to the extent spelt out in loan agreements, offer

letters or as may otherwise be mutually agreed by the parties.



The Directors of a company in financial difficulty are liable to be

proceeded against if found wanting under Section 290, CAMA. This

Section provides that where money and/or property was received by

a company by way of loan for specific purpose or by way of advance

payment from a party for the execution of a contract or project, and

not so channeled, the directors and/or officers would be personally

liable to the party for such misappropriation.

In terms of duties, the directors owe a duty to make a declaration of

solvency or otherwise at a General Meeting of the company. Where

the company is found to be in financial difficulties, it may elect to

voluntarily wind up. Otherwise, creditors of the company may file

a petition in court to wind up the said company. Where this is the

case, the Board of Directors has a duty to approve the special

resolution and call an Extraordinary meeting. Additionally, where a

receiver/manager or a liquidator might have been appointed to

assume management of a company, the Directors shall become

functus officio (without further authority or legal competence).

However, while at the helm of affairs over a company in financial

difficulties, the Directors must take care to ensure that the monies

received by way of loan or advance payment are channeled to the

right source, or risk personal liability. Likewise, BIA entitles a

trustee to bring an application to court, and the court may inquire

into any transactions (e.g. dividend redemption or purchase on

cancelled shares) approved by the Directors of a company, to

ascertain whether it occurred at a time when the corporation was

insolvent or whether it rendered the corporation insolvent. If the

court finds that the act of the Directors in this regard has rendered

the company insolvent, the court will enter judgment against the

directors in the amount of the dividend or redemption or purchase

price, with interest thereon.

With regards to the time frame for a company to restructure, there is

no specific point at which a company must restructure, as

restructuring is a continuous process and could occur in moments of

solvency (e.g. arrangement on sale) or insolvency (compromise).


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For insolvency proceedings, however, it may be initiated once a

company, after being served with demand notice, fails or is unable

to pay any debt in excess of N2,000. This is as provided for in

Section 408, CAMA and upheld in the recent Supreme Court

decision of Unifam Ind. Ltd. v. Ecobank (Nig.) Ltd. [2019] 1 NWLR (Pt. 1653) SC 187.


Statutory bodies including AMCON, the Nigerian Deposit

Insurance Corporation (NDIC), the Securities and Exchange

Commission (SEC), the Corporate Affairs Commission (CAC), the

National Social Insurance Trust Fund (NSITF), the Federal Inland

Revenue Service (FIRS) have influence over a company’s situation.

These, however, are substantially regulatory, except for AMCON,

NSITF and FIRS, which are purely debt, social insurance and tax

recovery agencies, respectively. Other stakeholders that might

influence the situation of a company, especially in times of financial

difficulties, are debenture holders, employees and landlords.

The law defines their priority, how and when they can bring an action

against a company and to what extent they can recover. Under the

relevant laws, preferential payments shall be made to pay off debts in

the nature of charges, rates and other taxes that the company owes,

within 12 months preceding its insolvency. Deductions accruable to

NSITF and wages or salaries of clerks, servants, workmen, labourers

or employees of the company also enjoy priority. Likewise, a

landlord of a property demised to a company is equally entitled to

claim payment from the company or its liquidator for arrears of rent.

With respect to restructuring, such as mergers, the same will not be

sanctioned (made enforceable) by the court until adequate provisions

are made for the employees to be affected.

The moratoria allowed for commencement of bankruptcy and

winding up proceedings under AMCON Act are 30 and 60 days from

the date of judgment and bankruptcy, respectively. With respect to

other creditors, moratoria are as spelt out in the loan agreements or

offer letters duly executed by the company and its creditor.

Stay on enforcement can only operate against unsecured creditors.

Secured creditors cannot be restrained from the realisation of a loan

before winding up proceedings. Additionally, under Section 412, CAMA, where a petition for the winding up of a company is before

a court, a company, its creditor or its contributory may obtain a stay

or restraining order against all other suits in any other court, pending

the outcome of the winding up proceedings, or apply to have such

other matter transferred to the court hearing the petition.


The directors of a company can lawfully act for and on behalf of a

company until a receiver/manager or liquidator is appointed either

by the company, creditors or by the court. At such point, every

action taken for the company must be made by the receiver/manager

or liquidator; otherwise, it is voidable. A member of a company,

past or subsisting director or officer, a creditor, the CAC or any

other appropriate person may apply to the court for remedies where

it is perceived that the business of a company has been conducted in

an unfairly prejudicial and oppressive manner. Such remedies

include rescission of a transaction, damages and criminal indictment

and/or conviction. Likewise, a company and its affairs may be

investigated by the CAC and where the investigation may result in

civil action or criminal proceedings (piercing the veil) of the

company, to make the culpable alter egos (agents) accountable.



An informal work-out is possible in Nigeria. It will, however,

require the concession of the parties, especially the creditor, to take

place. For AMCON acquired loans, AMCON has a statutory power

to initiate or participate in any restructuring, rearrangement or other

compromises. Further, with respect to banks and other financial

institutions, as noted in question 1.2 above, they can enter into an

agreement or arrangement with the consent of the CBN Governor.

Indeed, there had been quite a number of such restructuring since the

continual recapitalisation exercise by the CBN which started in 2009.


The formal restructuring procedures available in Nigeria are

numerous. Prominent among these are mergers, takeovers and

acquisitions. It is apt to say that swaps are permissible in Nigeria.

Section 160 (2), CAMA allows a company to acquire its own shares

for several purposes, one of which is to settle or compromise a debt

or claim asserted by or against it, or satisfy the claims of a dissenting

shareholder. Also, Section 166, CAMA allows a company to borrow

money for the purposes of business or objects and may mortgage or

charge its undertakings, property and uncalled capital, or any part

thereof, and issue debentures, debenture stock and other securities

whether outright or as security for any debt, liability or obligation of

the company or a third party. Lastly, Section 383 (3), CAMA, gives a

clear indication of the power of Nigerian companies to allot unissued

shares to debenture holders or creditors as shares fully paid up.

The restructuring procedures are never embarked upon without

carrying the stakeholders along. Merging companies must hold

separate meetings and obtain a yes vote of persons who own at least

¾ of the total value of shares in the companies. With respect to

intermediate and large mergers, notices of the proposed merger must

be served, personally or through trade unions, on the employees to

be affected by the merger. Sections 129 and 130, ISA makes an

ample provision by which a transferee company may acquire shares

of dissenting shareholders, and the right of dissenting shareholders

to compel acquisition of their shares, respectively. For mergers, the

transferee company must command at least 51% of the controlling

shares of the transferor company, whereas for takeover, control of

up to 30% would be sufficient to kickstart the bid. It might be a

regular or hostile takeover. The Takeover Bid must be served on the

SEC, the board of directors of the companies, the shareholders and

the creditors of the target company. Nine tenths of the members of

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the target companies must endorse it for it to scale through. The

interest of the dissenting � can be acquired, at a price to be fixed by

a court-appointed independent share valuer. To this extent, it is right

to say that dissenting classes of shareholders can be crammed down.


The foremost criteria for entry into a merger as noted in question 3.2

above is for the acquiring or transferee company to wield a

controlling share interest of at least 51% in the targeted company.

Other detailed criteria for a merger is determined by the size of the

merger, which could be small (not more that N500 million worth),

intermediate (more than N500 million but less than N5 billion worth)

or large (more than N5 billion worth, or exactly N5 billion worth)

merger. For the most part, however, the common criteria are that

SEC must be notified, SEC must consider its suitability vis-à-vis

competition and public policy. Upon SEC approval, it must be

sanctioned by order of the Federal High Court which must be

gazetted and published in at least one national newspaper.

The criteria for takeover are a controlling share interest of at least

30% in the target company, a resolution by the acquiring/controlling

company, a takeover bid document, an inspector to be appointed by

SEC to consider the fairness of the bid and prepare a report on same

and sanctioning order by the FHC of the report.


Informal restructurings that are done internally are piloted by the

directors and shareholders of the company, sometimes with

influences from creditors. The company only ensures statutory

regulations are adhered to.

For formal restructurings that are often external, the SEC manages

most of the processes. The CAC comes in mostly in the returns area

by the company to update their records.

As for court involvement, the Federal High Court is involved in both

mergers and takeovers. Additionally, AMCON may be involved in

a restructuring, utilising as appropriate or a judicial involvement.


A contract duly entered into in compliance with CAMA shall

survive every restructuring procedure and be enforceable against the

entity that emerges from such restructuring unless the contract itself

takes into account the event of the restructuring of the company.

According to Section 71(2), CAMA, an existing contract shall bind

the company and its successors and all other parties thereto, their

heirs, executors, or administrators, as the case may be.

It is important to note the peculiarity with AMCON-acquired assets.

The recent amendment (Section 4, Asset Management Corporation of Nigeria (Amendment) Act, 2015) entitles AMCON to ‘rights’

alone, without any prior existing ‘obligations’. Thus, giving a rigid

interpretation may suggest that AMCON may refuse to be bound by

a contract between a third party and the bank from which AMCON

acquired an eligible asset. Parties obliged under such contracts may

apply for it to be varied or discharged mutually. Often, because of

the insertion of arbitration clauses in such contracts, the party may

decide to terminate the relationship and where the facts create a

possibility for set-off, it may be adopted to fully discharge the rights

and obligation between the parties.


Internal restructuring is funded internally. Company stakeholders,

including shareholders, debenture holders, creditors and directors,

depending on the module of restructuring involved, may be

expected to make compromises. For external or more formal

restructurings like mergers and takeovers, the funding is handled by

both companies, but substantially by the acquiring or transferee

company. With regards to rescue financing, Section 383 (1), CAMA

requires the directors of the company to earmark a reasonable sum

as a reserve and capitalisation before making any declaration for the

dividend at the end of any financial period.



There are two broad types of winding up proceedings in Nigeria:

compulsory winding up (i.e. winding up by the court, or subject to the

supervision of the court); and voluntary winding up (i.e. members’

voluntary winding up and creditors’ voluntary winding up).


The grounds for winding up by the court are: inability of a company

to pay its debt; shortfall in membership of the company below two

adults; default in filing of statutory report by the company; where a

court considers winding up just and equitable; or where the

members by a special resolution call for a court winding up.

Sometimes, a company may pass a resolution for voluntary winding

up but the court is petitioned for the processes to be completed by

the court. Then it is said to be winding up subject to the supervision

of the court.

The grounds for members’ voluntary winding up are effluxion of the

lifespan of the company or happening of a predefined occurrence

after which the company was to be wound up as provided in its

article of association, and where the company decides by a special

resolution that it be wound up voluntarily.

The ground for a creditor’s voluntary winding up is an inability on

the part of the directors of the company to issue a declaration of

solvency pursuant to Section 462, CAMA.


A substantial number of interfaces take place in all the winding up

procedures, involving different persons at different stages. For a

winding up by the court or subject to the supervision of the court, the

Board of Directors, the Extraordinary General Meeting, CAC, a

provisional liquidator, the FHC and a liquidator are all involved at

different stages. Upon the appointment of the provisional

liquidator, the directors take a back seat, and the liquidator becomes

the key person who follows the procedure through.

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In the case of a members’ voluntary winding up, the Directors, the

General Meeting, a liquidator, an auditor and CAC are involved at

different stages. Again, the directors hand over to the liquidator

immediately once he is appointed.

A creditors’ voluntary winding up engages the Directors, the

General Meeting, the creditors of the company, the Liquidator (who

is appointed as the pilot by the creditors), the Extraordinary General

Meeting, the auditor and the CAC.

Ultimately, the Federal High Court is vested with the exclusive

power to wind up a company.


In a creditors’ voluntary winding up proceedings, the creditors play

key roles capable of greatly influencing the process. Section 473, CAMA gives the creditors a wide power in the appointment of the

liquidator for a creditors’ voluntary winding up. Upon such

appointment, the directors of the company must refrain from the

running and management of the company. The creditors, however,

retain the power to fill vacancies for the position of liquidator

occasioned by either death, resignation or otherwise. Moreover, the

creditors may decide to appoint a committee of inspectors which

oversees the activities and determines the remuneration of the

liquidator(s).

The influence shareholders have over any winding up proceedings

lies in their power to vote at every general meeting, including one

for a resolution to commence winding up proceedings. As such,

they have the potential to halt the process. Even minority rights are

protected through the existence of a company, in the event that a few

shareholders are dissenting.


As with question 3.5 above, a valid contract entered by a company

being wound up subsists even after winding up, unless the contract

provides otherwise. The receiver/manager or liquidator has a duty

to take care of all liabilities and assets of the company, which must

be distributed in the order of priority and on the basis of laid down

guidelines. Under Section 441, CAMA, the court may, at any time

after making a winding up order, make an order on any contributory

for the time being on the list of contributories to pay, in the manner

directed by the order, any money due from him or from the estate of

the person whom he represents to the company, exclusive of any

money payable by him or the estate by virtue of any call. Moreover,

when all the creditors are paid in full, the money due on any account

whatsoever to a contributory from the company may be allowed to

him by way of set off against any subsequent call. It is important to

note that any conveyance, mortgage, delivery of goods, payment,

execution or other act relating to property, where done by or against

a company, in fraudulent preference of its creditors, in the event of

its being wound up, shall be invalid.


The ranking of claims are deemed as followed:

1. costs and expenses of winding up;

2. secured creditors;

3. social and contractual liabilities, such as:

■ local rates and charges, all pay-as-you-earn tax deductions,

assessed taxes, land tax, property or income tax assessed on

or due from the company;

■ deductions under the Nigeria Social Insurance Trust Fund

Act;

■ wages or salary of any clerk or servant in respect of services

rendered to the company;

■ wages of any workman or labourer, in respect of services

rendered to the company; and

■ accrued holiday remuneration payable to any clerk, servant,

workman or labourer or their heirs on the termination of their

employment before or by the effect of the winding up; and

4. debenture holders under a floating charge and other

unsecured creditors.


A wound up company can still be revived in the future. Section 524, CAMA gives room for a company under liquidation to be revived.

The law also provides for the voiding of a dissolution order within

two years upon the application of an interested party or the liquidator.

5 Tax


Restructuring or insolvency does not usually attract the risk of direct

taxation. Indirect taxes or incidental taxes might, however, come in

the territory of stamp duties, value-added taxes on professional

services retained, withholding tax on dividends offset or tax on

gains of capital asset disposal.

6 Employees


Employment contracts are usually reviewed or terminated during

restructuring or insolvency, respectively. An employee may be

reabsorbed or laid off after a restructuring, hence the provision under

ISA for them to be put in the picture during such restructuring. With

respect to insolvency, their job cannot be safeguarded. However, they

are settled as discussed in question 4.6 above. Finally, Section 566, CAMA empowers a company to make provisions for its employees on

cessation or transfer of its business, where said provisions can be made

from the undertakings of the company itself, or its subsidiaries, if any.



SEC reserves the power to authorise and regulate cross-border

securities transactions. However, foreign direct investment requires

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domestication of a company in Nigeria by its parent branch outside of

Nigeria. For instance, Celtel was severally restructured as Vmobile,

Zain and currently Airtel but is not a wholly Nigerian company.


This depends on the rule of reciprocity where similar decisions from

Nigerian courts will be enforced. This is possible via bilateral

arrangements as per Section 10, Foreign (Reciprocal Enforcement) Act. This section requires the existence of a satisfied foreign

monetary judgment.


Save for the provision of CAMA that requires foreigners holding

shares undergoing compromises, restructuring or other forms of

arrangements to obtain SEC approval, there is no other law that

recognises the enforcement of cross-border insolvency procedures,

unless if in conformity with what is obtainable as discussed in

question 7.2 above. Noteworthy, SEC has the power to authorise

and regulate cross-border securities transactions, and may to this

extent, have control over cross-border insolvency proceedings

involving securities companies.

8 Groups


There are no specific provisions of the CAMA that deals with the

restructuring or liquidation of a group of companies. However, if

individual companies are in such a situation, they may appoint the

same insolvency officers so as to save cost and avoid multiplicity of

actions. There are also provisions for audits and investigations to

extend to subsidiaries of groups of companies or a holding

company. CAMA also requires the directors of a group of

companies to also prepare group financial statements annually.

9 Reform


The CAMA (Amendment) Bill has been passed by both Houses of the

National Assembly, though it is awaiting presidential assent. Some

notable changes in the new bill include: the provision for e-

registration; pre-action notice and a restriction on the levy of

execution; increase in the minimum share capital for companies;

electronic signature; exemption from audit requirements for small

companies; and registration of a one-man company, etc. There is

also the Bankruptcy & Insolvency Act, (Repeal & Re-enactment) Bill, 2016. Experts have been brainstorming on the need for

insolvency proceedings to be settled out of court, thereby exploring

the Alternative Dispute Resolution (ADR) schemes. This is geared

towards ensuring that companies may be able to settle their debts (at

agreed periodic intervals) thereby minimising the risk of being

liquidated.

Acknowledgments

The authors would like to thank others who worked on this

contribution: Umar Abubakar; Ifedolapo Oladimeji; and Jennifer

Chu.

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Dr. Jennifer Douglas-Abubakar Miyetti Law 1 Nwaora Close, Off Gana Street Maitama, FCT Abuja Nigeria Tel: +234 09 904 6440


URL: www.miyettilaw.com

Jude Odi Miyetti Law 1 Nwaora Close, Off Gana Street Maitama, FCT Abuja Nigeria Tel: +234 8090 205 904


URL: www.miyettilaw.com

Miyetti Law is a boutique law firm providing representation to individuals and organisations worldwide. With over a decade of collective experience, our lawyers provide representation to foreign and local business organisations in corporate, energy, financial and other related sectors. Our team of lawyers and legal specialists approach complex legal problems using expert knowledge of the current domestic legal environment and international resources.

At Miyetti Law, our lawyers have real-world business experience and are ready to work with individuals and organisations to ensure that the legal advisory provided helps clients meet their short-term objectives and long-term goals.

Miyetti Law adopts an inventive approach to handling different clients’ issues via a multi-disciplinary approach to legal advisory. This approach incorporates solutions from the legal field and public policy, business sector and expert partnerships to mention a few. We provide customised solutions in the areas of corporate services and complex corporate litigation, international law, private client and government relations.

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

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chapter 27


synum aDv

alexander Zadorozhny

artem Kazantsev

russia

1 Overview


Russian bankruptcy legislation may be characterised as pro-creditor,

both in theory and practice. The following provisions of the Federal

Law No. 127-FZ “On insolvency (bankruptcy)” (the “Law on

Bankruptcy”) emphasises Russia as a pro-creditor jurisdiction, due to:

■ enhancement of subsidiary responsibility of the persons

controlling the debtor, including the presumption of guilt for

controlling persons under certain circumstances, the

challenging burden of which is assigned to the controlling

person. Herewith, the controlling person can be brought to

subsidiary responsibility both out of the bankruptcy matter

and in the case of its termination;

■ special bankruptcy conditions for challenging a debtor

transaction, which resulted in the withdrawal of assets or one

or several creditors were provided with a preferential

satisfaction of obligations;

■ banks and tax authorities are entitled to apply for debtor

bankruptcy without court resolution, as opposed to all other

creditors, which right to apply for bankruptcy arises upon a

legally effective court decision on debt collection;

■ pledge lenders are entitled to vote on the meetings of the

creditor on key aspects, including the selection of an applicable

bankruptcy proceeding as well as the matters referring to

removal or selection of an insolvency manager candidate;

■ deprivation of the debtor’s right to choose an insolvency

manager candidate in case of initiation of the bankruptcy

matter by such debtor; and

■ authorisation of employees to apply for declaration of

bankruptcy of the employer without any costs to the

bankruptcy matter.


The Law on Bankruptcy obliges the management of a company to

take measures on bankruptcy prevention should financial

difficulties arise, which may lead to the initiation of a formal

bankruptcy procedure.

The obligation of bankruptcy prevention is assigned to managers,

shareholders and other persons, who may give mandatory

instructions to a company’s management.

In relation to the companies carrying out ordinary business (small

and medium-sized business) the bankruptcy legislation does not

contain a list of specific measures that the management of the

company should take in order to prevent bankruptcy. Meanwhile,

there is a provision in Russian legislation obliging the manager to

take measures on bankruptcy prevention.

Such measures can be taken in the form of reestablishing a debtor’s

solvency. Herewith, the creditors can directly participate in such

reestablishing through entering into the agreements with the debtor.

Russian legislation specifies financial recovery as one of the

bankruptcy prevention measures, which result in the provision of

financial aid to the debtor by shareholders in an amount sufficient to

satisfy all the debts of the debtor.

The regulation of banks’ bankruptcy prerequisites is accounted in

more detail in the Russian bankruptcy legislation.

The legislation provides the following measures on the prevention

of bankruptcy in banks, which can also be applied to ordinary

companies:

■ financial recovery of the company, may include the following

measures:

1) financial aid to the company from its subscribers and

other persons;

2) change of the structure of the assets and liabilities of the

company;

3) change of the organisational structure of the company;

and

4) harmonisation of the share and equity capital of the

company;

■ company reorganisation; and

■ other measures.

Considering that the list of measures on bankruptcy prevention both

for ordinary companies and banks is non-exhaustive and subject to

broad interpretation, managers have the right at their discretion to

take any measures that can potentially help to overcome financial

difficulties.

Such measures may include the agreements with the creditor on

change of obligation terms, deferred payments, decrease of interest,

provision of compensation and novation of the obligations.

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The Law on Bankruptcy provides for the possibility of bringing the

head of the company to administrative and criminal liability, as well

as imposing liability on the head of the company in terms of

liabilities that were not paid during the bankruptcy procedure.

Bringing the head of the company to subsidiary liability is possible

in the following cases:

■ If the actions of a manager, shareholder or other controlling

person have become a proven reason for failure in repaying

all claims of the creditors in full. In this case, the amount of

liability is equal to the amount of the creditors’ claims, which

were not cancelled during the bankruptcy procedure.

■ If the manager, shareholder or other controlling person has

not timely applied to the court with a statement on

bankruptcy of the debtor. In this case, the amount of

subsidiary liability is equal to the amount of unpaid claims

that arose after the obligation to file for bankruptcy appeared.

Russian bankruptcy laws have established the following cases

where the debtor’s manager is obliged to file a bankruptcy petition

with a company:

■ payment in favour of one creditor or several creditors will

make it impossible for the debtor to fulfill monetary

obligations in full to other creditors;

■ decision of the head of the company on liquidation of the

debtor with subsequent application to the arbitration court on

recognising the insolvency of the debtor;

■ foreclosure of the debtor’s property will significantly

complicate or make the economic activity of the debtor

impossible;

■ the debtor meets the criteria of insolvency and/or insufficiency

of property; and

■ there are wage arrears outstanding for more than three

months due to insufficient funds.

The obligation to file a bankruptcy petition must be performed by

the manager within one month after the occurrence of any of the

circumstances above.

The head of the company may be held: (a) criminally liable in the

event that the bankruptcy of the company is proved to be fictitious

or deliberate; and (b) administratively liable for failure to comply

with the requirements of bankruptcy laws.


Other interested persons who may influence the company through the

initiation of a bankruptcy matter, except the head of the company, are:

■ shareholders/members;

■ other controlling persons of the debtor;

■ liquidator or liquidation committee;

■ employees of the debtor; and

■ creditors.

According to Russian bankruptcy legislation, the controlling person

of the debtor is a person, that has or had the right to give mandatory

instructions to the debtor or an opportunity to define its actions

otherwise, including instructions on entering into the transactions

and defining their terms, for not more than three years prior to the

signs of a bankruptcy arising, before the debtor’s bankruptcy

application was adopted by the arbitration court.

In the event a company manager failed to apply to the court for

bankruptcy of the company, shareholder or other controlling person

of the debtor, they may demand an early meeting with the managing

body of the company in order to apply to the arbitration court for

bankruptcy of the debtor.

Russian bankruptcy legislation obliges the liquidator to apply for

bankruptcy of the debtor, in the event the company meets the signs

of insolvency and/or lack of property within the liquidation process.

The right of employees or former employees of the company to

apply for bankruptcy arises, if there is an effective court decision on

wage or discharge allowances claims.

There are two types of debtor creditors:

■ creditors with privileged status concerning the origination of

the bankruptcy matter – banks and tax authorities, which may

apply to the bankruptcy of the debtor without an effective

court decision; and

■ ordinary creditors and creditors secured by a pledge, which

have the equal right to originate a bankruptcy matter, provided

that there is an effective court decision on debt recovery.

Hereafter, creditors secured by the pledge have sufficiently

limited voting rights on the meetings of the creditors.

The question of moratorium and suspension of obligation performance

is regulated individually for each procedure applicable in the

bankruptcy matter and depends on the scope of activities of the

debtor (banks, insurance company, town-forming enterprises, etc.).


Transactions that are committed by a company in the face of

financial problems that have occurred may be invalidated with the

use of corresponding consequences, both for general reasons and for

special reasons provided for by the Russian bankruptcy legislation.

The transactions made at pre-foreclosure stage fall into shady and

preferential transactions.

In turn, shady transactions fall into transactions made with the

purpose to cause property damage to creditors and transactions with

unequal counter-performance.

A transaction with an unequal counter-performance is a transaction

made within one year prior to, or after the adoption of a bankruptcy

application, if the debtor transferred property at a price lower than

the price at which similar transactions are carried out.

A transaction made with the purpose of causing damage to creditors

is a transaction made within three years prior to the adoption of a

bankruptcy application, or after it, if the transaction resulted in the

alienation of property of the debtor and the other party was aware of

the purpose of the transaction made.

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A preferential transaction is a transaction made within one month

prior to the adoption of the bankruptcy application, or after it, if such

transaction influences or may influence a preference towards one of

the creditors instead of another creditor.

The consequence of rendering the abovementioned transactions

ineffective is returned to the debtor of the assets, which were

transferred by the debtor and withdrawn from him under the

transaction. In case of the impossibility to return the property to the

debtor, the counterparty to the transaction should compensate the

market value of the assets from the moment it was acquired, as well

as the damages caused by its subsequent price change.



Informal work-out procedures are the more preferred means of

solvency reestablishing in Russia than the procedures stipulated in

the Law on Bankruptcy due to an unsatisfactory level of legal

regulation of rehabilitation procedures and their rare implementation

in practice.


The restructuring can be carried out at several stages of the

bankruptcy procedure, which consists of observation, external

management, financial recovery, settlement agreement and

bankruptcy administration. The following procedures belong to

solvency rehabilitation: financial recovery; external management;

and settlement agreement.

Besides, the Law on Bankruptcy provides sanation. Sanation is a

provision of financial assistance by the shareholders of the company

in order to reestablish debtor solvency. Russian legislation does not

contain a detailed regulation of sanation. The provision of financial

assistance can be accompanied by obtaining obligations by the

debtor or other persons in favour of the persons which provide

financial assistance.

Financial recovery procedure is applied in respect of the debtor in

order to reestablish its solvency and debt repayment in accordance

with an approved schedule.

The purpose of external management is financial recovery of

enterprise with transfer of management authorities of the debtor to

the receiver. External management is carried out in accordance with

the schedule approved by the creditors.

A settlement agreement can be concluded at any bankruptcy stage

that should contain the conditions on procedure and terms of

obligation performance of the debtor in monetary form.

In respect of a pro-creditor orientation of regulation, the procedures

aimed at recovering the company are rarely applied in practice. The

creditors usually choose bankruptcy administration, as a rule, in

order to enforce the recovery of property at a reduced value, which

is defined by tender.

Replacing of assets is possible at the stage of external management

and bankruptcy administration. The decision to replace assets shall

be taken only by unanimous approval of the creditors secured by the

pledge.

Shareholders, minority lenders and other persons do not have the

option to obstruct decisions on implementation of a certain bankruptcy

procedure, which was adopted by the meeting of shareholders.


The observation procedure is the first stage of bankruptcy, which

can be initiated by both the debtor and the creditor.

After observation, on the basis of the decision of the first meeting of

creditors, the court makes a decision on the introduction of the

following procedure. The decision is made at the creditor meeting

by a majority vote.

In order to participate in the creditor meeting, the latter must be

included in the register of creditors’ claims.

Financial recovery is introduced at the request of the debtor on the

basis of the decision of its members, which is approved by the

majority of creditors.

External management is introduced on the basis of the creditors’

decision.

A settlement agreement shall be accepted by a majority of creditors’

votes and is considered accepted once all the creditors secured by

the pledge have voted for it.

Sanation may be carried out only in case of the provision of

financial assistance to the debtor by its founders, creditors or third

parties. Provision of financial assistance may be accompanied by

the commitment of the debtor or other persons in favour of the

persons who have provided financial assistance.


In bankruptcy procedures, debtor management is carried out by an

insolvency officer that is approved by a majority vote on the meeting of

creditors of the debtor. Functionality and obligations of the insolvency

officer varies depending on the stages of bankruptcy procedure.

The whole bankruptcy procedure is under the control of the court that

makes decisions on key aspects of the procedure, including: the

approval of an insolvency officer candidate selected by the creditors;

approval of the bankruptcy stage selected by the creditors;

consideration of individual disputes within the bankruptcy matter

referring to the inclusion of creditors on the list of creditors; claims of

actions/omission of the insolvency officer; the recovery of the damages;

the question of challenging the transaction of the debtor made with

preference or fraudulent conveyance; and bringing controlling persons

of the debtor to subsidiary liability (corporate veil piercing).


From the date that recognises the debtor as bankrupt, the period for

the fulfillment of obligations under contracts arising prior to the

recognition of the debtor as bankrupt is considered to have occurred.

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Therefore, all creditors have the right to demand performance of the

contract by filing an application for inclusion in the register of

creditors’ claims, after which the arbitration court can verify the

reasonableness of the creditors’ claims.

External management procedure provides for the right of the debtor

to refuse to execute transactions if they interfere with the restoration

of the debtor’s solvency. In this case, the counterparty has the right

to demand compensation from the debtor for damages caused by the

refusal. This waiver cannot be filed in respect of transactions

concluded during the observation with the consent of the insolvency

manager or during the financial rehabilitation.

After the introduction of bankruptcy, the creditor’s claims against

the debtor are not allowed.


As a general rule, the bankruptcy procedure is financed through the

property account of the debtor.

If the property of the debtor is insufficient for financing the

procedure, the court may assign creditors to finance the procedure

with their consent. The court may also require the creditor to

transfer funds on a special deposit account of the court.

If the property of the debtor is insufficient or no consent of the creditors

is obtained, the court can terminate the bankruptcy procedure.



The bankruptcy of a debtor being liquidated is the key insolvency

procedure available to wind up a company. The debtor is liquidated in

the manner prescribed by the Law on Bankruptcy, if the value of the

property of the debtor, in respect of which the decision on liquidation

was made, is insufficient to satisfy the claims of the creditors.

In addition to the bankruptcy of the debtor being liquidated, the

meeting of creditors or the person providing security during the

financial rehabilitation of the debtor has the right to decide on the

reorganisation of the debtor through merger, accession, division,

separation or transformation, while the debtor ceases to exist in all

types of reorganisation, except for separation.


Any winding up procedure is introduced only by the decision of the

court based on the application received from the owners of the

company, creditors of the company or tax authority.

The reorganisation of the company with subsequent liquidation of

the debtor requires a relevant decision from the creditors’ meeting

and the application of a company’s CEO in the event the

reorganisation helps to restore the company’s solvency.


Each winding up process is managed by a liquidation manager. An

insolvency winding up procedure develops within a particular

matter of the court under regular control of the judge.


Shareholders have no influence on the winding up process, as the

shareholders’ meeting can lose its power after an insolvency manager

enters into power. In the meantime, creditors have all the influence on

the process due to the key role of the resolution of the creditors’

meeting. Actions decided during the creditors’ meeting have no

restrictions subject to its compliance with the law. For example, the

right to determine the procedure and conditions for the sale of the

pledged property in the bankruptcy proceedings, as well as the right to

first priority satisfaction of their claims from the money raised from the

sale of the pledged property, is granted only to the secured creditors.


Refusal to execute existing contracts and other transactions of a

debtor can be declared, if such transactions impede the restoration

of the debtor’s solvency or if the debtor’s execution of such

transactions entails losses for the debtor as compared to similar

transactions concluded with comparable circumstances.

It is not allowed to terminate the debtor’s monetary obligations by

offsetting a homogeneous claim, if this violates the legal order of

satisfying creditors’ claims.


It is necessary to distinguish competitive and current (extraordinary)

lenders.

Only those creditors of a debtor whose monetary claims arose

before filing an application to the court of arbitration for declaring a

debtor insolvent (bankrupt) can be recognised as bankruptcy

creditors. If the claims against the debtor appeared after the

introduction of the monitoring procedure, then such creditors are

current creditors.

Claims of current creditors are satisfied in the course of insolvency

procedures, regardless of the transition to settlements with creditors,

while satisfaction of the requirements of bankruptcy creditors

occurs only in the case of transition to settlements with creditors.

Current claims are ranked in the following order:

■ The first order: current payments of the debtor, to include

payment for the services of an arbitration manager, court

costs and other costs associated with property management.

■ The second order: requirements of the employees who quit

both before and after the declaration of bankruptcy. Payment

of wages for the worked period and severance pay is carried

out, except wages of the head, chief accountant, their

deputies, etc., which shall be paid after the debt repayment to

the first three orders of the creditors.

■ The third order: payment for the services of persons engaged

by an arbitration manager for bankruptcy proceedings and

property management.

■ The fourth order: payment of utility and energy supplying

services.

■ The fifth order: satisfaction of requirements for other current

payments.

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The fulfilment of obligations within one queue takes place in

calendar order.

The following expenses are redeemed out of ranking (before current

claims):

■ claims of creditors for current payments to creditors whose

claims arose before the application for declaring the debtor

bankrupt; and

■ the cost of carrying out activities to prevent the occurrence of

man-made and/or environmental disasters, or death.

Claims of bankruptcy creditors are satisfied in the following order:

■ The first order: payments for causing harm to the life or

health of citizens.

■ The second order: payment of severance payments and/or

wages to persons working under an employment contract,

remunerations to the authors of intellectual property.

■ The third order: payments to the other creditors.

Payment to the creditors for a transaction declared invalid in

bankruptcy proceedings are made after settlements with the other

creditors of the third order.

The claims of creditors for obligations secured by the pledge of the

debtor’s property are satisfied at the expense of the value of the

collateral.

Claims of the owners of bonds with no maturity are satisfied after

the claims of all other creditors are satisfied.


The company may be revived in the following events:

■ restoration of the company’s solvency during either financial

recovery or external management;

■ conclusion of a settlement agreement;

■ refusal of all the creditors involved in a bankruptcy case from

the stated requirements; or

■ satisfaction of all the creditor claims included in the register

of creditor claims in the course of any procedure applied in a

bankruptcy case.

5 Tax


Due to the initiation of bankruptcy matter the debtor and the creditor

have the following tax consequences:

The debtor at any bankruptcy stage remains a taxpayer until the

bankruptcy management procedure is finished.

The debtor should continue to pay property taxes (property tax and

land tax) and keep a record of property sales operations for income

tax and VAT calculation subject to recovery and payment to the

budget, if VAT paid to the seller had been previously declared by the

debtor as tax deduction by acquisition of respective assets. Such

taxes can be recorded as current receivables that are to be satisfied

prior to the other listed claims.

Income tax will occur when the property can be sold at a price

higher than the remaining cost according to balance, and taxable

income will originate. This income will be reduced to current losses

from the collection of receivables and other property (if the cost of

its sale proved to be lower than the remaining cost), to losses formed

by uncollectible debt relief and so on. At the same time, different

situations can occur, and, notwithstanding specified provisions, the

final financial result can be positive. Current income formed during

bankruptcy management can be redeemed by the losses of previous

years. But such redemption can take place under the condition of

documentary confirmation of business transactions for the period of

losses formation, and such redemption cannot cause income tax

reduction for more than 50%. Thus, a positive financial result from

the sale of the property of the debtor under bankruptcy management

is subject to income tax.

As a general rule, asset disposition operations and the sale of

property of the debtor are not subject to VAT taxation. However, the

operations for the performance of works and services, and the

provision of property for use are not excluded from the operations

subject to VAT taxation. That is, if the debtor continues to carry out

income activity during bankruptcy management, the obligation to

pay VAT will increase.

There is also a risk that tax amounts adopted by the debtor to be

deducted by the acquisition of property used in the activity, within

which the operations on products (works, services) sales subject to

VAT taxation were carried out, are subject to recovery. That is, if

bankruptcy management is introduced in respect of the company

and the depreciation term of the property is not expired by the time

of its sale, the amount of previously calculated tax deduction should

be recalculated, as situations can occur where VAT tax burdens in

respect of bankruptcy assets will increase.

From a creditor’s point of view, by the time bankruptcy

management of the debtor is finished, the creditor obtains the right

to acknowledge losses formed due to bankruptcy of the counterparty

for the purpose of income taxation, which is considered to be a

compensatory measure for taxpayers.

6 Employees


The employees and former employees are entitled to apply for

bankruptcy of the debtor along with the other creditors. The

manager of the debtor should inform employees about bankruptcy

procedure implementation.

The insolvency officer should call a meeting for employees and

former employees, where they will elect a representative to

participate in the bankruptcy procedure, however, it can be held

earlier upon the initiative of the employees or the manager of the

organisation. Herewith, the payment for services of the

representative of the employees should be carried out on account of

the debtor. The representative of the employees has the right to

participate in the meeting of the creditors together with the

employees, but doesn’t have the right to vote. He has the right to

apply to bring the debtor’s controllers to subsidiary liability.

The insolvency officer of the debtor is entitled to dismiss employees

by compliance with the established procedure.

The requirement to pay remunerations and discharge allowances is

a second priority in the claims of the creditors on current payments

(arose upon bankruptcy application and payable prior to listed

claims) – after payment of expenses in respect of bankruptcy

procedure, however, before the rest of current claims.

Employee claims are a second priority in the list of creditors – right

after the claims concerning personal injury and before the rest of the

claims of the creditors.

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Upon the application of an insolvency officer, the court has the right to

reduce the wage rate of the employees, in the event the wage rate was

increased within six months before the bankruptcy application was made.

In the event of a bankruptcy of a town-forming enterprise (an

enterprise with the number of employees exceeding 5,000 persons,

or an enterprise where no less than 25% of a town population is

working) additional guaranties to employees can be provided. That

way, by the sale of an enterprise during bankruptcy, the obligation of

the buyer to retain no less than 50% of workplaces within a specified

term (no more than three years) can be established.



This question is applicable to Russian legislation and it does not

contain any direct prohibition for foreign persons to go through the

procedure of restructuring or bankruptcy in Russia.

There is a general provision in the Arbitration Procedure Code that

allows Russian courts to consider disputes involving the tight connection

of the legal relationship in dispute with the territory of the Russian

Federation, and there have been cases of carrying out bankruptcy

procedures on foreign citizens on this basis, because they conducted

their main activity in Russia. However, there are no bankruptcy

procedures for foreign entities in the Russian Federation in practice.

That aside, foreign companies may file their claims in the creditors’

claims register for Russian insolvent companies.


Resolutions of foreign courts, including bankruptcy matters, are

recognised and enforced in Russia by judicial procedure as well as upon

international contracts and principles of mutuality. However, Russian

legislation doesn’t consider that bankruptcy is an extended process and

requires separate recognition of every judicial act under one case.


There are no cases of restructuring or bankruptcy of Russian

companies in other jurisdictions.

8 Groups


Russian legislation does not contain any provisions on the

bankruptcy of corporate groups, and manager cooperation is not

specifically regulated.

9 Reform


The Supreme Court of Russia brought a bill in Russian Parliament,

which suggests the empowerment of insolvency officers to include

the claims of creditors in the register of creditors’ claims

independently, without any adoption of a judicial act. Herewith,

other parties to a case will have the right to challenge such decisions

of an insolvent officer in court. This bill is currently under

consideration by Russian Parliament.

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Alexander Zadorozhny Synum ADV Yakimanskaya Naberezhnaya 4, building 1 Moscow Russia Tel: +7 495 90 99 924


URL: www.synum.ru

Artem Kazantsev Synum ADV Yakimanskaya Naberezhnaya 4, building 1 Moscow Russia Tel: +7 495 90 99 924


URL: www.synum.ru

Alexander Zadorozhny is Russian lawyer with more than 15 years of experience in litigation, bankruptcy and corporate law.

With Alexander’s input, legal disputes have been successfully completed, as a result of which the principals were able to retain ownership of the property that makes up the energy business; large land plots for development and corporate rights. Alexander Zadorozhny has a wealth of experience in supporting bankruptcy proceedings, protecting the interests of both creditors and debtors, including the experience of participating in bankruptcy proceedings of credit organisations.

Alexander is a regular author of bankruptcy articles and relevant lectures.

Alexander holds a Master’s degree in private law from the Russian School of Private Law under the President of the Russian Federation (Moscow). He is fluent in Russian and English.

Synum ADV is a Russian law firm specialising in litigation, bankruptcy and corporate conflicts. Due to rapid development, Synum ADV now successfully represents the interests of major Russian and international companies both in legal consulting and in conflict situations.

Being professional participants of the distressed assets market we represent interests of business in bankruptcy, corporate and property disputes. Synum ADV has consistent experience of solicitation in all instances of state arbitrazh courts, city courts and international commercial arbitration courts.

Synum ADV leverages its unique litigation experience for advising its clients in corporate law issues, the legal support of investment projects and merger and acquisition deals.

Lawyers of Synum ADV have a long record of successfully consulting of companies in respect of a wide range of legal issues, as well as a constant integrated legal support of business.

Artem Kazantsev is Russian lawyer with over 15 years of experience in dispute resolution, bankruptcy and commercial law.

He has a unique experience in developing the laws of the constituent entities of the Russian Federation regulating economic activities.

Artem’s experience includes work in international law firms, such as DLA Piper and Gide Loyrette Nouel.

Artem graduated from Rostov State University and studied in the graduate school of the Moscow State Law University named after O.E. Kutafin. He is fluent in Russian, English and French.

synum aDv russia

chapter 28

allen & gledhill llp

Kenneth lim

edward tiong

singapore

1 Overview


Singapore takes a relatively balanced stance. Our legislative

framework strives to allow deserving debtors time and space to

resolve short term issues and to propose long term solutions to their

creditors, while ensuring that the interests of creditors are protected

by requiring proof of creditor support and periodic disclosure of

financial information, amongst other things.


Our statutes do not directly address informal work-outs, and debtors

and creditors are free to reach agreements to restructure financial

obligations inter se.

If an informal work-out is not possible, debtors and creditors may

have to resort to the formal restructuring regimes provided under

Singapore law: proposing a scheme of arrangement; or placing the

debtor company under judicial management.

A scheme of arrangement may be proposed by the company to its

creditors on a standalone basis, or may be proposed by a judicial

manager as part of the judicial management process (with some

differences in the judicial management context). Generally, the

value of a scheme of arrangement is that it allows a compromise that

has been approved by the statutory majority and by the Court to

become binding on all of the creditors or the relevant class of

creditors.

The judicial management regime hands control of the debtor

company to a judicial manager and places it under a moratorium,

with the aim of providing some breathing space to either allow the

company to be nursed back into financial health, obtain the approval

of a scheme of arrangement for the company and its creditors or

achieve a better realisation of its assets than would have been

possible in a liquidation scenario. Judicial management is not a

debtor in possession regime, and is particularly helpful when

creditors lack confidence in the existing management of the debtor.

The scheme of arrangement regime is generally more commonly

used than judicial management. Schemes of arrangement are debtor

in possession regimes, and are generally less costly than judicial

management. In addition, the scheme of arrangement regime was

enhanced following amendments to the Companies Act (Cap. 50)

(“CA”) in 2017, which provided enhanced automatic moratorium

provisions to allow debtors time to finalise and propose a scheme to

their creditors, as well as the ability to cram-down dissenting

creditor classes in certain circumstances.

If formal restructuring is unsuccessful, or deemed unlikely to

succeed, the debtor company may be placed into voluntary

liquidation by resolution of its shareholders or into compulsory

liquidation by order of Court. Insolvency proceedings are usually

taken as a last resort.



In addition to their usual duties, when a company is insolvent or

close to insolvency, directors in carrying out their duties must act in

good faith and give particular regard to the interests of creditors of

the company generally rather than the shareholders, and failure to

do so may give rise to a breach of fiduciary duties.

Furthermore, directors should not cause a company to enter into

voidable transactions, as doing so would be a breach of directors’

duties. We elaborate further on these voidable transactions in

question 2.3 below.

Directors of companies which are insolvent or close to insolvency

also should be wary of committing offences under the Act which

include, in particular, being party to the contracting of a debt when,

at the time the debt was contracted, the director had no reasonable

expectation that the company would be able to pay it.

There is no requirement under Singapore law for a company to initiate

restructuring or insolvency proceedings once a specific threshold or

event has been reached. Anecdotally, debtors tend to delay reaching

out to restructuring professionals until creditor goodwill and funds are

running low. Consequently, restructuring can become more difficult

as a result of inertia. Restructuring professionals should be consulted

when directors become aware of signs of distress in order to reduce

the likelihood of directors becoming personally liable and to increase

the chances of a successful restructuring.



The stakeholders that can influence a company’s situation will vary

depending on the type of business carried out by the company and

the assets held by the company.

Generally, creditors are able to significantly influence the

company’s situation. Secured creditors may appoint receivers to

enforce their security. Creditors may also apply to place the

company under judicial management or liquidation, which as

mentioned above would displace the management of the company

in favour of the nominated judicial manager or liquidator.

Moratoria are available in support of schemes of arrangement and as

part of the judicial management regime, and preclude, amongst

other things: the commencement/continuation of proceedings

against the company; the enforcement of security over property of

the company; and repossession of goods held by the company under,

amongst others, retention of title agreements and the enforcement of

any right of re-entry or forfeiture under any lease of premises

occupied by the company, save with leave of Court.


A liquidator (or, with Court sanction, a judicial manager) may apply

to reverse or set aside certain transactions entered into before the

commencement of winding up or the making of a judicial

management order. In particular:

(1) transactions at an undervalue;

(2) unfair preferences;

(3) the provision of credit on terms which require grossly

exorbitant payments, or are harsh and unconscionable or

substantially unfair having regard to the risk accepted by the

creditor;

(4) floating charges granted by the company for insufficient or

nil consideration; and

(5) registrable charges which are not registered within the

statutory timelines.

If the statutory requirements are met, the transaction will be voided

and the relevant counterparties will be required to take the necessary

steps to reverse the transaction.

In addition to the above, the Singapore Courts will generally not

give effect to contractual arrangements in a liquidation scenario:

(1) that intend to deprive a party of its property (or rights) on the

insolvency of that party (the anti-deprivation rule); and

(2) that provide a creditor with more than his proper share of the

available assets or where debts due to the creditor were to be

dealt with other than in accordance with the statutory regime

(the pari passu rule).



As mentioned above, yes, it is possible to implement an informal

work-out in Singapore.


Singapore law provides for two formal rescue/restructuring

procedures: schemes of arrangement; and judicial management.

Debt-for-equity swaps are possible, and may be implemented as part

of either an informal work-out or a formal restructuring procedure.

A scheme of arrangement proposed between a company and its

shareholders or its creditors outside of judicial management may be

blocked at the scheme meeting by (i) a majority in number of

shareholders or creditors (as the case may be) in a given class, and/or

(ii) shareholders or creditors (as the case may be) representing more

than one-fourth in value of the shareholders or creditors.

In the case of a scheme proposed within the context of judicial

management, it may be blocked at the scheme meeting by creditors

representing more than one-fourth in value of the creditors present

and voting in each class.

Cram-downs are possible. The Singapore Courts retain the power to

approve a scheme of arrangement despite there being dissenting

classes of creditors, if the Court is satisfied that the scheme does not

discriminate unfairly between classes of creditors, and is fair and

equitable to the dissenting class(es).


In relation to a scheme of arrangement, a company should generally

make an application to Court for approval to call a meeting of

creditors after they have formulated a proposal of a scheme to be

considered by the creditors.

In the case of judicial management, a company or its creditors may

apply for the company to be placed under judicial management if

the company is or is nearing insolvency, and there is a reasonable

probability of achieving one of the aims of judicial management, i.e.

rehabilitating the company, preserving all or part of its business as a

going concern, or achieving a better realisation of its assets than

would have been possible in a liquidation scenario.


The scheme of arrangement process is managed by a scheme

manager, who is generally appointed by the debtor company. The

Court is involved at key points in the process, namely deciding

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whether any long term moratorium protection should be extended to

the company, whether a meeting of shareholders or creditors should

be summoned to consider the scheme and whether the scheme

should be made binding after the requisite approval of the

shareholders or creditors has been obtained.

Judicial management, on the other hand, is initiated upon a successful

application to Court for a judicial management order. Following on

from this, the existing management of the debtor company is

displaced in favour of a judicial manager who will manage the affairs,

business and assets of the company. The initial judicial management

order is valid for 180 days, and the judicial manager must return to

Court to apply for any extension of this period. In the meantime, the

judicial manager is required to keep the Court apprised on, amongst

other things, the proposals which he intends to make to the creditors

to achieve the aims of judicial management, and the outcome of the

creditors’ meeting to consider his proposals.


While a judicial management order is in effect, and where

moratorium protection has been sought to facilitate the proposal of

a scheme of arrangement, creditors will be unable to commence or

continue proceedings against the company without leave of Court.

That being said, it is common for contracts to contain ipso facto clauses,

i.e. clauses which provide that the entry of a contracting party into a

restructuring or insolvency procedure will entitle the other contracting

parties to terminate the contract. These clauses are not currently

affected by the moratoria mentioned above. This position will be

affected by the commencement of the Insolvency, Restructuring and

Dissolution Act. We elaborate further on this in question 9.1 below.


Both restructuring processes are generally funded out of the assets

of the debtor company, unless arrangements can be made with

creditors or a third-party investor or funder.

The Court has the power to grant super priority for financing which

is necessary for the survival of a company or to achieve a better

realisation of its assets than would have been possible in a liquidation

scenario. The Court may in appropriate circumstances order that:

(1) in the event that the company is wound up, the debt shall be

treated as part of the costs and expenses of the winding up, or

shall have priority over other unsecured debts;

(2) the debt be secured by security over unencumbered property; or

(3) if the existing security holder’s interest is sufficiently protected,

the debt be secured by a security interest on property subject to

existing security, on an equal or higher priority than the existing

security interest.



Under Singapore law, a company may be wound up voluntarily or

by order of court, which is also known as compulsory winding up.

Voluntary winding up may be divided into two further categories,

members’ voluntary winding up or creditors’ voluntary winding up.

Generally, compulsory winding up and creditors’ voluntary winding

up apply to insolvent companies, and only solvent companies

should be placed into members’ voluntary winding up.


A company may be placed into voluntary winding up by the passing

of a special resolution by its shareholders. In the case of a members’

voluntary winding up, the directors of the company must make a

declaration of solvency, stating in essence that they have formed the

opinion that the company will be able to pay its debts in full within

12 months of the commencement of winding up.

If the directors of the company are not able to make a declaration of

solvency, a meeting of the creditors shall be summoned immediately

after the meeting at which the resolution for voluntary is to be proposed,

for the creditors to, amongst other things, nominate a liquidator.

Compulsory winding up is primarily initiated by creditors, rather

than by the shareholders. Briefly, an application must be made to

Court by a party with standing for the company in question to be

wound up. The most common ground for seeking such an order is

that the company is unable to pay its debts.


A liquidator is appointed to manage each winding up process.

However, the party appointing the liquidator is likely to be different

in each case. In a members’ voluntary winding up, the liquidator is

appointed by the shareholders. In a creditors’ voluntary winding up,

the shareholders and the creditors will at their respective meetings

nominate a liquidator, with the creditor’s nomination trumping the

shareholders’.

In the case of a compulsory winding up, the Court is required to exercise

its discretion whether to place a company into winding up or not.

However, once a company is placed into winding up, whether

voluntary or compulsory, the Court is generally less involved than in

the case of a scheme of arrangement or judicial management. That

being said, it is common for liquidators to apply to Court to seek

directions or sanction of major decisions, in particular in relation to

litigation funding, if required.


In a members’ voluntary winding up, the liquidator will usually seek

the views of the shareholders on important matters.

However, in a creditors’ voluntary winding up or in a compulsory

winding up, the views of the creditors are sought instead.

The creditors may appoint a committee of inspection to represent

the interests of the creditors, and the committee of inspection may

approve the exercise of certain powers by the liquidator.

If the creditors and/or shareholders do not agree with the decisions

of the liquidator, the liquidator, creditor or shareholder may apply to

Court for directions. In appropriate cases, it is possible for the

creditors and/or shareholders to apply to Court to show cause for

removal of a liquidator.



When a company is put into liquidation, creditors and/or shareholders

will not be able to commence or continue proceedings against the

company without leave of Court. There is generally no restriction

on the enforcement of security, save that the liquidator has the right

to challenge security in appropriate circumstances, e.g. see question

2.3 above.


Save that mandatory insolvency set-off of mutual debts will displace

contractual rights of set-off, the commencement of winding up

generally does not, without more, affect existing contracts.

As mentioned in question 3.5 above, ipso facto clauses currently give

contractual counterparties the right to terminate existing contracts

upon the commencement of insolvency. This position will be

affected by the commencement of the Insolvency, Restructuring and

Dissolution Act. We elaborate further on this in question 9.1 below.

The liquidator may, with leave of Court or the Committee of

Inspection, disclaim onerous property or unprofitable contracts if

such disclaimer would facilitate the liquidation process. In such

cases, the other party may prove as a debt in the liquidation the loss

suffered as a result of the disclaimer, calculated on the basis of

damages for breach of contract.


In brief, claims against an insolvent company are ranked as follows:

(1) secured creditors and certain quasi-security holders;

(2) debts arising from rescue financing accorded super priority;

(3) the costs and expenses of winding up;

(4) wages and salary of employees;

(5) retrenchment benefits or ex gratia payments due to employees;

(6) work injury compensation due under the Work Injury

Compensation Act (Cap. 354);

(7) Central Provident Fund (“CPF”) contributions;

(8) Remuneration payable to employees in respect of vacation

leave;

(9) taxes;

(10) retirement and retrenchment benefits payable under the

Employment Act;

(11) claims secured by floating charge;

(12) claims of the general body of unsecured creditors; and

(13) shareholders.


If the company has not yet been dissolved, it is possible to apply for

a stay of the winding up proceedings, which halts the winding up

proceedings and allows the management to resume control from the

date of the stay. It should be noted that the threshold for such a stay

is a relatively high one.

Where a company has been dissolved, the Court may at any time

within two years after the date of dissolution, on application of the

liquidator of the company or of any other person who appears to the

Court to be interested, make an order upon such terms as the Court

thinks fit declaring the dissolution to have been void. The Court’s

general approach would be to exercise that discretion carefully and

judicially, bearing in mind that in some instances, a winding up

ought to be reversed to ensure fairness and justice. A non-

exhaustive list of scenarios that might warrant a reversal include the

presence of overlooked realisable assets, prejudice or fraud, or

reasons stemming from broader considerations of justice. Once the

Court has made such a declaration, proceedings may be taken as

they might have been taken if the company had not been dissolved.

5 Tax


The tax implications arising from a restructuring depends on the

specific form and structure of the relevant transaction. A company

under judicial management is still required to submit its income tax

return (Form C-S/C), audited/unaudited financial statements and tax

computations to the Inland Revenue Authority of Singapore

(“IRAS”) annually.

In relation to an insolvency, the liquidator must not distribute any

assets of a company to its shareholders unless he has made provision

for the payment in full of any tax which may be found payable by the

company under the Income Tax Act, Chapter 134 of Singapore, and is

required to carry out certain actions including submitting all

outstanding tax returns, financial statements and tax computation(s) of

the company in liquidation up to the date of liquidation. Tax clearance

may also be obtained in certain circumstances from the IRAS.

6 Employees


Schemes of arrangement generally do not have any direct effect on

contracts of employment.

The onset of judicial management also will not have a direct effect

on contracts of employment. That being said, the judicial manager

has the power to terminate these contracts, and should decide

whether to adopt or terminate these contracts within 28 days of the

making of the judicial management order. If the employees

continue to work for the company after the 28-day period, the

judicial manager may be personally liable for their wages.

As mentioned above in question 4.6, in a liquidation scenario, save

that claims for wages and salary and retrenchment benefits are

subject to a cap, claims by employees for wages and salary,

retrenchment benefits, work injury compensation, CPF contributions,

remuneration for vacation leave and retirement and retrenchment

benefits are given priority.



The Singapore Courts have the discretion to wind up a foreign

company if the company has a substantial connection with

Singapore. In this regard, the following factors are relevant when

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determining whether a foreign company has a substantial

connection with Singapore:

(1) whether Singapore is the centre of main interest of the

company;

(2) whether the company is carrying on business in Singapore or

has a place of business in Singapore;

(3) whether the company is registered in Singapore under the CA;

(4) whether the company has substantial assets in Singapore;

(5) whether the company has chosen Singapore law as the

governing law for its transaction documents; or

(6) whether the company has submitted to the jurisdiction of the

Singapore Courts for the resolution of disputes involving the

company.

A foreign company which has a substantial connection with

Singapore may similarly avail itself of Singapore’s scheme of

arrangement or judicial management regime if it is able to meet the

relevant statutory requirements.


An application may be made to the Singapore Courts by the foreign

representative for recognition of the foreign restructuring or insolvency

proceedings, where the main proceeding takes place in the state where

the debtor has its centre of main interests or, if the debtor has an

establishment within the foreign state for non-main proceedings. Such

foreign proceedings may not be recognised in Singapore if it is found

that they are contrary to the public policy of Singapore, although the

Singapore Courts have shown willingness to grant limited recognition

in such cases where required by justice and fairness.


It is not unusual for companies incorporated in Singapore which are

in judicial management or winding up to commence ancillary

insolvency proceedings in other jurisdictions to, amongst other

things, recover assets located in said jurisdictions.

8 Groups


The starting position is that group companies are considered

separate legal entities, and the insolvency of one group company,

without more, will not directly affect the others.

However, where there have been dealings between persons

connected with a company, which is often the case in groups of

companies, the statutory time limit for a transaction to be considered

an unfair preference is extended, and certain adverse presumptions

will be made in relation to the transaction which may facilitate

insolvency clawbacks.

In addition, where it is shown that a company is used as a façade for

other solvent entities, the corporate veil may be lifted so as to treat

the companies as a single entity. Another example where the veil

may be lifted is where the controller of the company treats the

companies as a single entity and has complete control over them.

On the other hand, Singapore’s legislative framework also facilitates

the rehabilitation of groups of companies by permitting the

extension of a Section 211B moratorium to a subsidiary, a holding

company or an ultimate holding company where such company

plays a necessary and integral role in the compromise or

arrangement.

9 Reform


Singapore has been taking significant steps to improve its corporate

restructuring regimes. A raft of substantial amendments to the Act

were introduced in 2017 and include in particular enhanced stay and

cram-down provisions in support of schemes of arrangements, super

priority for rescue financing in relation to both schemes of

arrangement and judicial management and the adoption of the

UNCITRAL Model Law.

Further, the landmark omnibus Insolvency, Restructuring and

Dissolution Act (“IRDA”) was passed by Parliament in October

2018 and is expected to come into force in 2019. Amongst other

things, this Act consolidates personal and corporate insolvency

laws, and the laws relating to debt restructuring by individuals and

companies into a single piece of legislation.

The key changes under the IRDA include:

(1) restrictions on the operation of certain types of ipso facto

clauses;

(2) the scope for appointment of the Official Receiver as

liquidator has been reduced. Applicants must show that they

have taken reasonable steps, but were unable to appoint a

private liquidator, and they must obtain the consent of the

Official Receiver;

(3) a new “wrongful trading” provision will replace the current

“insolvent trading” regime at Sections 339 and 340 of the

CA;

(4) in relation to schemes of arrangement, certain specified

proceedings may be allowed to proceed unaffected by

moratoria if so prescribed by regulations; and

(5) in relation to judicial management, debtor companies will be

permitted to place themselves into judicial management

without the need for an order of Court, if they are able to

obtain a resolution of the company’s creditors for the

company to be placed into judicial management.



Kenneth Lim Allen & Gledhill LLP One Marina Boulevard #28-00 Singapore 018989 Tel: +65 6890 7811


URL: www.allenandgledhill.com

Edward Tiong Allen & Gledhill LLP One Marina Boulevard #28-00 Singapore 018989 Tel: +65 6890 7887


URL: www.allenandgledhill.com

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

He has been consistently cited and recommended for his expertise in restructuring and insolvency. He is named as a Rising Star by IFLR1000, recommended by The Legal 500 Asia-Pacific, and cited as a Noted Practitioner by Chambers Asia-Pacific. He is also recognised as a Future Star in International Arbitration and Commercial and Transactions by Benchmark Litigation Asia-Pacific.

Allen & Gledhill is an award-winning, full-service South-east Asian commercial law firm which provides legal services to a wide range of premier clients, including local and multinational corporations and financial institutions. Established in 1902, the Firm is consistently ranked as one of the market leaders in Singapore and South-east Asia, having been involved in a number of challenging, complex and significant deals, many of which are the first of its kind. The Firm’s reputation for high-quality advice is regularly affirmed by the strong rankings in leading publications, and by the various awards and accolades it has received from independent commentators and clients. The Firm is consistently ranked band one in the highest number of practice areas, and is one of the firms with the highest number of lawyers recognised as leading individuals. Over the years, the Firm has also been named ‘Regional Law Firm of the Year’ and ‘SE Asia Law Firm of the Year’ by many prominent legal awards. With a growing network of associate firms and offices, Allen & Gledhill is well-placed to advise clients on their business interests in Singapore and beyond, in particular, on matters involving South-east Asia and the Asia region. With its offices in Singapore and Myanmar; its associate firm, Rahmat Lim & Partners in Malaysia; and its alliance firm, Soemadipradja & Taher in Indonesia, the Allen & Gledhill network has over 550 lawyers in the region, making it one of the largest law firms in South-east Asia.

Edward is a Partner at Allen & Gledhill LLP. His main areas of practice are corporate restructuring and insolvency, commercial and banking litigation and property disputes. He has been lead counsel in several high-profile cases, in particular, restructuring matters (both cross-border and domestic), and commercial disputes.

In insolvency, he has advised statutory boards, government-linked companies, major banks, corporates and financial institutions on schemes of arrangements and compromise, judicial management, liquidation and clawbacks.

Edward has been recommended for his expertise in several legal publications, Chambers Asia-Pacific, The Legal 500 Asia-Pacific and Benchmark Asia-Pacific. He is also listed as an expert for Restructuring & Insolvency in Who’s Who Legal and mentioned as a prominent partner in Global Restructuring Review. Recent accolades from Chambers Asia-Pacific note that he “has very good commercial awareness and client-liaison skills; his management of the relationship

is exceptional ” and is “a good, sound practitioner ”.


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Additional Author

Edward Kwok, [email protected]

Edward’s main areas of practice are restructuring and insolvency,

commercial litigation, employment law and tenancy law.

On the restructuring and insolvency front, Edward has advised directors,

financial institutions, statutory boards and multinational corporations. He

also has extensive experience with restructuring and insolvency-related

litigation, including winding up, schemes of arrangement, judicial

management and litigation on behalf of insolvency practitioners

involving breaches of directors’ duties and misappropriation of assets.

In litigation, Edward has assisted in a number of high value suits,

representing banks, real estate investment trusts and multinational

corporations.

Edward graduated from King’s College London in 2009, was called to the

Singapore Bar in 2012 and has been with Allen & Gledhill since. He is

also a contributor to Listing in Singapore: Corporate Governance Perspectives.

chapter 29


sca legal, slp

pedro moreira

isabel Álvarez

spain

1 Overview


Historically, Spain has been a creditor-friendly jurisdiction, in the

sense that the law – only in very limited terms – allowed for limitations

of the creditors’ rights or for any reductions of the debt burden imposed

on the creditors. Under such scenario, creditors’ rights are fully

enforced, no matter the financial condition of the debtor, in terms that,

in many cases, ended with the liquidation of the debtors’ assets on a

“first come, first served” basis. In practical terms, this does not mean

that creditors end up recovering their credits in better terms than they

would otherwise do, but the fact is that, at least from a legal

perspective, the law has been always on the creditors’ side.

This scenario has not substantially changed with the passing of the

first insolvency legislation in 1922 nor with the enactment, in 2003,

of Law 22/2003, as of 9 July, on Insolvency (hereinafter “Spanish

Insolvency Act” or “SIA”). With the SIA, Spain gained a modern

insolvency legal framework, although, so far, in general terms,

neither debtors nor creditors have been able to use it in a manner that

generates better ratios of credit recovery and fewer winding ups of

debtors.

This has several reasons, one of them being the fact that a high

number of debtors file for bankruptcy at a very late stage of financial

stress, where even liquidity available to pay debts generated after

the bankruptcy declaration may be scarce, something that makes

recovery much more difficult than at an earlier stage. Nonetheless,

other reasons thereto have to do with certain options followed by the

legislator, based on the principle that credits are to be honoured,

such as (i) the high majorities required for the approval of a

creditors’ agreement (article 124 SIA), (ii) the protections given to

creditors with security on debtor’s assets, which in practical terms

leaves them almost immune to the effects of the bankruptcy

proceedings (articles 56 (1) and 155 SIA), and (iii) the fact that

senior credits (tax and social security contributions, among others)

are excluded from the mandatory effects of a creditors’ agreement

(article 100 (2) SIA), which means that such credits will not be

subject to the pardons and/or delays foreseen in such an agreement.

And, last but not least, the technical option followed by the SIA to

set forth a unique type of bankruptcy proceedings, though with an

alternative development that avoids the winding up (the approval of

a creditors’ agreement), also plays a role in the bad fate of most of

the bankruptcy proceedings held in Spain. Due to the mentioned

unique type of bankruptcy proceedings, with long and complex

steps, in cases where simple and rapid steps could have made a

difference, debtors find themselves in a scenario where, much to the

regret of some if not all stakeholders, winding up is the most

common outcome.

Therefore, from a legal point of view, Spain is definitely a more

creditor-friendly jurisdiction. Nonetheless, in practical terms, the

insolvency regime may lead to undesired outcomes for the creditors,

as the winding up of bankrupt debtors, to which most are fated,

tends to generate insufficient proceeds, resulting in most of the

credits, notably non-senior ones, being left unpaid. This is actually

the most common scenario in the case of small and mid-size

companies in the services area, which tend to operate with few

assets and, as such, generate scarce proceeds at the time of being

liquidated via bankruptcy proceedings.


From a legal perspective, nothing prevents informal work-outs

between creditors and debtors who are interested in negotiating an

arrangement. If all creditors accept a certain work-out, this

agreement would be fully enforceable and there would be no need

for the debtor to initiate insolvency proceedings.

Nonetheless, in most situations, with a reasonable number of

creditors, it is not easy for a debtor to bring in all its creditors.

Therefore, in most cases, only some of the creditors would end up

engaging in a work-out, and this is what makes them less used than

they could be.

In practice, informal work outs are not used as much as they could

be, because creditors (notably, banks and other providers of finance)

tend to refuse to engage in these sort of arrangements, as they see

them as bearing the risk of being repealed in case the debtor initiates

bankruptcy proceedings or, if not for any other reason, because they

tend to see them as an undue intent of the debtor to sweeten its

obligations under the initial finance agreements, or, in the best case,

as an attempt to treat the creditors that participate in the arrangement

in terms less favourable than those applied to the holdout creditors.

Informal refinancing tends to be accepted by banks when negotiated

in advance by smarter debtors who, at the time of the negotiations,

are still in good standing.

As for formal restructuring and insolvency proceedings, both are

provided by the SIA. The SIA provides two types of formal

restructuring: refinancing agreements, under article 71 bis, a

provision added in 2013; and out-of-court payment arrangements,

under articles 231 to 242, all added in 2013.

spai

n


Pursuant to article 71 bis SIA, refinancing agreements are

arrangements reached with some of the creditors before the debtor is

declared bankrupt by a court, that cannot be turned down by this, in

case the debtor is declared bankrupt at a later stage, if they (i)

increase the amount of credit available to the debtor, if they

refinance the debtor, or (ii) modify or extinguish any of the debtor’s

debts, (iii) provided that, in any case, such measures are part of a

viability plan that allows the continuation of the debtor’s activity in

the short- and mid-term.

Regarding out-of-court payment arrangements, these can be used by

companies only if they are already bankrupt and if their debts and

assets do not amount to more than €5 million each (articles 232.2

and 190 SIA). These arrangements need to be managed by an

official bankruptcy mediator, appointed either by a notary public or

the Companies’ Registrar (article 233 SIA). If successful, these

arrangements end with an agreement that can include any of the

following measures: (i) a delay of no more than 10 years; (ii) an

acquaintance; (iii) an assignment to the creditors of the debtor’s

assets to cover its debts, either in full or partially; (iv) debt equity

swaps, where credits are converted into new equity to be issued by

the debtor; or (v) the conversion of such credits in certain types of

loans or financial instruments (callable preferred stock, convertible

bonds, debt instruments where interest is paid in debtor’s shares,

junior debt, etc.).

Pursuant to article 5 bis SIA, the initiation of negotiations aimed at

reaching a refinance agreement or an out-of-court payment

arrangement give the debtor a four-month period, during which: (i)

no creditor is allowed to request the courts to declare the bankruptcy

of the debtor; and (ii) no enforcement of credits against assets used

by the debtor in its activities can be initiated or, in case they had

already been, will be subject to a stay. If the debtor could, during the

said four-month period, not reach any such arrangements that

excludes it from the obligation, foreseen in article 5 SIA, to request

the court to initiate bankruptcy proceedings, then it is mandatory for

the debtor to do so (article 235 SIA).

As for insolvency proceedings, as mentioned before, the SIA rules

on a unique type of insolvency proceedings, covering all parts of the

same, both in substantive and procedural terms, and ruling on the

regime applicable to the receivers.

The use of the insolvency proceedings is much more widespread

than that of the informal work-outs and formal restructuring,

although not so much as one would think at first, notably in what

concerns small- and mid-size indebted companies.



As a rule, the directors of a company are not liable for the

company’s debts. Nonetheless, in case this is declared insolvent,

within bankruptcy proceedings, they may be liable for the unpaid

debts in case they took decisions that are considered, by the court

that hears the case, as the cause of debtor’s inability to pay its debts

or a part thereof, insofar as those decisions lead such court to qualify

the bankruptcy as blameworthy (article 165 (1), 1st, SIA).

Article 5 (1) SIA provides that the debtor has to file for a bankruptcy

process in the two months following the time when it acquires

knowledge that it cannot comply with its due obligations, i.e., that

its available liquidity is not enough to allow it to comply with its

obligations (article 2 (2)).

In the case of companies, the obligation to file for a bankruptcy

process lies on the directors of the bankrupt company. Failure by

the debtor to comply with this obligation is a ground for the court to

qualify the bankruptcy as blameworthy under the aforesaid article

165 (1) SIA. In such scenario, those persons (directors,

shareholders, etc.) who failed to file for bankruptcy at the time

foreseen by the SIA may be deemed personally liable for the

unpayable debts of the bankrupt debtor.


The most important stakeholders are creditors (creditors in general,

employees and public creditors) and employees and landlords, not

as creditors but as parties interested in keeping their respective

condition of suppliers of labour and offices/land to the debtor in the

future.

Creditors play an important role in the sense that, when the debtor

does not request its winding up, either at the time of filing for

bankruptcy or at a latter stage during the bankruptcy proceedings,

the survival of the debtor, under a creditors’ agreement, will

basically depend on their will to approve such an agreement, which

will mean, to some of the credits, pardons and/or delays.

When a court declares the bankruptcy of a debtor, this automatically

imposes a moratorium or a stay on the enforcement of the creditors’

rights. From that point on, their credits will be enforceable under

the less favourable terms of a creditors’ agreement, in case this

comes to be approved, or within the liquidation process, in case it

does not.

Therefore, new individual enforcements are never allowed during

the bankruptcy proceedings (article 55 (1) SIA), save in case of

enforcement of credits secured by assets, which are allowed, though

in some cases with a moratorium of one year (article 56 SIA). As for

stays on enforcement, pursuant to article 55 SIA, the fact that a

debtor is declared bankrupt by a court necessarily determines such

stay, though with several exceptions (enforcement of administrative

rights and labour credits, provided that the seizure of any of the

debtor’s assets was ordered before the bankruptcy declaration and if

those assets are not necessary for the debtor’s business activity).


The SIA sets forth that certain transactions entered into by the

debtor in the two years before the date when a company initiates an

insolvency process can be challenged (article 71), either by the

insolvency practitioner (“receiver”) or, in case this fails, by the

creditors (article 72), whenever such transactions can be deemed

harmful to the debtor’s assets.

Defiance of those transactions in court can lead the court to declare

them void, in which case their effects will be repealed (article 73),

e.g., in case of a sale of a debtor’s asset that is declared void by the

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court, such asset will return to the debtor’s balance sheet and any

monies paid by the buyer will be returned to the debtor.

Nonetheless, as mentioned before, the transactions entered into by

the debtor with the aim of avoiding insolvency can be excluded

from any challenges if they meet certain requirements, as is the case

of the refinance agreements, carried out under article 71 bis SIA, as

mentioned in the answer to question 1.2.



An informal workout between a debtor and its creditors is always

possible under Spanish law, if the parties agree to engage in such an

arrangement. Once the parties reach an agreement, unless it

breaches any mandatory regulations, in principle, this would be

enforceable between them.

However, if the debtor does not succeed in convincing all its debtors

to accept the terms of the work-out and if the debtor, no matter the

existence of such an arrangement, is still unable to comply with its

obligations before any holdout creditors, any of the latter may

request the court of commerce to declare the debtor in bankruptcy.

And if bankruptcy is actually declared, the arrangements reached by

the debtor with some of the creditors may be turned down by the

court, on request of the receiver or, a creditor.

Nonetheless, article 71 bis SIA, added in 2011 and modified in

2014, waives the possibility of those arrangements (reached with

some of the creditors before the debtor is declared bankrupt by a

court), being repealed by the court, if they increase credit available

to the debtor or modify or extinguish debts of this, provided that

certain other requirements are met and when those measures can be

deemed part of a viability plan that forecasts the continuation of the

debtor’s activity in the short- and mid-term. Provided that some

other requirements are also met, the arrangements can be ratified by

the court, in which case, they could not be repealed at a later stage,

either by the receiver or the creditors (fourth additional provision of

the SIA).

3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholders?

The SIA provides for a unique bankruptcy process (“process”),

though with two different types, main and abridged (articles 183–

191 quater SIA), whose use does not depend on who files for

bankruptcy (the debtor or its creditor) but on the dimension of the

debtor.

The process begins with a common phase, where the financial

situation of the debtor is fully accessed and ends with two reports

submitted by the receiver, where it discloses the debtor’s assets and

their debts at the time of the declaration of bankruptcy, with the

grade assigned to them (first order, senior, ordinary and/or junior)

by the receiver.

From this point on, the process can either proceed to the winding up

of the debtor or to the negotiation of a creditors’ agreement.

In the first case, the debtor will be extinguished, and its assets sold,

with a view to use the proceeds of the sales to pay the creditors. This

phase begins with the approval of a liquidation plan (where pre-

packaged sales may definitely be carried out) and once this is

approved, the receiver begins with the sale of the assets. Once the

proceeds have been collected, the receiver starts paying the credits

in accordance with their grade, from the highest to the lowest. In

case the proceeds are not sufficient to pay all credits qualified with

the same grade, the receiver will pay them in proportion.

Creditors have a say in the outcome of the process, in the sense that, if

the majority of the ordinary creditors, as foreseen in article 124 SIA,

does not accept the terms of a creditors’ agreement submitted either by

some of the creditors or by the debtor, the company will automatically

be wound up. Therefore, creditors actually have the power to block

any restructuring of the credits and the survival of the debtor.

The debtor also has a say in the process in the sense that it can either

request the court to wind it up (article 142 (1) SIA) or submit a draft of

a creditors’ agreement (article 124 (1) and (2) SIA). However, it

cannot avoid the winding up if it fails to convince the required majority

of creditors to accept the creditors’ agreement submitted to them.

As the decisions to be taken by the debtor under the SIA, as a rule

lie in the hands of the debtor’s directors or former directors, the

debtor’s shareholders tend to have very limited input in the process.

The only area in which shareholders can play a significant role is in

the case of debt-for-equity swaps, as the issue of new equity is a

matter reserved for the shareholders’ meeting (article 160 of the

Spanish Companies Act). Nonetheless, if the shareholders’ meeting

refuses to authorise an increase of the share capital within a debt-

for-equity swap, this may lead the bankruptcy to be declared by the

court as blameworthy, and the shareholders voting against the said

share capital increase will be deemed liable for the unpaid credits

(article 165 (2) SIA).


In its initial version, the SIA foresaw a unique bankruptcy type for the

court process. Nonetheless, in 2013, Law 14/2013 added a chapter to

the SIA (Title X, with articles 231 to 242), which provides out-of-court

formal work-out proceedings, to be managed by a bankruptcy mediator.

Companies can file for this process only in case they (i) meet the

requirements foreseen in article 5 (1), in relation to (article 2 (2),

and (ii) would qualify for an abridged court process (article 231 (2)),

two things that are not required in the case of physical persons.

Therefore, in the case of companies, the criteria foreseen by the SIA

for court and out-of-court bankruptcy proceedings are the same, i.e.

a company can initiate these work-out proceedings only if it is

already at a stage where it cannot comply with its obligations, not at

an earlier stage where it may have reasons to think that it will fail to

comply with those obligations in the future.


Bankruptcies declared by a court are managed by the receivers

appointed thereto by the court. Receivers are in charge of

identifying the assets and liabilities of the debtor, managing the

company in certain cases or authorising the decisions taken by the

directors in other cases, preparing reports for the court, requesting

the court to declare void certain transactions on the ground of

damaging the creditors, liquidating the company, requesting the

court to declare the bankruptcy as blameworthy, etc.


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Some of the decisions taken by the receiver can be defied by the

creditors or even the debtor before the court of commerce that is

hearing the case. The court will rule on the dispute after hearing the

other party or parties.

Nonetheless, the most important decisions in the process are up to

the court hearing the case, notably the decisions to initiate (articles

14-15 SIA) and terminate the process (article 176 SIA), approve a

creditors’ agreement (article 127 SIA), wind up the debtor (articles

142 and 143 SIA) and declare the bankruptcy as fortuitous or

blameworthy (article 172 SIA).

Out-of-court payment arrangements are negotiated by a bankruptcy

mediator, whose functions cease once they have been approved by

the shareholders who accepted to engage in the negotiation. These

arrangements in no way require court involvement, save in case one

creditor decides to challenge them, in which case it would be up to

the court to rule on the dispute (article 239 SIA).


The fact that a debtor is declared bankrupt does not in itself lead to

the termination of the contracts in force at the time of the declaration

of bankruptcy (article 61 (2) SIA). Any termination or set-off

provisions to be applied in case of bankruptcy of one of the parties

to an agreement would breach the provision set forth in article 61 (2)

SIA and, as such, would be deemed void.

Nonetheless, the receiver, in case the directors of the debtor have

been removed, or otherwise the debtor, with the receiver’s approval,

can request the court to order termination of the agreements if they

deem this convenient to the interest of the process. The court will

hear the other party to the agreements and in case the parties do not

reach a termination agreement, uphold the claim in case it also

considers that termination is convenient for the process. This

decision is a court ruling just like any other and should be

enforceable in the very same terms.

The other party to an agreement in force at the time the debtor is declared

bankrupt cannot terminate that agreement on the ground of such

declaration. Although the credits generated to such party after the

declaration of bankruptcy will be treated as first order credits, i.e., credits

excluded from the bankruptcy proceedings and that are to be paid once

they become due (“first grade credits”). The risk of unsettlement of this

type of credit is small, although in no way non-existent.


The funding of any restructuring process depends on the will of the

creditors or any third parties to provide funds that allow the debtor

to leave the state of insolvency. Funding can be either in the form of

a pardon, a delay, a debt-equity swap or fresh credits.

Any fresh credits granted after the declaration of bankruptcy will

always be qualified as first grade, and as such payable before any

other with different grades. Regarding credits granted before such

declaration, the SIA sets forth that those granted under the regime

foreseen in article 71 bis will are graded as senior.

Rescue finance can also be granted as a condition for the creditors to

approve a creditors’ agreement. It can be provided either by a third

party (a shareholder, existing or new, a bank, etc.) or a creditor. In

such scenario, the protection granted to the new funding will be

agreed between the rescuer and the creditors, provided that it does

not breach the rules on creditors’ agreements foreseen by the SIA.



The SIA provides a unique insolvency procedure, during the course

of which the court, under certain circumstances, can order the

winding up of the debtor. When, in the end of the so-called

“common phase” of this process, the court rules in these terms, then

the winding up phase is initiated.

Basically, the winding up of a company consists of two steps: first,

when the court orders the winding up, at which point the company

immediately ceases to be a legal person with organs and assets and

liabilities; and secondly, consists of a liquidation process, where the

remaining assets that once belonged to the debtor are sold and the

proceeds therefrom used to pay its debts or, in most of the cases, a

part thereof.

The liquidation process shall follow the mandatory rules foreseen

thereto in the SIA (articles 142–162) and those included in the

liquidation plan to be approved by the court under article 148 of this

piece of legislation. As a rule, the assets need to be sold in auctions

organised by the court, though, in some cases, a direct sale to a

certain buyer can be authorised by the court if certain requirements

thereto are met. In addition, though the rule is that each asset shall

be sold in an independent manner, the SIA provides a subsidiary rule

for the sale of business units, under which terms this type of unit

should preferably be sold as a whole.


A bankrupt company can be placed into a winding up process at its

own request, at any time during the bankruptcy proceedings (article

142 SIA). In addition, if the creditors do not agree on a creditors’

agreement during these proceedings, the same will necessarily end

with the winding up of the company (article 143 SIA).


The winding up process consists of two subphases, the first where a

decision to wind up the debtor is taken by the court and the second for

liquidation, where the debtor’s assets are sold and the proceeds are

used to pay the creditors. Whereas the first subphase always lies in

the hands of the court upon a request of the debtor or in case of failure

to approve a creditors’ agreement, the second is managed by the

receiver, previously appointed by the court, under the supervision of

the court. The receiver will liquidate the assets and pay the creditors

in accordance with the rules provided by the SIA (articles 148–162).


The ability of the creditors and/or shareholders to influence the

winding up process is null. Once the court orders the winding up of


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the debtor and approves the liquidation plan, all that is left to be

done is the sale of the debtor’s assets in accordance with such plan

and the use of the proceeds to pay the creditors in accordance with

each credit’s grade. Though the legality of each decision taken by

the receiver at this stage can still be defied in court, what is at stake

is no longer how the process should evolve in the future but only

whether the measures adopted by the receiver to liquidate the

company comply with the laws and the liquidation plan.

The rights of the creditors with security on a certain debtor’s assets

can be enforced at any stage during the process in separate

enforcement proceedings or within the process. Their rights will in

no way be affected by the winding up, as the proceeds of the sale of

the secured asset will be assigned to the secured credit and only the

remaining amount, if any, after this settlement, will be available to

pay any other credits (article 155 SIA).


The decision in itself to wind up a company does not automatically

determine the termination of all agreements, although, at the end of

the liquidation process, all agreements necessarily terminate, unless

an assignment of the same could be worked out before that point.

Nonetheless, while the agreement has not been validly terminated

by either of the parties (e.g., on the ground of a breach of its

obligations by the other party), it remains in force during the

winding up procedure, and this, in itself, is no ground for

termination by the other party.


The ranking of credits follows the rules set forth in the SIA (articles

84 and 89 to 93).

The main distinction is between the credits out of the bankruptcy

proceedings (“outs”) and those in these proceedings (“ins”).

The outs are credits of first order, in the sense that they are payable

once due and in any case before the ins (article 154 (1) SIA). With a

few exceptions (certain labour credits, the cost incurred by the debtor

with the declaration of bankruptcy claim, etc.), almost all of the outs

are credits generated after the declaration of bankruptcy (article 84

SIA), and the reason for their priority is the intent to avoid the debtor

being banished from engaging in any transaction after its bankruptcy

declaration, as the risk of unsettlement for the other party (provider,

seller, etc.) would be too high.

As for the ins, all credits qualified in these terms are credits due, although

unsettled, at the time of the bankruptcy declaration. These credits, if

admitted by the receiver in the listing of such credits to be approved in

the first phase of the process, will be paid after the outs, with the

remaining liquidity. In the said listing, the receiver will assign one of the

following alternative grades to each of the admitted credits: senior (with

or without security over the debtor’s assets); ordinary; or junior.

Ordinary credits are ins that, pursuant to the SIA, should not be

qualified either as senior or junior (article 89 (3)).

Senior credits will be paid after the outs and no ordinary credits are

payable until all seniors have been paid in full. Nonetheless, the

proceeds from the senior secured credits will be used to pay the

creditors secured by them and only in case the senior secured credits

have been paid will the remaining proceeds be used to pay non-

secured senior credits.

Once all senior credits have been paid in full and there is still

liquidity outstanding, this will be used to pay the ordinary ones.

And if such liquidity is enough to pay all the ordinary credits and

there is still liquidity outstanding, then payment of the juniors will

begin.

As mentioned before, if the proceeds available are not sufficient to

pay all credits qualified with the same grade, they will be paid in

proportion.


Under the Spanish Companies’ Act, a decision to wind up a non-

bankrupt company would not prevent it from being revived if the

shareholders agree (article 370 (1)), although such decision could not

be taken after the termination of the liquidation process. If it were

taken thereafter, instead of a revival, the shareholders would have to

set up a new company, foreseeably with the same name, though with

a different tax number and fully independent, in terms of assets and

liabilities, from the wound up company.

Nonetheless, in case of a company engaged in insolvency

proceedings, after the court has decided to wind it up, its revival

would be possible only in case those proceedings could be

terminated on the ground of the full payment of its debts (article 176

(1), 4th, SIA). In such a scenario, though the SIA does not expressly

provide so, there is no legal reason why the company could not be

revived, and this is the logical outcome of the company if it

succeeds in paying all its debts.

5 Tax


Tax creditors share the risks borne by any creditors, in the sense that,

if the debtors’ assets are not enough to cover all their liabilities,

creditors may face losses.

However, part of the tax credits are graded as senior, something that

increases their chances of being paid, if not in full at least in part. This

is on the ground that they will be paid before any lower graded credits,

but also because, as mentioned before, in case of approval of a

creditors’ agreement, senior credits are excluded from it, which is

something that will eradicate them from any pardon or delay.

From the debtor’s perspective, tax does not incur specific risks.

However, in case the bankruptcy proceedings are qualified as

blameworthy, the unpaid tax credits will stand, just like any other

credits, at the time of determining the bulk of the unpayable credits

of the debtor for which certain persons provided by the SIA may be

deemed personally liable.

In addition to the above, it is worth bearing in mind that, in case of

pardons granted by the creditors in a creditors’ agreement, this

would generate capital gains in the debtor, which would be taxed in

accordance with the corporate tax regulations (article 15 of Law

27/2014, on Corporate Tax). Against this, debt-for-equity swaps

arranged between the debtor and any of its creditors, in principle,

would not have any tax effects, at least in terms of corporate tax

(article 17 (2) of the said Law 27/2014, as interpreted by the Tax

General Directorate, in its binding resolution V3463-16, passed on

20 July 2016).


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6 Employees


A distinction should be made between employees’ credits and jobs.

As for employees’ credits, the SIA distinguishes between credits for

salaries earned in the last 30 days of work before the initiation of the

debtor’s bankruptcy process and up to the double of the minimum

salary, which are subject to the regime provided in article 84 SIA,

and any other labour credits. The regime provided in article 84 is the

most protective for the creditors, in the sense that it allows payment

of the credits to which it applies before any other credits. Credits

covered by the said article 84 are payable once they become due and

the said labour credits, provided by its section (1) are so on spot.

Concerning the remaining labour credits, the SIA distinguishes

between certain labour credits (salaries and indemnities for labour

accidents and/or illnesses), which are deemed senior under article

91, and the remaining ones, which may be ordinary (article 89 (5))

or even subordinated (article 92).

In terms of jobs, the initiation of a bankruptcy process does not in

itself determine the termination of any labour contracts or a change

in the terms of these. During the bankruptcy process, those

agreements can be either terminated or modified by the debtor’s

appointed receiver, under the rules foreseen in the labour legislation

with the specialties set forth in article 64 SIA. Nonetheless, with

some minor exceptions, any labour disputes or issues arising during

the bankruptcy process will not be heard by a labour court but by the

court of commerce where such process is pending (article 8 SIA).

Whereas, as we have said, the initiation of a bankruptcy process does

not in itself determine the termination of any labour contracts, the

initiation of a winding up process necessarily leads to the termination of

all labour agreements at the end of the liquidation or even before that,

save in case the company is revived in terms mentioned in the answer to

question 4.7 or in case of a sale of a business unit of the debtor, as

provided in labour legislation (article 44 of the Spanish Labour Act). In

this last case, if a business unit of the debtor is sold to a third party, the

debtor’s employees that worked in that unit are automatically assigned

to the acquirer and therefore their contracts are not terminated.



Article 10 SIA distinguishes between main and territorial insolvency

proceedings, the former being any proceedings initiated in the

country where the debtor has its registered office and/or its main

place of business, in which case they cover its worldwide assets, and

the latter being any proceedings that pertain only to assets owned by

the debtor in the territory where such proceedings are pending.

Under the said rules, insolvency proceedings can be initiated in

Spain in relation to a company incorporated elsewhere, provided

that such company has its main place of business in Spain, in which

case the proceedings will be deemed main, or, in case it does not,

provided that it has assets in this country, in which case such

proceedings will be territorial.


As a rule, insolvency processes that have commenced elsewhere will

not be recognised in Spain until the corresponding rulings given in a

foreign country obtain exequatur (article 220 SIA). Nonetheless, in

the case of processes initiated in another EU Member State, they

would be fully recognised in Spain without any exequatur, pursuant to

the Regulation (EU) 2015/848, of the European Parliament and the

Council of 20 May 2015, on insolvency proceedings.


Pursuant to the said EU regulation 2015/848, a company

incorporated in Spain can initiate proceedings in other EU

jurisdictions, if it has its main place of business in such jurisdiction,

in which case those proceedings should be main ones, or if it has

assets in such jurisdiction, in which case they should be territorial. Nonetheless, so far, it is not common practice for a Spanish

company to file for bankruptcy in other EU Member States.

8 Groups


The SIA provides that any members of a group of companies can file

for bankruptcy in a single petition and creditors are also allowed to

request the declaration of bankruptcy in the same proceedings of

any such members (article 25 SIA).

In addition, during a bankruptcy process, either the debtor or the

receiver can also request two or more pending processes be merged

into a single one, if those processes pertain to companies that belong

to a group (article 25 bis SIA).

Regardless, both in case of joint or merged processes under articles

25 and 25 bis SIA, respectively, as a rule, neither the assets nor the

debts of each of the bankrupt companies can be merged (article 25

ter SIA); the only effect of the joint handling of the cases is that they

will be handled in a coordinated manner.

9 Reform


For the time being, no reform of the Spanish corporate rescue and

insolvency regime has been announced.


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Pedro Moreira SCA LEGAL, SLP Calle Castelló 82, 4º I 28006 Madrid Spain

Tel: +34 91 781 50 40


URL: www.sca-legal.com

Isabel Álvarez SCA LEGAL, SLP Calle Castelló 82, 4º I 28006 Madrid Spain

Tel: +34 91 781 50 40


URL: www.sca-legal.com

Established in 2001, SCA LEGAL is an independent Spanish business law firm with offices in Madrid and representative offices in São Paulo (Brazil) and Buenos Aires (Argentina).

The firm counts on a team of lawyers used to work on international transactions involving different sets of laws, flexibility to adapt to the clients’ needs, a reliable work method, underpinned by a solid body of experience, and a cost/benefit approach.

In the beginning, the firm specialised in commercial and corporate law. Now that its practice has expanded to other areas, the commercial and corporate practice is still one of the most thriving. And, within this, insolvency has been one of most thriving subareas, as the firm has advised, in many occasions, (i) creditors of bankrupt companies, (ii) bankrupt companies, and (iii) directors of bankrupt companies in liability claims filed against them.

In addition, one of the firm’s partners has been appointed receiver in several bankruptcy cases heard by some of the Madrid’s Courts of Commerce.

A founding Partner of SCA LEGAL, SLP Pedro Moreira has almost 20 years of experience as a litigation lawyer, specialising in civil, commercial and corporate law disputes. Thanks to his expertise in those areas of law and his background in economics and business administration, he regularly advises clients, from different jurisdictions and sectors, in complex litigation cases (in relation to the breach of commercial contracts, damage claims, shareholders conflicts and other corporate law issues, bankruptcy and insolvency matters, etc.), some of them multijurisdictional and/or heard by a court of arbitration. Mr. Moreira advises also on a regular basis on non-contentious matters, mostly in commercial and corporate law. Mr. Moreira has also been appointed receiver in several bankruptcy cases by some of Madrid’s Courts of Commerce.

Mr. Moreira graduated in Law from the Complutense University of Madrid and also has a BA in Law from the Catholic University of Lisbon, a MA in Economics (Diploma de Estudios Avanzados en Economía) from the Complutense University of Madrid and an MBA from the EAE/Camilo José Cela University (Madrid). He is a member of the Madrid Bar Association, speaks fluent Spanish, Portuguese and English and has also a working knowledge of French and German.

Isabel Álvarez is a Partner at SCA LEGAL, SLP. She has almost 10 years of experience as a litigator, her practice focusing on civil, commercial and labour law disputes. She regularly advises Spanish and foreign clients in complex litigation cases (in relation to breaches of contract, damage claims, real property and inheritance disputes, termination of labour agreements with directors and other senior staff, etc.). She advises also on a regular basis on non-contentious matters, mostly in civil and commercial law.

Ms. Álvarez holds a BA in Law from the Complutense University of Madrid and is a member of the Madrid Bar Association. She speaks fluent Spanish and English.


179

chapter 30


Hannes snellman attorneys

carolina wahlby

Fredrik olsson

sweden

1 Overview


Sweden has elements of offering a debtor-friendly procedure –

company restructuring and protecting over-indebted debtors from

its creditors in order to recover the business. At the same time,

company restructurings cannot go on forever (a bit more than one

year is the maximum) and no write down of debt will occur unless a

qualified majority of creditors vote in favour of it.

The second procedure – the bankruptcy processes – is a creditor-

friendly procedure where the administrator shall strive to achieve

the best possible outcome for the creditors.

In general, when it comes to insolvency proceedings, we would

place Sweden on the more creditor-friendly end of the scale.

Please note that our answers below are only taking into account

debtors as limited liability companies and do not include the special

provisions that apply for companies under the supervision of the

Swedish Financial Supervisory Authority.


The Business Reorganisation Act (Sw. lag (1996:764) om företagsrekonstruktion) provides for formal proceedings involving a

court, and is used in practice. The intention of the legislator has

been that the reorganisation would be used at an early stage of the

financial difficulties, but in practice companies tend to then try to

find solutions through informal out-of-court restructurings while

applying for a formal reorganisation procedure first when the

difficulties are rather advanced. The reason for this is often to avoid

the publicity that the formal reorganisation procedure entails.

There is no legislative framework for informal out-of-court

restructurings. However, informal debt write-downs and extensions

involving only the main creditors are commonplace. Informal

elements may also occur within formal insolvency proceedings, as

some creditors may be willing to accept a renegotiation of terms to

enable the company to continue as a going concern.

If the parties involved in an informal work-out so agree, they can

amend existing agreements between them. However, it will only

bind the parties involved. To also bind non-consenting parties, the

company will have to initiate a formal reorganisation in accordance

with the Business Reorganisation Act. In case of a negotiated

agreement being made during a formal restructuring, the

administrator is generally involved.



The board of a limited liability company is obliged to prepare a

control balance sheet if the board members have reason to believe

that the net assets of the company are less than half of the share

capital or if an attempt of levy of execution (Sw. utmätning) has

taken place without there being sufficient assets.

Upon preparing the control balance sheet, the board must promptly

summon an extraordinary general meeting (referred to as the first

control general meeting) at which the shareholders shall decide

whether to liquidate the company or not. If no liquidation decision

is made despite the first control balance sheet showing that less than

half of the share capital was intact, a second control balance sheet

must be prepared and a second control general meeting must be held

within eight months from the first general meeting. Should the

share capital then not be fully restored, the shareholders are obliged

to resolve to liquidate the company. Absent such decision, the board

members are obliged to initiate the liquidation process themselves.

Should the board fail to take any of the required measures in a

timely manner and incur further liabilities, the board members

become personally and jointly liable for all such liabilities incurred

from the date they should have taken the relevant action until doing

so. The same applies to any representative of the company or a

shareholder of the company that is aware of the board’s failure and

nonetheless participates in incurring further liabilities.

There is no obligation to enter any reorganisation proceeding or to

apply for bankruptcy. However, the board members should be

aware of the risk of becoming personally liable for tax payments

(see question 5.1 below). Further, not initiating an insolvency

proceeding may under certain circumstances have consequences.

For example, the Swedish Penal Act (Sw. brottsbalken) comprises

certain criminal acts jointly referred to as crimes against creditors,

of which one is to continue to run a business, utilising thereby

considerable means without a corresponding benefit to the

company, although the representatives of the company are aware


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that the company is insolvent or is in manifest danger of becoming

insolvent.

In addition thereto, the general provisions regarding liability for

damages by negligence are stipulated by the Swedish Companies

Act (Sw. aktiebolagslagen (2005:551)) will apply.


Counterparties, employees and creditors may try to influence the

company’s situation within the boundaries of their agreement with

the company. Once starting to suspect that the company may be in

financial difficulties, most counterparties and creditors will start to

investigate what actions they may take to limit their losses in case a

formal insolvency procedure would follow. Counterparties and

creditors should in their interactions with the company be aware of

the clawback risks (see question 2.3 below).

A creditor may try to collect a claim through the Swedish

Enforcement Authority or apply for the debtor to be put in

bankruptcy (or, very rarely, company restructuring). However,

should the company be in a company restructuring, a stay on

enforcement will apply (see question 3.2 below), and no levy of

execution or other enforcement measures may take place in respect

of the debtor, unless the creditor possesses a general or particular

lien or if special cause exists to believe that the debtor is executing

or failing to execute a particular measure and is thereby jeopardising

a creditor’s rights. If creditors wish to take actions otherwise, they

must first make the court decide on a cessation of the company

restructuring.

There are no special rules or regimes which apply to particular types

of unsecured creditor prior to entering into any formal insolvency

proceeding.


Once in a formal reorganisation procedure (provided that it involves

debt composition proceedings) or in a bankruptcy, an administrator

may seek to challenge transactions taken by the company prior to

proceedings initiated by way of clawback, upon which a transaction

is recovered to the company or the bankruptcy estate.

Generally, a prerequisite for clawback is that the transaction has

adversely affected the creditors and the purpose of a clawback is that

the clawback shall return the financial position of the relevant

company to as if the challenged transaction had not taken place.

The time limits (the hardening periods) range from between three

months to eternity, depending on the type of transaction, but

transactions between related parties are generally easier to claw

back than transactions with third parties.

The general clawback provision stipulates that any action whereby a

creditor is unduly put in a better position than other creditors, or

assets of the debtor are being deprived from the creditors or the

debts of the debtor are increasing, may be clawed back if the debtor

was, or as a result (directly or indirectly) of the action, has become

insolvent. However, this shall only apply if the counterparty knew,

or should have known, about the debtor’s insolvency and the

circumstances that made the action undue. It is assumed that related

parties have such knowledge.

Further, payment of a debt which has been made prior to initiating a

formal insolvency proceeding and which was made by other than

ordinary means of payment, or prior to the due date or with such

amount that the financial situation of the debtor became

considerably worse, may be clawed back if the circumstances under

which the payment was made do not make it an ordinary payment.

Other clawback provisions relate to, inter alia, gifts, salaries or

other remunerations. Another example is that security that the

debtor has transferred within a hardening period is annulled unless

it was provided when the debt was created or was transferred

without delay after the creation of the debt.

It is not a general requirement that the transaction was made with

actual intent to defraud creditors, and some clawback provisions can

be applied even if the company was not insolvent or became

insolvent as a result of the transaction but thereafter entered into

company restructuring or bankruptcy.





The key restructuring procedure is reorganisation in accordance

with the Business Reorganisation Act. The purpose of such

procedure is to give companies in financial difficulties a possibility

to avoid bankruptcy, by, for example, providing protection from

certain enforcement actions from creditors or giving a grace period

in respect of payments of debts that had arisen before the

reorganisation was initiated. Further, one common reason to apply

for company restructuring is to try to achieve a debt write-down.

Provided that a qualified majority has approved thereof, all

unsecured debt will be written down pro rata and the company shall

be given a grace period of up to one year. A debt composition

proposal, which yields at least 50 per cent of the amount of the

unsecured debt, shall be deemed to be accepted by the creditors,

where three-fifths of the creditors voting have accepted the proposal

and their claims amount to three-fifths of the total amount of claims

held by the creditors entitled to vote. Where the debt composition

percentage is lower, the debt composition proposal shall be deemed

to be accepted where three-fourths of the creditors voting have

approved the proposal and their claims amount to three-fourths of

the total amount of the claims held by the creditors entitled to vote.

During the reorganisation process, the management continues to

control the business and to run the daily operations of the relevant

company, and the board of directors have full capacity to represent

the company. However, an administrator is appointed by the court

to supervise all activities. The company may not assume new legal

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obligations, nor may it transfer, pledge or grant a third party any

rights to property which is of substantial importance to the business

operations without the consent of the administrator. Furthermore,

the company is prohibited from paying, or granting security for, any

debt that occurred prior to filing for company reorganisation without

the consent of the administrator. However, the absence of such

consent does not affect the validity of the transaction.

As a general rule, a reorganisation may not continue for more than a

year.

Swedish law does not as such recognise a “pre-pack” as an

instrument. However, Swedish law does not explicitly prohibit

entities from taking steps and measures prior to a bankruptcy, such

as finding suitable buyers for assets, which can be implemented in

the bankruptcy. Which pre-pack measures may be taken must be

decided on a case-by-case basis.

Debt-for-equity swaps may be made both by shareholders and by

third parties if the shareholders approve of the equity issue. Third

parties who acquire distressed debt may use it to gain an equity

interest in the debtor.

During the reorganisation, secured creditors may still enforce

certain types of security. Other enforcement measures may only

take place in respect of the debtor if there are special reasons to

believe that the rights of a creditor are jeopardised. The court may

then take appropriate measures to safeguard such rights.

Upon request by a creditor, the court may appoint a creditors’

committee who the administrator should consult with during the

reorganisation. A creditors’ committee may consist of a maximum

of three creditors, and if the company has more than 25 employees,

it is entitled to appoint a fourth member.


A prerequisite for entering into a reorganisation process pursuant to

the Business Reorganisation Act is that the company is incapable of

paying its debts, or that such incapacity presumably will occur in the

near future. Further, an application to enter into a reorganisation

shall be dismissed if there is no reason to expect that the

reorganisation will be successful. In practice, courts often approve

an application for reorganisation so that an administrator is

appointed and can investigate this further.


A court approval is required in order to enter a reorganisation and

the court will also make the decision to terminate the reorganisation.

As described in question 3.2, an administrator is appointed by the

court to supervise the activities of the company.


A reorganisation provides protection to the company, as it prevents

counterparties from terminating agreements by sole reason of the

company’s late payments or performance (or anticipated delays of

such nature) if the company (with the consent of the administrator)

upon request by the counterparty informs the counterparty that it

wishes the agreement to continue in force. A provision in a contract

that a party may be entitled to terminate the agreement due to the

insolvency of the company may be unenforceable.

If the contract stipulates that it is time for the counterparty to

perform its obligation under the contract, the counterparty may

require that the company performs its obligations (e.g. pays)

simultaneously, or that the counterparty receives security for such

performance. A counterparty may also in other situations be entitled

to request security if necessary, in order to protect it from making a

loss.

Set-offs will be accepted, with a few exceptions. A set-off is not

permitted if the debt was acquired (from someone else not having

the right of set-off) within a three-month period starting from when

the reorganisation was initiated or if the creditor reasonably should

have known about the insolvency.


Most suppliers will start to require advance payments or payments

upfront in order to deliver goods needed, wherefore the company

will need cash at hand during the reorganisation.

The state wage guarantee (see question 6.1 below) will provide

some support, but a company is often dependent on contributions

from its shareholders or external funding in order to be able to

continue to run the business.

Although not provided for by law, in practice an administrator takes

control of the funds of the company by having them transferred to an

escrow account controlled by the administrator during the

reorganisation.



The key insolvency procedure is bankruptcy in accordance with the

Bankruptcy Act (Sw. konkurslag (1987:672)), providing for all

assets of the debtor to be fairly distributed to the creditors and for

the company to be subsequently dissolved. Further, the Companies

Act entails certain provisions regarding mandatory liquidation.


A company can apply for bankruptcy voluntarily or be forced into

bankruptcy upon the application of a creditor, if the company is

considered insolvent. A company is considered insolvent if it

cannot pay its debts as they fall due and this incapacity is not

temporary. A statement by a company that it is insolvent is assumed

to be correct, unless there are circumstances giving the court reason

to believe that this is not the case.

In case a creditor files for bankruptcy, it would have to provide

evidence as to why the company would be insolvent or would have

to rely on certain stipulated presumption rules. A creditor cannot

force a company into bankruptcy if its claim is protected by

sufficient security.

A mandatory liquidation must be initiated, inter alia, when the

solidity is below the levels stipulated by the Companies Act (see

question 2.1 above).


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An application for bankruptcy must be submitted to the district

court, which should then make a prompt decision on the matter. The

bankruptcy is managed by one or more administrators appointed by

the court who have the special insight and experience required and

are otherwise appropriate for the assignment, and the work of the

administrator is supervised by the Swedish Enforcement Authority

(Sw. kronofogdemyndigheten).

A liquidation will be administrated by a liquidator proposed by the

company and approved by the court or the Companies Registration

Office (Sw. bolagsverket) (the former if the liquidation is a part of a

court proceeding).


During the reorganisation, secured creditors may still enforce

security if the creditor has the security assets in its possession, i.e.

excluding, for example, business mortgages and security obtained

through registration.

Levy of execution (Sw. utmätning) may not take place in respect of

the debtor other than if the creditor has priority rights in respect of

its claims (see question 4.6 below).


The bankruptcy estate may choose not to honour existing

agreements, and the counterparty will then have a claim on the

company. However, there are no unified rules that apply to the

contracts of a company in bankruptcy. If there are specific

provisions set out in any legal act, those will, however, override any

clause in the agreement. Hence, all contracts will not automatically

terminate and a clause stipulating that a counterparty may terminate

the agreement due to the bankruptcy may be unenforceable. If not

regulated by law, the terms of the contract will apply.

One law limiting the right to terminate an agreement is the Sales of

Goods Act, but that provision is also invoked analogously in other

contractual relationships. The creditor (or supplier or similar) may

not terminate the agreement before giving the bankruptcy estate the

opportunity to step into the contract. If the estate decides to do so

and the performance by the creditor is due, the creditor may demand

that the estate completes its performance as well or, under certain

circumstances, that the estate provides security if necessary in order

to protect him against loss. If the estate does not step into the

agreement or grant security in accordance with the aforesaid, the

creditor may terminate the agreement.

As regards set-offs, please see question 3.2 above.


The Bankruptcy Act prioritises all costs of the bankruptcy procedure

and debt arising after the time of bankruptcy. Any surplus thereafter

shall be distributed to the creditors in accordance with the Priority

Rights Act (Sw. förmånsrättslag (1970:979)). If, however, the

creditor enforces a security on its own, which is possible for certain

so-called possessory liens (see question 4.4 above), the costs of the

bankruptcy estate cannot be taken from such proceeds.

According to the Priority Rights Act, firstly, debts secured by

specific property are paid out of the proceeds of the sale of that

specific property, including, inter alia, (in the order of priority as

listed): maritime liens and aircraft liens; international interests in

aircraft and aircraft engines which are registered pursuant to the

International Interests (Mobile Equipment) Act (2015:860); pledges

and rights to retain possession of personal property as security for a

debt (possessory liens); as well as grants of security interests made

on the basis of registration or notice pursuant to the Central

Securities Depositories and Financial Instruments Accounts Act

(SFS 1998:1479), security interests based upon mortgages granted

in ships, or shipbuilding, or aircraft and reserve parts for aircraft.

Thereafter would be a creditor having received security in the form of

business mortgages or security in the form of real property mortgages.

Thereafter there are claims of general priority, i.e. in the following

order of priority: costs for filing for bankruptcy; the costs for a

previous reorganisation process; costs arising with the consent of a

reorganisation administrator (in case there has been a preceding

reorganisation procedure) provided that it has clearly arisen in the

best interests of the creditors; audit costs; and employees’ salaries

and remunerations.

Lastly, all other unsecured creditors will share the remaining funds

(if any) pro rata between themselves and if all unsecured creditors

have been fully paid, the surplus will be paid to the shareholders.


While the company is typically dissolved after its assets are

liquidated, assets of the company, such as the brand name or

business model, may be acquired for use in a new venture. If there

is a surplus after a bankruptcy, the company itself must, however,

not be liquidated, but this is a rather unlikely scenario.

5 Tax


Generally, a restructuring or insolvency procedure does not give rise

to any further tax risks, but the procedure may result in forfeiture of

tax losses. However, taxable income may crystallise in case of

informal work-outs.


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A failure to apply for a restructuring or insolvency procedure when

a company becomes unable to pay all taxes in a due manner may

result in the board members incurring personal liability for the tax

payments of the company. Hence, it is important that all taxes are

duly paid.

6 Employees


A bankruptcy or reorganisation does not automatically cause the

employments to be terminated. If a Swedish company is insolvent

and therefore unable to pay salaries due to its employees, the state

wage guarantee (Sw. lönegaranti) will be triggered. A prerequisite

for the guarantee to be applicable is that the company has been

declared bankrupt or is in a company reorganisation procedure and

the total amount per employee that can be paid out corresponds to

four base income amounts (Sw. prisbasbelopp), which for 2019

adds up to a total of SEK 186,000. All different categories of

employees are covered, excluding, however, independent

contractors. As a general rule, the guarantee only covers salary

claims that have fallen due within three months prior to the date of

the bankruptcy filing.

Normally, employees have a general right of priority (Sw. allmän förmånsrätt) for wages or other compensation arising from the

employment. The general right of priority is however limited in

time and certain criteria must be fulfilled. As claims having a

specific right of priority (for example, secured creditors) has

precedence over claims having a general right of priority, secured

creditors rank ahead of employees. However, the employees rank

before, for example, unsecured creditors and shareholders.



For members of the EU (other than Denmark), the new Regulation

(EU) 2015/848 of the European Parliament and of the Council of 20

May 2015 on insolvency proceedings (the Insolvency Regulation),

which came into force on 26 June 2017, provides that the courts of

the EU Member State within the territory of which the centre of the

debtor’s main interests is situated shall have jurisdiction to open

insolvency proceedings (main insolvency proceedings). The centre

of main interests shall be the place where the debtor conducts the

administration of its interests on a regular basis and which is

ascertainable by third parties. However, if a company has an

establishment within the territory of another Member State, the

courts of such Member State may open insolvency proceedings in

respect of such assets (territorial proceedings). Generally, territorial

proceedings may not be opened if main insolvency proceedings have

been initiated, but there are certain exceptions to this general rule.

As regards situations where the Insolvency Regulation does not

apply, a Swedish court may initiate insolvency proceedings to the

extent it deems that the centre of main interests of the company is

located in Sweden, if the company has assets in Sweden or in a

limited number of other scenarios.


The main rule is that foreign insolvency proceedings will not be

recognised or enforced in Sweden. Notwithstanding the aforesaid,

Swedish authorities must recognise restructuring and insolvency

proceedings initiated in accordance with the Insolvency Regulations

(see question 7.1 above). Further, the Nordic countries have agreed

on the Convention between Denmark, Finland, Norway, Sweden

and Iceland on Bankruptcy which continues to apply between all

Nordic countries except between Sweden and Finland (as the

Insolvency Regulation supersedes the convention).


It would be unusual for a Swedish company to restructure or enter

into an insolvency proceeding in a jurisdiction other than Sweden.

8 Groups


From a legal point of view, each entity is treated separately from one

another. Notwithstanding the aforesaid, it is commonplace that

members of the group file at the same time and request that the same

administrator should be appointed for all Swedish members of the group.

The new Insolvency Regulation (see question 9.1 for further details)

includes provisions to enable an administrator to request the

opening of group coordination proceedings if one or more members

of a group are in bankruptcy proceedings in different jurisdictions.

If the request is approved, a coordinator will be appointed and may

make recommendations to the administrator.

9 Reform


The Insolvency Regulation came into force on 26 June 2017, and will

further harmonise the insolvency proceedings in the EU. A new EU

proposal has been presented on preventive restructuring frameworks,

second chance and measures to increase the efficiency of restructuring,

insolvency and discharge procedures and amending Directive

2012/30/EU, which will further harmonise the EU insolvency regime.


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Carolina Wahlby Hannes Snellman Attorneys Kungsträdgårdsgatan 20 SE-103 96 Stockholm Sweden Tel: +46 760 000 070


URL: www.hannessnellman.com

Fredrik Olsson Hannes Snellman Attorneys Kungsträdgårdsgatan 20 SE-103 96 Stockholm Sweden Tel: +46 760 000 006


URL: www.hannessnellman.com

Hannes Snellman is a premier Nordic law firm focusing on significant business transactions and complex dispute resolution. We serve our clients with commitment, creativity and quality.

Hannes Snellman is a key player in the Nordic financial centre with the capacity and specialist know-how to handle any demanding local or cross-border transaction or dispute.

Hannes Snellman’s restructuring and insolvency practice provides a broad range of legal, strategic and commercial advice, with extensive experience in domestic and international restructuring and insolvency matters, to navigate clients through the turmoil of situations involving financially distressed companies. Our insolvency practice represents debtors, creditors, bondholders, investors, boards of directors, auditors, and creditors’ committees in complex corporate restructurings, bankruptcies, work-outs and in bankruptcy planning, negotiations and litigations. The insolvency team works closely with the corporate, finance, tax and litigation practices to provide a complete and comprehensive service to the Firm’s clients.

Carolina Wahlby is a Managing Associate in the Finance and Restructuring team, and specialises in financing, including providing advice on restructurings and bankruptcies, where she has acted as counsel on all sides of the proceedings.

Her more recent experience includes representing a blue chip company in its strategic counterparty insolvency, representing a creditor considering a pre-pack in relation to the bankruptcy of one of its key counterparties as well as representing clients in debt-to-equity swap discussions.

The head of the Finance and Restructuring practice at the Stockholm office, Fredrik Olsson has vast experience of finance-related work, including restructurings and insolvencies. He has experience of representing a variety of different parties, including debtors, distressed financial institutes, syndicates of banks and other creditors and counterparties. He is experienced both in formal and informal reorganisations, and of providing advice in cases in simultaneous proceedings in several jurisdictions. In addition thereto, he advises clients on transactions involving the purchase of debt and debt-for-equity swaps.

Examples of his previous experience include representing groups with insolvency procedures in their Swedish subsidiaries, as well as representing a company within the public sector in connection with the company reorganisation of its counterparty and being counsel to a company investigating the possibility of doing a debt-to-equity swap.


185

chapter 31


lenz & staehelin

tanja luginbühl

Dr. roland Fischer

switzerland

1 Overview


The recovery and insolvency of companies incorporated in

Switzerland is governed by the Swiss Code of Obligations (CO) and

the Swiss Debt Enforcement and Bankruptcy Act (DEBA). The CO

and the DEBA provide for a fair balance of rights and obligations of

both debtors and creditors.

In 2014, the DEBA was amended to make in-court restructuring

options more appealing to debtors. Based on our experience so far,

this has slightly shifted the balance. In turn, the trigger events set

forth in the CO to initiate insolvency proceedings are currently

under review and it is to be expected that the focus will shift from

balance sheet triggers to liquidity triggers.


There are two main types of formal insolvency and restructuring

proceedings in Switzerland: bankruptcy (i.e., liquidation) proceedings

(Konkursverfahren/faillite); and composition proceedings

(Nachlassverfahren/concordat). Whereas in bankruptcy proceedings

a company is eventually wound up, composition proceedings can

either: (i) be used to liquidate and realise the debtor’s assets in a more

flexible manner than in bankruptcy (composition agreement with

assignment of assets); (ii) result in a debt restructuring (be it through

a debt-rescheduling or a dividend agreement or a combination

thereof); or (iii) be used as a mere restructuring moratorium, which

may be terminated without the need to reach a composition agreement

or to open bankruptcy liquidation proceedings if the debtor can be

successfully restructured during the moratorium. Further, Swiss law

provides for the possibility of an informal work-out; please see

question 3.1 below for more details. Special insolvency regimes exist

for certain types of companies, most notably banks, securities dealers,

insurance companies and other players in the financial industry.

It is fair to say that although both types of formal proceedings are

used in practice, bankruptcy proceedings are opened significantly

more frequently than composition proceedings. Due to the higher

costs linked to the latter, they are primarily (albeit not exclusively)

used by major companies in financial distress.



The CO provides for various inalienable and non-transferable

responsibilities of the directors of a Swiss company that specifically

apply in financial distress. The regime is identical for the corporate

forms most frequently used in practice, i.e., corporations

(Aktiengesellschaften/sociétés anonymes) and limited liability

companies (Gesellschaften mit beschränkter Haftung/sociétés à résponsabilité limitée).

If, based on the last financial statements, half of the share capital and

the legal reserves of the company are no longer covered by its assets

(article 725 par. 1 CO, Kapitalverlust/perte de capital) the directors,

inter alia, have to convene an extraordinary shareholders’ meeting

and to propose appropriate restructuring measures. If a Swiss

company is over-indebted (überschuldet/surendetté) within the

meaning of article 725 par. 2 CO, i.e., if its assets no longer cover its

liabilities, the board of directors must notify the court without delay

unless certain creditors are willing to subordinate their claims to

those of all other company creditors in an amount sufficient to cover

the capital deficit and any losses anticipated to be incurred in the

next 12 months. Notification of the court will typically lead to the

opening of bankruptcy proceedings. Furthermore, bankruptcy

proceedings have to be initiated if a shareholders’ meeting resolves

on the dissolution of the corporation as a result of its illiquidity

(zahlungsunfähig/insolvable) pursuant to article 191 DEBA.

As an alternative to filing for bankruptcy, a company (or a creditor

entitled to request the opening of bankruptcy proceedings) may apply

for the postponement of bankruptcy (Konkursaufschub/ajournement de faillite) or the opening of composition proceedings. However, it is

not required for the admissibility of composition proceedings and the

grant of a moratorium that the company is over-indebted within the

meaning of article 725 CO, i.e. if its assets no longer cover its

liabilities, or that it is unable to pay its debts within the meaning of

article 190 par. 1 section 2 DEBA. Still, the debtor must make it

plausible to the court that over-indebtedness and/or illiquidity are

likely to occur in the near or more distant future unless a restructuring

is pursued under the protection of a moratorium. Furthermore, court


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precedents hold that a company which is over-indebted may continue

to trade if there are good prospects that the company can be

restructured within a short period of time. The timeframe available

to the directors is typically viewed to be in the range of four to six

weeks from the determination of over-indebtedness.

Directors’ liability typically arises in bankruptcy. The general legal

basis as regards the civil liability of directors (Haftung für Geschäftsführung/responsabilité dans la gestion) is article 754 CO,

pursuant to which the members of the board of directors and any

person entrusted with the management or the liquidation of a

corporation shall be liable for damages “caused by wilful or

negligent violation of their duties”. Accordingly, the liability of a

director requires: (i) a breach of the director’s duties; (ii) damages

caused to the corporation or a particular creditor; (iii) a wilful or

negligent conduct (fault); and (iv) a causal link between the breach

and the damage. According to the above, courts have held directors

who failed to take the steps required by law by not notifying the court

about the over-indebtedness of the company liable. In such

scenarios, damages typically cover the increase of loss that occurred

between the moment the directors should have known of the

corporation’s distressed situation and failed to take appropriate

actions and the moment the bankruptcy was actually declared

(Konkursverschleppung/retard de la prononcé de la faillite). Further

liability risks may arise in case of a mismanagement or the context of

transactions that are at risk of being challenged (see question 2.3).

Several provisions of the Swiss Criminal Code (CrimC) may also

apply in the context of the activity undertaken by a director. Article

165 CrimC punishes debtors whose acts of mismanagement have

caused the company’s bankruptcy (Misswirtschaft/gestion fautive).

This criminal provision expressly refers to the case of the debtor

who, by means of an insufficient capital endowment, causes or

aggravates its over-indebtedness before being declared bankrupt.

Special attention must also be paid to article 167 CrimC, which

deals with the issue of the advantages granted to certain creditors by

an insolvent debtor who is subsequently declared bankrupt

(Bevorzugung eines Gläubigers/avantages accordés à certains créanciers). As for disqualification (Berufsverbot/interdiction d’exercer une profession) issues, article 67 par. 1 CrimC (which is in

fact very rarely implemented) provides that the court may prevent a

convicted person from exercising their profession for a period

extending from six months to five years if this person has been

punished either by an imprisonment sanction exceeding six months

or a fine exceeding 180 day rates for an offence committed within

the exercise of a profession when the circumstances give reason to

fear new abuses from the convicted person.


Moratoria and stays on enforcement are generally available under

Swiss insolvency laws, as outlined in detail in question 1.2 above

and questions 3.2 et seq. below. They would not, however, prevent

foreclosure in all types of collateral. Most importantly, foreclosure

in assets where legal title has been transferred for security purposes

may still occur despite a composition moratorium and certain types

of intermediated securities may also be realised during a stay.

As to the possibility of using other stakeholders to influence the

company’s situation, firstly it should be noted that the company’s

statutory auditors (Revisionsstelle/organe de révision) must notify

the court if the company is over-indebted and the board of directors

fails to notify the court itself. In addition, creditors may petition the

court to open bankruptcy proceedings or composition proceedings

in respect of the company under certain circumstances. As long as

no such proceedings have been opened by the court, creditors may

take the same debt enforcement actions against a company in

financial distress as they may against a company in good standing.

Also, there are no special rules and regimes applicable to particular

types of unsecured creditors as far as the enforcement of their claims

is concerned, i.e. the available enforcement actions under the DEBA

are the same for all unsecured creditors. This notwithstanding, the

claims of certain creditor categories such as employees or social

security insurances are privileged in the context of insolvency

proceedings (see also question 4.6 below) and some creditors may

have additional contractual rights vis-à-vis the debtor under Swiss

substantive laws (e.g. the right of termination of the landlord in case

of non-payment of the rent). A particular constellation in this

context consists of the so-called lien of the landlord (Retentionsrechts des Vermieters) which, under certain circumstances, provides that

the inventory kept in the premises leased under a commercial lease

shall secure outstanding rent payments for a period of up to a year-

and-a-half. If the lessee is declared bankrupt or otherwise liquidated

by means of formal insolvency proceedings, the landlord would

need to register its claims and the pertaining lien – subject to a

number of limitations and requirements – in the course of such

proceedings. Whether or not such claims and the lien would then be

admitted to the schedule of claims is decided by the receiver in

bankruptcy, with other creditors being able to contest both the

existence and amount of the claim itself as well as the lien.

Finally, with regard to retention of title arrangements in general, it

should be noted that while Swiss law in theory allows for such

arrangements to be established, the pertaining formal requirements

are rather cumbersome and the retention of title does not protect

against the bona fide acquisition of title by a third party.

Consequently, such constellations are of very little relevance and do

not confer any additional creditor rights in insolvency proceedings.


According to the DEBA, certain preferential or fraudulent acts made

by the debtor within certain suspect periods may become subject to

challenge. The avoidance regime set forth in articles 285 et seq.

DEBA provides for three different avoidance actions

(Anfechtungsklage/action révocatoire), i.e.: (i) the action to avoid

gratuitous transactions (Schenkungsanfechtung/révocation des libéralités) which targets, in particular, all gifts and all dispositions

made by the debtor without any, or without adequate, consideration

during the year prior to the opening of bankruptcy proceedings, the

granting of a moratorium or the seizure of assets; (ii) the voidability

of certain specified transactions during the year prior to the opening

of bankruptcy proceedings, the granting of a moratorium or the

seizure of assets while the debtor is already over-indebted

(Überschuldungsanfechtung/révocation en cas de surendettement) i.e., the granting of a security interest for existing debts without

being, by prior agreement, contractually obligated to create the

relevant security interest, the settlement of a monetary claim in a

manner other than by usual means of payment, or the payment of a

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debt which was not yet due, in each case provided that the recipient

is unable to prove that it was unaware and must not have been aware

of the debtor’s over-indebtedness; and (iii) the avoidance for intent

(Absichtsanfechtung/révocation pour dol) which targets dispositions

and other acts made by the debtor within a period of five years prior

to the opening of bankruptcy proceedings, the granting of a

moratorium or the seizure of assets if the disposition was made by the

insolvent with the intent to disadvantage its creditors or to prefer

certain creditors to the detriment of other creditors and if the

privileged creditor knew or should have known of such intent. For all

challenges, it is further required that the challenged transaction has

caused damages to other creditors of the debtor. The rules regarding

avoidance for intent as well as avoidance of gratuitous transactions

provide for an inversion of the burden of proof whenever these

transactions are entered into by related parties (including affiliated

entities). Accordingly, in such cases the benefiting party must prove

that it could not have been aware of the disproportion between

performance and consideration (in case of avoidance of gratuitous

transactions) or of the intention of the insolvent debtor to prefer

certain creditors over others (in case of avoidance for intent).

If all prerequisites are met, the court orders the defendant to return

the specific assets to the estate. If the return of a specific asset is no

longer possible, the court may order the defendant to compensate

the estate in cash. In recent case law, the Swiss Federal Supreme

Court has shown a tendency to apply rather low standards for a

successful avoidance for intent.



In case of a loss of capital (Kapitalverlust/perte de capital), the

board of directors must convene an extraordinary shareholders’

meeting and propose appropriate restructuring measures (article 725

par. 1 CO, see question 2.1). No court needs to be involved for the

proposition or implementation of such measures.

While, according to article 725 par. 2 CO, there is a general obligation

to notify the court in case of over-indebtedness

(Überschuldung/surendettement), court precedents hold that, during a

short window of a few weeks, an informal work-out may be carried out

without court involvement in case of good prospects of success (see

question 2.1). Furthermore, the court may, at the request of the board

of directors or a creditor, postpone the adjudication of bankruptcy,

provided that there is the prospect of a financial reorganisation

(Konkursaufschub/ajournement de la faillite). Such reorganisation

may occur under the supervision of an administrator, which is instated

by the court. That said, the opening of composition proceedings (see

question 3.2 below) is requested more frequently in such instances.


Formal rescue procedures are available in the form of composition

proceedings. The restructuring of liabilities may be achieved in two

ways, with or without a cram-down element:

First, composition proceedings may be used as a mere restructuring

moratorium (article 296a DEBA). A termination is only possible if

it can be established before the court that the debtor is restructured

(without the need for a debt rescheduling or a dividend agreement).

An individual agreement must be reached with each single creditor

who is expected to make a concession.

Second, where it is not possible to receive consent from each single

creditor, a composition agreement may be proposed. In a debt-

rescheduling agreement (Stundungsvergleich/concordat moratoire)

the debtor offers the creditors full discharge of their claims

according to a fixed time schedule and, hence, the contractual terms

and conditions of the credits are modified. In a dividend agreement

(Prozent- oder Dividendenvergleich/concordat dividende), the

debtor offers the creditors only a partial payment of their claims in

connection with a creditors’ waiver of the remainder. The debtor is

not wound-up as a consequence of such debt-rescheduling or

dividend agreement and once such agreement has been adopted by

the required quorum of creditors and the competent court, the debtor

would have full power to manage the company’s affairs. The

composition agreement must be approved by a majority of creditors.

These are rarely used to restructure large companies.

Debt-for-equity swaps and/or composition agreements with

incorporation of a company (Nachlassvertrag mit Gesellschaftsgründung/concordat avec constitution de société) are

admissible in Switzerland. In a typical debt-for-equity swap, creditors

receive interests in the debtor in proportion to their recognised claims.

Under a composition agreement with incorporation of a company, the

debtor undertakes to assign its assets to a newly created company in

which the creditors obtain interests in proportion to their recognised

claims. Furthermore, pre-packaged sales are possible under Swiss

law. Such sales may require the consent of the court-appointed

administrator (Sachwalter/commissaire) and the court.

Specific rules apply to debt-for-equity swaps for certain entities that

are subject to a special insolvency regime, most notably to banks.

During the moratorium, creditors of claims are not entitled to

commence or continue debt enforcement proceedings

(Betreibung/poursuite). This restriction does not apply to creditors

whose claims are secured by real estate who are, however, precluded

from foreclosing on the real estate. For further limitations on the

effects of a stay see question 2.2.

As soon as a draft composition agreement

(Nachlassvertrag/concordat) is proposed, the administrator

convenes a creditors’ meeting. Only creditors who have filed claims

in time are given the right to vote in the creditors’ meeting. Other

than the right to vote in the creditors’ meeting, creditors are

generally not able to influence composition proceedings.

Approval of the proposed composition agreement requires an

affirmative vote by a quorum of either (i) a majority of creditors

representing two-thirds of the total debt, or (ii) one-quarter of the

creditors representing three-quarters of the total debt. Creditors with

privileged claims and secured creditors (to the extent that their claims

are covered by the estimated liquidation proceeds of the collateral)

will not be entitled to vote on the composition agreement. After

approval by the creditors, the composition agreement requires

confirmation by the composition court. With the court’s

confirmation, the composition agreement becomes valid and binding

upon all creditors of claims subject to the composition agreement,

whether or not they have participated in the composition proceedings

and irrespective of their non-approval of the composition agreement.

It is, thus, possible to cram-down dissenting creditors in such

proceedings. In turn, Swiss law does not provide for different classes

of creditors which are subject to a composition agreement and, hence,

no cram-down of dissenting classes of creditors is available.


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As opposed to the creditors, shareholders have no voting rights over

court-adjudicated composition agreements. The DEBA, however,

provides that in order for an ordinary composition agreement to be

approved by the court, the equity holders must make an appropriate

contribution to the restructuring efforts.


Composition proceedings are typically initiated by the debtor. No

specific trigger event exists which must have occurred for the debtor

to be entitled to request the opening of composition proceedings. In

addition, both creditors entitled to request the opening of

bankruptcy proceedings and the bankruptcy court may request the

opening of composition instead of bankruptcy proceedings.

Upon receipt of a request to this effect, the court grants a provisional

moratorium (provisorische Nachlassstundung/sursis provisoire) of

up to four months. Furthermore, a provisional administrator

(provisorischer Sachwalter/commissaire provisoire) may be

appointed by the court to permit an assessment of the prospects of a

successful reorganisation or of a composition agreement.

If the court finds that there are reasonable prospects for a successful

reorganisation or that a composition agreement is likely to be

concluded, it must grant a definitive moratorium (definitive Nachlassstundung/sursis concordataire) for a period of four to six

months and appoint an administrator (Sachwalter/commissaire). Upon

application by the administrator, the duration of the moratorium may

be extended to up to 12, and in particularly complex cases, 24 months.


If the provisional moratorium is made public, it is not compulsory

(but customary) to appoint an administrator during the provisional

moratorium. An administrator must always be appointed for the

duration of the definitive moratorium. In addition, the court may

appoint a creditors’ committee (Gläubigerausschuss/commission des créanciers) to supervise the administrator and the proceedings

in general.

The debtor may continue its business activities under the supervision

of the administrator and the court. The composition court may,

however, direct that certain acts shall require the administrator’s

participation in order to be legally valid, or authorise the

administrator to take over the management from the debtor. Without

the authorisation of the composition court or the creditors’ committee

(if appointed), the debtor is prohibited from divesting, encumbering

or pledging certain assets and to grant guarantees or to make gifts.

Major steps in the composition proceedings require the involvement

of the court. This holds true for the opening of composition

proceedings, the appointment of an administrator, the approval of

certain transactions involving the debtor and, finally, the approval of

the composition agreement.


Contractual relationships between the debtor and its counterparties

generally continue to be effective unless (i) there is a specific

statutory provision under applicable contract law providing for an

automatic termination of the relevant agreement or a termination

right upon the grant of a moratorium, or (ii) the specific contract

provides for an automatic termination or a termination right upon

the grant of a moratorium. If so, the termination would generally be

valid and enforceable vis-à-vis the Swiss debtor and the

administrator from a Swiss insolvency law perspective.

Notwithstanding the foregoing, there are certain restrictions (see

question 3.4) which may prohibit the debtor from disposing of its

assets or continuing its business.

If, in contrast, a contract is not terminated, while the contracting

party would generally have to perform its obligations in kind, it may

demand that security be provided if the debtor’s restructuring has an

adverse effect on the counterparty’s claim (which would typically be

the case). In the event that no security is provided in due course –

with the applicable time period depending on the underlying

circumstances – the counterparty is entitled to unilaterally rescind

the relevant agreement. In case of long-term contracts

(Dauerschuldverhältnisse/contrats de durée), to the extent the

counterparty performs its obligations during a moratorium with the

consent of the administrator, its claims against the debtor constitute

so-called debts of the estate (Masseverbindlichkeiten/dettes de la masse) and have to be paid as a matter of priority (prior to all other

non-secured creditors).

Further, the administrator has the authority to order conversion of a

performance owed by the debtor in kind into a monetary claim of

corresponding value, which will then become subject to the terms of

the composition agreement. Set-off rights are modified upon the

grant of a moratorium in much the same way as upon the opening of

bankruptcy proceedings (see question 4.5 below).

Finally, with the consent of the administrator, the debtor may

extraordinarily terminate long-term contracts

(Dauerschuldverhältnisse/contrats de durée) during the moratorium

against full indemnification of the counterparty if the continuing

existence of these contracts would defeat the restructuring purpose

(article 297a DEBA).


Costs triggered by composition proceedings qualify as debts of the

estate (Masseverbindlichkeiten/dettes de la masse) and have to be

paid with priority from funds available at the outset of the

proceedings, trading results or realisation proceeds. External

funding is possible. An administrator will carefully analyse whether

external funding is appropriate.

As to rescue financing, whether or not the provision of such

financing is given protection depends on the individual

circumstances of the restructuring context. In particular, a

distinction needs to be made between rescue financings made

available prior to the opening of insolvency proceedings and loans

granted in the context of composition proceedings. As a result of the

most recent revision of the DEBA, transactions made during

composition proceedings with the approval of the competent court

or – if applicable – the creditors’ committee are explicitly exempted

from the scope of avoidance actions as described in question 2.3

above and, thus, benefit from claw-back protection. In addition, any

claims arising out of such transactions qualify as debts of the estate

(Masseverbindlichkeiten/dettes de la masse) which are paid with

priority before any distributions are made to other creditors.

In light of the most recent court precedents, it is not clear if – and on

what conditions – rescue financing granted prior to the opening of

insolvency proceedings (so-called Sanierungsdarlehen/prêt accordés


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dans un but d’assainissement) may benefit from claw-back

protection. As a consequence of such unclear and ambiguous case

law, pre-insolvency rescue financing presents a rather high risk for

potential lenders.



The key insolvency procedure which leads to the winding up of a

company is bankruptcy. Additionally, composition proceedings can

be used to liquidate and realise the debtor’s assets in a more flexible

manner than in bankruptcy (composition agreement with assignment

of assets, Nachlassvertrag mit Vermögensabtretung/concordat par abandon d’actif ) but with the same result, i.e., winding up of the

company.


A company may be placed into bankruptcy proceedings by the

competent court: (i) if a creditor whose claim has not been settled

but upheld within the course of debt enforcement proceedings has

successfully requested the opening of bankruptcy proceedings

(Konkursbegehren/réquisition de faillite); (ii) upon a debtor’s

request by declaring to the court that it is insolvent; (iii) upon a

creditor’s request if the company has committed certain acts to the

disfavour of its creditors or if it has ceased payments or if certain

events have happened during composition proceedings; or (iv) upon

a notification of the court by the board of directors (or the statutory

auditors) of the company that the company is over-indebted within

the meaning of article 725 par. 2 CO. As to the opening of

composition proceedings with the intention of concluding a

composition agreement with assignment of assets, see question 3.3

above.


Bankruptcy proceedings are opened by the competent court and,

within the course of bankruptcy proceedings, the insolvent company

is represented exclusively by the bankruptcy administration. If the

rules for ordinary bankruptcy proceedings apply (summary

proceedings are ordered if the proceeds of the bankrupt’s assets are

unlikely to cover the costs of ordinary proceedings or in non-

complex circumstances), the bankruptcy estate is administered as

follows: the bankruptcy administration publishes a notice of

bankruptcy instructing all creditors and debtors to file their claims

and debts within one month and inviting creditors to a first creditors’

meeting. The first creditors’ meeting may appoint a private

bankruptcy administration acting instead of the state bankruptcy

office as well as a creditors’ committee which has certain

supervisory (and limited decisive) competencies. A second

creditors’ meeting is convened to pass resolutions as to all important

matters, including the commencement or continuation of claims

against third parties and the method of realisation of the assets

belonging to the bankruptcy estate (the actual realisation, however,

is reserved for the bankruptcy administrator). Following

distribution of the proceeds (according to question 4.6 below), the

bankruptcy administration submits its final report to the bankruptcy

court. If the court finds that the bankruptcy proceedings have been

completely carried out, it declares them closed. For composition

proceedings with assignment of assets please refer to question 3.4

above. Once a composition agreement with assignment of assets

has been approved and confirmed by the creditors and the court, the

liquidator would take over the realisation of the assets.


Once bankruptcy proceedings have been opened, all debt

enforcement proceedings come to an end and creditors may not

commence new debt enforcement proceedings against the debtor.

Apart from attending the creditors’ meetings (see question 4.3

above), unsecured creditors have no individual rights to enforce

their claims. Secured creditors have to (i) notify the bankruptcy

administrator if they are holding assets owned by the debtor within

30 days as from the public announcement of the opening of

bankruptcy proceedings, and (ii) hand in the collateral to the

bankruptcy administrator. As a rule, contractual or statutory rights

to privately realise such collateral are no longer enforceable in

bankruptcy. Notable exceptions exist with respect to individual

assets, most importantly for certain intermediated securities.

Furthermore, the restrictions do not apply to certain types of

security interests involving an outright transfer of title. In any

event, the secured creditors keep their preferential rights with

respect to the collateral and will be satisfied out of the net proceeds

of the sale of such collateral in priority to any other creditors. Real

estate mortgages are only realised and proceeds paid out to creditors

if their claims against the debtor are due; claims secured by real

estate mortgages that are not yet due are transferred to the acquirer

of the real property.

For composition proceedings with assignment of assets, please refer

to question 3.5 above. Once a composition agreement with

assignment of assets has been approved and confirmed by the

creditors and the court, private realisation of collateral is available

for movable assets on the basis of article 324 DEBA.


Whether existing contracts are terminated upon the initiation of

winding up procedures is primarily governed by substantive

contract law and the specific terms of a contract, which are generally

upheld in a Swiss winding up proceeding. Under Swiss contract

law, certain types of contracts are terminated ex lege, whereas others

can be terminated immediately by one party in case of bankruptcy of

the other.

If contracts are not terminated, the contracting party would

generally have to perform its obligations in kind but it would be

bound to accept a dividend rather than full payment or specific

performance. However, should the bankruptcy administration elect

in its sole discretion to pursue the performance of a contract which

was not or was only partially fulfilled at the time of the opening of

the bankruptcy proceedings, the counterparty may demand that

security be provided, and it may further expect full performance by

the bankruptcy administration. The right of the bankruptcy

administration to elect performance of the contract is excluded in


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the case of financial future, swap, option and similar strict deadline

transactions, if the value of the contractual performance can be

determined based on market or stock exchange prices at the time of

the opening of the bankruptcy. The bankruptcy administration and the

contractual partner are each entitled to claim the difference between

the agreed value of the contractual performance and the market value

at the time of the opening of the bankruptcy proceedings.

Special insolvency rules apply to long-term contracts. Even if they

are not terminated upon the opening of bankruptcy procedures, future

claims arising under such long-term contracts will only be admitted to

the schedule of claims if they cover the period until the next possible

termination date (calculated from the opening of bankruptcy) or until

the end of the fixed duration of a contract. If the bankruptcy estate has

made use of performances under the long-term contracts, article 211a

DEBA provides for the indemnification thereof to be a claim against

the bankruptcy estate (Masseverbindlichkeiten/dettes de la masse)

and, thus, to be paid with priority.

Set-off rights are also available in bankruptcy but the substantive set-

off rules are subject to certain modifications in bankruptcy. First, a

distinction needs to be made between (i) claims of the insolvent party

forming part of the insolvency estate and claims against the insolvent

party (Konkurs- oder Nachlassforderungen/créances dans la faillite ou le concordat) to be satisfied with a dividend payment out of the

proceeds of the insolvency estate on the one hand, and (ii) claims of,

and against, the insolvency estate (Masseforderungen und –verbindlichkeiten/créances et dettes de la masse) which are mainly

characterised by the fact that they have come into existence only after

the opening of insolvency proceedings with the consent of the

insolvency administration. As a rule, set-off is only possible between

claims of the same category. In addition, set-off of claims of the first

category is not admissible if (i) the debtor of the insolvent party

became a creditor of the latter only after the opening of bankruptcy

proceedings or the grant of a moratorium, respectively, or (ii) the

creditor of the insolvent party did not become a debtor of the

insolvent party or the insolvency estate until after the opening of the

bankruptcy proceedings or the grant of a moratorium, respectively.

Furthermore, set-off is voidable if a debtor of the insolvent party

acquires a claim against the latter prior to the opening of bankruptcy

proceedings or the grant of a moratorium, respectively, but in

awareness of the insolvency in order to gain an advantage for himself

or a third party to the detriment of the insolvency estate.


Secured claims (pfandgesicherte Forderungen/créances garanties par gage) are satisfied directly out of the proceeds from the

realisation of the collateral. Should the proceeds not be sufficient to

satisfy the claim of a secured creditor, such creditor shall rank as an

unsecured and non-privileged creditor for the outstanding amount of

its claim.

Unsecured claims are ranked within three classes of claims.

Leaving aside claims which are irrelevant in a corporate context, the

classes are composed as follows: the first class consists of claims of

employees (i) derived from the employment relationship which

arose during the six months prior to the opening of bankruptcy

proceedings and which do not exceed the maximum insurable

annual salary as defined by the Federal Ordinance on Accident

Insurance (which is currently CHF 148,200), (ii) in relation to the

restitution of deposited security, and (iii) derived from social

compensation plans which arose during the six months prior to the

opening of the bankruptcy proceedings. The first class also includes

claims of the assured derived from the Federal Statute on Accident

Insurance and from facultative pension schemes, as well as claims

of pension funds against employers. The second class includes

claims of various contributions to social insurances. All other

claims are comprised in the third class. Claims in a lower ranking

class will only receive dividend payments once all claims in a higher

ranking class have been satisfied in full. Claims within a class are

treated on a pari passu basis.

The costs incurred during the bankruptcy proceedings are debts of

the estate (Masseverbindlichkeiten/dettes de la masse) and have to

be paid with priority; i.e., before any other creditor is paid.


Once the bankruptcy proceedings have been terminated, this is

generally not possible. In this scenario, following distribution of the

proceeds, the bankruptcy administration submits its final report to

the bankruptcy court which declares the bankruptcy proceedings

closed if it finds that they have been completely carried out. As a

consequence, the company ceases to exist and will be removed from

the commercial register. However, in case previously unknown

assets of the insolvent are discovered after the bankruptcy

proceedings have been closed, the bankruptcy administration

distributes the proceeds of such assets without further formalities.

In contrast, there are limited options for the debtor to have

bankruptcy proceedings revoked during the course of proceedings.

At the outset of bankruptcy proceedings, the debtor has the

possibility to appeal the declaration of bankruptcy ordered by the

competent court within 10 days. To this effect, the debtor must (i)

make it plausible that it is able to pay its debts (zahlungsfähig/ solvable), and (ii) provide evidence that the relevant claim has been

settled or deposited with the court on behalf of the respective

creditor or that the creditor having requested the opening of

bankruptcy proceedings renounces that such proceedings be carried

out. Alternatively, at a later stage, as from the expiration of the

deadline for the creditors’ call (Schuldenruf/appel aux créanciers)

until the closure of proceedings, the debtor may request the

competent court to revoke bankruptcy (Widerruf des Konkurses/revocation de la faillite), provided that the debtor (i) is

able to evidence that all claims have been settled, (ii) submits a

written statement of all creditors having requested the opening of

bankruptcy proceedings that such request is withdrawn, or (iii) a

composition agreement has been achieved.

5 Tax


As a rule, companies in financial difficulties do not benefit from any

special tax treatment under Swiss law. In particular, dissolving

hidden reserves or the forgiveness of debt granted by third parties is

generally considered a taxable profit. However, companies in

financial difficulties have generally incurred losses in previous

years that can be set-off against these profits. In this context, one

must note that Swiss tax law enables set-off with reported losses of

the seven prior years. The forgiveness of debt granted by

shareholders is, under certain circumstances, treated as a

contribution for no remuneration and is subject to an issuance stamp

duty (Emissionsabgabe/timbre d’émission) of one per cent, as is the


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case with respect to an increase of capital. The same analysis

prevails in case of a reduction of the share capital followed by an

increase of the share capital or the contribution for no remuneration

(“Harmonika”). However, in case of a financial restructuring, a

company may apply for a waiver of issuance stamp duty to the

extent that the increase of share capital, the contribution for no

remuneration or the forgiveness of debt does not exceed CHF 10

million and further provided that such amount covers losses of the

company. In addition, even if such threshold is exceeded, a waiver

of stamp duty can be obtained if levying such duty would be

excessively harsh for the company.

6 Employees


Employment agreements are not automatically terminated upon the

opening of insolvency proceedings of the employer. In case the

employer becomes insolvent, though, an employee may terminate the

employment relationship without notice unless such employee is

provided security for claims arising from the employment relationship.

Subject to such termination rights, the bankruptcy administration may

decide to maintain some employment contracts. The administration

may also, as it happens in the majority of cases, cease the business and

therefore decide to terminate the work contracts. When doing so, it has

to comply with the applicable notice period. Unpaid salaries have to

be claimed and scheduled. Composition proceedings generally have a

legal effect that is similar to bankruptcy with respect to employment

contracts. That said, it is much more common to maintain employment

contracts than in bankruptcy.

Employee claims’ are privileged claims and rank in the first class of

creditors. They comprise (i) claims having their basis in the

employment relationship which arose during a period of six months

prior to the opening of insolvency proceedings, up to a maximum

amount determined by Swiss accident insurance legislation which is

currently equivalent to CHF 148,200 (see also question 4.6 above)

as well as employee claims for (ii) return of deposits, and (iii) social

compensation plans (Sozialplan/plan social) that came into

existence or fell due no earlier than six months prior to the opening

of insolvency proceedings. Claims exceeding such maximum

amount are allocated to the third class of (unsecured and non-

privileged) creditors while claims in relation to social insurance

contributions are privileged and rank in the second class.



Pursuant to the DEBA, bankruptcy and composition proceedings

may only be opened in respect of companies incorporated in

Switzerland, meaning that such company must be registered with

the Swiss commercial register (Handelsregister/register du

commerce). A Swiss court is not competent to order the bankruptcy

or composition of a company with a registered seat outside of

Switzerland, even if such company has substantial trade and

business activities in Switzerland. A company incorporated outside

of Switzerland may, thus, only restructure or enter into insolvency

proceedings in Switzerland after such company has re-domiciled to

Switzerland. For the sake of completeness, it should be noted that

Swiss legal doctrine discusses the availability of main Swiss

proceedings for a non-Swiss incorporated entity in exceptional

circumstances where main insolvency proceedings in the

jurisdiction at the registered seat are either unavailable or

impracticable (high requirements) and that there is a close nexus to

Switzerland (which may be satisfied through a debtor’s main centre

of interest (COMI) in Switzerland). We are, however, not aware of

a precedent which would have opened main proceedings in

Switzerland on the basis of this theory. This notwithstanding, in

case a debtor incorporated outside of Switzerland operates a branch

in Switzerland, Swiss insolvency proceedings may be opened

against such debtor in the jurisdiction where the Swiss branch is

located (Niederlassungskonkurs/faillite de la succursale). Such

proceedings, however, are limited to obligations incurred by the

branch (article 50 DEBA).

In particular, it should be noted that Switzerland is not an EU Member

State and, thus, the centre of main interest (COMI) principle laid

down in EU Regulation 2015/848 on insolvency proceedings is not

applicable in cross-border cases involving Switzerland.


In bankruptcy matters, Switzerland follows the principle of

territoriality. Accordingly, a foreign bankruptcy or any similar

proceeding has no effect in Switzerland unless it has been

recognised. The recognition of foreign proceedings

(Anerkennung/reconnaissance) is governed by a special chapter in

the Swiss Private International Law Act (PILA). The conditions for

recognition are as follows: (i) the insolvency decree must have been

rendered in the state of the debtor’s domicile or where the debtor has

its centre of main interest (COMI) outside of Switzerland; (ii) the

petition for recognition has been introduced by the bankruptcy’s

administrator, by the debtor itself or by a creditor; (iii) the

bankruptcy decree must be enforceable in the state where it was

rendered; and (iv) the bankruptcy must not be inconsistent with

Swiss public policy and the fundamental principles of Swiss

procedural law. As from 1 January 2019, reciprocity is no longer a

requirement. As soon as the petition for recognition has been filed,

the court may, on application of the petitioner, order conservatory

measures. In principle, once the recognition is granted, the foreign

bankruptcy decree has the same effects as a Swiss bankruptcy

decree with regard to the debtor’s assets located in Switzerland.

The provisions relating to the recognition of foreign insolvency

proceedings of the PILA have been revised with effect as of 1

January 2019 (see question 9.1 below). Prior to such revision, the

opening of Swiss ancillary proceedings in case of bankruptcy was

mandatory whereas, under certain circumstances, such ancillary

proceedings were not necessary in case of the restructuring-type of

proceedings (Nachlass- oder ähnliches Verfahren/concordat ou procedure analogue). Under the revised PILA, it is now possible for

the Swiss courts to waive the opening of ancillary proceedings also

in case of a recognition of a foreign bankruptcy decree, provided

that (i) a request to this effect is made by the foreign bankruptcy

administration, (ii) there are no creditors in Switzerland the claims

of which are privileged or secured by a pledge, and (iii) the claims


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of non-privileged and unsecured creditors in Switzerland are

adequately taken into account in the foreign proceedings and such

creditors were granted an opportunity to be heard. In case no

ancillary proceedings are opened, the foreign insolvency

administration may carry out all actions to which it is authorised

pursuant to the applicable foreign law in Switzerland, including,

most notably, the transfer of assets of the foreign debtor located in

Switzerland to the foreign insolvency estate. In this context, the

foreign insolvency administration must ensure that it is at all times

compliant with all applicable Swiss laws. In particular, it must not

perform any official acts, use any means of coercion or adjudicate

on any disputes.

If, by contrast, ancillary insolvency proceedings are opened,

pursuant to article 172 par. 1 PILA, only certain claims may be

included in the schedule of admitted debts, i.e. (i) the claims secured

by pledged assets located in Switzerland according to article 219

pars. 1 to 3 DEBA, (ii) the unsecured but privileged claims of

creditors having their domicile in Switzerland according to article

219 par. 4 DEBA (first and second classes), and (iii) claims for

liabilities on account of a branch (Zweigniederlassung/succursale)

of the debtor registered in the commercial register in Switzerland.

After the satisfaction of these creditors, any remaining balance is

remitted to the foreign bankruptcy estate (article 173 par. 1 PILA).

This transfer, which represents the result of the Swiss ancillary

bankruptcy, requires, however, the prior recognition of the foreign

schedule of claims, whereby the Swiss courts review, in particular,

whether the creditors domiciled in Switzerland were fairly treated in

the procedure and were granted an opportunity to be heard.

Special provisions exist for banks and other financial institutions

where foreign insolvency proceedings are recognised by the Swiss

Financial Market Supervisory Authority (FINMA).


As stated in question 7.1 above, Swiss courts have exclusive

jurisdiction on companies registered in Switzerland for the opening

of insolvency proceedings. The fact that a company domiciled and

registered in Switzerland has already requested the opening of

insolvency proceedings outside of Switzerland would not prevent

the Swiss court from opening separate Swiss main proceedings. In

fact, the Swiss authorities would not accept any proceedings outside

of Switzerland in such instances. Accordingly, companies

domiciled in Switzerland and registered with the Swiss commercial

register do not, in practice, restructure or enter into insolvency

proceedings in other jurisdictions.

8 Groups


Swiss insolvency law is based on the principle of “one company one

proceeding”. Hence, in case multiple members of the same

corporate group request the opening of insolvency proceedings,

there will be separate insolvency proceedings for each group

member. The group itself is not subject to insolvency. This

principle notwithstanding, pursuant to article 4a DEBA, Swiss

bankruptcy authorities have to coordinate their actions to the extent

possible in a group insolvency scenario. In particular, based on

article 4a DEBA it would be possible to appoint one sole

administrator in the insolvency proceedings of affiliate entities

within the same group or to decide on the exclusive jurisdiction of

the insolvency courts and authorities which are competent for one

group entity for all affected group entities, subject to prior

agreement of all involved authorities. However, as this provision

was introduced only recently, there is little guidance available with

regards to how such coordination is handled in practice.

This duty to cooperate does not extend to foreign insolvency

proceedings of group members outside of Switzerland. In practice,

however, Swiss bankruptcy authorities in charge of liquidating a Swiss

group member often enter into mutual agreements with foreign

insolvency administrations, settling mutual claims amicably.

9 Reform


A change to articles 725 et seq. CO, currently dealing, inter alia,

with the issue of loss of capital and over-indebtedness (see question

3.1 above), is being contemplated. It is intended to lower the current

triggering threshold of loss of capital and define additional

circumstances which would trigger certain additional obligations of

the directors of a Swiss company at an earlier stage of financial

distress. The purpose of this reform is to induce the directors to take

countermeasures as early as possible in times of financial

difficulties. In this context, it is also proposed to extend the

maximum term of a silent moratorium from four to eight months.

These amendments are subject to parliamentary discussion and may

still change or be discarded entirely.


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Tanja Luginbühl Lenz & Staehelin Brandschenkestrasse 24 CH-8027 Zurich Switzerland Tel: +41 58 450 80 00


URL: www.lenzstaehelin.com

Dr. Roland Fischer Lenz & Staehelin Brandschenkestrasse 24 CH-8027 Zurich Switzerland Tel: +41 58 450 80 00


URL: www.lenzstaehelin.com

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

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

For a full biography, please visit:

http://www.lenzstaehelin.com/people/attorneys/profile/56/tanja-luginb%C3%BChl/.

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

For a full biography, please visit:

https://www.lenzstaehelin.com/people/attorneys/profile/48/roland-fischer/.


chapter 32


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gökben erdem Dirican

ali gozutok

turkey

1 Overview


Under Turkish law, the collection of receivables, bankruptcy and

restructuring procedures are mainly governed by the Execution and

Bankruptcy Law (Law No. 2004) (the “EBL”) (published in the

Official Gazette dated June 19, 1932 and numbered 2128). The EBL

provides provisions tending to balance the interest of the creditor

and the debtor. We may give as examples of such tendency that

while the creditor may initiate an execution proceeding against the

debtor without basing its claims over any document or Court

judgment, the debtor may suspend such proceeding by merely

raising an objection. Article 85 of the EBL provides that the

execution officer must equilibrate the interests of both parties. The

EBL sets forth provisions aiming to prevent the immoderate

violation of the debtor’s right of property, such as certain assets of

the debtor necessary for the conduct of the debtor’s business and his

house which is proper to his financial situation which cannot be

attached.


The financial restructuring may be conducted in an informal way

with an agreement executed between the debtor and its creditors.

Such a financial restructuring would not be binding on creditors

who are not parties to such agreements. The agreements must not be

executed to hide assets from other creditors, which shall prevent

them from collecting their receivables and cause them to incur

losses. The debtor who executed agreements with the intention of

causing his creditors damage shall be considered as fraudulent

bankrupt and shall be punished as per the Turkish Criminal Code

(Law No. 5237) (published in the Official Gazette dated October 12,

2004 and numbered 25611). Both informal work-outs and formal

restructuring and insolvency proceedings are widely used in

practice.



In the event of a suspicion that a company is in debt, the board of

directors must prepare an interim balance sheet. Pursuant to Article

179 of the EBL and Article 376 of the Turkish Commercial Code

(Law No. 6102) (published in the Official Gazette dated February

14, 2011 and numbered 27846) (“TCC”), in case the liabilities of the

company exceed its assets and/or it is understood from the interim

balance sheet that the company is deeply in debt, the board of

directors must apply to the Commercial Court with a bankruptcy

request. As per Article 377 of the TCC, the members of the board or

a creditor may also request concordat restructuring during the trial

process of bankruptcy at the Court.

Article 345/a of the EBL provides that in case the authorised

individuals of a company fail to apply for bankruptcy, they must be

punished with imprisonment for up to three months upon the

complaint filed by one of the company’s creditors. The board of

directors shall be liable for the damages arising from such failure.


When a joint stock company suffers losses, which reduce its paid-up

share capital by two-thirds, the board of directors is required to call

an extraordinary general assembly meeting. At this meeting, the

shareholders must resolve either to compensate the company in cash

for the accumulated loss or to decrease the company’s paid up share

capital to one-third of its existing share capital. If the shareholders

do not take one of these steps, the board of directors is required to

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file a lawsuit before the relevant Commercial Court for bankruptcy.

Please also see question 4.2. There are special debt collection

procedures available for some creditors such as landlords, creditors

with retention of title arrangements, banks, and creditors bearing

negotiable instruments. There are also special rules for a sped-up

trial process for employees.

The creditors can make an agreement to enter into a stay or

moratorium. The creditors will not, during the standstill period, take

action to enforce security, to make demands or speed up loans or

other debt claims, to bring legal proceedings against the company

and possibly, not to exercise rights of set-off.

The postponement of bankruptcy provisions enabling an insolvent

company or person to avoid declaring bankruptcy if and to the

extent that its financial situation is improvable, is abolished by the

Law No. 7101 (published in the Official Gazette dated March 15,2018 and numbered 30361) amending the EBL.

Stays on enforcement can be applicable depending on the

precautionary measures which may be taken by the Court.


The hardening period is a key concept in insolvency and bankruptcy

proceedings, providing that a transaction entered into during a

hardening period may be deemed invalid by a Court. During the

debt collection and liquidation process, the transactions of the

insolvent/bankrupt completed prior to its insolvency/bankruptcy,

particularly transactions within the hardening period, shall be

considered and reviewed, which may result in the cancellation of

such transactions provided that such fall within the scope of Articles

278, 279 and 280 of the EBL stating three different hardening

periods.

The one-year hardening period applies to (i) security interests if

such security interest is created to secure an existing debt and the

security collateral provider has not committed to provide security

interest at the time of incurring a debt, (ii) payments made via

instruments other than cash or ordinary payment instruments, (iii)

payments made before their due date, and (iv) certain annotations to

the title deed registries. These transactions should have been made

within one year prior to the bankruptcy of the debtor or the

attachment of its assets in order for these transactions to be annulled.

The two-year hardening period applies to donations or gifts.

The five-year hardening period applies to transactions made by the

debtor with one of its creditors with the aim of harming its other

creditors provided that the creditor with whom the transactions are

made is aware of the insolvency and the aim of the debtor at the time

of the transaction.

In order for the aforementioned transactions to be annulled, they

should have been made within five years prior to the initiation of

bankruptcy or execution proceedings.



Please see question 1.2.


Under Turkish law, the main types of restructuring are concord

restructuring and amicable restructuring.

Concord restructuring is proposed by the debtor or a creditor to

compromise certain liabilities in accordance with a plan. The key aim

is to present a probable success through a concordat plan, with no

intention to cause any damage or loss to the creditors. The restructuring

can be implemented in three different ways: as the ordinary concordat;

the concordat in bankruptcy; and the concordat through asset

abandonment. Some restrictions are imposed on creditors enforcing

their rights over companies under a temporary period and a precise

period of concordat. During the temporary period and precise period of

concordat, no proceedings may be filed against the company and any

proceedings previously initiated are suspended. Prescription periods

and statute of limitations deadlines shall be suspended. Preliminary

injunctions shall not be applicable. Foreclosure proceedings, mortgage

claims and commercial pledges may be initiated/continued provided

that protective measures cannot be taken by creditors and the sale of

pledged property cannot be performed.

Amicable restructuring is applicable for capital stock companies

and cooperatives. If a company is not able to pay its debts or its

receivables are not enough to recover its debts or if the company is

under the threat of facing these steps, such company may apply to a

Commercial Court in order to request the amicable restructuring.

With regard to debt-for-equity swaps, it is known that the principal

element of any debt-for-equity swap is a restructuring of the balance

sheet of a corporate debtor so that the relevant participating

creditors receive equity interests in a reorganised capital structure in

consideration for reducing their debt claims against the company.

Pursuant to Article 329 and Article 602 of the TCC, joint stock

companies and limited liability companies are liable for their debts

only by their assets owned as a legal entity. It is not possible to

impose an attachment on a shareholder’s shares due to a debt of the

company as a legal entity. Pursuant to Article 133 of the TCC, in

equity companies, in the event the creditors have a receivable from

a shareholder, the relevant creditors are entitled to request that the

shares owned by the debtor shareholder be attached as per the

relevant provisions of the EBL regarding movable assets and

request that such be sold and converted into cash.

For all trade companies, the creditors are also entitled to obtain their

receivables out of the receivables of the debtor shareholder from the

company, and also impose an attachment for such. Please also note

that the abovementioned provision does not hinder the creditors to

apply to the assets of the debtor shareholders out of the company.

With respect to pre-packaged sales, under Turkish Law, a pre-

packaged sale is possible in terms of Article 538 of the TCC.

Pursuant to the said Article, unless decided otherwise by the general

assembly, the liquidator can perform the sale of the active assets of

the company by way of negotiation. If the subject of the sale

constitutes a wholesale of a significant amount, then a general

assembly resolution is required. The sale shall then be conducted by

the liquidators.

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Concerning the concord restructuring, in case the Court does not

approve the concord or cancels the concord period, it will

immediately decide on the bankruptcy of the debtor upon the report

of the concord commissar. Creditors may apply to the Court for the

termination of the concord restructuring if it is found that the debtor

acted in bad faith in having the restructuring proposal approved or

that the debtor breaches the provisions of the concord.

Concerning the amicable restructuring, if the restructuring project is

successful, the debtor will continue to operate. If the company

breaches the terms of the amicable restructuring, the company

should seek to agree with creditors and to have an amendment

approved by the Court to the restructuring proposal. In the absence

of an agreement, a creditor may apply to the Court for the

termination of the restructuring. In case the Court realises that the

company did not fulfil its obligation arising from the amicable

restructuring, it will decide on bankruptcy.

There are no other cram-down provisions in the Turkish insolvency

legislation. Concord and amicable restructuring may include terms

that provide for the cram-down of creditors as a whole.


Concord restructuring is regulated under Articles 285–309 of the

EBL targeting the liquidation of the debts by protecting both the

debtor in poor financial standing and his creditors. Concord

restructuring may be proposed (i) by the debtor, where he/she will

submit a concord pre-plan to the Court together with documents

evidencing his/her financial status, the list of creditors and

privileged creditors, a chart comparing the amount to be provided to

creditors with concord restructuring and the amount the creditors

may receive upon a bankruptcy, financial analysis reports issued by

independent audit companies authorised by the Capital Markets

Board, with a petition stating the reason for its request, or (ii) by a

creditor, having the right to request bankruptcy by submitting its

petition, stating the reason for its concord request.

The Court shall grant a temporary period by appointing a commissar

and taking all necessary measures for the protection of the debtor’s

assets. The concord request will then be announced and within

seven days following the announcement, creditors can object the

concord request.

Should the Court consider the concord plan viable, it may accept it,

once it has received a positive report from the concord commissar.

The Court shall grant a precise one-year concord period with the

appointment of a commissar and a creditors board, if this is

necessary. In case the Court does not approve the concord or

cancels the precise concord period, it will decide on the bankruptcy.

Amicable restructuring is applicable for capital stock companies

(excluding banks and insurance companies) and cooperatives. The

company shall submit its restructuring plan which has been

previously negotiated and accepted by the creditors who are affected

by the terms of the plan. The creditors, who are invited to the

negotiation of the restructuring plan, are also deemed creditors who

are affected by the terms of the plan. The Court holds a hearing in

which opposing creditors can state their case. For the plan to

become effective, it shall be accepted by half of the total number of

the creditors and by a two-third majority by value of creditors who

participated in the voting of the plan. An amicable restructuring

plan must be approved by the Court.


Concerning concord restructuring, the concord commissar is liable

to supervise the acts of the debtor, report to the Court and inform the

creditors regarding the concord period (Article 290 of the EBL).

The creditors board shall supervise the acts of the commissar and

has the right to request a new appointment of a new commissar from

the Court when and if necessary.

Concerning amicable restructuring, if the Court takes measures to

protect the debtor’s assets until its decision on ratification or

rejection of the amicable restructuring plan, the creditors and debtor

– or, if the same fail to agree on one, the Court – can appoint one or

more mid-term auditors to assume responsibility for directing,

managing and supervising the debtor’s activities from the date of

appointment until the Court’s ratification or rejection of the plan

(Article 309(ö) of the EBL).

In the event that the plan is ratified by the Court, it may in its

ratification decision appoint one or more plan supervisors, who will

have the authority to supervise and monitor whether the plan is

being fulfilled and to report on the situation to the creditors (Article

309(p) of the EBL).


The provisions of agreements accepting concord claims as a valid

legal ground for a termination shall not be enforceable. In the

absence of such a provision, it is legally not possible to terminate an

agreement by referring to concord as a termination reason.

Agreements bearing perpetual liabilities may be terminated by the

debtor in case such agreements create a risk for the successful

completion of the concord with the positive view of the commissar

and approval of the Court. A set-off performed with an aim to

damage the rights of the creditors may be subject to objections

before a Court and the date of the temporary period shall be

considered. Please also see question 3.2.

Pursuant to Article 297 of the EBL, the debtor may continue his

activities under the supervision of the Commissar. The Court may

decide whether certain transactions are valid only with the

permission of the commissar or if the commissar should carry out the

operating activity in lieu of the debtor. The debtor cannot use liens,

warrants, transfers, and restrictions to gratuitously delay the ongoing

proceedings of the operation even partially without the leave of the

Court from the date of the respite decision. Otherwise, the

transactions are null and void. The Court has to take into account the

view of the creditors and the commissar for certain transactions

before granting its decision. There is no specific protection provided

for the parties performing their outstanding obligations.

With respect to the amicable restructuring, the restructuring

project’s terms will override all agreements executed with creditors

affected by the project. The following rules in agreements will not

apply, regardless of whether the agreements were concluded with

creditors that are affected by the project:

■ Rules that could lead to the amendment or termination of the

project.

■ Rules providing that a debtor’s use of restructuring is an act

of default or breach of the agreement.


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As per Article 285 of the EBL, the Court expenses and charges shall

be deposited in advance by the applicant. Pursuant to the Annex 1

of the Law of Charges, a fixed charge shall be paid while applying

for a concord request. There are other fees and charges applicable

such as expert examination fees, announcement expenses, concord

commissar expenses and other service expenses which shall also be

paid by the applicant in advance.



The insolvency procedure types provided by the EBL are: voluntary

bankruptcy; and bankruptcy.


When a joint stock company suffers losses, which reduce its paid-up

share capital by two-thirds, the board of directors is required to call

an extraordinary general assembly meeting. At this meeting, the

shareholders must resolve either to compensate the company in cash

for the accumulated loss or to decrease the company’s paid up share

capital to one-third of its existing share capital. Otherwise, the

board of directors is required to file a lawsuit before the relevant

Commercial Court of First Instance for bankruptcy. If the board of

directors does not file a voluntary bankruptcy lawsuit, each director

shall be personally, jointly and severally liable for any and all real

damages incurred by the creditors and the shareholders.

Bankruptcy

Ordinary bankruptcy

Ordinary bankruptcy involves a creditor bringing bankruptcy

proceedings against a debtor. Bankruptcy can only apply to merchants

(that is, an entity or a person engaged in the purchase and sale of

commodities for profit), in relation to their unpaid (and due) debts.

Special bankruptcy

A creditor who holds negotiable instruments (cheques, bonds or

promissory notes) can bring special bankruptcy proceedings for

negotiable instruments against the debtor.

Direct bankruptcy

Direct bankruptcy is possible where the debtor’s liabilities are

greater than its current assets. Individuals authorised to manage and

represent those companies, co-operatives or any of the creditors, can

apply for the debtor’s bankruptcy. A separate direct bankruptcy

reason is foreseen in the law for companies, which occurs when the

liabilities of a company is more than its assets.


Following the bankruptcy decision, the Court notifies such decision

to the Bankruptcy Office, which prepares a list of assets, takes the

necessary measures and calls a first creditors’ meeting.

At the first creditors’ meeting, the candidates for the bankruptcy

managers are notified to the Execution Court. Accordingly, the

Execution Court appoints the bankruptcy managers which constitute

the bankruptcy management.

Within one month after the declaration of the bankruptcy, the

creditors shall register to the bankruptcy management. After the

registry period provided for the creditors has expired and the

bankruptcy management has been elected, the bankruptcy

management examines the registrations, and prepares a list of

creditors, stating the orders of the creditors for the payment, submits

the relevant list to the bankruptcy office, and notifies the creditors

by way of announcement.

The Bankruptcy Administration, after determining the creditors,

shall invite to the second meeting the creditors whose claims are

accepted by the bankruptcy administration in part or in whole and

who have filed a suit for inclusion in the schedule of ranking, and

accepted to attend the meeting.

The powers of the second creditors’ meeting are more extensive

than the first meeting. The second creditors’ meeting decides as to

whether the bankruptcy administration shall continue its work or

not, claims of ownerships, whether the suspended lawsuits shall

continue or not, sale of certain goods by bargaining and the concord

offer made by bankruptcy.

The bankrupt’s estate shall be sold and distributed by the bankruptcy

administration. The administration shall request the closing of

bankruptcy by presenting a final report and the Commercial Court,

which has commenced the bankruptcy, has to decide on closing as well.


Any proceedings with an attachment request that were started

against the debtor for debt recovery before its bankruptcy are

suspended on the commencement of bankruptcy (that is, the

judgment of the Court) and terminated when the bankruptcy

decision becomes conclusive (that is, after the finalisation of the

appeal process).

A creditor with a prior perfected pledge/mortgage has a preferential

right to the proceeds of the pledged property. The pledged/mortgaged

assets will be sold at the earliest and most appropriate time by the

bankruptcy administration and the proceeds will be paid to the

pledgee/mortgagee without waiting for the end of the liquidation.

The pledgee/mortgagee may initiate an execution by way of

foreclosure of the pledge/mortgage and/or continue its previously

filed execution proceedings against the bankruptcy estate following

the declaration of the bankruptcy. If the pledged/mortgaged

property is insufficient to discharge the debt, the pledgee will be an

unsecured creditor for the remainder.

In case the bankrupt’s claim was deemed as unnecessary to pursue

by the bankruptcy administration, such claim may be transferred to

any requesting creditor. If the latter succeeds in such claim, the

amount to be obtained will be received by the relevant creditor after

deducting the expenses.


The effect of the opening of the bankruptcy on the existing contracts

of the bankrupt is a very comprehensive issue depending on the type

and conditions of the contract. Some of the existing contracts might


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be deemed as terminated upon the opening of the bankruptcy. For

instance, contracts related to usufructuary lease, financial lease,

mandate, commission, agency, ordinary partnership and current

account might be deemed as automatically terminated upon

bankruptcy. On the other hand, some of the existing contracts are

not terminated despite the bankruptcy. For instance, contracts

related to sale, barter, donation, ordinary lease, commodatum,

mutuum, employment, construction, insurance and surety might still

be deemed as not terminated despite the opening of the bankruptcy.

While it is possible to continue the business operation for the

management of the company until the bankruptcy decision is

rendered, after the opening of the bankruptcy, since the management

will have no disposal and/or representation authority, continuance of

the business operation by the management is not legally possible.

Following bankruptcy, the bankruptcy administration will be

entitled to continue to execute the existing (but not yet

executed/performed) contracts, but is not obliged to do so. If

execution of the contract (performance of the bankrupt’s obligation

arising from the contract) is more beneficial for the bankrupt’s

estate, the bankruptcy administration shall prefer to execute the

contract. Otherwise, the subject of the contract will be converted

into money and registered as bankruptcy receivable on the

bankrupt’s estate.


The Bankruptcy Office shall distribute the amount as per Articles

206 and 207 of the EBL. Receivables of preferred creditors are

firstly taken into consideration by the Bankruptcy Office. Ordinary

creditors shall be paid only after the preferred creditors are fully

satisfied. Concerning a receivable arising out from a contract,

please kindly note that such receivable is in principle an ordinary

receivable unless it is secured by a pledge or mortgage.

The liabilities of the estate are determined by a schedule of ranking.

The accepted portion and rank of every credit registered to the estate

and every claim other than ownership claims shall be shown in a

schedule of ranking.

Once the costs of procedure are paid, property that is

pledged/mortgaged forms part of the bankruptcy estate and a party

with a prior perfected pledge/mortgage has a preferential right to the

proceeds of the pledged property. The pledged/mortgaged assets

will be sold at the earliest and most appropriate time by the

bankruptcy administration and the proceeds will be paid to the

pledgee/mortgagee without waiting until the end of the liquidation.

The pledgee/mortgagee may initiate an execution by way of

foreclosure of the pledge/mortgage against the bankruptcy estate

following the declaration of the bankruptcy.

If the pledged/mortgaged property is insufficient to discharge the

debt, the pledgee is an unsecured creditor for the remainder.

The receivables secured but not covered by a pledge/mortgage, or

unsecured receivables are registered in order to be paid in the

following order:

■ First Rank: Receivables of the employees including

severance and notice pays arising from the employment

relation and accrued for the year before the opening of the

bankruptcy together with the severance and notice pays they

earn due to the termination of the employment relation due to

bankruptcy.

The debts of the employers to the foundations and institutions

which had been established in order to form provident funds

or other aid institutions for the employees and in order to

perpetuate such.

All sorts of alimony receivables arising from family law

which had accrued for the year before the opening of the

bankruptcy.

■ Second Rank: Receivables of the persons whose properties

are entrusted to the debtor because of parentship and

appointed guardianship.

■ Third Rank: Receivables which had been determined as

preferential receivables.

■ Fourth Rank: Unprivileged claims.

All the creditors in a category must be satisfied before creditors in

the following category are paid. If the remaining money is not

sufficient for the unprivileged receivables, it will be distributed

between those creditors in proportion to their receivables.

The expenses of the Bankruptcy Office or Bankruptcy Administration

can be requested from the bankrupt’s estate. Expenses regarding the

announcement of the bankruptcy decision, protection of the assets,

fees of the liquidators, etc., constitute some examples of these

expenses. The payments regarding estate debts have priority over

bankruptcy receivables.


As per Article 547 of the TCC, if it is determined that the liquidation

was not duly accomplished, and an additional liquidation must be

performed, upon the request of the board members, creditors,

shareholders or liquidation officers, the competent commercial

Court may decide that the company be restituted for an additional

liquidation. The shareholders may cancel a liquidation decision

before the commencement of the distribution of assets between the

shareholders.

5 Tax


A corporation which goes bankrupt shall be subject to the

liquidation process which is regulated under Article 17 of the

Corporate Income Tax Code (the “CIT Code”) (Law No. 5520)

(published in the Official Gazette dated June 21, 2006, and

numbered 26205). The liquidation period shall be considered

instead of the fiscal period.

According to subparagraph (a) of Article 17 paragraph (1) of the

CIT Code, the liquidation process starts on the registration date of

the General Assembly resolving that the company goes into

liquidation and such process is completed on the registration date of

the liquidation resolution.

In cases where liquidation is closed with loss, the liquidation result

shall be corrected towards the previous liquidation periods and the

taxes overpaid in the previous periods shall be refunded to the

taxpayer.

If the liquidation process starts and concludes within the same

calendar year, the liquidation tax return shall be submitted to the

affiliated tax office within 30 days following the date on which the

liquidation is concluded. If these are realised in different calendar

years, the liquidation tax return for each liquidation period shall be

submitted to the tax office from the first day until the evening of the

25th day of the fourth month following the month when the

liquidation period is closed.


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As per Article 17 paragraph (4) of the CIT Code, the tax base of a

corporation which goes into the liquidation shall be the liquidation

profit. The liquidation profit is the positive difference between the

value of the assets at the end of the liquidation period, and the value

of the assets as at the date of the commencement of the same.

During the calculation of the liquidation profit:

■ any and all kinds of payments that were made to the

shareholders or to the owners of the corporation as advanced

or otherwise shall be added to the value of the assets which is

calculated at the end of the liquidation; and

■ the payments that were made by the shareholders or the

owners of the corporation in addition to the current capital,

and the earnings and the proceeds obtained during the

liquidation, which were exempt from tax, shall be added to

the value of the assets which is calculated at the beginning of

the liquidation period.

During the calculation of the liquidation profit, related provisions of

the CIT Code in relation to the deductible expenses, loss deduction,

other deductions and non-deductible expenses shall be taken into

consideration. Upon calculation of the net liquidation profit, the

corporate income tax at the rate of 20 per cent shall be declared and

paid over such profit.

Without setting aside a provision in accordance with the Article 207

of the EBL for i) taxes already accrued on behalf of the company, ii)

taxes calculated according to the liquidation tax returns, and iii)

other disputed tax assessments, liquidation officers cannot pay to

the creditors stated in Article 206 of the EBL and cannot make

distribution to the shareholders.

From any and all kinds of tax assessments and tax penalties owed by

companies who have been already liquidated and the legal

personality of whom have been cancelled from the trade registry,

those which pertain to the pre-liquidation period shall be imposed

on behalf of one of the liquidator officers, and those which pertain

to the liquidation period shall be imposed on behalf of the legal

representatives as they will be held as severally liable.

For the public receivables which are pertaining to the pre-

liquidation period, shareholders of limited companies shall be held

liable limited to the proportion of the share capital that they invested

in the company. The liquidation officer’s liability is limited with

regard to the amount distributed as a result of the liquidation.

6 Employees


In all procedures, credits arising from the compensations to be paid

by the employers regarding the employment agreements are

determined to be the first rank of unsecured credits. Please also see

our answer to question 4.6.

The employees may claim receivables of the employees including

severance and notice pays arising from the employment and accrued

for the year before the opening of the bankruptcy together with the

severance and notice pays arising from the termination of their

employment. In case of bankruptcy, the receivables of employees

are accepted as privileged receivables at the first rank.



Pursuant to Article 154 of the EBL, the competence of the

Commercial Court at the place where the debtor’s business centre is

located pertains to the matter of public order and is exclusive. The

Commercial Court at the place where the debtor’s business centre is

located has jurisdiction over the concord restructuring and amicable

restructuring applications. Therefore, the companies incorporated

abroad cannot enter into insolvency proceedings in Turkey.


Please refer to question 7.1. Turkish authorities do not recognise

and execute bankruptcy judgments of other jurisdictions granted for

a Turkish entity. A decision given for a foreign entity may be

enforced in Turkey following the enforcement and recognition

process.


As explained above under question 7.2, since the competence of

Turkish Courts over the bankruptcy and restructuring proceedings

pertains to the matter of public order, Turkish authorities do not

recognise or execute bankruptcy procedures and bankruptcy

judgments of other jurisdictions granted for Turkish entities.

Therefore, it is not a common practice for Turkish companies to

enter into insolvency or restructuring proceedings in other

jurisdictions.

8 Groups


There is no specific provision pertaining to the insolvency of the

members of groups of companies and co-operation in this regard.

9 Reform


There are no other governmental proposals.


tur

key


Gökben Erdem Dirican Dirican | Gozutok Nispetiye Caddesi 4/1 Besiktas, Levent Istanbul Turkey Tel: +90 212 278 3170


URL: www.dgb-law.com

Ali Gozutok Dirican | Gozutok Nispetiye Caddesi 4/1 Besiktas, Levent Istanbul Turkey Tel: +90 212 278 3170


URL: www.dgb-law.com

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

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

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


201

chapter 33


engarDe attorneys at law

Dmytro Donenko

artem parnenko

Ukraine

1 Overview


Currently, the Ukraine Law “On Restoring Debtor’s Solvency or

Declaring it Bankrupt”, which entered into force on January 19,

2013 (with subsequent amendments), regulates bankruptcy issues in

Ukraine. In contrast to the previous law, the current edition contains

more detailed provisions regarding the procedure for the sale of a

bankrupt’s property, regulates the terms of the relevant procedures

and changes the rights of secured creditors, etc. In general, the

procedure has become more regulated. At the same time, the terms

are not always observed in practice.

An application for opening a bankruptcy case can be filed both by

the debtor and by the creditors. Following the introduction of the

relevant procedure, the control over the procedure is within the

majority of creditors. Operational management is carried out by the

arbitration manager. At the stage of disposing the bankrupt’s

property (at this stage there can be no agreements between the

debtor and the creditor), the court appoints the arbitration manager

selected by the automated system. At the stage of rehabilitation

(when there are agreements between the creditors and the debtor),

the arbitration manager may be appointed at the request of the

creditors’ committee. At the liquidation stage (the stage at which the

debtor loses control), the arbitration manager may be appointed at

the request of the creditors’ committee. In this regard, the court has

the right to appoint the arbitration manager independently.

In general, the legislator is trying to maintain a balance between the

rights of the debtor and creditors, but in practice, a better-trained

participant always has the advantage.


In Ukraine, the debtor’s rehabilitation procedure can be applied

before the opening of bankruptcy proceedings. The debtor or

creditor has the right to initiate such a procedure, subject to the

following conditions:

■ respective written consent of the owner of the property (the body

authorised to manage the property) of the debtor is obtained;

■ respective written consent of the creditors, the total amount

of the claims of which exceeds 50 per cent of the debtor’s

payables according to its accounting records is obtained; and

■ a rehabilitation plan is agreed in writing by all secured creditors

and approved by general meeting of creditors of the debtor.

Such procedure is applicable in cases where the debtor and the

majority of creditors, as well as the secured creditors are in friendly

relations. In practice it does not happen often. Therefore, bankruptcy

cases are more often considered according to the normal procedure.



The legislation of Ukraine provides that in the event of signs of

bankruptcy, the head of the debtor is obliged to send the founders

(participants, shareholders) of the debtor and the property owner

(the body authorised to manage the property) of the debtor a notice

informing them of the signs of bankruptcy.

In general, the debtor is obliged to apply to the court with an

application to initiate a bankruptcy case, if:

■ fulfilling the claims of one or several creditors will make it

impossible for the debtor to fulfill its monetary obligations in

full to other creditors (insolvency threat);

■ during the liquidation of the debtor not in connection with the

bankruptcy procedure, the impossibility of the debtor to

satisfy the creditors’ claims in full was established; or

■ in other cases, it is stipulated by the legislation.

It should also be noted that the debtor, as well as the creditor, may

apply to the court to initiate a bankruptcy case if the sum of the

indisputable claims of the creditor (creditors) is at least 300 in

minimum wages i.e. approximately EUR 41,072 (this is a sum of

court decisions) and the debtor is unable to fulfill such obligations

within three months.

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The creditors and the arbitration manager have the main influence on

the company during the bankruptcy proceedings. Creditors are persons

who have monetary claims against the debtor. At the same time, the

Ukrainian legislation distinguishes the creditors depending on whether

their claims are collateralised or not. The creditors, whose claims are

not secured by collateral, have the right to vote at a creditor meeting. At

the same time, the pledge creditors have the right to coordinate/veto the

sale of pledged property, rehabilitation plan, and settlement agreement.

The legislation also provides for the priority of meeting the claims

of creditors. Thus, first of all, the wage claims of former and current

employees are met, then so are the demands for paying taxes and

fees. In the third place, the claims of non-secured creditors are met,

and in the fourth, the claims of secured creditors at the expense of

the bankrupt’s property, which is the subject of collateral, are carried

out in an extraordinary manner.

At the opening of a bankruptcy case, the court renders a ruling

which, among other things, introduces a moratorium on the

satisfaction of creditors’ claims. Also, such a court ruling resolves

the issue of taking measures to secure creditors’ claims by

prohibiting the debtor and the property owner (the body authorised

to manage the property) of the debtor to make decisions on

liquidation, reorganisation of the debtor, as well as to alienate fixed

assets and pledged items. The court is also entitled, at the request of

the parties or participants in the bankruptcy case or on its own

initiative, to take other measures to secure the claims of creditors.


Deals or property actions of a debtor committed by a debtor after

initiating a bankruptcy case or within one year prior to initiating a

bankruptcy case may be respectively invalidated or refuted by the

court in bankruptcy proceedings upon the application of an arbitration

manager or non-secured creditor according to the following grounds:

■ the debtor alienated the property for free, assumed

obligations without corresponding property actions of the

other party, waived its own property claims;

■ the debtor has fulfilled their property obligations before the

deadline;

■ the debtor assumed obligations before initiating a bankruptcy

case, as a result of which he became insolvent or his

monetary obligations to other creditors became completely or

partially impossible;

■ the debtor alienated or acquired the property at prices lower or

higher than the market prices, provided that at the time of the

commitment or as a result of its fulfillment, the debtor’s property

was, or rather became insufficient to satisfy the creditors’ claims;

■ the debtor has paid the creditor or accepted the property in

order to fulfill the monetary claims on the day when the sum

of the claims of the creditors to the debtor exceeded the value

of the property; and

■ the debtor assumed secured liabilities to ensure the fulfillment

of monetary claims.



In Ukraine, the debtor’s rehabilitation procedure can be applied

before the opening of the bankruptcy proceedings. The debtor or

creditor has the right to initiate such a procedure, subject to the

following conditions:

■ respective written consent of the owner of the property (the

body authorised to manage the property) of the debtor is

obtained;

■ respective written consent of the creditors, the total amount

of the claims of which exceeds 50 per cent of the debtor’s

payables according to its accounting records is obtained; or

■ a rehabilitation plan is agreed in writing by all secured

creditors and approved by the general meeting of debtor

creditors.

The rehabilitation plan is subject to approval by the court. At the

same time, the court is obliged to approve it, except for the cases

when:

■ violations of the law were made when approving the

rehabilitation plan that affected the voting outcome of the

general meeting of creditors;

■ a creditor who did not participate in voting or voted against

the adoption of a rehabilitation plan proves that if the debtor

was liquidated in the manner specified by this Law, his

claims would be satisfied in an amount exceeding the amount

of claims that will be satisfied in accordance with the terms of

the rehabilitation plan;

■ there is no written approval of the rehabilitation plan by all

secured creditors; or

■ inaccurate data on accounts payable were provided by the

debtor.


According to Ukrainian legislation, the following bankruptcy

procedures are applied to the debtor:

■ disposal of the debtor’s property;

■ amicable settlement;

■ rehabilitation (reestablishing of solvency) of the debtor; and

■ liquidation of a bankrupt.

The property management is understood as a system of measures to

supervise and control the management and disposal of the debtor’s

property in order to ensure the preservation and effective use of the

debtor’s property assets, analyse its financial position, and

determine the following optimal procedure (rehabilitation,

settlement or liquidation) to meet the creditors’ claims in full or in

part.

Rehabilitation is understood as a system of measures taken during the

bankruptcy proceedings to prevent the debtor from being declared

bankrupt and his liquidation, aimed at improving the debtor’s financial

and business situation, as well as meeting the creditors’ claims in full

engarDe attorneys at law Ukraine

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or in part through restructuring of the enterprise, debts and assets

and/or changes in the organisational, legal and production structure

of the debtor.

The settlement agreement in a bankruptcy case is understood as an

agreement between the debtor and creditors regarding postponement

and/or payment by installments, as well as forgiveness (write-off) of

the debtor’s debts by the creditors, which is executed by entering

into an agreement between the parties.

The liquidation procedure in a bankruptcy case is understood as a

system of measures for the complete cessation of the debtor’s

activities, its liquidation, the sale of its property and the satisfaction

of creditors’ claims in full or in part.

In the Ukrainian legislation, there are no provisions that directly

regulate the procedure for converting the payables into the

authorised capital. At the same time, the legislation stipulates that

the settlement agreement, as well as the rehabilitation plan, may

contain conditions on the satisfaction of creditors’ claims in other

ways that do not contradict the law.

Ukrainian legislation provides that an agreement between the debtor

and the creditor (creditors) to conduct a debtor’s rehabilitation

before the commencement of proceedings (proceedings) in a

bankruptcy case can be achieved before the debtor’s debt arises. For

example, a transaction on the basis of which a debtor’s monetary

obligation arose. Such a procedure may include improving the

position of the debtor, including by selling the assets of such a

debtor. Thus, in any case, such actions must be agreed upon by the

majority of creditors, as well as by all secured creditors.

The main influence on the development of bankruptcy proceedings

is carried out by the debtor’s creditors. As a general rule, decisions

are made by a majority of lenders. Such decisions are binding on all

lenders. The debtor is not entitled to vote at the meetings of

creditors. The mortgage lenders, as not having the right to vote, at

the same time, have the right to veto the sale of the pledged property,

the rehabilitation plan, the amicable settlement (which, in turn, can

be rejected by allocating such pledged property).


The general procedure provides for the application of the property

disposal procedure with the subsequent transition to the

rehabilitation, liquidation or amicable settlement procedures.

During the disposal of the property, a search and subsequent

approval by the court of the register of creditors – the formation of a

creditors’ committee – shall be carried out by a body representing

the interests of all creditors.

The rehabilitation procedure shall be introduced by a court decision

at the request of the creditors’ committee for a period of six months.

During the rehabilitation, a rehabilitation plan shall be developed

and further approved by the court with the participation of

prospective investors.

The rehabilitation procedure shall be terminated prematurely in case

of failure to fulfill the conditions of the rehabilitation plan and/or in

case of a debtor’s failure to fulfill its current obligations, therefore

the court shall declare the debtor as a bankrupt and open the

liquidation procedure.

The amicable settlement can be concluded at any stage of the

bankruptcy proceedings. In the procedure for disposing of the

debtor’s property, an amicable settlement can be concluded only

after the identification of all creditors and upon the approval by the

court of the register of creditors’ claims. The amicable settlement

shall be approved by the court.

The liquidation procedure shall be introduced by the court, as well

as by virtue of the creditors’ request, in cases where, as a rule,

neither the debtor’s rehabilitation nor the amicable settlement can be

implemented, and the amount of the debtor’s assets is not enough to

satisfy the claims of all creditors.


Since the introduction of the property disposal procedure, the court

shall appoint a property manager from a group of arbitration

managers. The appointment of the property manager shall not be a

ground for termination of the powers of the head of the debtor or its

managing body. At the same time, after the appointment of the

property manager and prior to the termination of the property

disposal procedure, the debtor’s governing bodies are not entitled,

without the consent of the property manager, to make a number of

corporate decisions (on reorganisation, establishment of other legal

entities or branches, payment of dividends, withdrawal from other

entities, etc.).

In addition, the head or managing body of the debtor shall,

exclusively with the consent of the property manager, conclude

transactions regarding:

■ alienation or encumbrance of the debtor’s immovable

property, including its lease, pledge, contributing such

property to the authorised capital of another company or

business entity, disposing of the debtor’s immovable property

in any other way;

■ obtaining and granting loans (credits), providing guarantees,

warranties, assignment of demand, transfer of debt, and also

the transfer of debtor’s property to trust management; and

■ the disposition in any way of another debtor’s property, the

book value of which is more than one per cent of the book

value of the debtor’s assets, and the conclusion of other major

transactions.

If the debtor’s managing bodies fail to fulfill their obligations

properly, the court shall, at the request of the creditors, terminate the

powers of the debtor’s managing bodies and transfer them

temporarily to the debtor’s property manager.

Since the introduction of the debtor’s rehabilitation procedure, the

court will appoint a rehabilitation manager, who shall implement the

debtor’s rehabilitation procedure. From the moment of introduction

of the debtor’s rehabilitation procedure, the head of the debtor shall

be dismissed. Management of the debtor shall be passed to the

rehabilitation manager. At the end of the rehabilitation procedure,

the rehabilitation manager should provide a report, which must be


The decision to conclude an amicable settlement shall be made on

behalf of the debtor by its head or the arbitration manager

(rehabilitation manager, liquidator), who fulfills the authority of the

managing bodies and the head of the debtors and signs the document.

On behalf of the creditors, the amicable settlement shall be signed by

the chairman of the creditors’ committee. At the same time, the

decision to conclude an amicable settlement on behalf of creditors

shall be made by the creditors’ committee by a majority of votes of

creditors and members of the committee, and shall be considered as

accepted, provided that all creditors whose claims are secured by the

pledge of the debtor’s property expressed a written consent to conclude

an amicable settlement. The amicable settlement shall be approved by

the court.

Since the introduction of the debtor liquidation procedure, the court

appoints a liquidator who shall perform all the functions of

managing the debtor, as well as implement the liquidation procedure


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of the debtor who has been declared as a bankrupt and ensure

satisfaction of the creditors’ claims. After completion of all

settlements with creditors, the liquidator must provide a report and

liquidation balance sheet, which must be approved by the court.

The acts or omissions of any of the arbitration managers at any stage

may be appealed in the court.


Simultaneously, with the beginning of the disposal of property, a

moratorium on the satisfaction of creditors’ claims shall be introduced.

The moratorium on the satisfaction of creditors’ claims provides, inter alia, the suspension of the debtor’s fulfillment of monetary

obligations, the maturity of which is prior to the moratorium day, and

the termination of measures aimed at ensuring the fulfillment of these

obligations applied prior to the moratorium day. During the

moratorium, no penalty (fine, default interest) shall be charged; no

other financial sanctions shall be applied for non-fulfilment or

improper fulfillment of obligations to satisfy all claims to which the

moratorium applies. Also during the moratorium, the running of the

limitation period stops and the inflation index does not apply for the

entire period of delay in the performance of a monetary obligation, etc.

The moratorium does not apply to claims of current creditors, i.e. on

contractual obligations that arise after the initiation of a bankruptcy

case, on the payment of wages, claims on enforcement documents of

a non-property nature, obliging the debtor to perform certain actions

or to refrain from committing them, as well as a number of other

obligations.

In this case, the presentation of claims by current creditors to the

debtor and their satisfaction shall also be carried out in a special

procedure.

The action of the moratorium stops on the day of termination of the

bankruptcy proceedings.

During the rehabilitation procedure, the sale of property and the

satisfaction of creditors’ claims shall be carried out in accordance

with the rehabilitation plan. The action of the moratorium does not

stop until the debtor’s bankruptcy proceeding is terminated.

At the same time, since the opening of the liquidation procedure:

■ the maturity of all monetary obligations of the debtor is

considered to have occurred;

■ the debtor shall not have any additional obligations, except

for expenses related to the implementation of the liquidation

procedure;

■ the imposing of penalties (fines, default interest), interest and

other economic sanctions on all types of bankruptcy debts

shall discontinue; and

■ claims on the debtor’s bankruptcy obligations arising during

the bankruptcy proceedings may be made only within the

liquidation procedure within two months from the date of the

official publication of the information on declaration of the

debtor as a bankrupt and opening of the liquidation procedure.

As for the obligations under contracts to bankrupt, they remain in

force, unless otherwise provided by such contracts, and in the future

may be attributed to the property of the debtor, which is subject to

sale in order to satisfy the claims of creditors.

The offset of the counterclaims of the debtor and third parties is

considered through the prism of recognition of the claims of such a

party to the debtor (entry in the register of creditors). The legislation

provides for the satisfaction of creditors’ claims by offsetting

counter-claims shall be made with the consent of the creditor

(creditors) in cases where it does not violate the property rights of

other creditors.


All expenses associated with the bankruptcy proceedings in the

court are firstly subject to reimbursement in bankruptcy proceedings

from the sale of the bankrupt’s property. A debtor’s rehabilitation

plan or an amicable settlement may provide for a special procedure

for reimbursement of such expenses.

Creditors can create a fund for the advancement of monetary

remuneration and reimbursement of expenses of the arbitration

manager. The formation of the fund and the use of its resources

shall be determined by the decision of the creditors’ committee and




Liquidation procedure is where a debtor is subject to liquidation.

If, according to the results of the liquidation procedure, after the

satisfaction of the creditors’ claims, there is no property left, the court

shall decide to liquidate the legal entity as bankrupt. If the bankrupt’s

property was enough to satisfy the creditors’ claims in full, it shall be

considered to be debt free and can continue its business.


The liquidation procedure shall be introduced by the court, as well

as by virtue of the creditors’ request, in cases where, as a rule,

neither the debtor’s rehabilitation nor the amicable settlement can be

implemented, and the amount of the debtor’s assets is not enough to

satisfy the claims of all creditors.


A liquidator is a person who manages the liquidation procedure. He

shall perform all the functions of managing the debtor, as well as

implement the liquidation procedure of the debtor who has been

declared as a bankrupt and ensure satisfaction of the creditors’

claims. After completion of all settlements with creditors, the

liquidator must provide a report and liquidation balance sheet,

which must be approved by the court.


The impact of the debtor’s shareholders on the liquidation procedure

is very limited and may be exercised exclusively in cases when the

state holds more than 50 per cent in the property of the debtor.

Creditors have a larger impact on the liquidation procedure, during

which the liquidator reports to the creditors’ committee at least once


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a month about its activity, as well as financial status and property of

the debtor on the day of opening and during the liquidation

procedure, and the use of the debtor’s assets and other information

at the creditors’ committee request.

If the liquidator does not perform its obligations or performs them

inadequately, the commercial court at the request of the creditors’

committee may terminate its powers and appoint a new liquidator.

Besides that, after the opening of the liquidation procedure at the

request of the creditors’ committee, the court may rule to implement

the rehabilitation procedure if there is a rehabilitation plan and if it

happens before the start of the sale of the bankrupt’s property.

The sale of the bankrupt’s property, which is collateral, is carried out

with the permission of the court or the creditor, whose claims it

enforces.

The report of the liquidator presented at the end of the liquidation

procedure must be approved by the creditors’ committee.


From the moment of opening the liquidation procedure:

■ all of the debtor’s financial obligations mature;

■ no additional obligations of the debtor arise, apart from

expenses, related to the liquidation procedure;

■ penalties (late charges, fines), interest and other economic

sanctions stop accruing on all types of the bankrupt’s debts;

and

■ claims on liabilities of the debtor, declared bankrupt, which

arose during the bankruptcy procedures, may be advanced

only within the liquidation procedure and no later than two

months after official notification regarding bankruptcy and

commencement of the liquidation procedure.

Third parties’ obligations to the bankrupt remain in force unless

otherwise specified by the contract. Settlement of creditors’ claims

by setting off similar counterclaims is conducted upon the creditors’

authorisation in cases when it does not infringe the property rights

of other creditors.


Ukrainian law utilises a queue system to rank the order of settlement

of claims:

■ First queue: payments to employees and related claims;

claims by creditors based on insurance contracts; and

expenses related to bankruptcy proceedings, etc.

■ Second queue: claims on obligations, arising out of harm to

health and injuries; and claims of contributors of trust

institutions.

■ Third queue: tax payment claims.

■ Fourth queue: claims of unsecured creditors.

■ Fifth queue: claims of payment of dues of members of the

workforce to the statutory capital of the enterprise; claims of

additional remuneration to the manager of the rehabilitation

or the liquidator.

■ Sixth queue: other claims.

The settlement of claims of secured creditors at the expense of the

debtor’s property, which is collateral, is free of queues.


A company may renew its status after the commencement of

bankruptcy proceedings if claims of creditors are recognised as

unjustified, if the rehabilitation procedure is complete, or an

amicable settlement with creditors or creditors’ claims are fully

settled. If the company is liquidated, the liquidation balance sheet is

approved and changes are implemented in the registry of companies

of Ukraine – there is no procedure for the revival of such company

in Ukrainian law.

5 Tax


Ukrainian bankruptcy legislation prevails over the tax legislation.

Therefore, the special regime of discharge of obligations in the

bankruptcy procedure extends to the tax obligations.

At the same time, it is worth noting that the commencement of

bankruptcy proceedings is a ground for an unscheduled inspection

by the tax authorities.

6 Employees


The debtor’s employees’ claims are included in the general registry

of creditors and are to be settled in the first queue. They may not be

cancelled (written off ), delayed and/or split into instalments

according to an amicable agreement. In the course of rehabilitation,

employees of the debtor, who may not be engaged in the process of

enforcement of rehabilitation plan, are fired. From the moment of

commencement of the liquidation procedure, all the debtor’s

employees shall be fired.



Ukrainian bankruptcy legislation regulates procedures regarding

debtors incorporated in Ukraine only.


Ukrainian legislation provides a possibility to recognise foreign

bankruptcy proceedings.

Foreign bankruptcy proceedings may be applied in accordance with

the international treaties of Ukraine and according to the reciprocity

principle.


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Recognition of a foreign bankruptcy proceeding includes recognition

of foreign judicial decisions as well as decisions on appointment,

dismissal or replacement of a foreign receiver, decisions regarding

the status of the foreign proceeding, its suspension or termination.


Ukrainian legislation envisages a principle, according to which the

bankruptcy proceeding regarding a debtor, which is incorporated

and conducts activity in accordance with Ukrainian law and on the

territory of Ukraine, is the main proceeding in comparison to any

other foreign proceedings. In light of this principle, the possibility

of initiating bankruptcy proceedings regarding Ukrainian debtors in

other jurisdictions is questionable.

8 Groups


Ukrainian bankruptcy legislation does not contain special

provisions regarding the bankruptcy of a debtor belonging to a

group of companies.

9 Reform


On October 18, 2018 the Parliament of Ukraine has adopted the new

Code of Ukraine on bankruptcy procedures. As of the moment of

this publication, the Code has not been signed by the President and

is not published. The Code will enter into force six months after its

official publication.

The Code will update Ukrainian bankruptcy legislation. In

particular, it is anticipated that the effectiveness of procedures will

improve, the creditors’ right will be better protected, auction

procedure for sale of the debtor’s property will be enhanced, the

contracts and judicial decisions will be better enforced and issues of

renewal of solvency of natural persons will be better regulated.


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Dmytro Donenko ENGARDE Attorneys at law 45-v Honchara Str. Kiev 01054 Ukraine Tel: +38 044 498 73 80

Email: dmytro.donenko@

engarde-attorneys.com

URL: www.engarde-attorneys.com

Artem Parnenko ENGARDE Attorneys at law 45-v Honchara Str. Kiev 01054 Ukraine Tel: +38 044 498 73 80

Email: artem.parnenko@

engarde-attorneys.com

URL: www.engarde-attorneys.com

Being a well-established and dynamic Ukrainian law firm, we have a reputation for providing exceptional legal service. We are renowned for our commitment to excellence and for our ability to find innovative solutions to the most complex of legal problems.

Our focus is on dispute resolution, corporate law, and restructuring processes. We also have extensive experience in the following areas: mergers and acquisitions; international trade and investments; intellectual property; competition and antitrust; real estate and construction; and taxation.

Whatever the nature and role of our client – an individual or organisation, of Ukrainian origin or operating internationally – we combine our skills and legal expertise to deliver a service, which is not only tailored to suit clients’ needs but also represents true value for money.

Dmytro specialises in the areas of complex cross-border commercial litigation and international commercial and investment arbitration. He has been involved in high-profile matters related to corporate governance, M&A transactions, allegations of fraud and asset tracing, contractual disputes, and the validity of contractual instruments. Dmytro also represents clients in national courts.

Dmytro is permanently involved in organising the Kyiv Arbitration Days Conference in Kiev (2011–2018).

Artem has been practising law since 2004 and since that time he was exposed to important projects in many areas of financial and banking law. During his work as ENGARDE’s associate, an in-house lawyer for a leading leasing company and an industrial corporation, Artem developed outstanding expertise in corporate lending and leasing, debt collection, restructuring and bankruptcy.

Having joined ENGARDE after completing his LL.M. at the University of Amsterdam specialising in International Trade and Investment Law (International and European Law) and with seven years of prior legal experience, Artem immediately started working on high-value financial law projects.


chapter 34


paul, weiss, rifkind, wharton & garrison llp

alan w. Kornberg

elizabeth r. mccolm

Usa

1 Overview


The United States can most accurately be described as reorganisation-

friendly. On the one hand, the United States could be considered

comparatively debtor-friendly in that management is typically

permitted to retain operating control of the business, there is a very

broad stay of creditor enforcement actions, debtors have exclusive

authority to propose a plan of reorganisation at the outset of a case,

and debtors are given powers, such as the option to reject

unprofitable contracts, that they are not afforded outside of a formal

insolvency proceeding. On the other hand, the United States could

also be considered creditor-friendly in that creditors are afforded

significant protections by the Bankruptcy Code, the bankruptcy

process is designed to be public and transparent, and creditors are

given a voice at every stage of the restructuring process.


While informal out-of-court restructurings are commonplace and

are typically implemented by contract among the relevant parties,

there is no specific legislative framework to sanction such work-out

procedures. The relevant statute, the Bankruptcy Code, provides for

formal court-supervised proceedings, although the Bankruptcy

Code has several provisions which encourage pre-petition

restructuring negotiations.



Directors are not personally liable for continuing to trade while the

company is in financial distress.

The fiduciary duties of a company’s directors are defined by the law

of the state of the company’s incorporation. The primary duties of

directors are those of care and loyalty. The duty of care requires a

director to discharge duties with the care an ordinarily prudent person

in a like position would exercise under similar circumstances. The

duty of loyalty requires directors to act in the best interests of the

corporation; it prohibits self-dealing and the usurpation of corporate

opportunities by directors. Ordinarily, decision-making by directors

is protected by the business judgment rule, even when a company is

insolvent. Civil liability may arise if the directors fail to adhere to

their duties of loyalty or care.

In general, when a company becomes insolvent, the directors must

exercise their fiduciary duty in the best interests of the corporation,

taking into account the interests of, among others, creditors. Upon

insolvency, creditors may under certain circumstances bring

derivative claims on behalf of the corporation against directors.

Causes of action for breach of fiduciary duty, fraud and fraudulent

conveyance may be appropriate to challenge the wrongful actions of

directors of insolvent corporations.

In addition, directors may be criminally or civilly liable under

federal and state laws for failure to comply with certain disclosure

obligations or for insider trading, or for the company’s failure to pay

certain taxes and wages, among other things.


While in financial difficulty, but prior to a bankruptcy filing, a

company’s creditors, contract counterparties, employees, and interested

acquirers, among others, may all attempt to influence the company’s

situation within the bounds of whatever contractual agreements may

exist and applicable law. For this reason, and to make any potential

insolvency process smoother, a company in financial distress will

oftentimes seek to engage its stakeholders in restructuring discussions

prior to beginning an insolvency process. The commencement of a

bankruptcy case, however, effects an automatic stay that enjoins

secured and unsecured creditors from taking most actions against the

debtor or property of the estate absent further order of the court.

The Bankruptcy Code also prescribes special rules for certain

categories of creditors. For example, certain types of prepetition

claims (such as domestic support obligations, employee wages up to

$13,650 per individual, and certain tax obligations) are entitled to

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priority over other general unsecured claims. In addition,

counterparties to executory contracts and unexpired leases with the

debtor enjoy certain special rights. See question 3.2 for further detail.


Transactions entered into by an entity in financial distress may be

attacked as an actual or constructive fraudulent transfer or as a

preference under the Bankruptcy Code and/or state law.

Under the Bankruptcy Code, a transfer may be avoided as

fraudulent if it occurred within two years before the bankruptcy

filing, and the debtor made the transfer with actual intent to defraud

creditors, regardless of whether the debtor was insolvent. In

addition, a trustee (or debtor in possession) may recover a transfer as

constructively fraudulent that occurred within two years before the

bankruptcy filing if the debtor received less than reasonably

equivalent value in exchange for such transfer, and (i) was insolvent,

(ii) was engaged in business for which the debtor was insufficiently

capitalised, (iii) intended or believed it would incur debts beyond its

ability to repay, or (iv) made such transfer to, or for the benefit of, an

insider under an employment contract and not in the ordinary

course. Bankruptcy trustees (or debtors in possession) can also

invoke state fraudulent transfer laws, which may have longer

reachback periods, to recover transfers for the benefit of the estate.

A transfer of an interest of the debtor in property made on account of

an antecedent debt, while the debtor was insolvent and within the 90

days prior to a bankruptcy filing (or within one year before the

bankruptcy filing if the transferee was an insider) that enables the

creditor to receive more than it would have received in a liquidation,

can be avoided as a preference, subject to certain exceptions. There

is a rebuttable presumption that a debtor is insolvent during the 90

days before the bankruptcy filing.

Transactions determined to be preferential or constructively

fraudulent can be avoided or reversed so as to return the parties to

their original positions. This can be effectuated through the

recovery of payments or unwinding of entire transactions.



While out-of-court restructurings are commonplace and are

typically implemented by contract by and among the relevant

parties, there is no procedure by which a court will sanction such

work-outs. To receive the sanction of a court, a case must be filed

under the Bankruptcy Code.


Chapter 11 is the primary procedure by which companies restructure;

although it may also be used for the purposes of an orderly liquidation.

Chapter 15 provides the procedure for recognition of a foreign

insolvency or restructuring proceeding and for conducting an

ancillary proceeding in the United States. Ancillary proceedings are

those in aid of a “foreign proceeding” administered by a foreign

representative and designed to foster cooperation between US and

foreign courts.

Debt-for-equity swaps are commonplace both in-court and out-of-

court. Depending on the terms of the debt-for-equity swap, existing

equity may be substantially diluted or, if the valuation supports it,

eliminated altogether.

“Pre-packaged” sales may be achieved either by means of (i) a pre-

packaged chapter 11 plan, which the Bankruptcy Code is designed

to facilitate, or (ii) a sale under section 363 of the Bankruptcy Code,

which has been negotiated by the parties and documented prior to

the chapter 11 petition being filed.

The filing of a voluntary bankruptcy petition automatically operates

as a stay that enjoins secured and unsecured creditors from taking

most actions against the debtor or property of the estate absent

further order of the court. The stay of actions against the debtor’s

property generally continues until such property is no longer

property of the estate or the case is closed or dismissed.

A chapter 11 restructuring aims to foster cooperation between

management (which may include significant shareholders) and the

Company’s creditors to agree on a value-maximising path forward

for the Company. Shareholders and creditors alike are welcome to

propose transactions that could lead to the Company’s emergence

from bankruptcy; however, only the company has the right to

propose a plan of reorganisation and solicit its acceptance for at least

the first 120 days following the date of the filing; such time period

is often extended beyond 120 days by the Court but may not be

extended beyond 18 months following the date of the filing.

Secured creditors have certain special rights, however. A secured

creditor may be entitled to adequate protection in the form of cash

payments, replacement liens or the “indubitable equivalent” of the

value of its collateral to the extent such value is depreciating as a

result of the stay or the debtor’s use of such collateral. If secured

creditors are oversecured, they have the right to receive post-petition

interest generally at the applicable contract rate. Secured creditors

may also be well-positioned to provide debtor-in-possession

financing, which may provide the secured creditor greater influence

over the reorganisation process. Secured creditors generally are also

afforded the right to credit bid in a sale of their collateral.

Cramdown

In a chapter 11 case, a dissenting class of claims or interests may be

crammed down if, among other things: (i) the plan does not

discriminate unfairly; (ii) the plan is “fair and equitable”; and (iii) if

a class of claims is impaired under the plan, at least one class of

impaired claims has voted to accept the plan, without counting the

votes of “insiders”.

It is generally understood that a plan does not unfairly discriminate

if the dissenting class receives relatively equal value under the plan

as compared to similarly situated classes.

A plan is fair and equitable if it complies with the absolute priority

rule. With respect to secured creditors, members of the class must

either: (i) retain their liens and receive deferred payments with a

value equal to the allowed amount of their secured claims, valued as

of the effective date of the plan; (ii) receive the proceeds from the

sale of their collateral, if such property is to be sold, including the

right to credit bid at any such sale; or (iii) receive the “indubitable

equivalent” of their secured claims.

A plan is fair and equitable with respect to unsecured creditors if the

members of the class receive property of a value equal to the

paul, weiss, rifkind, wharton & garrison llp Usa

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allowed amount of their unsecured claims, or if such class is not

paid in full, no junior class will receive any estate property under the

plan.


Insolvency is not a prerequisite for chapter 11 relief. A company

may file a voluntary case under chapter 11 if the company has a

domicile, place of business or property in the United States.

An involuntary case may be commenced under chapter 11 by three or

more creditors that hold non-contingent, undisputed claims against

the company. The creditors (or an indenture trustee representing

them) must hold claims that aggregate $16,750 more than the value

of any collateral securing the creditors’ claims. If there are fewer

than 12 creditors of the debtor, a single creditor may file the petition.

If the petition is not timely controverted, the court will order relief.

However, if the petition is controverted, the creditors must establish

that the debtor is generally not paying its undisputed debts as they

come, or that a custodian was appointed within 120 days of the

petition date. Involuntary petitions filed in bad faith may result in

damages awarded against the petitioning creditor(s).


Under chapter 11, management retains control, remains “in

possession”, and continues to run the daily business operations of

the debtor company, subject to oversight by the company’s board of

directors. A chief restructuring officer or similar professional often

is added to the management team. Transactions which are not in the

ordinary course of business require bankruptcy court approval.

Official and unofficial committees generally consult with the debtor

concerning the administration of the estate, may investigate the

conduct, assets and liabilities of the debtor and participate in the

formulation of a plan. A chapter 11 trustee may be appointed where

there has been gross mismanagement or fraud.

The court closely supervises proceedings under chapter 11.


A chapter 11 debtor may assume or reject most executory contracts

or unexpired leases, subject to the court’s approval. Subject to time

limits applicable to non-residential real estate leases, the debtor may

assume or reject a contract or lease at any time before confirmation

of a plan, but the court may order the debtor to act within a shorter

time. In most cases, the debtor’s counterparty must continue to

perform until the debtor assumes or rejects the contract or lease.

Provisions providing for termination upon a bankruptcy filing are

typically unenforceable under the Bankruptcy Code, though there

are exceptions.

A debtor’s counterparties also enjoy certain protections under the

Bankruptcy Code. For example, a debtor must continue to pay rent

under a non-residential real estate lease prior to its determination

whether to assume or reject such lease. In addition, a counterparty

may seek adequate protection of its interests in any property leased,

used, or sold by the debtor. Furthermore, to the extent a debtor

accepts, but fails to pay for, post-petition benefits under an

executory contract or lease, the counterparty will generally be

allowed claims with administrative expense priority. Except to the

extent the holder of an administrative expense claim agrees to

different treatment, a chapter 11 plan can only be confirmed if it

provides for cash payment of the full amount of allowed

administrative expense claims.

If a debtor chooses to assume a contract or lease, it will be bound by

the contract’s terms. The debtor may not assume such contract or

lease unless it: (i) cures or provides adequate assurance that it will

cure any default; (ii) compensates, or provides adequate assurance

that it will compensate, the counterparty for any actual pecuniary

losses resulting from the default; and (iii) provides adequate

assurance of future performance under the contract or lease.

However, a debtor is not required to cure a default that arises

because of a provision in the contract conditioned on the insolvency

of the debtor. The debtor may not assume a contract where

applicable law excuses the counterparty to the contract from

accepting performance from, or rendering performance to, an entity

other than the debtor, such as a personal services contract.

A debtor may reject a contract where it determines that performance

of the contract would be unduly burdensome. Rejection of an

executory contract or unexpired lease constitutes a breach and

generally gives rise to a general unsecured claim for damages.

If a contract or lease has been assumed, the debtor usually may

assign it, notwithstanding a provision in the contract that prohibits

or conditions such an assignment.

The Bankruptcy Code generally preserves a creditor’s non-

bankruptcy set-off rights. A right of set-off is treated as a secured

claim and a creditor seeking to exercise such right must first obtain

relief from the automatic stay. However, creditors that possess set-

off rights under certain types of repurchase agreements and other

specified financial contracts may exercise such rights without

violating the stay.


A trustee or debtor in possession may use free cash in the ordinary

course of business without notice or a hearing, unless the court

orders otherwise. The debtor may not use encumbered cash unless

each entity with an interest in the cash collateral consents or the

court authorises such use upon a finding of adequate protection.

A trustee or debtor in possession may also obtain unsecured

financing in the ordinary course of business that will be allowed as

an administrative priority expense to pay the actual and necessary

costs of preserving the estate, including the payment of wages and

salaries after the commencement of the case, as well as taxes.

If the trustee or debtor in possession is unable to obtain unsecured

financing that would be allowed as an administrative priority

expense, the Bankruptcy Code contains a framework for permitting

other types of debtor-in-possession financing, including: (i)

unsecured financing allowed as a “superpriority” expense with

priority over all other administrative priority expenses; (ii)

financing secured by unencumbered estate property; (iii) financing

secured by a junior lien on previously encumbered estate property;

and (iv) financing secured by an equal or priming lien on previously

encumbered property (so long as the trustee or debtor in possession

is unable to obtain financing otherwise and each holder of a lien on

such property is adequately protected).


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Chapter 7 provides the procedure for liquidation of a company. As

noted above, although chapter 11 is the primary procedure by which

companies restructure, it may also be used for the purposes of an

orderly liquidation.


Insolvency is not a prerequisite for chapter 7 or chapter 11 relief. A

company may file a voluntary case under chapter 7 or chapter 11 if

the company has a domicile, place of business or property in the

United States.

The grounds for commencing an involuntary case under chapter 7

are the same as the grounds for commencing an involuntary case

under chapter 11. See question 3.3 for further detail.


In chapter 7, a trustee is appointed to marshal the assets of the

company, reduce them to cash and pay creditors. Officers and

directors are displaced. Courts closely supervise the chapter 7

process. As discussed in question 3.4, management generally

remains in possession during a chapter 11 case, even if the company

is liquidated during such case.


Secured creditors are prevented from enforcing their security in the

same manner in chapter 7 as they are in chapter 11. See question 3.2

for further detail. Unsecured creditor interests are most often

represented by an official committee. While shareholders have

standing to be heard, they generally have less influence in a chapter

7 case because the company is set to be liquidated by the trustee

rather than restructured.


A chapter 7 trustee or chapter 11 debtor may assume or reject most

executory contracts or unexpired leases, subject to the court’s

approval. See question 3.5 for further detail.

In chapter 7, the trustee must assume a contract or lease within 60

days of the order for relief or it will be deemed rejected, unless an

extension of time is granted by the court within such 60-day period.


Claims of secured creditors are entitled to priority with respect to

their interests in collateral and are secured only to the extent of such

interests. If a creditor is undersecured to some extent, such portion

is treated as a general unsecured claim.

The Bankruptcy Code confers priority on various categories of

claims. All claims in a higher priority must be paid in full before

claims with a lower priority may be paid. First priority is reserved

for unsecured claims for certain domestic support obligations (if the

debtor is an individual). Second priority is conferred on claims for

expenses incurred in connection with the administration of the

estate. Administrative priority expenses include wages and salaries

for employees for post-petition services rendered and compensation

for professionals retained in the case, including a chapter 7 trustee.

Lower priority categories include claims for certain pre-petition

wages and employee benefit plan contributions and pre-petition tax

claims, among others. General unsecured claims generally rank

equally with each other.


While the company as an entity is typically dissolved after its assets

are liquidated, assets of the company, such as the brand name or

business model, may be acquired for use in a new venture.

5 Tax


The bankruptcy process does not, in itself, impose additional tax risks

on the debtor. Day-to-day tax liability is incurred during a bankruptcy

case and claims for such liability are generally paid as administrative

expenses. While cancellation of indebtedness typically gives rise to

taxable income under United States tax law, debt cancelled in a

chapter 11 or chapter 7 case is not included as taxable income.

6 Employees


In chapter 11, the company may continue to employ its workers and

to pay their salaries and wages in the ordinary course of business.

To the extent the company owes pre-petition salaries and wages,

claims therefor will be entitled to priority status but only to the

extent of $13,650 for each individual earned within 180 days before

the bankruptcy filing.

The Bankruptcy Code restricts payments to “insiders”. Before a

company incurs an obligation to retain such a person, the court must

determine, among other things, that the obligation is essential


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because such person has received a job offer at the same or greater

rate of compensation and that the obligation incurred is not greater

than 10 times the amount of an obligation incurred to non-

management employees. A severance payment to an “insider”

officer or director may not be allowed or paid unless the payment is

part of a programme generally applicable to all full-time employees

and the amount of the payment is not greater than 10 times the mean

amount of severance pay provided to non-management employees.

A chapter 7 trustee will likely terminate most employees. They will

hold administrative priority claims for post-petition labour and

lower priority claims for any pre-bankruptcy filing wages owing to

the extent described above.



A company may file a voluntary case under chapter 7 or chapter 11

if the company has a domicile, place of business or property in the

United States. Such company may also commence a chapter 15 case

in the United States for recognition of a judicial or administrative

proceeding in a foreign country.


Yes. Chapter 15 cases are commenced by a foreign representative

filing a petition for recognition of a foreign proceeding in a US

bankruptcy court. A foreign proceeding is a collective judicial or

administrative proceeding in a foreign country in which the assets

and affairs of a debtor are subject to control or supervision by a

foreign court for the purposes of reorganisation or liquidation. In

chapter 15, the foreign representative may use such proceedings to

request assistance from the US court for such relief as entry of a stay

to protect property located in the United States.

A bankruptcy court will recognise the foreign proceeding if: (i) the

foreign proceeding qualifies as a “foreign main proceeding” (a foreign

proceeding pending in the country where the debtor has the centre of its

main interests) or “foreign non-main proceeding” (a foreign proceeding

pending in a country where the debtor conducts non-transitory

operations); (ii) the foreign representative applying for recognition is a

person or body authorised to administer the reorganisation or

liquidation of the debtor; and (iii) the petition is accompanied by

sufficient evidence of the commencement of the foreign proceeding and

of the appointment of the foreign representative.

Once the court has entered a recognition order concerning a foreign

main proceeding, several provisions of the Bankruptcy Code take

effect automatically, including the automatic stay and provisions

governing the use, sale or lease of property of the debtor in the US,

and other relief may be available upon request to the court. While

such relief is not automatically available with respect to a foreign

non-main proceeding, the court has discretion to grant similar relief.


It would be unusual for a company incorporated in the US to enter

into plenary insolvency proceedings in other jurisdictions, although

this has occurred from time to time.

8 Groups


Each member of a group of companies is treated as a separate entity

by the Bankruptcy Code. The insolvency of one group member has

no formal legal effect on other group members; each entity must file

its own case under the Bankruptcy Code. In practice, however, group

members usually file cases at the same time, in the same court, and are

often represented by the same professional advisors. In addition, their

cases generally are jointly administered for procedural purposes.

There is scope for court supervised cooperation between groups of

companies and their officeholders. In fact, it is typical for the first

day of a bankruptcy case to be devoted to motions designed to

maintain the “status quo” during the pendency of the case or cases;

courts often grant motions to continue a group cash management

system, group shared services agreements and other inter-group

arrangements during these so-called “first-day hearings”.

9 Reform


A proposal has been introduced with the aim of preventing debtors

from “forum shopping” for bankruptcy venues that are more

favourable to the debtors but may be less favourable to their

stakeholders. If approved, the proposal would amend the current

bankruptcy-venue provisions to require a debtor to file its

bankruptcy case in the U.S. District in which (i) its principal assets

are located, (ii) its principal place of business is located, or (iii) there

is a pending bankruptcy case of an affiliate that “directly or

indirectly owns, controls, is the general partner, or holds 50 per cent

or more of the outstanding voting securities” of the debtor. The

proposal would thus eliminate the current domicile-venue option, as

well as the current affiliate-venue option that allows larger parent

companies to file in the same court as a smaller subsidiary.

Although ancillary bankruptcy cases under chapter 15 of the

Bankruptcy Code are excluded, the proposal may affect foreign

debtors’ ability to file plenary bankruptcy cases in the United States.


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Alan W. Kornberg Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 USA Tel: +1 212 373 3209


URL: www.paulweiss.com

Elizabeth R. McColm Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 USA Tel: +1 212 373 3524


URL: www.paulweiss.com

Diversity of experience, senior-level attention and seamless delivery of multidisciplinary services are the foundations of the Paul, Weiss Bankruptcy & Corporate Reorganization Department.

We possess a thorough knowledge of every aspect of bankruptcy law, coupled with perspectives earned from representing every type of client. Our domestic and cross-border representations include debtors, official and unofficial committees of creditors and shareholders, secured and unsecured creditors and equity sponsors in chapter 11 cases, corporate reorganisations and workouts, non-bankruptcy insolvency proceedings and litigations and transactions involving financially distressed companies. We also represent purchasers of the assets, debt and securities of distressed companies.

Our Bankruptcy Department fields large, multidisciplinary teams that leverage the resources of our firm as a whole. By drawing on the expertise of our Corporate, Finance, Securities, Tax, Litigation, Employee Benefits, Real Estate and Environmental Departments, we are able to tailor our efforts to the specific business challenges that our clients face.

Co-chair of the Bankruptcy and Corporate Reorganization Department, Alan Kornberg handles chapter 11 cases, cross-border insolvency matters, out-of-court restructurings, bankruptcy-related acquisitions and insolvency-sensitive transactions and investments. Alan has represented a diverse range of clients spanning numerous industries in some of the most complex and contentious bankruptcy proceedings in recent years. Some of Alan’s significant cross-border and domestic debtor representations have included advising CGG S.A., Noranda, EnQuest, Quiznos, and Houghton Mifflin Harcourt Publishing Company. Alan also has extensive creditor-side experience, including representing ad hoc debtholder groups in the restructurings of Texas Competitive Electric Holdings Company, Tidewater, Pacific Exploration, and SquareTwo, and agents for lending syndicates to Genco Shipping & Trading Limited. Alan is recognised as a Band 1 practitioner by Chambers Global, and is also praised as a leading lawyer by The Legal 500, IFLR1000 and The Best Lawyers in America. He is one of only five practitioners in the U.S. to be recognised as a “Most Highly Regarded Individual” by Who’s Who Legal for restructuring and insolvency. Alan’s work has consistently received industry recognition by publications such as The American Lawyer and Financial Times, and he is also a prolific writer and speaker on industry topics. Alan is a Conferee of the National Bankruptcy Conference. He is a Fellow of the American College of Bankruptcy and a member of the International Insolvency Institute.

A partner in the Bankruptcy and Corporate Reorganization Department, Elizabeth McColm specialises in the areas of corporate restructurings and bankruptcy. She has been involved in major domestic and cross-border restructurings and bankruptcies representing debtors, creditors and acquirers of assets. Elizabeth’s recent creditor matters include advising key stakeholders in the restructurings of Pacific Drilling, GenOn, Armstrong Energy, Ultra Petroleum and SquareTwo Financial, and her noteworthy debtor representations include The Bon-Ton Stores and Noranda. The M&A Advisor selected Elizabeth’s representation of The Bon-Ton Stores and its affiliates, a national department store retailer, as its 2018 “Consumer Discretionary Deal of the Year (Over $100MM)”. The Financial Times has “Highly Commended” Elizabeth in its annual report on “U.S. Innovative Lawyers” for her work representing certain CEVA Group lenders in the company’s restructuring. Elizabeth is widely recognised as a leading restructuring practitioner, including by The Legal 500 and IFLR1000, and she speaks frequently at industry events.


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