Creditor Banks and Preventive Financial Restructuring

Creditor Banks and Preventive

Financial Restructuring

Proceeding

Content

• Incorporation into the International Sphere • Basic Points of Regulation • Overview of Important Rules • Position of Creditor Banks

Creditor Banks and Preventive Financial Restructuring Proceeding 2

Abbreviations

• Preventive proceeding – Preventive restructuring proceeding according to

ZFPPIPP

• Regulation – Council Regulation (EC) No 1346/2000 of 29 May 2000 on

insolvency proceedings

• Brussels I – Council Regulation (EC) No 44/2001 of 22 December 2000 on

jurisdiction and the recognition and enforcement of judgments in civil and

commercial matters

• Act – Financial Operations, Insolvency Proceedings and Compulsory

Dissolution Act (ZFPPIPP) Official Gazette of RS no. 126-6413/2007 to

100-3599/2013

• MS – Member State


• Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency

proceedings

• Preventive proceeding shall not be recognized as a proceeding under the

current Regulation, since it is not a proceeding in case of insolvency.

• Regulation is currently under revision (on 22 October 2013):

Regulation should also cover proceedings, (i) that are only connected

with insolvency and (ii) where there is a risk of future insolvency,

Definition of „collective proceedings" will expand to cases when

proceeding covers „significant share“ of creditors

• It is possible that after the revision of Regulation preventive proceeding will

be recognized as a proceeding under the Regulation. If this will be the

case, legal effects of preventive proceeding could not be challenged in

another member state.

Incorporation into the International Sphere

Council Regulation

No 1346/2000




Brussels I

• Recognition and enforcement of resolution on the confirmation of

agreement on financial restructuring in EU (except Denmark)

• Is decision of the court on the confirmation of agreement judgment

according to Brussels I? Brussels I shall also apply to confirmatory

judgments. It is important for the recognition of the judgment under the

Brussels I that the court, before passing the ruling, examines the grounds of

the judgment – it should not be just a confirmation of a private agreement.

• Under the Article 34 of Brussels I a resolution shall not be recognised in

another member state in 4 cases, alternatively:

if such recognition is manifestly contrary to the public policy of the MS

where it was given in default of appearance, if the defendant was not

served with the document which instituted the proceedings in sufficient

time and in such a way as to enable him to arrange for his defence,

unless the defendant failed to commence proceedings to challenge the

judgment when it was possible for him to do so;

if it is irreconcilable with a judgment given in a dispute between the

same parties in the MS in which recognition is sought;

if it is irreconcilable with an earlier judgment given in another MS or in

a third State involving the same cause of action and between the same

parties, provided that the earlier judgment fulfils the conditions

necessary for its recognition in the MS addressed.

Accelerated Financial

Safeguard Proceedings

Preventive Proceeding

Intended for companies in financial

difficulties, that are not yet insolvent

Intended for companies, that are not

insolvent, but are threatened by

insolvency

Only for large companies (more than

150 employees, 20 million € of

turnover)

Only for large and medium

companies according to ZGD-1

(more than 50 employees, 8,8

million € turnover)

Only financial creditors Only financial creditors

Administrator appointed by court No administrator

The court guards the interests of

minority creditors (not necessarily

equal treatment of creditors)

The court decides whether all

creditors are equally treated

Duration max 2 months Duration max 8 months

Confirmation of agreement with 66%

majority of claims

Confirmation of agreement with 75%

majority of claims

Recognized under the Regulation Not recognized under the

Regulation

Comparison with

French Accelerated

Financial Safeguard

Proceedings



• confidential nature of the proceeding

• proceeding intended only for well informed creditors

• debtor and financial creditors have the initiative

• limited role of courts and simple assessment of decisions

• fixed and unequivocal time limits

• simple proceeding initiation/standstill (consent of 30% of the total of all

financial claims is sufficient)

• simple termination of proceeding/standstill (consent of 30% of the total of all

financial claims is sufficient)

• equal treatment of creditors is decided on the merits, other decisions of the

court at the beginning or the end of the proceeding are formal in nature

• no court administrator of the proceeding

• goal of preventive proceeding is to enable the debtor, with the consent of

creditors, the necessary time to negotiate financial restructuring

• management of the debtor is liable for business operations in the course of

proceeding under the „Business Judgment Rule“; management of the

debtor is not obliged to manage the debtor conservatively with the goal to

retain assets of the debtor for repayment of creditors

• proceeding is linked to the subsequent insolvency proceedings in terms of

time frame and substance

Basic Points of Regulation


• Preventive proceeding, according to Amendment F, is not excluding out-of-

court agreement on financial restructuring, for which the total (100%)

consent of creditors and the debtor is necessary

• Proceeding is initiated by the request of the debtor to commence the

proceeding (preliminary proceeding), creditors cannot propose

commencement of the proceeding

• Attachments to the petition shall be:

a basic list of all financial claims against the debtor (according to the

end of the latest quarter before lodging the request)

an auditor‘s report on reviewing the basic list

notarized statements by creditors with at least 30% (75%) of total

amount of financial claims

• Procedural obstacles for commencement of the proceeding:

2 years from the previous proceeding (except with 75% consent)

ongoing compulsory settlement proceedings

2 years from the day when the debtor settled all liabilities arising from

a previous compulsory settlement (except with 75% consent)

ongoing bankruptcy proceedings

• Consequences of the initiation of the proceeding:

compulsory settlement proceedings may not be proposed

Overview of Important Rules

Preliminary

Proceeding


bankruptcy proceedings may not be initiated

• Financial creditor may notify the participation in the proceeding until

resolution on the initiation of proceeding has been issued and may appeal,

inter alia, that:

the debtor is already insolvent or

the debtor is not threatened by insolvency (1 year period) or

the basic list of claims does not contain all financial claims against the

debtor

• In such case the court shall be obliged to assess the disputed facts. Difficult

for the court to rule on. Question arises whether appeal makes sense, when

the termination of the proceeding can be achieved faster if it is requested

by creditors with at least 30% of the sum of all financial claims.

• Preliminary proceeding does not have an impact on claims or recovery of

claims, however, it constitutes an obstacle for initiation of compulsory

settlement and bankruptcy proceeding.


Preliminary

Proceeding


• The court shall decide on the request to commence proceeding with a

resolution, and if there is no appeal, assesses only formal requirements of

the Act

• Main proceeding is initiated on the beginning of the day when the court‘s

resolution on the initiation of proceeding is published on AJPES

• Legal consequences of the initiation of the proceeding (only for financial

claims):

Bar on initiation of enforcement or security proceedings

Enforcement and security proceedings shall be terminated upon the

request of the debtor

The limitation period for claims included in the basic list is suspended

The debtor is not in default for payment of the principal amounts

• Discharge of the proceeding

Validity of the agreement is conditional on:

signing the agreement on financial restructuring of:

the debtor

financial creditors with at least 75% of the sum of all ordinary

claims included in the basic list

financial creditors with at least 75% of the sum of all secured claims

included in the basic list (if agreement affects secured claims)


Main Proceeding


The fulfilment of additional conditions (if stipulated by agreement):

consent of all secured creditors for restructuring different from

reduction of interest rates and deferral of maturity

consent of commercial creditors

change of share capital (The Act is not introducing APR rule for

change of share capital)

In debt review of agreement by auditor (basis for court‘s decision) if the

agreement:

stipulates equal share of reduction and equal deferral of maturity

for ordinary financial creditors

stipulates equal deferral of maturity (not more than 5 years after

finality) and equally changed interest rate for secured financial

creditors

reaches 75% threshold

fulfils additional conditions

Agreement is signed and notarized by all consenting parties and one

original copy of agreement is deposited by the debtor with the notary.

Notary shall hand over a notarized copy of the agreement to each

signatory and to creditor whose claim is included in the basic list of

claims, even if such creditor is not a signatory to this agreement.

Basic list of claims shall be attached to agreement.


Main Proceeding


• The court confirms the agreement with a resolution:

if the request for the confirmation is filed within 5 or 3 months

(prolongation for 3 or 2 months with 30%)

Attached documents:

an engrossed notarized copy of the original of the agreement

minutes on the deposition

auditor‘s report

• Legal effects of the agreement:

after finality of court‘s resolution

on financial claims of creditors who agreed to agreement – other

obligations shall also have an effect on these creditors, if so agreed

on financial claims of ordinary creditors who did not agree (reduction of

interest rates and maturity)

on financial claims of secured creditors who did not agree (reduction of

interest rates and maturity)

the rights of creditors as specified in the agreement shall have effect in

favour of creditors who did not agree to agreement

at D/E „change of control“ clause and article 498 ZGD-1 (5 years after

finality) do not apply


Confirmation of the

Agreement by the

Court


subordinated claims terminate

enforceable instruments that are above the level of claims agreed in

agreement terminate

enforcement proceedings continue in limited way

subsequent court decisions - only up to the level of claims in

agreement


Confirmation of the

Agreement by the

Court


Termination of proceeding

if a reason for termination of the proceeding emerges the court

shall not terminate the proceeding but shall firstly merely issue a

resolution on the finding that a reason for termination of the

proceeding has emerged

resolution shall be published (AJPES)

the debtor and creditors (20% of financial claims) have a right to

lodge a petition for the initiation of the compulsory settlement

proceeding within 1 month after resolution has been published

(insolvency test, no automatic insolvency)

In case of subsequent bankruptcy

priority repayment of financial claims emerged during preventive

proceeding before priority claims in 21.1. in 2. (wages for the last

3 months, indemnity for occupational injury etc.)

actions of the debtor, carried out due to the fulfilment of obligations

under agreement, shall not be challenged

In case of subsequent compulsory settlement

priority repayment of financial claims emerged during preventive

proceeding – compulsory settlement does not effect such claims


Confirmation of the

Agreement by the

Court



Out-of-court

Restructuring

Preventive

Restructuring

Compulsory

Settlement (CS)

Required consent

ordinary

100% 75% 6/10

Required consent

secured

100% 75% 75%

Repayment

agreement

Free Equal treatment of

all creditors

Equal treatment of all

creditors

Consent of

creditors for „stand

still"

100% 30% Consent is not required

Duration of

negotiations

Unlimited Limited (5+3, 3+2) Limited

Contesting actions

in bankruptcy after

agreement

Yes No No

Has the new

financing senior

position in

bankruptcy/CS ?

No Yes Yes

Does rule in art.

498 ZGD 3-1 apply

for D/E?

Yes No No


Out-of-court

Restructuring

Preventive

Restructuring

Compulsory

Settlement (CS)

Does „Change of

control“ clause

remain valid?

Yes No

No

Absolute priority

rule

No No Yes

Management of

debtor‘s

business

„Business Judgment

Rule“, risky

transactions are

allowed

„Business Judgment

Rule“

risky transactions are

allowed

Restrictive governance,

preservation of value

for creditors, only

regular business

operations

Compulsory

change in

management

No No Yes

Reduction of

surety‘s

obligation

Yes

(accessory of surety

art. 1017 OZ)

Yes

(accessory of surety

art. 1017 OZ)

No

(exception from

accessory art. 1022

OZ)


Out-of-court

Restructuring

Preventive

Restructuring

Compulsory

Settlement (CS)

Possible

compulsory

effect („cram

down“) on

secured claims

No Yes (maturity for max

5 years)

Yes (no limitation for

maturity)

Division of

secured claims

No No Yes

Possible view of financial creditors on preventive proceeding:

• it is appropriate proceeding, when majority consent among financial

creditors on a manner of restructuring of the debtor is reached

• minority interests may be subordinated with this proceeding

• information on the debtor may be obtained (of assets, liabilities, business

operations and growth in business operations of the debtor) for subsequent

creditors‘ petition for compulsory settlement (limited only on financial

creditors or on all creditors),

• it is important that banks (i) get to know business operations of the debtor

(due diligence) early enough and (ii) that they are prepared to take over the

managing of the debtor from the beginning of the proceeding, logically all

the time during the proceeding (iii) prepare scenario of compulsory

settlement

• it is appropriate that the banks have an expert, that is familiar with the

industry and is capable to take over managing of the debtor, present from

the beginning

• decision making of the banks should be hastened, since the time limits are

unequivocally stated (proceeding is repeated only with 75% consent)

• simple (statutory) „stand still“, that is connected with compulsory settlement,

that may be filled within one month after resolution of the court

Position of Creditor Banks


• Negotiations should be conducted in a way that the debtor (and owners) is

aware from the beginning that he must be cooperative during time of

negotiations and that banks are the one that actually run the negotiations;

in compulsory settlement the debtor is looking into derived absolute priority

rule and (likely) change of debtors‘ management.

• 30% consent for initiation may be subject to certain commitments of the

debtor during the negotiations, e.g..: limit of investments, sale, restriction of

business operations, forming data base (for business operations „Business

Judgment Rule“ applies).

• Equal repayment rule in preventive proceeding may be, in certain

circumstances, changed with special agreement among financial creditors

(before or after finalized preventive restructuring proceeding).

• Perhaps financial creditors should come to a principal agreement that that

failed preventive restructuring proceeding would lead to immediate

continuation of insolvency proceedings, which would be a clear message

for debtors. Such agreement would form a distinct D-day that is so often

missing.

• Absolute priority rule may be agreed on in preventive proceeding and

consequently (perhaps partial) expropriation of owners (additional condition

of change in share capital as part of preventive restructuring). The debtor

must know what follows in compulsory settlement.



• debtor has as much room in negotiations as the banks leave him



21

Srečo Jadek, Partner

Law office JADEK & PENSA d.n.o.-o.p.

Tavčarjeva ulica 6

1000 Ljubljana

Slovenia

Tel: +386 1 234 25 20

Fax: +386 1 234 25 32

www.jadek-pensa.si

http://www.jadek-pensa.si/



Documents

Creditor Banks and Preventive Financial Restructuring